[House Report 104-736]
[From the U.S. Government Publishing Office]
104th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 104-736
_______________________________________________________________________
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
_______
July 31, 1996.--Ordered to be printed
_______________________________________________________________________
Mr. Hastert, from the committee of conference, submitted the following
CONFERENCE REPORT
[To accompany H.R. 3103]
The committee of conference on the disagreeing votes of
the two Houses on the amendment of the Senate to the bill (H.R.
3103), to amend the Internal Revenue Code of 1986 to improve
portability and continuity of health insurance coverage in the
group and individual markets, to combat waste, fraud, and abuse
in health insurance and health care delivery, to promote the
use of medical savings accounts, to improve access to long-term
care services and coverage, to simplify the administration of
health insurance, and for other purposes, having met, after
full and free conference, and agreed to recommend and do
recommend to their respective Houses as follows:
That the House recede from its disagreement to the
amendment of the Senate and agree to the same with an amendment
as follows:
In lieu of the matter proposed to be inserted by the
Senate amendment, insert the following:
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Health
Insurance Portability and Accountability Act of 1996''.
(b) Table of Contents.--The table of contents of this Act
is as follows:
Sec. 1. Short title; table of contents.
TITLE I--HEALTH CARE ACCESS, PORTABILITY, AND RENEWABILITY
Subtitle A--Group Market Rules
Part 1--Portability, Access, and Renewability Requirements
Sec. 101. Through the Employee Retirement Income Security Act of 1974.
``Part 7--Group Health Plan Portability, Access, and Renewability
Requirements
``Sec. 701. Increased portability through limitation on preexisting
condition exclusions.
``Sec. 702. Prohibiting discrimination against individual
participants and beneficiaries based on health status.
``Sec. 703. Guaranteed renewability in multiemployer plans and
multiple employer welfare arrangements.
``Sec. 704. Preemption; State flexibility; construction.
``Sec. 705. Special rules relating to group health plans.
``Sec. 706. Definitions.
``Sec. 707. Regulations.
Sec. 102. Through the Public Health Service Act.
``TITLE XXVII--ASSURING PORTABILITY, AVAILABILITY, AND RENEWABILITY OF
HEALTH INSURANCE COVERAGE
``Part A--Group Market Reforms
``Subpart 1--Portability, Access, and Renewability Requirements
``Sec. 2701. Increased portability through limitation on preexisting
condition exclusions.
``Sec. 2702. Prohibiting discrimination against individual
participants and beneficiaries based on health status.
``Subpart 2--Provisions Applicable Only to Health Insurance Issuers
``Sec. 2711. Guaranteed availability of coverage for employers in
the group market.
``Sec. 2712. Guaranteed renewability of coverage for employers in
the group market.
``Sec. 2713. Disclosure of information.
``Subpart 3--Exclusion of Plans; Enforcement; Preemption
``Sec. 2721. Exclusion of certain plans.
``Sec. 2722. Enforcement.
``Sec. 2723. Preemption; State flexibility; construction.
``Part C--Definitions; Miscellaneous Provisions
``Sec. 2791. Definitions.
``Sec. 2792. Regulations.
Sec. 103. Reference to implementation through the Internal Revenue Code
of 1986.
Sec. 104. Assuring coordination.
Subtitle B--Individual Market Rules
Sec. 111. Amendment to Public Health Service Act.
``Part B--Individual Market Rules
``Sec. 2741. Guaranteed availability of individual health insurance
coverage to certain individuals with prior group coverage.
``Sec. 2742. Guaranteed renewability of individual health insurance
coverage.
``Sec. 2743. Certification of coverage.
``Sec. 2744. State flexibility in individual market reforms.
``Sec. 2745. Enforcement.
``Sec. 2746. Preemption.
``Sec. 2747. General exceptions.
Subtitle C--General and Miscellaneous Provisions
Sec. 191. Health coverage availability studies.
Sec. 192. Report on medicare reimbursement of telemedicine.
Sec. 193. Allowing Federally-qualified HMOs to offer high deductible
plans.
Sec. 194. Volunteer services provided by health professionals at free
clinics.
Sec. 195. Findings; severability.
TITLE II--PREVENTING HEALTH CARE FRAUD AND ABUSE; ADMINISTRATIVE
SIMPLIFICATION; MEDICAL LIABILITY REFORM
Sec. 200. References in title.
Subtitle A--Fraud and Abuse Control Program
Sec. 201. Fraud and abuse control program.
Sec. 202. Medicare integrity program.
Sec. 203. Beneficiary incentive programs.
Sec. 204. Application of certain health anti-fraud and abuse sanctions
to fraud and abuse against Federal health care programs.
Sec. 205. Guidance regarding application of health care fraud and abuse
sanctions.
Subtitle B--Revisions to Current Sanctions for Fraud and Abuse
Sec. 211. Mandatory exclusion from participation in medicare and State
health care programs.
Sec. 212. Establishment of minimum period of exclusion for certain
individuals and entities subject to permissive exclusion from
medicare and State health care programs.
Sec. 213. Permissive exclusion of individuals with ownership or control
interest in sanctioned entities.
Sec. 214. Sanctions against practitioners and persons for failure to
comply with statutory obligations.
Sec. 215. Intermediate sanctions for medicare health maintenance
organizations.
Sec. 216. Additional exception to anti-kickback penalties for risk-
sharing arrangements.
Sec. 217. Criminal penalty for fraudulent disposition of assets in order
to obtain medicaid benefits.
Sec. 218. Effective date.
Subtitle C--Data Collection
Sec. 221. Establishment of the health care fraud and abuse data
collection program.
Subtitle D--Civil Monetary Penalties
Sec. 231. Social security act civil monetary penalties.
Sec. 232. Penalty for false certification for home health services.
Subtitle E--Revisions to Criminal Law
Sec. 241. Definitions relating to Federal health care offense.
Sec. 242. Health care fraud.
Sec. 243. Theft or embezzlement.
Sec. 244. False Statements.
Sec. 245. Obstruction of criminal investigations of health care
offenses.
Sec. 246. Laundering of monetary instruments.
Sec. 247. Injunctive relief relating to health care offenses.
Sec. 248. Authorized investigative demand procedures.
Sec. 249. Forfeitures for Federal health care offenses.
Sec. 250. Relation to ERISA authority.
Subtitle F--Administrative Simplification
Sec. 261. Purpose.
Sec. 262. Administrative simplification.
``Part C--Administrative Simplification
``Sec. 1171. Definitions.
``Sec. 1172. General requirements for adoption of standards.
``Sec. 1173. Standards for information transactions and data
elements.
``Sec. 1174. Timetables for adoption of standards.
``Sec. 1175. Requirements.
``Sec. 1176. General penalty for failure to comply with requirements
and standards.
``Sec. 1177. Wrongful disclosure of individually identifiable health
information.
``Sec. 1178. Effect on State law.
``Sec. 1179. Processing payment transactions.
Sec. 263. Changes in membership and duties of National Committee on
Vital and Health Statistics.
Sec. 264. Recommendations with respect to privacy of certain health
information.
Subtitle G--Duplication and Coordination of Medicare-Related Plans
Sec. 271. Duplication and coordination of medicare-related plans.
Subtitle H--Patent Extension
Sec. 281. Patent extension.
TITLE III--TAX-RELATED HEALTH PROVISIONS
Sec. 300. Amendment of 1986 Code.
Subtitle A--Medical Savings Accounts
Sec. 301. Medical savings accounts.
Subtitle B--Increase in Deduction for Health Insurance Costs of Self-
Employed Individuals
Sec. 311. Increase in deduction for health insurance costs of self-
employed individuals.
Subtitle C--Long-Term Care Services and Contracts
Part I--General Provisions
Sec. 321. Treatment of long-term care insurance.
Sec. 322. Qualified long-term care services treated as medical care.
Sec. 323. Reporting requirements.
Part II--Consumer Protection Provisions
Sec. 325. Policy requirements.
Sec. 326. Requirements for issuers of qualified long-term care insurance
contracts.
Sec. 327. Effective dates.
Subtitle D--Treatment of Accelerated Death Benefits
Sec. 331. Treatment of accelerated death benefits by recipient.
Sec. 332. Tax treatment of companies issuing qualified accelerated death
benefit riders.
Subtitle E--State Insurance Pools
Sec. 341. Exemption from income tax for State-sponsored organizations
providing health coverage for high-risk individuals.
Sec. 342. Exemption from income tax for State-sponsored workmen's
compensation reinsurance organizations.
Subtitle F--Organizations Subject to Section 833
Sec. 351. Organizations subject to section 833.
Subtitle G--IRA Distributions to the Unemployed
Sec. 361. Distributions from certain plans may be used without
additional tax to pay financially devastating medical
expenses.
Subtitle H--Organ and Tissue Donation Information Included With Income
Tax Refund Payments
Sec. 371. Organ and tissue donation information included with income tax
refund payments.
TITLE IV--APPLICATION AND ENFORCEMENT OF GROUP HEALTH PLAN REQUIREMENTS
Subtitle A--Application and Enforcement of Group Health Plan
Requirements
Sec. 401. Group health plan portability, access, and renewability
requirements.
Sec. 402. Penalty on failure to meet certain group health plan
requirements.
Subtitle B--Clarification of Certain Continuation Coverage Requirements
Sec. 421. COBRA clarifications.
TITLE V--REVENUE OFFSETS
Sec. 500. Amendment of 1986 Code.
Subtitle A--Company-Owned Life Insurance
Sec. 501. Denial of deduction for interest on loans with respect to
company-owned life insurance.
Subtitle B--Treatment of Individuals Who Lose United States Citizenship
Sec. 511. Revision of income, estate, and gift taxes on individuals who
lose United States citizenship.
Sec. 512. Information on individuals losing United States citizenship.
Sec. 513. Report on tax compliance by United States citizens and
residents living abroad.
Subtitle C--Repeal of Financial Institution Transition Rule to Interest
Allocation Rules
Sec. 521. Repeal of financial institution transition rule to interest
allocation rules.
TITLE I--HEALTH CARE ACCESS, PORTABILITY, AND RENEWABILITY
Subtitle A--Group Market Rules
Part 1--Portability, Access, and Renewability Requirements
SEC. 101. THROUGH THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974.
(a) In General.--Subtitle B of title I of the Employee
Retirement Income Security Act of 1974 is amended by adding at
the end the following new part:
``Part 7--Group Health Plan Portability, Access, and Renewability
Requirements
``SEC. 701. INCREASED PORTABILITY THROUGH LIMITATION ON PREEXISTING
CONDITION EXCLUSIONS.
``(a) Limitation on Preexisting Condition Exclusion Period;
Crediting for Periods of Previous Coverage.--Subject to
subsection (d), a group health plan, and a health insurance
issuer offering group health insurance coverage, may, with
respect to a participant or beneficiary, impose a preexisting
condition exclusion only if--
``(1) such exclusion relates to a condition
(whether physical or mental), 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;
``(2) such exclusion extends for a period of not
more than 12 months (or 18 months in the case of a late
enrollee) after the enrollment date; and
``(3) the period of any such preexisting condition
exclusion is reduced by the aggregate of the periods of
creditable coverage (if any, as defined in subsection
(c)(1)) applicable to the participant or beneficiary as
of the enrollment date.
``(b) Definitions.--For purposes of this part--
``(1) Preexisting condition exclusion.--
``(A) In general.--The term `preexisting
condition exclusion' means, with respect to
coverage, a limitation or exclusion of benefits
relating to a condition based on the fact that
the condition was present before the date of
enrollment for such coverage, whether or not
any medical advice, diagnosis, care, or
treatment was recommended or received before
such date.
``(B) Treatment of genetic information.--
Genetic information shall not be treated as a
condition described in subsection (a)(1) in the
absence of a diagnosis of the condition related
to such information.
``(2) Enrollment date.--The term `enrollment date'
means, with respect to an individual covered under a
group health plan or health insurance coverage, the
date of enrollment of the individual in the plan or
coverage or, if earlier, the first day of the waiting
period for such enrollment.
``(3) Late enrollee.--The term `late enrollee'
means, with respect to coverage under a group health
plan, a participant or beneficiary who enrolls under
the plan other than during--
``(A) the first period in which the
individual is eligible to enroll under the
plan, or
``(B) a special enrollment period under
subsection (f).
``(4) Waiting period.--The term `waiting period'
means, with respect to a group health plan and an
individual who is a potential participant or
beneficiary in the plan, the period that must pass with
respect to the individual before the individual is
eligible to be covered for benefits under the terms of
the plan.
``(c) Rules Relating to Crediting Previous Coverage.--
``(1) Creditable coverage defined.--For purposes of
this part, the term `creditable coverage' means, with
respect to an individual, coverage of the individual
under any of the following:
``(A) A group health plan.
``(B) Health insurance coverage.
``(C) Part A or part B of title XVIII of
the Social Security Act.
``(D) Title XIX of the Social Security Act,
other than coverage consisting solely of
benefits under section 1928.
``(E) Chapter 55 of title 10, United States
Code.
``(F) A medical care program of the Indian
Health Service or of a tribal organization.
``(G) A State health benefits risk pool.
``(H) A health plan offered under chapter
89 of title 5, United States Code.
``(I) A public health plan (as defined in
regulations).
``(J) A health benefit plan under section
5(e) of the Peace Corps Act (22 U.S.C.
2504(e)).
Such term does not include coverage consisting solely
of coverage of excepted benefits (as defined in section
706(c)).
``(2) Not counting periods before significant
breaks in coverage.--
``(A) In general.--A period of creditable
coverage shall not be counted, with respect to
enrollment of an individual under a group
health plan, if, after such period and before
the enrollment date, there was a 63-day period
during all of which the individual was not
covered under any creditable coverage.
``(B) Waiting period not treated as a break
in coverage.--For purposes of subparagraph (A)
and subsection (d)(4), any period that an
individual is in a waiting period for any
coverage under a group health plan (or for
group health insurance coverage) or is in an
affiliation period (as defined in subsection
(g)(2)) shall not be taken into account in
determining the continuous period under
subparagraph (A).
``(3) Method of crediting coverage.--
``(A) Standard method.--Except as otherwise
provided under subparagraph (B), for purposes
of applying subsection (a)(3), a group health
plan, and a health insurance issuer offering
group health insurance coverage, shall count a
period of creditable coverage without regard to
the specific benefits covered during the
period.
``(B) Election of alternative method.--A
group health plan, or a health insurance issuer
offering group health insurance coverage, may
elect to apply subsection (a)(3) based on
coverage of benefits within each of several
classes or categories of benefits specified in
regulations rather than as provided under
subparagraph (A). Such election shall be made
on a uniform basis for all participants and
beneficiaries. Under such election a group
health plan or issuer shall count a period of
creditable coverage with respect to any class
or category of benefits if any level of
benefits is covered within such class or
category.
``(C) Plan notice.--In the case of an
election with respect to a group health plan
under subparagraph (B) (whether or not health
insurance coverage is provided in connection
with such plan), the plan shall--
``(i) prominently state in any
disclosure statements concerning the
plan, and state to each enrollee at the
time of enrollment under the plan, that
the plan has made such election, and
``(ii) include in such statements a
description of the effect of this
election.
``(4) Establishment of period.--Periods of
creditable coverage with respect to an individual shall
be established through presentation of certifications
described in subsection (e) or in such other manner as
may be specified in regulations.
``(d) Exceptions.--
``(1) Exclusion not applicable to certain
newborns.--Subject to paragraph (4), a group health
plan, and a health insurance issuer offering group
health insurance coverage, may not impose any
preexisting condition exclusion in the case of an
individual who, as of the last day of the 30-day period
beginning with the date of birth, is covered under
creditable coverage.
``(2) Exclusion not applicable to certain adopted
children.--Subject to paragraph (4), a group health
plan, and a health insurance issuer offering group
health insurance coverage, may not impose any
preexisting condition exclusion in the case of a child
who is adopted or placed for adoption before attaining
18 years of age and who, as of the last day of the 30-
day period beginning on the date of the adoption or
placement for adoption, is covered under creditable
coverage. The previous sentence shall not apply to
coverage before the date of such adoption or placement
for adoption.
``(3) Exclusion not applicable to pregnancy.--A
group health plan, and health insurance issuer offering
group health insurance coverage, may not impose any
preexisting condition exclusion relating to pregnancy
as a preexisting condition.
``(4) Loss if break in coverage.--Paragraphs (1)
and (2) shall no longer apply to an individual after
the end of the first 63-day period during all of which
the individual was not covered under any creditable
coverage.
``(e) Certifications and Disclosure of Coverage.--
``(1) Requirement for certification of period of
creditable coverage.--
``(A) In general.--A group health plan, and
a health insurance issuer offering group health
insurance coverage, shall provide the
certification described in subparagraph (B)--
``(i) at the time an individual
ceases to be covered under the plan or
otherwise becomes covered under a COBRA
continuation provision,
``(ii) in the case of an individual
becoming covered under such a
provision, at the time the individual
ceases to be covered under such
provision, and
``(iii) on the request on behalf of
an individual made not later than 24
months after the date of cessation of
the coverage described in clause (i) or
(ii), whichever is later.
The certification under clause (i) may be
provided, to the extent practicable, at a time
consistent with notices required under any
applicable COBRA continuation provision.
``(B) Certification.--The certification
described in this subparagraph is a written
certification of--
``(i) the period of creditable
coverage of the individual under such
plan and the coverage (if any) under
such COBRA continuation provision, and
``(ii) the waiting period (if any)
(and affiliation period, if applicable)
imposed with respect to the individual
for any coverage under such plan.
``(C) Issuer compliance.--To the extent
that medical care under a group health plan
consists of group health insurance coverage,
the plan is deemed to have satisfied the
certification requirement under this paragraph
if the health insurance issuer offering the
coverage provides for such certification in
accordance with this paragraph.
``(2) Disclosure of information on previous
benefits.--In the case of an election described in
subsection (c)(3)(B) by a group health plan or health
insurance issuer, if the plan or issuer enrolls an
individual for coverage under the plan and the
individual provides a certification of coverage of the
individual under paragraph (1)--
``(A) upon request of such plan or issuer,
the entity which issued the certification
provided by the individual shall promptly
disclose to such requesting plan or issuer
information on coverage of classes and
categories of health benefits available under
such entity's plan or coverage, and
``(B) such entity may charge the requesting
plan or issuer for the reasonable cost of
disclosing such information.
``(3) Regulations.--The Secretary shall establish
rules to prevent an entity's failure to provide
information under paragraph (1) or (2) with respect to
previous coverage of an individual from adversely
affecting any subsequent coverage of the individual
under another group health plan or health insurance
coverage.
``(f) Special Enrollment Periods.--
``(1) Individuals losing other coverage.--A group
health plan, and a health insurance issuer offering
group health insurance coverage in connection with a
group health plan, shall permit an employee who is
eligible, but not enrolled, for coverage under the
terms of the plan (or a dependent of such an employee
if the dependent is eligible, but not enrolled, for
coverage under such terms) to enroll for coverage under
the terms of the plan if each of the following
conditions is met:
``(A) The employee or dependent was covered
under a group health plan or had health
insurance coverage at the time coverage was
previously offered to the employee or
dependent.
``(B) The employee stated in writing at
such time that coverage under a group health
plan or health insurance coverage was the
reason for declining enrollment, but only if
the plan sponsor or issuer (if applicable)
required such a statement at such time and
provided the employee with notice of such
requirement (and the consequences of such
requirement) at such time.
``(C) The employee's or dependent's
coverage described in subparagraph (A)--
``(i) was under a COBRA
continuation provision and the coverage
under such provision was exhausted; or
``(ii) was not under such a
provision and either the coverage was
terminated as a result of loss of
eligibility for the coverage (including
as a result of legal separation,
divorce, death, termination of
employment, or reduction in the number
of hours of employment) or employer
contributions towards such coverage
were terminated.
``(D) Under the terms of the plan, the
employee requests such enrollment not later
than 30 days after the date of exhaustion of
coverage described in subparagraph (C)(i) or
termination of coverage or employer
contribution described in subparagraph (C)(ii).
``(2) For dependent beneficiaries.--
``(A) In general.--If--
``(i) a group health plan makes
coverage available with respect to a
dependent of an individual,
``(ii) the individual is a
participant under the plan (or has met
any waiting period applicable to
becoming a participant under the plan
and is eligible to be enrolled under
the plan but for a failure to enroll
during a previous enrollment period),
and
``(iii) a person becomes such a
dependent of the individual through
marriage, birth, or adoption or
placement for adoption,
the group health plan shall provide for a
dependent special enrollment period described
in subparagraph (B) during which the person
(or, if not otherwise enrolled, the individual)
may be enrolled under the plan as a dependent
of the individual, and in the case of the birth
or adoption of a child, the spouse of the
individual may be enrolled as a dependent of
the individual if such spouse is otherwise
eligible for coverage.
``(B) Dependent special enrollment
period.--A dependent special enrollment period
under this subparagraph shall be a period of
not less than 30 days and shall begin on the
later of--
``(i) the date dependent coverage
is made available, or
``(ii) the date of the marriage,
birth, or adoption or placement for
adoption (as the case may be) described
in subparagraph (A)(iii).
``(C) No waiting period.--If an individual
seeks to enroll a dependent during the first 30
days of such a dependent special enrollment
period, the coverage of the dependent shall
become effective--
``(i) in the case of marriage, not
later than the first day of the first
month beginning after the date the
completed request for enrollment is
received;
``(ii) in the case of a dependent's
birth, as of the date of such birth; or
``(iii) in the case of a
dependent's adoption or placement for
adoption, the date of such adoption or
placement for adoption.
``(g) Use of Affiliation Period by HMOs as Alternative to
Preexisting Condition Exclusion.--
``(1) In general.--In the case of a group health
plan that offers medical care through health insurance
coverage offered by a health maintenance organization,
the plan may provide for an affiliation period with
respect to coverage through the organization only if--
``(A) no preexisting condition exclusion is
imposed with respect to coverage through the
organization,
``(B) the period is applied uniformly
without regard to any health status-related
factors, and
``(C) such period does not exceed 2 months
(or 3 months in the case of a late enrollee).
``(2) Affiliation period.--
``(A) Defined.--For purposes of this part,
the term `affiliation period' means a period
which, under the terms of the health insurance
coverage offered by the health maintenance
organization, must expire before the health
insurance coverage becomes effective. The
organization is not required to provide health
care services or benefits during such period
and no premium shall be charged to the
participant or beneficiary for any coverage
during the period.
``(B) Beginning.--Such period shall begin
on the enrollment date.
``(C) Runs concurrently with waiting
periods.--An affiliation period under a plan
shall run concurrently with any waiting period
under the plan.
``(3) Alternative methods.--A health maintenance
organization described in paragraph (1) may use
alternative methods, from those described in such
paragraph, to address adverse selection as approved by
the State insurance commissioner or official or
officials designated by the State to enforce the
requirements of part A of title XXVII of the Public
Health Service Act for the State involved with respect
to such issuer.
``SEC. 702. PROHIBITING DISCRIMINATION AGAINST INDIVIDUAL PARTICIPANTS
AND BENEFICIARIES BASED ON HEALTH STATUS.
``(a) In Eligibility to Enroll.--
``(1) In general.--Subject to paragraph (2), a
group health plan, and a health insurance issuer
offering group health insurance coverage in connection
with a group health plan, may not establish rules for
eligibility (including continued eligibility) of any
individual to enroll under the terms of the plan based
on any of the following health status-related factors
in relation to the individual or a dependent of the
individual:
``(A) Health status.
``(B) Medical condition (including both
physical and mental illnesses).
``(C) Claims experience.
``(D) Receipt of health care.
``(E) Medical history.
``(F) Genetic information.
``(G) Evidence of insurability (including
conditions arising out of acts of domestic
violence).
``(H) Disability.
``(2) No application to benefits or exclusions.--To
the extent consistent with section 701, paragraph (1)
shall not be construed--
``(A) to require a group health plan, or
group health insurance coverage, to provide
particular benefits other than those provided
under the terms of such plan or coverage, or
``(B) to prevent such a plan or coverage
from establishing limitations or restrictions
on the amount, level, extent, or nature of the
benefits or coverage for similarly situated
individuals enrolled in the plan or coverage.
``(3) Construction.--For purposes of paragraph (1),
rules for eligibility to enroll under a plan include
rules defining any applicable waiting periods for such
enrollment.
``(b) In Premium Contributions.--
``(1) In general.--A group health plan, and a
health insurance issuer offering health insurance
coverage in connection with a group health plan, may
not require any individual (as a condition of
enrollment or continued enrollment under the plan) to
pay a premium or contribution which is greater than
such premium or contribution for a similarly situated
individual enrolled in the plan on the basis of any
health status-related factor in relation to the
individual or to an individual enrolled under the plan
as a dependent of the individual.
``(2) Construction.--Nothing in paragraph (1) shall
be construed--
``(A) to restrict the amount that an
employer may be charged for coverage under a
group health plan; or
``(B) to prevent a group health plan, and a
health insurance issuer offering group health
insurance coverage, from establishing premium
discounts or rebates or modifying otherwise
applicable copayments or deductibles in return
for adherence to programs of health promotion
and disease prevention.
``SEC. 703. GUARANTEED RENEWABILITY IN MULTIEMPLOYER PLANS AND MULTIPLE
EMPLOYER WELFARE ARRANGEMENTS.
``A group health plan which is a multiemployer plan or
which 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 a plan, other than--
``(1) for nonpayment of contributions;
``(2) for fraud or other intentional
misrepresentation of material fact by the employer;
``(3) for noncompliance with material plan
provisions;
``(4) because the plan is ceasing to offer any
coverage in a geographic area;
``(5) in the case of a plan that offers benefits
through a network plan, there is no longer any
individual enrolled through the employer who lives,
resides, or works in the service area of the network
plan and the plan applies this paragraph uniformly
without regard to the claims experience of employers or
any health status-related factor in relation to such
individuals or their dependents; and
``(6) for failure to meet the terms of an
applicable collective bargaining agreement, to renew a
collective bargaining or other agreement requiring or
authorizing contributions to the plan, or to employ
employees covered by such an agreement.
``SEC. 704. PREEMPTION; STATE FLEXIBILITY; CONSTRUCTION.
``(a) Continued Applicability of State Law With Respect to
Health Insurance Issuers.--
``(1) In General.--Subject to paragraph (2) and
except as provided in subsection (b), this part shall
not be construed to supersede any provision of State
law which establishes, implements, or continues in
effect any standard or requirement solely relating to
health insurance issuers in connection with group
health insurance coverage except to the extent that
such standard or requirement prevents the application
of a requirement of this part.
``(2) Continued preemption with respect to group
health plans.--Nothing in this part shall be construed
to affect or modify the provisions of section 514 with
respect to group health plans.
``(b) Special Rules in Case of Portability Requirements.--
``(1) In general.--Subject to paragraph (2), the
provisions of this part relating to health insurance
coverage offered by a health insurance issuer supersede
any provision of State law which establishes,
implements, or continues in effect a standard or
requirement applicable to imposition of a preexisting
condition exclusion specifically governed by section
701 which differs from the standards or requirements
specified in such section.
``(2) Exceptions.--Only in relation to health
insurance coverage offered by a health insurance
issuer, the provisions of this part do not supersede
any provision of State law to the extent that such
provision--
``(i) substitutes for the reference to `6-
month period' in section 701(a)(1) a reference
to any shorter period of time;
``(ii) substitutes for the reference to `12
months' and `18 months' in section 701(a)(2) a
reference to any shorter period of time;
``(iii) substitutes for the references to
`63' days in sections 701(c)(2)(A) and
701(d)(4)(A) a reference to any greater number
of days;
``(iv) substitutes for the reference to
`30-day period' in sections 701(b)(2) and
701(d)(1) a reference to any greater period;
``(v) prohibits the imposition of any
preexisting condition exclusion in cases not
described in section 701(d) or expands the
exceptions described in such section;
``(vi) requires special enrollment periods
in addition to those required under section
701(f); or
``(vii) reduces the maximum period
permitted in an affiliation period under
section 701(g)(1)(B).
``(c) Rules of Construction.--Nothing in this part shall be
construed as requiring a group health plan or health insurance
coverage to provide specific benefits under the terms of such
plan or coverage.
``(d) Definitions.--For purposes of this section--
``(1) State law.--The term `State law' includes all
laws, decisions, rules, regulations, or other State
action having the effect of law, of any State. A law of
the United States applicable only to the District of
Columbia shall be treated as a State law rather than a
law of the United States.
``(2) State.--The term `State' includes a State,
the Northern Mariana Islands, any political
subdivisions of a State or such Islands, or any agency
or instrumentality of either.
``SEC. 705. SPECIAL RULES RELATING TO GROUP HEALTH PLANS.
``(a) General Exception for Certain Small Group Health
Plans.--The requirements of this part shall not apply to any
group health plan (and group health insurance coverage offered
in connection with a group health plan) for any plan year if,
on the first day of such plan year, such plan has less than 2
participants who are current employees.
``(b) Exception for Certain Benefits.--The requirements of
this part shall not apply to any group health plan (and group
health insurance coverage) in relation to its provision of
excepted benefits described in section 706(c)(1).
``(c) Exception for Certain Benefits If Certain Conditions
Met.--
``(1) Limited, excepted benefits.--The requirements
of this part shall not apply to any group health plan
(and group health insurance coverage offered in
connection with a group health plan) in relation to its
provision of excepted benefits described in section
706(c)(2) if the benefits--
``(A) are provided under a separate policy,
certificate, or contract of insurance; or
``(B) are otherwise not an integral part of
the plan.
``(2) Noncoordinated, excepted benefits.--The
requirements of this part shall not apply to any group
health plan (and group health insurance coverage
offered in connection with a group health plan) in
relation to its provision of excepted benefits
described in section 706(c)(3) if all of the following
conditions are met:
``(A) The benefits are provided under a
separate policy, certificate, or contract of
insurance.
``(B) There is no coordination between the
provision of such benefits and any exclusion of
benefits under any group health plan maintained
by the same plan sponsor.
``(C) Such benefits are paid with respect
to an event without regard to whether benefits
are provided with respect to such an event
under any group health plan maintained by the
same plan sponsor.
``(3) Supplemental excepted benefits.--The
requirements of this part shall not apply to any group
health plan (and group health insurance coverage) in
relation to its provision of excepted benefits
described in section 706(c)(4) if the benefits are
provided under a separate policy, certificate, or
contract of insurance.
``(d) Treatment of Partnerships.--For purposes of this
part--
``(1) Treatment as a group health plan.--Any plan,
fund, or program which would not be (but for this
subsection) an employee welfare benefit plan and which
is established or maintained by a partnership, to the
extent that such plan, fund, or program provides
medical care (including items and services paid for as
medical care) to present or former partners in the
partnership or to their dependents (as defined under
the terms of the plan, fund, or program), directly or
through insurance, reimbursement, or otherwise, shall
be treated (subject to paragraph (2)) as an employee
welfare benefit plan which is a group health plan.
``(2) Employer.--In the case of a group health
plan, the term `employer' also includes the partnership
in relation to any partner.
``(3) Participants of group health plans.--In the
case of a group health plan, the term `participant'
also includes--
``(A) in connection with a group health
plan maintained by a partnership, an individual
who is a partner in relation to the
partnership, or
``(B) in connection with a group health
plan maintained by a self-employed individual
(under which one or more employees are
participants), the self-employed individual,
if such individual is, or may become, eligible to
receive a benefit under the plan or such individual's
beneficiaries may be eligible to receive any such
benefit.
``SEC. 706. DEFINITIONS.
``(a) Group Health Plan.--For purposes of this part--
``(1) In general.--The term `group health plan'
means an employee welfare benefit plan to the extent
that the plan provides medical care (as defined in
paragraph (2) and including items and services paid for
as medical care) to employees or their dependents (as
defined under the terms of the plan) directly or
through insurance, reimbursement, or otherwise.
``(2) Medical care.--The term `medical care' means
amounts paid for--
``(A) the diagnosis, cure, mitigation,
treatment, or prevention of disease, or amounts
paid for the purpose of affecting any structure
or function of the body,
``(B) amounts paid for transportation
primarily for and essential to medical care
referred to in subparagraph (A), and
``(C) amounts paid for insurance covering
medical care referred to in subparagraphs (A)
and (B).
``(b) Definitions Relating to Health Insurance.--For
purposes of this part--
``(1) Health insurance coverage.--The term `health
insurance coverage' means benefits consisting of
medical care (provided directly, through insurance or
reimbursement, or otherwise and including items and
services paid for as medical care) under any hospital
or medical service policy or certificate, hospital or
medical service plan contract, or health maintenance
organization contract offered by a health insurance
issuer.
``(2) Health insurance issuer.--The term `health
insurance issuer' means an insurance company, insurance
service, or insurance organization (including a health
maintenance organization, as defined in paragraph (3))
which is licensed to engage in the business of
insurance in a State and which is subject to State law
which regulates insurance (within the meaning of
section 514(b)(2)). Such term does not include a group
health plan.
``(3) Health maintenance organization.--The term
`health maintenance organization' means--
``(A) a Federally qualified health
maintenance organization (as defined in section
1301(a) of the Public Health Service Act (42
U.S.C. 300e(a))),
``(B) an organization recognized under
State law as a health maintenance organization,
or
``(C) a similar organization regulated
under State law for solvency in the same manner
and to the same extent as such a health
maintenance organization.
``(4) Group health insurance coverage.--The term
`group health insurance coverage' means, in connection
with a group health plan, health insurance coverage
offered in connection with such plan.
``(c) Excepted Benefits.--For purposes of this part, the
term `excepted benefits' means benefits under one or more (or
any combination thereof) of the following:
``(1) Benefits not subject to requirements.--
``(A) Coverage only for accident, or
disability income insurance, or any combination
thereof.
``(B) Coverage issued as a supplement to
liability insurance.
``(C) Liability insurance, including
general liability insurance and automobile
liability insurance.
``(D) Workers' compensation or similar
insurance.
``(E) Automobile medical payment insurance.
``(F) Credit-only insurance.
``(G) Coverage for on-site medical clinics.
``(H) Other similar insurance coverage,
specified in regulations, under which benefits
for medical care are secondary or incidental to
other insurance benefits.
``(2) Benefits not subject to requirements if
offered separately.--
``(A) Limited scope dental or vision
benefits.
``(B) Benefits for long-term care, nursing
home care, home health care, community-based
care, or any combination thereof.
``(C) Such other similar, limited benefits
as are specified in regulations.
``(3) Benefits not subject to requirements if
offered as independent, noncoordinated benefits.--
``(A) Coverage only for a specified disease
or illness.
``(B) Hospital indemnity or other fixed
indemnity insurance.
``(4) Benefits not subject to requirements if
offered as separate insurance policy.--Medicare
supplemental health insurance (as defined under section
1882(g)(1) of the Social Security Act), coverage
supplemental to the coverage provided under chapter 55
of title 10, United States Code, and similar
supplemental coverage provided to coverage under a
group health plan.
``(d) Other Definitions.--For purposes of this part--
``(1) COBRA continuation provision.--The term
`COBRA continuation provision' means any of the
following:
``(A) Part 6 of this subtitle.
``(B) Section 4980B of the Internal Revenue
Code of 1986, other than subsection (f)(1) of
such section insofar as it relates to pediatric
vaccines.
``(C) Title XXII of the Public Health
Service Act.
``(2) Health status-related factor.--The term
`health status-related factor' means any of the factors
described in section 702(a)(1).
``(3) Network plan.--The term `network plan' means
health insurance coverage offered by a health insurance
issuer under which the financing and delivery of
medical care (including items and services paid for as
medical care) are provided, in whole or in part,
through a defined set of providers under contract with
the issuer.
``(4) Placed for adoption.--The term `placement',
or being `placed', for adoption, has the meaning given
such term in section 609(c)(3)(B).
``SEC. 707. REGULATIONS.
``The Secretary, consistent with section 104 of the Health
Care Portability and Accountability Act of 1996, may promulgate
such regulations as may be necessary or appropriate to carry
out the provisions of this part. The Secretary may promulgate
any interim final rules as the Secretary determines are
appropriate to carry out this part.''.
(b) Enforcement with Respect to Health Insurance Issuers.--
Section 502(b) of such Act (29 U.S.C. 1132(b)) is amended by
adding at the end the following new paragraph:
``(3) The Secretary is not authorized to enforce under this
part any requirement of part 7 against a health insurance
issuer offering health insurance coverage in connection with a
group health plan (as defined in section 706(a)(1)). Nothing in
this paragraph shall affect the authority of the Secretary to
issue regulations to carry out such part.''.
(c) Disclosure of Information to Participants and
Beneficiaries.--
(1) In general.--Section 104(b)(1) of such Act (29
U.S.C. 1024(b)(1)) is amended in the matter following
subparagraph (B)--
(A) by striking ``102(a)(1),'' and
inserting ``102(a)(1) (other than a material
reduction in covered services or benefits
provided in the case of a group health plan (as
defined in section 706(a)(1))),''; and
(B) by adding at the end the following new
sentences: ``If there is a modification or
change described in section 102(a)(1) that is a
material reduction in covered services or
benefits provided under a group health plan (as
defined in section 706(a)(1)), a summary
description of such modification or change
shall be furnished to participants and
beneficiaries not later than 60 days after the
date of the adoption of the modification or
change. In the alternative, the plan sponsors
may provide such description at regular
intervals of not more than 90 days. The
Secretary shall issue regulations within 180
days after the date of enactment of the Health
Insurance Portability and Accountability Act of
1996, providing alternative mechanisms to
delivery by mail through which group health
plans (as so defined) may notify participants
and beneficiaries of material reductions in
covered services or benefits.''.
(2) Plan description and summary.--Section 102(b)
of such Act (29 U.S.C. 1022(b)) is amended--
(A) by inserting ``in the case of a group
health plan (as defined in section 706(a)(1)),
whether a health insurance issuer (as defined
in section 706(b)(2)) is responsible for the
financing or administration (including payment
of claims) of the plan and (if so) the name and
address of such issuer;'' after ``type of
administration of the plan;''; and
(B) by inserting ``including the office at
the Department of Labor through which
participants and beneficiaries may seek
assistance or information regarding their
rights under this Act and the Health Insurance
Portability and Accountability Act of 1996 with
respect to health benefits that are offered
through a group health plan (as defined in
section 706(a)(1))'' after ``benefits under the
plan''.
(d) Treatment of Health Insurance Issuers Offering Health
Insurance Coverage to Noncovered Plans.--Section 4(b) of such
Act (29 U.S.C. 1003(b)) is amended by adding at the end (after
and below paragraph (5)) the following:
``The provisions of part 7 of subtitle B shall not apply to a
health insurance issuer (as defined in section 706(b)(2))
solely by reason of health insurance coverage (as defined in
section 706(b)(1)) provided by such issuer in connection with a
group health plan (as defined in section 706(a)(1)) if the
provisions of this title do not apply to such group health
plan.''.
(e) Reporting and Enforcement with Respect to Certain
Arrangements.--
(1) In general.--Section 101 of such Act (29 U.S.C.
1021) is amended--
(A) by redesignating subsection (g) as
subsection (h), and
(B) by inserting after subsection (f) the
following new subsection:
``(g) Reporting by Certain Arrangements.--The Secretary
may, by regulation, require multiple employer welfare
arrangements providing benefits consisting of medical care
(within the meaning of section 706(a)(2)) which are not group
health plans to report, not more frequently than annually, in
such form and such manner as the Secretary may require for the
purpose of determining the extent to which the requirements of
part 7 are being carried out in connection with such
benefits.''.
(2) Enforcement.--
(A) In general.--Section 502 of such Act
(29 U.S.C. 1132) is amended--
(i) in subsection (a)(6), by
striking ``under subsection (c)(2) or
(i) or (l)'' and inserting ``under
paragraph (2), (4), or (5) of
subsection (c) or under subsection (i)
or (l)''; and
(ii) in the last 2 sentences of
subsection (c), by striking ``For
purposes of this paragraph'' and all
that follows through ``The Secretary
and'' and inserting the following:
``(5) The Secretary may assess a civil penalty against any
person of up to $1,000 a day from the date of the person's
failure or refusal to file the information required to be filed
by such person with the Secretary under regulations prescribed
pursuant to section 101(g).
``(6) The Secretary and''.
(B) Technical and conforming amendment.--
Section 502(c)(1) of such Act (29 U.S.C.
1132(c)(1)) is amended by adding at the end the
following sentence: ``For purposes of this
paragraph, each violation described in
subparagraph (A) with respect to any single
participant, and each violation described in
subparagraph (B) with respect to any single
participant or beneficiary, shall be treated as
a separate violation.''.
(3) Coordination.--Section 506 of such Act (29
U.S.C. 1136) is amended by adding at the end the
following new subsection:
``(c) Coordination of Enforcement with States with Respect
to Certain Arrangements.--A State may enter into an agreement
with the Secretary for delegation to the State of some or all
of the Secretary's authority under sections 502 and 504 to
enforce the requirements under part 7 in connection with
multiple employer welfare arrangements, providing medical care
(within the meaning of section 706(a)(2)), which are not group
health plans.''.
(f) Conforming Amendments.--
(1) Section 514(b) of such Act (29 U.S.C. 1144(b))
is amended by adding at the end the following new
paragraph:
``(9) For additional provisions relating to group health
plans, see section 704.''.
(2)(A) Part 6 of subtitle B of title I of such Act
(29 U.S.C. 1161 et seq.) is amended by striking the
heading and inserting the following:
``Part 6--Continuation Coverage and Additional Standards for Group
Health Plans''.
(B) The table of contents in section 1 of such Act
is amended by striking the item relating to the heading
for part 6 of subtitle B of title I and inserting the
following:
``Part 6--Continuation Coverage and Additional Standards for Group
Health Plans''.
(3) The table of contents in section 1 of such Act
(as amended by the preceding provisions of this
section) is amended by inserting after the items
relating to part 6 the following new items:
``Part 7--Group Health Plan Portability, Access, and Renewability
Requirements
``Sec. 701. Increased portability through limitation on preexisting
condition exclusions.
``Sec. 702. Prohibiting discrimination against individual participants
and beneficiaries based on health status.
``Sec. 703. Guaranteed renewability in multiemployer plans and multiple
employer welfare arrangements.
``Sec. 704. Preemption; State flexibility; construction.
``Sec. 705. Special rules relating to group health plans.
``Sec. 706. Definitions.
``Sec. 707. Regulations.''.
(g) Effective Dates.--
(1) In general.--Except as provided in this
section, this section (and the amendments made by this
section) shall apply with respect to group health plans
for plan years beginning after June 30, 1997.
(2) Determination of creditable coverage.--
(A) Period of coverage.--
(i) In general.--Subject to clause
(ii), no period before July 1, 1996,
shall be taken into account under part
7 of subtitle B of title I of the
Employee Retirement Income Security Act
of 1974 (as added by this section) in
determining creditable coverage.
(ii) Special rule for certain
periods.--The Secretary of Labor,
consistent with section 104, shall
provide for a process whereby
individuals who need to establish
creditable coverage for periods before
July 1, 1996, and who would have such
coverage credited but for clause (i)
may be given credit for creditable
coverage for such periods through the
presentation of documents or other
means.
(B) Certifications, etc.--
(i) In general.--Subject to clauses
(ii) and (iii), subsection (e) of
section 701 of the Employee Retirement
Income Security Act of 1974 (as added
by this section) shall apply to events
occurring after June 30, 1996.
(ii) No certification required to
be provided before june 1, 1997.--In no
case is a certification required to be
provided under such subsection before
June 1, 1997.
(iii) Certification only on written
request for events occurring before
october 1, 1996.--In the case of an
event occurring after June 30, 1996,
and before October 1, 1996, a
certification is not required to be
provided under such subsection unless
an individual (with respect to whom the
certification is otherwise required to
be made) requests such certification in
writing.
(C) Transitional rule.--In the case of an
individual who seeks to establish creditable
coverage for any period for which certification
is not required because it relates to an event
occurring before June 30, 1996--
(i) the individual may present
other credible evidence of such
coverage in order to establish the
period of creditable coverage; and
(ii) a group health plan and a
health insurance issuer shall not be
subject to any penalty or enforcement
action with respect to the plan's or
issuer's crediting (or not crediting)
such coverage if the plan or issuer has
sought to comply in good faith with the
applicable requirements under the
amendments made by this section.
(3) Special rule for collective bargaining
agreements.--Except as provided in paragraph (2), in
the case of a group health plan maintained pursuant to
1 or more collective bargaining agreements between
employee representatives and one or more employers
ratified before the date of the enactment of this Act,
part 7 of subtitle B of title I of Employee Retirement
Income Security Act of 1974 (other than section 701(e)
thereof) shall not apply to plan years beginning before
the later of--
(A) the date on which the last of the
collective bargaining agreements relating to
the plan terminates (determined without regard
to any extension thereof agreed to after the
date of the enactment of this Act), or
(B) July 1, 1997.
For purposes of subparagraph (A), any plan amendment
made pursuant to a collective bargaining agreement
relating to the plan which amends the plan solely to
conform to any requirement of such part shall not be
treated as a termination of such collective bargaining
agreement.
(4) Timely regulations.--The Secretary of Labor,
consistent with section 104, shall first issue by not
later than April 1, 1997, such regulations as may be
necessary to carry out the amendments made by this
section.
(5) Limitation on actions.--No enforcement action
shall be taken, pursuant to the amendments made by this
section, against a group health plan or health
insurance issuer with respect to a violation of a
requirement imposed by such amendments before January
1, 1998, or, if later, the date of issuance of
regulations referred to in paragraph (4), if the plan
or issuer has sought to comply in good faith with such
requirements.
SEC. 102. THROUGH THE PUBLIC HEALTH SERVICE ACT.
(a) In General.--The Public Health Service Act is amended
by adding at the end the following new title:
``TITLE XXVII--ASSURING PORTABILITY, AVAILABILITY, AND RENEWABILITY OF
HEALTH INSURANCE COVERAGE
``Part A--Group Market Reforms
``Subpart 1--Portability, Access, and Renewability Requirements
``SEC. 2701. INCREASED PORTABILITY THROUGH LIMITATION ON PREEXISTING
CONDITION EXCLUSIONS.
``(a) Limitation on Preexisting Condition Exclusion Period;
Crediting for Periods of Previous Coverage.--Subject to
subsection (d), a group health plan, and a health insurance
issuer offering group health insurance coverage, may, with
respect to a participant or beneficiary, impose a preexisting
condition exclusion only if--
``(1) such exclusion relates to a condition
(whether physical or mental), 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;
``(2) such exclusion extends for a period of not
more than 12 months (or 18 months in the case of a late
enrollee) after the enrollment date; and
``(3) the period of any such preexisting condition
exclusion is reduced by the aggregate of the periods of
creditable coverage (if any, as defined in subsection
(c)(1)) applicable to the participant or beneficiary as
of the enrollment date.
``(b) Definitions.--For purposes of this part--
``(1) Preexisting condition exclusion.--
``(A) In general.--The term `preexisting
condition exclusion' means, with respect to
coverage, a limitation or exclusion of benefits
relating to a condition based on the fact that
the condition was present before the date of
enrollment for such coverage, whether or not
any medical advice, diagnosis, care, or
treatment was recommended or received before
such date.
``(B) Treatment of genetic information.--
Genetic information shall not be treated as a
condition described in subsection (a)(1) in the
absence of a diagnosis of the condition related
to such information.
``(2) Enrollment date.--The term `enrollment date'
means, with respect to an individual covered under a
group health plan or health insurance coverage, the
date of enrollment of the individual in the plan or
coverage or, if earlier, the first day of the waiting
period for such enrollment.
``(3) Late enrollee.--The term `late enrollee'
means, with respect to coverage under a group health
plan, a participant or beneficiary who enrolls under
the plan other than during--
``(A) the first period in which the
individual is eligible to enroll under the
plan, or
``(B) a special enrollment period under
subsection (f).
``(4) Waiting period.--The term `waiting period'
means, with respect to a group health plan and an
individual who is a potential participant or
beneficiary in the plan, the period that must pass with
respect to the individual before the individual is
eligible to be covered for benefits under the terms of
the plan.
``(c) Rules Relating to Crediting Previous Coverage.--
``(1) Creditable coverage defined.--For purposes of
this title, the term `creditable coverage' means, with
respect to an individual, coverage of the individual
under any of the following:
``(A) A group health plan.
``(B) Health insurance coverage.
``(C) Part A or part B of title XVIII of
the Social Security Act.
``(D) Title XIX of the Social Security Act,
other than coverage consisting solely of
benefits under section 1928.
``(E) Chapter 55 of title 10, United States
Code.
``(F) A medical care program of the Indian
Health Service or of a tribal organization.
``(G) A State health benefits risk pool.
``(H) A health plan offered under chapter
89 of title 5, United States Code.
``(I) A public health plan (as defined in
regulations).
``(J) A health benefit plan under section
5(e) of the Peace Corps Act (22 U.S.C.
2504(e)).
Such term does not include coverage consisting solely
of coverage of excepted benefits (as defined in section
2791(c)).
``(2) Not counting periods before significant
breaks in coverage.--
``(A) In general.--A period of creditable
coverage shall not be counted, with respect to
enrollment of an individual under a group
health plan, if, after such period and before
the enrollment date, there was a 63-day period
during all of which the individual was not
covered under any creditable coverage.
``(B) Waiting period not treated as a break
in coverage.--For purposes of subparagraph (A)
and subsection (d)(4), any period that an
individual is in a waiting period for any
coverage under a group health plan (or for
group health insurance coverage) or is in an
affiliation period (as defined in subsection
(g)(2)) shall not be taken into account in
determining the continuous period under
subparagraph (A).
``(3) Method of crediting coverage.--
``(A) Standard method.--Except as otherwise
provided under subparagraph (B), for purposes
of applying subsection (a)(3), a group health
plan, and a health insurance issuer offering
group health insurance coverage, shall count a
period of creditable coverage without regard to
the specific benefits covered during the
period.
``(B) Election of alternative method.--A
group health plan, or a health insurance issuer
offering group health insurance, may elect to
apply subsection (a)(3) based on coverage of
benefits within each of several classes or
categories of benefits specified in regulations
rather than as provided under subparagraph (A).
Such election shall be made on a uniform basis
for all participants and beneficiaries. Under
such election a group health plan or issuer
shall count a period of creditable coverage
with respect to any class or category of
benefits if any level of benefits is covered
within such class or category.
``(C) Plan notice.--In the case of an
election with respect to a group health plan
under subparagraph (B) (whether or not health
insurance coverage is provided in connection
with such plan), the plan shall--
``(i) prominently state in any
disclosure statements concerning the
plan, and state to each enrollee at the
time of enrollment under the plan, that
the plan has made such election, and
``(ii) include in such statements a
description of the effect of this
election.
``(D) Issuer notice.--In the case of an
election under subparagraph (B) with respect to
health insurance coverage offered by an issuer
in the small or large group market, the
issuer--
``(i) shall prominently state in
any disclosure statements concerning
the coverage, and to each employer at
the time of the offer or sale of the
coverage, that the issuer has made such
election, and
``(ii) shall include in such
statements a description of the effect
of such election.
``(4) Establishment of period.--Periods of
creditable coverage with respect to an individual shall
be established through presentation of certifications
described in subsection (e) or in such other manner as
may be specified in regulations.
``(d) Exceptions.--
``(1) Exclusion not applicable to certain
newborns.--Subject to paragraph (4), a group health
plan, and a health insurance issuer offering group
health insurance coverage, may not impose any
preexisting condition exclusion in the case of an
individual who, as of the last day of the 30-day period
beginning with the date of birth, is covered under
creditable coverage.
``(2) Exclusion not applicable to certain adopted
children.--Subject to paragraph (4), a group health
plan, and a health insurance issuer offering group
health insurance coverage, may not impose any
preexisting condition exclusion in the case of a child
who is adopted or placed for adoption before attaining
18 years of age and who, as of the last day of the 30-
day period beginning on the date of the adoption or
placement for adoption, is covered under creditable
coverage. The previous sentence shall not apply to
coverage before the date of such adoption or placement
for adoption.
``(3) Exclusion not applicable to pregnancy.--A
group health plan, and health insurance issuer offering
group health insurance coverage, may not impose any
preexisting condition exclusion relating to pregnancy
as a preexisting condition.
``(4) Loss if break in coverage.--Paragraphs (1)
and (2) shall no longer apply to an individual after
the end of the first 63-day period during all of which
the individual was not covered under any creditable
coverage.
``(e) Certifications and Disclosure of Coverage.--
``(1) Requirement for certification of period of
creditable coverage.--
``(A) In general.--A group health plan, and
a health insurance issuer offering group health
insurance coverage, shall provide the
certification described in subparagraph (B)--
``(i) at the time an individual
ceases to be covered under the plan or
otherwise becomes covered under a COBRA
continuation provision,
``(ii) in the case of an individual
becoming covered under such a
provision, at the time the individual
ceases to be covered under such
provision, and
``(iii) on the request on behalf of
an individual made not later than 24
months after the date of cessation of
the coverage described in clause (i) or
(ii), whichever is later.
The certification under clause (i) may be
provided, to the extent practicable, at a time
consistent with notices required under any
applicable COBRA continuation provision.
``(B) Certification.--The certification
described in this subparagraph is a written
certification of--
``(i) the period of creditable
coverage of the individual under such
plan and the coverage (if any) under
such COBRA continuation provision, and
``(ii) the waiting period (if any)
(and affiliation period, if applicable)
imposed with respect to the individual
for any coverage under such plan.
``(C) Issuer compliance.--To the extent
that medical care under a group health plan
consists of group health insurance coverage,
the plan is deemed to have satisfied the
certification requirement under this paragraph
if the health insurance issuer offering the
coverage provides for such certification in
accordance with this paragraph.
``(2) Disclosure of information on previous
benefits.--In the case of an election described in
subsection (c)(3)(B) by a group health plan or health
insurance issuer, if the plan or issuer enrolls an
individual for coverage under the plan and the
individual provides a certification of coverage of the
individual under paragraph (1)--
``(A) upon request of such plan or issuer,
the entity which issued the certification
provided by the individual shall promptly
disclose to such requesting plan or issuer
information on coverage of classes and
categories of health benefits available under
such entity's plan or coverage, and
``(B) such entity may charge the requesting
plan or issuer for the reasonable cost of
disclosing such information.
``(3) Regulations.--The Secretary shall establish
rules to prevent an entity's failure to provide
information under paragraph (1) or (2) with respect to
previous coverage of an individual from adversely
affecting any subsequent coverage of the individual
under another group health plan or health insurance
coverage.
``(f) Special Enrollment Periods.--
``(1) Individuals losing other coverage.--A group
health plan, and a health insurance issuer offering
group health insurance coverage in connection with a
group health plan, shall permit an employee who is
eligible, but not enrolled, for coverage under the
terms of the plan (or a dependent of such an employee
if the dependent is eligible, but not enrolled, for
coverage under such terms) to enroll for coverage under
the terms of the plan if each of the following
conditions is met:
``(A) The employee or dependent was covered
under a group health plan or had health
insurance coverage at the time coverage was
previously offered to the employee or
dependent.
``(B) The employee stated in writing at
such time that coverage under a group health
plan or health insurance coverage was the
reason for declining enrollment, but only if
the plan sponsor or issuer (if applicable)
required such a statement at such time and
provided the employee with notice of such
requirement (and the consequences of such
requirement) at such time.
``(C) The employee's or dependent's
coverage described in subparagraph (A)--
``(i) was under a COBRA
continuation provision and the coverage
under such provision was exhausted; or
``(ii) was not under such a
provision and either the coverage was
terminated as a result of loss of
eligibility for the coverage (including
as a result of legal separation,
divorce, death, termination of
employment, or reduction in the number
of hours of employment) or employer
contributions towards such coverage
were terminated.
``(D) Under the terms of the plan, the
employee requests such enrollment not later
than 30 days after the date of exhaustion of
coverage described in subparagraph (C)(i) or
termination of coverage or employer
contribution described in subparagraph (C)(ii).
``(2) For dependent beneficiaries.--
``(A) In general.--If--
``(i) a group health plan makes
coverage available with respect to a
dependent of an individual,
``(ii) the individual is a
participant under the plan (or has met
any waiting period applicable to
becoming a participant under the plan
and is eligible to be enrolled under
the plan but for a failure to enroll
during a previous enrollment period),
and
``(iii) a person becomes such a
dependent of the individual through
marriage, birth, or adoption or
placement for adoption,
the group health plan shall provide for a
dependent special enrollment period described
in subparagraph (B) during which the person
(or, if not otherwise enrolled, the individual)
may be enrolled under the plan as a dependent
of the individual, and in the case of the birth
or adoption of a child, the spouse of the
individual may be enrolled as a dependent of
the individual if such spouse is otherwise
eligible for coverage.
``(B) Dependent special enrollment
period.--A dependent special enrollment period
under this subparagraph shall be a period of
not less than 30 days and shall begin on the
later of--
``(i) the date dependent coverage
is made available, or
``(ii) the date of the marriage,
birth, or adoption or placement for
adoption (as the case may be) described
in subparagraph (A)(iii).
``(C) No waiting period.--If an individual
seeks to enroll a dependent during the first 30
days of such a dependent special enrollment
period, the coverage of the dependent shall
become effective--
``(i) in the case of marriage, not
later than the first day of the first
month beginning after the date the
completed request for enrollment is
received;
``(ii) in the case of a dependent's
birth, as of the date of such birth; or
``(iii) in the case of a
dependent's adoption or placement for
adoption, the date of such adoption or
placement for adoption.
``(g) Use of Affiliation Period by HMOs as Alternative to
Preexisting Condition Exclusion.--
``(1) In general.--A health maintenance
organization which offers health insurance coverage in
connection with a group health plan and which does not
impose any preexisting condition exclusion allowed
under subsection (a) with respect to any particular
coverage option may impose an affiliation period for
such coverage option, but only if--
``(A) such period is applied uniformly
without regard to any health status-related
factors; and
``(B) such period does not exceed 2 months
(or 3 months in the case of a late enrollee).
``(2) Affiliation period.--
``(A) Defined.--For purposes of this title,
the term `affiliation period' means a period
which, under the terms of the health insurance
coverage offered by the health maintenance
organization, must expire before the health
insurance coverage becomes effective. The
organization is not required to provide health
care services or benefits during such period
and no premium shall be charged to the
participant or beneficiary for any coverage
during the period.
``(B) Beginning.--Such period shall begin
on the enrollment date.
``(C) Runs concurrently with waiting
periods.--An affiliation period under a plan
shall run concurrently with any waiting period
under the plan.
``(3) Alternative methods.--A health maintenance
organization described in paragraph (1) may use
alternative methods, from those described in such
paragraph, to address adverse selection as approved by
the State insurance commissioner or official or
officials designated by the State to enforce the
requirements of this part for the State involved with
respect to such issuer.
``SEC. 2702. PROHIBITING DISCRIMINATION AGAINST INDIVIDUAL PARTICIPANTS
AND BENEFICIARIES BASED ON HEALTH STATUS.
``(a) In Eligibility to Enroll.--
``(1) In general.--Subject to paragraph (2), a
group health plan, and a health insurance issuer
offering group health insurance coverage in connection
with a group health plan, may not establish rules for
eligibility (including continued eligibility) of any
individual to enroll under the terms of the plan based
on any of the following health status-related factors
in relation to the individual or a dependent of the
individual:
``(A) Health status.
``(B) Medical condition (including both
physical and mental illnesses).
``(C) Claims experience.
``(D) Receipt of health care.
``(E) Medical history.
``(F) Genetic information.
``(G) Evidence of insurability (including
conditions arising out of acts of domestic
violence).
``(H) Disability.
``(2) No application to benefits or exclusions.--To
the extent consistent with section 701, paragraph (1)
shall not be construed--
``(A) to require a group health plan, or
group health insurance coverage, to provide
particular benefits other than those provided
under the terms of such plan or coverage, or
``(B) to prevent such a plan or coverage
from establishing limitations or restrictions
on the amount, level, extent, or nature of the
benefits or coverage for similarly situated
individuals enrolled in the plan or coverage.
``(3) Construction.--For purposes of paragraph (1),
rules for eligibility to enroll under a plan include
rules defining any applicable waiting periods for such
enrollment.
``(b) In Premium Contributions.--
``(1) In general.--A group health plan, and a
health insurance issuer offering health insurance
coverage in connection with a group health plan, may
not require any individual (as a condition of
enrollment or continued enrollment under the plan) to
pay a premium or contribution which is greater than
such premium or contribution for a similarly situated
individual enrolled in the plan on the basis of any
health status-related factor in relation to the
individual or to an individual enrolled under the plan
as a dependent of the individual.
``(2) Construction.--Nothing in paragraph (1) shall
be construed--
``(A) to restrict the amount that an
employer may be charged for coverage under a
group health plan; or
``(B) to prevent a group health plan, and a
health insurance issuer offering group health
insurance coverage, from establishing premium
discounts or rebates or modifying otherwise
applicable copayments or deductibles in return
for adherence to programs of health promotion
and disease prevention.
``Subpart 2--Provisions Applicable Only to Health Insurance Issuers
``SEC. 2711. GUARANTEED AVAILABILITY OF COVERAGE FOR EMPLOYERS IN THE
GROUP MARKET.
``(a) Issuance of Coverage in the Small Group Market.--
``(1) In general.--Subject to subsections (c)
through (f), each health insurance issuer that offers
health insurance coverage in the small group market in
a State--
``(A) must accept every small employer (as
defined in section 2791(e)(4)) in the State
that applies for such coverage; and
``(B) must accept for enrollment under such
coverage every eligible individual (as defined
in paragraph (2)) who applies for enrollment
during the period in which the individual first
becomes eligible to enroll under the terms of
the group health plan and may not place any
restriction which is inconsistent with section
2702 on an eligible individual being a
participant or beneficiary.
``(2) Eligible individual defined.--For purposes of
this section, the term `eligible individual' means,
with respect to a health insurance issuer that offers
health insurance coverage to a small employer in
connection with a group health plan in the small group
market, such an individual in relation to the employer
as shall be determined--
``(A) in accordance with the terms of such
plan,
``(B) as provided by the issuer under rules
of the issuer which are uniformly applicable in
a State to small employers in the small group
market, and
``(C) in accordance with all applicable
State laws governing such issuer and such
market.
``(b) Assuring Access in the Large Group Market.--
``(1) Reports to hhs.--The Secretary shall request
that the chief executive officer of each State submit
to the Secretary, by not later December 31, 2000, and
every 3 years thereafter a report on--
``(A) the access of large employers to
health insurance coverage in the State, and
``(B) the circumstances for lack of access
(if any) of large employers (or one or more
classes of such employers) in the State to such
coverage.
``(2) Triennial reports to congress.--The
Secretary, based on the reports submitted under
paragraph (1) and such other information as the
Secretary may use, shall prepare and submit to
Congress, every 3 years, a report describing the extent
to which large employers (and classes of such
employers) that seek health insurance coverage in the
different States are able to obtain access to such
coverage. Such report shall include such
recommendations as the Secretary determines to be
appropriate.
``(3) GAO report on large employer access to health
insurance coverage.--The Comptroller General shall
provide for a study of the extent to which classes of
large employers in the different States are able to
obtain access to health insurance coverage and the
circumstances for lack of access (if any) to such
coverage. The Comptroller General shall submit to
Congress a report on such study not later than 18
months after the date of the enactment of this title.
``(c) Special Rules for Network Plans.--
``(1) In general.--In the case of a health
insurance issuer that offers health insurance coverage
in the small group market through a network plan, the
issuer may--
``(A) limit the employers that may apply
for such coverage to those with eligible
individuals who live, work, or reside in the
service area for such network plan; and
``(B) within the service area of such plan,
deny such coverage to such employers if the
issuer has demonstrated, if required, to the
applicable State authority that--
``(i) it will not have the capacity
to deliver services adequately to
enrollees of any additional groups
because of its obligations to existing
group contract holders and enrollees,
and
``(ii) it is applying this
paragraph uniformly to all employers
without regard to the claims experience
of those employers and their employees
(and their dependents) or any health
status-related factor relating to such
employees and dependents.
``(2) 180-day suspension upon denial of coverage.--
An issuer, upon denying health insurance coverage in
any service area in accordance with paragraph (1)(B),
may not offer coverage in the small group market within
such service area for a period of 180 days after the
date such coverage is denied.
``(d) Application of Financial Capacity Limits.--
``(1) In general.--A health insurance issuer may
deny health insurance coverage in the small group
market if the issuer has demonstrated, if required, to
the applicable State authority that--
``(A) it does not have the financial
reserves necessary to underwrite additional
coverage; and
``(B) it is applying this paragraph
uniformly to all employers in the small group
market in the State consistent with applicable
State law and without regard to the claims
experience of those employers and their
employees (and their dependents) or any health
status-related factor relating to such
employees and dependents.
``(2) 180-day suspension upon denial of coverage.--
A health insurance issuer upon denying health insurance
coverage in connection with group health plans in
accordance with paragraph (1) in a State may not offer
coverage in connection with group health plans in the
small group market in the State for a period of 180
days after the date such coverage is denied or until
the issuer has demonstrated to the applicable State
authority, if required under applicable State law, that
the issuer has sufficient financial reserves to
underwrite additional coverage, whichever is later. An
applicable State authority may provide for the
application of this subsection on a service-area-
specific basis.
``(e) Exception to Requirement for Failure To Meet Certain
Minimum Participation or Contribution Rules.--
``(1) In general.--Subsection (a) shall not be
construed to preclude a health insurance issuer from
establishing employer contribution rules or group
participation rules for the offering of health
insurance coverage in connection with a group health
plan in the small group market, as allowed under
applicable State law.
``(2) Rules defined.--For purposes of paragraph
(1)--
``(A) the term `employer contribution rule'
means a requirement relating to the minimum
level or amount of employer contribution toward
the premium for enrollment of participants and
beneficiaries; and
``(B) the term `group participation rule'
means a requirement relating to the minimum
number of participants or beneficiaries that
must be enrolled in relation to a specified
percentage or number of eligible individuals or
employees of an employer.
``(f) Exception for Coverage Offered Only to Bona Fide
Association Members.--Subsection (a) shall not apply to health
insurance coverage offered by a health insurance issuer if such
coverage is made available in the small group market only
through one or more bona fide associations (as defined in
section 2791(d)(3)).
``SEC. 2712. GUARANTEED RENEWABILITY OF COVERAGE FOR EMPLOYERS IN THE
GROUP MARKET.
``(a) In General.--Except as provided in this section, if a
health insurance issuer offers health insurance coverage in the
small or large group market in connection with a group health
plan, the issuer must renew or continue in force such coverage
at the option of the plan sponsor of the plan.
``(b) General Exceptions.--A health insurance issuer may
nonrenew or discontinue health insurance coverage offered in
connection with a group health plan in the small or large group
market based only on one or more of the following:
``(1) Nonpayment of premiums.--The plan sponsor has
failed to pay premiums or contributions in accordance
with the terms of the health insurance coverage or the
issuer has not received timely premium payments.
``(2) Fraud.--The plan sponsor has performed an act
or practice that constitutes fraud or made an
intentional misrepresentation of material fact under
the terms of the coverage.
``(3) Violation of participation or contribution
rules.--The plan sponsor has failed to comply with a
material plan provision relating to employer
contribution or group participation rules, as permitted
under section 2711(e) in the case of the small group
market or pursuant to applicable State law in the case
of the large group market.
``(4) Termination of coverage.--The issuer is
ceasing to offer coverage in such market in accordance
with subsection (c) and applicable State law.
``(5) Movement outside service area.--In the case
of a health insurance issuer that offers health
insurance coverage in the market through a network
plan, there is no longer any enrollee in connection
with such plan who lives, resides, or works in the
service area of the issuer (or in the area for which
the issuer is authorized to do business) and, in the
case of the small group market, the issuer would deny
enrollment with respect to such plan under section
2711(c)(1)(A).
``(6) Association membership ceases.--In the case
of health insurance coverage that is made available in
the small or large group market (as the case may be)
only through one or more bona fide associations, the
membership of an employer in the association (on the
basis of which the coverage is provided) ceases but
only if such coverage is terminated under this
paragraph uniformly without regard to any health
status-related factor relating to any covered
individual.
``(c) Requirements for Uniform Termination of Coverage.--
``(1) Particular type of coverage not offered.--In
any case in which an issuer decides to discontinue
offering a particular type of group health insurance
coverage offered in the small or large group market,
coverage of such type may be discontinued by the issuer
in accordance with applicable State law in such market
only if--
``(A) the issuer provides notice to each
plan sponsor provided coverage of this type in
such market (and participants and beneficiaries
covered under such coverage) of such
discontinuation at least 90 days prior to the
date of the discontinuation of such coverage;
``(B) the issuer offers to each plan
sponsor provided coverage of this type in such
market, the option to purchase all (or, in the
case of the large group market, any) other
health insurance coverage currently being
offered by the issuer to a group health plan in
such market; and
``(C) in exercising the option to
discontinue coverage of this type and in
offering the option of coverage under
subparagraph (B), the issuer acts uniformly
without regard to the claims experience of
those sponsors or any health status-related
factor relating to any participants or
beneficiaries covered or new participants or
beneficiaries who may become eligible for such
coverage.
``(2) Discontinuance of all coverage.--
``(A) In general.--In any case in which a
health insurance issuer elects to discontinue
offering all health insurance coverage in the
small group market or the large group market,
or both markets, in a State, health insurance
coverage may be discontinued by the issuer only
in accordance with applicable State law and
if--
``(i) the issuer provides notice to
the applicable State authority and to
each plan sponsor (and participants and
beneficiaries covered under such
coverage) of such discontinuation at
least 180 days prior to the date of the
discontinuation of such coverage; and
``(ii) all health insurance issued
or delivered for issuance in the State
in such market (or markets) are
discontinued and coverage under such
health insurance coverage in such
market (or markets) is not renewed.
``(B) Prohibition on market reentry.--In
the case of a discontinuation under
subparagraph (A) in a market, the issuer may
not provide for the issuance of any health
insurance coverage in the market and State
involved during the 5-year period beginning on
the date of the discontinuation of the last
health insurance coverage not so renewed.
``(d) Exception for Uniform Modification of Coverage.--At
the time of coverage renewal, a health insurance issuer may
modify the health insurance coverage for a product offered to a
group health plan--
``(1) in the large group market; or
``(2) in the small group market if, for coverage
that is available in such market other than only
through one or more bona fide associations, such
modification is consistent with State law and effective
on a uniform basis among group health plans with that
product.
``(e) Application to Coverage Offered Only Through
Associations.--In applying this section in the case of health
insurance coverage that is made available by a health insurance
issuer in the small or large group market to employers only
through one or more associations, a reference to `plan sponsor'
is deemed, with respect to coverage provided to an employer
member of the association, to include a reference to such
employer.
``SEC. 2713. DISCLOSURE OF INFORMATION.
``(a) Disclosure of Information by Health Plan Issuers.--In
connection with the offering of any health insurance coverage
to a small employer, a health insurance issuer--
``(1) shall make a reasonable disclosure to such
employer, as part of its solicitation and sales
materials, of the availability of information described
in subsection (b), and
``(2) upon request of such a small employer,
provide such information.
``(b) Information Described.--
``(1) In general.--Subject to paragraph (3), with
respect to a health insurance issuer offering health
insurance coverage to a small employer, information
described in this subsection is information
concerning--
``(A) the provisions of such coverage
concerning issuer's right to change premium
rates and the factors that may affect changes
in premium rates;
``(B) the provisions of such coverage
relating to renewability of coverage;
``(C) the provisions of such coverage
relating to any preexisting condition
exclusion; and
``(D) the benefits and premiums available
under all health insurance coverage for which
the employer is qualified.
``(2) Form of information.--Information under this
subsection shall be provided to small employers in a
manner determined to be understandable by the average
small employer, and shall be sufficient to reasonably
inform small employers of their rights and obligations
under the health insurance coverage.
``(3) Exception.--An issuer is not required under
this section to disclose any information that is
proprietary and trade secret information under
applicable law.
``Subpart 3--Exclusion of Plans; Enforcement; Preemption
``SEC. 2721. EXCLUSION OF CERTAIN PLANS.
``(a) Exception for Certain Small Group Health Plans.--The
requirements of subparts 1 and 2 shall not apply to any group
health plan (and health insurance coverage offered in
connection with a group health plan) for any plan year if, on
the first day of such plan year, such plan has less than 2
participants who are current employees.
``(b) Limitation on Application of Provisions Relating to
Group Health Plans.--
``(1) In general.--The requirements of subparts 1
and 2 shall apply with respect to group health plans
only--
``(A) subject to paragraph (2), in the case
of a plan that is a nonfederal governmental
plan, and
``(B) with respect to health insurance
coverage offered in connection with a group
health plan (including such a plan that is a
church plan or a governmental plan).
``(2) Treatment of nonfederal governmental plans.--
``(A) Election to be excluded.--If the plan
sponsor of a nonfederal governmental plan which
is a group health plan to which the provisions
of subparts 1 and 2 otherwise apply makes an
election under this subparagraph (in such form
and manner as the Secretary may by regulations
prescribe), then the requirements of such
subparts insofar as they apply directly to
group health plans (and not merely to group
health insurance coverage) shall not apply to
such governmental plans for such period except
as provided in this paragraph.
``(B) Period of election.--An election
under subparagraph (A) shall apply--
``(i) for a single specified plan
year, or
``(ii) in the case of a plan
provided pursuant to a collective
bargaining agreement, for the term of
such agreement.
An election under clause (i) may be extended
through subsequent elections under this
paragraph.
``(C) Notice to enrollees.--Under such an
election, the plan shall provide for--
``(i) notice to enrollees (on an
annual basis and at the time of
enrollment under the plan) of the fact
and consequences of such election, and
``(ii) certification and disclosure
of creditable coverage under the plan
with respect to enrollees in accordance
with section 2701(e).
``(c) Exception for Certain Benefits.--The requirements of
subparts 1 and 2 shall not apply to any group health plan (or
group health insurance coverage) in relation to its provision
of excepted benefits described in section 2791(c)(1).
``(d) Exception for Certain Benefits If Certain Conditions
Met.--
``(1) Limited, excepted benefits.--The requirements
of subparts 1 and 2 shall not apply to any group health
plan (and group health insurance coverage offered in
connection with a group health plan) in relation to its
provision of excepted benefits described in section
2791(c)(2) if the benefits--
``(A) are provided under a separate policy,
certificate, or contract of insurance; or
``(B) are otherwise not an integral part of
the plan.
``(2) Noncoordinated, excepted benefits.--The
requirements of subparts 1 and 2 shall not apply to any
group health plan (and group health insurance coverage
offered in connection with a group health plan) in
relation to its provision of excepted benefits
described in section 2791(c)(3) if all of the following
conditions are met:
``(A) The benefits are provided under a
separate policy, certificate, or contract of
insurance.
``(B) There is no coordination between the
provision of such benefits and any exclusion of
benefits under any group health plan maintained
by the same plan sponsor.
``(C) Such benefits are paid with respect
to an event without regard to whether benefits
are provided with respect to such an event
under any group health plan maintained by the
same plan sponsor.
``(3) Supplemental excepted benefits.--The
requirements of this part shall not apply to any group
health plan (and group health insurance coverage) in
relation to its provision of excepted benefits
described in section 27971(c)(4) if the benefits are
provided under a separate policy, certificate, or
contract of insurance.
``(e) Treatment of Partnerships.--For purposes of this
part--
``(1) Treatment as a group health plan.--Any plan,
fund, or program which would not be (but for this
subsection) an employee welfare benefit plan and which
is established or maintained by a partnership, to the
extent that such plan, fund, or program provides
medical care (including items and services paid for as
medical care) to present or former partners in the
partnership or to their dependents (as defined under
the terms of the plan, fund, or program), directly or
through insurance, reimbursement, or otherwise, shall
be treated (subject to paragraph (2)) as an employee
welfare benefit plan which is a group health plan.
``(2) Employer.--In the case of a group health
plan, the term `employer' also includes the partnership
in relation to any partner.
``(3) Participants of group health plans.--In the
case of a group health plan, the term `participant'
also includes--
``(A) in connection with a group health
plan maintained by a partnership, an individual
who is a partner in relation to the
partnership, or
``(B) in connection with a group health
plan maintained by a self-employed individual
(under which one or more employees are
participants), the self-employed individual,
if such individual is, or may become, eligible to
receive a benefit under the plan or such individual's
beneficiaries may be eligible to receive any such
benefit.
``SEC. 2722. ENFORCEMENT.
``(a) State Enforcement.--
``(1) State authority.--Subject to section 2723,
each State may require that health insurance issuers
that issue, sell, renew, or offer health insurance
coverage in the State in the small or large group
markets meet the requirements of this part with respect
to such issuers.
``(2) Failure to implement provisions.--In the case
of a determination by the Secretary that a State has
failed to substantially enforce a provision (or
provisions) in this part with respect to health
insurance issuers in the State, the Secretary shall
enforce such provision (or provisions) under subsection
(b) insofar as they relate to the issuance, sale,
renewal, and offering of health insurance coverage in
connection with group health plans in such State.
``(b) Secretarial Enforcement Authority.--
``(1) Limitation.--The provisions of this
subsection shall apply to enforcement of a provision
(or provisions) of this part only--
``(A) as provided under subsection (a)(2);
and
``(B) with respect to group health plans
that are nonfederal governmental plans.
``(2) Imposition of penalties.--In the cases
described in paragraph (1)--
``(A) In general.--Subject to the
succeeding provisions of this subsection, any
nonfederal governmental plan that is a group
health plan and any health insurance issuer
that fails to meet a provision of this part
applicable to such plan or issuer is subject to
a civil money penalty under this subsection.
``(B) Liability for penalty.--In the case
of a failure by--
``(i) a health insurance issuer,
the issuer is liable for such penalty,
or
``(ii) a group health plan that is
a nonfederal governmental plan which
is--
``(I) sponsored by 2 or
more employers, the plan is
liable for such penalty, or
``(II) not so sponsored,
the employer is liable for such
penalty.
``(C) Amount of penalty.--
``(i) In general.--The maximum
amount of penalty imposed under this
paragraph is $100 for each day for each
individual with respect to which such a
failure occurs.
``(ii) Considerations in
imposition.--In determining the amount
of any penalty to be assessed under
this paragraph, the Secretary shall
take into account the previous record
of compliance of the entity being
assessed with the applicable provisions
of this part and the gravity of the
violation.
``(iii) Limitations.--
``(I) Penalty not to apply
where failure not discovered
exercising reasonable
diligence.--No civil money
penalty shall be imposed under
this paragraph on any failure
during any period for which it
is established to the
satisfaction of the Secretary
that none of the entities
against whom the penalty would
be imposed knew, or exercising
reasonable diligence would have
known, that such failure
existed.
``(II) Penalty not to apply
to failures corrected within 30
days.--No civil money penalty
shall be imposed under this
paragraph on any failure if
such failure was due to
reasonable cause and not to
willful neglect, and such
failure is corrected during the
30-day period beginning on the
first day any of the entities
against whom the penalty would
be imposed knew, or exercising
reasonable diligence would have
known, that such failure
existed.
``(D) Administrative review.--
``(i) Opportunity for hearing.--The
entity assessed shall be afforded an
opportunity for hearing by the
Secretary upon request made within 30
days after the date of the issuance of
a notice of assessment. In such hearing
the decision shall be made on the
record pursuant to section 554 of title
5, United States Code. If no hearing is
requested, the assessment shall
constitute a final and unappealable
order.
``(ii) Hearing procedure.--If a
hearing is requested, the initial
agency decision shall be made by an
administrative law judge, and such
decision shall become the final order
unless the Secretary modifies or
vacates the decision. Notice of intent
to modify or vacate the decision of the
administrative law judge shall be
issued to the parties within 30 days
after the date of the decision of the
judge. A final order which takes effect
under this paragraph shall be subject
to review only as provided under
subparagraph (E).
``(E) Judicial review.--
``(i) Filing of action for
review.--Any entity against whom an
order imposing a civil money penalty
has been entered after an agency
hearing under this paragraph may obtain
review by the United States district
court for any district in which such
entity is located or the United States
District Court for the District of
Columbia by filing a notice of appeal
in such court within 30 days from the
date of such order, and simultaneously
sending a copy of such notice by
registered mail to the Secretary.
``(ii) Certification of
administrative record.--The Secretary
shall promptly certify and file in such
court the record upon which the penalty
was imposed.
``(iii) Standard for review.--The
findings of the Secretary shall be set
aside only if found to be unsupported
by substantial evidence as provided by
section 706(2)(E) of title 5, United
States Code.
``(iv) Appeal.--Any final decision,
order, or judgment of the district
court concerning such review shall be
subject to appeal as provided in
chapter 83 of title 28 of such Code.
``(F) Failure to pay assessment;
maintenance of action.--
``(i) Failure to pay assessment.--
If any entity fails to pay an
assessment after it has become a final
and unappealable order, or after the
court has entered final judgment in
favor of the Secretary, the Secretary
shall refer the matter to the Attorney
General who shall recover the amount
assessed by action in the appropriate
United States district court.
``(ii) Nonreviewability.--In such
action the validity and appropriateness
of the final order imposing the penalty
shall not be subject to review.
``(G) Payment of penalties.--Except as
otherwise provided, penalties collected under
this paragraph shall be paid to the Secretary
(or other officer) imposing the penalty and
shall be available without appropriation and
until expended for the purpose of enforcing the
provisions with respect to which the penalty
was imposed.
``SEC. 2723. PREEMPTION; STATE FLEXIBILITY; CONSTRUCTION.
``(a) Continued Applicability of State Law with Respect to
Health Insurance Issuers.--
``(1) In General.--Subject to paragraph (2) and
except as provided in subsection (b), this part and
part C insofar as it relates to this part shall not be
construed to supersede any provision of State law which
establishes, implements, or continues in effect any
standard or requirement solely relating to health
insurance issuers in connection with group health
insurance coverage except to the extent that such
standard or requirement prevents the application of a
requirement of this part.
``(2) Continued preemption with respect to group
health plans.--Nothing in this part shall be construed
to affect or modify the provisions of section 514 of
the Employee Retirement Income Security Act of 1974
with respect to group health plans.
``(b) Special Rules in Case of Portability Requirements.--
``(1) In general.--Subject to paragraph (2), the
provisions of this part relating to health insurance
coverage offered by a health insurance issuer supersede
any provision of State law which establishes,
implements, or continues in effect a standard or
requirement applicable to imposition of a preexisting
condition exclusion specifically governed by section
701 which differs from the standards or requirements
specified in such section.
``(2) Exceptions.--Only in relation to health
insurance coverage offered by a health insurance
issuer, the provisions of this part do not supersede
any provision of State law to the extent that such
provision--
``(i) substitutes for the reference to `6-
month period' in section 2701(a)(1) a reference
to any shorter period of time;
``(ii) substitutes for the reference to `12
months' and `18 months' in section 2701(a)(2) a
reference to any shorter period of time;
``(iii) substitutes for the references to
`63' days in sections 2701(c)(2)(A) and
2701(d)(4)(A) a reference to any greater number
of days;
``(iv) substitutes for the reference to
`30-day period' in sections 2701(b)(2) and
2701(d)(1) a reference to any greater period;
``(v) prohibits the imposition of any
preexisting condition exclusion in cases not
described in section 2701(d) or expands the
exceptions described in such section;
``(vi) requires special enrollment periods
in addition to those required under section
2701(f); or
``(vii) reduces the maximum period
permitted in an affiliation period under
section 2701(g)(1)(B).
``(c) Rules of Construction.--Nothing in this part shall be
construed as requiring a group health plan or health insurance
coverage to provide specific benefits under the terms of such
plan or coverage.
``(d) Definitions.--For purposes of this section--
``(1) State law.--The term `State law' includes all
laws, decisions, rules, regulations, or other State
action having the effect of law, of any State. A law of
the United States applicable only to the District of
Columbia shall be treated as a State law rather than a
law of the United States.
``(2) State.--The term `State' includes a State
(including the Northern Mariana Islands), any political
subdivisions of a State or such Islands, or any agency
or instrumentality of either.
``Part C--Definitions; Miscellaneous Provisions
``SEC. 2791. DEFINITIONS.
``(a) Group Health Plan.--
``(1) Definition.--The term `group health plan'
means an employee welfare benefit plan (as defined in
section 3(1) of the Employee Retirement Income Security
Act of 1974) to the extent that the plan provides
medical care (as defined in paragraph (2)) and
including items and services paid for as medical care)
to employees or their dependents (as defined under the
terms of the plan) directly or through insurance,
reimbursement, or otherwise.
``(2) Medical care.--The term `medical care' means
amounts paid for--
``(A) the diagnosis, cure, mitigation,
treatment, or prevention of disease, or amounts
paid for the purpose of affecting any structure
or function of the body,
``(B) amounts paid for transportation
primarily for and essential to medical care
referred to in subparagraph (A), and
``(C) amounts paid for insurance covering
medical care referred to in subparagraphs (A)
and (B).
``(3) Treatment of certain plans as group health
plan for notice provision.--A program under which
creditable coverage described in subparagraph (C), (D),
(E), or (F) of section 2701(c)(1) is provided shall be
treated as a group health plan for purposes of applying
section 2701(e).
``(b) Definitions Relating to Health Insurance.--
``(1) Health insurance coverage.--The term `health
insurance coverage' means benefits consisting of
medical care (provided directly, through insurance or
reimbursement, or otherwise and including items and
services paid for as medical care) under any hospital
or medical service policy or certificate, hospital or
medical service plan contract, or health maintenance
organization contract offered by a health insurance
issuer.
``(2) Health insurance issuer.--The term `health
insurance issuer' means an insurance company, insurance
service, or insurance organization (including a health
maintenance organization, as defined in paragraph (3))
which is licensed to engage in the business of
insurance in a State and which is subject to State law
which regulates insurance (within the meaning of
section 514(b)(2) of the Employee Retirement Income
Security Act of 1974). Such term does not include a
group health plan.
``(3) Health maintenance organization.--The term
`health maintenance organization' means--
``(A) a Federally qualified health
maintenance organization (as defined in section
1301(a)),
``(B) an organization recognized under
State law as a health maintenance organization,
or
``(C) a similar organization regulated
under State law for solvency in the same manner
and to the same extent as such a health
maintenance organization.
``(4) Group health insurance coverage.--The term
`group health insurance coverage' means, in connection
with a group health plan, health insurance coverage
offered in connection with such plan.
``(5) Individual health insurance coverage.--The
term `individual health insurance coverage' means
health insurance coverage offered to individuals in the
individual market, but does not include short-term
limited duration insurance.
``(c) Excepted Benefits.--For purposes of this title, the
term `excepted benefits' means benefits under one or more (or
any combination thereof) of the following:
``(1) Benefits not subject to requirements.--
``(A) Coverage only for accident, or
disability income insurance, or any combination
thereof.
``(B) Coverage issued as a supplement to
liability insurance.
``(C) Liability insurance, including
general liability insurance and automobile
liability insurance.
``(D) Workers' compensation or similar
insurance.
``(E) Automobile medical payment insurance.
``(F) Credit-only insurance.
``(G) Coverage for on-site medical clinics.
``(H) Other similar insurance coverage,
specified in regulations, under which benefits
for medical care are secondary or incidental to
other insurance benefits.
``(2) Benefits not subject to requirements if
offered separately.--
``(A) Limited scope dental or vision
benefits.
``(B) Benefits for long-term care, nursing
home care, home health care, community-based
care, or any combination thereof.
``(C) Such other similar, limited benefits
as are specified in regulations.
``(3) Benefits not subject to requirements if
offered as independent, noncoordinated benefits.--
``(A) Coverage only for a specified disease
or illness.
``(B) Hospital indemnity or other fixed
indemnity insurance.
``(4) Benefits not subject to requirements if
offered as separate insurance policy.--Medicare
supplemental health insurance (as defined under section
1882(g)(1) of the Social Security Act), coverage
supplemental to the coverage provided under chapter 55
of title 10, United States Code, and similar
supplemental coverage provided to coverage under a
group health plan.
``(d) Other Definitions.--
``(1) Applicable state authority.--The term
`applicable State authority' means, with respect to a
health insurance issuer in a State, the State insurance
commissioner or official or officials designated by the
State to enforce the requirements of this title for the
State involved with respect to such issuer.
``(2) Beneficiary.--The term `beneficiary' has the
meaning given such term under section 3(8) of the
Employee Retirement Income Security Act of 1974.
``(3) Bona fide association.--The term `bona fide
association' means, with respect to health insurance
coverage offered in a State, an association which--
``(A) has been actively in existence for at
least 5 years;
``(B) has been formed and maintained in
good faith for purposes other than obtaining
insurance;
``(C) does not condition membership in the
association on any health status-related factor
relating to an individual (including an
employee of an employer or a dependent of an
employee);
``(D) makes health insurance coverage
offered through the association available to
all members regardless of any health status-
related factor relating to such members (or
individuals eligible for coverage through a
member);
``(E) does not make health insurance
coverage offered through the association
available other than in connection with a
member of the association; and
``(F) meets such additional requirements as
may be imposed under State law.
``(4) COBRA continuation provision.--The term
`COBRA continuation provision' means any of the
following:
``(A) Section 4980B of the Internal Revenue
Code of 1986, other than subsection (f)(1) of
such section insofar as it relates to pediatric
vaccines.
``(B) Part 6 of subtitle B of title I of
the Employee Retirement Income Security Act of
1974, other than section 609 of such Act.
``(C) Title XXII of this Act.
``(5) Employee.--The term `employee' has the
meaning given such term under section 3(6) of the
Employee Retirement Income Security Act of 1974.
``(6) Employer.--The term `employer' has the
meaning given such term under section 3(5) of the
Employee Retirement Income Security Act of 1974, except
that such term shall include only employers of two or
more employees.
``(7) Church plan.--The term `church plan' has the
meaning given such term under section 3(33) of the
Employee Retirement Income Security Act of 1974.
``(8) Governmental plan.--(A) The term
`governmental plan' has the meaning given such term
under section 3(32) of the Employee Retirement Income
Security Act of 1974 and any Federal governmental plan.
``(B) Federal governmental plan.--The term `Federal
governmental plan' means a governmental plan
established or maintained for its employees by the
Government of the United States or by any agency or
instrumentality of such Government.
``(C) Nonfederal governmental plan.--The term
`nonfederal governmental plan' means a governmental
plan that is not a Federal governmental plan.
``(9) Health status-related factor.--The term
`health status-related factor' means any of the factors
described in section 2702(a)(1).
``(10) Network plan.--The term `network plan' means
health insurance coverage of a health insurance issuer
under which the financing and delivery of medical care
(including items and services paid for as medical care)
are provided, in whole or in part, through a defined
set of providers under contract with the issuer.
``(11) Participant.--The term `participant' has the
meaning given such term under section 3(7) of the
Employee Retirement Income Security Act of 1974.
``(12) Placed for adoption defined.--The term
`placement', or being `placed', for adoption, in
connection with any placement for adoption of a child
with any person, means the assumption and retention by
such person of a legal obligation for total or partial
support of such child in anticipation of adoption of
such child. The child's placement with such person
terminates upon the termination of such legal
obligation.
``(13) Plan sponsor.--The term `plan sponsor' has
the meaning given such term under section 3(16)(B) of
the Employee Retirement Income Security Act of 1974.
``(14) State.--The term `State' means each of the
several States, the District of Columbia, Puerto Rico,
the Virgin Islands, Guam, American Samoa, and the
Northern Mariana Islands.
``(e) Definitions Relating to Markets and Small
Employers.--For purposes of this title:
``(1) Individual market.--
``(A) In general.--The term `individual
market' means the market for health insurance
coverage offered to individuals other than in
connection with a group health plan.
``(B) Treatment of very small groups.--
``(i) In general.--Subject to
clause (ii), such terms includes
coverage offered in connection with a
group health plan that has fewer than
two participants as current employees
on the first day of the plan year.
``(ii) State exception.--Clause (i)
shall not apply in the case of a State
that elects to regulate the coverage
described in such clause as coverage in
the small group market.
``(2) Large employer.--The term `large employer'
means, in connection with a group health plan with
respect to a calendar year and a plan year, an employer
who employed an average of at least 51 employees on
business days during the preceding calendar year and
who employs at least 2 employees on the first day of
the plan year.
``(3) Large group market.--The term `large group
market' means the health insurance market under which
individuals obtain health insurance coverage (directly
or through any arrangement) on behalf of themselves
(and their dependents) through a group health plan
maintained by a large employer.
``(4) Small employer.--The term `small employer'
means, in connection with a group health plan with
respect to a calendar year and a plan year, an employer
who employed an average of at least 2 but not more than
50 employees on business days during the preceding
calendar year and who employs at least 2 employees on
the first day of the plan year.
``(5) Small group market.--The term `small group
market' means the health insurance market under which
individuals obtain health insurance coverage (directly
or through any arrangement) on behalf of themselves
(and their dependents) through a group health plan
maintained by a small employer.
``(6) Application of certain rules in determination
of employer size.--For purposes of this subsection--
``(A) Application of aggregation rule for
employers.--all persons treated as a single
employer under subsection (b), (c), (m), or (o)
of section 414 of the Internal Revenue Code of
1986 shall be treated as 1 employer.
``(B) Employers not in existence in
preceding year.--In the case of an employer
which was not in existence throughout the
preceding calendar year, the determination of
whether such employer is a small or large
employer shall be based on the average number
of employees that it is reasonably expected
such employer will employ on business days in
the current calendar year.
``(C) Predecessors.--Any reference in this
subsection to an employer shall include a
reference to any predecessor of such employer.
``SEC. 2792. REGULATIONS.
``The Secretary, consistent with section 104 of the Health
Care Portability and Accountability Act of 1996, may promulgate
such regulations as may be necessary or appropriate to carry
out the provisions of this title. The Secretary may promulgate
any interim final rules as the Secretary determines are
appropriate to carry out this title.''.
(b) Application of Rules by Certain Health Maintenance
Organizations.--Section 1301 of such Act (42 U.S.C. 300e) is
amended by adding at the end the following new subsection:
``(d) An organization that offers health benefits coverage
shall not be considered as failing to meet the requirements of
this section notwithstanding that it provides, with respect to
coverage offered in connection with a group health plan in the
small or large group market (as defined in section 2791(e)), an
affiliation period consistent with the provisions of section
2701(g).''.
(c) Effective Date.--
(1) In general.--Except as provided in this
subsection, part A of title XXVII of the Public Health
Service Act (as added by subsection (a)) shall apply
with respect to group health plans, and health
insurance coverage offered in connection with group
health plans, for plan years beginning after June 30,
1997.
(2) Determination of creditable coverage.--
(A) Period of coverage.--
(i) In general.--Subject to clause
(ii), no period before July 1, 1996,
shall be taken into account under part
A of title XXVII of the Public Health
Service Act (as added by this section)
in determining creditable coverage.
(ii) Special rule for certain
periods.--The Secretary of Health and
Human Services, consistent with section
104, shall provide for a process
whereby individuals who need to
establish creditable coverage for
periods before July 1, 1996, and who
would have such coverage credited but
for clause (i) may be given credit for
creditable coverage for such periods
through the presentation of documents
or other means.
(B) Certifications, etc.--
(i) In general.--Subject to clauses
(ii) and (iii), subsection (e) of
section 2701 of the Public Health
Service Act (as added by this section)
shall apply to events occurring after
June 30, 1996.
(ii) No certification required to
be provided before june 1, 1997.--In no
case is a certification required to be
provided under such subsection before
June 1, 1997.
(iii) Certification only on written
request for events occurring before
october 1, 1996.--In the case of an
event occurring after June 30, 1996,
and before October 1, 1996, a
certification is not required to be
provided under such subsection unless
an individual (with respect to whom the
certification is otherwise required to
be made) requests such certification in
writing.
(C) Transitional rule.--In the case of an
individual who seeks to establish creditable
coverage for any period for which certification
is not required because it relates to an event
occurring before June 30, 1996--
(i) the individual may present
other credible evidence of such
coverage in order to establish the
period of creditable coverage; and
(ii) a group health plan and a
health insurance issuer shall not be
subject to any penalty or enforcement
action with respect to the plan's or
issuer's crediting (or not crediting)
such coverage if the plan or issuer has
sought to comply in good faith with the
applicable requirements under the
amendments made by this section.
(3) Special rule for collective bargaining
agreements.--Except as provided in paragraph (2)(B), in
the case of a group health plan maintained pursuant to
1 or more collective bargaining agreements between
employee representatives and one or more employers
ratified before the date of the enactment of this Act,
part A of title XXVII of the Public Health Service Act
(other than section 2701(e) thereof) shall not apply to
plan years beginning before the later of--
(A) the date on which the last of the
collective bargaining agreements relating to
the plan terminates (determined without regard
to any extension thereof agreed to after the
date of the enactment of this Act), or
(B) July 1, 1997.
For purposes of subparagraph (A), any plan amendment
made pursuant to a collective bargaining agreement
relating to the plan which amends the plan solely to
conform to any requirement of such part shall not be
treated as a termination of such collective bargaining
agreement.
(4) Timely regulations.--The Secretary of Health
and Human Services, consistent with section 104, shall
first issue by not later than April 1, 1997, such
regulations as may be necessary to carry out the
amendments made by this section and section 111.
(5) Limitation on actions.--No enforcement action
shall be taken, pursuant to the amendments made by this
section, against a group health plan or health
insurance issuer with respect to a violation of a
requirement imposed by such amendments before January
1, 1998, or, if later, the date of issuance of
regulations referred to in paragraph (4), if the plan
or issuer has sought to comply in good faith with such
requirements.
(d) Miscellaneous Correction.--Section 2208(1) of the
Public Health Service Act (42 U.S.C. 300bb-8(1)) is amended by
striking ``section 162(i)(2)'' and inserting ``5000(b)''.
SEC. 103. REFERENCE TO IMPLEMENTATION THROUGH THE INTERNAL REVENUE CODE
OF 1986.
For provisions amending the Internal Revenue Code of 1986
to provide for application and enforcement of rules for group
health plans similar to those provided under the amendments
made by section 101(a), see section 401.
SEC. 104. ASSURING COORDINATION.
The Secretary of the Treasury, the Secretary of Health and
Human Services, and the Secretary of Labor shall ensure,
through the execution of an interagency memorandum of
understanding among such Secretaries, that--
(1) regulations, rulings, and interpretations
issued by such Secretaries relating to the same matter
over which two or more such Secretaries have
responsibility under this subtitle (and the amendments
made by this subtitle and section 401) are administered
so as to have the same effect at all times; and
(2) coordination of policies relating to enforcing
the same requirements through such Secretaries in order
to have a coordinated enforcement strategy that avoids
duplication of enforcement efforts and assigns
priorities in enforcement.
Subtitle B--Individual Market Rules
SEC. 111. AMENDMENT TO PUBLIC HEALTH SERVICE ACT.
(a) In General.--Title XXVII of the Public Health Service
Act, as added by section 102(a) of this Act, is amended by
inserting after part A the following new part:
``Part B--Individual Market Rules
``SEC. 2741. GUARANTEED AVAILABILITY OF INDIVIDUAL HEALTH INSURANCE
COVERAGE TO CERTAIN INDIVIDUALS WITH PRIOR GROUP
COVERAGE.
``(a) Guaranteed Availability.--
``(1) In general.--Subject to the succeeding
subsections of this section and section 2744, each
health insurance issuer that offers health insurance
coverage (as defined in section 2791(b)(1)) in the
individual market in a State may not, with respect to
an eligible individual (as defined in subsection (b))
desiring to enroll in individual health insurance
coverage--
``(A) decline to offer such coverage to, or
deny enrollment of, such individual; or
``(B) impose any preexisting condition
exclusion (as defined in section 2701(b)(1)(A))
with respect to such coverage.
``(2) Substitution by state of acceptable
alternative mechanism.--The requirement of paragraph
(1) shall not apply to health insurance coverage
offered in the individual market in a State in which
the State is implementing an acceptable alternative
mechanism under section 2744.
``(b) Eligible Individual Defined.--In this part, the term
`eligible individual' means an individual--
``(1)(A) for whom, as of the date on which the
individual seeks coverage under this section, the
aggregate of the periods of creditable coverage (as
defined in section 2701(c)) is 18 or more months and
(B) whose most recent prior creditable coverage was
under a group health plan, governmental plan, or church
plan (or health insurance coverage offered in
connection with any such plan);
``(2) who is not eligible for coverage under (A) a
group health plan, (B) part A or part B of title XVIII
of the Social Security Act, or (C) a State plan under
title XIX of such Act (or any successor program), and
does not have other health insurance coverage;
``(3) with respect to whom the most recent coverage
within the coverage period described in paragraph
(1)(A) was not terminated based on a factor described
in paragraph (1) or (2) of section 2712(b) (relating to
nonpayment of premiums or fraud);
``(4) if the individual had been offered the option
of continuation coverage under a COBRA continuation
provision or under a similar State program, who elected
such coverage; and
``(5) who, if the individual elected such
continuation coverage, has exhausted such continuation
coverage under such provision or program.
``(c) Alternative Coverage Permitted Where No State
Mechanism.--
``(1) In general.--In the case of health insurance
coverage offered in the individual market in a State in
which the State is not implementing an acceptable
alternative mechanism under section 2744, the health
insurance issuer may elect to limit the coverage
offered under subsection (a) so long as it offers at
least two different policy forms of health insurance
coverage both of which--
``(A) are designed for, made generally
available to, and actively marketed to, and
enroll both eligible and other individuals by
the issuer; and
``(B) meet the requirement of paragraph (2)
or (3), as elected by the issuer.
For purposes of this subsection, policy forms which
have different cost-sharing arrangements or different
riders shall be considered to be different policy
forms.
``(2) Choice of most popular policy forms.--The
requirement of this paragraph is met, for health
insurance coverage policy forms offered by an issuer in
the individual market, if the issuer offers the policy
forms for individual health insurance coverage with the
largest, and next to largest, premium volume of all
such policy forms offered by the issuer in the State or
applicable marketing or service area (as may be
prescribed in regulation) by the issuer in the
individual market in the period involved.
``(3) Choice of 2 policy forms with representative
coverage.--
``(A) In general.--The requirement of this
paragraph is met, for health insurance coverage
policy forms offered by an issuer in the
individual market, if the issuer offers a
lower-level coverage policy form (as defined in
subparagraph (B)) and a higher-level coverage
policy form (as defined in subparagraph (C))
each of which includes benefits substantially
similar to other individual health insurance
coverage offered by the issuer in that State
and each of which is covered under a method
described in section 2744(c)(3)(A) (relating to
risk adjustment, risk spreading, or financial
subsidization).
``(B) Lower-level of coverage described.--A
policy form is described in this subparagraph
if the actuarial value of the benefits under
the coverage is at least 85 percent but not
greater than 100 percent of a weighted average
(described in subparagraph (D)).
``(C) Higher-level of coverage described.--
A policy form is described in this subparagraph
if--
``(i) the actuarial value of the
benefits under the coverage is at least
15 percent greater than the actuarial
value of the coverage described in
subparagraph (B) offered by the issuer
in the area involved; and
``(ii) the actuarial value of the
benefits under the coverage is at least
100 percent but not greater than 120
percent of a weighted average
(described in subparagraph (D)).
``(D) Weighted average.--For purposes of
this paragraph, the weighted average described
in this subparagraph is the average actuarial
value of the benefits provided by all the
health insurance coverage issued (as elected by
the issuer) either by that issuer or by all
issuers in the State in the individual market
during the previous year (not including
coverage issued under this section), weighted
by enrollment for the different coverage.
``(4) Election.--The issuer elections under this
subsection shall apply uniformly to all eligible
individuals in the State for that issuer. Such an
election shall be effective for policies offered during
a period of not shorter than 2 years.
``(5) Assumptions.--For purposes of paragraph (3),
the actuarial value of benefits provided under
individual health insurance coverage shall be
calculated based on a standardized population and a set
of standardized utilization and cost factors.
``(d) Special Rules for Network Plans.--
``(1) In general.--In the case of a health
insurance issuer that offers health insurance coverage
in the individual market through a network plan, the
issuer may--
``(A) limit the individuals who may be
enrolled under such coverage to those who live,
reside, or work within the service area for
such network plan; and
``(B) within the service area of such plan,
deny such coverage to such individuals if the
issuer has demonstrated, if required, to the
applicable State authority that--
``(i) it will not have the capacity
to deliver services adequately to
additional individual enrollees because
of its obligations to existing group
contract holders and enrollees and
individual enrollees, and
``(ii) it is applying this
paragraph uniformly to individuals
without regard to any health status-
related factor of such individuals and
without regard to whether the
individuals are eligible individuals.
``(2) 180-day suspension upon denial of coverage.--
An issuer, upon denying health insurance coverage in
any service area in accordance with paragraph (1)(B),
may not offer coverage in the individual market within
such service area for a period of 180 days after such
coverage is denied.
``(e) Application of Financial Capacity Limits.--
``(1) In general.--A health insurance issuer may
deny health insurance coverage in the individual market
to an eligible individual if the issuer has
demonstrated, if required, to the applicable State
authority that--
``(A) it does not have the financial
reserves necessary to underwrite additional
coverage; and
``(B) it is applying this paragraph
uniformly to all individuals in the individual
market in the State consistent with applicable
State law and without regard to any health
status-related factor of such individuals and
without regard to whether the individuals are
eligible individuals.
``(2) 180-day suspension upon denial of coverage.--
An issuer upon denying individual health insurance
coverage in any service area in accordance with
paragraph (1) may not offer such coverage in the
individual market within such service area for a period
of 180 days after the date such coverage is denied or
until the issuer has demonstrated, if required under
applicable State law, to the applicable State authority
that the issuer has sufficient financial reserves to
underwrite additional coverage, whichever is later. A
State may provide for the application of this paragraph
on a service-area-specific basis.
``(e) Market Requirements.--
``(1) In general.--The provisions of subsection (a)
shall not be construed to require that a health
insurance issuer offering health insurance coverage
only in connection with group health plans or through
one or more bona fide associations, or both, offer such
health insurance coverage in the individual market.
``(2) Conversion policies.--A health insurance
issuer offering health insurance coverage in connection
with group health plans under this title shall not be
deemed to be a health insurance issuer offering
individual health insurance coverage solely because
such issuer offers a conversion policy.
``(f) Construction.--Nothing in this section shall be
construed--
``(1) to restrict the amount of the premium rates
that an issuer may charge an individual for health
insurance coverage provided in the individual market
under applicable State law; or
``(2) to prevent a health insurance issuer offering
health insurance coverage in the individual market from
establishing premium discounts or rebates or modifying
otherwise applicable copayments or deductibles in
return for adherence to programs of health promotion
and disease prevention.
``SEC. 2742. GUARANTEED RENEWABILITY OF INDIVIDUAL HEALTH INSURANCE
COVERAGE.
``(a) In General.--Except as provided in this section, a
health insurance issuer that provides individual health
insurance coverage to an individual shall renew or continue in
force such coverage at the option of the individual.
``(b) General Exceptions.--A health insurance issuer may
nonrenew or discontinue health insurance coverage of an
individual in the individual market based only on one or more
of the following:
``(1) Nonpayment of premiums.--The individual has
failed to pay premiums or contributions in accordance
with the terms of the health insurance coverage or the
issuer has not received timely premium payments.
``(2) Fraud.--The individual has performed an act
or practice that constitutes fraud or made an
intentional misrepresentation of material fact under
the terms of the coverage.
``(3) Termination of plan.--The issuer is ceasing
to offer coverage in the individual market in
accordance with subsection (c) and applicable State
law.
``(4) Movement outside service area.--In the case
of a health insurance issuer that offers health
insurance coverage in the market through a network
plan, the individual no longer resides, lives, or works
in the service area (or in an area for which the issuer
is authorized to do business) but only if such coverage
is terminated under this paragraph uniformly without
regard to any health status-related factor of covered
individuals.
``(5) Association membership ceases.--In the case
of health insurance coverage that is made available in
the individual market only through one or more bona
fide associations, the membership of the individual in
the association (on the basis of which the coverage is
provided) ceases but only if such coverage is
terminated under this paragraph uniformly without
regard to any health status-related factor of covered
individuals.
``(c) Requirements for Uniform Termination of Coverage.--
``(1) Particular type of coverage not offered.--In
any case in which an issuer decides to discontinue
offering a particular type of health insurance coverage
offered in the individual market, coverage of such type
may be discontinued by the issuer only if--
``(A) the issuer provides notice to each
covered individual provided coverage of this
type in such market of such discontinuation at
least 90 days prior to the date of the
discontinuation of such coverage;
``(B) the issuer offers to each individual
in the individual market provided coverage of
this type, the option to purchase any other
individual health insurance coverage currently
being offered by the issuer for individuals in
such market; and
``(C) in exercising the option to
discontinue coverage of this type and in
offering the option of coverage under
subparagraph (B), the issuer acts uniformly
without regard to any health status-related
factor of enrolled individuals or individuals
who may become eligible for such coverage.
``(2) Discontinuance of all coverage.--
``(A) In general.--Subject to subparagraph
(C), in any case in which a health insurance
issuer elects to discontinue offering all
health insurance coverage in the individual
market in a State, health insurance coverage
may be discontinued by the issuer only if--
``(i) the issuer provides notice to
the applicable State authority and to
each individual of such discontinuation
at least 180 days prior to the date of
the expiration of such coverage, and
``(ii) all health insurance issued
or delivered for issuance in the State
in such market are discontinued and
coverage under such health insurance
coverage in such market is not renewed.
``(B) Prohibition on market reentry.--In
the case of a discontinuation under
subparagraph (A) in the individual market, the
issuer may not provide for the issuance of any
health insurance coverage in the market and
State involved during the 5-year period
beginning on the date of the discontinuation of
the last health insurance coverage not so
renewed.
``(d) Exception for Uniform Modification of Coverage.--At
the time of coverage renewal, a health insurance issuer may
modify the health insurance coverage for a policy form offered
to individuals in the individual market so long as such
modification is consistent with State law and effective on a
uniform basis among all individuals with that policy form.
``(e) Application to Coverage Offered Only Through
Associations.--In applying this section in the case of health
insurance coverage that is made available by a health insurance
issuer in the individual market to individuals only through one
or more associations, a reference to an `individual' is deemed
to include a reference to such an association (of which the
individual is a member).
``SEC. 2743. CERTIFICATION OF COVERAGE.
``The provisions of section 2701(e) shall apply to health
insurance coverage offered by a health insurance issuer in the
individual market in the same manner as it applies to health
insurance coverage offered by a health insurance issuer in
connection with a group health plan in the small or large group
market.
``SEC. 2744. STATE FLEXIBILITY IN INDIVIDUAL MARKET REFORMS.
``(a) Waiver of Requirements Where Implementation of
Acceptable Alternative Mechanism.--
``(1) In general.--The requirements of section 2741
shall not apply with respect to health insurance
coverage offered in the individual market in the State
so long as a State is found to be implementing, in
accordance with this section and consistent with
section 2746(b), an alternative mechanism (in this
section referred to as an `acceptable alternative
mechanism')--
``(A) under which all eligible individuals
are provided a choice of health insurance
coverage;
``(B) under which such coverage does not
impose any preexisting condition exclusion with
respect to such coverage;
``(C) under which such choice of coverage
includes at least one policy form of coverage
that is comparable to comprehensive health
insurance coverage offered in the individual
market in such State or that is comparable to a
standard option of coverage available under the
group or individual health insurance laws of
such State; and
``(D) in a State which is implementing--
``(i) a model act described in
subsection (c)(1),
``(ii) a qualified high risk pool
described in subsection (c)(2), or
``(iii) a mechanism described in
subsection (c)(3).
``(2) Permissible forms of mechanisms.--A private
or public individual health insurance mechanism (such
as a health insurance coverage pool or programs,
mandatory group conversion policies, guaranteed issue
of one or more plans of individual health insurance
coverage, or open enrollment by one or more health
insurance issuers), or combination of such mechanisms,
that is designed to provide access to health benefits
for individuals in the individual market in the State
in accordance with this section may constitute an
acceptable alternative mechanism.
``(b) Application of Acceptable Alternative Mechanisms.--
``(1) Presumption.--
``(A) In general.--Subject to the
succeeding provisions of this subsection, a
State is presumed to be implementing an
acceptable alternative mechanism in accordance
with this section as of July 1, 1997, if, by
not later than April 1, 1997, the chief
executive officer of a State--
``(i) notifies the Secretary that
the State has enacted or intends to
enact (by not later than January 1,
1998, or July 1, 1998, in the case of a
State described in subparagraph
(B)(ii)) any necessary legislation to
provide for the implementation of a
mechanism reasonably designed to be an
acceptable alternative mechanism as of
January 1, 1998 (or, in the case of a
State described in subparagraph
(B)(ii), July 1, 1998); and
``(ii) provides the Secretary with
such information as the Secretary may
require to review the mechanism and its
implementation (or proposed
implementation) under this subsection.
``(B) Delay permitted for certain states.--
``(i) Effect of delay.--In the case
of a State described in clause (ii)
that provides notice under subparagraph
(A)(i), for the presumption to continue
on and after July 1, 1998, the chief
executive officer of the State by April
1, 1998--
``(I) must notify the
Secretary that the State has
enacted any necessary
legislation to provide for the
implementation of a mechanism
reasonably designed to be an
acceptable alternative
mechanism as of July 1, 1998;
and
``(II) must provide the
Secretary with such information
as the Secretary may require to
review the mechanism and its
implementation (or proposed
implementation) under this
subsection.
``(ii) States described.--A State
described in this clause is a State
that has a legislature that does not
meet within the 12-month period
beginning on the date of enactment of
this Act.
``(C) Continued application.--In order for
a mechanism to continue to be presumed to be an
acceptable alternative mechanism, the State
shall provide the Secretary every 3 years with
information described in subparagraph (A)(ii)
or (B)(i)(II) (as the case may be).
``(2) Notice.--If the Secretary finds, after review
of information provided under paragraph (1) and in
consultation with the chief executive officer of the
State and the insurance commissioner or chief insurance
regulatory official of the State, that such a mechanism
is not an acceptable alternative mechanism or is not
(or no longer) being implemented, the Secretary--
``(A) shall notify the State of--
``(i) such preliminary
determination, and
``(ii) the consequences under
paragraph (3) of a failure to implement
such a mechanism; and
``(B) shall permit the State a reasonable
opportunity in which to modify the mechanism
(or to adopt another mechanism) in a manner so
that may be an acceptable alternative mechanism
or to provide for implementation of such a
mechanism.
``(3) Final determination.--If, after providing
notice and opportunity under paragraph (2), the
Secretary finds that the mechanism is not an acceptable
alternative mechanism or the State is not implementing
such a mechanism, the Secretary shall notify the State
that the State is no longer considered to be
implementing an acceptable alternative mechanism and
that the requirements of section 2741 shall apply to
health insurance coverage offered in the individual
market in the State, effective as of a date specified
in the notice.
``(4) Limitation on secretarial authority.--The
Secretary shall not make a determination under
paragraph (2) or (3) on any basis other than the basis
that a mechanism is not an acceptable alternative
mechanism or is not being implemented.
``(5) Future adoption of mechanisms.--If a State,
after January 1, 1997, submits the notice and
information described in paragraph (1), unless the
Secretary makes a finding described in paragraph (3)
within the 90-day period beginning on the date of
submission of the notice and information, the mechanism
shall be considered to be an acceptable alternative
mechanism for purposes of this section, effective 90
days after the end of such period, subject to the
second sentence of paragraph (1).
``(c) Provision Related to Risk.--
``(1) Adoption of naic models.--The model act
referred to in subsection (a)(1)(D)(i) is the Small
Employer and Individual Health Insurance Availability
Model Act (adopted by the National Association of
Insurance Commissioners on June 3, 1996) insofar as it
applies to individual health insurance coverage or the
Individual Health Insurance Portability Model Act (also
adopted by such Association on such date).
``(2) Qualified high risk pool.--For purposes of
subsection (a)(1)(D)(ii), a `qualified high risk pool'
described in this paragraph is a high risk pool that--
``(A) provides to all eligible individuals
health insurance coverage (or comparable
coverage) that does not impose any preexisting
condition exclusion with respect to such
coverage for all eligible individuals, and
``(B) provides for premium rates and
covered benefits for such coverage consistent
with standards included in the NAIC Model
Health Plan for Uninsurable Individuals Act (as
in effect as of the date of the enactment of
this title).
``(3) Other mechanisms.--For purposes of subsection
(a)(1)(D)(iii), a mechanism described in this
paragraph--
``(A) provides for risk adjustment, risk
spreading, or a risk spreading mechanism (among
issuers or policies of an issuer) or otherwise
provides for some financial subsidization for
eligible individuals, including through
assistance to participating issuers; or
``(B) is a mechanism under which each
eligible individual is provided a choice of all
individual health insurance coverage otherwise
available.
``SEC. 2745. ENFORCEMENT.
``(a) State Enforcement.--
``(1) State authority.--Subject to section 2746,
each State may require that health insurance issuers
that issue, sell, renew, or offer health insurance
coverage in the State in the individual market meet the
requirements established under this part with respect
to such issuers.
``(2) Failure to implement requirements.--In the
case of a State that fails to substantially enforce the
requirements set forth in this part with respect to
health insurance issuers in the State, the Secretary
shall enforce the requirements of this part under
subsection (b) insofar as they relate to the issuance,
sale, renewal, and offering of health insurance
coverage in the individual market in such State.
``(b) Secretarial Enforcement Authority.--The Secretary
shall have the same authority in relation to enforcement of the
provisions of this part with respect to issuers of health
insurance coverage in the individual market in a State as the
Secretary has under section 2722(b)(2) in relation to the
enforcement of the provisions of part A with respect to issuers
of health insurance coverage in the small group market in the
State.
``SEC. 2746. PREEMPTION.
``(a) In General.--Subject to subsection (b), nothing in
this part (or part C insofar as it applies to this part) shall
be construed to prevent a State from establishing,
implementing, or continuing in effect standards and
requirements unless such standards and requirements prevent the
application of a requirement of this part.
``(b) Rules of Construction.--Nothing in this part (or part
C insofar as it applies to this part) shall be construed to
affect or modify the provisions of section 514 of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1144).
``SEC. 2747. GENERAL EXCEPTIONS.
``(a) Exception for Certain Benefits.--The requirements of
this part shall not apply to any health insurance coverage in
relation to its provision of excepted benefits described in
section 2791(c)(1).
``(b) Exception for Certain Benefits If Certain Conditions
Met.--The requirements of this part shall not apply to any
health insurance coverage in relation to its provision of
excepted benefits described in paragraph (2), (3), or (4) of
section 2791(c) if the benefits are provided under a separate
policy, certificate, or contract of insurance.''.
(b) Effective Date.--
(1) In general.--Except as provided in this
subsection, part B of title XXVII of the Public Health
Service Act (as inserted by subsection (a)) shall apply
with respect to health insurance coverage offered,
sold, issued, renewed, in effect, or operated in the
individual market after June 30, 1997, regardless of
when a period of creditable coverage occurs.
(2) Application of certification rules.--The
provisions of section 102(d)(2) of this Act shall apply
to section 2743 of the Public Health Service Act in the
same manner as it applies to section 2701(e) of such
Act.
Subtitle C--General and Miscellaneous Provisions
SEC. 191. HEALTH COVERAGE AVAILABILITY STUDIES.
(a) Studies.--
(1) Study on effectiveness of reforms.--The
Secretary of Health and Human Services shall provide
for a study on the effectiveness of the provisions of
this title and the various State laws, in ensuring the
availability of reasonably priced health coverage to
employers purchasing group coverage and individuals
purchasing coverage on a non-group basis.
(2) Study on access and choice.--The Secretary also
shall provide for a study on--
(A) the extent to which patients have
direct access to, and choice of, health care
providers, including specialty providers,
within a network plan, as well as the
opportunity to utilize providers outside of the
network plan, under the various types of
coverage offered under the provisions of this
title; and
(B) the cost and cost-effectiveness to
health insurance issuers of providing access to
out-of-network providers, and the potential
impact of providing such access on the cost and
quality of health insurance coverage offered
under provisions of this title.
(3) Consultation.--The studies under this
subsection shall be conducted in consultation with the
Secretary of Labor, representatives of State officials,
consumers, and other representatives of individuals and
entities that have expertise in health insurance and
employee benefits.
(b) Reports.--Not later than January 1, 2000, the Secretary
shall submit to the appropriate committees of Congress a report
on each of the studies under subsection (a).
SEC. 192. REPORT ON MEDICARE REIMBURSEMENT OF TELEMEDICINE.
The Health Care Financing Administration shall complete its
ongoing study of medicare reimbursement of all telemedicine
services and submit a report to Congress on medicare
reimbursement of telemedicine services by not later than March
1, 1997. The report shall--
(1) utilize data compiled from the current
demonstration projects already under review and gather
data from other ongoing telemedicine networks;
(2) include an analysis of the cost of services
provided via telemedicine; and
(3) include a proposal for medicare reimbursement
of such services.
SEC. 193. ALLOWING FEDERALLY-QUALIFIED HMOS TO OFFER HIGH DEDUCTIBLE
PLANS.
Section 1301(b) of the Public Health Service Act (42 U.S.C.
300e(b)) is amended by adding at the end the following new
paragraph:
``(6) A health maintenance organization that
otherwise meets the requirements of this title may
offer a high-deductible health plan (as defined in
section 220(c)(2) of the Internal Revenue Code of
1986).''.
SEC. 194. VOLUNTEER SERVICES PROVIDED BY HEALTH PROFESSIONALS AT FREE
CLINICS.
Section 224 of the Public Health Service Act (42 U.S.C.
233) is amended by adding at the end the following subsection:
``(o)(1) For purposes of this section, a free clinic health
professional shall in providing a qualifying health service to
an individual be deemed to be an employee of the Public Health
Service for a calendar year that begins during a fiscal year
for which a transfer was made under paragraph (6)(D). The
preceding sentence is subject to the provisions of this
subsection.
``(2) In providing a health service to an individual, a
health care practitioner shall for purposes of this subsection
be considered to be a free clinic health professional if the
following conditions are met:
``(A) The service is provided to the individual at
a free clinic, or through offsite programs or events
carried out by the free clinic.
``(B) The free clinic is sponsoring the health care
practitioner pursuant to paragraph (5)(C).
``(C) The service is a qualifying health service
(as defined in paragraph (4)).
``(D) Neither the health care practitioner nor the
free clinic receives any compensation for the service
from the individual or from any third-party payor
(including reimbursement under any insurance policy or
health plan, or under any Federal or State health
benefits program). With respect to compliance with such
condition:
``(i) The health care practitioner may
receive repayment from the free clinic for
reasonable expenses incurred by the health care
practitioner in the provision of the service to
the individual.
``(ii) The free clinic may accept voluntary
donations for the provision of the service by
the health care practitioner to the individual.
``(E) Before the service is provided, the health
care practitioner or the free clinic provides written
notice to the individual of the extent to which the
legal liability of the health care practitioner is
limited pursuant to this subsection (or in the case of
an emergency, the written notice is provided to the
individual as soon after the emergency as is
practicable). If the individual is a minor or is
otherwise legally incompetent, the condition under this
subparagraph is that the written notice be provided to
a legal guardian or other person with legal
responsibility for the care of the individual.
``(F) At the time the service is provided, the
health care practitioner is licensed or certified in
accordance with applicable law regarding the provision
of the service.
``(3)(A) For purposes of this subsection, the term `free
clinic' means a health care facility operated by a nonprofit
private entity meeting the following requirements:
``(i) The entity does not, in providing health
services through the facility, accept reimbursement
from any third-party payor (including reimbursement
under any insurance policy or health plan, or under any
Federal or State health benefits program).
``(ii) The entity, in providing health services
through the facility, either does not impose charges on
the individuals to whom the services are provided, or
imposes a charge according to the ability of the
individual involved to pay the charge.
``(iii) The entity is licensed or certified in
accordance with applicable law regarding the provision
of health services.
``(B) With respect to compliance with the conditions under
subparagraph (A), the entity involved may accept voluntary
donations for the provision of services.
``(4) For purposes of this subsection, the term `qualifying
health service' means any medical assistance required or
authorized to be provided in the program under title XIX of the
Social Security Act, without regard to whether the medical
assistance is included in the plan submitted under such program
by the State in which the health care practitioner involved
provides the medical assistance. References in the preceding
sentence to such program shall as applicable be considered to
be references to any successor to such program.
``(5) Subsection (g) (other than paragraphs (3) through
(5)) and subsections (h), (i), and (l) apply to a health care
practitioner for purposes of this subsection to the same extent
and in the same manner as such subsections apply to an officer,
governing board member, employee, or contractor of an entity
described in subsection (g)(4), subject to paragraph (6) and
subject to the following:
``(A) The first sentence of paragraph (1) applies
in lieu of the first sentence of subsection (g)(1)(A).
``(B) This subsection may not be construed as
deeming any free clinic to be an employee of the Public
Health Service for purposes of this section.
``(C) With respect to a free clinic, a health care
practitioner is not a free clinic health professional
unless the free clinic sponsors the health care
practitioner. For purposes of this subsection, the free
clinic shall be considered to be sponsoring the health
care practitioner if--
``(i) with respect to the health care
practitioner, the free clinic submits to the
Secretary an application meeting the
requirements of subsection (g)(1)(D); and
``(ii) the Secretary, pursuant to
subsection (g)(1)(E), determines that the
health care practitioner is deemed to be an
employee of the Public Health Service.
``(D) In the case of a health care practitioner who
is determined by the Secretary pursuant to subsection
(g)(1)(E) to be a free clinic health professional, this
subsection applies to the health care practitioner
(with respect to the free clinic sponsoring the health
care practitioner pursuant to subparagraph C)) for any
cause of action arising from an act or omission of the
health care practitioner occurring on or after the date
on which the Secretary makes such determination.
``(E) Subsection (g)(1)(F) applies to a health care
practitioner for purposes of this subsection only to
the extent that, in providing health services to an
individual, each of the conditions specified in
paragraph (2) is met.
``(6)(A) For purposes of making payments for judgments
against the United States (together with related fees and
expenses of witnesses) pursuant to this section arising from
the acts or omissions of free clinic health professionals,
there is authorized to be appropriated $10,000,000 for each
fiscal year.
``(B) The Secretary shall establish a fund for purposes of
this subsection. Each fiscal year amounts appropriated under
subparagraph (A) shall be deposited in such fund.
``(C) Not later than May 1 of each fiscal year, the
Attorney General, in consultation with the Secretary, shall
submit to the Congress a report providing an estimate of the
amount of claims (together with related fees and expenses of
witnesses) that, by reason of the acts or omissions of free
clinic health professionals, will be paid pursuant to this
section during the calendar year that begins in the following
fiscal year. Subsection (k)(1)(B) applies to the estimate under
the preceding sentence regarding free clinic health
professionals to the same extent and in the same manner as such
subsection applies to the estimate under such subsection
regarding officers, governing board members, employees, and
contractors of entities described in subsection (g)(4).
``(D) Not later than December 31 of each fiscal year, the
Secretary shall transfer from the fund under subparagraph (B)
to the appropriate accounts in the Treasury an amount equal to
the estimate made under subparagraph (C) for the calendar year
beginning in such fiscal year, subject to the extent of amounts
in the fund.
``(7)(A) This subsection takes effect on the date of the
enactment of the first appropriations Act that makes an
appropriation under paragraph (6)(A), except as provided in
subparagraph (B)(i).
``(B)(i) Effective on the date of the enactment of the
Health Insurance Portability and Accountability Act of 1996--
``(I) the Secretary may issue regulations for
carrying out this subsection, and the Secretary may
accept and consider applications submitted pursuant to
paragraph (5)(C); and
``(II) reports under paragraph (6)(C) may be
submitted to the Congress.
``(ii) For the first fiscal year for which an appropriation
is made under subparagraph (A) of paragraph (6), if an estimate
under subparagraph (C) of such paragraph has not been made for
the calendar year beginning in such fiscal year, the transfer
under subparagraph (D) of such paragraph shall be made
notwithstanding the lack of the estimate, and the transfer
shall be made in an amount equal to the amount of such
appropriation.''.
SEC. 195. FINDINGS; SEVERABILITY.
(a) Findings Relating to Exercise of Commerce Clause
Authority.--Congress finds the following in relation to the
provisions of this title:
(1) Provisions in group health plans and health
insurance coverage that impose certain preexisting
condition exclusions impact the ability of employees to
seek employment in interstate commerce, thereby
impeding such commerce.
(2) Health insurance coverage is commercial in
nature and is in and affects interstate commerce.
(3) It is a necessary and proper exercise of
Congressional authority to impose requirements under
this title on group health plans and health insurance
coverage (including coverage offered to individuals
previously covered under group health plans) in order
to promote commerce among the States.
(4) Congress, however, intends to defer to States,
to the maximum extent practicable, in carrying out such
requirements with respect to insurers and health
maintenance organizations that are subject to State
regulation, consistent with the provisions of the
Employee Retirement Income Security Act of 1974.
(b) Severability.--If any provision of this title or the
application of such provision to any person or circumstance is
held to be unconstitutional, the remainder of this title and
the application of the provisions of such to any person or
circumstance shall not be affected thereby.
TITLE II--PREVENTING HEALTH CARE FRAUD AND ABUSE; ADMINISTRATIVE
SIMPLIFICATION
SEC. 200. REFERENCES IN TITLE.
Except as otherwise specifically provided, whenever in this
title an amendment is expressed in terms of an amendment to or
repeal of a section or other provision, the reference shall be
considered to be made to that section or other provision of the
Social Security Act.
Subtitle A--Fraud and Abuse Control Program
SEC. 201. FRAUD AND ABUSE CONTROL PROGRAM.
(a) Establishment of Program.--Title XI (42 U.S.C. 1301 et
seq.) is amended by inserting after section 1128B the following
new section:
``fraud and abuse control program
``Sec. 1128C. (a) Establishment of Program.--
``(1) In general.--Not later than January 1, 1997,
the Secretary, acting through the Office of the
Inspector General of the Department of Health and Human
Services, and the Attorney General shall establish a
program--
``(A) to coordinate Federal, State, and
local law enforcement programs to control fraud
and abuse with respect to health plans,
``(B) to conduct investigations, audits,
evaluations, and inspections relating to the
delivery of and payment for health care in the
United States,
``(C) to facilitate the enforcement of the
provisions of sections 1128, 1128A, and 1128B
and other statutes applicable to health care
fraud and abuse,
``(D) to provide for the modification and
establishment of safe harbors and to issue
advisory opinions and special fraud alerts
pursuant to section 1128D, and
``(E) to provide for the reporting and
disclosure of certain final adverse actions
against health care providers, suppliers, or
practitioners pursuant to the data collection
system established under section 1128E.
``(2) Coordination with health plans.--In carrying
out the program established under paragraph (1), the
Secretary and the Attorney General shall consult with,
and arrange for the sharing of data with
representatives of health plans.
``(3) Guidelines.--
``(A) In general.--The Secretary and the
Attorney General shall issue guidelines to
carry out the program under paragraph (1). The
provisions of sections 553, 556, and 557 of
title 5, United States Code, shall not apply in
the issuance of such guidelines.
``(B) Information guidelines.--
``(i) In general.--Such guidelines
shall include guidelines relating to
the furnishing of information by health
plans, providers, and others to enable
the Secretary and the Attorney General
to carry out the program (including
coordination with health plans under
paragraph (2)).
``(ii) Confidentiality.--Such
guidelines shall include procedures to
assure that such information is
provided and utilized in a manner that
appropriately protects the
confidentiality of the information and
the privacy of individuals receiving
health care services and items.
``(iii) Qualified immunity for
providing information.--The provisions
of section 1157(a) (relating to
limitation on liability) shall apply to
a person providing information to the
Secretary or the Attorney General in
conjunction with their performance of
duties under this section.
``(4) Ensuring access to documentation.--The
Inspector General of the Department of Health and Human
Services is authorized to exercise such authority
described in paragraphs (3) through (9) of section 6 of
the Inspector General Act of 1978 (5 U.S.C. App.) as
necessary with respect to the activities under the
fraud and abuse control program established under this
subsection.
``(5) Authority of inspector general.--Nothing in
this Act shall be construed to diminish the authority
of any Inspector General, including such authority as
provided in the Inspector General Act of 1978 (5 U.S.C.
App.).
``(b) Additional Use of Funds by Inspector General.--
``(1) Reimbursements for investigations.--The
Inspector General of the Department of Health and Human
Services is authorized to receive and retain for
current use reimbursement for the costs of conducting
investigations and audits and for monitoring compliance
plans when such costs are ordered by a court,
voluntarily agreed to by the payor, or otherwise.
``(2) Crediting.--Funds received by the Inspector
General under paragraph (1) as reimbursement for costs
of conducting investigations shall be deposited to the
credit of the appropriation from which initially paid,
or to appropriations for similar purposes currently
available at the time of deposit, and shall remain
available for obligation for 1 year from the date of
the deposit of such funds.
``(c) Health Plan Defined.--For purposes of this section,
the term `health plan' means a plan or program that provides
health benefits, whether directly, through insurance, or
otherwise, and includes--
``(1) a policy of health insurance;
``(2) a contract of a service benefit organization;
and
``(3) a membership agreement with a health
maintenance organization or other prepaid health
plan.''.
(b) Establishment of Health Care Fraud and Abuse Control
Account in Federal Hospital Insurance Trust Fund.--Section 1817
(42 U.S.C. 1395i) is amended by adding at the end the following
new subsection:
``(k) Health Care Fraud and Abuse Control Account.--
``(1) Establishment.--There is hereby established
in the Trust Fund an expenditure account to be known as
the `Health Care Fraud and Abuse Control Account' (in
this subsection referred to as the `Account').
``(2) Appropriated amounts to trust fund.--
``(A) In general.--There are hereby
appropriated to the Trust Fund--
``(i) such gifts and bequests as
may be made as provided in subparagraph
(B);
``(ii) such amounts as may be
deposited in the Trust Fund as provided
in sections 242(b) and 249(c) of the
Health Insurance Portability and
Accountability Act of 1996, and title
XI; and
``(iii) such amounts as are
transferred to the Trust Fund under
subparagraph (C).
``(B) Authorization to accept gifts.--The
Trust Fund is authorized to accept on behalf of
the United States money gifts and bequests made
unconditionally to the Trust Fund, for the
benefit of the Account or any activity financed
through the Account.
``(C) Transfer of amounts.--The Managing
Trustee shall transfer to the Trust Fund, under
rules similar to the rules in section 9601 of
the Internal Revenue Code of 1986, an amount
equal to the sum of the following:
``(i) Criminal fines recovered in
cases involving a Federal health care
offense (as defined in section
982(a)(6)(B) of title 18, United States
Code).
``(ii) Civil monetary penalties and
assessments imposed in health care
cases, including amounts recovered
under titles XI, XVIII, and XIX, and
chapter 38 of title 31, United States
Code (except as otherwise provided by
law).
``(iii) Amounts resulting from the
forfeiture of property by reason of a
Federal health care offense.
``(iv) Penalties and damages
obtained and otherwise creditable to
miscellaneous receipts of the general
fund of the Treasury obtained under
sections 3729 through 3733 of title 31,
United States Code (known as the False
Claims Act), in cases involving claims
related to the provision of health care
items and services (other than funds
awarded to a relator, for restitution
or otherwise authorized by law).
``(D) Application.--Nothing in subparagraph
(C)(iii) shall be construed to limit the
availability of recoveries and forfeitures
obtained under title I of the Employee
Retirement Income Security Act of 1974 for the
purpose of providing equitable or remedial
relief for employee welfare benefit plans, and
for participants and beneficiaries under such
plans, as authorized under such title.
``(3) Appropriated amounts to account for fraud and
abuse control program, etc.--
``(A) Departments of health and human
services and justice.--
``(i) In general.--There are hereby
appropriated to the Account from the
Trust Fund such sums as the Secretary
and the Attorney General certify are
necessary to carry out the purposes
described in subparagraph (C), to be
available without further
appropriation, in an amount not to
exceed--
``(I) for fiscal year 1997,
$104,000,000,
``(II) for each of the
fiscal years 1998 through 2003,
the limit for the preceding
fiscal year, increased by 15
percent; and
``(III) for each fiscal
year after fiscal year 2003,
the limit for fiscal year 2003.
``(ii) Medicare and medicaid
activities.--For each fiscal year, of
the amount appropriated in clause (i),
the following amounts shall be
available only for the purposes of the
activities of the Office of the
Inspector General of the Department of
Health and Human Services with respect
to the medicare and medicaid programs--
``(I) for fiscal year 1997,
not less than $60,000,000 and
not more than $70,000,000;
``(II) for fiscal year
1998, not less than $80,000,000
and not more than $90,000,000;
``(III) for fiscal year
1999, not less than $90,000,000
and not more than $100,000,000;
``(IV) for fiscal year
2000, not less than
$110,000,000 and not more than
$120,000,000;
``(V) for fiscal year 2001,
not less than $120,000,000 and
not more than $130,000,000;
``(VI) for fiscal year
2002, not less than
$140,000,000 and not more than
$150,000,000; and
``(VII) for each fiscal
year after fiscal year 2002,
not less than $150,000,000 and
not more than $160,000,000.
``(B) Federal bureau of investigation.--
There are hereby appropriated from the general
fund of the United States Treasury and hereby
appropriated to the Account for transfer to the
Federal Bureau of Investigation to carry out
the purposes described in subparagraph (C), to
be available without further appropriation--
``(i) for fiscal year 1997,
$47,000,000;
``(ii) for fiscal year 1998,
$56,000,000;
``(iii) for fiscal year 1999,
$66,000,000;
``(iv) for fiscal year 2000,
$76,000,000;
``(v) for fiscal year 2001,
$88,000,000;
``(vi) for fiscal year 2002,
$101,000,000; and
``(vii) for each fiscal year after
fiscal year 2002, $114,000,000.
``(C) Use of funds.--The purposes described
in this subparagraph are to cover the costs
(including equipment, salaries and benefits,
and travel and training) of the administration
and operation of the health care fraud and
abuse control program established under section
1128C(a), including the costs of--
``(i) prosecuting health care
matters (through criminal, civil, and
administrative proceedings);
``(ii) investigations;
``(iii) financial and performance
audits of health care programs and
operations;
``(iv) inspections and other
evaluations; and
``(v) provider and consumer
education regarding compliance with the
provisions of title XI.
``(4) Appropriated amounts to account for medicare
integrity program.--
``(A) In general.--There are hereby
appropriated to the Account from the Trust Fund
for each fiscal year such amounts as are
necessary to carry out the Medicare Integrity
Program under section 1893, subject to
subparagraph (B) and to be available without
further appropriation.
``(B) Amounts specified.--The amount
appropriated under subparagraph (A) for a
fiscal year is as follows:
``(i) For fiscal year 1997, such
amount shall be not less than
$430,000,000 and not more than
$440,000,000.
``(ii) For fiscal year 1998, such
amount shall be not less than
$490,000,000 and not more than
$500,000,000.
``(iii) For fiscal year 1999, such
amount shall be not less than
$550,000,000 and not more than
$560,000,000.
``(iv) For fiscal year 2000, such
amount shall be not less than
$620,000,000 and not more than
$630,000,000.
``(v) For fiscal year 2001, such
amount shall be not less than
$670,000,000 and not more than
$680,000,000.
``(vi) For fiscal year 2002, such
amount shall be not less than
$690,000,000 and not more than
$700,000,000.
``(vii) For each fiscal year after
fiscal year 2002, such amount shall be
not less than $710,000,000 and not more
than $720,000,000.
``(5) Annual report.--Not later than January 1, the
Secretary and the Attorney General shall submit jointly
a report to Congress which identifies--
``(A) the amounts appropriated to the Trust
Fund for the previous fiscal year under
paragraph (2)(A) and the source of such
amounts; and
``(B) the amounts appropriated from the
Trust Fund for such year under paragraph (3)
and the justification for the expenditure of
such amounts.
``(6) GAO report.--Not later than January 1 of
2000, 2002, and 2004, the Comptroller General of the
United States shall submit a report to Congress which--
``(A) identifies--
``(i) the amounts appropriated to
the Trust Fund for the previous two
fiscal years under paragraph (2)(A) and
the source of such amounts; and
``(ii) the amounts appropriated
from the Trust Fund for such fiscal
years under paragraph (3) and the
justification for the expenditure of
such amounts;
``(B) identifies any expenditures from the
Trust Fund with respect to activities not
involving the Medicare program under title
XVIII;
``(C) identifies any savings to the Trust
Fund, and any other savings, resulting from
expenditures from the Trust Fund; and
``(D) analyzes such other aspects of the
operation of the Trust Fund as the Comptroller
General of the United States considers
appropriate.''.
SEC. 202. MEDICARE INTEGRITY PROGRAM.
(a) Establishment of Medicare Integrity Program.--Title
XVIII is amended by adding at the end the following new
section:
``medicare integrity program
``Sec. 1893. (a) Establishment of Program.--There is hereby
established the Medicare Integrity Program (in this section
referred to as the `Program') under which the Secretary shall
promote the integrity of the Medicare program by entering into
contracts in accordance with this section with eligible
entities to carry out the activities described in subsection
(b).
``(b) Activities Described.--The activities described in
this subsection are as follows:
``(1) Review of activities of providers of services
or other individuals and entities furnishing items and
services for which payment may be made under this title
(including skilled nursing facilities and home health
agencies), including medical and utilization review and
fraud review (employing similar standards, processes,
and technologies used by private health plans,
including equipment and software technologies which
surpass the capability of the equipment and
technologies used in the review of claims under this
title as of the date of the enactment of this section).
``(2) Audit of cost reports.
``(3) Determinations as to whether payment should
not be, or should not have been, made under this title
by reason of section 1862(b), and recovery of payments
that should not have been made.
``(4) Education of providers of services,
beneficiaries, and other persons with respect to
payment integrity and benefit quality assurance issues.
``(5) Developing (and periodically updating) a list
of items of durable medical equipment in accordance
with section 1834(a)(15) which are subject to prior
authorization under such section.
``(c) Eligibility of Entities.--An entity is eligible to
enter into a contract under the Program to carry out any of the
activities described in subsection (b) if--
``(1) the entity has demonstrated capability to
carry out such activities;
``(2) in carrying out such activities, the entity
agrees to cooperate with the Inspector General of the
Department of Health and Human Services, the Attorney
General, and other law enforcement agencies, as
appropriate, in the investigation and deterrence of
fraud and abuse in relation to this title and in other
cases arising out of such activities;
``(3) the entity complies with such conflict of
interest standards as are generally applicable to
Federal acquisition and procurement; and
``(4) the entity meets such other requirements as
the Secretary may impose.
In the case of the activity described in subsection (b)(5), an
entity shall be deemed to be eligible to enter into a contract
under the Program to carry out the activity if the entity is a
carrier with a contract in effect under section 1842.
``(d) Process for Entering Into Contracts.--The Secretary
shall enter into contracts under the Program in accordance with
such procedures as the Secretary shall by regulation establish,
except that such procedures shall include the following:
``(1) Procedures for identifying, evaluating, and
resolving organizational conflicts of interest that are
generally applicable to Federal acquisition and
procurement.
``(2) Competitive procedures to be used--
``(A) when entering into new contracts
under this section;
``(B) when entering into contracts that may
result in the elimination of responsibilities
of an individual fiscal intermediary or carrier
under section 202(b) of the Health Insurance
Portability and Accountability Act of 1996; and
``(C) at any other time considered
appropriate by the Secretary,
except that the Secretary may continue to contract with
entities that are carrying out the activities described
in this section pursuant to agreements under section
1816 or contracts under section 1842 in effect on the
date of the enactment of this section.
``(3) Procedures under which a contract under this
section may be renewed without regard to any provision
of law requiring competition if the contractor has met
or exceeded the performance requirements established in
the current contract.
The Secretary may enter into such contracts without regard to
final rules having been promulgated.
``(e) Limitation on Contractor Liability.--The Secretary
shall by regulation provide for the limitation of a
contractor's liability for actions taken to carry out a
contract under the Program, and such regulation shall, to the
extent the Secretary finds appropriate, employ the same or
comparable standards and other substantive and procedural
provisions as are contained in section 1157.''.
(b) Elimination of FI and Carrier Responsibility for
Carrying Out Activities Subject to Program.--
(1) Responsibilities of fiscal intermediaries under
part a.--Section 1816 (42 U.S.C. 1395h) is amended by
adding at the end the following new subsection:
``(l) No agency or organization may carry out (or receive
payment for carrying out) any activity pursuant to an agreement
under this section to the extent that the activity is carried
out pursuant to a contract under the Medicare Integrity Program
under section 1893.''.
(2) Responsibilities of carriers under part b.--
Section 1842(c) (42 U.S.C. 1395u(c)) is amended by
adding at the end the following new paragraph:
``(6) No carrier may carry out (or receive payment for
carrying out) any activity pursuant to a contract under this
subsection to the extent that the activity is carried out
pursuant to a contract under the Medicare Integrity Program
under section 1893. The previous sentence shall not apply with
respect to the activity described in section 1893(b)(5)
(relating to prior authorization of certain items of durable
medical equipment under section 1834(a)(15)).''.
SEC. 203. BENEFICIARY INCENTIVE PROGRAMS.
(a) Clarification of Requirement to Provide Explanation of
Medicare Benefits.--The Secretary of Health and Human Services
(in this section referred to as the ``Secretary'') shall
provide an explanation of benefits under the medicare program
under title XVIII of the Social Security Act with respect to
each item or service for which payment may be made under the
program which is furnished to an individual, without regard to
whether or not a deductible or coinsurance may be imposed
against the individual with respect to the item or service.
(b) Program To Collect Information on Fraud and Abuse.--
(1) Establishment of program.--Not later than 3
months after the date of the enactment of this Act, the
Secretary shall establish a program under which the
Secretary shall encourage individuals to report to the
Secretary information on individuals and entities who
are engaging in or who have engaged in acts or
omissions which constitute grounds for the imposition
of a sanction under section 1128, 1128A, or 1128B of
the Social Security Act, or who have otherwise engaged
in fraud and abuse against the medicare program under
title XVIII of such act for which there is a sanction
provided under law. The program shall discourage
provision of, and not consider, information which is
frivolous or otherwise not relevant or material to the
imposition of such a sanction.
(2) Payment of portion of amounts collected.--If an
individual reports information to the Secretary under
the program established under paragraph (1) which
serves as the basis for the collection by the Secretary
or the Attorney General of any amount of at least $100
(other than any amount paid as a penalty under section
1128B of the Social Security Act), the Secretary may
pay a portion of the amount collected to the individual
(under procedures similar to those applicable under
section 7623 of the Internal Revenue Code of 1986 to
payments to individuals providing information on
violations of such Code).
(c) Program To Collect Information on Program Efficiency.--
(1) Establishment of program.--Not later than 3
months after the date of the enactment of this Act, the
Secretary shall establish a program under which the
Secretary shall encourage individuals to submit to the
Secretary suggestions on methods to improve the
efficiency of the medicare program.
(2) Payment of portion of program savings.--If an
individual submits a suggestion to the Secretary under
the program established under paragraph (1) which is
adopted by the Secretary and which results in savings
to the program, the Secretary may make a payment to the
individual of such amount as the Secretary considers
appropriate.
SEC. 204. APPLICATION OF CERTAIN HEALTH ANTI-FRAUD AND ABUSE SANCTIONS
TO FRAUD AND ABUSE AGAINST FEDERAL HEALTH CARE
PROGRAMS.
(a) In General.--Section 1128B (42 U.S.C. 1320a-7b) is
amended as follows:
(1) In the heading, by striking ``medicare or state
health care programs'' and inserting ``federal health
care programs''.
(2) In subsection (a)(1), by striking ``a program
under title XVIII or a State health care program (as
defined in section 1128(h))'' and inserting ``a Federal
health care program (as defined in subsection (f))''.
(3) In subsection (a)(5), by striking ``a program
under title XVIII or a State health care program'' and
inserting ``a Federal health care program''.
(4) In the second sentence of subsection (a)--
(A) by striking ``a State plan approved
under title XIX'' and inserting ``a Federal
health care program'', and
(B) by striking ``the State may at its
option (notwithstanding any other provision of
that title or of such plan)'' and inserting
``the administrator of such program may at its
option (notwithstanding any other provision of
such program)''.
(5) In subsection (b), by striking ``title XVIII or
a State health care program'' each place it appears and
inserting ``a Federal health care program''.
(6) In subsection (c), by inserting ``(as defined
in section 1128(h))'' after ``a State health care
program''.
(7) By adding at the end the following new
subsection:
``(f) For purposes of this section, the term `Federal
health care program' means--
``(1) any plan or program that provides health
benefits, whether directly, through insurance, or
otherwise, which is funded directly, in whole or in
part, by the United States Government (other than the
health insurance program under chapter 89 of title 5,
United States Code); or
``(2) any State health care program, as defined in
section 1128(h).''.
(b) Effective Date.--The amendments made by this section
shall take effect on January 1, 1997.
SEC. 205. GUIDANCE REGARDING APPLICATION OF HEALTH CARE FRAUD AND ABUSE
SANCTIONS.
Title XI (42 U.S.C. 1301 et seq.), as amended by section
201, is amended by inserting after section 1128C the following
new section:
``guidance regarding application of health care fraud and abuse
sanctions
``Sec. 1128D. (a) Solicitation and Publication of
Modifications to Existing Safe Harbors and New Safe Harbors.--
``(1) In general.--
``(A) Solicitation of proposals for safe
harbors.--Not later than January 1, 1997, and
not less than annually thereafter, the
Secretary shall publish a notice in the Federal
Register soliciting proposals, which will be
accepted during a 60-day period, for--
``(i) modifications to existing
safe harbors issued pursuant to section
14(a) of the Medicare and Medicaid
Patient and Program Protection Act of
1987 (42 U.S.C. 1320a-7b note);
``(ii) additional safe harbors
specifying payment practices that shall
not be treated as a criminal offense
under section 1128B(b) and shall not
serve as the basis for an exclusion
under section 1128(b)(7);
``(iii) advisory opinions to be
issued pursuant to subsection (b); and
``(iv) special fraud alerts to be
issued pursuant to subsection (c).
``(B) Publication of proposed modifications
and proposed additional safe harbors.--After
considering the proposals described in clauses
(i) and (ii) of subparagraph (A), the
Secretary, in consultation with the Attorney
General, shall publish in the Federal Register
proposed modifications to existing safe harbors
and proposed additional safe harbors, if
appropriate, with a 60-day comment period.
After considering any public comments received
during this period, the Secretary shall issue
final rules modifying the existing safe harbors
and establishing new safe harbors, as
appropriate.
``(C) Report.--The Inspector General of the
Department of Health and Human Services (in
this section referred to as the `Inspector
General') shall, in an annual report to
Congress or as part of the year-end semiannual
report required by section 5 of the Inspector
General Act of 1978 (5 U.S.C. App.), describe
the proposals received under clauses (i) and
(ii) of subparagraph (A) and explain which
proposals were included in the publication
described in subparagraph (B), which proposals
were not included in that publication, and the
reasons for the rejection of the proposals that
were not included.
``(2) Criteria for modifying and establishing safe
harbors.--In modifying and establishing safe harbors
under paragraph (1)(B), the Secretary may consider the
extent to which providing a safe harbor for the
specified payment practice may result in any of the
following:
``(A) An increase or decrease in access to
health care services.
``(B) An increase or decrease in the
quality of health care services.
``(C) An increase or decrease in patient
freedom of choice among health care providers.
``(D) An increase or decrease in
competition among health care providers.
``(E) An increase or decrease in the
ability of health care facilities to provide
services in medically underserved areas or to
medically underserved populations.
``(F) An increase or decrease in the cost
to Federal health care programs (as defined in
section 1128B(f)).
``(G) An increase or decrease in the
potential overutilization of health care
services.
``(H) The existence or nonexistence of any
potential financial benefit to a health care
professional or provider which may vary based
on their decisions of--
``(i) whether to order a health
care item or service; or
``(ii) whether to arrange for a
referral of health care items or
services to a particular practitioner
or provider.
``(I) Any other factors the Secretary deems
appropriate in the interest of preventing fraud
and abuse in Federal health care programs (as
so defined).
``(b) Advisory Opinions.--
``(1) Issuance of advisory opinions.--The
Secretary, in consultation with the Attorney General,
shall issue written advisory opinions as provided in
this subsection.
``(2) Matters subject to advisory opinions.--The
Secretary shall issue advisory opinions as to the
following matters:
``(A) What constitutes prohibited
remuneration within the meaning of section
1128B(b).
``(B) Whether an arrangement or proposed
arrangement satisfies the criteria set forth in
section 1128B(b)(3) for activities which do not
result in prohibited remuneration.
``(C) Whether an arrangement or proposed
arrangement satisfies the criteria which the
Secretary has established, or shall establish
by regulation for activities which do not
result in prohibited remuneration.
``(D) What constitutes an inducement to
reduce or limit services to individuals
entitled to benefits under title XVIII or title
XIX within the meaning of section 1128B(b).
``(E) Whether any activity or proposed
activity constitutes grounds for the imposition
of a sanction under section 1128, 1128A, or
1128B.
``(3) Matters not subject to advisory opinions.--
Such advisory opinions shall not address the following
matters:
``(A) Whether the fair market value shall
be, or was paid or received for any goods,
services or property.
``(B) Whether an individual is a bona fide
employee within the requirements of section
3121(d)(2) of the Internal Revenue Code of
1986.
``(4) Effect of advisory opinions.--
``(A) Binding as to secretary and parties
involved.--Each advisory opinion issued by the
Secretary shall be binding as to the Secretary
and the party or parties requesting the
opinion.
``(B) Failure to seek opinion.--The failure
of a party to seek an advisory opinion may not
be introduced into evidence to prove that the
party intended to violate the provisions of
sections 1128, 1128A, or 1128B.
``(5) Regulations.--
``(A) In general.--Not later than 180 days
after the date of the enactment of this
section, the Secretary shall issue regulations
to carry out this section. Such regulations
shall provide for--
``(i) the procedure to be followed
by a party applying for an advisory
opinion;
``(ii) the procedure to be followed
by the Secretary in responding to a
request for an advisory opinion;
``(iii) the interval in which the
Secretary shall respond;
``(iv) the reasonable fee to be
charged to the party requesting an
advisory opinion; and
``(v) the manner in which advisory
opinions will be made available to the
public.
``(B) Specific contents.--Under the
regulations promulgated pursuant to
subparagraph (A)--
``(i) the Secretary shall be
required to issue to a party requesting
an advisory opinion by not later than
60 days after the request is received;
and
``(ii) the fee charged to the party
requesting an advisory opinion shall be
equal to the costs incurred by the
Secretary in responding to the request.
``(6) Application of subsection.--This subsection
shall apply to requests for advisory opinions made on
or after the date which is 6 months after the date of
enactment of this section and before the date which is
4 years after such date of enactment.
``(c) Special Fraud Alerts.--
``(1) In general.--
``(A) Request for special fraud alerts.--
Any person may present, at any time, a request
to the Inspector General for a notice which
informs the public of practices which the
Inspector General considers to be suspect or of
particular concern under the medicare program
under title XVIII or a State health care
program, as defined in section 1128(h) (in this
subsection referred to as a `special fraud
alert').
``(B) Issuance and publication of special
fraud alerts.--Upon receipt of a request
described in subparagraph (A), the Inspector
General shall investigate the subject matter of
the request to determine whether a special
fraud alert should be issued. If appropriate,
the Inspector General shall issue a special
fraud alert in response to the request. All
special fraud alerts issued pursuant to this
subparagraph shall be published in the Federal
Register.
``(2) Criteria for special fraud alerts.--In
determining whether to issue a special fraud alert upon
a request described in paragraph (1), the Inspector
General may consider--
``(A) whether and to what extent the
practices that would be identified in the
special fraud alert may result in any of the
consequences described in subsection (a)(2);
and
``(B) the volume and frequency of the
conduct that would be identified in the special
fraud alert.''.
Subtitle B--Revisions to Current Sanctions for Fraud and Abuse
SEC. 211. MANDATORY EXCLUSION FROM PARTICIPATION IN MEDICARE AND STATE
HEALTH CARE PROGRAMS.
(a) Individual Convicted of Felony Relating to Health Care
Fraud.--
(1) In general.--Section 1128(a) (42 U.S.C. 1320a-
7(a)) is amended by adding at the end the following new
paragraph:
``(3) Felony conviction relating to health care
fraud.--Any individual or entity that has been
convicted for an offense which occurred after the date
of the enactment of the Health Insurance Portability
and Accountability Act of 1996, under Federal or State
law, in connection with the delivery of a health care
item or service or with respect to any act or omission
in a health care program (other than those specifically
described in paragraph (1)) operated by or financed in
whole or in part by any Federal, State, or local
government agency, of a criminal offense consisting of
a felony relating to fraud, theft, embezzlement, breach
of fiduciary responsibility, or other financial
misconduct.''.
(2) Conforming amendment.--Paragraph (1) of section
1128(b) (42 U.S.C. 1320a-7(b)) is amended to read as
follows:
``(1) Conviction relating to fraud.--Any individual
or entity that has been convicted for an offense which
occurred after the date of the enactment of the Health
Insurance Portability and Accountability Act of 1996,
under Federal or State law--
``(A) of a criminal offense consisting of a
misdemeanor relating to fraud, theft,
embezzlement, breach of fiduciary
responsibility, or other financial misconduct--
``(i) in connection with the
delivery of a health care item or
service, or
``(ii) with respect to any act or
omission in a health care program
(other than those specifically
described in subsection (a)(1))
operated by or financed in whole or in
part by any Federal, State, or local
government agency; or
``(B) of a criminal offense relating to
fraud, theft, embezzlement, breach of fiduciary
responsibility, or other financial misconduct
with respect to any act or omission in a
program (other than a health care program)
operated by or financed in whole or in part by
any Federal, State, or local government
agency.''.
(b) Individual Convicted of Felony Relating to Controlled
Substance.--
(1) In general.--Section 1128(a) (42 U.S.C. 1320a-
7(a)), as amended by subsection (a), is amended by
adding at the end the following new paragraph:
``(4) Felony conviction relating to controlled
substance.--Any individual or entity that has been
convicted for an offense which occurred after the date
of the enactment of the Health Insurance Portability
and Accountability Act of 1996, under Federal or State
law, of a criminal offense consisting of a felony
relating to the unlawful manufacture, distribution,
prescription, or dispensing of a controlled
substance.''.
(2) Conforming amendment.--Section 1128(b)(3) (42
U.S.C. 1320a-7(b)(3)) is amended--
(A) in the heading, by striking
``Conviction'' and inserting ``Misdemeanor
conviction''; and
(B) by striking ``criminal offense'' and
inserting ``criminal offense consisting of a
misdemeanor''.
SEC. 212. ESTABLISHMENT OF MINIMUM PERIOD OF EXCLUSION FOR CERTAIN
INDIVIDUALS AND ENTITIES SUBJECT TO PERMISSIVE
EXCLUSION FROM MEDICARE AND STATE HEALTH CARE
PROGRAMS.
Section 1128(c)(3) (42 U.S.C. 1320a-7(c)(3)) is amended by
adding at the end the following new subparagraphs:
``(D) In the case of an exclusion of an individual or
entity under paragraph (1), (2), or (3) of subsection (b), the
period of the exclusion shall be 3 years, unless the Secretary
determines in accordance with published regulations that a
shorter period is appropriate because of mitigating
circumstances or that a longer period is appropriate because of
aggravating circumstances.
``(E) In the case of an exclusion of an individual or
entity under subsection (b)(4) or (b)(5), the period of the
exclusion shall not be less than the period during which the
individual's or entity's license to provide health care is
revoked, suspended, or surrendered, or the individual or the
entity is excluded or suspended from a Federal or State health
care program.
``(F) In the case of an exclusion of an individual or
entity under subsection (b)(6)(B), the period of the exclusion
shall be not less than 1 year.''.
SEC. 213. PERMISSIVE EXCLUSION OF INDIVIDUALS WITH OWNERSHIP OR CONTROL
INTEREST IN SANCTIONED ENTITIES.
Section 1128(b) (42 U.S.C. 1320a-7(b)) is amended by adding
at the end the following new paragraph:
``(15) Individuals controlling a sanctioned
entity.--(A) Any individual--
``(i) who has a direct or indirect
ownership or control interest in a sanctioned
entity and who knows or should know (as defined
in section 1128A(i)(6)) of the action
constituting the basis for the conviction or
exclusion described in subparagraph (B); or
``(ii) who is an officer or managing
employee (as defined in section 1126(b)) of
such an entity.
``(B) For purposes of subparagraph (A), the term
`sanctioned entity' means an entity--
``(i) that has been convicted of any
offense described in subsection (a) or in
paragraph (1), (2), or (3) of this subsection;
or
``(ii) that has been excluded from
participation under a program under title XVIII
or under a State health care program.''.
SEC. 214. SANCTIONS AGAINST PRACTITIONERS AND PERSONS FOR FAILURE TO
COMPLY WITH STATUTORY OBLIGATIONS.
(a) Minimum Period of Exclusion for Practitioners and
Persons Failing To Meet Statutory Obligations.--
(1) In general.--The second sentence of section
1156(b)(1) (42 U.S.C. 1320c-5(b)(1)) is amended by
striking ``may prescribe)'' and inserting ``may
prescribe, except that such period may not be less than
1 year)''.
(2) Conforming amendment.--Section 1156(b)(2) (42
U.S.C. 1320c-5(b)(2)) is amended by striking ``shall
remain'' and inserting ``shall (subject to the minimum
period specified in the second sentence of paragraph
(1)) remain''.
(b) Repeal of ``Unwilling or Unable'' Condition for
Imposition of Sanction.--Section 1156(b)(1) (42 U.S.C. 1320c-
5(b)(1)) is amended--
(1) in the second sentence, by striking ``and
determines'' and all that follows through ``such
obligations,''; and
(2) by striking the third sentence.
SEC. 215. INTERMEDIATE SANCTIONS FOR MEDICARE HEALTH MAINTENANCE
ORGANIZATIONS.
(a) Application of Intermediate Sanctions for any Program
Violations.--
(1) In general.--Section 1876(i)(1) (42 U.S.C.
1395mm(i)(1)) is amended by striking ``the Secretary
may terminate'' and all that follows and inserting ``in
accordance with procedures established under paragraph
(9), the Secretary may at any time terminate any such
contract or may impose the intermediate sanctions
described in paragraph (6)(B) or (6)(C) (whichever is
applicable) on the eligible organization if the
Secretary determines that the organization--
``(A) has failed substantially to carry out the
contract;
``(B) is carrying out the contract in a manner
substantially inconsistent with the efficient and
effective administration of this section; or
``(C) no longer substantially meets the applicable
conditions of subsections (b), (c), (e), and (f).''.
(2) Other intermediate sanctions for miscellaneous
program violations.--Section 1876(i)(6) (42 U.S.C.
1395mm(i)(6)) is amended by adding at the end the
following new subparagraph:
``(C) In the case of an eligible organization for which the
Secretary makes a determination under paragraph (1), the basis
of which is not described in subparagraph (A), the Secretary
may apply the following intermediate sanctions:
``(i) Civil money penalties of not more than
$25,000 for each determination under paragraph (1) if
the deficiency that is the basis of the determination
has directly adversely affected (or has the substantial
likelihood of adversely affecting) an individual
covered under the organization's contract.
``(ii) Civil money penalties of not more than
$10,000 for each week beginning after the initiation of
procedures by the Secretary under paragraph (9) during
which the deficiency that is the basis of a
determination under paragraph (1) exists.
``(iii) Suspension of enrollment of individuals
under this section after the date the Secretary
notifies the organization of a determination under
paragraph (1) and until the Secretary is satisfied that
the deficiency that is the basis for the determination
has been corrected and is not likely to recur.''.
(3) Procedures for imposing sanctions.--Section
1876(i) (42 U.S.C. 1395mm(i)) is amended by adding at
the end the following new paragraph:
``(9) The Secretary may terminate a contract with an
eligible organization under this section or may impose the
intermediate sanctions described in paragraph (6) on the
organization in accordance with formal investigation and
compliance procedures established by the Secretary under
which--
``(A) the Secretary first provides the organization
with the reasonable opportunity to develop and
implement a corrective action plan to correct the
deficiencies that were the basis of the Secretary's
determination under paragraph (1) and the organization
fails to develop or implement such a plan;
``(B) in deciding whether to impose sanctions, the
Secretary considers aggravating factors such as whether
an organization has a history of deficiencies or has
not taken action to correct deficiencies the Secretary
has brought to the organization's attention;
``(C) there are no unreasonable or unnecessary
delays between the finding of a deficiency and the
imposition of sanctions; and
``(D) the Secretary provides the organization with
reasonable notice and opportunity for hearing
(including the right to appeal an initial decision)
before imposing any sanction or terminating the
contract.''.
(4) Conforming amendments.--Section 1876(i)(6)(B)
(42 U.S.C. 1395mm(i)(6)(B)) is amended by striking the
second sentence.
(b) Agreements With Peer Review Organizations.--Section
1876(i)(7)(A) (42 U.S.C. 1395mm(i)(7)(A)) is amended by
striking ``an agreement'' and inserting ``a written
agreement''.
(c) Effective Date.--The amendments made by this section
shall apply with respect to contract years beginning on or
after January 1, 1997.
SEC. 216. ADDITIONAL EXCEPTION TO ANTI-KICKBACK PENALTIES FOR RISK-
SHARING ARRANGEMENTS.
(a) In General.--Section 1128B(b)(3) (42 U.S.C. 1320a-
7b(b)(3)) is amended--
(1) by striking ``and'' at the end of subparagraph
(D);
(2) by striking the period at the end of
subparagraph (E) and inserting ``; and''; and
(3) by adding at the end the following new
subparagraph:
``(F) any remuneration between an organization and
an individual or entity providing items or services, or
a combination thereof, pursuant to a written agreement
between the organization and the individual or entity
if the organization is an eligible organization under
section 1876 or if the written agreement, through a
risk-sharing arrangement, places the individual or
entity at substantial financial risk for the cost or
utilization of the items or services, or a combination
thereof, which the individual or entity is obligated to
provide.''.
(b) Negotiated Rulemaking for Risk-Sharing Exception.--
(1) Establishment.--
(A) In general.--The Secretary of Health
and Human Services (in this subsection referred
to as the ``Secretary'') shall establish, on an
expedited basis and using a negotiated
rulemaking process under subchapter 3 of
chapter 5 of title 5, United States Code,
standards relating to the exception for risk-
sharing arrangements to the anti-kickback
penalties described in section 1128B(b)(3)(F)
of the Social Security Act, as added by
subsection (a).
(B) Factors to consider.--In establishing
standards relating to the exception for risk-
sharing arrangements to the anti-kickback
penalties under subparagraph (A), the
Secretary--
(i) shall consult with the Attorney
General and representatives of the
hospital, physician, other health
practitioner, and health plan
communities, and other interested
parties; and
(ii) shall take into account--
(I) the level of risk
appropriate to the size and
type of arrangement;
(II) the frequency of
assessment and distribution of
incentives;
(III) the level of capital
contribution; and
(IV) the extent to which
the risk-sharing arrangement
provides incentives to control
the cost and quality of health
care services.
(2) Publication of notice.--In carrying out the
rulemaking process under this subsection, the Secretary
shall publish the notice provided for under section
564(a) of title 5, United States Code, by not later
than 45 days after the date of the enactment of this
Act.
(3) Target date for publication of rule.--As part
of the notice under paragraph (2), and for purposes of
this subsection, the `target date for publication'
(referred to in section 564(a)(5) of such title) shall
be January 1, 1997.
(4) Abbreviated period for submission of
comments.--In applying section 564(c) of such title
under this subsection, `15 days' shall be substituted
for `30 days'.
(5) Appointment of negotiated rulemaking committee
and facilitator.--The Secretary shall provide for--
(A) the appointment of a negotiated
rulemaking committee under section 565(a) of
such title by not later than 30 days after the
end of the comment period provided for under
section 564(c) of such title (as shortened
under paragraph (4)), and
(B) the nomination of a facilitator under
section 566(c) of such title by not later than
10 days after the date of appointment of the
committee.
(6) Preliminary committee report.--The negotiated
rulemaking committee appointed under paragraph (5)
shall report to the Secretary, by not later than
October 1, 1996, regarding the committee's progress on
achieving a consensus with regard to the rulemaking
proceeding and whether such consensus is likely to
occur before one month before the target date for
publication of the rule. If the committee reports that
the committee has failed to make significant progress
towards such consensus or is unlikely to reach such
consensus by the target date, the Secretary may
terminate such process and provide for the publication
of a rule under this subsection through such other
methods as the Secretary may provide.
(7) Final committee report.--If the committee is
not terminated under paragraph (6), the rulemaking
committee shall submit a report containing a proposed
rule by not later than one month before the target
publication date.
(8) Interim, final effect.--The Secretary shall
publish a rule under this subsection in the Federal
Register by not later than the target publication date.
Such rule shall be effective and final immediately on
an interim basis, but is subject to change and revision
after public notice and opportunity for a period (of
not less than 60 days) for public comment. In
connection with such rule, the Secretary shall specify
the process for the timely review and approval of
applications of entities to be certified as provider-
sponsored organizations pursuant to such rules and
consistent with this subsection.
(9) Publication of rule after public comment.--The
Secretary shall provide for consideration of such
comments and republication of such rule by not later
than 1 year after the target publication date.
(c) Effective Date.--The amendments made by subsection (a)
shall apply to written agreements entered into on or after
January 1, 1997, without regard to whether regulations have
been issued to implement such amendments.
SEC. 217. CRIMINAL PENALTY FOR FRAUDULENT DISPOSITION OF ASSETS IN
ORDER TO OBTAIN MEDICAID BENEFITS.
Section 1128B(a) (42 U.S.C. 1320a-7b(a)) is amended--
(1) by striking ``or'' at the end of paragraph (4);
(2) by adding ``or'' at the end of paragraph (5);
and
(3) by inserting after paragraph (5) the following
new paragraph:
``(6) knowingly and willfully disposes of assets
(including by any transfer in trust) in order for an
individual to become eligible for medical assistance
under a State plan under title XIX, if disposing of the
assets results in the imposition of a period of
ineligibility for such assistance under section
1917(c),''.
SEC. 218. EFFECTIVE DATE.
Except as otherwise provided, the amendments made by this
subtitle shall take effect January 1, 1997.
Subtitle C--Data Collection
SEC. 221. ESTABLISHMENT OF THE HEALTH CARE FRAUD AND ABUSE DATA
COLLECTION PROGRAM.
(a) In General.--Title XI (42 U.S.C. 1301 et seq.), as
amended by sections 201 and 205, is amended by inserting after
section 1128D the following new section:
``health care fraud and abuse data collection program
``Sec. 1128E. (a) General Purpose.--Not later than January
1, 1997, the Secretary shall establish a national health care
fraud and abuse data collection program for the reporting of
final adverse actions (not including settlements in which no
findings of liability have been made) against health care
providers, suppliers, or practitioners as required by
subsection (b), with access as set forth in subsection (c), and
shall maintain a database of the information collected under
this section.
``(b) Reporting of Information.--
``(1) In general.--Each Government agency and
health plan shall report any final adverse action (not
including settlements in which no findings of liability
have been made) taken against a health care provider,
supplier, or practitioner.
``(2) Information to be reported.--The information
to be reported under paragraph (1) includes:
``(A) The name and TIN (as defined in
section 7701(a)(41) of the Internal Revenue
Code of 1986) of any health care provider,
supplier, or practitioner who is the subject of
a final adverse action.
``(B) The name (if known) of any health
care entity with which a health care provider,
supplier, or practitioner, who is the subject
of a final adverse action, is affiliated or
associated.
``(C) The nature of the final adverse
action and whether such action is on appeal.
``(D) A description of the acts or
omissions and injuries upon which the final
adverse action was based, and such other
information as the Secretary determines by
regulation is required for appropriate
interpretation of information reported under
this section.
``(3) Confidentiality.--In determining what
information is required, the Secretary shall include
procedures to assure that the privacy of individuals
receiving health care services is appropriately
protected.
``(4) Timing and form of reporting.--The
information required to be reported under this
subsection shall be reported regularly (but not less
often than monthly) and in such form and manner as the
Secretary prescribes. Such information shall first be
required to be reported on a date specified by the
Secretary.
``(5) To whom reported.--The information required
to be reported under this subsection shall be reported
to the Secretary.
``(c) Disclosure and Correction of Information.--
``(1) Disclosure.--With respect to the information
about final adverse actions (not including settlements
in which no findings of liability have been made)
reported to the Secretary under this section with
respect to a health care provider, supplier, or
practitioner, the Secretary shall, by regulation,
provide for--
``(A) disclosure of the information, upon
request, to the health care provider, supplier,
or licensed practitioner, and
``(B) procedures in the case of disputed
accuracy of the information.
``(2) Corrections.--Each Government agency and
health plan shall report corrections of information
already reported about any final adverse action taken
against a health care provider, supplier, or
practitioner, in such form and manner that the
Secretary prescribes by regulation.
``(d) Access to Reported Information.--
``(1) Availability.--The information in the
database maintained under this section shall be
available to Federal and State government agencies and
health plans pursuant to procedures that the Secretary
shall provide by regulation.
``(2) Fees for disclosure.--The Secretary may
establish or approve reasonable fees for the disclosure
of information in such database (other than with
respect to requests by Federal agencies). The amount of
such a fee shall be sufficient to recover the full
costs of operating the database. Such fees shall be
available to the Secretary or, in the Secretary's
discretion to the agency designated under this section
to cover such costs.
``(e) Protection From Liability for Reporting.--No person
or entity, including the agency designated by the Secretary in
subsection (b)(5) shall be held liable in any civil action with
respect to any report made as required by this section, without
knowledge of the falsity of the information contained in the
report.
``(f) Coordination With National Practitioner Data Bank.--
The Secretary shall implement this section in such a manner as
to avoid duplication with the reporting requirements
established for the National Practitioner Data Bank under the
Health Care Quality Improvement Act of 1986 (42 U.S.C. 11101 et
seq.).
``(g) Definitions and Special Rules.--For purposes of this
section:
``(1) Final adverse action.--
``(A) In general.--The term `final adverse
action' includes:
``(i) Civil judgments against a
health care provider, supplier, or
practitioner in Federal or State court
related to the delivery of a health
care item or service.
``(ii) Federal or State criminal
convictions related to the delivery of
a health care item or service.
``(iii) Actions by Federal or State
agencies responsible for the licensing
and certification of health care
providers, suppliers, and licensed
health care practitioners, including--
``(I) formal or official
actions, such as revocation or
suspension of a license (and
the length of any such
suspension), reprimand, censure
or probation,
``(II) any other loss of
license or the right to apply
for, or renew, a license of the
provider, supplier, or
practitioner, whether by
operation of law, voluntary
surrender, non-renewability, or
otherwise, or
``(III) any other negative
action or finding by such
Federal or State agency that is
publicly available information.
``(iv) Exclusion from participation
in Federal or State health care
programs (as defined in sections
1128B(f) and 1128(h), respectively).
``(v) Any other adjudicated actions
or decisions that the Secretary shall
establish by regulation.
``(B) Exception.--The term does not include
any action with respect to a malpractice claim.
``(2) Practitioner.--The terms `licensed health
care practitioner', `licensed practitioner', and
`practitioner' mean, with respect to a State, an
individual who is licensed or otherwise authorized by
the State to provide health care services (or any
individual who, without authority holds himself or
herself out to be so licensed or authorized).
``(3) Government agency.--The term `Government
agency' shall include:
``(A) The Department of Justice.
``(B) The Department of Health and Human
Services.
``(C) Any other Federal agency that either
administers or provides payment for the
delivery of health care services, including,
but not limited to the Department of Defense
and the Veterans' Administration.
``(D) State law enforcement agencies.
``(E) State medicaid fraud control units.
``(F) Federal or State agencies responsible
for the licensing and certification of health
care providers and licensed health care
practitioners.
``(4) Health plan.--The term `health plan' has the
meaning given such term by section 1128C(c).
``(5) Determination of conviction.--For purposes of
paragraph (1), the existence of a conviction shall be
determined under paragraph (4) of section 1128(i).''.
(b) Improved Prevention in Issuance of Medicare Provider
Numbers.--Section 1842(r) (42 U.S.C. 1395u(r)) is amended by
adding at the end the following new sentence: ``Under such
system, the Secretary may impose appropriate fees on such
physicians to cover the costs of investigation and
recertification activities with respect to the issuance of the
identifiers.''.
Subtitle D--Civil Monetary Penalties
SEC. 231. SOCIAL SECURITY ACT CIVIL MONETARY PENALTIES.
(a) General Civil Monetary Penalties.--Section 1128A (42
U.S.C. 1320a-7a) is amended as follows:
(1) In the third sentence of subsection (a), by
striking ``programs under title XVIII'' and inserting
``Federal health care programs (as defined in section
1128B(f)(1))''.
(2) In subsection (f)--
(A) by redesignating paragraph (3) as
paragraph (4); and
(B) by inserting after paragraph (2) the
following new paragraph:
``(3) With respect to amounts recovered arising out
of a claim under a Federal health care program (as
defined in section 1128B(f)), the portion of such
amounts as is determined to have been paid by the
program shall be repaid to the program, and the portion
of such amounts attributable to the amounts recovered
under this section by reason of the amendments made by
the Health Insurance Portability and Accountability Act
of 1996 (as estimated by the Secretary) shall be
deposited into the Federal Hospital Insurance Trust
Fund pursuant to section 1817(k)(2)(C).''.
(3) In subsection (i)--
(A) in paragraph (2), by striking ``title
V, XVIII, XIX, or XX of this Act'' and
inserting ``a Federal health care program (as
defined in section 1128B(f))'',
(B) in paragraph (4), by striking ``a
health insurance or medical services program
under title XVIII or XIX of this Act'' and
inserting ``a Federal health care program (as
so defined)'', and
(C) in paragraph (5), by striking ``title
V, XVIII, XIX, or XX'' and inserting ``a
Federal health care program (as so defined)''.
(4) By adding at the end the following new
subsection:
``(m)(1) For purposes of this section, with respect to a
Federal health care program not contained in this Act,
references to the Secretary in this section shall be deemed to
be references to the Secretary or Administrator of the
department or agency with jurisdiction over such program and
references to the Inspector General of the Department of Health
and Human Services in this section shall be deemed to be
references to the Inspector General of the applicable
department or agency.
``(2)(A) The Secretary and Administrator of the departments
and agencies referred to in paragraph (1) may include in any
action pursuant to this section, claims within the jurisdiction
of other Federal departments or agencies as long as the
following conditions are satisfied:
``(i) The case involves primarily claims submitted
to the Federal health care programs of the department
or agency initiating the action.
``(ii) The Secretary or Administrator of the
department or agency initiating the action gives notice
and an opportunity to participate in the investigation
to the Inspector General of the department or agency
with primary jurisdiction over the Federal health care
programs to which the claims were submitted.
``(B) If the conditions specified in subparagraph (A) are
fulfilled, the Inspector General of the department or agency
initiating the action is authorized to exercise all powers
granted under the Inspector General Act of 1978 (5 U.S.C. App.)
with respect to the claims submitted to the other departments
or agencies to the same manner and extent as provided in that
Act with respect to claims submitted to such departments or
agencies.''.
(b) Excluded Individual Retaining Ownership or Control
Interest in Participating Entity.--Section 1128A(a) (42 U.S.C.
1320a-7a(a)) is amended--
(1) by striking ``or'' at the end of paragraph
(1)(D);
(2) by striking ``, or'' at the end of paragraph
(2) and inserting a semicolon;
(3) by striking the semicolon at the end of
paragraph (3) and inserting ``; or''; and
(4) by inserting after paragraph (3) the following
new paragraph:
``(4) in the case of a person who is not an
organization, agency, or other entity, is excluded from
participating in a program under title XVIII or a State
health care program in accordance with this subsection
or under section 1128 and who, at the time of a
violation of this subsection--
``(A) retains a direct or indirect
ownership or control interest in an entity that
is participating in a program under title XVIII
or a State health care program, and who knows
or should know of the action constituting the
basis for the exclusion; or
``(B) is an officer or managing employee
(as defined in section 1126(b)) of such an
entity;''.
(c) Modifications of Amounts of Penalties and
Assessments.--Section 1128A(a) (42 U.S.C. 1320a-7a(a)), as
amended by subsection (b), is amended in the matter following
paragraph (4)--
(1) by striking ``$2,000'' and inserting
``$10,000'';
(2) by inserting ``; in cases under paragraph (4),
$10,000 for each day the prohibited relationship
occurs'' after ``false or misleading information was
given''; and
(3) by striking ``twice the amount'' and inserting
``3 times the amount''.
(d) Clarification of Level of Knowledge Required for
Imposition of Civil Monetary Penalties.--
(1) In general.--Section 1128A(a) (42 U.S.C. 1320a-
7a(a)) is amended--
(A) in paragraphs (1) and (2), by inserting
``knowingly'' before ``presents'' each place it
appears; and
(B) in paragraph (3), by striking ``gives''
and inserting ``knowingly gives or causes to be
given''.
(2) Definition of standard.--Section 1128A(i) (42
U.S.C. 1320a-7a(i)), as amended by subsection (h)(2),
is amended by adding at the end the following new
paragraph:
``(7) The term `should know' means that a person,
with respect to information--
``(A) acts in deliberate ignorance of the
truth or falsity of the information; or
``(B) acts in reckless disregard of the
truth or falsity of the information,
and no proof of specific intent to defraud is
required.''.
(e) Claim for Item or Service Based on Incorrect Coding or
Medically Unnecessary Services.--Section 1128A(a)(1) (42 U.S.C.
1320a-7a(a)(1)), as amended by subsection (b), is amended--
(1) in subparagraph (A) by striking ``claimed,''
and inserting ``claimed, including any person who
engages in a pattern or practice of presenting or
causing to be presented a claim for an item or service
that is based on a code that the person knows or should
know will result in a greater payment to the person
than the code the person knows or should know is
applicable to the item or service actually provided,'';
(2) in subparagraph (C), by striking ``or'' at the
end;
(3) in subparagraph (D), by striking the semicolon
and inserting ``, or''; and
(4) by inserting after subparagraph (D) the
following new subparagraph:
``(E) is for a pattern of medical or other
items or services that a person knows or should
know are not medically necessary;''.
(f) Sanctions Against Practitioners and Persons for Failure
To Comply With Statutory Obligations.--Section 1156(b)(3) (42
U.S.C. 1320c-5(b)(3)) is amended by striking ``the actual or
estimated cost'' and inserting ``up to $10,000 for each
instance''.
(g) Procedural Provisions.--Section 1876(i)(6) (42 U.S.C.
1395mm(i)(6)), as amended by section 215(a)(2), is amended by
adding at the end the following new subparagraph:
``(D) The provisions of section 1128A (other than
subsections (a) and (b)) shall apply to a civil money penalty
under subparagraph (B)(i) or (C)(i) in the same manner as such
provisions apply to a civil money penalty or proceeding under
section 1128A(a).''.
(h) Prohibition Against Offering Inducements to Individuals
Enrolled Under Programs or Plans.--
(1) Offer of remuneration.--Section 1128A(a) (42
U.S.C. 1320a-7a(a)), as amended by subsection (b), is
amended--
(A) by striking ``or'' at the end of
paragraph (3);
(B) by striking the semicolon at the end of
paragraph (4) and inserting ``; or''; and
(D) by inserting after paragraph (4) the
following new paragraph:
``(5) offers to or transfers remuneration to any
individual eligible for benefits under title XVIII of
this Act, or under a State health care program (as
defined in section 1128(h)) that such person knows or
should know is likely to influence such individual to
order or receive from a particular provider,
practitioner, or supplier any item or service for which
payment may be made, in whole or in part, under title
XVIII, or a State health care program (as so
defined);''.
(2) Remuneration defined.--Section 1128A(i) (42
U.S.C. 1320a-7a(i)) is amended by adding at the end the
following new paragraph:
``(6) The term `remuneration' includes the waiver
of coinsurance and deductible amounts (or any part
thereof), and transfers of items or services for free
or for other than fair market value. The term
`remuneration' does not include--
``(A) the waiver of coinsurance and
deductible amounts by a person, if--
``(i) the waiver is not offered as
part of any advertisement or
solicitation;
``(ii) the person does not
routinely waive coinsurance or
deductible amounts; and
``(iii) the person--
``(I) waives the
coinsurance and deductible
amounts after determining in
good faith that the individual
is in financial need;
``(II) fails to collect
coinsurance or deductible
amounts after making reasonable
collection efforts; or
``(III) provides for any
permissible waiver as specified
in section 1128B(b)(3) or in
regulations issued by the
Secretary;
``(B) differentials in coinsurance and
deductible amounts as part of a benefit plan
design as long as the differentials have been
disclosed in writing to all beneficiaries,
third party payers, and providers, to whom
claims are presented and as long as the
differentials meet the standards as defined in
regulations promulgated by the Secretary not
later than 180 days after the date of the
enactment of the Health Insurance Portability
and Accountability Act of 1996; or
``(C) incentives given to individuals to
promote the delivery of preventive care as
determined by the Secretary in regulations so
promulgated.''.
(i) Effective Date.--The amendments made by this section
shall apply to acts or omissions occurring on or after January
1, 1997.
SEC. 232. PENALTY FOR FALSE CERTIFICATION FOR HOME HEALTH SERVICES.
(a) In General.--Section 1128A(b) (42 U.S.C. 1320a-7a(b))
is amended by adding at the end the following new paragraph:
``(3)(A) Any physician who executes a document described in
subparagraph (B) with respect to an individual knowing that all
of the requirements referred to in such subparagraph are not
met with respect to the individual shall be subject to a civil
monetary penalty of not more than the greater of--
``(i) $5,000, or
``(ii) three times the amount of the payments under
title XVIII for home health services which are made
pursuant to such certification.
``(B) A document described in this subparagraph is any
document that certifies, for purposes of title XVIII, that an
individual meets the requirements of section 1814(a)(2)(C) or
1835(a)(2)(A) in the case of home health services furnished to
the individual.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to certifications made on or after the date of the
enactment of this Act.
Subtitle E--Revisions to Criminal Law
SEC. 241. DEFINITIONS RELATING TO FEDERAL HEALTH CARE OFFENSE.
(a) In General.--Chapter 1 of title 18, United States Code,
is amended by adding at the end the following:
``Sec. 24. Definitions relating to Federal health care offense
``(a) As used in this title, the term `Federal health care
offense' means a violation of, or a criminal conspiracy to
violate--
``(1) section 669, 1035, 1347, or 1518 of this
title;
``(2) section 287, 371, 664, 666, 1001, 1027, 1341,
1343, or 1954 of this title, if the violation or
conspiracy relates to a health care benefit program.
``(b) As used in this title, the term `health care benefit
program' means any public or private plan or contract,
affecting commerce, under which any medical benefit, item, or
service is provided to any individual, and includes any
individual or entity who is providing a medical benefit, item,
or service for which payment may be made under the plan or
contract.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 2 of title 18, United States Code, is
amended by inserting after the item relating to section 23 the
following new item:
``24. Definitions relating to Federal health care offense.''.
SEC. 242. HEALTH CARE FRAUD.
(a) Offense.--
(1) In general.--Chapter 63 of title 18, United
States Code, is amended by adding at the end the
following:
``Sec. 1347. Health care fraud
``Whoever knowingly and willfully executes, or attempts to
execute, a scheme or artifice--
``(1) to defraud any health care benefit program;
or
``(2) to obtain, by means of false or fraudulent
pretenses, representations, or promises, any of the
money or property owned by, or under the custody or
control of, any health care benefit program,
in connection with the delivery of or payment for health care
benefits, items, or services, shall be fined under this title
or imprisoned not more than 10 years, or both. If the violation
results in serious bodily injury (as defined in section 1365 of
this title), such person shall be fined under this title or
imprisoned not more than 20 years, or both; and if the
violation results in death, such person shall be fined under
this title, or imprisoned for any term of years or for life, or
both.''.
(2) Clerical amendment.--The table of sections at
the beginning of chapter 63 of title 18, United States
Code, is amended by adding at the end the following:
``1347. Health care fraud.''.
(b) Criminal Fines Deposited in Federal Hospital Insurance
Trust Fund.--The Secretary of the Treasury shall deposit into
the Federal Hospital Insurance Trust Fund pursuant to section
1817(k)(2)(C) of the Social Security Act (42 U.S.C. 1395i) an
amount equal to the criminal fines imposed under section 1347
of title 18, United States Code (relating to health care
fraud).
SEC. 243. THEFT OR EMBEZZLEMENT.
(a) In General.--Chapter 31 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 669. Theft or embezzlement in connection with health care
``(a) Whoever knowingly and willfully embezzles, steals, or
otherwise without authority converts to the use of any person
other than the rightful owner, or intentionally misapplies any
of the moneys, funds, securities, premiums, credits, property,
or other assets of a health care benefit program, shall be
fined under this title or imprisoned not more than 10 years, or
both; but if the value of such property does not exceed the sum
of $100 the defendant shall be fined under this title or
imprisoned not more than one year, or both.
``(b) As used in this section, the term `health care
benefit program' has the meaning given such term in section
1347(b) of this title.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 31 of title 18, United States Code, is
amended by adding at the end the following:
``669. Theft or embezzlement in connection with health care.''.
SEC. 244. FALSE STATEMENTS.
(a) In General.--Chapter 47 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 1035. False statements relating to health care matters
``(a) Whoever, in any matter involving a health care
benefit program, knowingly and willfully--
``(1) falsifies, conceals, or covers up by any
trick, scheme, or device a material fact; or
``(2) makes any materially false, fictitious, or
fraudulent statements or representations, or makes or
uses any materially false writing or document knowing
the same to contain any materially false, fictitious,
or fraudulent statement or entry,
in connection with the delivery of or payment for health care
benefits, items, or services, shall be fined under this title
or imprisoned not more than 5 years, or both.
``(b) As used in this section, the term `health care
benefit program' has the meaning given such term in section
1347(b) of this title.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 47 of title 18, United States Code, is
amended by adding at the end the following new item:
``1035. False statements relating to health care matters.''.
SEC. 245. OBSTRUCTION OF CRIMINAL INVESTIGATIONS OF HEALTH CARE
OFFENSES.
(a) In General.--Chapter 73 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 1518. Obstruction of criminal investigations of health care
offenses
``(a) Whoever willfully prevents, obstructs, misleads,
delays or attempts to prevent, obstruct, mislead, or delay the
communication of information or records relating to a violation
of a Federal health care offense to a criminal investigator
shall be fined under this title or imprisoned not more than 5
years, or both.
``(b) As used in this section the term `criminal
investigator' means any individual duly authorized by a
department, agency, or armed force of the United States to
conduct or engage in investigations for prosecutions for
violations of health care offenses.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 73 of title 18, United States Code, is
amended by adding at the end the following new item:
``1518. Obstruction of criminal investigations of health care
offenses.''.
SEC. 246. LAUNDERING OF MONETARY INSTRUMENTS.
Section 1956(c)(7) of title 18, United States Code, is
amended by adding at the end the following:
``(F) Any act or activity constituting an
offense involving a Federal health care
offense.''.
SEC. 247. INJUNCTIVE RELIEF RELATING TO HEALTH CARE OFFENSES.
(a) In General.--Section 1345(a)(1) of title 18, United
States Code, is amended--
(1) by striking ``or'' at the end of subparagraph
(A);
(2) by inserting ``or'' at the end of subparagraph
(B); and
(3) by adding at the end the following:
``(C) committing or about to commit a Federal
health care offense.''.
(b) Freezing of Assets.--Section 1345(a)(2) of title 18,
United States Code, is amended by inserting ``or a Federal
health care offense'' after ``title)''.
SEC. 248. AUTHORIZED INVESTIGATIVE DEMAND PROCEDURES.
(a) In General.--Chapter 223 of title 18, United States
Code, is amended by adding after section 3485 the following:
``Sec. 3486. Authorized investigative demand procedures
``(a) Authorization.--(1) In any investigation relating to
any act or activity involving a Federal health care offense,
the Attorney General or the Attorney General's designee may
issue in writing and cause to be served a subpoena--
``(A) requiring the production of any records
(including any books, papers, documents, electronic
media, or other objects or tangible things), which may
be relevant to an authorized law enforcement inquiry,
that a person or legal entity may possess or have care,
custody, or control; or
``(B) requiring a custodian of records to give
testimony concerning the production and authentication
of such records.
``(2) A subpoena under this subsection shall describe the
objects required to be produced and prescribe a return date
within a reasonable period of time within which the objects can
be assembled and made available.
``(3) The production of records shall not be required under
this section at any place more than 500 miles distant from the
place where the subpoena for the production of such records is
served.
``(4) Witnesses summoned under this section shall be paid
the same fees and mileage that are paid witnesses in the courts
of the United States.
``(b) Service.--A subpoena issued under this section may be
served by any person who is at least 18 years of age and is
designated in the subpoena to serve it. Service upon a natural
person may be made by personal delivery of the subpoena to him.
Service may be made upon a domestic or foreign corporation or
upon a partnership or other unincorporated association which is
subject to suit under a common name, by delivering the subpoena
to an officer, to a managing or general agent, or to any other
agent authorized by appointment or by law to receive service of
process. The affidavit of the person serving the subpoena
entered on a true copy thereof by the person serving it shall
be proof of service.
``(c) Enforcement.--In the case of contumacy by or refusal
to obey a subpoena issued to any person, the Attorney General
may invoke the aid of any court of the United States within the
jurisdiction of which the investigation is carried on or of
which the subpoenaed person is an inhabitant, or in which he
carries on business or may be found, to compel compliance with
the subpoena. The court may issue an order requiring the
subpoenaed person to appear before the Attorney General to
produce records, if so ordered, or to give testimony concerning
the production and authentication of such records. Any failure
to obey the order of the court may be punished by the court as
a contempt thereof. All process in any such case may be served
in any judicial district in which such person may be found.
``(d) Immunity From Civil Liability.--Notwithstanding any
Federal, State, or local law, any person, including officers,
agents, and employees, receiving a summons under this section,
who complies in good faith with the summons and thus produces
the materials sought, shall not be liable in any court of any
State or the United States to any customer or other person for
such production or for nondisclosure of that production to the
customer.
``(e) Limitation on Use.--(1) Health information about an
individual that is disclosed under this section may not be used
in, or disclosed to any person for use in, any administrative,
civil, or criminal action or investigation directed against the
individual who is the subject of the information unless the
action or investigation arises out of and is directly related
to receipt of health care or payment for health care or action
involving a fraudulent claim related to health; or if
authorized by an appropriate order of a court of competent
jurisdiction, granted after application showing good cause
therefor.
``(2) In assessing good cause, the court shall weigh the
public interest and the need for disclosure against the injury
to the patient, to the physician-patient relationship, and to
the treatment services.
``(3) Upon the granting of such order, the court, in
determining the extent to which any disclosure of all or any
part of any record is necessary, shall impose appropriate
safeguards against unauthorized disclosure.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 223 of title 18, United States Code, is
amended by inserting after the item relating to section 3485
the following new item:
``3486. Authorized investigative demand procedures.''.
(c) Conforming Amendment.--Section 1510(b)(3)(B) of title
18, United States Code, is amended by inserting ``or a
Department of Justice subpoena (issued under section 3486 of
title 18),'' after ``subpoena''.
SEC. 249. FORFEITURES FOR FEDERAL HEALTH CARE OFFENSES.
(a) In General.--Section 982(a) of title 18, United States
Code, is amended by adding after paragraph (5) the following
new paragraph:
``(6) The court, in imposing sentence on a person convicted
of a Federal health care offense, shall order the person to
forfeit property, real or personal, that constitutes or is
derived, directly or indirectly, from gross proceeds traceable
to the commission of the offense.''.
(b) Conforming Amendment.--Section 982(b)(1)(A) of title
18, United States Code, is amended by inserting ``or (a)(6)''
after ``(a)(1)''.
(c) Property Forfeited Deposited in Federal Hospital
Insurance Trust Fund.--
(1) In general.--After the payment of the costs of
asset forfeiture has been made and after all
restoration payments (if any) have been made, and
notwithstanding any other provision of law, the
Secretary of the Treasury shall deposit into the
Federal Hospital Insurance Trust Fund pursuant to
section 1817(k)(2)(C) of the Social Security Act, as
added by section 301(b), an amount equal to the net
amount realized from the forfeiture of property by
reason of a Federal health care offense pursuant to
section 982(a)(6) of title 18, United States Code.
(2) Costs of asset forfeiture.--For purposes of
paragraph (1), the term ``payment of the costs of asset
forfeiture'' means--
(A) the payment, at the discretion of the
Attorney General, of any expenses necessary to
seize, detain, inventory, safeguard, maintain,
advertise, sell, or dispose of property under
seizure, detention, or forfeited, or of any
other necessary expenses incident to the
seizure, detention, forfeiture, or disposal of
such property, including payment for--
(i) contract services;
(ii) the employment of outside
contractors to operate and manage
properties or provide other specialized
services necessary to dispose of such
properties in an effort to maximize the
return from such properties; and
(iii) reimbursement of any Federal,
State, or local agency for any
expenditures made to perform the
functions described in this
subparagraph;
(B) at the discretion of the Attorney
General, the payment of awards for information
or assistance leading to a civil or criminal
forfeiture involving any Federal agency
participating in the Health Care Fraud and
Abuse Control Account;
(C) the compromise and payment of valid
liens and mortgages against property that has
been forfeited, subject to the discretion of
the Attorney General to determine the validity
of any such lien or mortgage and the amount of
payment to be made, and the employment of
attorneys and other personnel skilled in State
real estate law as necessary;
(D) payment authorized in connection with
remission or mitigation procedures relating to
property forfeited; and
(E) the payment of State and local property
taxes on forfeited real property that accrued
between the date of the violation giving rise
to the forfeiture and the date of the
forfeiture order.
(3) Restoration payment.--Notwithstanding any other
provision of law, if the Federal health care offense
referred to in paragraph (1) resulted in a loss to an
employee welfare benefit plan within the meaning of
section 3(1) of the Employee Retirement Income Security
Act of 1974, the Secretary of the Treasury shall
transfer to such employee welfare benefit plan, from
the amount realized from the forfeiture of property
referred to in paragraph (1), an amount equal to such
loss. For purposes of paragraph (1), the term
`restoration payment' means the amount transferred to
an employee welfare benefit plan pursuant to this
paragraph.''.
SEC. 250. RELATION TO ERISA AUTHORITY.
Nothing in this subtitle shall be construed as affecting
the authority of the Secretary of Labor under section 506(b) of
the Employee Retirement Income Security Act of 1974, including
the Secretary's authority with respect to violations of title
18, United States Code (as amended by this subtitle).
Subtitle F--Administrative Simplification
SEC. 261. PURPOSE.
It is the purpose of this subtitle to improve the medicare
program under title XVIII of the Social Security Act, the
medicaid program under title XIX of such Act, and the
efficiency and effectiveness of the health care system, by
encouraging the development of a health information system
through the establishment of standards and requirements for the
electronic transmission of certain health information.
SEC. 262. ADMINISTRATIVE SIMPLIFICATION.
(a) In General.--Title XI (42 U.S.C. 1301 et seq.) is
amended by adding at the end the following:
``Part C--Administrative Simplification
``definitions
``Sec. 1171. For purposes of this part:
``(1) Code set.--The term `code set' means any set
of codes used for encoding data elements, such as
tables of terms, medical concepts, medical diagnostic
codes, or medical procedure codes.
``(2) Health care clearinghouse.--The term `health
care clearinghouse' means a public or private entity
that processes or facilitates the processing of
nonstandard data elements of health information into
standard data elements.
``(3) Health care provider.--The term `health care
provider' includes a provider of services (as defined
in section 1861(u)), a provider of medical or other
health services (as defined in section 1861(s)), and
any other person furnishing health care services or
supplies.
``(4) Health information.--The term `health
information' means any information, whether oral or
recorded in any form or medium, that--
``(A) is created or received by a health
care provider, health plan, public health
authority, employer, life insurer, school or
university, or health care clearinghouse; and
``(B) relates to the past, present, or
future physical or mental health or condition
of an individual, the provision of health care
to an individual, or the past, present, or
future payment for the provision of health care
to an individual.
``(5) Health plan.--The term `health plan' means an
individual or group plan that provides, or pays the
cost of, medical care (as such term is defined in
section 2791 of the Public Health Service Act). Such
term includes the following, and any combination
thereof:
``(A) A group health plan (as defined in
section 2791(a) of the Public Health Service
Act), but only if the plan--
``(i) has 50 or more participants
(as defined in section 3(7) of the
Employee Retirement Income Security Act
of 1974); or
``(ii) is administered by an entity
other than the employer who established
and maintains the plan.
``(B) A health insurance issuer (as defined
in section 2791(b) of the Public Health Service
Act).
``(C) A health maintenance organization (as
defined in section 2791(b) of the Public Health
Service Act).
``(D) Part A or part B of the medicare
program under title XVIII.
``(E) The medicaid program under title XIX.
``(F) A medicare supplemental policy (as
defined in section 1882(g)(1)).
``(G) A long-term care policy, including a
nursing home fixed indemnity policy (unless the
Secretary determines that such a policy does
not provide sufficiently comprehensive coverage
of a benefit so that the policy should be
treated as a health plan).
``(H) An employee welfare benefit plan or
any other arrangement which is established or
maintained for the purpose of offering or
providing health benefits to the employees of 2
or more employers.
``(I) The health care program for active
military personnel under title 10, United
States Code.
``(J) The veterans health care program
under chapter 17 of title 38, United States
Code.
``(K) The Civilian Health and Medical
Program of the Uniformed Services (CHAMPUS), as
defined in section 1072(4) of title 10, United
States Code.
``(L) The Indian health service program
under the Indian Health Care Improvement Act
(25 U.S.C. 1601 et seq.).
``(M) The Federal Employees Health Benefit
Plan under chapter 89 of title 5, United States
Code.
``(6) Individually identifiable health
information.--The term `individually identifiable
health information' means any information, including
demographic information collected from an individual,
that--
``(A) is created or received by a health
care provider, health plan, employer, or health
care clearinghouse; and
``(B) relates to the past, present, or
future physical or mental health or condition
of an individual, the provision of health care
to an individual, or the past, present, or
future payment for the provision of health care
to an individual, and--
``(i) identifies the individual; or
``(ii) with respect to which there
is a reasonable basis to believe that
the information can be used to identify
the individual.
``(7) Standard.--The term `standard', when used
with reference to a data element of health information
or a transaction referred to in section 1173(a)(1),
means any such data element or transaction that meets
each of the standards and implementation specifications
adopted or established by the Secretary with respect to
the data element or transaction under sections 1172
through 1174.
``(8) Standard setting organization.--The term
`standard setting organization' means a standard
setting organization accredited by the American
National Standards Institute, including the National
Council for Prescription Drug Programs, that develops
standards for information transactions, data elements,
or any other standard that is necessary to, or will
facilitate, the implementation of this part.
``general requirements for adoption of standards
``Sec. 1172. (a) Applicability.--Any standard adopted under
this part shall apply, in whole or in part, to the following
persons:
``(1) A health plan.
``(2) A health care clearinghouse.
``(3) A health care provider who transmits any
health information in electronic form in connection
with a transaction referred to in section 1173(a)(1).
``(b) Reduction of Costs.--Any standard adopted under this
part shall be consistent with the objective of reducing the
administrative costs of providing and paying for health care.
``(c) Role of Standard Setting Organizations.--
``(1) In general.--Except as provided in paragraph
(2), any standard adopted under this part shall be a
standard that has been developed, adopted, or modified
by a standard setting organization.
``(2) Special rules.--
``(A) Different standards.--The Secretary
may adopt a standard that is different from any
standard developed, adopted, or modified by a
standard setting organization, if--
``(i) the different standard will
substantially reduce administrative
costs to health care providers and
health plans compared to the
alternatives; and
``(ii) the standard is promulgated
in accordance with the rulemaking
procedures of subchapter III of chapter
5 of title 5, United States Code.
``(B) No standard by standard setting
organization.--If no standard setting
organization has developed, adopted, or
modified any standard relating to a standard
that the Secretary is authorized or required to
adopt under this part--
``(i) paragraph (1) shall not
apply; and
``(ii) subsection (f) shall apply.
``(3) Consultation requirement.--
``(A) In general.--A standard may not be
adopted under this part unless--
``(i) in the case of a standard
that has been developed, adopted, or
modified by a standard setting
organization, the organization
consulted with each of the
organizations described in subparagraph
(B) in the course of such development,
adoption, or modification; and
``(ii) in the case of any other
standard, the Secretary, in complying
with the requirements of subsection
(f), consulted with each of the
organizations described in subparagraph
(B) before adopting the standard.
``(B) Organizations described.--The
organizations referred to in subparagraph (A)
are the following:
``(i) The National Uniform Billing
Committee.
``(ii) The National Uniform Claim
Committee.
``(iii) The Workgroup for
Electronic Data Interchange.
``(iv) The American Dental
Association.
``(d) Implementation Specifications.--The Secretary shall
establish specifications for implementing each of the standards
adopted under this part.
``(e) Protection of Trade Secrets.--Except as otherwise
required by law, a standard adopted under this part shall not
require disclosure of trade secrets or confidential commercial
information by a person required to comply with this part.
``(f) Assistance to the Secretary.--In complying with the
requirements of this part, the Secretary shall rely on the
recommendations of the National Committee on Vital and Health
Statistics established under section 306(k) of the Public
Health Service Act (42 U.S.C. 242k(k)), and shall consult with
appropriate Federal and State agencies and private
organizations. The Secretary shall publish in the Federal
Register any recommendation of the National Committee on Vital
and Health Statistics regarding the adoption of a standard
under this part.
``(g) Application to Modifications of Standards.--This
section shall apply to a modification to a standard (including
an addition to a standard) adopted under section 1174(b) in the
same manner as it applies to an initial standard adopted under
section 1174(a).
``standards for information transactions and data elements
``Sec. 1173. (a) Standards to Enable Electronic Exchange.--
``(1) In general.--The Secretary shall adopt
standards for transactions, and data elements for such
transactions, to enable health information to be
exchanged electronically, that are appropriate for--
``(A) the financial and administrative
transactions described in paragraph (2); and
``(B) other financial and administrative
transactions determined appropriate by the
Secretary, consistent with the goals of
improving the operation of the health care
system and reducing administrative costs.
``(2) Transactions.--The transactions referred to
in paragraph (1)(A) are transactions with respect to
the following:
``(A) Health claims or equivalent encounter
information.
``(B) Health claims attachments.
``(C) Enrollment and disenrollment in a
health plan.
``(D) Eligibility for a health plan.
``(E) Health care payment and remittance
advice.
``(F) Health plan premium payments.
``(G) First report of injury.
``(H) Health claim status.
``(I) Referral certification and
authorization.
``(3) Accommodation of specific providers.--The
standards adopted by the Secretary under paragraph (1)
shall accommodate the needs of different types of
health care providers.
``(b) Unique Health Identifiers.--
``(1) In general.--The Secretary shall adopt
standards providing for a standard unique health
identifier for each individual, employer, health plan,
and health care provider for use in the health care
system. In carrying out the preceding sentence for each
health plan and health care provider, the Secretary
shall take into account multiple uses for identifiers
and multiple locations and specialty classifications
for health care providers.
``(2) Use of identifiers.--The standards adopted
under paragraphs (1) shall specify the purposes for
which a unique health identifier may be used.
``(c) Code Sets.--
``(1) In general.--The Secretary shall adopt
standards that--
``(A) select code sets for appropriate data
elements for the transactions referred to in
subsection (a)(1) from among the code sets that
have been developed by private and public
entities; or
``(B) establish code sets for such data
elements if no code sets for the data elements
have been developed.
``(2) Distribution.--The Secretary shall establish
efficient and low-cost procedures for distribution
(including electronic distribution) of code sets and
modifications made to such code sets under section
1174(b).
``(d) Security Standards for Health Information.--
``(1) Security standards.--The Secretary shall
adopt security standards that--
``(A) take into account--
``(i) the technical capabilities of
record systems used to maintain health
information;
``(ii) the costs of security
measures;
``(iii) the need for training
persons who have access to health
information;
``(iv) the value of audit trails in
computerized record systems; and
``(v) the needs and capabilities of
small health care providers and rural
health care providers (as such
providers are defined by the
Secretary); and
``(B) ensure that a health care
clearinghouse, if it is part of a larger
organization, has policies and security
procedures which isolate the activities of the
health care clearinghouse with respect to
processing information in a manner that
prevents unauthorized access to such
information by such larger organization.
``(2) Safeguards.--Each person described in section
1172(a) who maintains or transmits health information
shall maintain reasonable and appropriate
administrative, technical, and physical safeguards--
``(A) to ensure the integrity and
confidentiality of the information;
``(B) to protect against any reasonably
anticipated--
``(i) threats or hazards to the
security or integrity of the
information; and
``(ii) unauthorized uses or
disclosures of the information; and
``(C) otherwise to ensure compliance with
this part by the officers and employees of such
person.
``(e) Electronic Signature.--
``(1) Standards.--The Secretary, in coordination
with the Secretary of Commerce, shall adopt standards
specifying procedures for the electronic transmission
and authentication of signatures with respect to the
transactions referred to in subsection (a)(1).
``(2) Effect of compliance.--Compliance with the
standards adopted under paragraph (1) shall be deemed
to satisfy Federal and State statutory requirements for
written signatures with respect to the transactions
referred to in subsection (a)(1).
``(f) Transfer of Information Among Health Plans.--The
Secretary shall adopt standards for transferring among health
plans appropriate standard data elements needed for the
coordination of benefits, the sequential processing of claims,
and other data elements for individuals who have more than one
health plan.
``timetables for adoption of standards
``Sec. 1174. (a) Initial Standards.--The Secretary shall
carry out section 1173 not later than 18 months after the date
of the enactment of the Health Insurance Portability and
Accountability Act of 1996, except that standards relating to
claims attachments shall be adopted not later than 30 months
after such date.
``(b) Additions and Modifications to Standards.--
``(1) In general.--Except as provided in paragraph
(2), the Secretary shall review the standards adopted
under section 1173, and shall adopt modifications to
the standards (including additions to the standards),
as determined appropriate, but not more frequently than
once every 12 months. Any addition or modification to a
standard shall be completed in a manner which minimizes
the disruption and cost of compliance.
``(2) Special rules.--
``(A) First 12-month period.--Except with
respect to additions and modifications to code
sets under subparagraph (B), the Secretary may
not adopt any modification to a standard
adopted under this part during the 12-month
period beginning on the date the standard is
initially adopted, unless the Secretary
determines that the modification is necessary
in order to permit compliance with the
standard.
``(B) Additions and modifications to code
sets.--
``(i) In general.--The Secretary
shall ensure that procedures exist for
the routine maintenance, testing,
enhancement, and expansion of code
sets.
``(ii) Additional rules.--If a code
set is modified under this subsection,
the modified code set shall include
instructions on how data elements of
health information that were encoded
prior to the modification may be
converted or translated so as to
preserve the informational value of the
data elements that existed before the
modification. Any modification to a
code set under this subsection shall be
implemented in a manner that minimizes
the disruption and cost of complying
with such modification.
``requirements
``Sec. 1175. (a) Conduct of Transactions by Plans.--
``(1) In general.--If a person desires to conduct a
transaction referred to in section 1173(a)(1) with a
health plan as a standard transaction--
``(A) the health plan may not refuse to
conduct such transaction as a standard
transaction;
``(B) the insurance plan may not delay such
transaction, or otherwise adversely affect, or
attempt to adversely affect, the person or the
transaction on the ground that the transaction
is a standard transaction; and
``(C) the information transmitted and
received in connection with the transaction
shall be in the form of standard data elements
of health information.
``(2) Satisfaction of requirements.--A health plan
may satisfy the requirements under paragraph (1) by--
``(A) directly transmitting and receiving
standard data elements of health information;
or
``(B) submitting nonstandard data elements
to a health care clearinghouse for processing
into standard data elements and transmission by
the health care clearinghouse, and receiving
standard data elements through the health care
clearinghouse.
``(3) Timetable for compliance.--Paragraph (1)
shall not be construed to require a health plan to
comply with any standard, implementation specification,
or modification to a standard or specification adopted
or established by the Secretary under sections 1172
through 1174 at any time prior to the date on which the
plan is required to comply with the standard or
specification under subsection (b).
``(b) Compliance With Standards.--
``(1) Initial compliance.--
``(A) In general.--Not later than 24 months
after the date on which an initial standard or
implementation specification is adopted or
established under sections 1172 and 1173, each
person to whom the standard or implementation
specification applies shall comply with the
standard or specification.
``(B) Special rule for small health
plans.--In the case of a small health plan,
paragraph (1) shall be applied by substituting
`36 months' for `24 months'. For purposes of
this subsection, the Secretary shall determine
the plans that qualify as small health plans.
``(2) Compliance with modified standards.--If the
Secretary adopts a modification to a standard or
implementation specification under this part, each
person to whom the standard or implementation
specification applies shall comply with the modified
standard or implementation specification at such time
as the Secretary determines appropriate, taking into
account the time needed to comply due to the nature and
extent of the modification. The time determined
appropriate under the preceding sentence may not be
earlier than the last day of the 180-day period
beginning on the date such modification is adopted. The
Secretary may extend the time for compliance for small
health plans, if the Secretary determines that such
extension is appropriate.
``(3) Construction.--Nothing in this subsection
shall be construed to prohibit any person from
complying with a standard or specification by--
``(A) submitting nonstandard data elements
to a health care clearinghouse for processing
into standard data elements and transmission by
the health care clearinghouse; or
``(B) receiving standard data elements
through a health care clearinghouse.
``general penalty for failure to comply with requirements and standards
``Sec. 1176. (a) General Penalty.--
``(1) In general.--Except as provided in subsection
(b), the Secretary shall impose on any person who
violates a provision of this part a penalty of not more
than $100 for each such violation, except that the
total amount imposed on the person for all violations
of an identical requirement or prohibition during a
calendar year may not exceed $25,000.
``(2) Procedures.--The provisions of section 1128A
(other than subsections (a) and (b) and the second
sentence of subsection (f)) shall apply to the
imposition of a civil money penalty under this
subsection in the same manner as such provisions apply
to the imposition of a penalty under such section
1128A.
``(b) Limitations.--
``(1) Offenses otherwise punishable.--A penalty may
not be imposed under subsection (a) with respect to an
act if the act constitutes an offense punishable under
section 1177.
``(2) Noncompliance not discovered.--A penalty may
not be imposed under subsection (a) with respect to a
provision of this part if it is established to the
satisfaction of the Secretary that the person liable
for the penalty did not know, and by exercising
reasonable diligence would not have known, that such
person violated the provision.
``(3) Failures due to reasonable cause.--
``(A) In general.--Except as provided in
subparagraph (B), a penalty may not be imposed
under subsection (a) if--
``(i) the failure to comply was due
to reasonable cause and not to willful
neglect; and
``(ii) the failure to comply is
corrected during the 30-day period
beginning on the first date the person
liable for the penalty knew, or by
exercising reasonable diligence would
have known, that the failure to comply
occurred.
``(B) Extension of period.--
``(i) No penalty.--The period
referred to in subparagraph (A)(ii) may
be extended as determined appropriate
by the Secretary based on the nature
and extent of the failure to comply.
``(ii) Assistance.--If the
Secretary determines that a person
failed to comply because the person was
unable to comply, the Secretary may
provide technical assistance to the
person during the period described in
subparagraph (A)(ii). Such assistance
shall be provided in any manner
determined appropriate by the
Secretary.
``(4) Reduction.--In the case of a failure to
comply which is due to reasonable cause and not to
willful neglect, any penalty under subsection (a) that
is not entirely waived under paragraph (3) may be
waived to the extent that the payment of such penalty
would be excessive relative to the compliance failure
involved.
``wrongful disclosure of individually identifiable health information
``Sec. 1177. (a) Offense.--A person who knowingly and in
violation of this part--
``(1) uses or causes to be used a unique health
identifier;
``(2) obtains individually identifiable health
information relating to an individual; or
``(3) discloses individually identifiable health
information to another person,
shall be punished as provided in subsection (b).
``(b) Penalties.--A person described in subsection (a)
shall--
``(1) be fined not more than $50,000, imprisoned
not more than 1 year, or both;
``(2) if the offense is committed under false
pretenses, be fined not more than $100,000, imprisoned
not more than 5 years, or both; and
``(3) if the offense is committed with intent to
sell, transfer, or use individually identifiable health
information for commercial advantage, personal gain, or
malicious harm, fined not more than $250,000,
imprisoned not more than 10 years, or both.
``effect on state law
``Sec. 1178. (a) General Effect.--
``(1) General rule.--Except as provided in
paragraph (2), a provision or requirement under this
part, or a standard or implementation specification
adopted or established under sections 1172 through
1174, shall supersede any contrary provision of State
law, including a provision of State law that requires
medical or health plan records (including billing
information) to be maintained or transmitted in written
rather than electronic form.
``(2) Exceptions.--A provision or requirement under
this part, or a standard or implementation
specification adopted or established under sections
1172 through 1174, shall not supersede a contrary
provision of State law, if the provision of State law--
``(A) is a provision the Secretary
determines--
``(i) is necessary--
``(I) to prevent fraud and
abuse;
``(II) to ensure
appropriate State regulation of
insurance and health plans;
``(III) for State reporting
on health care delivery or
costs; or
``(IV) for other purposes;
or
``(ii) addresses controlled
substances; or
``(B) subject to section 264(c)(2) of the
Health Insurance Portability and Accountability
Act of 1996, relates to the privacy of
individually identifiable health information.
``(b) Public Health.--Nothing in this part shall be
construed to invalidate or limit the authority, power, or
procedures established under any law providing for the
reporting of disease or injury, child abuse, birth, or death,
public health surveillance, or public health investigation or
intervention.
``(c) State Regulatory Reporting.--Nothing in this part
shall limit the ability of a State to require a health plan to
report, or to provide access to, information for management
audits, financial audits, program monitoring and evaluation,
facility licensure or certification, or individual licensure or
certification.
``processing payment transactions by financial institutions
``Sec. 1179. To the extent that an entity is engaged in
activities of a financial institution (as defined in section
1101 of the Right to Financial Privacy Act of 1978), or is
engaged in authorizing, processing, clearing, settling,
billing, transferring, reconciling, or collecting payments, for
a financial institution, this part, and any standard adopted
under this part, shall not apply to the entity with respect to
such activities, including the following:
``(1) The use or disclosure of information by the
entity for authorizing, processing, clearing, settling,
billing, transferring, reconciling or collecting, a
payment for, or related to, health plan premiums or
health care, where such payment is made by any means,
including a credit, debit, or other payment card, an
account, check, or electronic funds transfer.
``(2) The request for, or the use or disclosure of,
information by the entity with respect to a payment
described in paragraph (1)--
``(A) for transferring receivables;
``(B) for auditing;
``(C) in connection with--
``(i) a customer dispute; or
``(ii) an inquiry from, or to, a
customer;
``(D) in a communication to a customer of
the entity regarding the customer's
transactions, payment card, account, check, or
electronic funds transfer;
``(E) for reporting to consumer reporting
agencies; or
``(F) for complying with--
``(i) a civil or criminal subpoena;
or
``(ii) a Federal or State law
regulating the entity.''.
(b) Conforming Amendments.--
(1) Requirement for medicare providers.--Section
1866(a)(1) (42 U.S.C. 1395cc(a)(1)) is amended--
(A) by striking ``and'' at the end of
subparagraph (P);
(B) by striking the period at the end of
subparagraph (Q) and inserting ``; and''; and
(C) by inserting immediately after
subparagraph (Q) the following new
subparagraph:
``(R) to contract only with a health care
clearinghouse (as defined in section 1171) that meets
each standard and implementation specification adopted
or established under part C of title XI on or after the
date on which the health care clearinghouse is required
to comply with the standard or specification.''.
(2) Title heading.--Title XI (42 U.S.C. 1301 et
seq.) is amended by striking the title heading and
inserting the following:
``TITLE XI--GENERAL PROVISIONS, PEER REVIEW, AND ADMINISTRATIVE
SIMPLIFICATION''.
SEC. 263. CHANGES IN MEMBERSHIP AND DUTIES OF NATIONAL COMMITTEE ON
VITAL AND HEALTH STATISTICS.
Section 306(k) of the Public Health Service Act (42 U.S.C.
242k(k)) is amended--
(1) in paragraph (1), by striking ``16'' and
inserting ``18'';
(2) by amending paragraph (2) to read as follows:
``(2) The members of the Committee shall be appointed from
among persons who have distinguished themselves in the fields
of health statistics, electronic interchange of health care
information, privacy and security of electronic information,
population-based public health, purchasing or financing health
care services, integrated computerized health information
systems, health services research, consumer interests in health
information, health data standards, epidemiology, and the
provision of health services. Members of the Committee shall be
appointed for terms of 4 years.'';
(3) by redesignating paragraphs (3) through (5) as
paragraphs (4) through (6), respectively, and inserting
after paragraph (2) the following:
``(3) Of the members of the Committee--
``(A) 1 shall be appointed, not later than 60 days
after the date of the enactment of the Health Insurance
Portability and Accountability Act of 1996, by the
Speaker of the House of Representatives after
consultation with the minority leader of the House of
Representatives;
``(B) 1 shall be appointed, not later than 60 days
after the date of the enactment of the Health Insurance
Portability and Accountability Act of 1996, by the
President pro tempore of the Senate after consultation
with the minority leader of the Senate; and
``(C) 16 shall be appointed by the Secretary.'';
(4) by amending paragraph (5) (as so redesignated)
to read as follows:
``(5) The Committee--
``(A) shall assist and advise the Secretary--
``(i) to delineate statistical problems
bearing on health and health services which are
of national or international interest;
``(ii) to stimulate studies of such
problems by other organizations and agencies
whenever possible or to make investigations of
such problems through subcommittees;
``(iii) to determine, approve, and revise
the terms, definitions, classifications, and
guidelines for assessing health status and
health services, their distribution and costs,
for use (I) within the Department of Health and
Human Services, (II) by all programs
administered or funded by the Secretary,
including the Federal-State-local cooperative
health statistics system referred to in
subsection (e), and (III) to the extent
possible as determined by the head of the
agency involved, by the Department of Veterans
Affairs, the Department of Defense, and other
Federal agencies concerned with health and
health services;
``(iv) with respect to the design of and
approval of health statistical and health
information systems concerned with the
collection, processing, and tabulation of
health statistics within the Department of
Health and Human Services, with respect to the
Cooperative Health Statistics System
established under subsection (e), and with
respect to the standardized means for the
collection of health information and statistics
to be established by the Secretary under
subsection (j)(1);
``(v) to review and comment on findings and
proposals developed by other organizations and
agencies and to make recommendations for their
adoption or implementation by local, State,
national, or international agencies;
``(vi) to cooperate with national
committees of other countries and with the
World Health Organization and other national
agencies in the studies of problems of mutual
interest;
``(vii) to issue an annual report on the
state of the Nation's health, its health
services, their costs and distributions, and to
make proposals for improvement of the Nation's
health statistics and health information
systems; and
``(viii) in complying with the requirements
imposed on the Secretary under part C of title
XI of the Social Security Act;
``(B) shall study the issues related to the
adoption of uniform data standards for patient medical
record information and the electronic exchange of such
information;
``(C) shall report to the Secretary not later than
4 years after the date of the enactment of the Health
Insurance Portability and Accountability Act of 1996
recommendations and legislative proposals for such
standards and electronic exchange; and
``(D) shall be responsible generally for advising
the Secretary and the Congress on the status of the
implementation of part C of title XI of the Social
Security Act.''; and
(5) by adding at the end the following:
``(7) Not later than 1 year after the date of the enactment
of the Health Insurance Portability and Accountability Act of
1996, and annually thereafter, the Committee shall submit to
the Congress, and make public, a report regarding the
implementation of part C of title XI of the Social Security
Act. Such report shall address the following subjects, to the
extent that the Committee determines appropriate:
``(A) The extent to which persons required to
comply with part C of title XI of the Social Security
Act are cooperating in implementing the standards
adopted under such part.
``(B) The extent to which such entities are meeting
the security standards adopted under such part and the
types of penalties assessed for noncompliance with such
standards.
``(C) Whether the Federal and State Governments are
receiving information of sufficient quality to meet
their responsibilities under such part.
``(D) Any problems that exist with respect to
implementation of such part.
``(E) The extent to which timetables under such
part are being met.''.
SEC. 264. RECOMMENDATIONS WITH RESPECT TO PRIVACY OF CERTAIN HEALTH
INFORMATION.
(a) In General.--Not later than the date that is 12 months
after the date of the enactment of this Act, the Secretary of
Health and Human Services shall submit to the Committee on
Labor and Human Resources and the Committee on Finance of the
Senate and the Committee on Commerce and the Committee on Ways
and Means of the House of Representatives detailed
recommendations on standards with respect to the privacy of
individually identifiable health information.
(b) Subjects for Recommendations.--The recommendations
under subsection (a) shall address at least the following:
(1) The rights that an individual who is a subject
of individually identifiable health information should
have.
(2) The procedures that should be established for
the exercise of such rights.
(3) The uses and disclosures of such information
that should be authorized or required.
(c) Regulations.--
(1) In general.--If legislation governing standards
with respect to the privacy of individually
identifiable health information transmitted in
connection with the transactions described in section
1173(a) of the Social Security Act (as added by section
262) is not enacted by the date that is 36 months after
the date of the enactment of this Act, the Secretary of
Health and Human Services shall promulgate final
regulations containing such standards not later than
the date that is 42 months after the date of the
enactment of this Act. Such regulations shall address
at least the subjects described in subsection (b).
(2) Preemption.--A regulation promulgated under
paragraph (1) shall not supercede a contrary provision
of State law, if the provision of State law imposes
requirements, standards, or implementation
specifications that are more stringent than the
requirements, standards, or implementation
specifications imposed under the regulation.
(d) Consultation.--In carrying out this section, the
Secretary of Health and Human Services shall consult with--
(1) the National Committee on Vital and Health
Statistics established under section 306(k) of the
Public Health Service Act (42 U.S.C. 242k(k)); and
(2) the Attorney General.
Subtitle G--Duplication and Coordination of Medicare-Related Plans
SEC. 271. DUPLICATION AND COORDINATION OF MEDICARE-RELATED PLANS.
(a) Treatment of Certain Health Insurance Policies as
Nonduplicative.--Section 1882(d)(3)(A) (42 U.S.C.
1395ss(d)(3)(A)) is amended--
(1) in clause (iii), by striking ``clause (i)'' and
inserting ``clause (i)(II)''; and
(2) by adding at the end the following:
``(iv) For purposes of this subparagraph, a health
insurance policy (other than a medicare supplemental policy)
providing for benefits which are payable to or on behalf of an
individual without regard to other health benefit coverage of
such individual is not considered to `duplicate' any health
benefits under this title, under title XIX, or under a health
insurance policy, and subclauses (I) and (III) of clause (i) do
not apply to such a policy.
``(v) For purposes of this subparagraph, a health insurance
policy (or a rider to an insurance contract which is not a
health insurance policy) is not considered to `duplicate'
health benefits under this title or under another health
insurance policy if it--
``(I) provides health care benefits only for long-
term care, nursing home care, home health care, or
community-based care, or any combination thereof,
``(II) coordinates against or excludes items and
services available or paid for under this title or
under another health insurance policy, and
``(III) for policies sold or issued on or after the
end of the 90-day period beginning on the date of
enactment of the Health Insurance Portability and
Accountability Act of 1996) discloses such coordination
or exclusion in the policy's outline of coverage.
For purposes of this clause, the terms `coordinates' and
`coordination' mean, with respect to a policy in relation to
health benefits under this title or under another health
insurance policy, that the policy under its terms is secondary
to, or excludes from payment, items and services to the extent
available or paid for under this title or under another health
insurance policy.
``(vi)(I) An individual entitled to benefits under part A
or enrolled under part B of this title who is applying for a
health insurance policy (other than a policy described in
subclause (III)) shall be furnished a disclosure statement
described in clause (vii) for the type of policy being applied
for. Such statement shall be furnished as a part of (or
together with) the application for such policy.
``(II) Whoever issues or sells a health insurance policy
(other than a policy described in subclause (III)) to an
individual described in subclause (I) and fails to furnish the
appropriate disclosure statement as required under such
subclause shall be fined under title 18, United States Code, or
imprisoned not more than 5 years, or both, and, in addition to
or in lieu of such a criminal penalty, is subject to a civil
money penalty of not to exceed $25,000 (or $15,000 in the case
of a person other than the issuer of the policy) for each such
violation.
``(III) A policy described in this subclause (to which
subclauses (I) and (II) do not apply) is a medicare
supplemental policy or a health insurance policy identified
under 60 Federal Register 30880 (June 12, 1995) as a policy not
required to have a disclosure statement.
``(IV) Any reference in this section to the revised NAIC
model regulation (referred to in subsection (m)(1)(A)) is
deemed a reference to such regulation as revised by section
171(m)(2) of the Social Security Act Amendments of 1994 (Public
Law 103-432) and as modified by substituting, for the
disclosure required under section 16D(2), disclosure under
subclause (I) of an appropriate disclosure statement under
clause (vii).
``(vii) The disclosure statement described in this clause
for a type of policy is the statement specified under
subparagraph (D) of this paragraph (as in effect before the
date of the enactment of the Health Insurance Portability and
Accountability Act of 1996) for that type of policy, as revised
as follows:
``(I) In each statement, amend the second line to
read as follows:
`THIS IS NOT MEDICARE SUPPLEMENT INSURANCE'.
``(II) In each statement, strike the third line and
insert the following: `Some health care services paid
for by Medicare may also trigger the payment of
benefits under this policy.'.
``(III) In each statement not described in
subclause (V), strike the boldface matter that begins
`This insurance' and all that follows up to the next
paragraph that begins `Medicare'.
``(IV) In each statement not described in subclause
(V), insert before the boxed matter (that states
`Before You Buy This Insurance') the following: `This
policy must pay benefits without regard to other health
benefit coverage to which you may be entitled under
Medicare or other insurance.'.
``(V) In a statement relating to policies providing
both nursing home and non-institutional coverage, to
policies providing nursing home benefits only, or
policies providing home care benefits only, amend the
sentence that begins `Federal law' to read as follows:
`Federal law requires us to inform you that in certain
situations this insurance may pay for some care also
covered by Medicare.'.
``(viii)(I) Subject to subclause (II), nothing in this
subparagraph shall restrict or preclude a State's ability to
regulate health insurance policies, including any health
insurance policy that is described in clause (iv), (v), or
(vi)(III).
``(II) A State may not declare or specify, in statute,
regulation, or otherwise, that a health insurance policy (other
than a medicare supplemental policy) or rider to an insurance
contract which is not a health insurance policy, that is
described in clause (iv), (v), or (vi)(III) and that is sold,
issued, or renewed to an individual entitled to benefits under
part A or enrolled under part B `duplicates' health benefits
under this title or under a medicare supplemental policy.''.
(b) Conforming Amendments.--Section 1882(d)(3) (42 U.S.C.
1395ss(d)(3)) is amended--
(1) in subparagraph (C)--
(A) by striking ``with respect to (i)'' and
inserting ``with respect to'', and
(B) by striking ``, (ii) the sale'' and all
that follows up to the period at the end; and
(2) by striking subparagraph (D).
(c) Transitional Provision.--
(1) No penalties.--Subject to paragraph (3), no
criminal or civil money penalty may be imposed under
section 1882(d)(3)(A) of the Social Security Act for
any act or omission that occurred during the transition
period (as defined in paragraph (4)) and that relates
to any health insurance policy that is described in
clause (iv) or (v) of such section (as amended by
subsection (a)).
(2) Limitation on legal action.--Subject to
paragraph (3), no legal action shall be brought or
continued in any Federal or State court insofar as such
action--
(A) includes a cause of action which arose,
or which is based on or evidenced by any act or
omission which occurred, during the transition
period; and
(B) relates to the application of section
1882(d)(3)(A) of the Social Security Act to any
act or omission with respect to the sale,
issuance, or renewal of any health insurance
policy that is described in clause (iv) or (v)
of such section (as amended by subsection (a)).
(3) Disclosure condition.--In the case of a policy
described in clause (iv) of section 1882(d)(3)(A) of
the Social Security Act that is sold or issued on or
after the effective date of statements under section
171(d)(3)(C) of the Social Security Act Amendments of
1994 and before the end of the 30-day period beginning
on the date of the enactment of this Act, paragraphs
(1) and (2) shall only apply if disclosure was made in
accordance with section 1882(d)(3)(C)(ii) of the Social
Security Act (as in effect before the date of the
enactment of this Act).
(4) Transition period.--In this subsection, the
term ``transition period'' means the period beginning
on November 5, 1991, and ending on the date of the
enactment of this Act.
(d) Effective Date.--(1) Except as provided in this
subsection, the amendment made by subsection (a) shall be
effective as if included in the enactment of section 4354 of
the Omnibus Budget Reconciliation Act of 1990.
(2)(A) Clause (vi) of section 1882(d)(3)(A) of the Social
Security Act, as added by subsection (a), shall only apply to
individuals applying for--
(i) a health insurance policy described in section
1882(d)(3)(A)(iv) of such Act (as added by subsection
(a)), after the date of the enactment of this Act, or
(ii) another health insurance policy after the end
of the 30-day period beginning on the date of the
enactment of this Act.
(B) A seller or issuer of a health insurance policy may
substitute, for the disclosure statement described in clause
(vii) of such section, the statement specified under section
1882(d)(3)(D) of the Social Security Act (as in effect before
the date of the enactment of this Act), without the revision
specified in such clause.
Subtitle H--Patent Extension
SEC. 281. PATENT EXTENSION.
(a) In General.--Any owner on the date of the enactment of
this Act of the right to market a non-steroidal anti-
inflammatory drug that--
(1) contains a patented active agent,
(2) has been reviewed by the Federal Food and Drug
Administration for a period of more than 96 months as a
new drug application, and
(3) was approved as safe and effective by the
Federal Food and Drug Administration on January 31,
1991,
shall be entitled, for the 2-year period beginning on February
28, 1997, to exclude others from making, using, offering for
sale, selling, or importing into the United States such active
agent, in accordance with section 154(a)(1) of title 35, United
States Code.
(b) Infringement.--Section 271 of title 35, United States
Code, shall apply to the infringement of the entitlement
provided under subsection (a) to the same extent as such
section applies to infringement of a patent.
(c) Notification.--Not later than 30 days after the date of
the enactment of this Act, any owner granted an entitlement
under subsection (a) shall notify the Commissioner of Patents
and Trademarks and the Secretary for Health and Human Services
of such entitlement. Not later than 7 days after the receipt of
such notice, the Commissioner and the Secretary shall publish
an appropriate notice of the receipt of such notice.
(d) Offset.--An owner described in subsection (a) shall pay
the amount of $10,000,000 to the Secretary of Health and Human
Services in each of the fiscal years 1997 and 1998 as a
condition for being eligible to qualify for the entitlement
under subsection (a). As a further condition for eligibility,
such owner shall enter into a legally binding agreement with
the Secretary of Health and Human Services which shall provide
a means for ensuring that the entitlement under subsection (a)
shall not create any net costs to the States under the medicaid
program under title XIX of the Social Security Act.
TITLE III--TAX-RELATED HEALTH PROVISIONS
SEC. 300. AMENDMENT OF 1986 CODE.
Except as otherwise expressly provided, whenever in this
title an amendment or repeal is expressed in terms of an
amendment to, or repeal of, a section or other provision, the
reference shall be considered to be made to a section or other
provision of the Internal Revenue Code of 1986.
Subtitle A--Medical Savings Accounts
SEC. 301. MEDICAL SAVINGS ACCOUNTS.
(a) In General.--Part VII of subchapter B of chapter 1
(relating to additional itemized deductions for individuals) is
amended by redesignating section 220 as section 221 and by
inserting after section 219 the following new section:
``SEC. 220. MEDICAL SAVINGS ACCOUNTS.
``(a) Deduction Allowed.--In the case of an individual who
is an eligible individual for any month during the taxable
year, there shall be allowed as a deduction for the taxable
year an amount equal to the aggregate amount paid in cash
during such taxable year by such individual to a medical
savings account of such individual.
``(b) Limitations.--
``(1) In general.--The amount allowable as a
deduction under subsection (a) to an individual for the
taxable year shall not exceed the sum of the monthly
limitations for months during such taxable year that
the individual is an eligible individual.
``(2) Monthly limitation.--The monthly limitation
for any month is the amount equal to \1/12\ of--
``(A) in the case of an individual who has
self-only coverage under the high deductible
health plan as of the first day of such month,
65 percent of the annual deductible under such
coverage, and
``(B) in the case of an individual who has
family coverage under the high deductible
health plan as of the first day of such month,
75 percent of the annual deductible under such
coverage.
``(3) Special rule for married individuals.--In the
case of individuals who are married to each other, if
either spouse has family coverage--
``(A) both spouses shall be treated as
having only such family coverage (and if such
spouses each have family coverage under
different plans, as having the family coverage
with the lowest annual deductible), and
``(B) the limitation under paragraph (1)
(after the application of subparagraph (A) of
this paragraph) shall be divided equally
between them unless they agree on a different
division.
``(4) Deduction not to exceed compensation.--
``(A) Employees.--The deduction allowed
under subsection (a) for contributions as an
eligible individual described in subclause (I)
of subsection (c)(1)(A)(iii) shall not exceed
such individual's wages, salaries, tips, and
other employee compensation which are
attributable to such individual's employment by
the employer referred to in such subclause.
``(B) Self-employed individuals.--The
deduction allowed under subsection (a) for
contributions as an eligible individual
described in subclause (II) of subsection
(c)(1)(A)(iii) shall not exceed such
individual's earned income (as defined in
section 401(c)(1)) derived by the taxpayer from
the trade or business with respect to which the
high deductible health plan is established.
``(C) Community property laws not to
apply.--The limitations under this paragraph
shall be determined without regard to community
property laws.
``(5) Coordination with exclusion for employer
contributions.--No deduction shall be allowed under
this section for any amount paid for any taxable year
to a medical savings account of an individual if--
``(A) any amount is contributed to any
medical savings account of such individual for
such year which is excludable from gross income
under section 106(b), or
``(B) if such individual's spouse is
covered under the high deductible health plan
covering such individual, any amount is
contributed for such year to any medical
savings account of such spouse which is so
excludable.
``(6) Denial of deduction to dependents.--No
deduction shall be allowed under this section to any
individual with respect to whom a deduction under
section 151 is allowable to another taxpayer for a
taxable year beginning in the calendar year in which
such individual's taxable year begins.
``(c) Definitions.--For purposes of this section--
``(1) Eligible individual.--
``(A) In general.--The term `eligible
individual' means, with respect to any month,
any individual if--
``(i) such individual is covered
under a high deductible health plan as
of the 1st day of such month,
``(ii) such individual is not,
while covered under a high deductible
health plan, covered under any health
plan--
``(I) which is not a high
deductible health plan, and
``(II) which provides
coverage for any benefit which
is covered under the high
deductible health plan, and
``(iii)(I) the high deductible
health plan covering such individual is
established and maintained by the
employer of such individual or of the
spouse of such individual and such
employer is a small employer, or
``(II) such individual is an
employee (within the meaning of section
401(c)(1)) or the spouse of such an
employee and the high deductible health
plan covering such individual is not
established or maintained by any
employer of such individual or spouse.
``(B) Certain coverage disregarded.--
Subparagraph (A)(ii) shall be applied without
regard to--
``(i) coverage for any benefit
provided by permitted insurance, and
``(ii) coverage (whether through
insurance or otherwise) for accidents,
disability, dental care, vision care,
or long-term care.
``(C) Continued eligibility of employee and
spouse establishing medical savings accounts.--
If, while an employer is a small employer--
``(i) any amount is contributed to
a medical savings account of an
individual who is an employee of such
employer or the spouse of such an
employee, and
``(ii) such amount is excludable
from gross income under section 106(b)
or allowable as a deduction under this
section,
such individual shall not cease to meet the
requirement of subparagraph (A)(iii)(I) by
reason of such employer ceasing to be a small
employer so long as such employee continues to
be an employee of such employer.
``(D) Limitations on eligibility.--
``For limitations on number of taxpayers who are eligible to
have medical savings accounts, see subsection (i).
``(2) High deductible health plan.--
``(A) In general.--The term `high
deductible health plan' means a health plan--
``(i) in the case of self-only
coverage, which has an annual
deductible which is not less than
$1,500 and not more than $2,250,
``(ii) in the case of family
coverage, which has an annual
deductible which is not less than
$3,000 and not more than $4,500, and
``(iii) the annual out-of-pocket
expenses required to be paid under the
plan (other than for premiums) for
covered benefits does not exceed--
``(I) $3,000 for self-only
coverage, and
``(II) $5,500 for family
coverage.
``(B) Special rules.--
``(i) Exclusion of certain plans.--
Such term does not include a health
plan if substantially all of its
coverage is coverage described in
paragraph (1)(B).
``(ii) Safe harbor for absence of
preventive care deductible.--A plan
shall not fail to be treated as a high
deductible health plan by reason of
failing to have a deductible for
preventive care if the absence of a
deductible for such care is required by
State law.
``(3) Permitted insurance.--The term `permitted
insurance' means--
``(A) Medicare supplemental insurance,
``(B) insurance if substantially all of the
coverage provided under such insurance relates
to--
``(i) liabilities incurred under
workers' compensation laws,
``(ii) tort liabilities,
``(iii) liabilities relating to
ownership or use of property, or
``(iv) such other similar
liabilities as the Secretary may
specify by regulations,
``(C) insurance for a specified disease or
illness, and
``(D) insurance paying a fixed amount per
day (or other period) of hospitalization.
``(4) Small employer.--
``(A) In general.--The term `small
employer' means, with respect to any calendar
year, any employer if such employer employed an
average of 50 or fewer employees on business
days during either of the 2 preceding calendar
years. For purposes of the preceding sentence,
a preceding calendar year may be taken into
account only if the employer was in existence
throughout such year.
``(B) Employers not in existence in
preceding year.--In the case of an employer
which was not in existence throughout the 1st
preceding calendar year, the determination
under subparagraph (A) shall be based on the
average number of employees that it is
reasonably expected such employer will employ
on business days in the current calendar year.
``(C) Certain growing employers retain
treatment as small employer.--The term `small
employer' includes, with respect to any
calendar year, any employer if--
``(i) such employer met the
requirement of subparagraph (A)
(determined without regard to
subparagraph (B)) for any preceding
calendar year after 1996,
``(ii) any amount was contributed
to the medical savings account of any
employee of such employer with respect
to coverage of such employee under a
high deductible health plan of such
employer during such preceding calendar
year and such amount was excludable
from gross income under section 106(b)
or allowable as a deduction under this
section, and
``(iii) such employer employed an
average of 200 or fewer employees on
business days during each preceding
calendar year after 1996.
``(D) Special rules.--
``(i) Controlled groups.--For
purposes of this paragraph, all persons
treated as a single employer under
subsection (b), (c), (m), or (o) of
section 414 shall be treated as 1
employer.
``(ii) Predecessors.--Any reference
in this paragraph to an employer shall
include a reference to any predecessor
of such employer.
``(5) Family coverage.--The term `family
coverage' means any coverage other than self-
only coverage.
``(d) Medical Savings Account.--For purposes of this
section--
``(1) Medical savings account.--The term `medical
savings account' means a trust created or organized in
the United States exclusively for the purpose of paying
the qualified medical expenses of the account holder,
but only if the written governing instrument creating
the trust meets the following requirements:
``(A) Except in the case of a rollover
contribution described in subsection (f)(5), no
contribution will be accepted--
``(i) unless it is in cash, or
``(ii) to the extent such
contribution, when added to previous
contributions to the trust for the
calendar year, exceeds 75 percent of
the highest annual limit deductible
permitted under subsection
(c)(2)(A)(ii) for such calendar year.
``(B) The trustee is a bank (as defined in
section 408(n)), an insurance company (as
defined in section 816), or another person who
demonstrates to the satisfaction of the
Secretary that the manner in which such person
will administer the trust will be consistent
with the requirements of this section.
``(C) No part of the trust assets will be
invested in life insurance contracts.
``(D) The assets of the trust will not be
commingled with other property except in a
common trust fund or common investment fund.
``(E) The interest of an individual in the
balance in his account is nonforfeitable.
``(2) Qualified medical expenses.--
``(A) In general.--The term `qualified
medical expenses' means, with respect to an
account holder, amounts paid by such holder for
medical care (as defined in section 213(d)) for
such individual, the spouse of such individual,
and any dependent (as defined in section 152)
of such individual, but only to the extent such
amounts are not compensated for by insurance or
otherwise.
``(B) Health insurance may not be purchased
from account.--
``(i) In general.--Subparagraph (A)
shall not apply to any payment for
insurance.
``(ii) Exceptions.--Clause (i)
shall not apply to any expense for
coverage under--
``(I) a health plan during
any period of continuation
coverage required under any
Federal law,
``(II) a qualified long-
term care insurance contract
(as defined in section
7702B(b)), or
``(III) a health plan
during a period in which the
individual is receiving
unemployment compensation under
any Federal or State law.
``(C) Medical expenses of individuals who
are not eligible individuals.--Subparagraph (A)
shall apply to an amount paid by an account
holder for medical care of an individual who is
not an eligible individual for the month in
which the expense for such care is incurred
only if no amount is contributed (other than a
rollover contribution) to any medical savings
account of such account holder for the taxable
year which includes such month. This
subparagraph shall not apply to any expense for
coverage described in subclause (I) or (III) of
subparagraph (B)(ii).
``(3) Account holder.--The term `account holder'
means the individual on whose behalf the medical
savings account was established.
``(4) Certain rules to apply.--Rules similar to the
following rules shall apply for purposes of this
section:
``(A) Section 219(d)(2) (relating to no
deduction for rollovers).
``(B) Section 219(f)(3) (relating to time
when contributions deemed made).
``(C) Except as provided in section 106(b),
section 219(f)(5) (relating to employer
payments).
``(D) Section 408(g) (relating to community
property laws).
``(E) Section 408(h) (relating to custodial
accounts).
``(e) Tax Treatment of Accounts.--
``(1) In general.--A medical savings account is
exempt from taxation under this subtitle unless such
account has ceased to be a medical savings account.
Notwithstanding the preceding sentence, any such
account is subject to the taxes imposed by section 511
(relating to imposition of tax on unrelated business
income of charitable, etc. organizations).
``(2) Account terminations.--Rules similar to the
rules of paragraphs (2) and (4) of section 408(e) shall
apply to medical savings accounts, and any amount
treated as distributed under such rules shall be
treated as not used to pay qualified medical expenses.
``(f) Tax Treatment of Distributions.--
``(1) Amounts used for qualified medical
expenses.--Any amount paid or distributed out of a
medical savings account which is used exclusively to
pay qualified medical expenses of any account holder
shall not be includible in gross income.
``(2) Inclusion of amounts not used for qualified
medical expenses.--Any amount paid or distributed out
of a medical savings account which is not used
exclusively to pay the qualified medical expenses of
the account holder shall be included in the gross
income of such holder.
``(3) Excess contributions returned before due date
of return.--
``(A) In general.--If any excess
contribution is contributed for a taxable year
to any medical savings account of an
individual, paragraph (2) shall not apply to
distributions from the medical savings accounts
of such individual (to the extent such
distributions do not exceed the aggregate
excess contributions to all such accounts of
such individual for such year) if--
``(i) such distribution is received
by the individual on or before the last
day prescribed by law (including
extensions of time) for filing such
individual's return for such taxable
year, and
``(ii) such distribution is
accompanied by the amount of net income
attributable to such excess
contribution.
Any net income described in clause (ii) shall
be included in the gross income of the
individual for the taxable year in which it is
received.
``(B) Excess contribution.--For purposes of
subparagraph (A), the term `excess
contribution' means any contribution (other
than a rollover contribution) which is neither
excludable from gross income under section
106(b) nor deductible under this section.
``(4) Additional tax on distributions not used for
qualified medical expenses.--
``(A) In general.--The tax imposed by this
chapter on the account holder for any taxable
year in which there is a payment or
distribution from a medical savings account of
such holder which is includible in gross income
under paragraph (2) shall be increased by 15
percent of the amount which is so includible.
``(B) Exception for disability or death.--
Subparagraph (A) shall not apply if the payment
or distribution is made after the account
holder becomes disabled within the meaning of
section 72(m)(7) or dies.
``(C) Exception for distributions after
medicare eligibility.--Subparagraph (A) shall
not apply to any payment or distribution after
the date on which the account holder attains
the age specified in section 1811 of the Social
Security Act.
``(5) Rollover contribution.--An amount is
described in this paragraph as a rollover contribution
if it meets the requirements of subparagraphs (A) and
(B).
``(A) In general.--Paragraph (2) shall not
apply to any amount paid or distributed from a
medical savings account to the account holder
to the extent the amount received is paid into
a medical savings account for the benefit of
such holder not later than the 60th day after
the day on which the holder receives the
payment or distribution.
``(B) Limitation.--This paragraph shall not
apply to any amount described in subparagraph
(A) received by an individual from a medical
savings account if, at any time during the 1-
year period ending on the day of such receipt,
such individual received any other amount
described in subparagraph (A) from a medical
savings account which was not includible in the
individual's gross income because of the
application of this paragraph.
``(6) Coordination with medical expense
deduction.--For purposes of determining the amount of
the deduction under section 213, any payment or
distribution out of a medical savings account for
qualified medical expenses shall not be treated as an
expense paid for medical care.
``(7) Transfer of account incident to divorce.--The
transfer of an individual's interest in a medical
savings account to an individual's spouse or former
spouse under a divorce or separation instrument
described in subparagraph (A) of section 71(b)(2) shall
not be considered a taxable transfer made by such
individual notwithstanding any other provision of this
subtitle, and such interest shall, after such transfer,
be treated as a medical savings account with respect to
which such spouse is the account holder.
``(8) Treatment after death of account holder.--
``(A) Treatment if designated beneficiary
is spouse.--If the account holder's surviving
spouse acquires such holder's interest in a
medical savings account by reason of being the
designated beneficiary of such account at the
death of the account holder, such medical
savings account shall be treated as if the
spouse were the account holder.
``(B) Other cases.--
``(i) In general.--If, by reason of
the death of the account holder, any
person acquires the account holder's
interest in a medical savings account
in a case to which subparagraph (A)
does not apply--
``(I) such account shall
cease to be a medical savings
account as of the date of
death, and
``(II) an amount equal to
the fair market value of the
assets in such account on such
date shall be includible if
such person is not the estate
of such holder, in such
person's gross income for the
taxable year which includes
such date, or if such person is
the estate of such holder, in
such holder's gross income for
the last taxable year of such
holder.
``(ii) Special rules.--
``(I) Reduction of
inclusion for pre-death
expenses.--The amount
includible in gross income
under clause (i) by any person
(other than the estate) shall
be reduced by the amount of
qualified medical expenses
which were incurred by the
decedent before the date of the
decedent's death and paid by
such person within 1 year after
such date.
``(II) Deduction for estate
taxes.--An appropriate
deduction shall be allowed
under section 691(c) to any
person (other than the decedent
or the decedent's spouse) with
respect to amounts included in
gross income under clause (i)
by such person.
``(g) Cost-of-Living Adjustment.--In the case of any
taxable year beginning in a calendar year after 1998, each
dollar amount in subsection (c)(2) shall be increased by an
amount equal to--
``(1) such dollar amount, multiplied by
``(2) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in which
such taxable year begins by substituting `calendar year
1997' for `calendar year 1992' in subparagraph (B)
thereof.
If any increase under the preceding sentence is not a multiple
of $50, such increase shall be rounded to the nearest multiple
of $50.
``(h) Reports.--The Secretary may require the trustee of a
medical savings account to make such reports regarding such
account to the Secretary and to the account holder with respect
to contributions, distributions, and such other matters as the
Secretary determines appropriate. The reports required by this
subsection shall be filed at such time and in such manner and
furnished to such individuals at such time and in such manner
as may be required by the Secretary.
``(i) Limitation on Number of Taxpayers Having Medical
Savings Accounts.--
``(1) In general.--Except as provided in paragraph
(5), no individual shall be treated as an eligible
individual for any taxable year beginning after the
cut-off year unless--
``(A) such individual was an active MSA
participant for any taxable year ending on or
before the close of the cut-off year, or
``(B) such individual first became an
active MSA participant for a taxable year
ending after the cut-off year by reason of
coverage under a high deductible health plan of
an MSA-participating employer.
``(2) Cut-off year.--For purposes of paragraph (1),
the term `cut-off year' means the earlier of--
``(A) calendar year 2000, or
``(B) the first calendar year before 2000
for which the Secretary determines under
subsection (j) that the numerical limitation
for such year has been exceeded.
``(3) Active msa participant.--For purposes of this
subsection--
``(A) In general.--The term `active MSA
participant' means, with respect to any taxable
year, any individual who is the account holder
of any medical savings account into which any
contribution was made which was excludable from
gross income under section 106(b), or allowable
as a deduction under this section, for such
taxable year.
``(B) Special rule for cut-off years before
2000.--In the case of a cut-off year before
2000--
``(i) an individual shall not be
treated as an eligible individual for
any month of such year or an active MSA
participant under paragraph (1)(A)
unless such individual is, on or before
the cut-off date, covered under a high
deductible health plan, and
``(ii) an employer shall not be
treated as an MSA-participating
employer unless the employer, on or
before the cut-off date, offered
coverage under a high deductible health
plan to any employee.
``(C) Cut-off date.--For purposes of
subparagraph (B)--
``(i) In general.--Except as
otherwise provided in this
subparagraph, the cut-off date is
October 1 of the cut-off year.
``(ii) Employees with enrollment
periods after october 1.--In the case
of an individual described in subclause
(I) of subsection (c)(1)(A)(iii), if
the regularly scheduled enrollment
period for health plans of the
individual's employer occurs during the
last 3 months of the cut-off year, the
cut-off date is December 31 of the cut-
off year.
``(iii) Self-employed
individuals.--In the case of an
individual described in subclause (II)
of subsection (c)(1)(A)(iii), the cut-
off date is November 1 of the cut-off
year.
``(iv) Special rules for 1997.--If
1997 is a cut-off year by reason of
subsection (j)(1)(A)--
``(I) each of the cut-off
dates under clauses (i) and
(iii) shall be 1 month earlier
than the date determined
without regard to this clause,
and
``(II) clause (ii) shall be
applied by substituting `4
months' for `3 months'.
``(4) MSA-participating employer.--For purposes of
this subsection, the term `MSA-participating employer'
means any small employer if--
``(A) such employer made any contribution
to the medical savings account of any employee
during the cut-off year or any preceding
calendar year which was excludable from gross
income under section 106(b), or
``(B) at least 20 percent of the employees
of such employer who are eligible individuals
for any month of the cut-off year by reason of
coverage under a high deductible health plan of
such employer each made a contribution of at
least $100 to their medical savings accounts
for any taxable year ending with or within the
cut-off year which was allowable as a deduction
under this section.
``(5) Additional eligibility after cut-off year.--
If the Secretary determines under subsection (j)(2)(A)
that the numerical limit for the calendar year
following a cut-off year described in paragraph (2)(B)
has not been exceeded--
``(A) this subsection shall not apply to
any otherwise eligible individual who is
covered under a high deductible health plan
during the first 6 months of the second
calendar year following the cut-off year (and
such individual shall be treated as an active
MSA participant for purposes of this subsection
if a contribution is made to any medical
savings account with respect to such coverage),
and
``(B) any employer who offers coverage
under a high deductible health plan to any
employee during such 6-month period shall be
treated as an MSA-participating employer for
purposes of this subsection if the requirements
of paragraph (4) are met with respect to such
coverage.
For purposes of this paragraph, subsection (j)(2)(A)
shall be applied for 1998 by substituting `750,000' for
`600,000'.
``(j) Determination of Whether Numerical Limits Are
Exceeded.--
``(1) Determination of whether limit exceeded for
1997.--The numerical limitation for 1997 is exceeded
if, based on the reports required under paragraph (4),
the number of medical savings accounts established as
of--
``(A) April 30, 1997, exceeds 375,000, or
``(B) June 30, 1997, exceeds 525,000.
``(2) Determination of whether limit exceeded for
1998 or 1999.--
``(A) In general.--The numerical limitation
for 1998 or 1999 is exceeded if the sum of--
``(i) the number of MSA returns
filed on or before April 15 of such
calendar year for taxable years ending
with or within the preceding calendar
year, plus
``(ii) the Secretary's estimate
(determined on the basis of the returns
described in clause (i)) of the number
of MSA returns for such taxable years
which will be filed after such date,
exceeds 600,000 (750,000 in the case of 1999).
For purposes of the preceding sentence, the
term `MSA return' means any return on which any
exclusion is claimed under section 106(b) or
any deduction is claimed under this section.
``(B) Alternative computation of
limitation.--The numerical limitation for 1998
or 1999 is also exceeded if the sum of--
``(i) 90 percent of the sum
determined under subparagraph (A) for
such calendar year, plus
``(ii) the product of 2.5 and the
number of medical savings accounts
established during the portion of such
year preceding July 1 (based on the
reports required under paragraph (4))
for taxable years beginning in such
year,
exceeds 750,000.
``(3) Previously uninsured individuals not included
in determination.--
``(A) In general.--The determination of
whether any calendar year is a cut-off year
shall be made by not counting the medical
savings account of any previously uninsured
individual.
``(B) Previously uninsured individual.--For
purposes of this subsection, the term
`previously uninsured individual' means, with
respect to any medical savings account, any
individual who had no health plan coverage
(other than coverage referred to in subsection
(c)(1)(B)) at any time during the 6-month
period before the date such individual's
coverage under the high deductible health plan
commences.
``(4) Reporting by msa trustees.--
``(A) In general.--Not later than August 1
of 1997, 1998, and 1999, each person who is the
trustee of a medical savings account
established before July 1 of such calendar year
shall make a report to the Secretary (in such
form and manner as the Secretary shall specify)
which specifies--
``(i) the number of medical savings
accounts established before such July 1
(for taxable years beginning in such
calendar year) of which such person is
the trustee,
``(ii) the name and TIN of the
account holder of each such account,
and
``(iii) the number of such accounts
which are accounts of previously
uninsured individuals.
``(B) Additional report for 1997.--Not
later than June 1, 1997, each person who is the
trustee of a medical savings account
established before May 1, 1997, shall make an
additional report described in subparagraph (A)
but only with respect to accounts established
before May 1, 1997.
``(C) Penalty for failure to file report.--
The penalty provided in section 6693(a) shall
apply to any report required by this paragraph,
except that--
``(i) such section shall be applied
by substituting `$25' for `$50', and
``(ii) the maximum penalty imposed
on any trustee shall not exceed $5,000.
``(D) Aggregation of accounts.--To the
extent practical, in determining the number of
medical savings accounts on the basis of the
reports under this paragraph, all medical
savings accounts of an individual shall be
treated as 1 account and all accounts of
individuals who are married to each other shall
be treated as 1 account.
``(5) Date of making determinations.--Any
determination under this subsection that a calendar
year is a cut-off year shall be made by the Secretary
and shall be published not later than October 1 of such
year.
(b) Deduction Allowed Whether or Not Individual Itemizes
Other Deductions.--Subsection (a) of section 62 is amended by
inserting after paragraph (15) the following new paragraph:
``(16) Medical savings accounts.--The deduction
allowed by section 220.''
(c) Exclusions for Employer Contributions to Medical
Savings Accounts.--
(1) Exclusion from income tax.--The text of section
106 (relating to contributions by employer to accident
and health plans) is amended to read as follows:
``(a) General Rule.--Except as otherwise provided in this
section, gross income of an employee does not include employer-
provided coverage under an accident or health plan.
``(b) Contributions to Medical Savings Accounts.--
``(1) In general.--In the case of an employee who
is an eligible individual, amounts contributed by such
employee's employer to any medical savings account of
such employee shall be treated as employer-provided
coverage for medical expenses under an accident or
health plan to the extent such amounts do not exceed
the limitation under section 220(b)(1) (determined
without regard to this subsection) which is applicable
to such employee for such taxable year.
``(2) No constructive receipt.--No amount shall be
included in the gross income of any employee solely
because the employee may choose between the
contributions referred to in paragraph (1) and employer
contributions to another health plan of the employer.
``(3) Special rule for deduction of employer
contributions.--Any employer contribution to a medical
savings account, if otherwise allowable as a deduction
under this chapter, shall be allowed only for the
taxable year in which paid.
``(4) Employer msa contributions required to be
shown on return.--Every individual required to file a
return under section 6012 for the taxable year shall
include on such return the aggregate amount contributed
by employers to the medical savings accounts of such
individual or such individual's spouse for such taxable
year.
``(5) MSA contributions not part of cobra
coverage.--Paragraph (1) shall not apply for purposes
of section 4980B.
``(6) Definitions.--For purposes of this
subsection, the terms `eligible individual' and
`medical savings account' have the respective meanings
given to such terms by section 220.
``(7) Cross reference.--
``For penalty on failure by employer to make comparable
contributions to the medical savings accounts of comparable
employees, see section 4980E.''.
(2) Exclusion from employment taxes.--
(A) Railroad retirement tax.--Subsection
(e) of section 3231 is amended by adding at the
end the following new paragraph:
``(10) Medical savings account contributions.--The
term `compensation' shall not include any payment made
to or for the benefit of an employee if at the time of
such payment it is reasonable to believe that the
employee will be able to exclude such payment from
income under section 106(b).''
(B) Unemployment tax.--Subsection (b) of
section 3306 is amended by striking ``or'' at
the end of paragraph (15), by striking the
period at the end of paragraph (16) and
inserting ``; or'', and by inserting after
paragraph (16) the following new paragraph:
``(17) any payment made to or for the benefit of an
employee if at the time of such payment it is
reasonable to believe that the employee will be able to
exclude such payment from income under section
106(b).''
(C) Withholding tax.--Subsection (a) of
section 3401 is amended by striking ``or'' at
the end of paragraph (19), by striking the
period at the end of paragraph (20) and
inserting ``; or'', and by inserting after
paragraph (20) the following new paragraph:
``(21) any payment made to or for the benefit of an
employee if at the time of such payment it is
reasonable to believe that the employee will be able to
exclude such payment from income under section
106(b).''
(3) Employer contributions required to be shown on
w-2.--Subsection (a) of section 6051 is amended by
striking ``and'' at the end of paragraph (9), by
striking the period at the end of paragraph (10) and
inserting ``, and'', and by inserting after paragraph
(10) the following new paragraph:
``(11) the amount contributed to any medical
savings account (as defined in section 220(d)) of such
employee or such employee's spouse.''
(4) Penalty for failure of employer to make
comparable msa contributions.--
(A) In general.--Chapter 43 is amended by
adding after section 4980D the following new
section:
``SEC. 4980E. FAILURE OF EMPLOYER TO MAKE COMPARABLE MEDICAL SAVINGS
ACCOUNT CONTRIBUTIONS.
``(a) General Rule.--In the case of an employer who makes a
contribution to the medical savings account of any employee
with respect to coverage under a high deductible health plan of
the employer during a calendar year, there is hereby imposed a
tax on the failure of such employer to meet the requirements of
subsection (d) for such calendar year.
``(b) Amount of Tax.--The amount of the tax imposed by
subsection (a) on any failure for any calendar year is the
amount equal to 35 percent of the aggregate amount contributed
by the employer to medical savings accounts of employees for
taxable years of such employees ending with or within such
calendar year.
``(c) Waiver by Secretary.--In the case of a failure which
is due to reasonable cause and not to willful neglect, the
Secretary may waive part or all of the tax imposed by
subsection (a) to the extent that the payment of such tax would
be excessive relative to the failure involved.
``(d) Employer Required To Make Comparable MSA
Contributions for All Participating Employees.--
``(1) In general.--An employer meets the
requirements of this subsection for any calendar year
if the employer makes available comparable
contributions to the medical savings accounts of all
comparable participating employees for each coverage
period during such calendar year.
``(2) Comparable contributions.--
``(A) In general.--For purposes of
paragraph (1), the term `comparable
contributions' means contributions--
``(i) which are the same amount, or
``(ii) which are the same
percentage of the annual deductible
limit under the high deductible health
plan covering the employees.
``(B) Part-year employees.--In the case of
an employee who is employed by the employer for
only a portion of the calendar year, a
contribution to the medical savings account of
such employee shall be treated as comparable if
it is an amount which bears the same ratio to
the comparable amount (determined without
regard to this subparagraph) as such portion
bears to the entire calendar year.
``(3) Comparable participating employees.--For
purposes of paragraph (1), the term `comparable
participating employees' means all employees--
``(A) who are eligible individuals covered
under any high deductible health plan of the
employer, and
``(B) who have the same category of
coverage.
For purposes of subparagraph (B), the categories of
coverage are self-only and family coverage.
``(4) Part-time employees.--
``(A) In general.--Paragraph (3) shall be
applied separately with respect to part-time
employees and other employees.
``(B) Part-time employee.--For purposes of
subparagraph (A), the term `part-time employee'
means any employee who is customarily employed
for fewer than 30 hours per week.
``(e) Controlled Groups.--For purposes of this section, all
persons treated as a single employer under subsection (b), (c),
(m), or (o) of section 414 shall be treated as 1 employer.
``(f) Definitions.--Terms used in this section which are
also used in section 220 have the respective meanings given
such terms in section 220.''
(B) Clerical amendment.--The table of
sections for chapter 43 is amended by adding
after the item relating to section 4980D the
following new item:
``Sec. 4980E. Failure of employer to make comparable medical
savings account contributions.''
(d) Medical Savings Account Contributions Not Available
Under Cafeteria Plans.--Subsection (f) of section 125 of such
Code is amended by inserting ``106(b),'' before ``117''.
(e) Tax on Excess Contributions.--Section 4973 (relating to
tax on excess contributions to individual retirement accounts,
certain section 403(b) contracts, and certain individual
retirement annuities) is amended--
(1) by inserting ``medical savings accounts,''
after ``accounts,'' in the heading of such section,
(2) by striking ``or'' at the end of paragraph (1)
of subsection (a),
(3) by redesignating paragraph (2) of subsection
(a) as paragraph (3) and by inserting after paragraph
(1) the following:
``(2) a medical savings account (within the meaning
of section 220(d)), or'', and
(4) by adding at the end the following new
subsection:
``(d) Excess Contributions to Medical Savings Accounts.--
For purposes of this section, in the case of medical savings
accounts (within the meaning of section 220(d)), the term
`excess contributions' means the sum of--
``(1) the aggregate amount contributed for the
taxable year to the accounts (other than rollover
contributions described in section 220(f)(5)) which is
neither excludable from gross income under section
106(b) nor allowable as a deduction under section 220
for such year, and
``(2) the amount determined under this subsection
for the preceding taxable year, reduced by the sum of--
``(A) the distributions out of the accounts
which were included in gross income under
section 220(f)(2), and
``(B) the excess (if any) of--
``(i) the maximum amount allowable
as a deduction under section 220(b)(1)
(determined without regard to section
106(b)) for the taxable year, over
``(ii) the amount contributed to
the accounts for the taxable year.
For purposes of this subsection, any contribution which is
distributed out of the medical savings account in a
distribution to which section 220(f)(3) applies shall be
treated as an amount not contributed.''
(f) Tax on Prohibited Transactions.--
(1) Section 4975 (relating to tax on prohibited
transactions) is amended by adding at the end of
subsection (c) the following new paragraph:
``(4) Special rule for medical savings accounts.--
An individual for whose benefit a medical savings
account (within the meaning of section 220(d)) is
established shall be exempt from the tax imposed by
this section with respect to any transaction concerning
such account (which would otherwise be taxable under
this section) if, with respect to such transaction, the
account ceases to be a medical savings account by
reason of the application of section 220(e)(2) to such
account.''
(2) Paragraph (1) of section 4975(e) is amended to
read as follows:
``(1) Plan.--For purposes of this section, the term
`plan' means--
``(A) a trust described in section 401(a)
which forms a part of a plan, or a plan
described in section 403(a), which trust or
plan is exempt from tax under section 501(a),
``(B) an individual retirement account
described in section 408(a),
``(C) an individual retirement annuity
described in section 408(b),
``(D) a medical savings account described
in section 220(d), or
``(E) a trust, plan, account, or annuity
which, at any time, has been determined by the
Secretary to be described in any preceding
subparagraph of this paragraph.''
(g) Failure To Provide Reports on Medical Savings
Accounts.--
(1) Subsection (a) of section 6693 (relating to
failure to provide reports on individual retirement
accounts or annuities) is amended to read as follows:
``(a) Reports.--
``(1) In general.--If a person required to file a
report under a provision referred to in paragraph (2)
fails to file such report at the time and in the manner
required by such provision, such person shall pay a
penalty of $50 for each failure unless it is shown that
such failure is due to reasonable cause.
``(2) Provisions.--The provisions referred to in
this paragraph are--
``(A) subsections (i) and (l) of section
408 (relating to individual retirement plans),
and
``(B) section 220(h) (relating to medical
savings accounts).''
(h) Exception From Capitalization of Policy Acquisition
Expenses.--Subparagraph (B) of section 848(e)(1) (defining
specified insurance contract) is amended by striking ``and'' at
the end of clause (ii), by striking the period at the end of
clause (iii) and inserting ``, and'', and by adding at the end
the following new clause:
``(iv) any contract which is a
medical savings account (as defined in
section 220(d)).''.
(i) Clerical Amendment.--The table of sections for part VII
of subchapter B of chapter 1 is amended by striking the last
item and inserting the following:
``Sec. 220. Medical savings accounts.
``Sec. 221. Cross reference.''.
(j) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1996.
(k) Monitoring of Participation in Medical Savings
Accounts.--The Secretary of the Treasury or his delegate
shall--
(1) during 1997, 1998, 1999, and 2000, regularly
evaluate the number of individuals who are maintaining
medical savings accounts and the reduction in revenues
to the United States by reason of such accounts, and
(2) provide such reports of such evaluations to
Congress as such Secretary determines appropriate.
(l) Study of Effects of Medical Savings Accounts on Small
Group Market.--The Comptroller General of the United States
shall enter into a contract with an organization with expertise
in health economics, health insurance markets, and actuarial
science to conduct a comprehensive study regarding the effects
of medical savings accounts in the small group market on--
(1) selection, including adverse selection,
(2) health costs, including any impact on premiums
of individuals with comprehensive coverage,
(3) use of preventive care,
(4) consumer choice,
(5) the scope of coverage of high deductible plans
purchased in conjunction with such accounts, and
(6) other relevant items.
A report on the results of the study conducted under this
subsection shall be submitted to the Congress no later than
January 1, 1999.
Subtitle B--Increase in Deduction for Health Insurance Costs of Self-
Employed Individuals
SEC. 311. INCREASE IN DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
EMPLOYED INDIVIDUALS.
(a) In General.--Paragraph (1) of section 162(l) is amended
to read as follows:
``(1) Allowance of deduction.--
``(A) In general.--In the case of an
individual who is an employee within the
meaning of section 401(c)(1), there shall be
allowed as a deduction under this section an
amount equal to the applicable percentage of
the amount paid during the taxable year for
insurance which constitutes medical care for
the taxpayer, his spouse, and dependents.
``(B) Applicable percentage.--For purposes
of subparagraph (A), the applicable percentage
shall be determined under the following table:
``For taxable years
beginning in The applicable
calendar year-- percentage is--
1997...................................... 40 percent
1998 through 2002......................... 45 percent
2003...................................... 50 percent
2004...................................... 60 percent
2005...................................... 70 percent
2006 or thereafter........................ 80 percent.''.
(b) Exclusion for Amounts Received Under Certain Self-
Insured Plans.--Paragraph (3) of section 104(a) is amended by
inserting ``(or through an arrangement having the effect of
accident or health insurance)'' after ``health insurance''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1996.
Subtitle C--Long-Term Care Services and Contracts
PART I--GENERAL PROVISIONS
SEC. 321. TREATMENT OF LONG-TERM CARE INSURANCE.
(a) General Rule.--Chapter 79 (relating to definitions) is
amended by inserting after section 7702A the following new
section:
``SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE INSURANCE.
``(a) In General.--For purposes of this title--
``(1) a qualified long-term care insurance contract
shall be treated as an accident and health insurance
contract,
``(2) amounts (other than policyholder dividends,
as defined in section 808, or premium refunds) received
under a qualified long-term care insurance contract
shall be treated as amounts received for personal
injuries and sickness and shall be treated as
reimbursement for expenses actually incurred for
medical care (as defined in section 213(d)),
``(3) any plan of an employer providing coverage
under a qualified long-term care insurance contract
shall be treated as an accident and health plan with
respect to such coverage,
``(4) except as provided in subsection (e)(3),
amounts paid for a qualified long-term care insurance
contract providing the benefits described in subsection
(b)(2)(A) shall be treated as payments made for
insurance for purposes of section 213(d)(1)(D), and
``(5) a qualified long-term care insurance contract
shall be treated as a guaranteed renewable contract
subject to the rules of section 816(e).
``(b) Qualified Long-Term Care Insurance Contract.--For
purposes of this title--
``(1) In general.--The term `qualified long-term
care insurance contract' means any insurance contract
if--
``(A) the only insurance protection
provided under such contract is coverage of
qualified long-term care services,
``(B) such contract does not pay or
reimburse expenses incurred for services or
items to the extent that such expenses are
reimbursable under title XVIII of the Social
Security Act or would be so reimbursable but
for the application of a deductible or
coinsurance amount,
``(C) such contract is guaranteed
renewable,
``(D) such contract does not provide for a
cash surrender value or other money that can
be--
``(i) paid, assigned, or pledged as
collateral for a loan, or
``(ii) borrowed,
other than as provided in subparagraph (E) or
paragraph (2)(C),
``(E) all refunds of premiums, and all
policyholder dividends or similar amounts,
under such contract are to be applied as a
reduction in future premiums or to increase
future benefits, and
``(F) such contract meets the requirements
of subsection (g).
``(2) Special rules.--
``(A) Per diem, etc. payments permitted.--A
contract shall not fail to be described in
subparagraph (A) or (B) of paragraph (1) by
reason of payments being made on a per diem or
other periodic basis without regard to the
expenses incurred during the period to which
the payments relate.
``(B) Special rules relating to medicare.--
``(i) Paragraph (1)(B) shall not
apply to expenses which are
reimbursable under title XVIII of the
Social Security Act only as a secondary
payor.
``(ii) No provision of law shall be
construed or applied so as to prohibit
the offering of a qualified long-term
care insurance contract on the basis
that the contract coordinates its
benefits with those provided under such
title.
``(C) Refunds of premiums.--Paragraph
(1)(E) shall not apply to any refund on the
death of the insured, or on a complete
surrender or cancellation of the contract,
which cannot exceed the aggregate premiums paid
under the contract. Any refund on a complete
surrender or cancellation of the contract shall
be includible in gross income to the extent
that any deduction or exclusion was allowable
with respect to the premiums.
``(c) Qualified Long-Term Care Services.--For purposes of
this section--
``(1) In general.--The term `qualified long-term
care services' means necessary diagnostic, preventive,
therapeutic, curing, treating, mitigating, and
rehabilitative services, and maintenance or personal
care services, which--
``(A) are required by a chronically ill
individual, and
``(B) are provided pursuant to a plan of
care prescribed by a licensed health care
practitioner.
``(2) Chronically ill individual.--
``(A) In general.--The term `chronically
ill individual' means any individual who has
been certified by a licensed health care
practitioner as--
``(i) being unable to perform
(without substantial assistance from
another individual) at least 2
activities of daily living for a period
of at least 90 days due to a loss of
functional capacity,
``(ii) having a level of disability
similar (as determined under
regulations prescribed by the Secretary
in consultation with the Secretary of
Health and Human Services) to the level
of disability described in clause (i),
or
``(iii) requiring substantial
supervision to protect such individual
from threats to health and safety due
to severe cognitive impairment.
Such term shall not include any individual
otherwise meeting the requirements of the
preceding sentence unless within the preceding
12-month period a licensed health care
practitioner has certified that such individual
meets such requirements.
``(B) Activities of daily living.--For
purposes of subparagraph (A), each of the
following is an activity of daily living:
``(i) Eating.
``(ii) Toileting.
``(iii) Transferring.
``(iv) Bathing.
``(v) Dressing.
``(vi) Continence.
A contract shall not be treated as a qualified
long-term care insurance contract unless the
determination of whether an individual is a
chronically ill individual takes into account
at least 5 of such activities.
``(3) Maintenance or personal care services.--The
term `maintenance or personal care services' means any
care the primary purpose of which is the provision of
needed assistance with any of the disabilities as a
result of which the individual is a chronically ill
individual (including the protection from threats to
health and safety due to severe cognitive impairment).
``(4) Licensed health care practitioner.--The term
`licensed health care practitioner' means any physician
(as defined in section 1861(r)(1) of the Social
Security Act) and any registered professional nurse,
licensed social worker, or other individual who meets
such requirements as may be prescribed by the
Secretary.
``(d) Aggregate Payments in Excess of Limits.--
``(1) In general.--If the aggregate of--
``(A) the periodic payments received for
any period under all qualified long-term care
insurance contracts which are treated as made
for qualified long-term care services for an
insured, and
``(B) the periodic payments received for
such period which are treated under section
101(g) as paid by reason of the death of such
insured,
exceeds the per diem limitation for such period, such
excess shall be includible in gross income without
regard to section 72. A payment shall not be taken into
account under subparagraph (B) if the insured is a
terminally ill individual (as defined in section
101(g)) at the time the payment is received.
``(2) Per diem limitation.--For purposes of
paragraph (1), the per diem limitation for any period
is an amount equal to the excess (if any) of--
``(A) the greater of--
``(i) the dollar amount in effect
for such period under paragraph (4), or
``(ii) the costs incurred for
qualified long-term care services
provided for the insured for such
period, over
``(B) the aggregate payments received as
reimbursements (through insurance or otherwise)
for qualified long-term care services provided
for the insured during such period.
``(3) Aggregation rules.--For purposes of this
subsection--
``(A) all persons receiving periodic
payments described in paragraph (1) with
respect to the same insured shall be treated as
1 person, and
``(B) the per diem limitation determined
under paragraph (2) shall be allocated first to
the insured and any remaining limitation shall
be allocated among the other such persons in
such manner as the Secretary shall prescribe.
``(4) Dollar amount.--The dollar amount in effect
under this subsection shall be $175 per day (or the
equivalent amount in the case of payments on another
periodic basis).
``(5) Inflation adjustment.--In the case of a
calendar year after 1997, the dollar amount contained
in paragraph (4) shall be increased at the same time
and in the same manner as amounts are increased
pursuant to section 213(d)(10).
``(6) Periodic payments.--For purposes of this
subsection, the term `periodic payment' means any
payment (whether on a periodic basis or otherwise) made
without regard to the extent of the costs incurred by
the payee for qualified long-term care services.
``(e) Treatment of Coverage Provided as Part of a Life
Insurance Contract.--Except as otherwise provided in
regulations prescribed by the Secretary, in the case of any
long-term care insurance coverage (whether or not qualified)
provided by a rider on or as part of a life insurance
contract--
``(1) In general.--This section shall apply as if
the portion of the contract providing such coverage is
a separate contract.
``(2) Application of 7702.--Section 7702(c)(2)
(relating to the guideline premium limitation) shall be
applied by increasing the guideline premium limitation
with respect to a life insurance contract, as of any
date--
``(A) by the sum of any charges (but not
premium payments) against the life insurance
contract's cash surrender value (within the
meaning of section 7702(f)(2)(A)) for such
coverage made to that date under the contract,
less
``(B) any such charges the imposition of
which reduces the premiums paid for the
contract (within the meaning of section
7702(f)(1)).
``(3) Application of section 213.--No deduction
shall be allowed under section 213(a) for charges
against the life insurance contract's cash surrender
value described in paragraph (2), unless such charges
are includible in income as a result of the application
of section 72(e)(10) and the rider is a qualified long-
term care insurance contract under subsection (b).
``(4) Portion defined.--For purposes of this
subsection, the term `portion' means only the terms and
benefits under a life insurance contract that are in
addition to the terms and benefits under the contract
without regard to long-term care insurance coverage.
``(f) Treatment of Certain State-Maintained Plans.--
``(1) In general.--If--
``(A) an individual receives coverage for
qualified long-term care services under a State
long-term care plan, and
``(B) the terms of such plan would satisfy
the requirements of subsection (b) were such
plan an insurance contract,
such plan shall be treated as a qualified long-term
care insurance contract for purposes of this title.
``(2) State long-term care plan.--For purposes of
paragraph (1), the term `State long-term care plan'
means any plan--
``(A) which is established and maintained
by a State or an instrumentality of a State,
``(B) which provides coverage only for
qualified long-term care services, and
``(C) under which such coverage is provided
only to--
``(i) employees and former
employees of a State (or any political
subdivision or instrumentality of a
State),
``(ii) the spouses of such
employees, and
``(iii) individuals bearing a
relationship to such employees or
spouses which is described in any of
paragraphs (1) through (8) of section
152(a).''
(b) Reserve Method.--Clause (iii) of section 807(d)(3)(A)
is amended by inserting ``(other than a qualified long-term
care insurance contract, as defined in section 7702B(b))''
after ``insurance contract''.
(c) Long-Term Care Insurance Not Permitted Under Cafeteria
Plans or Flexible Spending Arrangements.--
(1) Cafeteria plans.--Section 125(f) is amended by
adding at the end the following new sentence: ``Such
term shall not include any product which is advertised,
marketed, or offered as long-term care insurance.''
(2) Flexible spending arrangements.--Section 106
(relating to contributions by employer to accident and
health plans), as amended by section 301(c), is amended
by adding at the end the following new subsection:
``(c) Inclusion of Long-Term Care Benefits Provided Through
Flexible Spending Arrangements.--
``(1) In general.--Effective on and after January
1, 1997, gross income of an employee shall include
employer-provided coverage for qualified long-term care
services (as defined in section 7702B(c)) to the extent
that such coverage is provided through a flexible
spending or similar arrangement.
``(2) Flexible spending arrangement.--For purposes
of this subsection, a flexible spending arrangement is
a benefit program which provides employees with
coverage under which--
``(A) specified incurred expenses may be
reimbursed (subject to reimbursement maximums
and other reasonable conditions), and
``(B) the maximum amount of reimbursement
which is reasonably available to a participant
for such coverage is less than 500 percent of
the value of such coverage.
In the case of an insured plan, the maximum amount
reasonably available shall be determined on the basis
of the underlying coverage.''
(d) Continuation Coverage Rules Not To Apply.--
(1) Paragraph (2) of section 4980B(g) is amended by
adding at the end the following new sentence: ``Such
term shall not include any plan substantially all of
the coverage under which is for qualified long-term
care services (as defined in section 7702B(c)).''
(2) Paragraph (1) of section 607 of the Employee
Retirement Income Security Act of 1974 is amended by
adding at the end the following new sentence: ``Such
term shall not include any plan substantially all of
the coverage under which is for qualified long-term
care services (as defined in section 7702B(c) of such
Code).''
(3) Paragraph (1) of section 2208 of the Public
Health Service Act is amended by adding at the end the
following new sentence: ``Such term shall not include
any plan substantially all of the coverage under which
is for qualified long-term care services (as defined in
section 7702B(c) of such Code).''
(e) Clerical Amendment.--The table of sections for chapter
79 is amended by inserting after the item relating to section
7702A the following new item:
``Sec. 7702B. Treatment of qualified long-term care
insurance.''.
(f) Effective Dates.--
(1) General effective date.--
(A) In general.--Except as provided in
subparagraph (B), the amendments made by this
section shall apply to contracts issued after
December 31, 1996.
(B) Reserve method.--The amendment made by
subsection (b) shall apply to contracts issued
after December 31, 1997.
(2) Continuation of existing policies.--In the case
of any contract issued before January 1, 1997, which
met the long-term care insurance requirements of the
State in which the contract was sitused at the time the
contract was issued--
(A) such contract shall be treated for
purposes of the Internal Revenue Code of 1986
as a qualified long-term care insurance
contract (as defined in section 7702B(b) of
such Code), and
(B) services provided under, or reimbursed
by, such contract shall be treated for such
purposes as qualified long-term care services
(as defined in section 7702B(c) of such Code).
In the case of an individual who is covered on December
31, 1996, under a State long-term care plan (as defined
in section 7702B(f)(2) of such Code), the terms of such
plan on such date shall be treated for purposes of the
preceding sentence as a contract issued on such date
which met the long-term care insurance requirements of
such State.
(3) Exchanges of existing policies.--If, after the
date of enactment of this Act and before January 1,
1998, a contract providing for long-term care insurance
coverage is exchanged solely for a qualified long-term
care insurance contract (as defined in section 7702B(b)
of such Code), no gain or loss shall be recognized on
the exchange. If, in addition to a qualified long-term
care insurance contract, money or other property is
received in the exchange, then any gain shall be
recognized to the extent of the sum of the money and
the fair market value of the other property received.
For purposes of this paragraph, the cancellation of a
contract providing for long-term care insurance
coverage and reinvestment of the cancellation proceeds
in a qualified long-term care insurance contract within
60 days thereafter shall be treated as an exchange.
(4) Issuance of certain riders permitted.--For
purposes of applying sections 101(f), 7702, and 7702A
of the Internal Revenue Code of 1986 to any contract--
(A) the issuance of a rider which is
treated as a qualified long-term care insurance
contract under section 7702B, and
(B) the addition of any provision required
to conform any other long-term care rider to be
so treated,
shall not be treated as a modification or material
change of such contract.
(5) Application of per diem limitation to existing
contracts.--The amount of per diem payments made under
a contract issued on or before July 31, 1996, with
respect to an insured which are excludable from gross
income by reason of section 7702B of the Internal
Revenue Code of 1986 (as added by this section) shall
not be reduced under subsection (d)(2)(B) thereof by
reason of reimbursements received under a contract
issued on or before such date. The preceding sentence
shall cease to apply as of the date (after July 31,
1996) such contract is exchanged or there is any
contract modification which results in an increase in
the amount of such per diem payments or the amount of
such reimbursements.
(g) Long-Term Care Study Request.--The Chairman of the
Committee on Ways and Means of the House of Representatives and
the Chairman of the Committee on Finance of the Senate shall
jointly request the National Association of Insurance
Commissioners, in consultation with representatives of the
insurance industry and consumer organizations, to formulate,
develop, and conduct a study to determine the marketing and
other effects of per diem limits on certain types of long-term
care policies. If the National Association of Insurance
Commissioners agrees to the study request, the National
Association of Insurance Commissioners shall report the results
of its study to such committees not later than 2 years after
accepting the request.
SEC. 322. QUALIFIED LONG-TERM CARE SERVICES TREATED AS MEDICAL CARE.
(a) General Rule.--Paragraph (1) of section 213(d)
(defining medical care) is amended by striking ``or'' at the
end of subparagraph (B), by redesignating subparagraph (C) as
subparagraph (D), and by inserting after subparagraph (B) the
following new subparagraph:
``(C) for qualified long-term care services
(as defined in section 7702B(c)), or''.
(b) Technical Amendments.--
(1) Subparagraph (D) of section 213(d)(1) (as
redesignated by subsection (a)) is amended by inserting
before the period ``or for any qualified long-term care
insurance contract (as defined in section 7702B(b))''.
(2)(A) Paragraph (1) of section 213(d) is amended
by adding at the end the following new flush sentence:
``In the case of a qualified long-term care insurance
contract (as defined in section 7702B(b)), only
eligible long-term care premiums (as defined in
paragraph (10)) shall be taken into account under
subparagraph (D).''
(B) Paragraph (2) of section 162(l) is amended by
adding at the end the following new subparagraph:
``(C) Long-term care premiums.--In the case
of a qualified long-term care insurance
contract (as defined in section 7702B(b)), only
eligible long-term care premiums (as defined in
section 213(d)(10)) shall be taken into account
under paragraph (1).''
(C) Subsection (d) of section 213 is amended by
adding at the end the following new paragraphs:
``(10) Eligible long-term care premiums.--
``(A) In general.--For purposes of this
section, the term `eligible long-term care
premiums' means the amount paid during a
taxable year for any qualified long-term care
insurance contract (as defined in section
7702B(b)) covering an individual, to the extent
such amount does not exceed the limitation
determined under the following table:
``In the case of an individual with an attained age before the close of
the taxable year of: The limitation is:
40 or less................................ $200
More than 40 but not more than 50......... 375
More than 50 but not more than 60......... 750
More than 60 but not more than 70......... 2,000
More than 70.............................. 2,500.
``(B) Indexing.--
``(i) In general.--In the case of
any taxable year beginning in a
calendar year after 1997, each dollar
amount contained in subparagraph (A)
shall be increased by the medical care
cost adjustment of such amount for such
calendar year. If any increase
determined under the preceding sentence
is not a multiple of $10, such increase
shall be rounded to the nearest
multiple of $10.
``(ii) Medical care cost
adjustment.--For purposes of clause
(i), the medical care cost adjustment
for any calendar year is the percentage
(if any) by which--
``(I) the medical care
component of the Consumer Price
Index (as defined in section
1(f)(5)) for August of the
preceding calendar year,
exceeds
``(II) such component for
August of 1996.
The Secretary shall, in consultation
with the Secretary of Health and Human
Services, prescribe an adjustment which
the Secretary determines is more
appropriate for purposes of this
paragraph than the adjustment described
in the preceding sentence, and the
adjustment so prescribed shall apply in
lieu of the adjustment described in the
preceding sentence.
``(11) Certain payments to relatives treated as not
paid for medical care.--An amount paid for a qualified
long-term care service (as defined in section 7702B(c))
provided to an individual shall be treated as not paid
for medical care if such service is provided--
``(A) by the spouse of the individual or by
a relative (directly or through a partnership,
corporation, or other entity) unless the
service is provided by a licensed professional
with respect to such service, or
``(B) by a corporation or partnership which
is related (within the meaning of section
267(b) or 707(b)) to the individual.
For purposes of this paragraph, the term `relative'
means an individual bearing a relationship to the
individual which is described in any of paragraphs (1)
through (8) of section 152(a). This paragraph shall not
apply for purposes of section 105(b) with respect to
reimbursements through insurance.'' .
(3) Paragraph (6) of section 213(d) is amended--
(A) by striking ``subparagraphs (A) and
(B)'' and inserting ``subparagraphs (A), (B),
and (C)'', and
(B) by striking ``paragraph (1)(C)'' in
subparagraph (A) and inserting ``paragraph
(1)(D)''.
(4) Paragraph (7) of section 213(d) is amended by
striking ``subparagraphs (A) and (B)'' and inserting
``subparagraphs (A), (B), and (C)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1996.
SEC. 323. REPORTING REQUIREMENTS.
(a) In General.--Subpart B of part III of subchapter A of
chapter 61 is amended by adding at the end the following new
section:
``SEC. 6050Q. CERTAIN LONG-TERM CARE BENEFITS.
``(a) Requirement of Reporting.--Any person who pays long-
term care benefits shall make a return, according to the forms
or regulations prescribed by the Secretary, setting forth--
``(1) the aggregate amount of such benefits paid by
such person to any individual during any calendar year,
``(2) whether or not such benefits are paid in
whole or in part on a per diem or other periodic basis
without regard to the expenses incurred during the
period to which the payments relate,
``(3) the name, address, and TIN of such
individual, and
``(4) the name, address, and TIN of the chronically
ill or terminally ill individual on account of whose
condition such benefits are paid.
``(b) Statements To Be Furnished to Persons With Respect to
Whom Information Is Required.--Every person required to make a
return under subsection (a) shall furnish to each individual
whose name is required to be set forth in such return a written
statement showing--
``(1) the name of the person making the payments,
and
``(2) the aggregate amount of long-term care
benefits paid to the individual which are required to
be shown on such return.
The written statement required under the preceding sentence
shall be furnished to the individual on or before January 31 of
the year following the calendar year for which the return under
subsection (a) was required to be made.
``(c) Long-Term Care Benefits.--For purposes of this
section, the term `long-term care benefit' means--
``(1) any payment under a product which is
advertised, marketed, or offered as long-term care
insurance, and
``(2) any payment which is excludable from gross
income by reason of section 101(g).''.
(b) Penalties.--
(1) Subparagraph (B) of section 6724(d)(1) is
amended by redesignating clauses (ix) through (xiv) as
clauses (x) through (xv), respectively, and by
inserting after clause (viii) the following new clause:
``(ix) section 6050Q (relating to
certain long-term care benefits),''.
(2) Paragraph (2) of section 6724(d) is amended by
redesignating subparagraphs (Q) through (T) as
subparagraphs (R) through (U), respectively, and by
inserting after subparagraph (P) the following new
subparagraph:
``(Q) section 6050Q(b) (relating to certain
long-term care benefits),''.
(c) Clerical Amendment.--The table of sections for subpart
B of part III of subchapter A of chapter 61 is amended by
adding at the end the following new item:
``Sec. 6050Q. Certain long-term care benefits.''.
(d) Effective Date.--The amendments made by this section
shall apply to benefits paid after December 31, 1996.
PART II--CONSUMER PROTECTION PROVISIONS
SEC. 325. POLICY REQUIREMENTS.
Section 7702B (as added by section 321) is amended by
adding at the end the following new subsection:
``(g) Consumer Protection Provisions.--
``(1) In general.--The requirements of this
subsection are met with respect to any contract if the
contract meets--
``(A) the requirements of the model
regulation and model Act described in paragraph
(2),
``(B) the disclosure requirement of
paragraph (3), and
``(C) the requirements relating to
nonforfeitability under paragraph (4).
``(2) Requirements of model regulation and act.--
``(A) In general.--The requirements of this
paragraph are met with respect to any contract
if such contract meets--
``(i) Model regulation.--The
following requirements of the model
regulation:
``(I) Section 7A (relating
to guaranteed renewal or
noncancellability), and the
requirements of section 6B of
the model Act relating to such
section 7A.
``(II) Section 7B (relating
to prohibitions on limitations
and exclusions).
``(III) Section 7C
(relating to extension of
benefits).
``(IV) Section 7D (relating
to continuation or conversion
of coverage).
``(V) Section 7E (relating
to discontinuance and
replacement of policies).
``(VI) Section 8 (relating
to unintentional lapse).
``(VII) Section 9 (relating
to disclosure), other than
section 9F thereof.
``(VIII) Section 10
(relating to prohibitions
against post-claims
underwriting).
``(IX) Section 11 (relating
to minimum standards).
``(X) Section 12 (relating
to requirement to offer
inflation protection), except
that any requirement for a
signature on a rejection of
inflation protection shall
permit the signature to be on
an application or on a separate
form.
``(XI) Section 23 (relating
to prohibition against
preexisting conditions and
probationary periods in
replacement policies or
certificates).
``(ii) Model act.--The following
requirements of the model Act:
``(I) Section 6C (relating
to preexisting conditions).
``(II) Section 6D (relating
to prior hospitalization).
``(B) Definitions.--For purposes of this
paragraph--
``(i) Model provisions.--The terms
`model regulation' and `model Act' mean
the long-term care insurance model
regulation, and the long-term care
insurance model Act, respectively,
promulgated by the National Association
of Insurance Commissioners (as adopted
as of January 1993).
``(ii) Coordination.--Any provision
of the model regulation or model Act
listed under clause (i) or (ii) of
subparagraph (A) shall be treated as
including any other provision of such
regulation or Act necessary to
implement the provision.
``(iii) Determination.--For
purposes of this section and section
4980C, the determination of whether any
requirement of a model regulation or
the model Act has been met shall be
made by the Secretary.
``(3) Disclosure requirement.--The requirement of
this paragraph is met with respect to any contract if
such contract meets the requirements of section
4980C(d).
``(4) Nonforfeiture requirements.--
``(A) In general.--The requirements of this
paragraph are met with respect to any level
premium contract, if the issuer of such
contract offers to the policyholder, including
any group policyholder, a nonforfeiture
provision meeting the requirements of
subparagraph (B).
``(B) Requirements of provision.--The
nonforfeiture provision required under
subparagraph (A) shall meet the following
requirements:
``(i) The nonforfeiture provision
shall be appropriately captioned.
``(ii) The nonforfeiture provision
shall provide for a benefit available
in the event of a default in the
payment of any premiums and the amount
of the benefit may be adjusted
subsequent to being initially granted
only as necessary to reflect changes in
claims, persistency, and interest as
reflected in changes in rates for
premium paying contracts approved by
the Secretary for the same contract
form.
``(iii) The nonforfeiture provision
shall provide at least one of the
following:
``(I) Reduced paid-up
insurance.
``(II) Extended term
insurance.
``(III) Shortened benefit
period.
``(IV) Other similar
offerings approved by the
Secretary.
``(5) Cross reference.--
``For coordination of the requirements of this subsection with
State requirements, see section 4980C(f).''
SEC. 326. REQUIREMENTS FOR ISSUERS OF QUALIFIED LONG-TERM CARE
INSURANCE CONTRACTS.
(a) In General.--Chapter 43 is amended by adding at the end
the following new section:
``SEC. 4980C. REQUIREMENTS FOR ISSUERS OF QUALIFIED LONG-TERM CARE
INSURANCE CONTRACTS.
``(a) General Rule.--There is hereby imposed on any person
failing to meet the requirements of subsection (c) or (d) a tax
in the amount determined under subsection (b).
``(b) Amount.--
``(1) In general.--The amount of the tax imposed by
subsection (a) shall be $100 per insured for each day
any requirement of subsection (c) or (d) is not met
with respect to each qualified long-term care insurance
contract.
``(2) Waiver.--In the case of a failure which is
due to reasonable cause and not to willful neglect, the
Secretary may waive part or all of the tax imposed by
subsection (a) to the extent that payment of the tax
would be excessive relative to the failure involved.
``(c) Responsibilities.--The requirements of this
subsection are as follows:
``(1) Requirements of model provisions.--
``(A) Model regulation.--The following
requirements of the model regulation must be
met:
``(i) Section 13 (relating to
application forms and replacement
coverage).
``(ii) Section 14 (relating to
reporting requirements), except that
the issuer shall also report at least
annually the number of claims denied
during the reporting period for each
class of business (expressed as a
percentage of claims denied), other
than claims denied for failure to meet
the waiting period or because of any
applicable preexisting condition.
``(iii) Section 20 (relating to
filing requirements for marketing).
``(iv) Section 21 (relating to
standards for marketing), including
inaccurate completion of medical
histories, other than sections 21C(1)
and 21C(6) thereof, except that--
``(I) in addition to such
requirements, no person shall,
in selling or offering to sell
a qualified long-term care
insurance contract,
misrepresent a material fact;
and
``(II) no such requirements
shall include a requirement to
inquire or identify whether a
prospective applicant or
enrollee for long-term care
insurance has accident and
sickness insurance.
``(v) Section 22 (relating to
appropriateness of recommended
purchase).
``(vi) Section 24 (relating to
standard format outline of coverage).
``(vii) Section 25 (relating to
requirement to deliver shopper's
guide).
``(B) Model act.--The following
requirements of the model Act must be met:
``(i) Section 6F (relating to right
to return), except that such section
shall also apply to denials of
applications and any refund shall be
made within 30 days of the return or
denial.
``(ii) Section 6G (relating to
outline of coverage).
``(iii) Section 6H (relating to
requirements for certificates under
group plans).
``(iv) Section 6I (relating to
policy summary).
``(v) Section 6J (relating to
monthly reports on accelerated death
benefits).
``(vi) Section 7 (relating to
incontestability period).
``(C) Definitions.--For purposes of this
paragraph, the terms `model regulation' and
`model Act' have the meanings given such terms
by section 7702B(g)(2)(B).
``(2) Delivery of policy.--If an application for a
qualified long-term care insurance contract (or for a
certificate under such a contract for a group) is
approved, the issuer shall deliver to the applicant (or
policyholder or certificateholder) the contract (or
certificate) of insurance not later than 30 days after
the date of the approval.
``(3) Information on denials of claims.--If a claim
under a qualified long-term care insurance contract is
denied, the issuer shall, within 60 days of the date of
a written request by the policyholder or
certificateholder (or representative)--
``(A) provide a written explanation of the
reasons for the denial, and
``(B) make available all information
directly relating to such denial.
``(d) Disclosure.--The requirements of this subsection are
met if the issuer of a long-term care insurance policy
discloses in such policy and in the outline of coverage
required under subsection (c)(1)(B)(ii) that the policy is
intended to be a qualified long-term care insurance contract
under section 7702B(b).
``(e) Qualified Long-Term Care Insurance Contract
Defined.--For purposes of this section, the term `qualified
long-term care insurance contract' has the meaning given such
term by section 7702B.
``(f) Coordination With State Requirements.--If a State
imposes any requirement which is more stringent than the
analogous requirement imposed by this section or section
7702B(g), the requirement imposed by this section or section
7702B(g) shall be treated as met if the more stringent State
requirement is met.''.
(b) Conforming Amendment.--The table of sections for
chapter 43 is amended by adding at the end the following new
item:
``Sec. 4980C. Requirements for issuers of qualified long-term
care insurance contracts.''
SEC. 327. EFFECTIVE DATES.
(a) In General.--The provisions of, and amendments made by,
this part shall apply to contracts issued after December 31,
1996. The provisions of section 321(f) (relating to transition
rule) shall apply to such contracts.
(b) Issuers.--The amendments made by section 326 shall
apply to actions taken after December 31, 1996.
Subtitle D--Treatment of Accelerated Death Benefits
SEC. 331. TREATMENT OF ACCELERATED DEATH BENEFITS BY RECIPIENT.
(a) In General.--Section 101 (relating to certain death
benefits) is amended by adding at the end the following new
subsection:
``(g) Treatment of Certain Accelerated Death Benefits.--
``(1) In general.--For purposes of this section,
the following amounts shall be treated as an amount
paid by reason of the death of an insured:
``(A) Any amount received under a life
insurance contract on the life of an insured
who is a terminally ill individual.
``(B) Any amount received under a life
insurance contract on the life of an insured
who is a chronically ill individual.
``(2) Treatment of viatical settlements.--
``(A) In general.--If any portion of the
death benefit under a life insurance contract
on the life of an insured described in
paragraph (1) is sold or assigned to a viatical
settlement provider, the amount paid for the
sale or assignment of such portion shall be
treated as an amount paid under the life
insurance contract by reason of the death of
such insured.
``(B) Viatical settlement provider.--
``(i) In general.--The term
`viatical settlement provider' means
any person regularly engaged in the
trade or business of purchasing, or
taking assignments of, life insurance
contracts on the lives of insureds
described in paragraph (1) if--
``(I) such person is
licensed for such purposes
(with respect to insureds
described in the same
subparagraph of paragraph (1)
as the insured) in the State in
which the insured resides, or
``(II) in the case of an
insured who resides in a State
not requiring the licensing of
such persons for such purposes
with respect to such insured,
such person meets the
requirements of clause (ii) or
(iii), whichever applies to
such insured.
``(ii) Terminally ill insureds.--A
person meets the requirements of this
clause with respect to an insured who
is a terminally ill individual if such
person--
``(I) meets the
requirements of sections 8 and
9 of the Viatical Settlements
Model Act of the National
Association of Insurance
Commissioners, and
``(II) meets the
requirements of the Model
Regulations of the National
Association of Insurance
Commissioners (relating to
standards for evaluation of
reasonable payments) in
determining amounts paid by
such person in connection with
such purchases or assignments.
``(iii) Chronically ill insureds.--
A person meets the requirements of this
clause with respect to an insured who
is a chronically ill individual if such
person--
``(I) meets requirements
similar to the requirements
referred to in clause (ii)(I),
and
``(II) meets the standards
(if any) of the National
Association of Insurance
Commissioners for evaluating
the reasonableness of amounts
paid by such person in
connection with such purchases
or assignments with respect to
chronically ill individuals.
``(3) Special rules for chronically ill insureds.--
In the case of an insured who is a chronically ill
individual--
``(A) In general.--Paragraphs (1) and (2)
shall not apply to any payment received for any
period unless--
``(i) such payment is for costs
incurred by the payee (not compensated
for by insurance or otherwise) for
qualified long-term care services
provided for the insured for such
period, and
``(ii) the terms of the contract
giving rise to such payment satisfy--
``(I) the requirements of
section 7702B(b)(1)(B), and
``(II) the requirements (if
any) applicable under
subparagraph (B).
For purposes of the preceding sentence, the
rule of section 7702B(b)(2)(B) shall apply.
``(B) Other requirements.--The requirements
applicable under this subparagraph are--
``(i) those requirements of section
7702B(g) and section 4980C which the
Secretary specifies as applying to such
a purchase, assignment, or other
arrangement,
``(ii) standards adopted by the
National Association of Insurance
Commissioners which specifically apply
to chronically ill individuals (and, if
such standards are adopted, the
analogous requirements specified under
clause (i) shall cease to apply), and
``(iii) standards adopted by the
State in which the policyholder resides
(and if such standards are adopted, the
analogous requirements specified under
clause (i) and (subject to section
4980C(f)) standards under clause (ii),
shall cease to apply).
``(C) Per diem payments.--A payment shall
not fail to be described in subparagraph (A) by
reason of being made on a per diem or other
periodic basis without regard to the expenses
incurred during the period to which the payment
relates.
``(D) Limitation on exclusion for periodic
payments.--
``For limitation on amount of periodic payments which are
treated as described in paragraph (1), see section 7702B(d).''
``(4) Definitions.--For purposes of this
subsection--
``(A) Terminally ill individual.--The term
`terminally ill individual' means an individual
who has been certified by a physician as having
an illness or physical condition which can
reasonably be expected to result in death in 24
months or less after the date of the
certification.
``(B) Chronically ill individual.--The term
`chronically ill individual' has the meaning
given such term by section 7702B(c)(2); except
that such term shall not include a terminally
ill individual.
``(C) Qualified long-term care services.--
The term `qualified long-term care services'
has the meaning given such term by section
7702B(c).
``(D) Physician.--The term `physician' has
the meaning given to such term by section
1861(r)(1) of the Social Security Act (42
U.S.C. 1395x(r)(1)).
``(5) Exception for business-related policies.--
This subsection shall not apply in the case of any
amount paid to any taxpayer other than the insured if
such taxpayer has an insurable interest with respect to
the life of the insured by reason of the insured being
a director, officer, or employee of the taxpayer or by
reason of the insured being financially interested in
any trade or business carried on by the taxpayer.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to amounts received after December 31, 1996.
SEC. 332. TAX TREATMENT OF COMPANIES ISSUING QUALIFIED ACCELERATED
DEATH BENEFIT RIDERS.
(a) Qualified Accelerated Death Benefit Riders Treated as
Life Insurance.--Section 818 (relating to other definitions and
special rules) is amended by adding at the end the following
new subsection:
``(g) Qualified Accelerated Death Benefit Riders Treated as
Life Insurance.--For purposes of this part--
``(1) In general.--Any reference to a life
insurance contract shall be treated as including a
reference to a qualified accelerated death benefit
rider on such contract.
``(2) Qualified accelerated death benefit riders.--
For purposes of this subsection, the term `qualified
accelerated death benefit rider' means any rider on a
life insurance contract if the only payments under the
rider are payments meeting the requirements of section
101(g).
``(3) Exception for long-term care riders.--
Paragraph (1) shall not apply to any rider which is
treated as a long-term care insurance contract under
section 7702B.''.
(b) Effective Date.--
(1) In general.--The amendment made by this section
shall take effect on January 1, 1997.
(2) Issuance of rider not treated as material
change.--For purposes of applying sections 101(f),
7702, and 7702A of the Internal Revenue Code of 1986 to
any contract--
(A) the issuance of a qualified accelerated
death benefit rider (as defined in section
818(g) of such Code (as added by this Act)),
and
(B) the addition of any provision required
to conform an accelerated death benefit rider
to the requirements of such section 818(g),
shall not be treated as a modification or material
change of such contract.
Subtitle E--State Insurance Pools
SEC. 341. EXEMPTION FROM INCOME TAX FOR STATE-SPONSORED ORGANIZATIONS
PROVIDING HEALTH COVERAGE FOR HIGH-RISK
INDIVIDUALS.
(a) In General.--Subsection (c) of section 501 (relating to
list of exempt organizations) is amended by adding at the end
the following new paragraph:
``(26) Any membership organization if--
``(A) such organization is established by a
State exclusively to provide coverage for
medical care (as defined in section 213(d)) on
a not-for-profit basis to individuals described
in subparagraph (B) through--
``(i) insurance issued by the
organization, or
``(ii) a health maintenance
organization under an arrangement with
the organization,
``(B) the only individuals receiving such
coverage through the organization are
individuals--
``(i) who are residents of such
State, and
``(ii) who, by reason of the
existence or history of a medical
condition--
``(I) are unable to acquire
medical care coverage for such
condition through insurance or
from a health maintenance
organization, or
``(II) are able to acquire
such coverage only at a rate
which is substantially in
excess of the rate for such
coverage through the membership
organization,
``(C) the composition of the membership in
such organization is specified by such State,
and
``(D) no part of the net earnings of the
organization inures to the benefit of any
private shareholder or individual.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 1996.
SEC. 342. EXEMPTION FROM INCOME TAX FOR STATE-SPONSORED WORKMEN'S
COMPENSATION REINSURANCE ORGANIZATIONS.
(a) In General.--Subsection (c) of section 501 (relating to
list of exempt organizations), as amended by section 341, is
amended by adding at the end the following new paragraph:
``(27) Any membership organization if--
``(A) such organization is established
before June 1, 1996, by a State exclusively to
reimburse its members for losses arising under
workmen's compensation acts,
``(B) such State requires that the
membership of such organization consist of--
``(i) all persons who issue
insurance covering workmen's
compensation losses in such State, and
``(ii) all persons and governmental
entities who self-insure against such
losses, and
``(C) such organization operates as a non-
profit organization by--
``(i) returning surplus income to
its members or workmen's compensation
policyholders on a periodic basis, and
``(ii) reducing initial premiums in
anticipation of investment income.''
(b) Effective Date.--The amendment made by this section
shall apply to taxable years ending after the date of the
enactment of this Act.
Subtitle F--Organizations Subject to Section 833
SEC. 351. ORGANIZATIONS SUBJECT TO SECTION 833.
(a) In General.--Section 833(c) (relating to organization
to which section applies) is amended by adding at the end the
following new paragraph:
``(4) Treatment as existing blue cross or blue
shield organization.--
``(A) In general.--Paragraph (2) shall be
applied to an organization described in
subparagraph (B) as if it were a Blue Cross or
Blue Shield organization.
``(B) Applicable organization.--An
organization is described in this subparagraph
if it--
``(i) is organized under, and
governed by, State laws which are
specifically and exclusively applicable
to not-for-profit health insurance or
health service type organizations, and
``(ii) is not a Blue Cross or Blue
Shield organization or health
maintenance organization.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years ending after December 31, 1996.
Subtitle G--IRA Distributions to the Unemployed
SEC. 361. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE USED WITHOUT
ADDITIONAL TAX TO PAY FINANCIALLY DEVASTATING
MEDICAL EXPENSES.
(a) In General.--Section 72(t)(3)(A) is amended by striking
``(B),''.
(b) Distributions for Payment of Health Insurance Premiums
of Certain Unemployed Individuals.--Paragraph (2) of section
72(t) is amended by adding at the end the following new
subparagraph:
``(D) Distributions to unemployed
individuals for health insurance premiums.--
``(i) In general.--Distributions
from an individual retirement plan to
an individual after separation from
employment--
``(I) if such individual
has received unemployment
compensation for 12 consecutive
weeks under any Federal or
State unemployment compensation
law by reason of such
separation,
``(II) if such
distributions are made during
any taxable year during which
such unemployment compensation
is paid or the succeeding
taxable year, and
``(III) to the extent such
distributions do not exceed the
amount paid during the taxable
year for insurance described in
section 213(d)(1)(D) with
respect to the individual and
the individual's spouse and
dependents (as defined in
section 152).
``(ii) Distributions after
reemployment.--Clause (i) shall not
apply to any distribution made after
the individual has been employed for at
least 60 days after the separation from
employment to which clause (i) applies.
``(iii) Self-employed
individuals.--To the extent provided in
regulations, a self-employed individual
shall be treated as meeting the
requirements of clause (i)(I) if, under
Federal or State law, the individual
would have received unemployment
compensation but for the fact the
individual was self-employed.''.
(c) Conforming Amendment.--Subparagraph (B) of section
72(t)(2) is amended by striking ``or (C)'' and inserting ``,
(C), or (D)''.
(d) Effective Date.--The amendments made by this section
shall apply to distributions after December 31, 1996.
Subtitle H--Organ and Tissue Donation Information Included With Income
Tax Refund Payments
SEC. 371. ORGAN AND TISSUE DONATION INFORMATION INCLUDED WITH INCOME
TAX REFUND PAYMENTS.
(a) In General.--The Secretary of the Treasury shall, to
the extent practicable, include with the mailing of any payment
of a refund of individual income tax made during the period
beginning on February 1, 1997, and ending on June 30, 1997, a
copy of the document described in subsection (b).
(b) Text of Document.--The Secretary of the Treasury shall,
after consultation with the Secretary of Health and Human
Services and organizations promoting organ and tissue
(including eye) donation, prepare a document suitable for
inclusion with individual income tax refund payments which--
(1) encourages organ and tissue donation;
(2) includes a detachable organ and tissue donor
card; and
(3) urges recipients to--
(A) sign the organ and tissue donor card;
(B) discuss organ and tissue donation with
family members and tell family members about
the recipient's desire to be an organ and
tissue donor if the occasion arises; and
(C) encourage family members to request or
authorize organ and tissue donation if the
occasion arises.
TITLE IV--APPLICATION AND ENFORCEMENT OF GROUP HEALTH PLAN REQUIREMENTS
Subtitle A--Application and Enforcement of Group Health Plan
Requirements
SEC. 401. GROUP HEALTH PLAN PORTABILITY, ACCESS, AND RENEWABILITY
REQUIREMENTS.
(a) In General.--The Internal Revenue Code of 1986 is
amended by adding at the end the following new subtitle:
``Subtitle K--Group Health Plan Portability, Access, and Renewability
Requirements
``Chapter 100. Group health plan portability, access, and
renewability requirements.
``CHAPTER 100--GROUP HEALTH PLAN PORTABILITY, ACCESS, AND RENEWABILITY
REQUIREMENTS
``Sec. 9801. Increased portability through limitation on
preexisting condition exclusions.
``Sec. 9802. Prohibiting discrimination against individual
participants and beneficiaries based on health status.
``Sec. 9803. Guaranteed renewability in multiemployer plans and
certain multiple employer welfare arrangements.
``Sec. 9804. General exceptions.
``Sec. 9805. Definitions.
``Sec. 9806. Regulations.
``SEC. 9801. INCREASED PORTABILITY THROUGH LIMITATION ON PREEXISTING
CONDITION EXCLUSIONS.
``(a) Limitation on Preexisting Condition Exclusion Period;
Crediting for Periods of Previous Coverage.--Subject to
subsection (d), a group health plan may, with respect to a
participant or beneficiary, impose a preexisting condition
exclusion only if--
``(1) such exclusion relates to a condition
(whether physical or mental), 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;
``(2) such exclusion extends for a period of not
more than 12 months (or 18 months in the case of a late
enrollee) after the enrollment date; and
``(3) the period of any such preexisting condition
exclusion is reduced by the length of the aggregate of
the periods of creditable coverage (if any) applicable
to the participant or beneficiary as of the enrollment
date.
``(b) Definitions.--For purposes of this section--
``(1) Preexisting condition exclusion.--
``(A) In general.--The term `preexisting
condition exclusion' means, with respect to
coverage, a limitation or exclusion of benefits
relating to a condition based on the fact that
the condition was present before the date of
enrollment for such coverage, whether or not
any medical advice, diagnosis, care, or
treatment was recommended or received before
such date.
``(B) Treatment of genetic information.--
For purposes of this section, genetic
information shall not be treated as a condition
described in subsection (a)(1) in the absence
of a diagnosis of the condition related to such
information.
``(2) Enrollment date.--The term `enrollment date'
means, with respect to an individual covered under a
group health plan, the date of enrollment of the
individual in the plan or, if earlier, the first day of
the waiting period for such enrollment.
``(3) Late enrollee.--The term `late enrollee'
means, with respect to coverage under a group health
plan, a participant or beneficiary who enrolls under
the plan other than during--
``(A) the first period in which the
individual is eligible to enroll under the
plan, or
``(B) a special enrollment period under
subsection (f).
``(4) Waiting period.--The term `waiting period'
means, with respect to a group health plan and an
individual who is a potential participant or
beneficiary in the plan, the period that must pass with
respect to the individual before the individual is
eligible to be covered for benefits under the terms of
the plan.
``(c) Rules Relating to Crediting Previous Coverage.--
``(1) Creditable coverage defined.--For purposes of
this part, the term `creditable coverage' means, with
respect to an individual, coverage of the individual
under any of the following:
``(A) A group health plan.
``(B) Health insurance coverage.
``(C) Part A or part B of title XVIII of
the Social Security Act.
``(D) Title XIX of the Social Security Act,
other than coverage consisting solely of
benefits under section 1928.
``(E) Chapter 55 of title 10, United States
Code.
``(F) A medical care program of the Indian
Health Service or of a tribal organization.
``(G) A State health benefits risk pool.
``(H) A health plan offered under chapter
89 of title 5, United States Code.
``(I) A public health plan (as defined in
regulations).
``(J) A health benefit plan under section
5(e) of the Peace Corps Act (22 U.S.C. 2504(e).
Such term does not include coverage consisting solely
of coverage of excepted benefits (as defined in section
9805(c)).
``(2) Not counting periods before significant
breaks in coverage.--
``(A) In general.--A period of creditable
coverage shall not be counted, with respect to
enrollment of an individual under a group
health plan, if, after such period and before
the enrollment date, there was a 63-day period
during all of which the individual was not
covered under any creditable coverage.
``(B) Waiting period not treated as a break
in coverage.--For purposes of subparagraph (A)
and subsection (d)(4), any period that an
individual is in a waiting period for any
coverage under a group health plan or is in an
affiliation period shall not be taken into
account in determining the continuous period
under subparagraph (A).
``(C) Affiliation period.--
``(i) In general.--For purposes of
this section, the term `affiliation
period' means a period which, under the
terms of the health insurance coverage
offered by the health maintenance
organization, must expire before the
health insurance coverage becomes
effective. During such an affiliation
period, the organization is not
required to provide health care
services or benefits and no premium
shall be charged to the participant or
beneficiary.
``(ii) Beginning.--Such period
shall begin on the enrollment date.
``(iii) Runs concurrently with
waiting periods.--Any such affiliation
period shall run concurrently with any
waiting period under the plan.
``(3) Method of crediting coverage.--
``(A) Standard method.--Except as otherwise
provided under subparagraph (B), for purposes
of applying subsection (a)(3), a group health
plan shall count a period of creditable
coverage without regard to the specific
benefits for which coverage is offered during
the period.
``(B) Election of alternative method.--A
group health plan may elect to apply subsection
(a)(3) based on coverage of any benefits within
each of several classes or categories of
benefits specified in regulations rather than
as provided under subparagraph (A). Such
election shall be made on a uniform basis for
all participants and beneficiaries. Under such
election a group health plan shall count a
period of creditable coverage with respect to
any class or category of benefits if any level
of benefits is covered within such class or
category.
``(C) Plan notice.--In the case of an
election with respect to a group health plan
under subparagraph (B), the plan shall--
``(i) prominently state in any
disclosure statements concerning the
plan, and state to each enrollee at the
time of enrollment under the plan, that
the plan has made such election, and
``(ii) include in such statements a
description of the effect of this
election.
``(4) Establishment of period.--Periods of
creditable coverage with respect to an individual shall
be established through presentation of certifications
described in subsection (e) or in such other manner as
may be specified in regulations.
``(d) Exceptions.--
``(1) Exclusion not applicable to certain
newborns.--Subject to paragraph (4), a group health
plan may not impose any preexisting condition exclusion
in the case of an individual who, as of the last day of
the 30-day period beginning with the date of birth, is
covered under creditable coverage.
``(2) Exclusion not applicable to certain adopted
children.--Subject to paragraph (4), a group health
plan may not impose any preexisting condition exclusion
in the case of a child who is adopted or placed for
adoption before attaining 18 years of age and who, as
of the last day of the 30-day period beginning on the
date of the adoption or placement for adoption, is
covered under creditable coverage. The previous
sentence shall not apply to coverage before the date of
such adoption or placement for adoption.
``(3) Exclusion not applicable to pregnancy.--For
purposes of this section, a group health plan may not
impose any preexisting condition exclusion relating to
pregnancy as a preexisting condition.
``(4) Loss if break in coverage.--Paragraphs (1)
and (2) shall no longer apply to an individual after
the end of the first 63-day period during all of which
the individual was not covered under any creditable
coverage.
``(e) Certifications and Disclosure of Coverage.--
``(1) Requirement for certification of period of
creditable coverage.--
``(A) In general.--A group health plan
shall provide the certification described in
subparagraph (B)--
``(i) at the time an individual
ceases to be covered under the plan or
otherwise becomes covered under a COBRA
continuation provision,
``(ii) in the case of an individual
becoming covered under such a
provision, at the time the individual
ceases to be covered under such
provision, and
``(iii) on the request on behalf of
an individual made not later than 24
months after the date of cessation of
the coverage described in clause (i) or
(ii), whichever is later.
The certification under clause (i) may be
provided, to the extent practicable, at a time
consistent with notices required under any
applicable COBRA continuation provision.
``(B) Certification.--The certification
described in this subparagraph is a written
certification of--
``(i) the period of creditable
coverage of the individual under such
plan and the coverage under such COBRA
continuation provision, and
``(ii) the waiting period (if any)
(and affiliation period, if applicable)
imposed with respect to the individual
for any coverage under such plan.
``(C) Issuer compliance.--To the extent
that medical care under a group health plan
consists of health insurance coverage offered
in connection with the plan, the plan is deemed
to have satisfied the certification requirement
under this paragraph if the issuer provides for
such certification in accordance with this
paragraph.
``(2) Disclosure of information on previous
benefits.--
``(A) In general.--In the case of an
election described in subsection (c)(3)(B) by a
group health plan, if the plan enrolls an
individual for coverage under the plan and the
individual provides a certification of coverage
of the individual under paragraph (1)--
``(i) upon request of such plan,
the entity which issued the
certification provided by the
individual shall promptly disclose to
such requesting plan information on
coverage of classes and categories of
health benefits available under such
entity's plan, and
``(ii) such entity may charge the
requesting plan or issuer for the
reasonable cost of disclosing such
information.
``(3) Regulations.--The Secretary shall establish
rules to prevent an entity's failure to provide
information under paragraph (1) or (2) with respect to
previous coverage of an individual from adversely
affecting any subsequent coverage of the individual
under another group health plan or health insurance
coverage.
``(f) Special Enrollment Periods.--
``(1) Individuals losing other coverage.--A group
health plan shall permit an employee who is eligible,
but not enrolled, for coverage under the terms of the
plan (or a dependent of such an employee if the
dependent is eligible, but not enrolled, for coverage
under such terms) to enroll for coverage under the
terms of the plan if each of the following conditions
is met:
``(A) The employee or dependent was covered
under a group health plan or had health
insurance coverage at the time coverage was
previously offered to the employee or
individual.
``(B) The employee stated in writing at
such time that coverage under a group health
plan or health insurance coverage was the
reason for declining enrollment, but only if
the plan sponsor (or the health insurance
issuer offering health insurance coverage in
connection with the plan) required such a
statement at such time and provided the
employee with notice of such requirement (and
the consequences of such requirement) at such
time.
``(C) The employee's or dependent's
coverage described in subparagraph (A)--
``(i) was under a COBRA
continuation provision and the coverage
under such provision was exhausted; or
``(ii) was not under such a
provision and either the coverage was
terminated as a result of loss of
eligibility for the coverage (including
as a result of legal separation,
divorce, death, termination of
employment, or reduction in the number
of hours of employment) or employer
contributions towards such coverage
were terminated.
``(D) Under the terms of the plan, the
employee requests such enrollment not later
than 30 days after the date of exhaustion of
coverage described in subparagraph (C)(i) or
termination of coverage or employer
contribution described in subparagraph (C)(ii).
``(2) For dependent beneficiaries.--
``(A) In general.--If--
``(i) a group health plan makes
coverage available with respect to a
dependent of an individual,
``(ii) the individual is a
participant under the plan (or has met
any waiting period applicable to
becoming a participant under the plan
and is eligible to be enrolled under
the plan but for a failure to enroll
during a previous enrollment period),
and
``(iii) a person becomes such a
dependent of the individual through
marriage, birth, or adoption or
placement for adoption,
the group health plan shall provide for a
dependent special enrollment period described
in subparagraph (B) during which the person
(or, if not otherwise enrolled, the individual)
may be enrolled under the plan as a dependent
of the individual, and in the case of the birth
or adoption of a child, the spouse of the
individual may be enrolled as a dependent of
the individual if such spouse is otherwise
eligible for coverage.
``(B) Dependent special enrollment
period.--The dependent special enrollment
period under this subparagraph shall be a
period of not less than 30 days and shall begin
on the later of--
``(i) the date dependent coverage
is made available, or
``(ii) the date of the marriage,
birth, or adoption or placement for
adoption (as the case may be) described
in subparagraph (A)(iii).
``(C) No waiting period.--If an individual
seeks coverage of a dependent during the first
30 days of such a dependent special enrollment
period, the coverage of the dependent shall
become effective--
``(i) in the case of marriage, not
later than the first day of the first
month beginning after the date the
completed request for enrollment is
received;
``(ii) in the case of a dependent's
birth, as of the date of such birth; or
``(iii) in the case of a
dependent's adoption or placement for
adoption, the date of such adoption or
placement for adoption.
``SEC. 9802. PROHIBITING DISCRIMINATION AGAINST INDIVIDUAL PARTICIPANTS
AND BENEFICIARIES BASED ON HEALTH STATUS.
``(a) In Eligibility to Enroll.--
``(1) In general.--Subject to paragraph (2), a
group health plan may not establish rules for
eligibility (including continued eligibility) of any
individual to enroll under the terms of the plan based
on any of the following factors in relation to the
individual or a dependent of the individual:
``(A) Health status.
``(B) Medical condition (including both
physical and mental illnesses).
``(C) Claims experience.
``(D) Receipt of health care.
``(E) Medical history.
``(F) Genetic information.
``(G) Evidence of insurability (including
conditions arising out of acts of domestic
violence).
``(H) Disability.
``(2) No application to benefits or exclusions.--To
the extent consistent with section 9801, paragraph (1)
shall not be construed--
``(A) to require a group health plan to
provide particular benefits (or benefits with
respect to a specific procedure, treatment, or
service) other than those provided under the
terms of such plan; or
``(B) to prevent such a plan from
establishing limitations or restrictions on the
amount, level, extent, or nature of the
benefits or coverage for similarly situated
individuals enrolled in the plan or coverage.
``(3) Construction.--For purposes of paragraph (1),
rules for eligibility to enroll under a plan include
rules defining any applicable waiting periods for such
enrollment.
``(b) In Premium Contributions.--
``(1) In general.--A group health plan may not
require any individual (as a condition of enrollment or
continued enrollment under the plan) to pay a premium
or contribution which is greater than such premium or
contribution for a similarly situated individual
enrolled in the plan on the basis of any factor
described in subsection (a)(1) in relation to the
individual or to an individual enrolled under the plan
as a dependent of the individual.
``(2) Construction.--Nothing in paragraph (1) shall
be construed--
``(A) to restrict the amount that an
employer may be charged for coverage under a
group health plan; or
``(B) to prevent a group health plan from
establishing premium discounts or rebates or
modifying otherwise applicable copayments or
deductibles in return for adherence to programs
of health promotion and disease prevention.
``SEC. 9803. GUARANTEED RENEWABILITY IN MULTIEMPLOYER PLANS AND CERTAIN
MULTIPLE EMPLOYER WELFARE ARRANGEMENTS.
``(a) In General.--A group health plan which is a
multiemployer plan (as defined in section 414(f)) or which is a
multiple employer welfare arrangement may not deny an employer
continued access to the same or different coverage under such
plan, other than--
``(1) for nonpayment of contributions;
``(2) for fraud or other intentional
misrepresentation of material fact by the employer;
``(3) for noncompliance with material plan
provisions;
``(4) because the plan is ceasing to offer any
coverage in a geographic area;
``(5) in the case of a plan that offers benefits
through a network plan, because there is no longer any
individual enrolled through the employer who lives,
resides, or works in the service area of the network
plan and the plan applies this paragraph uniformly
without regard to the claims experience of employers or
a factor described in section 9802(a)(1) in relation to
such individuals or their dependents; or
``(6) for failure to meet the terms of an
applicable collective bargaining agreement, to renew a
collective bargaining or other agreement requiring or
authorizing contributions to the plan, or to employ
employees covered by such an agreement.
``(b) Multiple Employer Welfare Arrangement.--For purposes
of subsection (a), the term `multiple employer welfare
arrangement' has the meaning given such term by section 3(40)
of the Employee Retirement Income Security Act of 1974, as in
effect on the date of the enactment of this section.
``SEC. 9804. GENERAL EXCEPTIONS.
``(a) Exception for Certain Plans.--The requirements of
this chapter shall not apply to--
``(1) any governmental plan, and
``(2) any group health plan for any plan year if,
on the first day of such plan year, such plan has less
than 2 participants who are current employees.
``(b) Exception for Certain Benefits.--The requirements of
this chapter shall not apply to any group health plan in
relation to its provision of excepted benefits described in
section 9805(c)(1).
``(c) Exception for Certain Benefits If Certain Conditions
Met.--
``(1) Limited, excepted benefits.--The requirements
of this chapter shall not apply to any group health
plan in relation to its provision of excepted benefits
described in section 9805(c)(2) if the benefits--
``(A) are provided under a separate policy,
certificate, or contract of insurance; or
``(B) are otherwise not an integral part of
the plan.
``(2) Noncoordinated, excepted benefits.--The
requirements of this chapter shall not apply to any
group health plan in relation to its provision of
excepted benefits described in section 9805(c)(3) if
all of the following conditions are met:
``(A) The benefits are provided under a
separate policy, certificate, or contract of
insurance.
``(B) There is no coordination between the
provision of such benefits and any exclusion of
benefits under any group health plan maintained
by the same plan sponsor.
``(C) Such benefits are paid with respect
to an event without regard to whether benefits
are provided with respect to such an event
under any group health plan maintained by the
same plan sponsor.
``(3) Supplemental excepted benefits.--The
requirements of this chapter shall not apply to any
group health plan in relation to its provision of
excepted benefits described in section 9805(c)(4) if
the benefits are provided under a separate policy,
certificate, or contract of insurance.
``SEC. 9805. DEFINITIONS.
``(a) Group Health Plan.--For purposes of this chapter, the
term `group health plan' has the meaning given to such term by
section 5000(b)(1).
``(b) Definitions Relating to Health Insurance.--For
purposes of this chapter--
``(1) Health insurance coverage.--
``(A) In general.--Except as provided in
subparagraph (B), the term `health insurance
coverage' means benefits consisting of medical
care (provided directly, through insurance or
reimbursement, or otherwise) under any hospital
or medical service policy or certificate,
hospital or medical service plan contract, or
health maintenance organization contract
offered by a health insurance issuer.
``(B) No application to certain excepted
benefits.--In applying subparagraph (A),
excepted benefits described in subsection
(c)(1) shall not be treated as benefits
consisting of medical care.
``(2) Health insurance issuer.--The term `health
insurance issuer' means an insurance company, insurance
service, or insurance organization (including a health
maintenance organization, as defined in paragraph (3))
which is licensed to engage in the business of
insurance in a State and which is subject to State law
which regulates insurance (within the meaning of
section 514(b)(2) of the Employee Retirement Income
Security Act of 1974, as in effect on the date of the
enactment of this section). Such term does not include
a group health plan.
``(3) Health maintenance organization.--The term
`health maintenance organization' means--
``(A) a Federally qualified health
maintenance organization (as defined in section
1301(a) of the Public Health Service Act (42
U.S.C. 300e(a))),
``(B) an organization recognized under
State law as a health maintenance organization,
or
``(C) a similar organization regulated
under State law for solvency in the same manner
and to the same extent as such a health
maintenance organization.
``(c) Excepted Benefits.--For purposes of this chapter, the
term `excepted benefits' means benefits under one or more (or
any combination thereof) of the following:
``(1) Benefits not subject to requirements.--
``(A) Coverage only for accident, or
disability income insurance, or any combination
thereof.
``(B) Coverage issued as a supplement to
liability insurance.
``(C) Liability insurance, including
general liability insurance and automobile
liability insurance.
``(D) Workers' compensation or similar
insurance.
``(E) Automobile medical payment insurance.
``(F) Credit-only insurance.
``(G) Coverage for on-site medical clinics.
``(H) Other similar insurance coverage,
specified in regulations, under which benefits
for medical care are secondary or incidental to
other insurance benefits.
``(2) Benefits not subject to requirements if
offered separately.--
``(A) Limited scope dental or vision
benefits.
``(B) Benefits for long-term care, nursing
home care, home health care, community-based
care, or any combination thereof.
``(C) Such other similar, limited benefits
as are specified in regulations.
``(3) Benefits not subject to requirements if
offered as independent, noncoordinated benefits.--
``(A) Coverage only for a specified disease
or illness.
``(B) Hospital indemnity or other fixed
indemnity insurance.
``(4) Benefits not subject to requirements if
offered as separate insurance policy.--Medicare
supplemental health insurance (as defined under section
1882(g)(1) of the Social Security Act), coverage
supplemental to the coverage provided under chapter 55
of title 10, United States Code, and similar
supplemental coverage provided to coverage under a
group health plan.
``(d) Other Definitions.--For purposes of this chapter--
``(1) COBRA continuation provision.--The term
`COBRA continuation provision' means any of the
following:
``(A) Section 4980B, other than subsection
(f)(1) thereof insofar as it relates to
pediatric vaccines.
``(B) Part 6 of subtitle B of title I of
the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1161 et seq.), other than
section 609 of such Act.
``(C) Title XXII of the Public Health
Service Act.
``(2) Governmental plan.--The term `governmental
plan' has the meaning given such term by section
414(d).
``(3) Medical care.--The term `medical care' has
the meaning given such term by section 213(d)
determined without regard to--
``(A) paragraph (1)(C) thereof, and
``(B) so much of paragraph (1)(D) thereof
as relates to qualified long-term care
insurance.
``(4) Network plan.--The term `network plan' means
health insurance coverage of a health insurance issuer
under which the financing and delivery of medical care
are provided, in whole or in part, through a defined
set of providers under contract with the issuer.
``(5) Placed for adoption defined.--The term
`placement', or being `placed', for adoption, in
connection with any placement for adoption of a child
with any person, means the assumption and retention by
such person of a legal obligation for total or partial
support of such child in anticipation of adoption of
such child. The child's placement with such person
terminates upon the termination of such legal
obligation.
``SEC. 9806. REGULATIONS.
``The Secretary, consistent with section 104 of the Health
Care Portability and Accountability Act of 1996, may promulgate
such regulations as may be necessary or appropriate to carry
out the provisions of this chapter. The Secretary may
promulgate any interim final rules as the Secretary determines
are appropriate to carry out this chapter.''
(b) Clerical Amendment.--The table of subtitles of such
Code is amended by adding at the end the following new item:
``Subtitle K. Group health plan portability, access, and
renewability requirements.''
(c) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to plan years beginning after June
30, 1997.
(2) Determination of creditable coverage.--
(A) Period of coverage.--
(i) In general.--Subject to clause
(ii), no period before July 1, 1996,
shall be taken into account under
chapter 100 of the Internal Revenue
Code of 1986 (as added by this section)
in determining creditable coverage.
(ii) Special rule for certain
periods.--The Secretary of the
Treasury, consistent with section 104,
shall provide for a process whereby
individuals who need to establish
creditable coverage for periods before
July 1, 1996, and who would have such
coverage credited but for clause (i)
may be given credit for creditable
coverage for such periods through the
presentation of documents or other
means.
(B) Certifications, etc.--
(i) In general.--Subject to clauses
(ii) and (iii), subsection (e) of
section 9801 of the Internal Revenue
Code of 1986 (as added by this section)
shall apply to events occurring after
June 30, 1996.
(ii) No certification required to
be provided before june 1, 1997.--In no
case is a certification required to be
provided under such subsection before
June 1, 1997.
(iii) Certification only on written
request for events occurring before
october 1, 1996.--In the case of an
event occurring after June 30, 1996,
and before October 1, 1996, a
certification is not required to be
provided under such subsection unless
an individual (with respect to whom the
certification is otherwise required to
be made) requests such certification in
writing.
(C) Transitional rule.--In the case of an
individual who seeks to establish creditable
coverage for any period for which certification
is not required because it relates to an event
occurring before June 30, 1996--
(i) the individual may present
other credible evidence of such
coverage in order to establish the
period of creditable coverage; and
(ii) a group health plan and a
health insurance issuer shall not be
subject to any penalty or enforcement
action with respect to the plan's or
issuer's crediting (or not crediting)
such coverage if the plan or issuer has
sought to comply in good faith with the
applicable requirements under the
amendments made by this section.
(3) Special rule for collective bargaining
agreements.--Except as provided in paragraph (2), in
the case of a group health plan maintained pursuant to
1 or more collective bargaining agreements between
employee representatives and one or more employers
ratified before the date of the enactment of this Act,
the amendments made by this section shall not apply to
plan years beginning before the later of--
(A) the date on which the last of the
collective bargaining agreements relating to
the plan terminates (determined without regard
to any extension thereof agreed to after the
date of the enactment of this Act), or
(B) July 1, 1997.
For purposes of subparagraph (A), any plan amendment
made pursuant to a collective bargaining agreement
relating to the plan which amends the plan solely to
conform to any requirement added by this section shall
not be treated as a termination of such collective
bargaining agreement.
(4) Timely regulations.--The Secretary of the
Treasury, consistent with section 104, shall first
issue by not later than April 1, 1997, such regulations
as may be necessary to carry out the amendments made by
this section.
(5) Limitation on actions.--No enforcement action
shall be taken, pursuant to the amendments made by this
section, against a group health plan or health
insurance issuer with respect to a violation of a
requirement imposed by such amendments before January
1, 1998, or, if later, the date of issuance of
regulations referred to in paragraph (4), if the plan
or issuer has sought to comply in good faith with such
requirements.
SEC. 402. PENALTY ON FAILURE TO MEET CERTAIN GROUP HEALTH PLAN
REQUIREMENTS.
(a) In General.--Chapter 43 of the Internal Revenue Code of
1986 (relating to qualified pension, etc., plans) is amended by
adding after section 4980C the following new section:
``SEC. 4980D. FAILURE TO MEET CERTAIN GROUP HEALTH PLAN REQUIREMENTS.
``(a) General Rule.--There is hereby imposed a tax on any
failure of a group health plan to meet the requirements of
chapter 100 (relating to group health plan portability, access,
and renewability requirements).
``(b) Amount of Tax.--
``(1) In general.--The amount of the tax imposed by
subsection (a) on any failure shall be $100 for each
day in the noncompliance period with respect to each
individual to whom such failure relates.
``(2) Noncompliance period.--For purposes of this
section, the term `noncompliance period' means, with
respect to any failure, the period--
``(A) beginning on the date such failure
first occurs, and
``(B) ending on the date such failure is
corrected.
``(3) Minimum tax for noncompliance period where
failure discovered after notice of examination.--
Notwithstanding paragraphs (1) and (2) of subsection
(c)--
``(A) In general.--In the case of 1 or more
failures with respect to an individual--
``(i) which are not corrected
before the date a notice of examination
of income tax liability is sent to the
employer, and
``(ii) which occurred or continued
during the period under examination,
the amount of tax imposed by subsection (a) by
reason of such failures with respect to such
individual shall not be less than the lesser of
$2,500 or the amount of tax which would be
imposed by subsection (a) without regard to
such paragraphs.
``(B) Higher minimum tax where violations
are more than de minimis.--To the extent
violations for which any person is liable under
subsection (e) for any year are more than de
minimis, subparagraph (A) shall be applied by
substituting `$15,000' for `$2,500' with
respect to such person.
``(C) Exception for church plans.--This
paragraph shall not apply to any failure under
a church plan (as defined in section 414(e)).
``(c) Limitations on Amount of Tax.--
``(1) Tax not to apply where failure not discovered
exercising reasonable diligence.--No tax shall be
imposed by subsection (a) on any failure during any
period for which it is established to the satisfaction
of the Secretary that the person otherwise liable for
such tax did not know, and exercising reasonable
diligence would not have known, that such failure
existed.
``(2) Tax not to apply to failures corrected within
certain periods.--No tax shall be imposed by subsection
(a) on any failure if--
``(A) such failure was due to reasonable
cause and not to willful neglect, and
``(B)(i) in the case of a plan other than a
church plan (as defined in section 414(e)),
such failure is corrected during the 30-day
period beginning on the 1st date the person
otherwise liable for such tax knew, or
exercising reasonable diligence would have
known, that such failure existed, and
``(ii) in the case of a church plan (as so
defined), such failure is corrected before the
close of the correction period (determined
under the rules of section 414(e)(4)(C)).
``(3) Overall limitation for unintentional
failures.--In the case of failures which are due to
reasonable cause and not to willful neglect--
``(A) Single employer plans.--
``(i) In general.--In the case of
failures with respect to plans other
than specified multiple employer health
plans, the tax imposed by subsection
(a) for failures during the taxable
year of the employer shall not exceed
the amount equal to the lesser of--
``(I) 10 percent of the
aggregate amount paid or
incurred by the employer (or
predecessor employer) during
the preceding taxable year for
group health plans, or
``(II) $500,000.
``(ii) Taxable years in the case of
certain controlled groups.--For
purposes of this subparagraph, if not
all persons who are treated as a single
employer for purposes of this section
have the same taxable year, the taxable
years taken into account shall be
determined under principles similar to
the principles of section 1561.
``(B) Specified multiple employer health
plans.--
``(i) In general.--In the case of
failures with respect to a specified
multiple employer health plan, the tax
imposed by subsection (a) for failures
during the taxable year of the trust
forming part of such plan shall not
exceed the amount equal to the lesser
of--
``(I) 10 percent of the
amount paid or incurred by such
trust during such taxable year
to provide medical care (as
defined in section 9805(d)(3))
directly or through insurance,
reimbursement, or otherwise, or
``(II) $500,000.
For purposes of the preceding sentence,
all plans of which the same trust forms
a part shall be treated as 1 plan.
``(ii) Special rule for employers
required to pay tax.--If an employer is
assessed a tax imposed by subsection
(a) by reason of a failure with respect
to a specified multiple employer health
plan, the limit shall be determined
under subparagraph (A) (and not under
this subparagraph) and as if such plan
were not a specified multiple employer
health plan.
``(4) Waiver by secretary.--In the case of a
failure which is due to reasonable cause and not to
willful neglect, the Secretary may waive part or all of
the tax imposed by subsection (a) to the extent that
the payment of such tax would be excessive relative to
the failure involved.
``(d) Tax Not To Apply to Certain Insured Small Employer
Plans.--
``(1) In general.--In the case of a group health
plan of a small employer which provides health
insurance coverage solely through a contract with a
health insurance issuer, no tax shall be imposed by
this section on the employer on any failure which is
solely because of the health insurance coverage offered
by such issuer.
``(2) Small employer.--
``(A) In general.--For purposes of
paragraph (1), the term `small employer' means,
with respect to a calendar year and a plan
year, an employer who employed an average of at
least 2 but not more than 50 employees on
business days during the preceding calendar
year and who employs at least 2 employees on
the first day of the plan year. For purposes of
the preceding sentence, all persons treated as
a single employer under subsection (b), (c),
(m), or (o) of section 414 shall be treated as
1 employer.
``(B) Employers not in existence in
preceding year.--In the case of an employer
which was not in existence throughout the
preceding calendar year, the determination of
whether such employer is a small employer shall
be based on the average number of employees
that it is reasonably expected such employer
will employ on business days in the current
calendar year.
``(C) Predecessors.--Any reference in this
paragraph to an employer shall include a
reference to any predecessor of such employer.
``(3) Health insurance coverage; health insurance
issuer.--For purposes of paragraph (1), the terms
`health insurance coverage' and `health insurance
issuer' have the respective meanings given such terms
by section 9805.
``(e) Liability for Tax.--The following shall be liable for
the tax imposed by subsection (a) on a failure:
``(1) Except as otherwise provided in this
subsection, the employer.
``(2) In the case of a multiemployer plan, the
plan.
``(3) In the case of a failure under section 9803
(relating to guaranteed renewability) with respect to a
plan described in subsection (f)(2)(B), the plan.
``(f) Definitions.--For purposes of this section--
``(1) Group health plan.--The term `group health
plan' has the meaning given such term by section
9805(a).
``(2) Specified multiple employer health plan.--The
term `specified multiple employer health plan' means a
group health plan which is--
``(A) any multiemployer plan, or
``(B) any multiple employer welfare
arrangement (as defined in section 3(40) of the
Employee Retirement Income Secrurity Act of
1974, as in effect on the date of the enactment
of this section).
``(3) Correction.--A failure of a group health plan
shall be treated as corrected if--
``(A) such failure is retroactively undone
to the extent possible, and
``(B) the person to whom the failure
relates is placed in a financial position which
is as good as such person would have been in
had such failure not occurred.''
(b) Clerical Amendment.--The table of sections for chapter
43 of such Code is amended by adding after the item relating to
section 4980C the following new item:
``Sec. 4980D. Failure to meet certain group health plan
requirements.''
(c) Effective Date.--The amendments made by this section
shall apply to failures under chapter 100 of the Internal
Revenue Code of 1986 (as added by section 401 of this Act).
Subtitle B--Clarification of Certain Continuation Coverage Requirements
SEC. 421. COBRA CLARIFICATIONS.
(a) Public Health Service Act.--
(1) Period of coverage.--Section 2202(2) of the
Public Health Service Act (42 U.S.C. 300bb-2(2)) is
amended--
(A) in subparagraph (A)--
(i) by transferring the sentence
immediately preceding clause (iv) so as
to appear immediately following such
clause (iv); and
(ii) in the last sentence (as so
transferred)--
(I) by striking ``an
individual'' and inserting ``a
qualified beneficiary'';
(II) by striking ``at the
time of a qualifying event
described in section 2203(2)''
and inserting ``at any time
during the first 60 days of
continuation coverage under
this title'';
(III) by striking ``with
respect to such event,''; and
(IV) by inserting ``(with
respect to all qualified
beneficiaries)'' after ``29
months'';
(B) in subparagraph (D)(i), by inserting
before ``, or'' the following: ``(other than
such an exclusion or limitation which does not
apply to (or is satisfied by) such beneficiary
by reason of chapter 100 of the Internal
Revenue Code of 1986, part 7 of subtitle B of
title I of the Employee Retirement Income
Security Act of 1974, or title XXVII of this
Act)''; and
(C) in subparagraph (E), by striking ``at
the time of a qualifying event described in
section 2203(2)'' and inserting ``at any time
during the first 60 days of continuation
coverage under this title''.
(2) Notices.--Section 2206(3) of the Public Health
Service Act (42 U.S.C. 300bb-6(3)) is amended by
striking ``at the time of a qualifying event described
in section 2203(2)'' and inserting ``at any time during
the first 60 days of continuation coverage under this
title''.
(3) Birth or adoption of a child.--Section
2208(3)(A) of the Public Health Service Act (42 U.S.C.
300bb-8(3)(A)) is amended by adding at the end thereof
the following new flush sentence:
``Such term shall also include a child who is born to
or placed for adoption with the covered employee during
the period of continuation coverage under this
title.''.
(b) Employee Retirement Income Security Act of 1974.--
(1) Period of coverage.--Section 602(2) of the
Employee Retirement Income Security Act of 1974 (29
U.S.C. 1162(2)) is amended--
(A) in the last sentence of subparagraph
(A)--
(i) by striking ``an individual''
and inserting ``a qualified
beneficiary'';
(ii) by striking ``at the time of a
qualifying event described in section
603(2)'' and inserting ``at any time
during the first 60 days of
continuation coverage under this
part'';
(iii) by striking ``with respect to
such event''; and
(iv) by inserting ``(with respect
to all qualified beneficiaries)'' after
``29 months'';
(B) in subparagraph (D)(i), by inserting
before ``, or'' the following: ``(other than
such an exclusion or limitation which does not
apply to (or is satisfied by) such beneficiary
by reason of chapter 100 of the Internal
Revenue Code of 1986, part 7 of this subtitle,
or title XXVII of the Public Health Service
Act)''; and
(C) in subparagraph (E), by striking ``at
the time of a qualifying event described in
section 603(2)'' and inserting ``at any time
during the first 60 days of continuation
coverage under this part''.
(2) Notices.--Section 606(a)(3) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C.
1166(a)(3)) is amended by striking ``at the time of a
qualifying event described in section 603(2)'' and
inserting ``at any time during the first 60 days of
continuation coverage under this part''.
(3) Birth or adoption of a child.--Section
607(3)(A) of the Employee Retirement Income Security
Act of 1974 (29 U.S.C. 1167(3)) is amended by adding at
the end thereof the following new flush sentence:
``Such term shall also include a child who is born to
or placed for adoption with the covered employee during
the period of continuation coverage under this part.''.
(c) Internal Revenue Code of 1986.--
(1) Period of coverage.--Section 4980B(f)(2)(B) of
the Internal Revenue Code of 1986 is amended--
(A) in the last sentence of clause (i)--
(i) by striking ``at the time of a
qualifying event described in paragraph
(3)(B)'' and inserting ``at any time
during the first 60 days of
continuation coverage under this
section'';
(ii) by striking ``with respect to
such event''; and
(iii) by inserting ``(with respect
to all qualified beneficiaries)'' after
``29 months'';
(B) in clause (iv)(I), by inserting before
``, or'' the following: ``(other than such an
exclusion or limitation which does not apply to
(or is satisfied by) such beneficiary by reason
of chapter 100 of this title, part 7 of
subtitle B of title I of the Employee
Retirement Income Security Act of 1974, or
title XXVII of the Public Health Service
Act)''; and
(C) in clause (v), by striking ``at the
time of a qualifying event described in
paragraph (3)(B)'' and inserting ``at any time
during the first 60 days of continuation
coverage under this section''.
(2) Notices.--Section 4980B(f)(6)(C) of the
Internal Revenue Code of 1986 is amended by striking
``at the time of a qualifying event described in
paragraph (3)(B)'' and inserting ``at any time during
the first 60 days of continuation coverage under this
section''.
(3) Birth or adoption of a child.--Section
4980B(g)(1)(A) of the Internal Revenue Code of 1986 is
amended by adding at the end thereof the following new
flush sentence:
``Such term shall also include a child
who is born to or placed for adoption
with the covered employee during the
period of continuation coverage under
this section.''.
(d) Effective Date.--The amendments made by this section
shall become effective on January 1, 1997, regardless of
whether the qualifying event occurred before, on, or after such
date.
(e) Notification of Changes.--Not later than November 1,
1996, each group health plan (covered under title XXII of the
Public Health Service Act, part 6 of subtitle B of title I of
the Employee Retirement Income Security Act of 1974, and
section 4980B(f) of the Internal Revenue Code of 1986) shall
notify each qualified beneficiary who has elected continuation
coverage under such title, part or section of the amendments
made by this section.
TITLE V--REVENUE OFFSETS
SEC. 500. AMENDMENT OF 1986 CODE.
Except as otherwise expressly provided, whenever in this
title an amendment or repeal is expressed in terms of an
amendment to, or repeal of, a section or other provision, the
reference shall be considered to be made to a section or other
provision of the Internal Revenue Code of 1986.
Subtitle A--Company-Owned Life Insurance
SEC. 501. DENIAL OF DEDUCTION FOR INTEREST ON LOANS WITH RESPECT TO
COMPANY-OWNED LIFE INSURANCE.
(a) In General.--Paragraph (4) of section 264(a) is
amended--
(1) by inserting ``, or any endowment or annuity
contracts owned by the taxpayer covering any
individual,'' after ``the life of any individual'', and
(2) by striking all that follows ``carried on by
the taxpayer'' and inserting a period.
(b) Exception for Contracts Relating to Key Persons;
Permissible Interest Rates.--Section 264 is amended--
(1) by striking ``Any'' in subsection (a)(4) and
inserting ``Except as provided in subsection (d),
any'', and
(2) by adding at the end the following new
subsection:
``(d) Special Rules For Application of Subsection (a)(4).--
``(1) Exception for key persons.--Subsection (a)(4)
shall not apply to any interest paid or accrued on any
indebtedness with respect to policies or contracts
covering an individual who is a key person to the
extent that the aggregate amount of such indebtedness
with respect to policies and contracts covering such
individual does not exceed $50,000.
``(2) Interest rate cap on key persons and pre-1986
contracts.--
``(A) In general.--No deduction shall be
allowed by reason of paragraph (1) or the last
sentence of subsection (a) with respect to
interest paid or accrued for any month
beginning after December 31, 1995, to the
extent the amount of such interest exceeds the
amount which would have been determined if the
applicable rate of interest were used for such
month.
``(B) Applicable rate of interest.--For
purposes of subparagraph (A)--
``(i) In general.--The applicable
rate of interest for any month is the
rate of interest described as Moody's
Corporate Bond Yield Average-Monthly
Average Corporates as published by
Moody's Investors Service, Inc., or any
successor thereto, for such month.
``(ii) Pre-1986 contracts.--In the
case of indebtedness on a contract
purchased on or before June 20, 1986--
``(I) which is a contract
providing a fixed rate of
interest, the applicable rate
of interest for any month shall
be the Moody's rate described
in clause (i) for the month in
which the contract was
purchased, or
``(II) which is a contract
providing a variable rate of
interest, the applicable rate
of interest for any month in an
applicable period shall be such
Moody's rate for the third
month preceding the first month
in such period.
For purposes of subclause (II), the
taxpayer shall elect an applicable
period for such contract on its return
of tax imposed by this chapter for its
first taxable year ending on or after
October 13, 1995. Such applicable
period shall be for any number of
months (not greater than 12) specified
in the election and may not be changed
by the taxpayer without the consent of
the Secretary.
``(3) Key person.--For purposes of paragraph (1),
the term `key person' means an officer or 20-percent
owner, except that the number of individuals who may be
treated as key persons with respect to any taxpayer
shall not exceed the greater of--
``(A) 5 individuals, or
``(B) the lesser of 5 percent of the total
officers and employees of the taxpayer or 20
individuals.
``(4) 20-percent owner.--For purposes of this
subsection, the term `20-percent owner' means--
``(A) if the taxpayer is a corporation, any
person who owns directly 20 percent or more of
the outstanding stock of the corporation or
stock possessing 20 percent or more of the
total combined voting power of all stock of the
corporation, or
``(B) if the taxpayer is not a corporation,
any person who owns 20 percent or more of the
capital or profits interest in the employer.
``(5) Aggregation rules.--
``(A) In general.--For purposes of
paragraph (4)(A) and applying the $50,000
limitation in paragraph (1)--
``(i) all members of a controlled
group shall be treated as 1 taxpayer,
and
``(ii) such limitation shall be
allocated among the members of such
group in such manner as the Secretary
may prescribe.
``(B) Controlled group.--For purposes of
this paragraph, all persons treated as a single
employer under subsection (a) or (b) of section
52 or subsection (m) or (o) of section 414
shall be treated as members of a controlled
group.''.
(c) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to interest paid or accrued after
October 13, 1995.
(2) Transition rule for existing indebtedness.--
(A) In general.--In the case of--
(i) indebtedness incurred before
January 1, 1996, or
(ii) indebtedness incurred before
January 1, 1997 with respect to any
contract or policy entered into in 1994
or 1995,
the amendments made by this section shall not
apply to qualified interest paid or accrued on
such indebtedness after October 13, 1995, and
before January 1, 1999.
(B) Qualified interest.--For purposes of
subparagraph (A), the qualified interest with
respect to any indebtedness for any month is
the amount of interest (otherwise deductible)
which would be paid or accrued for such month
on such indebtedness if--
(i) in the case of any interest
paid or accrued after December 31,
1995, indebtedness with respect to no
more than 20,000 insured individuals
were taken into account, and
(ii) the lesser of the following
rates of interest were used for such
month:
(I) The rate of interest
specified under the terms of
the indebtedness as in effect
on October 13, 1995 (and
without regard to modification
of such terms after such date).
(II) The applicable
percentage of the rate of
interest described as Moody's
Corporate Bond Yield Average-
Monthly Average Corporates as
published by Moody's Investors
Service, Inc., or any successor
thereto, for such month.
For purposes of clause (i), all persons treated
as a single employer under subsection (a) or
(b) of section 52 of the Internal Revenue Code
of 1986 or subsection (m) or (o) of section 414
of such Code shall be treated as 1 person.
Subclause (II) of clause (ii) shall not apply
to any month before January 1, 1996.
(C) Applicable percentage.--For purposes of
subparagraph (B), the applicable percentage is
as follows:
For calendar year: The percentage is:
1996............................................ 100 percent
1997............................................ 90 percent
1998............................................ 80 percent.
(3) Special rule for grandfathered contracts.--This
section shall not apply to any contract purchased on or
before June 20, 1986, except that section 264(d)(2) of
the Internal Revenue Code of 1986 shall apply to
interest paid or accrued after October 13, 1995.
(d) Spread of Income Inclusion on Surrender, Etc. of
Contracts.--
(1) In general.--If any amount is received under
any life insurance policy or endowment or annuity
contract described in paragraph (4) of section 264(a)
of the Internal Revenue Code of 1986--
(A) on the complete surrender, redemption,
or maturity of such policy or contract during
calendar year 1996, 1997, or 1998, or
(B) in full discharge during any such
calendar year of the obligation under the
policy or contract which is in the nature of a
refund of the consideration paid for the policy
or contract,
then (in lieu of any other inclusion in gross income)
such amount shall be includible in gross income ratably
over the 4-taxable year period beginning with the
taxable year such amount would (but for this paragraph)
be includible. The preceding sentence shall only apply
to the extent the amount is includible in gross income
for the taxable year in which the event described in
subparagraph (A) or (B) occurs.
(2) Special rules for applying section 264.--A
contract shall not be treated as--
(A) failing to meet the requirement of
section 264(c)(1) of the Internal Revenue Code
of 1986, or
(B) a single premium contract under section
264(b)(1) of such Code,
solely by reason of an occurrence described in
subparagraph (A) or (B) of paragraph (1) of this
subsection or solely by reason of no additional
premiums being received under the contract by reason of
a lapse occurring after October 13, 1995.
(3) Special rule for deferred acquisition costs.--
In the case of the occurrence of any event described in
subparagraph (A) or (B) of paragraph (1) of this
subsection with respect to any policy or contract--
(A) section 848 of the Internal Revenue
Code of 1986 shall not apply to the unamortized
balance (if any) of the specified policy
acquisition expenses attributable to such
policy or contract immediately before the
insurance company's taxable year in which such
event occurs, and
(B) there shall be allowed as a deduction
to such company for such taxable year under
chapter 1 of such Code an amount equal to such
unamortized balance.
Subtitle B--Treatment of Individuals Who Lose United States Citizenship
SEC. 511. REVISION OF INCOME, ESTATE, AND GIFT TAXES ON INDIVIDUALS WHO
LOSE UNITED STATES CITIZENSHIP.
(a) In General.--Subsection (a) of section 877 is amended
to read as follows:
``(a) Treatment of Expatriates.--
``(1) In general.--Every nonresident alien
individual who, within the 10-year period immediately
preceding the close of the taxable year, lost United
States citizenship, unless such loss did not have for 1
of its principal purposes the avoidance of taxes under
this subtitle or subtitle B, shall be taxable for such
taxable year in the manner provided in subsection (b)
if the tax imposed pursuant to such subsection exceeds
the tax which, without regard to this section, is
imposed pursuant to section 871.
``(2) Certain individuals treated as having tax
avoidance purpose.--For purposes of paragraph (1), an
individual shall be treated as having a principal
purpose to avoid such taxes if--
``(A) the average annual net income tax (as
defined in section 38(c)(1)) of such individual
for the period of 5 taxable years ending before
the date of the loss of United States
citizenship is greater than $100,000, or
``(B) the net worth of the individual as of
such date is $500,000 or more.
In the case of the loss of United States citizenship in
any calendar year after 1996, such $100,000 and
$500,000 amounts shall be increased by an amount equal
to such dollar amount multiplied by the cost-of-living
adjustment determined under section 1(f)(3) for such
calendar year by substituting `1994' for `1992' in
subparagraph (B) thereof. Any increase under the
preceding sentence shall be rounded to the nearest
multiple of $1,000.''.
(b) Exceptions.--
(1) In general.--Section 877 is amended by striking
subsection (d), by redesignating subsection (c) as
subsection (d), and by inserting after subsection (b)
the following new subsection:
``(c) Tax Avoidance Not Presumed in Certain Cases.--
``(1) In general.--Subsection (a)(2) shall not
apply to an individual if--
``(A) such individual is described in a
subparagraph of paragraph (2) of this
subsection, and
``(B) within the 1-year period beginning on
the date of the loss of United States
citizenship, such individual submits a ruling
request for the Secretary's determination as to
whether such loss has for 1 of its principal
purposes the avoidance of taxes under this
subtitle or subtitle B.
``(2) Individuals described.--
``(A) Dual citizenship, etc.--An individual
is described in this subparagraph if--
``(i) the individual became at
birth a citizen of the United States
and a citizen of another country and
continues to be a citizen of such other
country, or
``(ii) the individual becomes (not
later than the close of a reasonable
period after loss of United States
citizenship) a citizen of the country
in which--
``(I) such individual was
born,
``(II) if such individual
is married, such individual's
spouse was born, or
``(III) either of such
individual's parents were born.
``(B) Long-term foreign residents.--An
individual is described in this subparagraph
if, for each year in the 10-year period ending
on the date of loss of United States
citizenship, the individual was present in the
United States for 30 days or less. The rule of
section 7701(b)(3)(D)(ii) shall apply for
purposes of this subparagraph.
``(C) Renunciation upon reaching age of
majority.--An individual is described in this
subparagraph if the individual's loss of United
States citizenship occurs before such
individual attains age 18\1/2\.
``(D) Individuals specified in
regulations.--An individual is described in
this subparagraph if the individual is
described in a category of individuals
prescribed by regulation by the Secretary.''
(2) Technical amendment.--Paragraph (1) of section
877(b) of such Code is amended by striking ``subsection
(c)'' and inserting ``subsection (d)''.
(c) Treatment of Property Disposed of in Nonrecognition
Transactions; Treatment of Distributions From Certain
Controlled Foreign Corporations.--Subsection (d) of section
877, as redesignated by subsection (b), is amended to read as
follows:
``(d) Special Rules for Source, Etc.--For purposes of
subsection (b)--
``(1) Source rules.--The following items of gross
income shall be treated as income from sources within
the United States:
``(A) Sale of property.--Gains on the sale
or exchange of property (other than stock or
debt obligations) located in the United States.
``(B) Stock or debt obligations.--Gains on
the sale or exchange of stock issued by a
domestic corporation or debt obligations of
United States persons or of the United States,
a State or political subdivision thereof, or
the District of Columbia.
``(C) Income or gain derived from
controlled foreign corporation.--Any income or
gain derived from stock in a foreign
corporation but only--
``(i) if the individual losing
United States citizenship owned (within
the meaning of section 958(a)), or is
considered as owning (by applying the
ownership rules of section 958(b)), at
any time during the 2-year period
ending on the date of the loss of
United States citizenship, more than 50
percent of--
``(I) the total combined
voting power of all classes of
stock entitled to vote of such
corporation, or
``(II) the total value of
the stock of such corporation,
and
``(ii) to the extent such income or
gain does not exceed the earnings and
profits attributable to such stock
which were earned or accumulated before
the loss of citizenship and during
periods that the ownership requirements
of clause (i) are met.
``(2) Gain recognition on certain exchanges.--
``(A) In general.--In the case of any
exchange of property to which this paragraph
applies, notwithstanding any other provision of
this title, such property shall be treated as
sold for its fair market value on the date of
such exchange, and any gain shall be recognized
for the taxable year which includes such date.
``(B) Exchanges to which paragraph
applies.--This paragraph shall apply to any
exchange during the 10-year period described in
subsection (a) if--
``(i) gain would not (but for this
paragraph) be recognized on such
exchange in whole or in part for
purposes of this subtitle,
``(ii) income derived from such
property was from sources within the
United States (or, if no income was so
derived, would have been from such
sources), and
``(iii) income derived from the
property acquired in the exchange would
be from sources outside the United
States.
``(C) Exception.--Subparagraph (A) shall
not apply if the individual enters into an
agreement with the Secretary which specifies
that any income or gain derived from the
property acquired in the exchange (or any other
property which has a basis determined in whole
or part by reference to such property) during
such 10-year period shall be treated as from
sources within the United States. If the
property transferred in the exchange is
disposed of by the person acquiring such
property, such agreement shall terminate and
any gain which was not recognized by reason of
such agreement shall be recognized as of the
date of such disposition.
``(D) Secretary may extend period.--To the
extent provided in regulations prescribed by
the Secretary, subparagraph (B) shall be
applied by substituting the 15-year period
beginning 5 years before the loss of United
States citizenship for the 10-year period
referred to therein.
``(E) Secretary may require recognition of
gain in certain cases.--To the extent provided
in regulations prescribed by the Secretary--
``(i) the removal of appreciated
tangible personal property from the
United States, and
``(ii) any other occurrence which
(without recognition of gain) results
in a change in the source of the income
or gain from property from sources
within the United States to sources
outside the United States,
shall be treated as an exchange to which this
paragraph applies.
``(3) Substantial diminishing of risks of
ownership.--For purposes of determining whether this
section applies to any gain on the sale or exchange of
any property, the running of the 10-year period
described in subsection (a) shall be suspended for any
period during which the individual's risk of loss with
respect to the property is substantially diminished
by--
``(A) the holding of a put with respect to
such property (or similar property),
``(B) the holding by another person of a
right to acquire the property, or
``(C) a short sale or any other
transaction.
``(4) Treatment of property contributed to
controlled foreign corporations.--
``(A) In general.--If--
``(i) an individual losing United
States citizenship contributes property
to any corporation which, at the time
of the contribution, is described in
subparagraph (B), and
``(ii) income derived from such
property was from sources within the
United States (or, if no income was so
derived, would have been from such
sources),
during the 10-year period referred to in
subsection (a), any income or gain on such
property (or any other property which has a
basis determined in whole or part by reference
to such property) received or accrued by the
corporation shall be treated as received or
accrued directly by such individual and not by
such corporation. The preceding sentence shall
not apply to the extent the property has been
treated under subparagraph (C) as having been
sold by such corporation.
``(B) Corporation described.--A corporation
is described in this subparagraph with respect
to an individual if, were such individual a
United States citizen--
``(i) such corporation would be a
controlled foreign corporation (as
defined in 957), and
``(ii) such individual would be a
United States shareholder (as defined
in section 951(b)) with respect to such
corporation.
``(C) Disposition of stock in
corporation.--If stock in the corporation
referred to in subparagraph (A) (or any other
stock which has a basis determined in whole or
part by reference to such stock) is disposed of
during the 10-year period referred to in
subsection (a) and while the property referred
to in subparagraph (A) is held by such
corporation, a pro rata share of such property
(determined on the basis of the value of such
stock) shall be treated as sold by the
corporation immediately before such
disposition.
``(D) Anti-abuse rules.--The Secretary
shall prescribe such regulations as may be
necessary to prevent the avoidance of the
purposes of this paragraph, including where--
``(i) the property is sold to the
corporation, and
``(ii) the property taken into
account under subparagraph (A) is sold
by the corporation.
``(E) Information reporting.--The Secretary
shall require such information reporting as is
necessary to carry out the purposes of this
paragraph.''
(d) Credit for Foreign Taxes Imposed on United States
Source Income.--
(1) Subsection (b) of section 877 is amended by
adding at the end the following new sentence: ``The tax
imposed solely by reason of this section shall be
reduced (but not below zero) by the amount of any
income, war profits, and excess profits taxes (within
the meaning of section 903) paid to any foreign country
or possession of the United States on any income of the
taxpayer on which tax is imposed solely by reason of
this section.''
(2) Subsection (a) of section 877, as amended by
subsection (a), is amended by inserting ``(after any
reduction in such tax under the last sentence of such
subsection)'' after ``such subsection''.
(e) Comparable Estate and Gift Tax Treatment.--
(1) Estate tax.--
(A) In general.--Subsection (a) of section
2107 is amended to read as follows:
``(a) Treatment of Expatriates.--
``(1) Rate of tax.--A tax computed in accordance
with the table contained in section 2001 is hereby
imposedon the transfer of the taxable estate,
determined as provided in section 2106, of every decedent nonresident
not a citizen of the United States if, within the 10-year period ending
with the date of death, such decedent lost United States citizenship,
unless such loss did not have for 1 of its principal purposes the
avoidance of taxes under this subtitle or subtitle A.
``(2) Certain individuals treated as having tax
avoidance purpose.--
``(A) In general.--For purposes of
paragraph (1), an individual shall be treated
as having a principal purpose to avoid such
taxes if such individual is so treated under
section 877(a)(2).
``(B) Exception.--Subparagraph (A) shall
not apply to a decedent meeting the
requirements of section 877(c)(1).''.
(B) Credit for foreign death taxes.--
Subsection (c) of section 2107 is amended by
redesignating paragraph (2) as paragraph (3)
and by inserting after paragraph (1) the
following new paragraph:
``(2) Credit for foreign death taxes.--
``(A) In general.--The tax imposed by
subsection (a) shall be credited with the
amount of any estate, inheritance, legacy, or
succession taxes actually paid to any foreign
country in respect of any property which is
included in the gross estate solely by reason
of subsection (b).
``(B) Limitation on credit.--The credit
allowed by subparagraph (A) for such taxes paid
to a foreign country shall not exceed the
lesser of--
``(i) the amount which bears the
same ratio to the amount of such taxes
actually paid to such foreign country
in respect of property included in the
gross estate as the value of the
property included in the gross estate
solely by reason of subsection (b)
bears to the value of all property
subjected to such taxes by such foreign
country, or
``(ii) such property's
proportionate share of the excess of--
``(I) the tax imposed by
subsection (a), over
``(II) the tax which would
be imposed by section 2101 but
for this section.
``(C) Proportionate share.--For purposes of
subparagraph (B), a property's proportionate
share is the percentage of the value of the
property which is included in the gross estate
solely by reason of subsection (b) bears to the
total value of the gross estate.''.
(C) Expansion of inclusion in gross estate
of stock of foreign corporations.--Paragraph
(2) of section 2107(b) is amended by striking
``more than 50 percent of'' and all that
follows and inserting ``more than 50 percent
of--
``(A) the total combined voting power of
all classes of stock entitled to vote of such
corporation, or
``(B) the total value of the stock of such
corporation,''.
(2) Gift tax.--
(A) In general.--Paragraph (3) of section
2501(a) is amended to read as follows:
``(3) Exception.--
``(A) Certain individuals.--Paragraph (2)
shall not apply in the case of a donor who,
within the 10-year period ending with the date
of transfer, lost United States citizenship,
unless such loss did not have for 1 of its
principal purposes the avoidance of taxes under
this subtitle or subtitle A.
``(B) Certain individuals treated as having
tax avoidance purpose.--For purposes of
subparagraph (A), an individual shall be
treated as having a principal purpose to avoid
such taxes if such individual is so treated
under section 877(a)(2).
``(C) Exception for certain individuals.--
Subparagraph (B) shall not apply to a decedent
meeting the requirements of section 877(c)(1).
``(D) Credit for foreign gift taxes.--The
tax imposed by this section solely by reason of
this paragraph shall be credited with the
amount of any gift tax actually paid to any
foreign country in respect of any gift which is
taxable under this section solely by reason of
this paragraph.''.
(f) Comparable Treatment of Lawful Permanent Residents Who
Cease To Be Taxed as Residents.--
(1) In general.--Section 877 is amended by
redesignating subsection (e) as subsection (f) and by
inserting after subsection (d) the following new
subsection:
``(e) Comparable Treatment of Lawful Permanent Residents
Who Cease To Be Taxed as Residents.--
``(1) In general.--Any long-term resident of the
United States who--
``(A) ceases to be a lawful permanent
resident of the United States (within the
meaning of section 7701(b)(6)), or
``(B) commences to be treated as a resident
of a foreign country under the provisions of a
tax treaty between the United States and the
foreign country and who does not waive the
benefits of such treaty applicable to residents
of the foreign country,
shall be treated for purposes of this section and
sections 2107, 2501, and 6039F in the same manner as if
such resident were a citizen of the United States who
lost United States citizenship on the date of such
cessation or commencement.
``(2) Long-term resident.--For purposes of this
subsection, the term `long-term resident' means any
individual (other than a citizen of the United States)
who is a lawful permanent resident of the United States
in at least 8 taxable years during the period of 15
taxable years ending with the taxable year during which
the event described in subparagraph (A) or (B) of
paragraph (1) occurs. For purposes of the preceding
sentence, an individual shall not be treated as a
lawful permanent resident for any taxable year if such
individual is treated as a resident of a foreign
country for the taxable year under the provisions of a
tax treaty between the United States and the foreign
country and does not waive the benefits of such treaty
applicable to residents of the foreign country.
``(3) Special rules.--
``(A) Exceptions not to apply.--Subsection
(c) shall not apply to an individual who is
treated as provided in paragraph (1).
``(B) Step-up in basis.--Solely for
purposes of determining any tax imposed by
reason of this subsection, property which was
held by the long-term resident on the date the
individual first became a resident of the
United States shall be treated as having a
basis on such date of not less than the fair
market value of such property on such date. The
preceding sentence shall not apply if the
individual elects not to have such sentence
apply. Such an election, once made, shall be
irrevocable.
``(4) Authority to exempt individuals.--This
subsection shall not apply to an individual who is
described in a category of individuals prescribed by
regulation by the Secretary.
``(5) Regulations.--The Secretary shall prescribe
such regulations as may be appropriate to carry out
this subsection, including regulations providing for
the application of this subsection in cases where an
alien individual becomes a resident of the United
States during the 10-year period after being treated as
provided in paragraph (1).''.
(2) Conforming amendments.--
(A) Section 2107 is amended by striking
subsection (d), by redesignating subsection (e)
as subsection (d), and by inserting after
subsection (d) (as so redesignated) the
following new subsection:
``(e) Cross Reference.--
``For comparable treatment of long-term lawful permanent
residents who ceased to be taxed as residents, see section
877(e).''.
(B) Paragraph (3) of section 2501(a) (as
amended by subsection (e)) is amended by adding
at the end the following new subparagraph:
``(E) Cross reference.--
``For comparable treatment of long-term lawful permanent
residents who ceased to be taxed as residents, see section
877(e).''.
(g) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to--
(A) individuals losing United States
citizenship (within the meaning of section 877
of the Internal Revenue Code of 1986) on or
after February 6, 1995, and
(B) long-term residents of the United
States with respect to whom an event described
in subparagraph (A) or (B) of section 877(e)(1)
of such Code occurs on or after February 6,
1995.
(2) Ruling requests.--In no event shall the 1-year
period referred to in section 877(c)(1)(B) of such
Code, as amended by this section, expire before the
date which is 90 days after the date of the enactment
of this Act.
(3) Special rule.--
(A) In general.--In the case of an
individual who performed an act of expatriation
specified in paragraph (1), (2), (3), or (4) of
section 349(a) of the Immigration and
Nationality Act (8 U.S.C. 1481(a)(1)-(4))
before February 6, 1995, but who did not, on or
before such date, furnish to the United States
Department of State a signed statement of
voluntary relinquishment of United States
nationality confirming the performance of such
act, the amendments made by this section and
section 512 shall apply to such individual
except that the 10-year period described in
section 877(a) of such Code shall not expire
before the end of the 10-year period beginning
on the date such statement is so furnished.
(B) Exception.--Subparagraph (A) shall not
apply if the individual establishes to the
satisfaction of the Secretary of the Treasury
that such loss of United States citizenship
occurred before February 6, 1994.
SEC. 512. INFORMATION ON INDIVIDUALS LOSING UNITED STATES CITIZENSHIP.
(a) In General.--Subpart A of part III of subchapter A of
chapter 61 is amended by inserting after section 6039E the
following new section:
``SEC. 6039F. INFORMATION ON INDIVIDUALS LOSING UNITED STATES
CITIZENSHIP.
``(a) In General.--Notwithstanding any other provision of
law, any individual who loses United States citizenship (within
the meaning of section 877(a)) shall provide a statement which
includes the information described in subsection (b). Such
statement shall be--
``(1) provided not later than the earliest date of
any act referred to in subsection (c), and
``(2) provided to the person or court referred to
in subsection (c) with respect to such act.
``(b) Information To Be Provided.--Information required
under subsection (a) shall include--
``(1) the taxpayer's TIN,
``(2) the mailing address of such individual's
principal foreign residence,
``(3) the foreign country in which such individual
is residing,
``(4) the foreign country of which such individual
is a citizen,
``(5) in the case of an individual having a net
worth of at least the dollar amount applicable under
section 877(a)(2)(B), information detailing the assets
and liabilities of such individual, and
``(6) such other information as the Secretary may
prescribe.
``(c) Acts Described.--For purposes of this section, the
acts referred to in this subsection are--
``(1) the individual's renunciation of his United
States nationality before a diplomatic or consular
officer of the United States pursuant to paragraph (5)
of section 349(a) of the Immigration and Nationality
Act (8 U.S.C. 1481(a)(5)),
``(2) the individual's furnishing to the United
States Department of State a signed statement of
voluntary relinquishment of United States nationality
confirming the performance of an act of expatriation
specified in paragraph (1), (2), (3), or (4) of section
349(a) of the Immigration and Nationality Act (8 U.S.C.
1481(a)(1)-(4)),
``(3) the issuance by the United States Department
of State of a certificate of loss of nationality to the
individual, or
``(4) the cancellation by a court of the United
States of a naturalized citizen's certificate of
naturalization.
``(d) Penalty.--Any individual failing to provide a
statement required under subsection (a) shall be subject to a
penalty for each year (of the 10-year period beginning on the
date of loss of United States citizenship) during any portion
of which such failure continues in an amount equal to the
greater of--
``(1) 5 percent of the tax required to be paid
under section 877 for the taxable year ending during
such year, or
``(2) $1,000,
unless it is shown that such failure is due to reasonable cause
and not to willful neglect.
``(e) Information To Be Provided to Secretary.--
Notwithstanding any other provision of law--
``(1) any Federal agency or court which collects
(or is required to collect) the statement under
subsection (a) shall provide to the Secretary--
``(A) a copy of any such statement, and
``(B) the name (and any other identifying
information) of any individual refusing to
comply with the provisions of subsection (a),
``(2) the Secretary of State shall provide to the
Secretary a copy of each certificate as to the loss of
American nationality under section 358 of the
Immigration and Nationality Act which is approved by
the Secretary of State, and
``(3) the Federal agency primarily responsible for
administering the immigration laws shall provide to the
Secretary the name of each lawful permanent resident of
the United States (within the meaning of section
7701(b)(6)) whose status as such has been revoked or
has been administratively or judicially determined to
have been abandoned.
Notwithstanding any other provision of law, not later than 30
days after the close of each calendar quarter, the Secretary
shall publish in the Federal Register the name of each
individual losing United States citizenship (within the meaning
of section 877(a)) with respect to whom the Secretary receives
information under the preceding sentence during such quarter.
``(f) Reporting by Long-Term Lawful Permanent Residents Who
Cease To Be Taxed as Residents.--In lieu of applying the last
sentence of subsection (a), any individual who is required to
provide a statement under this section by reason of section
877(e)(1) shall provide such statement with the return of tax
imposed by chapter 1 for the taxable year during which the
event described in such section occurs.
``(g) Exemption.--The Secretary may by regulations exempt
any class of individuals from the requirements of this section
if he determines that applying this section to such individuals
is not necessary to carry out the purposes of this section.''.
(b) Clerical Amendment.--The table of sections for such
subpart A is amended by inserting after the item relating to
section 6039E the following new item:
``Sec. 6039F. Information on individuals losing United States
citizenship.''.
(c) Effective Date.--The amendments made by this section
shall apply to--
(1) individuals losing United States citizenship
(within the meaning of section 877 of the Internal
Revenue Code of 1986) on or after February 6, 1995, and
(2) long-term residents of the United States with
respect to whom an event described in subparagraph (A)
or (B) of section 877(e)(1) of such Code occurs on or
after such date.
In no event shall any statement required by such amendments be
due before the 90th day after the date of the enactment of this
Act.
SEC. 513. REPORT ON TAX COMPLIANCE BY UNITED STATES CITIZENS AND
RESIDENTS LIVING ABROAD.
Not later than 90 days after the date of the enactment of
this Act, the Secretary of the Treasury shall prepare and
submit to the Committee on Ways and Means of the House of
Representatives and the Committee on Finance of the Senate a
report--
(1) describing the compliance with subtitle A of
the Internal Revenue Code of 1986 by citizens and
lawful permanent residents of the United States (within
the meaning of section 7701(b)(6) of such Code)
residing outside the United States, and
(2) recommending measures to improve such
compliance (including improved coordination between
executive branch agencies).
Subtitle C--Repeal of Financial Institution Transition Rule to Interest
Allocation Rules
SEC. 521. REPEAL OF FINANCIAL INSTITUTION TRANSITION RULE TO INTEREST
ALLOCATION RULES.
(a) In General.--Paragraph (5) of section 1215(c) of the
Tax Reform Act of 1986 (Public Law 99-514, 100 Stat. 2548) is
hereby repealed.
(b) Effective Date.--
(1) In general.--The amendment made by this section
shall apply to taxable years beginning after December
31, 1995.
(2) Special rule.--In the case of the first taxable
year beginning after December 31, 1995, the pre-
effective date portion of the interest expense of the
corporation referred to in such paragraph (5) of such
section 1215(c) for such taxable year shall be
allocated and apportioned without regard to such
amendment. For purposes of the preceding sentence, the
pre-effective date portion is the amount which bears
the same ratio to the interest expense for such taxable
year as the number of days during such taxable year
before the date of the enactment of this Act bears to
366.
And the Senate agree to the same.
Bill Archer,
Bill Thomas,
Tom Bliley,
Michael Bilirakis,
William F. Goodling,
H.W. Fawell,
Henry Hyde,
Bill McCollum,
J. Dennis Hastert,
Managers on the Part of the House.
Bill Roth,
Nancy Landon Kassebaum,
Trent Lott,
Ted Kennedy,
Managers on the Part of the Senate.
JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE
The managers on the part of the House and the Senate at
the conference on the disagreeing votes of the two Houses on
the amendment of the Senate to the bill (H.R. 3103) to amend
the Internal Revenue Code of 1986 to improve portability and
continuity of health insurance coverage in the group and
individual markets, to combat waste, fraud, and abuse in health
insurance and health care delivery, to promote the use of
medical savings accounts, to improve access to long-term care
services and coverage, to simplify the administration of health
insurance, and for other purposes, submit the following joint
statement to the House and the Senate in explanation of the
effect of the action agreed upon by the managers and
recommended in the accompanying conference report:
The Senate amendment struck all of the House bill after
the enacting clause and inserted a substitute text.
The House recedes from its disagreement to the amendment
of the Senate with an amendment that is a substitute for the
House bill and the Senate amendment. The differences between
the House bill, the Senate amendment, and the substitute agreed
to in conference are noted below, except for clerical
corrections, conforming changes made necessary by agreements
reached by the conferees, and minor drafting and clerical
changes.
TITLE I.--HEALTH CARE ACCESS, PORTABILITY, AND RENEWABILITY
I. Structure
House bill
The House bill would amend the Internal Revenue Code
(IRC) and the Employee Retirement Income Security Act of 1974
(ERISA), and includes free-standing provisions.
Senate amendment
The Senate amendment includes free-standing provisions.
Conference agreement
The conference agreement adds new provisions to the
Employee Retirement Income Security Act of 1974 (ERISA), the
Public Health Services (PHS) Act, and the Internal Revenue Code
(IRC).
II. Availability and Portability of Group Health Plans
Current law
Current federal law does not impose any requirements on
employers to provide or contribute toward the health insurance
coverage of their employees or their employees' dependents.
However, specific federal requirements do apply to existing
employer-sponsored health plans (e.g., fiduciary, notification
and disclosure requirements under ERISA and COBRA continuation
coverage, non-discrimination requirements under ERISA and the
Internal Revenue Code.)
House bill
The House bill would provide for federal requirements on
group health plans (and insurers and health maintenance
organizations (HMOs) selling to such plans) relating to
portability, the use of preexisting medical condition, and
discrimination based on health status.
Senate amendment
The Senate amendment would provide for federal
requirements on group health plans, health plan issuers
(entities licensed by the state to offer a group or individual
health plan) and employee health benefit plans, relating to
portability, the use of preexisting medical conditions, and
discrimination based on health status.
Conference agreement
The conference agreement provides for federal
requirements on group health plans and health insurance issuers
offering group health insurance coverage relating to
portability, access, and renewability.
a. definitions
(Also see item IX below.)
Current law
Section 5000(b)(1) of the Internal Revenue Code (IRC)
defines a group health plan as a plan (including a self-insured
plan) of, or contributed to by, an employer (including a self-
employed person) or employee organization to provide health
care (directly or otherwise) to the employees, former
employees, the employer, others associated or formerly
associated with the employer in a business relationship, or
their families.
Section 607(1) of ERISA defines a group health plan as an
employee welfare benefit plan providing medical care to
participants or beneficiaries directly or through insurance,
reimbursement, or otherwise.
Church plans are excluded from federal requirements on
existing employer plans such as ERISA's requirements on
employee health benefit plans and COBRA continuation coverage
requirements under the IRC and ERISA.
House bill
Group health plan means an employee welfare benefit plan
to the extent that the plan provides medical care employees and
their dependents directly or through insurance, reimbursement,
or otherwise, and includes a group health plan within the
meaning of section 5000(b)(1) of the IRC.
The provisions of this subtitle (other than those
relating to individual coverage) apply to group health plans
with 2 or more participants as current employees on the first
day of the plan year.
The requirements would not apply to church plans unless
such plans met the exemption for multiple employer health plans
under subtitle c (see item V). For purposes of applying the
provisions related to qualified prior coverage (II(B) below), a
group health plan could elect to disregard periods of coverage
of an individual under a church plan that is not subject to
this subtitle.
Governmental plans could elect not to be a group health
plan covered under the subtitle. For purposes of applying the
provisions related to qualified prior coverage, a group health
plan could elect not to include coverage under a governmental
plan that elected to be excluded from this subtitle's
requirements.
Senate amendment
Employee health benefit plan means any employee welfare
benefit plan, governmental plan, or church plan, or any health
benefit plan under section 5(e) of the Peace Corps Act, that
provides or pays for health benefit for participants or
beneficiaries whether directly, through a group health plan
offered by a health plan issuer (see item III(A) below), or
otherwise.
Conference agreement
The conference agreement defines a group health plan as
an employee welfare benefit plan to the extent that the plan
provides medical care to employees or their dependents directly
or through insurance, reimbursement, or otherwise. Both
governmental and church plans are included, but certain plans
with limited coverage are excluded.
The portability and guaranteed availability provisions
(other than those relating to individual coverage) apply to
group health plans with 2 or more participants who are active
employees on the first day of the plan year. These provisions
would apply to nonfederal governmental plans, unless they
elected to be excluded as described below, and to church and
governmental plans. (See section III(B)(3) below for exceptions
from availability, renewability, and portability requirements
for group health plans and group health insurance coverage for
certain benefits.)
Nonfederal governmental plans could elect not to be a
group health plan covered under the amendments to the PHS. An
election would apply for a single specified plan year, or, in
the case of a plan provided pursuant to a collective bargaining
agreement, for the term of such agreement. If a nonfederal
governmental plan makes this election, it must notify enrollees
of the fact and consequences of the election. The plan must
still provide certification and disclosure of creditable
coverage under the plan to enrollees who leave the plan, for
purposes of portability.
Upon request, Medicare, Medicaid, a program of the Indian
Health Service or a tribal organization, and military-sponsored
health care programs must also provide notice of previous
creditable coverage to individuals who leave such coverage.
b. portability of coverage for previously covered individuals
Current law
No provision.
House bill
The House bill would provide that in general, a group
health plan and an insurer or HMO offering health insurance
coverage in connection with a group health plan would have to
reduce any preexisting condition limitation period by the
length of the aggregate period of prior coverage. Prior
coverage would not qualify under this provision if there was
more than a 60-day break in coverage under a group health plan.
(Waiting periods would not be considered a break in coverage.)
Qualified coverage would include coverage of the individual
under a group health plan, health insurance coverage, Medicare,
Medicaid, Tricare, a program of the Indian Health Service, and
State health insurance coverage or risk pool, and coverage
under the Federal Employees Health Benefit Program (FEHBP).
Senate amendment
The Senate Amendment is similar. An employee benefit plan
or a health plan issuer offering a group health plan would have
to reduce any preexisting condition limitation period by 1
month for each month for which the person was in a period of
previous qualifying coverage. This provision would not apply if
there was a break of more than 30 days. (Waiting periods would
not be considered a break in coverage.) Previous qualifying
coverage includes enrollment under an employee health benefit
plan, group health plan, individual health plan, or under a
public or private health plan established under federal or
state law.
Conference agreement
The conference agreement provides that in general, group
health plans, and health insurance issuers offering group
health insurance coverage, would have to reduce any preexisting
condition limitation period by the length of the aggregate
period of prior creditable coverage. Prior coverage would not
qualify under this provision if there was a break in coverage
under a group health plan that was longer than a 63-day period.
(Waiting periods and affiliation periods would not be
considered a break in coverage.) Creditable coverage includes
coverage of the individual under a group health plan (including
a governmental or church plan), health insurance coverage
(either group or individual insurance), Medicare, Medicaid,
military-sponsored health care, a program of the Indian Health
Service, a State health benefits risk pool, the FEHBP, a public
health plan as defined in regulations, and any health benefit
plan under section 5(e) of the Peace Corps Act. An individual
would establish a creditable coverage period through
presentation of certifications describing previous coverage, or
through other procedures specified in regulations to carry out
this provision. The conferees intend that creditable coverage
includes short-term, limited coverage.
1. Method for establishing qualified coverage periods
Current law
No provision.
House bill
The House bill would provide that a group health plan or
insurer or HMO offering health insurance coverage in connection
with a group health plan could determine qualified coverage
periods without regard to the specific benefits offered,
referred to as the standard method. Alternatively, it could
make such determination on a benefit-specific basis and not
include as a qualified coverage period a specific benefit that
had not been included at the end of the most recent period of
coverage. If this alternative method were to be used, the group
plan or insurer would be required to state prominently in any
disclosure statements and to each enrollee at the time of
enrollment that such a method of determining qualifying
coverage was being used, and include a description of the
effect of this method. The plan, insurer, or HMO would request
a certification from prior plan administrators, insurers, or
HMOs which discloses the plan statement related to health
benefits under the plan or other detailed benefit information
on the benefits available under the previous plan or coverage.
The entity providing the certification could charge the
reasonable cost for providing the benefit information to the
requesting plan or insurer.
Senate bill
The Senate Amendment would provide that an employee
health benefit plan or health plan issuer offering a group plan
could impose a limitation or exclusion of benefits relating to
the treatment of a preexisting condition only to the extent
that such service or benefit was not previously covered under
the plan in which the participant or beneficiary was enrolled
immediately prior to enrollment in the plan involved.
Conference agreement
The conference agreement provides that a group health
plan, and issuer offering group health insurance coverage,
could determine creditable coverage periods without regard to
the specific benefits covered during the period. Alternatively,
it could make such determination based on several classes or
categories of benefits, as specified in regulations. A group
health plan and issuer would be required to count a period of
creditable coverage with respect to any class or category of
benefits if any level of benefits is provided. This alternative
would have to be used uniformly for all participants and
beneficiaries.
It is the intent of the conferees that the alternate
method be available to account for significant differences in
benefits. For example, the inclusion versus exclusion of a
category of benefits such as pharmaceuticals could be
considered a difference in classes of benefits. Similarly,
significant differentials in deductibles could be considered
differences in classes of benefits, but the alternative method
would not apply to small differences in deductibles, such as
$250 versus $200. The alternative method would not apply for
differences in specific services or treatments.
If the alternate method were to be used, the group health
plan and issuer would be required to state prominently in any
disclosure statements that such a method of determining
qualifying coverage was being used, and would be required to
include a description of the effect of this election. A group
health plan using the alternate method would be required to
notify each enrollee at the time of enrollment that the plan
had made such an election, and describe the effect. An issuer
would be required to notify each employer at the time of offer
or sale of the coverage.
2. Certification of prior coverage
Current law
No provision.
House bill
The House bill would require the plan administrator of a
group health plan, or the insurer or HMO offering health
insurance coverage to a group plan, on request made on behalf
of an individual covered or previously covered within the past
18 months under the plan or coverage, to provide for a
certification of the period of coverage of the individual under
the plan and of the waiting period (if any) imposed.
Senate amendment
The Senate Amendment would require an employee health
plan to provide documentation of coverage to participants and
beneficiaries whose coverage was terminated under the plan. As
specified by regulation, the duty of an employee health benefit
plan to verify previous qualifying coverage would be discharged
when such plan provided documentation to the participant or
beneficiary including the following information: (1) the dates
that the person was covered under the plan; and (2) the
benefits and cost-sharing arrangement available to the person
under the plan.
Conference agreement
The conference agreement requires the group health plan,
and health insurance issuer offering group health insurance
coverage, to provide a certification of the period of
creditable coverage under the plan, the coverage under any
applicable COBRA continuation provision, and waiting period (if
any) (and affiliation period if applicable) imposed on the
individual. This certification would have to be provided when
the individual ceases to be covered under the plan or otherwise
becomes covered under a COBRA continuation provision, after any
COBRA continuation coverage ceases, and on the request of an
individual not later than 24 months after coverage ceased. The
certification may be provided, to the extent practicable, at a
time consistent with notices required under any applicable
COBRA continuation provision. A group health plan offering
medical care through health insurance coverage would not be
required to provide certification if the health insurance
issuer provides certification.
If a group health plan or health insurance issuer elects
the alternative method of crediting coverage, the plan or
issuer would request, from prior entities providing coverage,
information on coverage of classes and categories of benefits
available under the previous plan or coverage. The entity
providing the certification could charge the reasonable cost
for providing such information to the requesting plan or
insurer. The Secretary is required to establish rules to
prevent an entity's failure to provide information on health
benefits under previous coverage from adversely affecting any
subsequent coverage under another group health plan or health
insurance coverage.
c. restrictions on use of pre-existing condition limitation period
Current law
No provision.
House bill
The House bill would restrict the use of preexisting
condition limitation periods in group health plans and in plans
offered by insurers and HMOs to group health plans.
Senate amendment
The Senate Amendment is similar but would apply to
employee health benefit plans and group plans offered by health
plan issuers.
Conference agreement
The conference agreement restricts the use of preexisting
condition limitation exclusions by group health plans and
health insurance issuers offering group health insurance
coverage.
1. Definition of preexisting condition
Current law
No provision.
House bill
The House bill would define a preexisting condition to be
a condition, regardless of the cause of condition, for which
medical advice, diagnosis, care, or treatment was recommended
or received within the 6-months ending on the day before the
effective date of the coverage or the earliest date upon which
such coverage would have been effective if no waiting period
was applicable, whichever was earlier. Genetic information
would not be considered a preexisting condition, so long as the
treatment of the condition to which the information was
applicable had not been sought in the 6-month period just
described.
Senate amendment
The Senate Amendment provides a similar definition of
preexisting condition. It does not include the genetic
information language.
Conference agreement
The conference agreement defines a preexisting condition
exclusion to be a limitation or exclusion of benefits relating
to a condition, whether physical or mental, based on the fact
that the condition was present before the enrollment date,
whether or not any medical advice, diagnosis, care, or
treatment was recommended or received before that date. Genetic
information would not be considered a condition in the absence
of a diagnosis of the condition related to such information.
2. Restrictions on limitation period
Current law
No provision.
House bill
The House bill would prohibit a group health plan, and an
insurer or HMO offering health insurance coverage in connection
with a group health plan from imposing a preexisting condition
limitation period in excess of 12 months, or 18 months in the
event of a late enrollment. A preexisting condition limitation
period could not be applied to a newborn, adopted child, or
child placed for adoption, so long as the individual became
covered within 30 days of birth or adoption or placement for
adoption. Preexisting condition limitation periods would not
apply to pregnancies. An HMO could impose an eligibility period
as an alternative to a preexisting condition limitation period
but only if it did not exceed 60 days for timely enrollment and
90 days for late enrollment. An HMO could use alternative
methods to address adverse selection as approved by state
regulators.
Senate amendment
The Senate Amendment includes a similar provision, but
with respect to affiliation periods of an HMO, would specify
that during such a period the plan could not be required to
provide health care services or benefits and no premium could
be charged to the participant or beneficiary.
Conference agreement
The conference agreement permits a group health plan and
health insurance issuers to impose a preexisting condition
exclusion if the exclusion relates to a condition (whether
physical or mental), regardless of the cause of condition, for
which medical advice, diagnosis, care, or treatment was
recommended or received within the 6-month period ending on the
enrollment date. The exclusion could extend to not more than 12
months (18 months for late enrollees) after the enrollment
date. The exclusion would be reduced by the aggregate of the
periods of creditable coverage. Enrollment date is defined as
the date of enrollment in the plan or coverage or, if earlier,
the first day of the waiting period for such enrollment.
Any waiting period or affiliation period would run
concurrently with any preexisting condition exclusion period. A
preexisting condition limitation period could not be applied to
a newborn, an adopted child or child placed for adoption under
age 18, so long as the individual becomes covered under
creditable coverage within 30 days of birth or adoption or
placement for adoption. These exceptions for newborns and
certain adopted children would not apply if the individual had
a break in coverage longer than a 63-day period. Preexisting
condition exclusions could not apply to pregnancies.
A group health plan offering health insurance coverage
through an HMO, or an HMO which offers health insurance
coverage in connection with a group health plan, may impose an
affiliation period only if no preexisting condition exclusion
is imposed, the period is imposed uniformly without regard to
health status, and does not exceed 2 months for timely
enrollment and 3 months for late enrollment. It is the intent
of the conferees that any affiliation period would apply to all
new enrollees and beneficiaries. During the affiliation period,
the HMO could not be required to provide health care services
or benefits and no premium could be charged to the participant
or beneficiary. The affiliation period would begin on the
enrollment date and would run concurrently with any other
applicable waiting period under the plan. An HMO could use
alternative methods to address adverse selection as approved by
state regulators.
d. prohibiting exclusions based on health status (access)
Current law
Under section 510 of ERISA, an employee benefit plan may
not discriminate against a particular beneficiary for
exercising any right to which he or she is entitled under the
provisions of an employee benefit plan. Section 105(h) of the
IRC prohibits discrimination in favor of highly compensated
individuals by self-insured employer health plans.
House bill
Except as specified below, a group health plan, and an
insurer or HMO offering coverage in connection with a plan,
cannot exclude an employee or his or her beneficiary from being
(or continuing to be enrolled) as a participant or beneficiary
under the plan based on health status. Health status includes,
with respect to an individual, medical condition, claims
experience, receipt of health care, medical history, genetic
information, evidence of insurability (including conditions
arising out of domestic violence), or disability. A group
health plan and an insurer or HMO offering coverage in
connection with a group health plan cannot require a premium or
contribution which is greater than such premium or contribution
for a similarly situated participant or beneficiary solely on
the basis of health status. It can, however, vary the premium
or contribution based on factors that are not directly related
to health status (such as scope of benefits, geographic area of
resident, or wage levels).
The House bill provides that nothing is intended to
affect the premium rates an insurer or HMO could charge an
employer for health insurance coverage provided in connection
with a group health plan.
A group health plan (or insurer or HMO providing coverage
in connection to a group plan) could establish premium
discounts or modify otherwise applicable copayments or
deductibles in return for adherence to programs of health
promotion and disease prevention.
Senate amendment
Except as specified below, a health plan issuer offering
a group health plan may not decline to offer whole group
coverage to a group purchaser desiring to purchase the
coverage. An employee health benefit plan or a health plan
issuer offering a group health plan could not condition
eligibility, enrollment, or premium contribution requirements
based on health status, medical condition, claims experience,
receipt of health care, medical history, evidence of
insurability (including conditions arising out of domestic
violence), genetic information, or disability.
The bill does not include a specific rule of construction
relating to premium rates charged to group health plans other
than a prohibition of premium contribution requirements based
on health status.
A group health plan (or insurer of HMO providing coverage
in connection to a group plan) could establish premium
discounts or modify otherwise applicable copayments or
deductibles in return for adherence to programs of health
promotion and disease prevention.
Conference agreement
Except as specified below, a group health plan, and a
health insurance issuer offering group health insurance
coverage, cannot establish rules for eligibility (including
continued eligibility) of an individual to enroll under the
terms of the plan based on any of the following health-related
factors in relation to the individual or a dependent of the
individual: health status, medical condition (including both
physical and mental illness), claims experience, receipt of
health care, medical history, genetic information, evidence of
insurability (including conditions arising out of domestic
violence), or disability.
The inclusion of evidence of insurability in the
definition of health status 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.
It is the intent of the conferees that a plan cannot
knowingly be designed to exclude individuals and their
dependents on the basis of health status. However, generally
applicable terms of the plan may have a disparate impact on
individual enrollees. For example, a plan may exclude all
coverage of a specific condition, or may include a lifetime cap
on all benefits, or a lifetime cap on specific benefits.
Although individuals with the specific condition would be
adversely affected by an exclusion of coverage for that
condition, and individuals with serious illnesses may be
adversely affected by a lifetime cap on all or specific
benefits, such plan characteristics would be permitted as long
as they are not directed at individual sick employees or
dependents.
The Conference agreement does not require a group health
plan or health insurance coverage to provide particular
benefits other than those provided under the terms of the plan
or coverage. Nor does it prevent any plan or coverage from
establishing limitations or restrictions on the amount, level,
extent, or nature of the benefits or coverage for similarly
situated individuals enrolled in the plan or coverage. Rules
defining any applicable waiting periods for enrollment may not
be established based on health status related factors.
It is the intent of the conferees that a plan or coverage
cannot single out an individual based on the health status or
health status related factors of that individual for denial of
a benefit otherwise provided other individuals covered under
the plan or coverage. For example, the plan or coverage may not
deny coverage for prescription drugs to a particular
beneficiary or dependent if such coverage is available to other
similarly situated individual covered under the plan or
coverage. However, the plan or coverage could deny coverage for
prescription drugs to all beneficiaries and dependents. The
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.
The conference agreement provides that a group health
plan and an issuer offering group coverage cannot require a
premium or contribution which is greater than such premium or
contribution for a similarly situated individual enrolled in
the plan on the basis of any health status-related factor
relating to the individual or to any individual enrolled under
the plan as a dependent of the individual. It does not restrict
the amount that an employer may be charged for coverage under a
group health plan. The group health plan and health insurance
issuer may establish premium discounts or rebates, or modify
otherwise applicable copayments or deductibles in return for
adherence to programs of health promotion and disease
prevention.
The conferees intend that these provisions preclude
insurance companies from denying coverage to employers based on
health status and related factors that they have traditionally
used. In addition, this provision is meant to prohibit insurers
or employers from excluding employees in a group from coverage
or charging them higher premiums based on their health status
and other related factors that could lead to higher health
costs. This does not mean that an entire group cannot be
charged more. But it does preclude health plans from singling
out individuals in the group for higher premiums or dropping
them from coverage altogether.
1. Exceptions to the non-discrimination requirement
Current law
No provision.
House bill
No provision for group health plans (i.e., the plans of
the employer). See item III(B) below on requirements on
insurers and HMOs.
Senate amendment
Exceptions are provided to health plan issuers with
respect to enrollment in the event that: (1) the health plan
ceases to offer coverage to any additional group purchasers; or
(2) the issuer can demonstrate to the state insurance regulator
that to enroll new people would impair its financial or
provider capacity. See item III-B(3) below.
Conference agreement
See item III(B) below on requirements for health plan
issuers offering group health insurance coverage.
e. enrollment of eligible individuals who lose other coverage
Current law
No provision.
House bill
The House bill would require group health plans to permit
an uncovered employee (or uncovered dependent) otherwise
eligible for coverage to enroll under at least one benefit
option if certain conditions are met: (1) the person was
already covered when the plan was previously offered; (2) the
person stated in writing at such time that another source of
coverage was the reason for declining enrollment; (3) the
person lost coverage as a result of a loss of eligibility or
termination from or reduction in hours of employment; and (4)
the person requested enrollment within 30 days after the date
of the coverage's termination.
If a group health plan offered dependent coverage, it
could not require, as a condition of coverage as a dependent, a
waiting period applicable to: (1) a newborn, (2) adopted child
or child placed for adoption, or (3) a spouse, at the time of
marriage if the person had met any applicable waiting period.
Enrollment of a participant's beneficiary would be
considered to be timely if a request for enrollment were made
within 30 days of the date family coverage was first made
available or, in the case of a newborn or adoption or placement
for adoption, within 30 days of that event; and in the case of
marriage, within 30 days of the date of the marriage, if family
coverage was available.
Senate amendment
The Senate Amendment would require employee health
benefit plans to provide for special enrollment periods
extending for a reasonable time after certain qualifying events
to permit the participant to change individual or family basis
of coverage or to enroll in the plan if coverage would have
otherwise been available. The qualifying events would be: (1)
changes in family status affecting eligibility under a plan
including marriage, separation, divorce, death, birth, or
placement of a child for adoption; (2) changes in employment
status that would otherwise cause the loss of eligibility for
coverage (other than COBRA continuation coverage); or (3)
changes in employment status of a family member that results in
a loss of eligibility under a group, individual, or employee
health benefit plan.
The special enrollment period would have to ensure that a
child born or placed for adoption was deemed covered as of the
date of birth or placement so long as the child was enrolled
within 30 days.
Conference agreement
The conference agreement requires special enrollment
periods for certain individuals losing other coverage and for
certain dependent beneficiaries. It requires group health
plans, and health insurance issuers offering group health
insurance coverage, to permit eligible employees or dependents
who lose other coverage to enroll under the terms of the plan
if each of the following conditions is met: (1) the employee or
dependent was already covered when the plan was previously
offered; (2) the employee stated in writing at such time that
another source of coverage was the reason for declining
enrollment, but only if the plan sponsor or issuer required
such a statement and provided the employee with notice of this
requirement; (3) the person was covered under COBRA
continuation coverage which was exhausted, or coverage was not
under a COBRA continuation provision and was terminated as a
result of a loss of eligibility for the coverage (including as
a result of legal separation, divorce, death, termination of
employment, or reduction in hours of employment) or termination
of employer contributions towards such coverage; and (4) the
person requested enrollment not later than 30 days after the
loss of other coverage.
If a group health plan offers dependent coverage, it must
offer a dependent special enrollment period for persons
becoming a dependent through marriage, birth, or adoption or
placement for adoption. The dependent special enrollment period
must last for not less than 30 days. The dependent may be
enrolled as a dependent of the individual. If the individual is
eligible for enrollment, but not enrolled, the individual may
also enroll at this time. Moreover, in the case of the birth or
adoption of a child, the spouse of the individual also may be
enrolled as a dependent of the individual if the spouse is
otherwise eligible for coverage but not already enrolled. If an
individual seeks to enroll a dependent during the first 30 days
of a dependent special enrollment period, the coverage would
become effective as of the date of birth, of adoption or
placement for adoption, or, in the case of marriage, not later
than the first day of the first month beginning after the date
the completed request for enrollment was received.
F. Applicability of renewal requirements to multiple employer
arrangements
Current law
Under section 3(37) of ERISA, a multiemployer plan is one
in which more than one employer contributes and which is
established through a collective bargaining agreement. (Such
plans are commonly found in unionized sectors of the building
and construction, publishing, and entertainment trades, and the
lumber, maritime, retail, food, hotel, and restaurant
industries.) Under section 3(40) of ERISA, a multiple employer
welfare arrangement (MEWA) is an employee welfare benefit plan
or any other arrangement which offers or provides health
benefits and meets additional criteria, (e.g., it must offer
such benefits to the employees of 2 or more employers). There
is no provision or definition under current law for ``multiple
employer health plans.''
House bill
Such plans could not deny an employer who employees are
covered under the plan or arrangement continued access to the
same or different coverage except: (1) for cause (e.g.,
nonpayment of premiums, fraud, and noncompliance with plan
provisions); (2) because the plan is not offering coverage in a
geographic area; or (3) due to a failure to meet the terms of
an applicable collective bargaining agreement. Certain
collectively bargained arrangements and ``multiple employer
health plans'' (MEHPs) would be required to meet specific
requirements relating to the nondiscrimination requirements.
(MEHPs are established under this bill (see item V below) and
are generally non-fully-insured MEWAs that meet certain
requirements excepting them from state regulation.)
Senate amendment
No provision. (Note that the rules regarding group and
individual health plans (e.g., guaranteed renewal,
nondiscrimination, and portability) or state laws not preempted
by the Senate amendment also apply to health plans offered by
health plan issuers to a purchasing cooperative. See item VIII
below).
Conference agreement
The conference agreement provides that a group health
plan which is a multiemployer plan or a multiple employer
welfare arrangement may not deny an employer continued access
to the same or different coverage under the terms of such plan
except: (1) for nonpayment of contributions; (2) for fraud; (3)
for noncompliance with plan provisions; (4) because the plan is
ceasing to offer any coverage in a geographic area; (5) in the
case of a network plan, there is no longer any individual
enrolled through the employer who lives, resides, or works in
the service area of the network plan, and the plan applies this
provision uniformly without regard to claims experience or
health status-related factors; or (6) due to a failure to meet
the terms of an applicable collective bargaining agreement, to
renew a collective bargaining agreement or other agreement
requiring or authorizing contributions to the plan, or to
employ employees covered by such an agreement.
G. Enforcement of group health plan requirements
Current law
Federal requirements on existing group health plans are
enforced through various laws, including ERISA, the Public
Health Service (PHS) Act, the IRC, and Medicare.
House bill
The House bill would provide for enforcement of the
federal group health plan availability and portability
requirements through the IRC, ERISA, and through civil monetary
penalties imposed through the Secretary of Health and Human
Services
Senate amendment
The Senate Amendment would provide for enforcement of the
federal group health plan availability and portability
requirements through the Secretary of Labor, in consultation
with the Secretary of Health and Human Services using ERISA
civil enforcement provisions.
Conference agreement
The conference agreement provides for enforcement of the
federal group health plan availability and portability
requirements through the IRC, ERISA, and through civil monetary
penalties imposed through the Secretary of Health and Human
Services (HHS).
1. Enforcement through COBRA provisions of IRC
Current law
Plans that fail to comply with the IRC COBRA provision
are subject to an excise tax of $100 per day per violation. The
tax is not applied where the failure was determined to be
unintentional or if the failure was corrected within 30 days.
An overall limitation on the tax applies in the event of an
unintentional failure.
House bill
The House bill would provide that noncomplying plans and
insurers and HMOs selling to group health plans would be
subject to an excise tax of $100 per day per violation enforced
through the COBRA provisions of the IRC. Penalties would not be
assessed if the failure was determined to be unintentional or a
correction was made within 30 days. No tax could be imposed on
a noncomplying insurer or HMO subject to state insurance
regulation if the Secretary of Health and Human Services (HHS)
determined that the state had an effective enforcement
mechanism. In the case of a group health plan of a small
employer that provided coverage solely through a contract with
an insurer or HMO, no tax would be imposed upon the employer if
the failure was solely because of the product offered by the
insurer or HMO. No tax penalty would be assessed for a failure
under this provision if a sanction had been imposed under ERISA
or by the Secretary of HHS.
Senate amendment
No provision.
Conference agreement
See Title IV.
2. Enforcement through ERISA
Current law
Under section 502 of ERISA, employee benefit plans that
fail to comply with applicable requirements can be sued for
relief and be subject to civil money penalties, and can be sued
to recover any benefits due under the plan. Section 504 of
ERISA provides the Secretary of Labor with investigative
authority to determine whether any person is out of compliance
with the law's requirements. Section 506 provides for
coordination and responsibility of agencies in enforcement.
Section 510 prohibits a health plan from discriminating against
a participant or beneficiary for exercising any right under the
plan.
House bill
The House bill would provide that ERISA sanctions apply
to group health plans by deeming the provisions of subtitle A
and subtitle D (insofar as it is applicable to this subtitle)
to be provisions of title I of ERISA. Such sanctions also would
apply to an insurer or HMO that was subject to state law in the
event that the Secretary of Labor determined that the state had
not provided for enforcement of the above provisions of this
Act. Sanctions would not apply in the event that the Secretary
of Labor established that none of the persons against whom the
liability would be imposed knew, or exercising reasonable
diligence, would have known that a failure existed, or if the
noncomplying entity acted within 30 days to correct the
failure. In no case would a civil money penalty be imposed
under ERISA for a violation for which an excise tax under the
COBRA enforcement provisions was imposed or for which a civil
money penalty was imposed by the Secretary of HHS.
Senate amendment
The Senate Amendment would provide that for employee
health benefit plans, the Secretary would be required to
enforce the reform standards established by the bill in the
same manner as provided under sections 502, 504, 506, and 510
of ERISA. (See item IV(I) below for enforcement provisions
relating to health plan issuers and group health plans sold to
employers and others.)
Conference agreement
The conference agreement provides that provisions with
respect to group health plans would be enforced under Title I
of ERISA as under current law. The Secretary of Labor would not
enforce the provisions of Title I applicable to health
insurance issuers. However, private right of action under part
V of ERISA would apply to such issuers. Enforcement of
provisions with respect to health insurance issuers generally
would be limited to civil remedies established under the PHS
Act amendments (as described in the following subsection).
The conference agreement provides that a state may enter
into an agreement with the Secretary for delegation to the
state of some or all of the Secretary's authority under
sections 502 and 504 of ERISA to enforce the requirements of
this part in connection with MEWAs providing medical care which
are not group health plans.
3. Enforcement through civil money penalties
Current law
No provision.
House bill
The House bill would provide that a group health plan,
insurer, or HMO that failed to meet the above requirements
would be subject to a civil money penalty. Rules similar to
those imposed under the COBRA penalties would apply. The
maximum amount of penalty would be $100 for each day for each
individual with respect to which a failure occurred. In
determining the penalty amount, the Secretary of HHS would have
to take into account the previous record of compliance of the
person being assessed with the applicable requirements of this
subtitle, the gravity of the violation, and the overall
limitations for unintentional failures provided under the IRC
COBRA provisions. No penalty could be assessed if the failure
was not intentional or if the failure was corrected within 30
days. A procedure would be available for administrative and
judicial review of a penalty assessment. Collected penalties
would be paid to the Secretary of HHS and would be available
for the purpose of enforcing the provisions with respect to
which the penalty was imposed.
The authority for the Secretary of HHS to impose civil
money penalties would not apply to enforcement with respect to
any entity which offered health insurance coverage and which
was an insurer or HMO subject to state regulation by an
applicable state authority if the Secretary of HHS determined
that the state had established an effective enforcement plan.
In no case would a civil money penalty be imposed under this
provision for a violation for which an excise tax under COBRA
or civil money penalty under ERISA was assessed.
Senate amendment
No provision.
Conference agreement
The conference agreement provides that each state may
require that health insurance issuers that issue, sell, renew,
or offer health insurance coverage in the state in the small or
large group markets meet the Act's requirements. In the case of
a determination by the Secretary of HHS that a state has failed
to substantially enforce a provision or provisions of part A
with respect to health insurance issuers in the state, the
Secretary would enforce such provision or provisions insofar as
they relate to the issuance, sale, renewal, and offering of
health insurance coverage in connection with group health plans
in the state. Secretarial enforcement would apply only in the
absence of state enforcement and with respect to group health
plans that are nonfederal governmental plans.
In the case of a failure by a health insurance issuer,
the issuer is liable for any penalty. In the case of failure by
a group health plan that is a nonfederal governmental plan, the
plan is liable if it is sponsored by 2 or more employers;
otherwise the employer is liable. Rules similar to those
imposed under the COBRA penalties would apply. The maximum
amount of penalty for noncompliance would be $100 per day per
individual. In determining the penalty amount, the Secretary of
HHS would have to take into account the previous record of
compliance and the gravity of the violation. No penalty could
be assessed if the failure was not intentional or if the
failure was corrected within 30 days. A procedure would be
available for administrative and judicial review of a penalty
assessment. Collected penalties would be paid to the Secretary
of HHS and would be available for the purpose of enforcing the
provisions with respect to which the penalty was imposed.
4. Coordination in administration
Current law
Section 506 of ERISA provides for coordination of other
federal agencies (e.g., the Internal Revenue Service) with the
Department of Labor in enforcing ERISA.
House bill
The House bill would require the Secretaries of Treasury,
Labor, and HHS to issue regulations that are not duplicative to
carry out this subtitle. The bill would require these
regulations to be issued in a manner that assures coordination
and nonduplication in their activities under this subtitle.
Senate amendment
No provision.
Conference agreement
The conference agreement provides that the Secretaries of
Treasury, Labor, and HHS would ensure, through execution of an
interagency memorandum of understanding, that regulations,
rulings, and interpretations are administered so as to have the
same effect at all times. It requires the Secretaries to
coordinate enforcement policies for the same requirements to
avoid duplication of enforcement efforts and assign priorities
in enforcement.
It is the intent of the conferees that the committees of
jurisdiction should work together to assure the coordination of
policies under this Act. Such coordination is considered
necessary to maintain consistency in the IRC, ERISA, and the
PHS Act.
III. Availability, Portability, and Renewability Requirements on
Insurers, HMOs, and Issuers of Health Plans in the Group Market
Current law
The McCarran Ferguson Act of 1945 (P.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(b)(2)(A) of ERISA leaves to the states the regulation of
insurance. (Employee benefit plans are not insurance and are
regulated by the federal government.)
House bill
The House bill would establish federal requirements on
insurers and HMOs selling in the group market to provide for
guaranteed availability of health insurance coverage.
Senate amendment
The Senate Amendment is similar but would apply
requirements to health plan issuers offering plans in the group
market.
Conference agreement
The conference agreement establishes federal requirements
on health insurance issuers offering group health insurance
coverage to provide for guaranteed availability of health
insurance coverage.
a. definitions
Current law
No provision.
House bill
The House bill would define insurer to mean an insurance
company, insurance service, or insurance organization which is
licensed to engage in the business of insurance in a state and
which (except for the purposes of individual health insurance
availability provisions of this subtitle) is subject to state
law which regulates insurance within the meaning of section
514(b)(2)(A) of ERISA.
The House bill would define a health maintenance
organization to mean (a) a federally qualified HMO, (b) an
organization recognized under state law as an HMO, or (c) a
similar organization regulated under state law for solvency in
the same manner and extent as an HMO, if (other than for the
purposes of individual health insurance availability provisions
of the bill) it is subject to state law which regulates
insurance within the meaning of section 514(b)(2) of ERISA.
Under the House bill, a bona fide association would be
defined as an association which (a) has been actively in
existence for at least 5 years; (b) has been formed and
maintained in good faith for purposes other than obtaining
insurance; (c) does not condition membership in the association
on health status; (d) makes health insurance coverage offered
through the association available to any individual who is a
member (or dependent of a member) of the association at the
time the coverage is initially issued; (e) does not make health
insurance coverage offered through the association available to
any member who is not a member (or dependent of a member) of
the association at the time coverage is initially issued; (f)
does not impose preexisting condition exclusions consistent
with the requirements of this bill relating to group health
plans; and (g) provides for renewal and continuation of
coverage consistent with the requirements of this bill.
Senate amendment
The Senate Amendment would define health plan issuer as
any entity that is licensed (prior to or after the date of
enactment of this Act) by a state to offer a group health plan
or an individual health plan.
The Senate Amendment does not use the terms health
maintenance organization, or bona fide association.
Conference agreement
The conference agreement defines a health insurance
issuer as an insurance company, insurance service, or insurance
organization, including an HMO, which is licensed to engage in
the business of insurance in a state and which is subject to
state law which regulates insurance within the meaning of
section 514(b)(2) of ERISA. A group health plan is not a health
insurance issuer.
An HMO is: (a) a federally qualified HMO, (b) an
organization recognized under state law as an HMO, or (c) a
similar organization regulated under state law for solvency in
the same manner and extent as an HMO.
A bona fide association is an association which: (a) has
been actively in existence for at least 5 years; (b) has been
formed and maintained in good faith for purposes other than
obtaining insurance; (c) does not condition membership in the
association on any health status-related factor; (d) makes
health insurance coverage offered through the association
available to any member, or individuals eligible for coverage
through such member, regardless of any health status-related
factor; (e) does not make health insurance coverage offered
through the association available other than in connection with
a member of the association; and (f) meets additional
requirements as may be imposed under state law.
b. guaranteed availability of coverage
Current law
No provision.
House bill
The House bill would require each insurer or HMO offering
health insurance coverage in the small group market to accept
every small employer in the state that applied for coverage and
to accept for enrollment under such coverage every eligible
individual who applied for enrollment during the initial
enrollment period in which the individual first became eligible
for the group coverage. No restriction could be imposed on an
eligible individual based on his or her health status. An
eligible individual is determined in accordance with the terms
of the plan consistent with all applicable state laws.
Senate amendment
The Senate Amendment would require a health plan issuer
offering a group health plan to accept the whole group desiring
to purchase the coverage. A health plan issuer offering a group
health plan could not condition eligibility, continuation of
eligibility, enrollment, or premium contribution requirements
based on health status. (Health status is defined the same as
under the House bill.)
Conference agreement
The conference agreement requires each health insurance
issuer that offers health insurance coverage in the small group
market in a state to accept every small employer in the state
that applies for coverage, and to accept for enrollment under
such coverage every eligible individual who applies for
enrollment during the period in which the individual first
became eligible to enroll under the terms of the group health
plan. The health plan issuer may not impose restrictions on any
eligible individual being a participant or beneficiary based on
his or her health status, or the health status of dependents.
An eligible individual is determined in accordance with the
terms of the plan, as provided by the health insurance issuer
under the rules of the issuer which are uniformly applicable in
a state to small employers in the small group market, and
consistent with all applicable state laws governing the issuer
and market.
1. Scope of requirement
Current law
No provision.
House bill
The House bill provides that the guaranteed availability
requirement apply to the small group market only. Small groups
are those with 2 to 50 employees.
Senate amendment
The Senate Amendment provides that the guaranteed
availability requirement apply to all health plan issuers and
group health plans.
Conference agreement
The conference agreement provides that the guaranteed
availability requirement applies to the small group market
only. Small groups are those with 2 to 50 employees on a
typical business day.
To assure access in the large group market, the
conference agreement provides that the Secretary of HHS request
that the chief executive officer of each state submit a report
on the access of large employers to health insurance coverage
and the circumstances for lack of access to coverage, if any,
of large employers, and classes of employers. The Secretary
shall request the reports not later than December 31, 2000 and
every 3 years thereafter. Based on the state reports and other
information, the Secretary would be required to prepare a
report for Congress, every 3 years, describing the access to
health insurance for large employers, and classes of employers
in each state. The Secretary may include recommendations to
assure access.
In addition, the Comptroller General will submit to
Congress not later than 18 months after the date of enactment
of this Act, a report on access of classes of large employers
to health insurance coverage in the different states, and the
circumstances for lack of access, if any.
2. Restrictions on preexisting condition limitation periods
Current law
No provision.
House bill
The House bill would provide for the same restrictions on
the use of preexisting condition limitations by each insurer
and HMO that offers health insurance coverage in connection
with a group health plan as those described in above item II-
(C).
Senate amendment
The Senate amendment would provide for the same
restrictions on the use of preexisting condition limitations by
health plan issuers as described in above item II-(C).
Conference agreement
The conference agreement provides us for the same
restrictions on the use of preexisting condition limitations by
each health insurance issuer that offers group health insurance
coverage as those described in above item II-(C).
3. Exceptions to guaranteed availability
Current law
No provision.
House bill
The House bill would provide that an HMO or an insurer
offering coverage in the small group market through a network
plan could: (1) limit employers for such coverage to those with
eligible individuals whose place of employment or residence was
in the plan's or HMO's service area; (2) limit the individuals
who might be enrolled to those whose place of residence or
employment was within the service area; (3) within the service
area, deny coverage if the plan or HMO demonstrated lack of
capacity to deliver services adequately, but only if it was
applying the capacity limit to all employers without regard to
the group's claims experience or the health status of its
participants and beneficiaries. Those denying coverage on the
basis of capacity could not offer small groups coverage in the
service area for 180 days. Similar exceptions would apply in
the event of financial capacity limits.
Senate amendment
The Senate amendment would provide that a health plan
issuer offering a group health plan could cease offering
coverage to group purchasers if (1) the plan ceased to offer
coverage to any additional group purchasers, and (2) the issuer
could demonstrate to the applicable certifying authority that
its financial or provider capacity would be impaired if the
issuer were required to offer coverage to additional group
purchasers. Such an issuer would be prohibited from offering
coverage for 6 months or until the issuer could demonstrate
that the capacity was adequate, whichever was later. An issuer
would only be eligible for this exception if it offered
coverage on a first-come-first-served basis or other basis
established by a state to ensure a fair opportunity to enroll
and avoid risk selection.
Conference agreement
The conference agreement provides that a health insurance
issuer offering coverage in the small group market through a
network plan could: (1) limit employers for such coverage to
those with eligible individuals who live, work, or reside in
the service area for the network plan; (2) within the service
area, deny coverage to small employers if the issuer has
demonstrated, if required, to the applicable state authority,
the lack of capacity to deliver services adequately to
additional groups, but only if it was applying the capacity
limit to all employers uniformly without regard to claims
experience or any health status-related factor. An issuer
denying coverage on the basis of capacity could not offer
coverage in the small group market in the service area for 180
days.
A health insurance issuer may deny coverage in the small
group market if the issuer has demonstrated, if required, to
the applicable state authority, that it does not have the
financial reserves necessary to underwrite additional coverage.
The issuer would be required to apply the financial capacity
limit to all employers in the small group market in the state,
consistent with applicable state law, and without regard to
claims experience or health status-related factors. An issuer
denying coverage on the basis of financial capacity could not
offer coverage in the small group market in the service area
for 180 days or until the issuer has demonstrated, if required,
to the applicable state authority, that it has adequate
capacity, whichever is later. A State may provide for
determination of adequate capacity on a service-area-specific
basis. It is the intent of the conferees that an issuer denying
coverage on the basis of capacity limitations may demonstrate
compliance if enrollment is provided on a first-come first-
serve basis, or other state approved method.
The conference agreement imposes requirements for renewal
and continuation on issuers offering health insurance plans to
bona fide associations, but does not require these issuers to
guarantee issue of the coverage offered to bona fide
associations. The conferees do not intend the provision to mean
that issuers of coverage to an association have to offer a
particular association plan to any other employer. Thus issuers
offering coverage to associations are not required to guarantee
issue the association's plan to other small employers.
Nondiscrimination rules would apply to these association plans,
and no employee or dependent could be excluded from coverage on
the basis of any health status-related factor.
The conference agreement provides exceptions to the
availability, renewability and portability requirements for
group health plans and group health insurance coverage for
certain benefits, sometimes under certain conditions. First,
these requirements would not apply to provision of certain
excepted benefits including: coverage only for accident, or
disability insurance, or any combination thereof; coverage
issued as a supplement to liability insurance; liability
insurance; workers' compensation or similar insurance;
automobile medical payment insurance; credit-only insurance;
coverage for on-site medical clinics; and, other similar
coverage, as specified in regulations, under which benefits for
medical care are secondary or incidental to other insurance
benefits.
Second, if the following benefits are (a) provided under
a separate policy, certificate, or contract or insurance, or
(b) if the benefits are otherwise not an integral part of the
plan, the requirements would not apply to: limited scope dental
or vision benefits; benefits for long-term care, nursing home
care, home health care, community-based care, or any
combination thereof; or, similar limited benefits as specified
in regulations.
Third, if the following benefits: (a) are provided under
a separate policy, certificate, or contract of insurance; (b)
there is no coordination between the provision of these
benefits and any exclusion of benefits under any group health
plan maintained by the same plan sponsor; and (c) such benefits
are paid with respect to an event without regard to whether
benefits are provided for that event under any group health
plan maintained by the same plan sponsor, the requirements
would not apply to: coverage only for a specified disease or
illness, or hospital indemnity or other fixed indemnity
insurance.
Fourth, if the following benefits are provided under a
separate policy, certificate, or contract of insurance, the
requirements would not apply to: Medicare supplemental health
insurance; coverage supplemental to coverage provided under
military health care; and, similar supplemental coverage
provided to coverage under a group health plan.
4. Exceptions for failure to meet participation or contribution rules
Current law
No provision.
House bill
The House bill would provide that an exception to the
guaranteed availability requirement would apply in the case of
any group health plan which failed to meet the participation or
contribution rules of the insurer or HMO. Such participation
and contribution rules would have to be uniformly applicable
and in accordance with state law.
Senate amendment
No provision.
Conference agreement
The conference agreement provides that an exception to
the guaranteed availability requirement would apply in the case
of any group health plan which failed to meet the participation
or contribution rules of the health insurance issuer. Such
participation and contribution rules would have to be in
accordance with state law.
c. guaranteed renewability
Current law
No provision.
House bill
The House bill would provide that regardless of the size
of the group, insurers and HMOs would be required to renew or
continue in force coverage at the option of the covered
employer with certain exceptions.
Senate amendment
The Senate provision is similar but at the option of the
group purchaser.
Conference agreement
The conference agreement provides that a health insurance
issuer offering group health insurance coverage in the small or
large group market would be required to renew or continue in
force coverage at the option of the plan sponsor of the plan.
1. Exceptions to guaranteed renewability of group coverage
Current law
No provision.
House bill
The House bill would provide exceptions to the guaranteed
renewability requirement for: nonpayment of premiums, fraud,
violation of participation and contribution rules, termination
of the plan in a state or geographic area, or the employer
moved outside the service area (but only if this last provision
was applied uniformly without regard to health status).
Exceptions to guaranteed renewability would also apply in the
event that the insurer or plan no longer offered a particular
type of coverage but only if prior notice was provided, the
employer was given the chance to buy another plan offered by
the insurer or HMO, and the termination was applied uniformly
without regard to health status or insurability. An exception
would also apply in the event of discontinuance of all
coverage, but only if certain conditions were met. In this
instance, the insurer or HMO could not market small and/or
large group coverage for 5 years.
Senate amendment
The Senate Amendment is similar. It would include as
exceptions to the guaranteed renewability requirement the loss
of eligibility of COBRA continuation coverage, and failure of a
participant or beneficiary to meet requirements for eligibility
for coverage under the group health plan that are not
prohibited by this subtitle.
A network plan could deny continued participation under
the plan to participant or beneficiaries who did not live,
reside, or work in an area in which the plan was offered, but
only if the denial was applied uniformly, without regard to
health status or insurability.
The provisions relating to discontinuation of a plan or
of coverage in general are similar to the House bill.
Conference agreement
The conference agreement provides exceptions to the
guaranteed renewability requirement for one or more of the
following: (1) nonpayment of premiums; (2) fraud; (3) violation
of participation or contribution rules; (4) termination of
coverage in the market in accordance with applicable state law,
as outlined below; (5) for network plans, no enrollees
connected to the plan live, reside, or work in the service area
of the issuer, or area for which the issuer is authorized to do
business, and, in the case of the small group market only if
the issuer would deny enrollment to the plan under regulations
governing guaranteed availability of coverage; (6) for coverage
made available to bona fide associations, if membership in the
association ceases, but only if coverage is terminated
uniformly without regard to any health status-related factor
relating to any covered individual.
Exceptions to guaranteed renewability would also apply if
the issuer or plan no longer offered a particular type of group
coverage in the small or large group market so long as the
issuer, in accordance with applicable state law: (1) provided
prior notice to each plan sponsor and participants and
beneficiaries; (2) gave the plan sponsor the chance to purchase
all (or, in the case of the large group market, any) other
plans offered by the issuer in such market; and (3) applied the
termination uniformly without regard to the claims experience
of the sponsors or any health status-related factor to any
participants or beneficiaries covered or new participants or
beneficiaries who may become eligible for such coverage.
An exception would also apply in the event of
discontinuance of all coverage, but only if certain conditions
were met. In this instance, the issuer could not offer coverage
in the market and state involved for 5 years.
Issuers would be permitted to modify the health insurance
coverage for a product offered to a group health plan in the
large group market, and in the small group market if the
modification was effective on a uniform basis among group
health plans with that product.
For example, the conferees intend that issuers could
uniformly modify the terms of treatment for particular
conditions among group health plans within a type of coverage.
An exception would apply to coverage available in the small
group market only through 1 or more bona fide associations.
Issuers could modify a product offered to a group plan in the
large group market.
See section B(3) above for exceptions from availability,
renewability, and portability requirements for certain
benefits.
d. disclosure of information by health plan issuers
Current law
Section 101 of ERISA requires covered plans to furnish
summary plan descriptions and other information and notices to
plan participants and the Secretary of Labor. Section 104 of
ERISA requires covered plans to file certain information with
the Secretary of Labor and to furnish certain information to
plan participants.
House bill
The House bill does not include a provision.
Senate amendment
The Senate Amendment would require that in connection
with the offering of any group health plan to a small employer
(defined under state law or, if not so defined, one with not
more than 50 employees), that a health plan issuer make a
reasonable disclosure as part of its solicitation and sales
materials of certain information, such as the provisions of the
plan concerning the right of the issuer to change premium rates
and the factors that could affect such changes, the provisions
of the plan relating to renewability and any preexisting
condition provisions, and descriptive information about the
plan's benefits and premiums. The information would have to be
understandable by the average small employer and sufficiently
accurate and comprehensive to reasonably inform employers,
participants, and beneficiaries of their rights and obligations
under the plan. These requirements would not apply to
proprietary and trade secret information under applicable law
and do not preempt state reporting and disclosure requirements.
The Senate Amendment would amend section 104(b)(1) of
ERISA relating to the summary plan description to provide that
if there is a modification or change described in the summary
plan description that is a material reduction in covered
services or benefits provided, a summary of such changes would
have to be furnished to participants within 60 days after the
date of its adoption. Alternatively, plans sponsors could
provide such a description at regular intervals of not more
than 90 days. The bill requires the Secretary of Labor to issue
regulations providing alternative mechanisms to delivering by
mail through which employee benefit plans may notify
participants of material reductions in covered services. It
further amends the summary plan description provisions of ERISA
to require the inclusion of certain information.
Conference agreement
The conference agreement requires a health plan issuer
offering any health insurance coverage to a small employer to
make a reasonable disclosure of the availability of information
as part of its solicitation and sales materials. At the small
employer's request, the issuer must provide the provisions of
the plan concerning the right of the issuer to change premium
rates and the factors that could affect such changes, the
provisions of the plan relating to renewability and any
preexisting condition provisions, and the benefits and premiums
under all health insurance coverage for which the employer is
qualified. The information would have to be understandable by
the average small employer and sufficient to reasonably inform
small employers of their rights and obligations under the
health insurance coverage. These requirements would not apply
to proprietary and trade secret information under applicable
law.
The conference agreement would amend section 104(b)(1) of
ERISA relating to the summary plan description to provide that
if there is a material reduction in covered services or
benefits, a summary of such changes would have to be furnished
to participants within 60 days after the date of its adoption.
Alternatively, plan sponsors could provide a description at
regular intervals of not more than 90 days. The conference
agreement requires the Secretary of Labor to issue regulations
within 180 days of enactment of this Act which would provide
for alternative mechanisms, besides delivery by mail, through
which employee benefit plans may notify participants of
material reductions in covered services. It further amends the
summary plan description provisions of ERISA to require the
inclusion of certain information.
The conference agreement would amend section 101 of ERISA
to permit the Secretary, in accordance with regulations
prescribed by the Secretary, to require MEWAs that provide
medical care benefits, but are not group health plans, to
report, not more frequently than annually, in such form and
manner as the Secretary may require to determine the extent to
which the requirements of this part are being carried out.
e. state flexibility
Current law
The McCarran Ferguson Act of 1945 (P.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
of ERISA leaves to the states the regulation of insurance.
(Employee benefit plans are not insurance and are regulated by
the federal government.)
House bill
The House bill would provide that unless preempted by
section 514 of ERISA, state laws would not be preempted that
(1) related to matters not specifically addressed in subtitles
A and B, or (2) that required insurers or HMOs to: (a) impose a
limitation or exclusion of benefits relating to the treatment
of a preexisting condition for periods shorter than specified
in the bill, (b) allowed persons to be considered to be in a
period of previous qualifying coverage if they experienced a
lapse in coverage greater than 60 days, or (c) had a look-back
provision shorter than 6 months.
Senate amendment
The Senate Amendment does not include ``related to
matters not specifically addressed in subtitles A and B.'' The
Senate Amendment would provide that unless preempted by section
514 of ERISA, state laws would not be preempted that (1)
required health plan issuers to impose a limitation or
exclusion of benefits relating to the treatment of a
preexisting condition for periods that are shorter than
specified in the bill; (2) allowed individuals, participants,
and beneficiaries to be considered in a period of previous
qualifying coverage if such person experienced a lapse in
coverage that was greater than the 30-days provided under this
bill; or (3) required issuers to have a lookback period shorter
than provided for under this subtitle.
Conference agreement
The conference agreement provides that any provision of
state law which establishes, implements, or continues in effect
any standard or requirement solely relating to health insurance
issuers in connection with health insurance coverage would not
be superseded unless the state standard or requirement prevents
the application of a federal requirement of this part. Nothing
in this part of the Act would affect or modify the provisions
of section 514 of ERISA with respect to group health plans.
The conferees intend the narrowest preemption. State laws
which are broader than federal requirements would not prevent
the application of federal requirements. For example, states
may require guaranteed availability of coverage for groups of
more than 50 employees, or for groups of 1.
The conference agreement provides special rules in the
case of portability requirements. State laws applicable to a
preexisting condition exclusion which differ from the standards
or requirements specified in this part would be superseded
except if they: (1) shorten the lookback period in
determination of a preexisting condition limitation (from 6
months to any shorter period of time); (2) shorter the length
of a preexisting condition limitation exclusion (from 12
months, or 18 months for late enrollees, to any shorter
period); (3) lengthen the break in coverage time from 63 days
to any greater number; (4) lengthen the time for enrollment of
newborns, or certain children adopted or placed for adoption,
from 30 days to any greater number; (5) prohibit the imposition
of any preexisting condition exclusions in cases not described,
or expand the exclusions described; (6) require additional
special enrollment periods; (7) reduce the maximum period
permitted in an affiliation period.
A group health plan or health insurance coverage is not
required to provide specific benefits other than those provided
under the terms of such plan or coverage.
IV. Individual Market Rules
Current law
The individual health insurance market is currently
regulated by the states. As of December, 1995, 11 states
required that individual insurers write policies on a
guaranteed issue basis; 16 states required guaranteed renewal;
and 22 states limited the use of preexisting condition
limitation periods.
House bill
The House bill would provide for federal requirements to
guarantee availability of individual health insurance coverage
to certain qualified individuals with prior group coverage,
without limitation or exclusion of benefits, and to guarantee
renewability of individual health insurance coverage.
Senate amendment
Similar.
Conference agreement
The conference agreement provides for federal
requirements to guarantee availability of individual health
insurance coverage to certain qualified individuals with prior
group coverage, without limitation or exclusion of benefits,
and to guarantee renewability of individual health insurance
coverage.
A. Guaranteed availability of individual health insurance coverage
Current law
No provision.
House bill
The House bill would include goals that any qualifying
individual would be able to obtain qualifying coverage and that
qualifying individuals would receive credit for prior coverage
toward the new coverage's preexisting condition exclusion
period, if any. If states fail to implement programs meeting
these goals, a federal fall back requirement would take effect
requiring that each individual insurer enroll all eligible
individuals and that such persons receive credit for their
prior coverage toward any preexisting condition limitation
period. (See item IV(D) below on exceptions for network plans
and HMOs.)
The House bill would require that any preexisting
condition exclusion period be reduced by the length of the
aggregate period of qualified prior coverage. To determine
qualified coverage, the plan could choose one of two
alternatives: (1) it could disregard specific benefits covered
and include all periods of coverage from qualified sources; or
(2) it could examine prior coverage on a benefit-specific
basis, and exclude from qualified coverage any specific
benefits not covered under the most recent prior plan. If the
second method were chosen, plans would be required to disclose
this procedure at the time of enrollment or sale of the plan.
Senate amendment
The Senate Amendment would provide that all health plan
issuers that issue or renew individual health plans must enroll
all eligible individuals except if the insurer demonstrates
that it would have financial problems, or, that its ability to
service individuals already enrolled in the plan would diminish
if new enrollees were allowed to join the plan. In these cases,
the insurer would be prohibited from enrolling new individuals
for a period of 6 months, or, if later, when the insurer could
demonstrate that they could properly service new entrants. An
insurer would have to enroll individuals on a first-come-first-
served basis, or other basis determined by the state, to be
eligible for this limitation. States implementing guaranteed
availability programs meeting certain requirements would be
excepted from the federal requirements.
The Senate amendment would provide that a health plan
issuer may not impose a limitation or exclusion of benefits on
benefits that were covered under prior health plans.
Conference agreement
The conference agreement provides that each health
insurance issuer that offers health insurance coverage in the
individual market in a state may not decline to offer coverage
to, or deny enrollment of an eligible individual and may not
impose any preexisting condition exclusions with respect to
such coverage. This requirement will not apply in States with
acceptable alternative mechanisms as described in section IV(E)
below. In addition, in States without an acceptable alternative
mechanism, a health insurance issuer may limit the coverage
offered as described in section IV(C).
B. Qualifying/eligible individuals
Current law
No provision.
House bill
The House bill would provide that qualifying individuals
are individuals: with 18 or more months of qualified coverage
periods; with most recent prior coverage from a group health
plan, governmental plan, or church plan; ineligible for group
health coverage, Medicare Parts A or B, Medicaid, and without
individual coverage; not terminated from most recent prior
coverage for nonpayment of premiums or fraud; who, if eligible
for continuation coverage under COBRA or similar state program,
elected and exhausted this coverage; and who applied for
individual coverage not more than 60 days after the last day of
coverage under a group plan, or the termination date of COBRA
benefits.
Senate amendment
Similar, but individual would have to apply for
individual coverage not more than 30 days after the last day of
coverage under a group plan.
Conference agreement
The conference agreement defines eligible individuals as
individuals: with 18 or more months of aggregate creditable
coverage; with most recent prior coverage from a group health
plan, governmental plan, or church plan (or health insurance
coverage offered in connection with any such plan); ineligible
for group health coverage, Medicare Parts A or B, Medicaid (or
any successor program), and without any other health insurance
coverage; not terminated from their most recent prior coverage
for nonpayment of premiums or fraud; and who, if eligible for
continuation coverage under COBRA or a similar state program,
elected and exhausted this coverage.
C. Qualifying coverage
Current law
No provision.
House bill
The House bill would require coverage with an actuarial
value of benefits not less than the weighted average actuarial
value of the benefits provided by all the individual health
insurance coverage (excluding coverage issued under this
section) during the previous year, issued by: (1) the insurer
or HMO in the state; or (2) all insurers and HMOs in the state.
Requires that the actuarial value of benefits be calculated
based on a standardized population and a set of standardized
utilization and cost factors.
Senate amendment
No provision.
Conference agreement
The conference agreement requires individual health
insurance issuers to offer coverage to eligible individuals
under all policy forms with exceptions. First, a health
insurance issuer may not offer coverage under all policy forms
if the state is implementing an acceptable alternative
mechanism (see section IV(E) below). If a state is not
implementing an acceptable alternative mechanism, the health
insurance issuer may elect to limit the policy forms offered to
eligible individuals so long as it offers at least two
different policy forms of health insurance coverage both of
which are designed for, made generally available and actively
marketed to, and enroll both eligible and other individuals by
the issuer. In addition, the 2 policy forms must meet one of
the following: (1) the 2 policy forms have the largest and next
to the largest premium volume; or (2) the 2 policy forms are
representative of individual health insurance coverage by the
issuer. An issuer must apply the election uniformly to all
eligible individuals in the state for that issuer, and the
election will be effective for policies offered for not less
than 2 years.
The 2 representative policy forms would include a lower
and higher-level of coverage, each of which has benefits
substantially similar to other individual health insurance
coverage offered by the issuer in the state. The lower-level
policy form would have benefits with an actuarial value at
least 85 percent, but not greater than 100 percent of a
weighted average benefit. The higher-level policy form would
have benefits with an actuarial value: (1) at least 15 percent
greater than the actuarial value of the lower-level policy
form; and (2) between 100 and 120 percent of the weighted
average benefit. Both products must include benefits
substantially similar to other individual health insurance
coverage offered by the issuer in the state. The weighted
average may be either: (1) the average actuarial value of the
benefits from individual coverage provided by the issuer; or
(2) the average actuarial value of the benefits from individual
coverage provided by all issuers in the state. The weighted
average will be based on coverage provided during the previous
year and exclude coverage of eligible individuals. Actuarial
values will be calculated based on a standardized population
and a set of standardized utilization and cost factors.
Network plans may limit coverage to those who live,
reside, or work within the service area for the network plan.
Within the service area for the plan, the issuer may deny
coverage to individuals if the issuer has demonstrated, if
required, to the applicable state authority that it will not
have the capacity to deliver services adequately to additional
individual enrollees. Denial must be made uniformly to
individuals without regard to any health status-related factor
and without regard to whether the individuals are eligible
individuals. Upon denial, the issuer may not offer coverage in
the individual market within the service area for 180 days.
Similar rules apply for financial capacity limits.
D. Guaranteed renewal
Current law
No provision.
House bill
The House bill would require that individual coverage is
renewable at the option of the individual except for:
nonpayment; fraud; termination of all individual coverage by
the insurer or HMO, or termination of coverage in a geographic
area in the case of network or HMO plans; movement of the
individual outside the insurer's service area; termination of
the particular type of coverage by the insurer or HMO, after
the insurer has provided 90 day notice, offered the option to
purchase any other coverage, and acted without regard to health
status or insurability; discontinuation of all individual
coverage by the insurer or HMO, after 180 days notice; uniform
modification of all health plans within the individual's type
of coverage.
Senate amendment
The Senate Amendment would require that individual
coverage is renewable at the option of the individual except
for: nonpayment; fraud; termination of the particular type of
coverage by the insurer or HMO, which has provided 90 day
notice, offered the option to purchase any other coverage, and
acted without regard to health status or insurability;
termination of all individual coverage by the insurer or HMO,
after 180 days notice, and prohibition against market re-entry
for 5 years; change such that the individual lives or works
outside the insurer's service area but only if denial of
coverage is applied uniformly without regard to the health
status or insurability of the individual.
Conference agreement
The conference agreement provides that a health insurance
issuer that provides individual health insurance coverage to an
individual must renew or continue in force such coverage at the
option of the individual. It provides exceptions to the
guaranteed renewability requirement for one or more of the
following: (1) nonpayment of premiums or untimely payment; (2)
fraud; (3) termination of coverage in the market (as outlined
below) in accordance with applicable state law; (4) for network
plans, the individual no longer lives, resides, or works in the
service area of the issuer, or area for which the issuer is
authorized to do business but only if coverage is terminated
uniformly without regard to any health status-related factor;
(5) for coverage made available to bona fide associations, if
membership in the association ceases, but only if the coverage
is terminated uniformly without regard to any health status-
related factor.
An issuer may discontinue a particular type of coverage
in the individual market only if the issuer: (1) provides prior
notice to each covered individual; (2) offers each individual
the option to purchase any other individual health insurance
coverage offered by the issuer for individuals; and (3) acts
uniformly without regard to any health status-related factor of
enrolled individuals or individuals who may become eligible for
such coverage. An issuer may elect to discontinue offering all
health insurance coverage in the individual market in a state
only if certain conditions are met. In this case, the issuer
could not issue coverage in the market and state involved for 5
years. Issuers could modify the health insurance coverage for a
policy form offered to individuals in the individual market so
long as the modification was consistent with state law and was
effective on a uniform basis among all individuals with that
policy form.
In the case of health insurance coverage that is made
available by a health insurance issuer in the individual market
to individuals only through one or more associations, the
issuer would be required to meet the Act's requirements related
to individuals.
Health insurance issuers in the individual market must
provide certifications of coverage in the same manner as health
insurance issuers in the small group market.
E. OPTIONAL STATE PROGRAMS/STATE FLEXIBILITY
1. In general
Current law
No provision.
House bill.
The House bill would provide that a state may establish
public or private mechanisms to meet the goals of guaranteed
availability of coverage. The chief executive officer of the
state must notify the Secretary of HHS if the state elects to
use state mechanisms. Under a state mechanism, a state may
define qualified coverage as coverage with benefits not less
than the weighted average actuarial value of the benefits
provided by all the individual health insurance coverage
(excluding coverage issued under this section) during the
previous year, issued by: the insurer or HMO in the state; or
all insurers and HMOs in the state. The state may elect to
establish qualified coverage for all insurers and HMOs in the
state after it has established qualified coverage for each
insurer or HMO.
State mechanisms could include one or more, or a
combination of: health insurance coverage pools or programs
authorized or established by the state; mandatory group
conversion policies; guaranteed issue of one or more plans; or
open enrollment by one or more insurers or HMOs. This list is
not exclusive.
A state with a health insurance coverage pool or risk
pool in effect on March 12, 1996, which offers qualified
coverage, would automatically be considered to have met the
Federal access objectives.
In general, states would have until July 1, 1997 to
implement a state program. States without a regular legislative
session between January 1, 1997 and June 30, 1997 would have a
deadline of July 1, 1998.
Senate amendment
Similar. The Senate Amendment would provide that a state
may adopt alternative public or private mechanisms to provide
access to affordable health benefits for eligible individuals.
The Governor of the state must notify the Secretary of Health
and Human Services that the state has adopted an alternative
mechanism which achieves the goals of portability and
renewability, and that the state intends to implement this
mechanism.
State mechanisms could include guaranteed issue, open
enrollment by one or more health plan issuers, high-risk pools,
mandatory conversion policies, or any combination of these
mechanisms. A state high risk pool would meet the portability
and renewability requirements if it is: (a) open to eligible
individuals; (b) limits preexisting condition waiting periods;
and (c) is consistent with premium rates and covered benefits
in the National Association of Insurance Commissioners (NAIC)
Model Health Plan for Uninsurable Individuals Act. States which
adopt a NAIC model act, including group to individual market
portability provisions that meet the Federal portability and
renewability goals, would not be subject to federal rules.
A state may notify the Secretary, within 6 months after
enactment of this Act, that state alternate mechanism(s) would
meet portability and renewability goals. The Secretary would
not determine if the state mechanism meets the goals until 12
months after the initial state notification, or January 1,
1998, whichever is later. The Secretary would not make a
determination until January 1, 1999 for states without
legislative sessions within the 12 months after enactment of
this Act.
Conference agreement
The conference agreement provides that a state may
implement an acceptable alternative mechanism that is designed
to provide access to health benefits for individuals. This
mechanism must: (1) provide a choice of health insurance
coverage to all eligible individuals; (2) not impose any
preexisting condition exclusions; and (3) include at least one
policy form of coverage that is comparable to either
comprehensive health insurance coverage offered in the
individual market in the state or a standard option of coverage
available under the group or individual health insurance laws
in the state. If a state elects to implement the following
mechanisms, the state must also meet the preceding
requirements. These mechanisms are: (1) the NAIC Small Employer
and Individual Health Insurance Availability Model Act (as it
applies to individual health insurance coverage) or the
Individual Health Insurance Portability Model Act; (2) a
qualified high risk pool that meets certain specified
requirements; or (3) other mechanisms that provide for risk
adjustment, risk spreading, or a risk spreading mechanism (by
an issuer or among issuers or policies of an issuer), or
otherwise provide some financial subsidies for participating
insurers or eligible individuals, or, alternatively, a
mechanism under which each eligible individual is provided a
choice of all individual health insurance coverage otherwise
available.
Examples of potential alternative mechanisms include
health insurance coverage pools or programs, mandatory group
conversion policies, guaranteed issue of one or more plans of
individual health insurance coverage, or open enrollment by one
or more health insurance issuers, or a combination of such
mechanisms.
A state is presumed to be implementing an acceptable
alternative mechanism as of January 1, 1998, by not later than
July 1, 1997, the chief executive officer of the state notifies
the Secretary that the state has enacted any necessary
legislation as of January 1, 1998 and provides the Secretary
with information needed to review the mechanism and its
implementation, or proposed implementation. The state must
provide this information to the Secretary every 3 years to
continue to be presumed to have an acceptable alternative
mechanism. If a state submits notice and information after July
1, 1997, and the Secretary makes no determination within 90
days, the mechanism will be considered acceptable after 90
days.
f. construction/preemption
Current law
No provision.
House bill
The House bill would provide that states are not
prevented from: (1) implementing guaranteed availability
mechanisms before the deadline; (2) continuing state mechanisms
that were in effect before the enactment of this Act; (3)
offering guaranteed availability of coverage that is not
qualifying coverage; or (4) offering guaranteed availability of
coverage to individuals who are not qualifying individuals
Senate amendment
The Senate Amendment would provide that states are not
required to replace or dissolve high risk pools or other
similar state mechanisms which are designed to provide
individuals in those states with access to health benefits.
Conference agreement
The conference agreement provides that nothing in this
part would prevent a state from establishing, implementing, or
continuing in effect standards and requirements unless they
prevent the application of a requirement in this part. Nothing
in this part would affect or modify the provisions of section
514 of ERISA.
g. federal rules (fallback or in absence of state alternative)
Current law
No provision.
House bill
The House bill would provide that the Secretary of HHS
notify a state that federal rules would apply if: (1) the state
has not elected to use a state mechanism; or (2) if the
Secretary finds, after consultation with state officials, that
the state mechanism would not meet the federal availability
goals, and the state has had reasonable opportunity to change
or implement a state mechanism to meet the goals.
Federal rules would provide that each insurer or HMO
which issues individual health insurance coverage in the state
would have to offer qualifying coverage to qualifying
individuals, and credit prior coverage toward any preexisting
condition exclusion periods. In addition, no individual could
be refused coverage based on health status. Network plans or
HMOs could refuse coverage to individuals who did not reside or
work in the plan's service area, or if network or financial
capacity limits would be exceeded. Federal rules would cease to
apply if the state implements a mechanism designed to meet the
federal goals of availability.
Senate amendment
The Senate Amendment would provide that Federal standards
would apply if the state does not notify the Secretary of HHS
of its intent to implement state mechanisms, or if the
Secretary finds that the state mechanism fails to: (1) offer
coverage to eligible individuals; (2) prohibit preexisting
condition limitations or exclusions for benefits covered under
previous health plans; (3) offer eligible individuals a choice
of individual health plans, including at least one
comprehensive plan, or a plan comparable to a standard option
plan available under the group or individual health insurance
laws of the state; or (4) implement a risk spreading mechanism,
cross subsidy mechanism, risk adjustment mechanism, rating
limitation or other mechanism designed to reduce the variation
in costs of coverage for eligible individuals and other plans
offered by the carrier or available in the state.
The bill would waive the requirement for a risk spreading
mechanism if all individual health plans available in the
market are also available to eligible individuals.
It would provide that if the Secretary determines that
the state alternative mechanism fails to meet the above
criteria, or if the state mechanism is no longer being
implemented, the Secretary would have to notify the Governor of
the failure to meet the goals of portability and renewability,
and permit the state to come into compliance. Federal
individual health plan portability rules would apply if the
state still does not meet these criteria. Under these rules, a
plan issuer could not, with respect to an eligible individual,
decline to offer coverage to or deny enrollment of the
individual or impose a limitation or exclusion of benefits,
otherwise available under the plan, for which coverage was
available under the group health plan or employee health
benefit plan in which the person was previously enrolled. (This
would not prevent a health plan issuer from establishing
premium discounts or modifying otherwise applicable copayments
or deductibles in return for adherence to programs of health
promotion or disease prevention.)
Future adoptions of a state mechanism would be subject to
the same procedures of: (1) notification of the Secretary; and
(2) determination of satisfaction of criteria for compliance,
except in the cases of adoption of the NAIC model or high risk
pool.
Conference agreement
The conference agreement provides that if the Secretary
finds that the state mechanism is not acceptable or is no
longer being implemented, the Secretary must notify the state
of the preliminary determination and consequences of failure to
implement an acceptable mechanism. The state will have a
reasonable opportunity to modify the mechanism, or adopt a new
mechanism. If the Secretary finds that the state mechanism is
not acceptable, or is not being implemented, the Secretary must
notify the state of the effective date of federal requirements
for guaranteed availability. Each issuer would then be required
to guarantee issue health insurance coverage to any individual,
but could limit coverage to 2 policy forms as outlined in
section IV(C) above. Secretarial authority would be limited to
determinations based only on whether a state mechanism is not
an acceptable alternative mechanism or is not being
implemented. It is the intent of Congress that the risk
adjustment, risk spreading, risk spreading mechanism and
financial subsidization standards provide meaningful financial
protection and assistance for eligible individuals, both in the
case of a state alternative system and alternative coverage
provided under section 2741(c).
h. construction (premiums, market requirements, association coverage
and marketing)
Current law
No provision.
House bill
The House bill would provide that insurers or HMOs are
free to determine the premiums for individual health insurance
coverage under applicable state law. Insurers or HMOs which
only insure groups or associations would not be required to
offer individual health insurance coverage. Insurers or HMOs
that offer conversion policies in connection with a group
health plan would not be required to offer individual coverage.
Insurers or HMOs that offer coverage only in connection with a
group health plan or in connection with individuals based on
affiliation with one or more bona fide associations would not
be considered to be offering individual coverage.
A state could require that insurers or HMOs offering
individual coverage actively market this coverage.
Senate bill
The Senate Amendment is similar but did not include a
provision relating to associations.
Conference agreement
Premiums that an issuer may charge an individual for
individual health insurance coverage are not restricted by the
conference agreement, but must comply with state law. The
health insurance issuer may establish premium discounts or
rebates, or modify otherwise applicable copayments or
deductibles in return for adherence to programs of health
promotion and disease prevention.
Under the conference agreement, health insurance issuers
offering health insurance coverage in connection with group
health plans, or through one or more bona fide associations, or
both, are not required to offer health insurance coverage in
the individual market. A health insurance issuer offering group
health coverage is not considered to be a health insurance
issuer offering individual health insurance coverage solely
because the issuer offers a conversion policy.
i. enforcement of requirements on individual insurers, hmo's, and
health plan issuers
Current law
Under section 502 of ERISA, employee benefit plans that
fail to comply with applicable requirements can be sued for
relief and be subject to civil money penalties, and can be sued
to recover any benefits due under the plan. Section 504 of
ERISA provides the Secretary of Labor with investigative
authority to determine whether any person is out of compliance
with the law's requirements. Section 506 provides for
coordination and responsibility of agencies in enforcement.
Section 510 prohibits a health plan from discriminating against
a participant or beneficiary for exercising any right under the
plan.
House bill
Noncomplying insurers and HMOs would be subject to
enforcement through federal civil money penalties (in the same
manner as imposed above (see item II(G)) but only in the event
that the Secretary of HHS has determined that the state in
which the insurer or HMO is selling coverage is not providing
for enforcement.
Senate amendment
Noncomplying individual health plans offered by a health
plan issuer would be subject to state enforcement. Each state
would require each individual health plan issued, sold,
renewed, or offered for sale or operated in the state by a
health plan issuer to meet the Act's standards pursuant to an
enforcement plan filed with the Secretary of Labor. The state
would be required to submit such information as required by the
Secretary demonstrating effective implementation of the
enforcement plan. In the event that the state failed to
substantially enforce the Act's standards and requirements, the
Secretary of Labor, in consultation with the Secretary of HHS,
would implement an enforcement plan. Issuers would then be
subject to civil enforcement as provided under sections 502,
504, 506 and 510 of ERISA. The Secretary of Labor could issue
such regulations as needed to carry out this Act.
Conference agreement
Each state may require health insurance issuers that
issue, sell, renew, or offer health insurance coverage in the
individual market to meet the requirements under this part with
respect to such issuers. If a state fails to substantially
enforce the federal requirements, the Secretary will provide
enforcement in the same manner as in the small group market
(see section II(G) above).
V. Multiple Employer Pooling Arrangements
A. Clarification of duty of the Secretary of Labor to implement current
law providing for exemptions from State regulation of multiple employer
health plans (MEHPS)
Current law
Section 3(40) of ERISA defines a multiple employer
welfare benefit plan, or any other arrangement which offers or
provides health benefits and meets additional criteria, (e.g.,
it must offer such benefits to the employees of 2 or more
employers and cannot be a plan established under a collective
bargaining agreement, a rural electric cooperative, or rural
telephone cooperative association). Two or more trades or
businesses, whether or not incorporated, are deemed a single
employer and thus not a MEWA if such trades or businesses are
within the same control group.
Section 514 of ERISA treats fully-insured MEWAs
differently from those that are not fully-insured (i.e., that
are partly or fully- self-insured). With respect to a fully-
insured MEWA, a state may apply and enforce its insurance laws
(section 514(b)(6)(A)(i)). With respect to a not-fully-insured
MEWA, a state may apply and enforce its insurance laws so long
as such laws or regulations are not inconsistent with ERISA
(section 514(b)(6)(A)(ii). Section 514(b)(6)(B) provides that
the Department of Labor (DOL) may issue an exemption from state
law with respect to non-fully-insured MEWAs. (No such
exemptions have been issued.)
House bill
The House bill would add a new Part 7 (Rules Governing
State Regulation of Multiple Employer Health Plans) to Title I
of ERISA.
It would define the following terms: insurer, fully-
insured, HMO, participating employer, sponsor, and state
insurance commissioner. The House bill would define a multiple
employer health plan as a MEWA which provides medical care and
which is or has been exempt under section 514(b)(6)(B) of
ERISA.
The bill clarifies the conditions under which multiple
employer health plans (MEHPs)--non-fully-insured multiple
employer arrangements providing medical care--may apply for an
exemption from certain state laws. It provides that only
certain legitimate association health plans and other
arrangements (described below) which are not fully insured are
eligible for an exemption. This is accomplished by clarifying
the duty of the Secretary of Labor to implement the provisions
of current law section 514(b)(6)(B) to provide exemption from
state law for MEHPS.
The bill would establish criteria which a not fully-
insured arrangement must meet to qualify for an exemption and
thus become a MEHP. The Secretary could grant an exemption to
an arrangement only if: (1) a complete application has been
filed, accompanied by the filing fee of $5,000; (2) the
application demonstrates compliance with requirements
established in new sections 703 and 704 described below; (3)
the Secretary finds that the exemption is administratively
feasible, not adverse to the interests of the individuals
covered under it, and protective of the rights and benefits of
the individuals covered under the arrangement, and (4) all
other terms of the exemption are met (including financial,
actuarial, reporting, participation, and such other
requirements as may be specified as a condition of the
exemption). The application must include: (1) identifying
information about the arrangement and the states in which it
will operate; (2) evidence that ERISA's bonding requirements
will be met; (3) copies of all plan documents and agreements
with service providers; (4) a funding report indicating that
the reserve requirements of new section 705 will be met, that
contribution rates will be adequate to cover obligations, and
that a qualified actuary (a member in good standing of the
American Academy of Actuaries or an actuary meeting such other
standards the Secretary considers adequate) has issued an
opinion with respect to the arrangement's assets, liabilities,
and projected costs; and (5) any other information prescribed
by the Secretary. Exempt arrangements must notify the Secretary
of any material changes in this information at any time, must
file annual reports with the Secretary, and must engage a
qualified actuary.
In addition, the bill would provide for a class exemption
from section 514(b)(6)(B)(ii) of ERISA for large MEHPs that
have been in operation for at least five years on the date of
enactment. An arrangement would qualify for this class
exemption if, in addition to all other requirements: (1) at the
time of application for exemption; the arrangement covers at
least 1,000 participants and beneficiaries, or has at least
2,000 employees of eligible participating employers ; (2) a
complete application has been filed and is pending; and (3) the
application meets requirements established by the Secretary
with respect to class exemptions. Class exemptions would be
treated as having been granted with respect to the arrangement
unless the Secretary provide appropriate notice that the
exemption has been denied.
1. Requirements relating to MEHP sponsors, board of trustees, plan
operations, and covered persons
The House bill would establish eligibility requirements
for MEHPs. Applications must comply with requirements
established by the Secretary. They must demonstrate that the
arrangement's sponsor has been in existence for a continuous
period of at least 5 years and is organized and maintained in
good faith, with a constitution and by laws specifically
starting its purpose and providing for at least annual
meetings, as a trade association, an industry association, a
professional association, or a chamber of commerce (or similar
business group, including a corporation or similar organization
that operates on a cooperative basis within the meaning of
section 1381 of the IRC) for purposes other than that of
obtaining or providing medical care. Also, the applicant must
demonstrate that the sponsor is established as a permanent
entity, has the active support of its members, and collects
dues from its members without conditioning such on the basis of
the health status or claims experience of plan participants or
beneficiaries or on the basis of the member's participation in
the MEHP.
The bill would require that the arrangement be operated,
pursuant to a trust agreement, by a ``board of trustees'' which
has complete fiscal control and which is responsible for all
operations of the arrangement. The board of trustees must
develop rules of operation and financial control based on a
three-year plan of operation which is adequate to carry out the
terms of the arrangement and to meet all applicable
requirements of the exemption and Title I of ERISA.
With respect to covered persons, the bill would require
that all employers who are association members be eligible for
participation under the terms of the plan. Eligible individuals
of such participating employers cannot be excluded from
enrolling in the plan because of health status (as required
under section 103 of the Act as described in item I-(B) above).
The rules also stipulate that premium rates established under
the plan with respect to any particular participating employer
cannot be based on the claims experience of the particular
employer.
2. Additional entities eligible to be MEHPs
In addition to the associations described above, certain
other entities would be provided eligibility to seek an
exemption as MEHPs under section 514(b)(6)(B). These include
(1) franchise networks (section 703(b)), (2) certain existing
collectively bargained arrangements which fail to meet the
statutory exemption criteria (section 703(c)), and (3) certain
arrangements not meeting the statutory exemption criteria for
single employer plans (section 703(d)). (Section 709 of ERISA,
added by section 166 of this subtitle, also makes eligible
certain church plans electing to seek an exemption.)
3. Other requirements for exemption
The House bill would require a MEHP to meet the following
additional requirements: (1) its governing instruments must
provide that the board of trustees serves as the named
fiduciary and plan administrator, that the sponsor serves as
plan sponsor, and that the reserve requirements of new section
705 are met; (2) the contribution rates must be adequate, and
(3) any other requirements set out in regulations by the
Secretary of Labor must be met.
4. Maintenance of reserves
The House bill would require that MEHPs establish and
maintain reserves sufficient for unearned contributions,
benefit liabilities incurred but not yet satisfied, and for
which risk of loss has not been transferred, expected
administrative costs, and any other obligations and margin for
error recommended by the qualified actuary. The minimum
reserves must be no less than 25% of expected incurred claims
and expenses for the year or $400,000, whichever is greater.
The Secretary may provide additional requirements relating to
reserves and excess/stop loss coverage and may provide
adjustments to the levels of reserves otherwise required to
take into account excess/stop loss coverage or other financial
arrangements. The bill provides for an alternative means of
compliance in which the Secretary could permit an arrangement
to substitute, for all or part of the requirements of this
section, such security, guarantee, hold-harmless arrangement,
or other financial arrangement as the Secretary of Labor
determined to be adequate to enable the arrangement to fully
meet its financial obligations on a timely basis.
5. Notice requirements for voluntary termination
The House bill would provide that, except as permitted in
new section 707 below, a MEHP may terminate only if the board
of trustees provides 60 days advance written notice to
participants and beneficiaries and submits to the Secretary a
plan providing for timely payment of all benefit obligations.
6. Corrective actions and mandatory termination
The House bill would require a MEHP to continue to meet
the reserve requirements even if its exemption is no longer in
effect. The board of trustees must quarterly determine whether
the reserve requirements of new section 705 (as described
above) are being met and, if they are not, must, in
consultation with the qualified actuary, develop a plan to
ensure compliance and report such information to the Secretary.
In any case where a MEHP notifies the Secretary that it has
failed to meet the reserve requirements and corrective action
has not restored compliance, and the Secretary of Labor
determines that the failure will result in a continuing failure
to pay benefit obligations, the Secretary may direct the board
to terminate the arrangement and take action needed to ensure
that the arrangement's affairs are resolved in a manner which
will result in timely provision of all benefits for which the
arrangement is obligated.
7. Temporary application of state laws
a. Provides for exclusion of arrangements from the small
group market in any state upon the state's certification of
guaranteed access to health insurance coverage in such state
(i.e, state opt-out). Provides that a state which certifies to
the Secretary that it provides guaranteed access to health
coverage may deny a MEHP the right to offer coverage in the
small group market (or otherwise regulate such MEHP with
respect to such coverage), except as described below. The
certification triggering the state opt-out could be in effect
no longer than 3 years.
A state is considered to provide such guaranteed access,
if (1) the state certifies that at least 90% of all state
residents are covered by a group health plan or otherwise have
health insurance coverage, or (2) the state has, in the small
group market, provided for guaranteed issue of at least one
standard benefits package and for rating reforms designed to
make health insurance coverage more affordable. In states
without such guaranteed access, MEHPs could offer coverage in
the small group market in the state as long as they met the
standards set forth in Part 7 (as established by this
subtitle).
b. Provides for exceptions to the exclusion of MEHPs from
state small group markets. Provides a limited exception to the
state opt out for certain large, multi-state arrangements. The
State opt out would not apply to new and existing MEHPs that
meet the following criteria: (1) the sponsor operates in a
majority of the 50 states and in at least 2 of the regions of
the country; (2) the arrangement covers or will cover at least
7,500 participants and beneficiaries; and (30 at the time the
application to become a MEHP is filed, the arrangement does not
have pending against it any enforcement action by the state. In
addition, the state opt out would not apply in a state in which
an arrangement meeting the MEHP standards operates on March 6,
1996, to the extent a state enforcement action is not pending
against such an entity at the time an application for an
exemption is made.
The above two exceptions do not apply to any state which,
as of January 1, 1996, either (1) has enacted a law providing
for guaranteed issue of fully community rated individual health
insurance coverage offered by insurers and HMOs, or (2)
requires insurers offering group health coverage to reimburse
insurers offering individual coverage for losses resulting from
their offering individual coverage on an open enrollment basis.
Regulations may also provide for an exemption to the
application of state law for certain single industry plans.
c. Premium tax assessment authority with respect to new
arrangements. Provides that a state could assess new
association-based MEHPs (formed after March 6, 1996)
nondiscriminatory state premium taxes set at a rate no greater
than that applicable to any insurer or health maintenance
organization offering health insurance coverage in the state.
MEHPs existing as of March 6, 1996 would remain exempt from
state premium taxes. However, if they expanded into a new
state, the state could apply the above rule.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
VI. State Authority Over Non-Exempt MEWAs
Current law
Under section 514(6)(A) of ERISA, a state may apply and
enforce state insurance laws with respect to a MEWA so long as
the law or regulation is not inconsistent with ERISA.
House bill
The House bill would provide that states have the
authority under ERISA to regulate without limitation non-fully-
insured MEWAs which are not provided an exemption under new
Part 7 of ERISA (see item V above). In other words, states can
continue to regulate MEWAs that are not MEHPs.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
VII. Additional MEWA and Related Provisions
A. Clarification of treatment of single-employer arrangements
Current law
Section 3(40) of ERISA defines a MEWA and specifies the
conditions under which two or more trades or businesses shall
be deemed a single employer, if such trades or businesses are
within the same control group. Common control could not be
based on an interest of less than 25%.
House bill
The House bill would modify the treatment of certain
single employer arrangements under section 3(40) of ERISA. The
treatment of a single employer plan as being excluded from the
definition of a MEWA (and thus from state law) is clarified by
defining the minimum interest required for two or more entities
to be in ``common control'' as a percentage which cannot be
required to be greater than 25%. Also a plan would be
considered a single employer plan if less than 25% of the
covered employees are employed by other participating
employers.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
b. clarification of treatment of certain collectively-bargained
arrangements
Current law
Under section 3(40) of ERISA, a MEWA is defined not to
include any plan or arrangement which is established or
maintained under or pursuant to one or more agreements which
the Secretary finds to be collective bargaining agreements, or
by a rural electric cooperative. (No such Secretarial finding
has ever been issued).
House bill
The House bill would establish the conditions under which
multiemployer and other collectively-bargained arrangements are
exempted from the MEWA definition, and thus exempt from state
law. Amends the definition of a MEWA to exclude a plan or
arrangement which is established or maintained under or
pursuant to a collective bargaining arrangement (as described
in the National Labor Relations Act, the Railway Labor Act, and
similar state public employee relations laws). It then
specifies additional conditions which must be met for such a
plan to be a statutorily excluded collectively bargained
arrangement and thus not a MEWA.
These conditions include: (1) The plan cannot utilize the
services of any licensed insurance agent or broker to solicit
or enroll employers or pay a commission or other form of
compensation to certain persons that is related to the volume
or number of employers or individuals solicited or enrolled in
the plan; (2) a maximum 15 percent rule applies to the number
of covered individuals in the plan who are not employees (or
their beneficiaries) within a bargaining unit covered by any of
the collective bargaining agreements with a participating
employer or who are not present or former employees (or their
beneficiaries) of sponsoring employee organizations or
employers who are or were a party to any of the collective
bargaining agreements (provides for a higher maximum in the
case of certain plans or arrangements in existence as of the
date of enactment); and (3) the employee organization or other
entity sponsoring the plan or arrangement must certify annually
to the Secretary the plan has met the previous requirements.
If the plan or arrangement is not fully insured, it must
be a multiemployer plan meeting specific requirements of the
Labor Management Relations Act (i.e., the requirement for joint
labor-management trusteeship under section 302(c)(5)(B)).
If the plan or arrangement is not in effect as of the
date of enactment, the employee organization or other entity
sponsoring the plan or arrangement must have existed for at
least 3 years or have been affiliated with another employee
organization in existence for at least 3 years, or demonstrates
to the Secretary that certain of the above requirements have
been met.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
c. treatment of church plans
Current law
Section 4(b)(2) of ERISA exempts from its requirements
church plans that do not elect to participate in qualified
pension plans under the IRC.
House bill
The House bill would add a new section 709 to ERISA
treating certain church plans (including a church, convention
or association of churches or similar organization) as a MEWA
and permitting such plans to voluntarily elect to apply to the
Department of Labor for an exemption from state laws that would
otherwise apply to a MEWA under section 514(b)(6)(B) and in
accordance with new ERISA Part 7. An exempted church plan
would, with certain exceptions, have to comply with the
provisions of ERISA Title I in order to receive an exception
from state law. The election to be covered by ERISA would be
irrevocable. A church plan is covered under this section if the
plan provides benefits which include medical care and some or
all of the benefits are not fully insured. (Certain provisions
of ERISA, such as its COBRA continuation coverage requirements,
would not apply to the church plans described herein.)
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
d. enforcement provisions relating to mewas
Current law
MEWAs are subject to ERISA's enforcement and other
provisions of title I.
House bill
The House bill would amend ERISA to establish enforcement
provisions relating to the multiple employer elements of the
bill: (1) a civil penalty would apply for failure of MEWAs to
file registration statements; (2) state enforcement would be
authorized through Federal courts with respect to violations by
multiple employer health plans, subject to the existence of
enforcement agreements between the states and the federal
government; (3) willful misrepresentation that an entity is an
exempted MEWA or collectively-bargained arrangement could
result in criminal penalties; (4) cease activity orders could
be issued for arrangements found to be neither licensed,
registered, or otherwise approved under State insurance law, or
operating in accordance with the terms of an exemption granted
by the Secretary under new part 7; and (5) provides that each
MEHP require its fiduciary or board of trustees to comply with
the required claims procedure under ERISA.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
e. cooperation between federal and state authorities
Current law
Section 506 of ERISA provides for coordination between
the Department of Labor and other federal agencies in the
enforcement of ERISA. The Secretary is authorized to use the
facilities or services of the states, with the consent of the
affected departments, agencies, or establishments in enforcing
ERISA.
House bill
The House bill would amend section 506 of ERISA to
specify State responsibility with respect to self-insured MEHPs
and voluntary health insurance associations (VHIAs). A State
could enter into an agreement with the Secretary for delegation
to the State of some or all of the Secretary's authority to
enforce provisions of ERISA applicable to exempted MEHPs or to
VHIAs. The Secretary would be required to enter into the
agreement if the Secretary determined that delegation to the
State would not result in a lower level or quality of
enforcement. However, if the Secretary delegated authority to a
State, the Secretary could continue to exercise such authority
concurrently with the State. The Secretary would be required to
provide enforcement assistance to the States with respect to
MEWAs.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
f. filing and disclosure requirements for mewas offering health
benefits
Current law
ERISA provides for certain reporting and disclosure
requirements.
House bill
The reporting and disclosure requirements of ERISA would
be amended to require MEWAs offering health benefits to file
with the Secretary a registration statement within 60 days
before beginning operations (for those starting on or after
January 1, 1997) and no later than February 15 of each year. In
addition, MEWAs providing medical care would be required to
issue to participating employers certain information including
summary plan descriptions, contribution rates, and the status
of the arrangement (whether fully-insured or an exempted self-
insured plan).
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
g. single annual filing for all participating employers
Current law
Section 110 of ERISA provides for alternative methods of
compliance with reporting and disclosure requirements to those
specified in previous sections of the law.
House bill
This section would amend ERISA's section 110 to provide
for a single annual filing for all participating employers of
fully insured MEWAs.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
h. effective dates/transition rules
Current law
No provision.
House bill
The House bill would provide that in general, the
amendments made by this title would be effective January 1,
1998. In addition, the Secretary would be required to issue all
regulations needed to carry out the amendments before January
1, 1998.
The bill would provide for transition rules for self-
insured MEWAs which meet the requirements of Part 7 and which
are in operation as of the effective date so that those
applying to the Secretary for an exemption from State
regulation are deemed to be excluded for a period not to exceed
18 months unless the Secretary denies the exemption or finds
the MEWAs application deficient, provided that the arrangement
does not have pending against it an enforcement action by a
state. The Secretary could revoke the exemption at any time if
it would be detrimental to the interests of individuals covered
under the Act.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
VIII. Voluntary Health Insurance Associations/Health Plan Purchasing
Cooperatives (HPPCs)
Current law
While the states regulate insurance sold to purchasing
cooperatives, a purchasing cooperative that is also a MEWA is
also regulated under ERISA. Under ERISA, a state may apply and
enforce its insurance laws with respect to fully-insured MEWAs.
As of December 1995, 15 states had enacted laws relating
to voluntary purchasing alliances/cooperatives.
House bill
The House bill would add a new subsection (d) to section
514 of ERISA defining under ERISA voluntary health insurance
associations and establishing federal requirements for such
associations. Associations meeting these requirements would be
exempt from specific state laws.
Senate amendment
The Senate Amendment would provide for limited exemptions
from state laws for health insurance purchasing cooperatives
that meet the requirements established by this section.
Conference agreement
The conference agreement does not include the House or
Senate provision.
a. definitions/nature of organization
Current law
No provision.
House bill
The House bill would define a voluntary health insurance
association as a multiple employer welfare arrangement,
maintained by a qualified association, under which all medical
benefits are fully-insured, under which no employer is excluded
as a participating employer (subject to minimum participation
requirements of an insurer), under which the enrollment
requirements of section 103 of the Act apply (see item II
above), under which all health insurance coverage options are
aggressively marketed, and under which the health insurance
coverage is provided by an insurer or HMO to which the laws of
the state in which it operates apply.
A qualified association would be an association in which
the sponsor of the association is, and has been (together with
its immediate predecessor, if any) for a continuous period of
not less than 5 years, organized and maintained in good faith,
with a constitution and bylaws specifically stating its
purpose, as a trade association, an industry association, a
professional association, or a chamber of commerce (or similar
business group), for substantial purposes other than that of
obtaining or providing medical care, is established as a
permanent entity which receives the active support of its
members and meets at least annually, and collects dues without
conditioning such dues on the basis of the health status or
claims experience of plan participants or beneficiaries or on
the basis of participation in a VHIA.
A ``small employer'' would be defined as one who employs
at least 2 but fewer than 51 employees on a typical business
day in the year.
Senate amendment
The Senate Amendment would define a ``health plan
purchasing cooperative'' or HPPC to mean a group of employees
or a group of individuals and employers that, on a voluntary
basis and in accordance with this section, form a cooperative
for the purpose of purchasing an individual health plan or
group health plans offered by health plan issuers.
An HPPC could not: (a) perform any activity relating to
the licensing of health plan issuers; (b) assume financial risk
directly or indirectly (that is, it would have to be fully-
insured); (c) establish eligibility, enrollment, or premium
contribution requirements for individual participants or
beneficiaries based on health status, medical condition, claims
experience, receipt of health care, medical history, evidence
of insurability, genetic information, or disability; (d)
operate on a for-profit or other basis where the legal
structure of the cooperative permits profits to be made and not
returned to the members of the cooperative, or (e) perform any
other activities that conflict or are inconsistent with the
performance of its duties under this Act. A for-profit
cooperative could be formed by a nonprofit organization or
organizations in which: (1) membership in such organization is
not based on health status, medical condition, claims
experience, receipt of health care, medical history, evidence
of insurability, genetic information, or disability and (2)
that accepts as members all employers or individuals on a
first-come, first-serve basis, subject to any established limit
on the maximum size of an employer that may become a member.
Conference agreement
The conference agreement does not include the House or
Senate provision.
b. certification
Current law
No provision.
House bill
No provision.
Senate agreement
The Senate Amendment would provide that a state certify a
group as a HPPC if it appropriately notifies the state and the
Secretary of Labor that it wants to form a HPPC under the
requirements of this section. The state would be required to
determine in a timely fashion whether the group is in
compliance with the section's requirements and to oversee the
operations of the HPPC to ensure continued compliance with the
requirements. Each certified HPPC would have to register with
the Secretary of Labor.
If a state failed to implement a HPPC certification
program in accordance with this Act's standards, the Secretary
of Labor would certify and oversee the HPPCs in that state.
However, the Secretary would not certify a HPPC if, upon
submission of an application of the state to the Secretary, the
Secretary determined that a state law was in effect on the date
of enactment of this Act providing that all small employers in
the state had a means readily available that ensured: (a) that
individuals and employees had a choice of multiple,
unaffiliated health plan issuers; (b) that health plan coverage
was subject to state premium rating requirements that were not
based on the health and other risk factors described above and
that contained a mandatory minimum loss ratio; (c) that
comparative health plan materials were disseminated (including
information about cost, quality, benefits, and other
information); and that (d) the state program otherwise met the
objectives of this Act.
A HPPC operating in more than one state would be
certified by the state in which the cooperative was domiciled.
States could enter into cooperative agreements for the purpose
of overseeing a HPPC's operation. A HPPC would be considered to
be domiciled in the state in which most of the members of the
HPPC reside.
Conference agreement
The conference agreement does not include the Senate
provision.
c. structure and responsibilities of organization
Current law
No provision.
House bill
The House bill would provide that VHIAs and qualified
associations meet certain conditions (described in items
VIII(A) and VIII(D)) to qualify as a VHIA and therefore for
exemption from state insurance laws.
Senate amendment
The Senate Amendment would provide for the following
requirements for HPPCs:
I. Board of Directors.--Requires each HPPC to be governed
by a board of directors that would be responsible for ensuring
the performance of the HPPC. The board would have to be
composed of a cross-section of representatives of employers,
employees, and individuals participating in the HPPC. The board
members could not be compensated but could receive
reimbursement for reasonable and necessary expenses incurred in
performing their HPPC responsibilities.
2. Membership and marketing area.--Permits a HPPC to
establish limits on the maximum size of employers who could
become members and to determine whether to allow individuals to
be members. Once membership limits were established, the HPPC
would be required to accept all employers (or individuals)
residing within the area served by the HPPC who met the
membership requirements on a first-come, first-served basis, or
on another basis established by the state to ensure equitable
access to the HPPC.
3. Duties and responsibilities.--Requires a HPPC to: (a)
objectively evaluate potential health plan issuers and enter
into agreements with multiple, unaffiliated ones, except that
this requirement would not apply in regions, such as remote or
frontier areas, where compliance was not possible; (b) enter
into agreements with employers and individuals who become
members; (c) participate in any program of risk-adjustment or
reinsurance, or any similar program established by the state;
(d) prepare and disseminate comparative health plan materials
concerning the plans offered through the HPPC; (e) broadly
solicit and actively market to all eligible employers and
individuals residing within the service area; and (f) act as an
ombudsman for enrollees.
4. Permissible activities.--Permits a HPPC to perform
other functions as needed to further the purposes of this Act,
such as: (a) collecting and distributing premiums and
performing other administrative functions; (b) collecting and
analyzing surveys of satisfaction; (c) charging fees for
membership and participation fees to issuers; (d) cooperating
with (or accepting as members) employers who provide health
benefits directly but only for the purpose of negotiating with
providers; and (5) negotiating with health care providers and
health plan issuers.
5. Limitation on cooperative activities.--see item
VIII(A) above.
6. Conflict of interest.--Prohibits any individual,
partnership, or corporation from serving on the HPPC board,
being employed by or receiving compensation from the HPPC, or
initiating or financing a HPPC if such individual, partnership,
or corporation (a) fails to discharge the duties and
responsibilities in a manner that is solely in the interest of
the members; or (b) derives personal benefit from the sale of,
or financial interest in, health plans, services, or products
sold through the HPPC. However, a HPPC could contract with
third parties to provide administrative, marketing, consultive,
or other services.
Conference agreement
The conference agreement does not include the House or
Senate provision.
d. preemption of state laws
Current law
Section 514(a) of ERISA preempts state laws relating to
employee benefit plans. Section 514(b)(2) of ERISA provides
that state laws apply in the case of the regulation of
insurance.
House bill
The House bill would amend section 514 of ERISA to
preempt the following state laws: (1) laws that preclude an
insurer or HMO from offering health insurance coverage under
VHIAs; (2) laws that preclude an insurer or HMO from setting
premium rates under a VHIA based on the claims experience of
the VHIA (except the VHIA's premium rates could not vary on the
basis of any particular employer's claims experience); (3) laws
that require coverage in connection with a VHIA to include
specific items or services of medical care or that require an
insurer or HMO offering coverage in connection with a VHIA to
include specific item or services consisting of medical care,
except to the extent that such state laws prohibit an exclusion
for a specific disease in such coverage. This preemption of
mandated benefits would apply only with respect to those items
and services specified in a list which would be prescribed in
regulations by the Secretary of Labor.
In general, states would be able to apply their laws if
they had in place guaranteed access measures meeting certain
conditions. A state which certified to the Secretary that it
provided ``guaranteed access'' to health coverage could deny a
VHIA the right to offer coverage in the small group market (or
otherwise regulate such VHIA with respect to such coverage),
except as described below. (The certification could not be in
effect for more than 3 years.)
A state would be considered to provide such guaranteed
access, if (1) it certified that at least 90% of all state
residents were covered by a group health plan or otherwise had
health insurance coverage, or (2) that it had, in the small
group market, provided for guaranteed issue of at least one
option of coverage and for small group rating reforms designed
to make health insurance coverage more affordable. However, an
exception to this provision would apply for certain large,
multi-state arrangements that demonstrated to the Secretary
that it met the following criteria. In other words, state laws
would not apply if: (1) the VHIA sponsor operates in a majority
of the 50 states and in at least 2 of the regions of the
country; (2) the arrangement covers or will cover (in the case
of new VHIAs) at least 7,500 participants and beneficiaries;
and (3) under the terms of the arrangement, either the
qualified association does not exclude from membership any
small employer in the state, or the arrangement accepts every
small employer in the state that applies for coverage. In
addition, state laws would not apply in a state in which a VHIA
operated on March 6, 1996 and under the terms of the
arrangement, either the qualified association does not exclude
from membership any small employer in the state, or the
arrangement accepts every small employer in the state that
applies for coverage.
The exemption from state laws for multistate plans and
existing plans would not apply to any state which, as of
January 1, 1996, either (1) had enacted a law providing for
guaranteed issue of fully community rated individual health
insurance coverage offered by insurers and HMOs, or (2)
required insurers offering group health coverage to reimburse
insurers offering individual coverage for losses resulting from
their offering individual coverage on an open enrollment basis.
In other words, such states could apply their insurance laws.
Senate amendment
The Senate Amendment would provide that HPPCs that meet
the requirements of this Act would be exempt from state
fictitious group laws.
A health plan issuer offering a group or individual
health plan through a HPPC meeting the requirements of this Act
would be required to comply with all otherwise applicable state
rating requirements if the plan were to be offered outside the
cooperative except a state would be required to permit an
issuer to reduce its premiums negotiated with a HPPC to reflect
savings derived from administrative costs, marketing costs,
profit margins, economies of scale, or other factors. However,
such premium reductions could not be based on the health
status, demographic factors, industry type, duration, or other
indicators of risk of HPPC members.
Health plan issuers offering coverage through the HPPC
would be required to comply with state mandated benefit laws.
However, in states that have enacted laws authorizing
alternative benefit plans for small employers, such issuers
could offer such small employer plan through a HPPC.
Conference agreement
The conference agreement does not include the House or
Senate provision.
e. rules of construction
Current law
No provision.
House bill
No provision.
Senate amendment
The Senate Amendment would provide that nothing in this
section should be construed to: (1) require that a state
organize, operate, or create HPPCs; (2) otherwise establish
HPPCs; (3) require individuals, plan sponsors, or employers to
purchase coverage through a HPPC; (4) preempt a state from
requiring licensure for individuals who are involved in
directly supplying advice or selling health plans on behalf of
a HPPC; (5) require that a HPPC be the only type of purchasing
arrangement permitted to operate in a state; (6) confer
authority upon a state that the state would not otherwise have
to regulate health plan issuers or employee health benefit
plans; (7) confer authority upon a state (or the federal
government) that it would not otherwise have to regulate group
purchasing arrangements, coalitions, association plans, or
similar entities that do not desire to become a HPPC; or (8)
except as specifically provided for above, prevent the
application of state laws and regulations otherwise to health
plan issuers offering coverage through a HPPC.
Conference agreement
The conference agreement does not include the Senate
provision.
f. enforcement through erisa
Current law
Part 4 of subtitle B of title I of ERISA provides for
fiduciary responsibilities, including the fiduciary duties of a
plan sponsor and prohibited transactions; part 5 provides for
administration and enforcement, including criminal and civil
penalties.
House bill
The House bill contains no specific provision (but as
MEWAs, VHIAs would be subject to ERISA requirements including
those related to fiduciary responsibilities and administration
and enforcement, including enforcement of the new VHIA rules as
added by this subtitle.)
Senate amendment
The Senate Amendment would provide that for enforcement
purposes only, that parts 4 and 5 of subtitle B of title I of
ERISA apply to a HPPC as if such plan were an employee benefit
plan.
Conference agreement
The conference agreement does not include the Senate
provision.
IX. Additional Definitions/Other Provisions
Current law
Section 3 of ERISA defines numerous terms relating to
pension and employee welfare benefit plans.
House bill
The House bill:
A. Defines the following terms: group health plan,
including treatment of governmental and church plans, and
defines Medicaid, medicare, and the Indian Health Service
programs as group health plans.
B. Incorporates specific ERISA definitions such as
beneficiary, participant, employee, and employer.
C. Provides additional definitions including applicable
state authority, bona fide association, COBRA continuation
provision, health insurance coverage, health maintenance
organization, health status, individual health insurance
coverage, insurer, medical care network plan, and waiting
period.
D. Provides for the treatment of partnerships.
E. Provides definitions related to markets and small
employers, including individual market, large group market,
small employer and small group market.
Senate bill
The Senate Amendment:
A. Defines an employee health benefit plan to include a
governmental or church plan. An employee health benefit plan is
not a group health plan, individual plan, or a health plan.
Provides different definition for group health plan.
B. Similarly incorporates many ERISA definitions such as
that for beneficiary, participant, employee, and employer.
C. Defines group purchaser and health plan issuer.
Conference agreement
The conference agreement:
A. Defines under ERISA the following terms relating to
health insurance: health insurance coverage, health insurance
issuer, health maintenance organization, group health insurance
coverage, and excepted benefits. Also defines placed for
adoption.
B. Defines under PHS Act the following terms relating to
health insurance: health insurance coverage, health insurance
issuer, health maintenance organization, group health insurance
coverage, and excepted benefits.
C. Defines under the PHS Act: state, applicable state
authority, state law, beneficiary, and bona fide association.
Also, provides definitions under the PHS Act relating to
markets and small employers for: large group market, small
employer, and small group market.
D. Provides definitions under ERISA and the PHS Act
relating to portability for: preexisting condition exclusion,
enrollment date, late enrollee, waiting period, creditable
coverage, and affiliation period.
E. Defines under ERISA and the PHS Act group health plan,
medical care, COBRA continuation provision, and health status-
related factor.
The definition of medical care is intended to parallel
that of the IRC using current law, and is intended to be broad
enough to encompass the services of Christian Science
practitioners, nurses, and sanatoriums and nursing facilities.
F. Amends ERISA to provide for the treatment of
partnerships.
G. Incorporates in the PHS Act specific ERISA definitions
such as employee, employer, beneficiary, church plan,
governmental plan, participant, plan sponsor.
H. Provides definitions under the PHS Act for federal
governmental plan, nonfederal governmental plan, and placed for
adoption.
X. Effective Dates
Current law
No provision.
House bill
The House bill, except as otherwise provided, would apply
with respect to (a) group health plans, and health insurance
coverage offered in connection with group health plans, for
plan years beginning on or after January 1, 1998; (b)
individual health insurance coverage issued, renewed, in
effect, or operated on or after July 1, 1998. The bill would
require the Secretaries of HHS, Treasury, and Labor to jointly
establish rules regarding the treatment of certain coverage
periods before the applicable effective dates, and would
require the 3 Secretaries to issue such regulations on a timely
basis.
Senate amendment
The Senate Amendment, except as otherwise provided, (a)
with respect to group health plans, would apply to plans
offered, sold, issued, renewed, in effect, or operated on or
after January 1, 1997; (b) with respect to individual health
plans, would apply to plans offered, sold, issued, renewed, in
effect, or operated on or after the date that is 6 months after
enactment or January 1, 1997, whichever is later; and (c) with
respect to employee health benefit plans, would apply on the
first day of the first plan year beginning on or after January
1, 1997, whichever is later.
Conference agreement
The conference agreement, except as otherwise provided,
would apply with respect to (a) group health plans, and health
insurance coverage offered in connection with group health
plans, for plan years beginning after July 1, 1997; (b)
individual health insurance coverage offered, sold, issued,
renewed, in effect, or operated after July 1, 1997. In general,
group health plans and health plan issuers would be required to
issue certifications of coverage for periods of coverage after
July 1, 1996; actual certifications need not be issued before
October 1, 1996. A special rule directs the Secretaries to
provide for a process whereby individuals who need to establish
creditable coverage for periods before July 1, 1996 may be
given credit through the presentation of documents or other
means. A special rule would apply to collective bargaining
agreements.
A good faith compliance provision is provided with
respect to a transition period.
XI. Health Coverage Availability Studies
Current law
No provision.
House bill
No provision.
Senate amendment
The Senate Amendment would require the Secretary of HHS,
in consultation with the Secretary of Labor, representatives of
state officials, consumers, and other representatives of
individuals and entities that have expertise in health
insurance and employee benefits, to conduct a three-part study
and prepare and submit reports. (A) By January 1, 1998, the
Secretary would be required to prepare and submit to Congress
an evaluation of the various mechanisms used to ensure the
availability of reasonably priced health coverage and whether
standards that limit premium variations would further the
purposes of this Act. (B) No later than January 1, 1999, the
Secretary would be required to prepare and submit to Congress a
report concerning the effectiveness of provisions of the Act
and various state laws in ensuring the availability of
reasonably priced health coverage. (C) No later than January 1,
1998, the Secretary would be required to prepare and submit to
Congress a report (1) evaluating the extent to which patients
have direct access to, and choice of, health care providers, as
well as the opportunity to utilize providers outside of the
network, under the various types of coverage offered under the
provisions of this Act; (2) evaluating the cost to the insurer
of providing out-of-network access to providers and the
feasibility of offering out-of-network access under all plans
offered under this Act; and (3) evaluating the percent of
premium used for medical care administration of the various
types of coverage offered.
Conference agreement
The conference agreement requires the Secretary of HHS,
in consultation with the Secretary of Labor, representatives of
state officials, consumers, and other representatives of
individuals and entities that have expertise in health
insurance and employee benefits, to conduct two studies by
January 1, 2000. The first study, on the effectiveness of
federal and state reforms, would examine the availability of
reasonably priced health coverage to employers purchasing group
coverage and individuals purchasing coverage on a non-group
basis. The second study, on access and choice, would examine
the extent to which patients have direct access to, and choice
of, health care providers, including specialty providers,
within a network plan, as well as the opportunity to use
providers outside of the network plan, under the various types
of coverage offered under the provisions of this title. This
study will also examine the cost and cost-effectiveness to
health insurance issuers of providing access to out-of-network
providers, and the potential impact of providing such access on
the cost and quality of health insurance coverage offered under
provisions of this title.
XII. Reimbursement of Telemedicine
Current law
No provision.
House bill
No provision.
Senate amendment
The Senate amendment would direct the Health Care
Financing Administration (HCFA) to complete its ongoing study
of reimbursement of all telemedicine services and submit a
report to Congress with a proposal for reimbursement of fee-
for-service medicine by March 1, 1997. The report would be
required to use data compiled from the current demonstration
projects already under review and gather data from other
ongoing telemedicine networks, and include an analysis of the
cost of services provided via telemedicine.
Conference agreement
The conference agreement directs the HCFA to complete its
ongoing study of Medicare reimbursement of all telemedicine
services and submit a report to Congress on reimbursement of
telemedicine services by March 1, 1997. The report would be
required to use data compiled from the current demonstration
projects already under review and gather data from other
ongoing telemedicine networks, include an analysis of the cost
of services provided via telemedicine, and include a proposal
for Medicare reimbursement of telemedicine services.
XIII. HMOs and Medical Savings Accounts (MSAs)
Current law
Under the Public Health Service Act, federally qualified
HMOs may require enrollees to pay only nominal copayments and a
reasonable deductible if services are obtained from an out-of-
network provider.
House bill
No provision, but see Title III, Subtitle A on Medical
Savings Accounts.
Senate amendment
The PHS Act would be amended to allow federally-qualified
HMOs, at the request of the HMO member, to charge a deductible
to the HMO member if he or she has an MSA.
Provides that it is the sense of the Committee on Labor
and Human Resources that the establishment of MSAs should be
encouraged as part of any health insurance reform legislation
passed by the Senate through the use of tax incentives relating
to contributions to, the income growth of, and the qualified
use of, such accounts.
Provides that it is the sense of the Senate that Congress
should take measures to further the purposes of this Act,
including any necessary changes to the Internal Revenue Code to
encourage groups and individuals to obtain health coverage, and
to promote access, equity, portability, affordability, and
security of health benefits.
Conference agreement
The conference agreement amends the PHS Act to allow
federally qualified HMOs to offer a high-deductible health plan
as defined in the IRC. All other requirements of the federal
HMO Act remain in effect.
XIV. Volunteer Services Provided by Health Professionals at Free
Clinics
See report language for Title II.
XV. Findings; Severability
Current law
No provision.
House bill
The House bill would provide that Congress finds: (1)
that group health plans and health insurance coverage that
impose preexisting conditions impact the ability of employees
to seek employment in interstate commerce and thereby impedes
such commerce; (2) that health insurance coverage is commercial
in nature and is in and affects interstate commerce; (3) that
it is a necessary and proper exercise of congressional
authority to impose requirements on group health plans and
health insurance coverage to promote commerce among states; and
(4) that Congress intends however to defer to the states to the
maximum extent practicable in carrying out requirements with
respect to insurers and HMOs that are subject to state
regulation, consistent with ERISA.
Senate amendment
The Senate Amendment would provide that if any provision
of the Act or application of a provision of the Act to any
person or circumstance is held to be unconstitutional, the
remainder of the Act and the application of the provisions of
such to any person or circumstances would not be affected.
Conference agreement
The conference agreement provides that Congress finds:
(1) that group health plans and health insurance coverage that
impose preexisting conditions impact the ability of employees
to seek employment in interstate commerce and thereby impedes
such commerce; (2) that health insurance coverage is commercial
in nature and is in and affects interstate commerce; (3) that
it is a necessary and proper exercise of congressional
authority to impose requirements under this title on group
health plans and health insurance coverage, including coverage
offered to individuals previously covered under group health
plans, to promote commerce among states; and (4) that Congress
intends to defer to the states, to the maximum extent
practicable, in carrying out such requirements with respect to
insurers and HMOs that are subject to state regulation,
consistent with ERISA.
The conference agreement provides that if any provision
of this title or application of such provision to any person or
circumstance is held to be unconstitutional, the remainder of
this title and the application of the provisions of such to any
person or circumstances would not be affected.
XVI. COBRA Clarifications
Current law
Title X of the Consolidated Omnibus Budget Reconciliation
Act of 1985 (COBRA, P.L. 99-272) amends the Internal Revenue
Code (IRC), ERISA, and the Public Health Service Act to require
employers who provide group health plans with 20 or more
employees to offer continuation coverage to employees and their
dependents who experience specific qualifying events, including
changes in job or family status. In general, when a covered
employee experiences termination or reductions in hours of
employment, the continued coverage of the employee and any
qualified beneficiaries is for 18 months. For other qualifying
events (e.g., death, divorce, legal separation, and child turns
age of majority under the plan), the duration of coverage is 3
years. The Omnibus Budget Reconciliation Act of 1989 (P.L. 10-
239) provides that if a covered employee is determined to be
disabled under the Social Security Act at the time in which he
or she terminates or reduces hours of employment, then the
employee is eligible for 29 months of continued coverage.
House bill
No provision.
Senate amendment
The Senate Amendment would amend the PHS Act, ERISA, and
the IRC to provide for clarifications of COBRA continuation
requirements. Provides that individuals who have disabled
family members or who become disabled at any time during their
coverage under an initial COBRA period (the first 18 months) be
able to extend their coverage for the additional 11 month
period currently available only to workers who are disabled at
the time they lose their coverage.
Provides that newborns and children who are placed for
adoption may be covered immediately under a parent's COBRA
policy.
Conference agreement
See Title IV, Subtitle B.
XVII. Sense of the Committee Regarding Medicare
Current law
No provision.
House bill
No provision.
Senate amendment
The Committee on Labor and Human Resources notes that the
Medicare trustees concluded in their 1995 report that: (i) the
Medicare program is unsustainable in its present form; (ii)
that the hospital insurance trust fund will only be able to pay
for benefits for about 7 years and is severely out of financial
balance in the long run; and (iii) the Public Trustees
recommended that the problems be urgently addressed on a
comprehensive basis including a review of the program's
financing methods, benefit provisions, and delivery mechanisms.
The provision expresses the sense of the Committee that the
Senate should take up measures necessary to reform the Medicare
program, to provide increased choice for seniors, and to
respond to the findings of the Public Trustees by protecting
the short term solvency and long-term sustainability of the
Medicare program.
Conference agreement
The conference agreement does not include the Senate
provision.
XVIII. Parity for Mental Health Services
Current law
No provision.
House bill
No provision.
Senate amendment
The Senate Amendment would prohibit an employee health
benefit plan, or a health plan issuer offering a group health
plan or individual health plan from imposing treatment
limitations or financial requirements on the coverage of mental
health services if similar requirements are not imposed on
coverage for services for other conditions.
It would provide for a rule of construction that the
preceding should not be construed as prohibiting an employee
health benefit plan or a health plan issuer offering a group or
individual health plan from requiring preadmission screening
prior to the authorization of services covered under the plan
or from applying other limitations that restrict coverage for
mental health services to those services that are medically
necessary.
Conference agreement
The conference agreement does not include the Senate
provision.
XIX. Waiver of Foreign Country Residence With Respect to International
Medical Graduates
Current law
The Immigration and Nationality Technical Corrections Act
of 1994 provides for a waiver of the requirement that
nonimmigrant international medical graduates entering as J
exchange visitors return to their country of nationality for
two years before being eligible to return to the U.S. The
provision applies to aliens admitted to the U.S. before June 1,
1996.
House bill
No provision.
Senate bill
The Senate Amendment would extend waivers for the
requirement that nonimmigrant international medical graduates
entering as J exchange visitors return to their country of
nationality for two years before being eligible to return to
the U.S. through June 1, 2002.
It would amend provisions related to federally requested
waivers requested by an interested U.S. agency on behalf of
certain aliens.
Conference agreement
The conference agreement does not include the Senate
provision.
XX. Organ and Tissue Donation Information Included With Income Tax
Refund Payments
Current law
No provision.
House bill
No provision.
Senate bill
The Senate Amendment would require the Secretary of
Treasury to include with any payment of a refund of individual
income tax made during the period beginning on February 1, 1997
through June 30, 1997, a copy of the document developed in
consultation with the Secretary of HHS and organizations
promoting organ and tissue donation which encourages organ and
tissue donation. The document would also include a detachable
organ and tissue donor card, and would urge recipients to sign
the card, discuss organ and tissue donations with family
members, and encourage family members to request or authorize
organ and tissue donation if the occasion arises.
Conference agreement
The conference agreement does not include the Senate
provision.
XXI. Sense of the Senate Regarding Adequate Health Care Coverage for
all Children and Pregnant Women
Current law
No provision.
House bill
No provision.
Senate amendment
The Senate Amendment provides that the Senate finds that
the health care coverage of mothers and children in the United
States is unacceptable, with more than 9.3 million children and
500,000 expectant mothers having no health insurance, in
addition to there being high levels of infant and maternal
mortality and other enumerated indicators of inadequate access
to care.
The Senate Amendment provides that it is the sense of the
Senate that the issue of adequate health care for our mothers
and children is important to the future of the United States,
and in consideration of the importance of such issue, the
Senate should pass health care legislation that will ensure
health care coverage for all of the United States' pregnant
women and children.
Conference agreement
The conference agreement does not include the Senate
provision.
XXII. Sense of the Senate Regarding Available Treatments
Current law
No provision.
House bill
No provision.
Senate amendment
The Senate Amendment provides that it is the sense of the
Senate that patients deserve to know the full range of
treatments available to them and Congress should thoughtfully
examine these issues to ensure that all patients get the care
they deserve.
Conference agreement
The conference agreement does not include the Senate
provision.
XXIII. Rule of Construction
Current law
No provision.
House bill
The House bill would provide that nothing in this title
or any amendment made by it may be construed to require (or to
authorize any regulation that requires) the coverage of any
specific procedure, treatment, or service under a group health
plan or health insurance coverage.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision, but see section III(E).
TITLE II--PREVENTING HEALTH CARE FRAUD AND ABUSE: ADMINISTRATIVE
SIMPLIFICATION; MEDICAL LIABILITY REFORM
1. Fraud and abuse control program
(Subtitle A of title II of the House bill; title V of the
Senate amendment.)
I. In general
A. Fraud and Abuse Control Program
(Section 201 of the House bill; section 501 of the Senate
amendment.)
Current law
Currently, the investigation and prosecution of fraud
related to Federal health programs is the responsibility of the
Department of Health and Human Services (DHHS), the FBI and the
Department of Justice. The DHHS Office of Inspector General
investigates Federal cases of fraud regarding Medicare,
Medicaid, and the Maternal and Child Health Block Grant
programs and is authorized by the Secretary to impose civil
monetary penalties and program exclusions on fraudulent
providers. The FBI can investigate both Federal and private
payer cases of fraud but cannot impose sanctions. Both the
Office of Inspector General and the FBI refer investigative
findings to the Department of Justice which may prosecute
persons for violations of federal criminal laws. State Medicaid
fraud control units are responsible for the investigation,
prosecution, or referral for prosecution, of fraudulent
activities associated with State Medicaid programs.
House bill
The Secretary of the Department of Health and Human
Services (acting through the Office of the Inspector General)
and the Attorney General would be required to jointly establish
a national health care fraud and abuse control program to
coordinate Federal, State and local law enforcement to combat
fraud with respect to health plans. To facilitate the
enforcement of this fraud and abuse control program the
Secretary and Attorney General would be authorized to conduct
investigations, audits, evaluations and inspections relating to
the delivery of and payment for health care, and would be
required to arrange for the sharing of data with
representatives of public and private third party payers. This
program, implemented by guidelines issued by the Secretary and
the Attorney General, would also facilitate the enforcement of
applicable Federal statutes relating to health care fraud and
abuse, and would provide for the provision of guidance to
health care providers through the issuance of safe harbors,
advisory opinions and special fraud alerts.
The Secretary and Attorney General would consult with and
share data with representatives of health plans. Guidelines
issued by the Secretary and Attorney General would ensure the
confidentiality of information furnished by health plans,
providers and others, as well as the privacy of individuals
receiving health care services. The Inspector General would
retain all current authorities.
For purposes of this section the term ``health plan''
means a plan or program that provides health benefits through
insurance or otherwise. Such plans include health insurance
policies, contracts of service benefit organizations, and
membership agreements with health maintenance organizations or
other prepaid health plans.
The Health Care Fraud and Abuse Control Account would be
established as an expenditure account within the Federal
Hospital Insurance (HI) Trust Fund. Amounts equal to monies
derived from the coordinated health care anti-fraud and abuse
programs from the imposition of civil money penalties, fines,
forfeitures and damages assessed in criminal, civil or
administrative health care cases, along with any gifts or
bequests would be transferred into the Medicare HI trust fund
from the U.S. Treasury. There are appropriated from the HI
trust fund to the Account such sums as the Secretary and the
Attorney General certify are necessary to carry out certain
functions, subject to specified limits for each fiscal year
beginning with 1997.
There would be appropriated from the general fund of the
U.S. Treasury to the Fraud and Abuse Account for transfer to
the FBI certain funds, subject to fiscal year limitations, for
specified functions. These functions include prosecuting health
care matters, investigations, audits of health care programs
and operations, inspections and other evaluations, and provider
and consumer education regarding compliance with fraud and
abuse provisions. Specified amounts in the Account would also
be available to carry out the Medicare Integrity Program. The
Secretary and the Attorney General would be required to submit
a joint annual report to Congress on the revenues and
expenditures, and the justification for such disbursements from
the Health Care Fraud and Abuse Control Account.
Senate amendment
Similar.
Conference agreement
The conference agreement includes the House provision
with an amendment adding a requirement that the Comptroller
General submit to Congress a report for certain fiscal years
regarding amounts deposited in the Hospital Insurance Trust
Fund under this section. The conference agreement also includes
a provision regarding the availability of recoveries and
forfeitures for purposes of certain provisions of the Employee
Retirement Income Security Act of 1974.
B. Medicare Integrity Program
(Section 202 of the House bill; section 502 of the Senate
amendment.)
Current law
Currently Medicare's program integrity functions are
subsumed under Medicare's general administrative budget. These
functions are performed, along with general claims processing
functions, by insurance companies under contract with the
Health Care Financing Administration.
House bill
Establishes a Medicare Integrity Program under which the
Secretary would promote the integrity of the Medicare program
by entering into contracts with eligible private entities to
carry out certain activities. These activities would include
the following: (1) review of activities of providers of
services or other individuals and entities furnishing items and
services for which payment may be made under the Medicare
program, including medical and utilization review and fraud
review, (2) audit of cost reports, (3) determinations as to
whether payment should not be, or should not have been, made by
reason of Medicare as secondary payor provisions and recovery
of payments that should not have been made, (4) education of
providers of services, beneficiaries and other persons with
respect to payment integrity and benefit quality assurance
issues, and (5) developing and updating a list of durable
medical equipment pursuant to section 1834(a)(15) of the Social
Security Act. An entity is eligible to enter into a contract
under this program if it meets certain requirements, including
demonstrating to the Secretary that the entity's financial
holdings, interests, or relationships will not interfere with
its ability to perform the required functions.
Senate amendment
Similar except for differences in applicable conflict of
interest requirements with regard to entities eligible to enter
into contracts under this program.
Conference agreement
The conference agreement includes the House provision
with a modification of the applicable conflict of interest
requirements for eligible entities and assurance that current
contractors meeting applicable requirements may compete for
contracts on new program integrity activities.
c. beneficiary incentive programs
(Section 203 of the House bill; section 503 of the Senate
amendment.)
Current law
No provision.
House bill
The Secretary would be required to provide an explanation
of Medicare benefits with respect to each item or service for
which payment may be made, without regard to whether a
deductible or coinsurance may be imposed with respect to the
item or service.
This provision would require the Secretary, within three
months after enactment of this bill, to establish a program to
encourage individuals to report to the Secretary information on
individuals and entities who are engaging or who have engaged
in acts or omissions that constitute grounds for sanctions
under sections 1128, 1128A, or 1128B of the Social Security
Act, or who have otherwise engaged in fraud and abuse against
the Medicare program. If an individual reports information to
the Secretary under this program that serves as a basis for the
collection by the Secretary or the Attorney General of any
amount of at least $100 (other than amounts paid as a penalty
under section 1128B), the Secretary may pay a portion of the
amount collected to the individual, under procedures similar to
those applicable under section 7623 of the Internal Revenue
Code of 1986.
The Secretary would be required, within three months
after enactment of this bill, to establish a program to
encourage individuals to submit to the Secretary suggestions on
methods to improve the efficiency of the Medicare program. If
the Secretary adopts a suggestion and savings to the program
result, the Secretary would make a payment to the individual of
an amount the Secretary considers appropriate.
Senate amendment
Identical.
Conference agreement
The conference agreement includes the House provision.
d. application of certain health anti-fraud and abuse sanctions to
fraud and abuse against federal health care programs
(Section 204 of the House bill; section 504 of the Senate
amendment.)
Current law
Section 1128B provides for certain criminal penalties for
convictions of Medicare and Medicaid (and certain other state
health care programs) program-related fraud.
House bill
This provision would extend certain criminal penalties
for fraud and abuse violations under the Medicare and Medicaid
programs to similar violations in Federal health care programs
generally. The term ``Federal health care program'' would mean
any plan or program that provides health benefits, whether
directly, through insurance, or otherwise which is funded
directly, in whole or in part by the United States Government
(other than the Federal Employee Health Benefit Program,
Chapter 89 of Title 5 of the United States Code). The term also
would include any state health care program, which under
section 1128(h), includes Medicaid, the Maternal and Child
Health Services Block Grant Program and the Social Services
Block Grant Program.
Senate amendment
Identical.
Conference agreement
The conference agreement includes the House provision.
e. guidance regarding application of health care fraud and abuse
sanctions
(Section 205 of House bill, section 505 of Senate
amendment.)
Current law
The 1987 Medicare and Medicaid Patient and Program
Protection Act specified various payment practices which,
although potentially capable of including referrals of business
under Medicare or State health care programs, are protected
from criminal prosecution or civil sanction under the anti-
kickback provisions of the law. The 1987 law also established
authority for the Secretary to promulgate regulations
specifying additional payment practices, known as ``safe
harbors,'' which will not be subject to sanctions under the
fraud and abuse provisions.
House bill
The Secretary would publish an annual notice in the
Federal Register soliciting proposals for modifications to
existing safe harbors and new safe harbors. After considering
such proposals the Secretary, in consultation with the Attorney
General, would issue final rules modifying existing safe
harbors and establishing new safe harbors, as appropriate. The
Inspector General would submit an annual report to Congress
describing the proposals received, as well as the action taken
regarding the proposals. The Secretary, in considering
proposals, may consider a number of factors including the
extent to which the proposals would affect access to health
care services, quality of care services, patient freedom of
choice among health care providers, competition among health
care providers, ability of health care facilities to provide
services in medically underserved areas or to medically
underserved populations, and the like.
The Secretary of Health and Human Services would publish
the first notice in the Federal Register soliciting proposals
for new or modified safe harbors no later than January 1, 1997.
The Secretary would issue written advisory opinions
regarding what constitutes prohibited remuneration under
section 1128B(b), whether an arrangement or proposed
arrangement satisfies the criteria for activities which do not
result in prohibited remuneration, what constitutes an
inducement to reduce or limit services to individuals entitled
to benefits, and, whether an activity constitutes grounds for
the imposition of civil or criminal sanctions under sections
1128, 1128A or 1128B. Advisory opinions would be binding as to
the Secretary and the party requesting the opinion.
Any person would be able to request the Inspector General
to issue a special fraud alert informing the public of
practices which the Inspector General considers to be suspect
or of particular concern under the Medicare program or a State
health care program, as defined in section 1128(h) of the
Social Security Act. After investigation of the subject matter
of the request, and, if appropriate, the Inspector General
would issue a special fraud alert in response to the request,
published in the Federal Register.
Senate amendment
Identical to the House bill provisions regarding the
issuance of safe harbors and special fraud alerts. However,
provides for the issuance of ``interpretative rulings'' instead
of ``advisory opinions'' by the Secretary.
Conference agreement
The conference agreement includes the House provision
with modifications to the advisory opinion provisions. The
Secretary will be required to issue to a party requesting an
advisory opinion within 60 days and the advisory opinion
provisions will apply to requests made for opinions on or after
the date which is 6 months after the date of enactment of this
section and before the date which is 4 years after such date of
enactment.
II. Revision to Current Sanctions for Fraud and Abuse
(Subtitle B of the House bill; subtitle B of the Senate
amendment.)
A. Mandatory Exclusion from Participation in Medicare and State Health
Care Programs
(Section 211 of the House bill; section 511 of the Senate
amendment.)
Current law
Section 1128 of the Social Security Act authorizes the
Secretary to impose mandatory and permissive exclusions of
individuals and entities from participation in the Medicare
program, Medicaid program and programs receiving funds under
the Maternal and Child Health Service Block Grant, or the
Social Services Block Grant. Mandatory exclusions are
authorized for convictions of criminal offenses related to the
delivery of health care services under Medicare and State
health care programs, as well as for convictions relating to
patient abuse in connection with the delivery of a health care
item or service. In the case of an exclusion under the
mandatory exclusion authority the minimum period of exclusion
could be no less than 5 years, with certain exceptions.
Permissive exclusions are authorized for a number of offenses
relating to fraud, kickbacks, obstruction of an investigation,
and controlled substances, and activities relating to license
revocations or suspensions, claims for excessive charges or
unnecessary services, and the like. There are no specified
minimum periods of exclusion under the permissive exclusion
authority.
Under Section 1128A of the Social Security Act civil
monetary penalties may be imposed for false and fraudulent
claims for reimbursement under the Medicare and State health
care programs.
Under section 1128B, upon conviction of a program-related
felony, an individual may be fined not more than $25,000 or
imprisoned for not more than five years, or both.
House bill
The provision would require the Secretary to exclude
individuals and entities from Medicare and State health care
programs who have been convicted of felony offenses relating to
health care fraud for a minimum five year period. The Secretary
would also retain the discretionary authority to exclude
individuals from Medicare and State health care programs who
have been convicted of misdemeanor criminal health care fraud
offenses, or who have been convicted of a criminal offense
relating to fraud, theft, embezzlement, breach of fiduciary
responsibility, or other financial misconduct in programs
(other than health care programs) funded in whole or part by
any Federal, State or local agency.
The Secretary would also be required to exclude
individuals and entities from Medicare and State health care
programs who have been convicted of felony offenses relating to
controlled substances for a minimum five year period. The
Secretary would retain the discretionary authority to exclude
individuals from Medicare and State health care programs who
have been convicted of misdemeanor offenses relating to
controlled substances.
Senate amendment
Identical.
Conference agreement
The conference agreement includes the House provision.
B. Establishment of Minimum Period of Exclusion for Certain Individuals
and Entities Subject to Permissive Exclusion from Medicare
(Section 212 of the House bill; section 512 of the Senate
amendment.)
Current law
See above.
House bill
This section would establish a minimum period of
exclusion for certain permissive exclusions from participation
in Medicare and State health care programs.
For convictions of misdemeanor criminal health care fraud
offenses, criminal offenses relating to fraud in non-health
care Federal or State programs, convictions relating to
obstruction of an investigation of health care fraud offenses,
and convictions of misdemeanor offenses relating to controlled
substances, the minimum period of exclusion would be three
years, unless the Secretary determines that a longer or shorter
period is appropriate, due to aggravating or mitigating
circumstances.
For permissive exclusions from Medicare or State health
care programs due to the revocation or suspension of a health
care license of an individual or entity, the minimum period of
exclusion would not be less than the period during which the
individual's or entity's license was revoked or suspended.
For permissive exclusions from Medicare or State health
care programs due to exclusion from any Federal health care
program or State health care program for reasons bearing on an
individual's or entity's professional competence of financial
integrity, the minimum period of exclusion would not be less
than the period the individual or entity is excluded or
suspended from a Federal or State health care program.
For permissive exclusions from Medicare or State health
care programs due to a determination by the Secretary that an
individual or entity has furnished items or services to
patients substantially in excess of the needs of such patients
or of a quality which fails to meet professionally recognized
standards of health care, the period of exclusion would be not
less than one year.
Senate amendment
Identical.
Conference agreement
The conference agreement includes the House provision.
c. permissive exclusion of Individuals with ownership or control
interest in sanctioned entities
(Section 213 of the House bill; section 513 of the Senate
amendment.)
Current law
See above.
House bill
Under this provision an individual who has a direct or
indirect ownership or control interest in a sanctioned entity
and who knows or should know of the action constituting the
basis for the conviction or exclusion, or who is an officer or
managing employee of such an entity, may also be excluded from
participation in Medicare and State health care programs by the
Secretary if the entity has been convicted of an offense listed
in section 1129(a) or (b)(1), (2) or (3) or otherwise excluded
from program participation. Under this provision, the culpable
individual would also be subject to program exclusion, even if
not initially convicted or excluded.
Senate amendment
Identical.
Conference agreement
The conference agreement includes the House provision.
d. sanctions against practitioners and persons for failure to comply
with statutory obligations
(Section 214 of the House bill; section 514 of the Senate
amendment.)
Current law
See above.
House bill
Under this provision the Secretary may exclude a
practitioner or person who has failed to comply with certain
statutory obligations relating to quality of health care for
such period as the Secretary may prescribe, except that such
period shall be not less than one year.
The Secretary, in making his determination that a
practitioner or person should be sanctioned for failure to
comply with certain statutory obligations relating to quality
of health care, will no longer be required to prove that the
individual was either unwilling or unable to comply with such
obligations.
Senate amendment
Identical.
Conference agreement
The conference agreement includes the House provision.
e. intermediate sanctions for medicare health maintenance organizations
(Section 215 of the House bill; section 515 of the Senate
amendment.)
Current law
A contract between the Secretary and a Medicare Health
Maintenance Organization (HMO) is generally for a 1 year term,
with an option for automatic renewal. However, the Secretary
may terminate any such contract at any time, after reasonable
notice and an opportunity for a hearing, if the Medicare HMO
has failed substantially to carry out the contract, or is
carrying out the contract in a manner inconsistent with the
efficient and effective administration of the requirements of
section 1876 of the Social Security Act, or if the Medicare HMO
no longer substantially meets the statutory requirements
contained in Section 1876(b), (c), (e) and (f).
House bill
Under this section the Secretary may terminate a contract
with a Medicare Health Maintenance Organization (HMO) or may
impose certain intermediate sanctions on the organization if
the Secretary determines that the Medicare HMO has failed
substantially to carry out the contract; is carrying out the
contract in a manner substantially inconsistent with the
efficient and effective administration of this section; or, if
the Medicare HMO no longer substantially meets the statutory
requirements contained in Section 1876(b), (c), (e) and (f) of
the Social Security Act.
If the basis for the determination by the Secretary that
intermediate sanctions should be imposed on an eligible
organization is other than that the organization has failed
substantially to carry out its contract with the Secretary,
then the Secretary may apply intermediate sanctions as follows:
civil money penalties of not more than $25,000 for each
determination if the deficiency that is the basis of the
determination has directly adversely affected (or has the
substantial likelihood of adversely affecting) an individual
covered under the organization's contract; civil money
penalties or not more than $10,000 for each week of a
continuing violation; and suspension of enrollment of
individuals until the Secretary is satisfied that the
deficiency has been corrected and is not likely to recur.
Whenever the Secretary seeks to either terminate a
Medicare HMO contract or impose intermediate sanctions on such
an organization, the Secretary must do so pursuant to a formal
investigation and under compliance procedures which provide the
organization with a reasonable opportunity to develop and
implement a corrective action plan to correct the deficiencies
that were the basis of the Secretary's adverse determination.
In making a decision whether to impose sanctions the Secretary
is required to consider aggravating factors such as whether an
entity has a history of deficiencies or has not taken action to
correct deficiencies the Secretary has brought to their
attention. The Secretary's compliance procedures must also
include notice and opportunity for a hearing (including the
right to appeal an initial decision) before the Secretary
imposes any sanction or terminates the contract of a Medicare
HMO, and there must not be any unreasonable or unnecessary
delay between the finding of a deficiency and the imposition of
sanctions.
Under this section each risk-sharing contract with a
Medicare HMO must provide that the organization will maintain a
written agreement with a utilization and quality control peer
review organization or similar organization for quality review
functions.
The amendments made by this section would apply to
contract years beginning on or after January 1, 1996.
Senate amendment
Same as the House bill provision except specifies a
different effective date, i.e., January 1, 1997.
Conference agreement
The conference agreement includes the House provision,
but with an effective date of January 1, 1997.
F. Additional Exception to Anti-Kickback Penalties for Risk-sharing
Arrangements
(Section 216 of the House bill; section 516 of the Senate
amendment)
Current law
The anti-kickback provision in section 1128B(b) contains
several exceptions. These exceptions include discounts or other
reductions in price obtained by a provider of services or other
entity under Medicare or a State health care program if the
reduction in price is properly disclosed and appropriately
reflected in the costs claimed or charges made by the provider
or entity under Medicare or a State health care program; any
amount paid by an employer to an employee for employment in the
provision of covered items or services; any amount paid by a
vendor of goods or services to a person authorized to act as a
purchasing agent for a group of individuals or entities under
specified conditions; a waiver of any co-insurance under Part B
of Medicare by a Federally qualified health care center with
respect to an individual who qualifies for subsidized services
under a provision of the Public Health Service Act; and any
payment practice specified by the Secretary as a safe harbor
exception.
House bill
This section would add a new exception to the anti-
kickback provisions allowing remuneration between an eligible
organization under section 1876 and an individual or entity
providing items or services pursuant to a written agreement
between an eligible organization under section 1876 and the
individual or entity. Remuneration would also be allowed
between an organization and an individual or entity if a
written agreement places the individual or entity at
substantial financial risk for the cost or utilization of the
items or services which the individual or entity is obligated
to provide. The risk arrangement may be provided through a
withhold, capitation, incentive pool, per diem payment or other
similar risk arrangement. This amendment would apply to acts of
omissions occurring after January 1, 1997.
Senate amendment
Similar. However, the House provision specifically lists
two permissible risk arrangements, i.e., incentive pools, and
per diem payments, which are not listed in the Senate
provision, and the Senate provision provides for the issuance
of regulations by the Secretary, in consultation with the
Attorney General, to define substantial financial risk as
necessary to protect program or patient abuse.
Conference agreement
The conference agreement includes the House provision
with modifications to the definition of allowable remuneration.
In addition, the conference agreement adds a provision setting
forth a negotiated rulemaking process for standards relating to
the new exception to the anti-kickback penalties added by this
section.
G. Criminal Penalty for Fraudulent Disposition of Assets in Order to
Obtain Medicaid Benefits
(Section 217 of the House bill.)
Current law
Under section 1128B, upon conviction of a program-related
felony, an individual may be fined not more than $25,000 or
imprisoned for not more than five years or both.
House bill
This provision would add a new crime to the list of
prohibited activities under section 1128B of the Social
Security Act for cases where a person knowingly and willfully
disposes of assets by transferring assets in order to become
eligible for benefits under the Medicaid program, if disposing
of the assets results in the imposition of a period of
ineligibility.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision.
III. Data Collection
(Subtitle C of the House bill; subtitle C of the Senate
amendment.)
A. Establishment of the Health Care Fraud and Abuse Data Collection
program
(Section 221 of the House bill; section 521 of the Senate
amendment.)
Current law
No provision.
House bill
The Secretary of Health and Human Services would be
required to establish a national health care fraud and abuse
data collection program for reporting final adverse actions
(not including settlements in which no findings of liability
have been made) against health care providers, suppliers, or
practitioners.
Each government agency and health plan would, on a
monthly basis, report any final adverse action taken against a
health care provider, supplier, or practitioner. Certain
information would be included in the report, including a
description of the acts or omissions and injuries upon which
the final adverse action was taken. The Secretary would,
however, protect the privacy of individuals receiving health
care services.
The Secretary would, by regulation, provide for
disclosure of the information about adverse actions, upon
request, to the health care provider, supplier, or licensed
practitioner and provide procedures in the case of disputed
accuracy of the information. Each government agency and health
plan is required to report corrections of information already
reported about any final adverse action taken against a health
care provider, supplier, or practitioner in such form and
manner that the Secretary prescribes by regulation.
The information in the database would be available to
Federal and State government agencies and health plans. The
Secretary may approve reasonable fees for the disclosure of
information in the data base (other than with respect to
requests by Federal agencies). The amount of such a fee shall
be sufficient to recover the full costs of operating the data
base.
No person or entity would be held liable in any civil
action with respect to any report made as required by this
section, unless the person or entity knows the information is
false.
The Secretary may impose appropriate fees on physicians
to cover the costs of investigation and recertification
activities with respect to the issuance of identifiers for
physicians who furnish services for which Medicare payments are
made.
Senate amendment
Similar with one additional provision requiring that the
Secretary implement this section in such a manner as to avoid
duplication with the reporting requirements established for the
National Practitioner Data Bank.
Conference agreement
The conference agreement includes the House provision
with a modification directing the Secretary to implement this
section so as to avoid duplication with the reporting
requirements of the National Practitioner Data Bank under the
Health Care Quality Improvement Act of 1986.
IV. Civil Monetary Penalties
(Subtitle D of the House bill; subtitle D of the Senate
amendment.)
a. social security act civil monetary penalties
(Section 231 of the House bill; section 531 of the Senate
amendment.)
Current law
Under Section 1128A of the Social Security Act civil
monetary penalties may be imposed for false and fraudulent
claims for reimbursement under the Medicare and State health
care programs.
House bill
The Medicare and Medicaid program provisions providing
for civil monetary penalties for specified fraud and abuse
violations would apply to similar violations involving other
Federal health care programs. Federal health care programs
would include any health insurance plans or programs funded, in
whole or part, by the Federal government, such as CHAMPUS.
Civil monetary penalties and assessments received by the
Secretary would be deposited into the Health Care Fraud and
Abuse Control Account established under this Act.
Any person who has been excluded from participating in
Medicare or a State health care program and who retains a
direct or indirect ownership or control interest in an entity
that is participating in a program under Medicare or a State
health care program, and who knows or should know of the action
constituting the basis for the exclusion, or who is an officer
or managing employee of such an entity, would be subject to a
civil monetary penalty of not more than $10,000 for each day
the prohibited relationship occurs.
Amends the civil monetary penalty provisions of Section
1128A(a) by increasing the amount of a civil money penalty from
$2,000 to $10,000 for each item or service involved. Also
increases the assessment which a person may be subject to from
``not more than twice the amount'' to ``not more than three
times the amount'' claimed for each such item or service in
lieu of damages sustained by the United States or a State
agency because of such claim.
Adds two practices to the list of prohibited practices
for which civil money penalties may be assessed. The first
occurs when a person engages in a pattern or practice of
presenting a claim for an item or service based on a code that
the person knows or should know will result in greater payments
than appropriate. The second is the practice whereby a person
submits a claim or claims that the person knows or should know
is for a medical item or service which is not medically
necessary.
The sanction against practitioners and persons who fail
to comply with certain statutory obligations is changed from an
amount equal to ``the actual or estimated cost'' of the
medically improper or unnecessary services provided, to ``up to
$10,000 for each instance of medically improper or unnecessary
services provided.
The procedural provisions outlined in Section 1128A, such
as notice, hearings, and judicial review rights, would apply to
civil monetary penalties assessed against Medicare Health
Maintenance Organizations in the same manner as they apply to
civil monetary penalties assessed against health care providers
generally.
This provision also adds a new practice to the list of
prohibited practices for which civil monetary penalties could
be assessed. Any person who offers remuneration to an
individual eligible for benefits under Medicare or a State
health care program that such individual knows or should know
is likely to influence such individual to order or received
from a particular provider, practitioner or supplier any item
or service reimbursable under Medicare or a State health care
program would be subject to the various civil monetary
penalties, assessments and exclusion provisions of section
1128A of the Social Security Act.
The term ``remuneration'' is defined to include the
waiver of part or all of coinsurance and deductible amounts, as
well as transfers of items or services for free, or for other
than fair market value. There would be exceptions to this
definition. The waiver of part or all of coinsurance and
deductible amounts would not be considered remuneration under
this section if the waiver is not offered as part of any
advertisement or solicitation, the person does not routinely
waive coinsurence or deductible amounts, and the person either
waives the coinsurance and deductible amounts because the
individual is in financial need, or fails to collect the
amounts after reasonable collection efforts, or provides for a
permissible waiver under regulations issued by the Secretary.
In addition, the term remuneration would not include
differentials in coinsurance and deductible amounts as part of
a benefit plan design if the differentials have been disclosed
in writing to all beneficiaries, third party payors, and
providers, and if the differentials meeting the standards
defined in the Secretary's regulations. Remuneration would also
not include incentives given to individuals to promote the
delivery of preventive care under the Secretary's regulations.
The effective date of these provisions is January 1,
1997.
Senate amendment
Identical.
Conference agreement
The conference agreement includes the House provision.
The conferees do not intend that the language of section 231(d)
create any new standard for coverage of a claim. The intent is
to assure that a proper evaluation by a practitioner is
completed and evidence of treatment need is established before
services are delivered for which claims are submitted. The
conferees recognize that under current law the reasonableness
of a service provided by a non-medical practitioner, including
a practitioner of alternative medicine, is judged by the
application of principles particular to such non-medical health
care professions. For example, the provision and reasonableness
of chiropractic services under Medicare is judged by the
application of chiropractic principles.
There is significant concern regarding the impact of the
anti-fraud provisions on the practice of complementary or
alternative medicine and health care. The practice of
complementary or alternative medical or health care practice
itself would not constitute fraud.
The conferees do not intend to penalize the exercise of
medical judgment of health care treatment choices made in good
faith and which are supported by significant evidence or held
by a respectable minority of those providers who customarily
provide similar methods of treatment. The Act is not intended
to penalize providers simply because of a professional
difference of opinion regarding diagnosis or treatment.
A sanction is not intended for providers who submit
claims they know will not be considered reimbursable as
medically necessary services, but who are required to submit
the claims because their patients need to document that
Medicare will not reimburse the service. In submitting such
claims, providers shall notify carriers that a claim is being
submitted solely for purpose of seeking reimbursement from
secondary payers.
Moreover, the conferees intend that a penalty will be
imposed on presentation of a claim that is false or fraudulent.
No sanction is intended for providers who simply inform
beneficiaries that a particular service is not covered by
Medicare. Moreover, nothing in this section is intended to
supersede the limitation on liability provisions established
under Section 1879 of the Social Security Act.
In addition, the conferees intend, with respect to
allowable remuneration, that this provision not preclude the
provision of items and services of nominal value, including,
for example, refreshments, medical literature, complimentary
local transportation services, or participation in free health
fairs.
B. Clarification of Level of Intent Required for Imposition of
Sanctions
(Section 232 of the House bill.)
Current law
Civil monetary penalties may be imposed for seeking
reimbursement under the Medicare and Medicaid programs for
items of services not provided or for services provided by
someone who is not a licensed physician, whose license was
obtained through misrepresentation, or who misrepresented his
or her qualification as a specialist, or where the claim is
otherwise fraudulent. Civil penalties may also be sought for
presenting a claim due for payments which are in violation of
(1) contracts limiting payment due to assignment of a patient,
(2) agreements with state agencies limiting permitted charges,
(3) agreements with participating physicians or suppliers, and
(4) agreements with providers of services. Civil monetary
penalties may also be sought against persons who provide false
or misleading information that could reasonably be expected to
influence a decision to discharge a person from a hospital. A
person is subject to these provisions if he or she presented a
claim and he or she ``knows or should have known'' that the
claim fell into one of the categories listed above.
House bill
This provision adds a requirement, similar to the False
Claims Act, that a person is subject to this provision when the
person ``knowingly'' presents a claim that the person ``knows
or should know'' falls into one of the prohibited categories.
Thus, an assessment under this provision would only be made
where a person had actual knowledge that he or she had
submitted a claim or had provided false or misleading
information, and where the person had actual knowledge of the
fraudulent nature of the claim, acted in deliberate ignorance,
or acted in reckless disregard of the truth or falsity of the
information. The requirement that a person ``knowingly''
present a claim or ``knowingly'' make a false or misleading
statement which influences discharge would prevent charging
persons who inadvertently perform these acts.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision,
but this provision has been added to the section of this bill
entitled ``Social Security Act Civil Monetary Penalties'',
above.
c. penalty for false certification for home health services
(Section 233 of the House bill.)
Current law
No provision.
House bill
This provision would add an additional civil monetary
penalty of not more than three times the amount of the
payments, or $5,000, whichever is greater, for a physician who
certifies that an individual meets all of Medicare's
requirements to receive home health care while knowing that the
individual does not meet all such requirements. This provision
would apply to certifications made on or after the date of
enactment of this Act.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision.
V. Revisions to Criminal Law
(Subtitle E of the House bill; subtitle E of the Senate
amendment.)
a. definitions relating to federal health care offense
(Section 241 of the House bill; section 542 of the Senate
amendment.)
Current law
No provision.
House bill
This provision defines the term ``Federal health care
offense'' to include violations of, or criminal conspiracies to
violate, section 669, 1035, 1347 or 1518 of Title 18 of the
United States Code, or section 287, 371, 664, 666, 1001, 1027,
1341, 1343, or 1954 of this title, if the violation or
conspiracy relates to a health care benefit program. A ``health
care benefit program'' is any public or private plan affecting
commerce under which any medical benefit, item or service is
provided to any individual, and includes any individual or
entity providing such a medical benefit, item or service for
which payment may be made under the plan.
Senate amendment
The Senate amendment defines ``Federal health care
offense'' as a violation of, or a criminal conspiracy to
violate section 1128B of the Social Security Act, section 1347
of this title, and sections 287, 371, 664, 666, 669, 1001,
1027, 1341, 1343, or 1954 of this title if the violation or
conspiracy relates to health care fraud.
Conference agreement
The conference agreement includes the House provision.
b. health care fraud
(Section 242 of the House bill; section 541 of the Senate
amendment.)
Current law
Depending on the facts of a particular case, criminal
penalties may be imposed on persons engaged in health care
fraud under federal mail and wire fraud statutes, the False
Claims Act, false statement statues, money laundering statutes,
racketeering, and other related laws.
House bill
Under this provision criminal penalties would be imposed
for knowingly executing or attempting to execute a scheme or
artifice (1) to defraud any health care benefit program; or (2)
to obtain, by means of false or fraudulent pretenses, money or
property owned by, or under the custody or control of, any
health care benefit program. Penalties include fines and up to
10 years imprisonment. If the violation results in serious
bodily injury, the person may be imprisoned up to 20 years. If
the violation results in death, the person may be imprisoned
for life.
Senate amendment
Similar. However, the Senate provision provides that the
crime be committed ``willfully'' as well as knowingly, and the
penalties are listed as ``any term of years'' if the violation
results in serious bodily injury. The Senate provision also
provides that criminal fines imposed under this section be
deposited into the Federal Hospital Insurance Trust Fund.
Conference agreement
The conference agreement includes the House provision
with a modification specifying that the standard of intent will
be ``knowingly and willfully''.
There has been significant concern regarding the impact
of the anti-fraud provisions on the practice of complementary
and alternative medicine and health care. The practice of
complementary, alternative, innovative, experimental or
investigational medical or health care itself would not
constitute fraud. The conferees intend that this proposal not
be interpreted as a prohibition of the practice of these types
of medical or health care. The Act is not intended to penalize
a person who exercises a health care treatment choice or makes
a medical or health care judgment in good faith simply because
there is a difference of opinion regarding the form of
diagnosis or treatment. Nor does this provision in general
prohibit plans from covering specific types of treatment.
Whether certain complementary and alternative practices will be
covered is and should be a decision left to health care plan
administrators.
c. theft or embezzlement
Section 243 of the House bill; section 546 of the Senate
amendment)
Current law
No provision.
House bill
Criminal penalties would be imposed for embezzling,
stealing, or otherwise without authority knowingly converting
or intentionally misapplying any of the moneys, funds,
securities, premiums, credits, property, or other assets of a
health care benefit program. A person convicted under this
provision would be subject to a fine under Title 18 of the
United States Code, or imprisoned not more than 10 years, or
both. If the value of property does not exceed $100, the
defendant would be fined or imprisoned not more than one year,
or both.
Senate amendment
Requires that this crime be committed ``willfully'', and
the person convicted is subject to a fine under this title or
imprisonment of not more than 10 years, or both.
Conference agreement
The conference agreement includes the House provision
with a modification specifying that the standard of intent will
be ``knowingly and willfully''.
d. false statements
(Section 244 of the House bill; section 544 of the Senate
amendment.)
Current law
The Federal false statements provision at 18 U.S.C.
Sec. 1001 generally prohibits false statements with regard to
any matter within the jurisdiction of a Federal department or
agency.
House bill
Criminal penalties would be imposed for knowingly
falsifying, concealing, or covering up by any trick, scheme, or
device a material fact, or making false, fictitious, or
fraudulent statements or representations, or making or using
any falsewriting or document knowing the same to contain any
false, fictitious, or fraudulent statement or entry in any
matter involving a health care benefit program. A person
convicted under this provision may be punished by the
imposition of fines under title 18 of the United States Code,
or by imprisonment of not more than 5 years, or both.
Senate amendment
Contains additional elements of the crime of false
statements, including the words ``willfully'' and
``materially''. The House bill language specifying that the
false statements be ``in connection with the delivery of or
payment for health care benefits, items, or services'' does not
appear in the Senate amendment provision.
Conference agreement
The conference agreement includes the House provision
with a modification specifying that the standard of intent will
be ``knowingly and willfully''.
e. obstruction of criminal investigations of health care offenses
(Section 245 of the House bill; section 545 of the Senate
amendment.)
Current law
Under current law, criminal penalties are imposed for
obstructing, delaying or preventing the communication of
information to law enforcement officials regarding the
violation of criminal statues by using bribery, intimidation,
threats, corrupt persuasion, or harassment.
House bill
Criminal penalties would be imposed for willfully
preventing, obstructing, misleading, delaying or attempting to
prevent, obstruct, mislead or delay the communication of
information or records relating to a Federal health care
offense to a criminal investigator. A person convicted under
this provision could be punished by the imposition of fines
under title 18 of the United States Code or by imprisonment of
not more than 5 years, or both. Criminal investigator would
mean any individual duly authorized by a department, agency, or
armed force of the United States to conduct or engage
investigations for prosecution for violations of health care
offenses.
Senate amendment
Similar, with only minor drafting differences.
Conference agreement
The conference agreement includes the House provision.
f. laundering of monetary instruments
(Section 246 of the House bill; section 547 of the Senate
amendment.)
Current law
The current Federal money laundering provision is found
at 18 U.S.C. Sec. 1956(c)(7), but does not include money
laundering as related to health care fraud.
House bill
An act or activity constituting a Federal health care
offense would be considered a ``specified unlawful activity''
for purposes of the prohibition on money laundering, so that
any person who engages in money laundering in connection with a
Federal health care offense would be subject to existing
criminal penalties.
Senate amendment
Similar, with only minor drafting differences.
Conference agreement
The conference agreement includes the House provision.
g. injunctive relief relating to health care offenses
(Section 247 of the House bill; section 543 of the Senate
amendment.)
Current law
Depending on the facts of a particular case, injunctive
relief may be imposed on persons who are committing or about to
commit health care fraud under federal racketeering statutes
and other related laws.
House bill
If a person is violating or about to commit a Federal
health care offense, the Attorney General of the United States
could commence a civil action in any Federal court to enjoin
such a violation. If a person is alienating or disposing of
property or intends to alienate or dispose of property obtained
as a result of a Federal health care offense, the Attorney
General could seek to enjoin such alienation or disposition, or
could seek a restraining order to prohibit the person from
withdrawing, transferring, removing, dissipating or disposing
of any such property or property of equivalent value and
appoint a temporary receiver to administer such restraining
order.
Senate amendment
Similar.
Conference agreement
The conference agreement includes the House provision.
h. authorized investigative demand procedures
(Section 248 of the House bill; section 548 of the Senate
amendment.)
Current law
No provision.
House bill
This provision would establish procedures for the
Attorney General to make investigative demands in cases
regarding health care fraud. Under this section, the Attorney
General could issue a summons for records and/or a witness to
authenticate the records.
Administrative summons would be authorized for
investigations of any scheme to defraud an health care benefit
program in connection with the delivery of or payment for
health care. This section would provide for service of a
subpoena and enforcement of a subpoena in all United States
courts, as well as a grant of immunity to persons responding to
a subpoena from civil liability for disclosure of such
information.
The provision would also provide that health information
about an individual that is disclosed under this section may
not be used in, or disclosed to any person for use in any
administrative, civil, or criminal action or investigation
directed against the individual who is the subject of the
information unless the action or investigation arises out of,
and is directly related to, receipt of health care of payment
for health care or action involving a fraudulent claim related
to health, or if good cause is shown.
Senate amendment
Contains additional language relating to testimony by a
custodian of records, the production of records, witness fees,
and administrative summons.
Conference agreement
The conference agreement includes the House provision
with an amendment to include Senate bill language relating to
testimony by a custodian of records.
I. Forfeitures for Federal Health Care Offenses
(Section 249 of the House bill; section 542 of the Senate
amendment.)
Current law
Depending on the facts of a particular case, criminal
forfeiture may be imposed on persons convicted under federal
money laundering statutes, racketeering statutes, and other
related laws.
House bill
A court imposing a sentence on a person convicted of a
Federal health care offense could order the person to forfeit
all real or personal property that is derived, directly or
indirectly, from proceeds traceable to the commission of the
offense. After payment of the costs of asset forfeiture have
been made, the Secretary of the Treasury would deposit into the
Federal Hospital Insurance Trust Fund an amount equal to the
net amount realized from the forfeiture of property by reason
of a federal health care offense.
Senate amendment
Identical.
Conference agreement
The conference agreement includes the House provision.
J. Relation to ERISA Authority
(Section 250 of the House bill.)
Current law
The Employee Retirement Income Security Act of 1974 sets
forth comprehensive requirements for employee pension and
welfare benefit plans, including reporting and disclosure
requirements and fiduciary standards for trustees and
fiduciaries; pension plans are also subject to funding,
participation, and vesting requirements.
House bill
The provision states that nothing in this subtitle
(Revisions to Criminal law), shall affect the authority of the
Secretary of Labor under section 506(b) of ERISA to detect and
investigate civil and criminal violations related to ERISA.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision.
2. Administrative simplification
(Sections 251 and 252 of subtitle F of title II of the
House bill.)
Current law
No provision.
House bill
The bill would provide that the purpose of the subtitle
was to improve the Medicare and Medicaid programs, and the
efficiency and effectiveness of the health care system, by
encouraging the development of health information network
through the establishment of standards and requirements for the
electronic transmission of certain health information. Amends
title XI of the Social Security Act by adding Part C--
Administrative Simplification.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision.
A. Definitions
(New section 1171 of the Social Security Act.)
Current law
No provision.
House bill
The bill would provide definitions for this part of the
Act including the following: clearinghouse, code set,
coordination of benefits, health care provider, health
information, health plan, individually identifiable health
information, standard, and standard setting organization.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision
with an amendment to exclude a definition for coordination of
benefits and clarifies the definition of health plan.
B. General requirements for adoption of standards
(New section 1172 of the Social Security Act.)
Current law
No provision.
House bill
The bill would require that any standard or modification
of a standard adopted would apply to the following: (1) a
health plan, (2) a clearinghouse, or (3) a health care
provider, but only to the extent that the provider was
conducting electronic transactions referred to in the bill. The
bill would require that any standard or modification of a
standard adopted must reduce the administrative cost of
providing and paying for health care. The standard setting
organization would be required to develop or modify any
standard or modification adopted. The Secretary could adopt a
standard or modification of a standard that was different from
any standard developed by such organization if the different
standard or modification was promulgated in accordance with
rulemaking procedures and would substantially reduce
administrative costs to providers and plans. The Secretary
would be required to establish specifications for implementing
each of the standards and modifications adopted. The standards
adopted would be prohibited from requiring disclosure of trade
secrets or confidential commercial information by a participant
in the health information network. In complying with the
requirements of this part, the Secretary would be required to
rely on the recommendations of the Health Information Advisory
Committee established by the bill, and consult with appropriate
Federal and State agencies and private organizations.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision
with a modification that requires the Secretary to rely on the
recommendations of the National Committee on Vital and Health
Statistics. The standard-setting organization should consult
with the National Uniform Billing Committee, the National
Uniform Claim Committee, the Working Group for Electronic Data
Interchange, and the American Dental Association.
C. Standards for information transactions and data elements
(New section 1173 of the Social Security Act.)
Current law
No provision.
House bill
The bill would require the Secretary to adopt appropriate
standards for financial and administrative transactions and
data elements exchanged electronically that are consistent with
the goals of improving the operation of the health care system
and reducing administrative costs. Financial and administrative
transactions would include claims, claims attachments,
enrollment and disenrollment, eligibility, health care payment
and remittance advice, premium payments, first report of
injury, claims status, and referral certification and
authorization. Standards adopted by the Secretary would be
required to accommodate the needs of different types of health
care providers.
The Secretary would be required to adopt standards
providing for a standard unique health identifier for each
individual, employer, health plan, and health care provider for
use in the health care system. The Secretary would be required
to establish security standards that (1) take into account the
technical capabilities of record systems to maintain health
information, the costs of security measures, the need for
training persons with access to health information, the value
of audit trails in computerized record systems used, and the
needs and capabilities of small health care providers and rural
health care providers; and (2) ensure that a clearinghouse, if
it is part of a larger organization, has policies and security
procedures which isolate the activities of such service to
prevent unauthorized access to such information by such larger
organization. The Secretary would be required to establish
standards and modifications to such standards regarding the
privacy of individually identifiable health information that is
in the health information network. The Secretary, in
coordination with the Secretary of Commerce, would be required
to adopt standards specifying procedures for the electronic
transmission and authentication of signatures, compliance with
which would be deemed to satisfy Federal and State statutory
requirements for written signatures with respect to the
transactions specified by the bill. This part would not be
construed to prohibit the payment of health care services or
health plan premiums by debit, credit, payment card or numbers,
or other electronic means. The Secretary would be required to
adopt standards for determining the financial liability of
health plans when health benefits are payable under two or more
health plans, the sequential processing of claims, and other
data elements for individuals who have more than one health
plan.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision.
The conferees recognize that certain uses of individually
identifiable information are appropriate, and do not compromise
the privacy of an individual. Examples of such use of
information include the transfer of information when making
referrals from primary care to specialty care, and the transfer
of information from a health plan to an organization for the
sole purpose of conducting health care-related research. As
health plans and providers continue to focus on outcomes
research and innovation, it is important that the exchange and
aggregated use of health care data be allowed.
The conference agreement includes a modification that this
part would not be construed to regulate the payment of health
care services or health care premiums by debit, credit, payment
card or other electronic means.
D. Timetables for adoption of standards
(New section 1174 of the Social Security Act.)
Current law
No provision.
House bill
The bill would require the Secretary to adopt standards
relating to the transactions, data elements of health
information, security and privacy by not later than 18 months
after the date of enactment of the part, except that standards
relating to claims attachments would be required to be adopted
not later than 30 months after enactment. The Secretary would
be required to review the adopted standards and adopt
additional or modified standards as appropriate, but not more
frequently than once every 6 months, except during the first
12-month period after the standards are adopted unless the
Secretary determines that a modification is necessary in order
to permit compliance with the standards. The Secretary would
also be required to ensure that procedures exist for the
routine maintenance, testing, enhancement, and expansion of
code sets.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision
with a modification that the Secretary would be required to
adopt additional or modified standards not more frequently than
12 months.
e. requirements
(New section 1175 of the Social Security Act.)
Current law
No provision.
House bill
The bill would establish that if a person desires to
conduct a financial or administrative transaction with a health
plan as a standard transaction, (1) the health plan may not
refuse to conduct such transaction as a standard transaction,
(2) the health plan may not delay such transaction, or
otherwise adversely affect, or attempt to adversely affect, the
person or the transaction on the grounds that the transaction
is a standard transaction, and (3) the information transmitted
and received in connection with the transaction would be
required to be in a form of standard data elements for health
information. Health plans could satisfy the transmission of
information by directly transmitting standard data elements of
health information, or submitting nonstandard data elements to
a clearinghouse for processing in to standard data elements and
transmission. Not later than 24 months after the date on which
standard or implementation specification was adopted or
established under this part, each person to which the standard
applied would be required to comply with the standard or
specification. Small health plans, determined by the Secretary,
would be required to comply not later than 36 months after
standards were adopted.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision.
f. general penalty for failure to comply with requirements and
standards
(Section 1176 of the Social Security Act.)
Current law
No provision.
House bill
The bill would require the Secretary to impose on any
person who violates a provision under the bill a penalty of not
more than $100 for each such violation of a specific standard
or requirement, except that the total amount imposed on the
person for all such violations during a calendar year would not
exceed $25,000. A penalty would not be imposed if it was
established that the person liable for the penalty did not
know, and by exercising reasonable diligence would not have
known, that such person violated the provision. A penalty would
not be imposed if (1) the failure to comply was due to
reasonable cause and not willful neglect, and (2) the failure
to comply as corrected during the 30-day period beginning on
the first date the person liable for the penalty knows, or
would have known, that the failure to comply occurred.
Senate amendment
No provision.
Conference agreement.
The conference agreement includes the House provision.
g. wrongful disclosure of individually identifiable health information
(New section 1177 of the Social Security Act.)
Current law
No provision.
House bill
The bill would define the offense of wrongful disclosure
of individually identifiable health information as instances
when a person who knowingly (1) uses or causes to be used a
unique health identifier violation of a provision in this part,
(2) obtains individually identifiable health information
relating to an individual in violation of a provision in this
part, or (3) discloses individually identifiable health
information to another person in violation of this part. A
person committing such an offense would be required to (1) be
fined not more than $50,000, imprisoned not more than 1 year,
or both; (2) if the offense was committed under false
pretenses, be fined not more than $100,000, imprisoned not more
than 5 years, or both; and (3) if the offense was committed
with intent to sell, transfer, or use individually identifiable
health information for commercial advantage, personal gain, or
malicious harm, fined not more than $250,000, imprisoned not
more than 10 years, or both.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision.
h. effect on state law
(New section 1178 of the Social Security Act.)
Current law
No provision.
House bill
The bill would require that a provision, requirement, or
standard provided by the bill supersede any contrary provision
of state law, including a provision of state law that required
medical or health plan records (including billing information)
to be maintained or transmitted in written rather that
electronic form. A provision under the bill would not supersede
a contrary provision of state law if the provision of state law
(1) was more stringent than the requirements of the bill with
respect to privacy or individually identifiable health
information, or (2) was a provision the Secretary determined
was necessary to prevent fraud and abuse with respect to
controlled substances or for other purposes.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision
with a modification, that the provision would not supersede a
contrary State law only if the Secretary determines that the
State law (1) is necessary to prevent fraud and abuse; (2) to
ensure appropriation State regulation of insurance and health
plans; (3) for state reporting on health care delivery or
costs, or for other purposes; or (4) addresses controlled
substances.
The conference agreement also includes the requirement
that any standard adopted under this part would not apply to
the following: (1) the use or disclosure of information for
authorizing, processing, clearing, settling, billing,
transferring, collecting, or reconciling a payment for, health
plan premiums or health care, where such payment is made by
means of a credit, debit, or other payment card, or by an
account, check, electronic funds transfer or other such means;
(2) the use or disclosure of information relating to a payment
described above for transferring receivables, resolving
customer disputes or inquiries, auditing, supplying a statement
to a consumer of a financial institution regarding the
customer's account with such an institution, reporting to
customer reporting agencies, or complying with a civil or
criminal subpoena or a Federal or State law regulating
financial institutions.
The conferees do not intend to exclude the activities of
financial institutions or their contractors from compliance
with the standards adopted under this part if such activities
would be subject to this part. However, conferees intend that
this part does not apply to use or disclosure of information
when an individual utilizes a payment system to make a payment
for, or related to, health plan premiums or health care. For
example, the exchange of information between participants in a
credit card system in connection with processing a credit card
payment for health care would not be covered by this part.
Similarly sending a checking account statement to an
accountholder who uses a credit or debit card to pay for health
care services, would not be covered by this part. However, this
part does apply if a company clears health care claims, the
health care claims activities remain subject to the
requirements of this part.
1. changes in membership and duties of national committee on vital and
health statistics
(Section 253 of the House bill.)
Current law
No provision.
House bill
The bill would amend the membership and duties of the
National Committee on Vital and Health Statistics, authorized
under section 306(k) of the Public Health Service Act, as
amended, by increasing the number of members to 18. The
committee would be required to (1) provide assistance and
advice to the Secretary on issues related to health statistical
and health information; health with complying with the
requirements of the bill; (2) study the issues related to the
adoption of uniform data standards for patient medical record
information and electronic exchange of such information; (3)
report to the Secretary not later than 4 years after enactment
of the Health Coverage Availability and Affordability Act of
1996, and annually thereafter, recommendations and legislative
proposals for such standards and electronic exchange; and (4)
be generally responsible for advising the Secretary and the
Congress on the status of the future of the health information
network. The committee would be required, not later than 1 year
after enactment, to report to Congress, health care providers,
health plans, and other entities using the health information
network regarding (1) the extent to which entities using the
network were meeting the standards adopted and working together
to form an integrated network that meets the needs of its
users; (2) the extent to which entities were meeting the
privacy and security standards, and the types of penalties
assessed for noncompliance; (3) whether the federal and state
governments were receiving information of sufficient quality to
meet their responsibilities; (4) any problems that exist with
implementation of the network; and (5) the extent to which
timetables established by under this part of the bill were
being met.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision.
The conference agreement also includes a requirement that
the Secretary submit detailed recommendations on standards with
respect to the privacy of individually identifiable health
information not later than 12 months after enactment. The
recommendations would be required to address at least: (1) the
rights an individual should have relating to individually
identifiable health information; (2) the procedures that should
be established for the exercise of such rights; and (3) the
uses and disclosures of such information that should be
authorized or required. The Secretary would be required to
consult with the Attorney General, and the National Committee
on Vital and Health Statistics for carrying out this
requirement. If Congress fails to enact privacy legislation,
the Secretary is required to develop standards with respect to
privacy of individually identifiable health information not
later than 42 months from the date of enactment.
The conferees recognize that industry experts are
essential to the membership of the National Committee on Vital
and Health Statistics. It is the conferees' intent that the
Committee select representatives from the insurer, HMO,
provider, employer, accreditation communities, and a
representative from the Workgroup for Electronic Data
Interchange (WEDI).
The conferees recognize that technological innovation
with respect to electronic transmission of health-care related
transactions is progressing rapidly in the marketplace. The
conferees do not intend to stifle innovation in this area.
Therefore, the conferees intend that the Committee take into
account private sector initiatives.
3. Duplication and coordination of Medicare-related plans
(Subtitle G of title II of the House bill.)
a. duplication and coordination of medicare-related plans
(Section 281 of House bill.)
Current law
Many Medicare beneficiaries purchase private health
insurance to supplement their Medicare coverage. These
individually purchased policies are known as Medigap policies.
The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990, P.L.
101-508) provided for a standardization of Medigap policies.
OBRA also substantially modified the antiduplication provision
contained in law. The intent of the OBRA 1990 anti-duplication
provision was to prohibit sales of duplicative Medigap
policies. However, the statutory language applied, with very
limited exceptions, to all ``health insurance policies'' sold
to Medicare beneficiaries. Observers noted that this provision
could thus apply to a broad range of policies including
hospital indemnity plans, dread disease policies, and long-term
care insurance policies.
The Social Security Amendments of 1994 (P.L. 103-432)
included a number of technical modifications to the Medigap
statute, including modifications to the anti-duplication
provisions contained in section 1882(d)(3) of the Act. Under
the revised language, it is illegal to sell or issue the
following policies to Medicare beneficiaries: (i) a health
insurance policy with knowledge that it duplicates Medicare or
Medicaid benefits to which a beneficiary is otherwise entitled;
(ii) a Medigap policy, with knowledge that the beneficiary
already has a Medigap policy; or (iii) a health insurance
policy (other than Medigap) with knowledge that it duplicates
private health benefits to which the beneficiary is already
entitled.
A number of exceptions to these prohibitions are
established. The sale of a medigap policy is not in violation
of the provisions relating to duplication of Medicaid coverage
if: (i) the State Medicaid program pays the premiums for the
policy; (ii) in the case of qualified Medicare beneficiaries
(QMBs), the policy includes prescription drug coverage; or
(iii) the only Medicaid assistance the individual is entitled
to is payment of Medicare Part B premiums.
The sale of a health insurance policy (other than a
Medigap policy) that duplicates private coverage is not
prohibited if the policy pays benefits directly to the
individual without regard to other coverage. Further, the sale
of a health insurance policy (other than a Medigap policy to an
individual entitled to Medicaid) is not in violation of the
prohibition relating to selling of a policy duplicating
Medicare or Medicaid, if the benefits are paid without regard
to the duplication in coverage. This exception is conditional
on the prominent disclosure of the extent of the duplication,
as part of or together with, the application statement.
P.L. 103-432 provided for the development by the National
Association of Insurance Commissioners (NAIC) of disclosure
statements describing the extent of duplication for each of the
types of private health insurance policies. Statements were to
be developed, at a minimum, for policies paying fixed cash
benefits directly to the beneficiary and policies limiting
benefits to specific diseases. The NAIC identified 10 types of
health insurance policies requiring disclosure statements and
developed statements for them. These were approved by the
Secretary and published in the Federal Register on June 12,
1995.
House bill
The provision would modify the anti-duplication
provisions. The requirement for obtaining a written application
statement would be limited to the sale of Medigap policies to
persons already having Medigap policies.
Anti-duplicative provisions would specifically state that
a policy which pays benefits to or on behalf of an individual
without regard to other health benefit coverage would not be
considered to duplicate any health benefits under Medicare,
Medicaid, or a health insurance policy. Further, such policies
would be excluded from the sales prohibitions.
The provision would specifically state that a health
insurance policy (or a rider to an insurance contract which is
not a health policy) which provides benefits for long term
care, nursing home care, home health care or community-based
care and that coordinates or excludes against services covered
under Medicare would not be considered duplicative, provided
such coordination or exclusion was disclosed in the policy's
outline of coverage.
The provision would specify that a health insurance
policy (which may be a contract with a health maintenance
organization), provided to a disabled beneficiary, that is a
replacement product for another policy that is being terminated
by the insurer would not be considered duplicative if it
coordinates with Medicare.
The provision would prohibit the imposition of criminal
or civil penalties, or taking of legal action, with respect to
any actions which occurred between enactment of P.L. 103-432
and enactment of this measure, provided the policies met the
new requirements.
The provision would prohibit States from imposing
duplication requirements with respect to a policy (other than
Medigap policy) or rider to an insurance contract which is not
a health policy if the policy or rider pays benefits without
regard to other benefits coverage or if it is a long-term care
policy or policy sold to the disabled (as such policies are
described above).
The provision would also delete current language relating
to required disclosure statements.
Senate amendment
No provision.
Conference agreement
The conference agreement includes the House provision
with modifications. The agreement would clarify that policies
offering only long-term care nursing home care, home health
care, or community based care, or any combination thereof would
be allowed to coordinate benefits with Medicare and not be
considered duplicative, provided such coordination was
disclosed. The conference agreement does not include the
provision relating to replacement policies sold to disabled
persons.
The conference agreement would modify, rather than
repeal, the current law requirement for disclosure statements
for policies that pay regardless of other coverage. Disclosure
statements, for the type of policy being applied for, would be
furnished to a Medicare beneficiary applying for a health
insurance policy. The statement would be furnished as a part of
(or together with) the policy application.
The conference agreement would specify that whoever
issues or sells a health insurance policy to a Medicare
beneficiary and fails to furnish the required disclosure
statement would be fined under title 18 of the United States
Code, or imprisoned not more than five years or both. In
addition, or in lieu of the criminal penalty, a civil money
penalty of $25,000 (or $15,000 in the case of someone who is
not an issuer) could be imposed for each violation.
The disclosure requirements would not apply to Medigap
policies or health insurance policies identified in the July
12, 1995 Federal Register notice (i.e. policies that do not
duplicate Medicare (even incidentally), life insurance policies
that contain long-term care riders or accelerated death
benefits, disability insurance policies, property and casualty
policies, employer and union group health plans, managed care
organizations with Medicare contracts, and health care
prepayment plans (HCPPs) that provide some or all of Part B
benefits under an agreement with HCFA.)
The conference agreement would modify existing disclosure
statements to remove the wording that implies the policies
duplicate Medicare coverage. New language would be substituted
which states that: ``Some health care services paid for by
Medicare may also trigger the payment of benefits under this
policy''.
The agreement would further modify the required statement
for policies providing both nursing home and non-institutional
coverage, nursing home benefits only, or home health care
benefits only. The reference to Federal law would be modified
to read: ``Federal law requires us to inform you that in
certain situations this insurance may pay for some care also
covered by Medicare''. All other policies would be required to
include the following statement: ``This policy must pay
benefits without regard to other health benefit coverage to
which you may be entitled under Medicare or other insurance.''
The conference agreement would further modify the
language relating to State actions. The law would specifically
state that nothing in the provision restricts or precludes a
State's ability to regulate health insurance, including the
policies subject to disclosure requirements. However, a State
may not declare or specify, in statute, regulation, or
otherwise, that a health insurance policy (other than a Medigap
policy) or rider to an insurance contract which is not a health
insurance policy that pays regardless of other coverage
duplicates Medicare or Medigap benefits.
The conference agreement further narrows the language
relating to application of penalties and legal action with
respect to non-duplication requirements during a transition
period, defined as beginning on November 5, 1991 and ending on
the date of enactment. No criminal or civil monetary penalty
could be imposed for an act or omission that occurred during
the transition period relating to policies that pay benefits
without regard to other coverage or long-term care policies. No
legal action could be brought or continued in any Federal or
State court with respect to the sale of such policies insofar
as such action includes a cause of action which arose or is
based on action occurring during the transition period and
relating to non-duplication requirements. This limitation on
legal actions would be conditional on the existing disclosure
requirements being met with respect to any policy sold during
the period beginning on the effective date of the disclosure
requirements required by the 1994 Act (i.e. August 11, 1995)
and ending 30 days after enactment.
The conference agreement further provides that the new
disclosure rules only apply after enactment to health insurance
policies that pay regardless of other coverage and 30-days
after enactment to another health insurance policy.
The conference agreement would further permit a seller or
issuer of a health insurance policy to use current disclosure
statements rather than the new disclosure statements.
4. Medical liability reform
(Subtitle H of title II of the House bill; section 310 of
title I of the Senate amendment.)
I. General Provisions
A. Federal reform of health care liability actions
(Section 271 of House bill.)
Current law
There are no uniform Federal standards governing health
care liability actions.
House bill
(1) Applicability. The provision would provide for
Federal reform of health care liability actions. It would apply
to any health care liability action brought in any State or
Federal court. The provisions would not apply to any action for
damages arising from a vaccine-related injury or death or to
the extent that the provisions of the National Vaccine Injury
Compensation Program apply. The provisions would also not apply
to actions under the Employment Retirement Income Security Act.
(2) Preemption; Effect on Sovereign Immunity. The
provisions would preempt State law to the extent State law
provisions were inconsistent with the new requirements.
However, it would not preempt State law to the extent State law
provisions were more stringent. The provision specifies that
nothing in the preemption provision could be construed to: (i)
waive or affect any defense of sovereign immunity asserted by
any State under any provision of law; (ii) waive or affect any
defense of sovereign immunity asserted by the U.S.: (iii)
affect any provision of the Foreign Services Immunity Act of
1976; (iv) preempt State choice-of-law rules with respect to
claims brought by a Foreign nation or a citizen of a foreign
nation; or (v) affect the right of any court to transfer venue
or to apply the law of a foreign nation or to dismiss a claim
of a foreign nation or of a citizen of a foreign nation on the
ground of inconvenient forum.
(3) Amount in Controversy; Federal Court Jurisdiction.
The provision would specify that in the case of a health care
liability action brought under section 1332 of Title 28 of the
U.S. Code, the amount of noneconomic and punitive damages and
attorneys fees would not be included in establishing the amount
in controversy for purposes of establishing original
jurisdiction. Further, the provision would specify that nothing
in this subtitle would be construed to establish any
jurisdiction in the U.S. district courts over health care
liability action on the basis of Federal question grounds
specified in section 1331 or 1337 of title 28 of the U.S. Code.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
b. definitions
(Section 272 of House bill.)
Current law
No provision.
House bill
The provision would define the following terms for
purposes of the Federal reforms: actual damages; alternative
dispute resolution system; claimant; clear and convincing
evidence; collateral source payments; drug; economic loss;
harm; health benefit plan; health care liability action; health
care liability claim; health care provider; health care
service; medical device; noneconomic damages; person; product
seller; punitive damages; and State.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
c. effective date
(Section 273 of House bill.)
Current law
No provision.
House bill
The provision would specify that Federal reforms apply to
any health care liability action brought in any State or
Federal court that is initiated after the date of enactment.
The provision would also apply to any health care liability
claim subject to an alternative dispute resolution system, Any
health care liability claim or action arising from an injury
occurring prior to enactment would be governed by the statute
of limitations in effect at the time the injury occurred.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
II. Uniform Standards for Health Care Liability Actions
a. statute of limitations
(Section 281 of House bill.)
Current law
To date reforms of the malpractice system have occurred
primarily at the State level and have generally involved
changes in the rules governing tort cases. (A tort case is a
civil action to recover damages, other than for a breach of
contract.)
House bill
The provision would establish a uniform statute of
limitations. Actions could not be brought more than two years
after the injury was discovered or reasonably should have been
discovered. In no event could the action be brought more than
five years after the date of the alleged injury.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
B. Calculation and payment of damages
(Section 282 of House bill.)
Current bill
No provision.
House bill
1. Noneconomic Damages. The provision would limit
noneconomic damages to $250,000 in a particular case. The limit
would apply regardless of the number of persons against whom
the action was brought or the number of actions brought.
The provision would specify that a defendant would only
be liable for the amount of noneconomic damages attributable to
that defendant's proportionate share of the fault or
responsibility for that claimant's injury.
2. Punitive Damages. The provision would permit the award
of punitive damages (to the extent allowed under State law)
only if the claimant established by clear and convincing
evidence either that the harm was the result of conduct that
specifically intended to cause harm or the conduct manifested a
conscious flagrant indifference to the rights or safety of
others. The amount of punitive damages awarded could not exceed
$250,000 or three times the amount of economic damages,
whichever was greater. The determination of punitive damages
would be determined by the court and not be disclosed to the
jury. The provision would not create a cause of action for
punitive damages. Further, it would not preempt or supersede
any State or Federal law to the extent that such law would
further limit punitive damage awards.
The provision would permit either party to request a
separate proceeding (bifurcation) on the issue of whether
punitive damages should be awarded and in what amount. If a
separate proceeding was requested, evidence related only to the
claim of punitive damages would be inadmissible in any
proceeding to determine whether actual damages should be
awarded.
The provision would prohibit the award of punitive
damages in a case where the drug or device was subject to
premarket approval by the Food and Drug Administration, unless
there was misrepresentation or fraud. A manufacturer or product
seller would not be held liable for punitive damages related to
adequacy of required tamper resistant packaging unless the
packaging or labeling was found by clear and convincing
evidence to be substantially out of compliance with the
regulations.
3. Periodic Payments for Future Losses. The provision
would permit the periodic (rather than lump sum) payment of
future losses in excess of $50,000. The judgment of a court
awarding periodic payments could not, in the absence of fraud,
be reopened at any time to contest, amended, or modify the
schedule or amount of payments. The provision would not
preclude a lump sum settlement.
4. Treatment of Collateral Source Payments. The provision
would permit a defendant to introduce evidence of collateral
source payments. Such payments are those which are any amounts
paid or reasonably likely to be paid by health or accident
insurance, disability coverage, workers compensation, or other
third party sources. If such evidence was introduced, the
claimant could introduce evidence of any amount paid or
reasonably likely to be paid to secure the right to such
collateral source payments. No provider of collateral source
payments would be permitted to recover any amount against the
claimant or against the claimant's recovery. The provision
would apply to settlements as well as actions resolved by the
courts.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
C. Alternative dispute resolution
(Section 283 of House bill.)
Current law
No provision.
House bill
The provision would require that any alternative dispute
resolution system used to resolve health care liability actions
or claims must include provisions identical to those specified
in the bill.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House
provision.
III. Medical Volunteers
(Section 310 of Senate bill.)
Current law
The Federally Supported Health Centers Assistance Act of
1992 (P.L. 102-501) provides protection from legal liability
for certain health professionals providing services under the
Public Health Service Act P.L. 104-73 made the provision
permanent.
House bill
No provision.
Senate amendment
Section 310 of the bill would be known as the Medical
Volunteer Act. It would provide that under certain
circumstances a health care professional would be regarded for
purposes of a malpractice claim to be a Federal employee for
purposes of the Federal tort claims provisions of title 28 of
the U.S. Code. Specifically this would occur when such
professional provided services to a medically underserved
person without receiving compensation for such services. The
professional would be deemed to have provided services without
providing compensation only if prior to furnishing services the
professional: (i) agreed to furnish services without charge to
any person, including any health insurance plan or program
under which the recipient is covered; and (ii) provided the
recipient with adequate notice (as determined by the Secretary)
of the limited liability of the professional. These provisions
would preempt any State law to the extent such law was
inconsistent; they would not preempt any State law that
provided greater incentives or protections.
A medically underserved person would be defined as a
person residing in either: (I) a medically underserved area as
defined for purposes of determining a medically underserved
population under section 330 of the Public Health Service Act;
or (ii) a health professional shortage area as defined in
section 332 of that Act. Further the individual would have to
receive care in a facility substantially comparable to any of
those designated in the Federally-Supported Health Centers Act,
as determined in regulations of the Secretary.
Conference agreement
The conference agreement includes the Senate provision.
This provision extends Federal Tort Claims Act coverage to
certain medical volunteers in free clinics in order to expand
access to health care services to low-income individuals in
medically underserved areas. Such coverage is currently
provided in the Public Health Service Act to certain community
and other health centers under the Federally Supported Health
Centers Assistance Act. The provision tracks to the extent
possible the provisions of that Act with respect to the
coverage provided, quality assurance, and the process by which
a free clinic applies to have a free clinic health professional
deemed an employee of the Public Health Service.
Health professionals must meet certain conditions before
they are deemed employees of the Public Health Service Act.
They must be licensed or certified in accordance with
applicable law and they must be volunteers; they may not
receive compensation for the services in the form of salary,
fees, or third-party payments. However, they may receive
reimbursement from the clinic for reasonable expenses, such as
costs of transportation and the cost of supplies they provide.
Further, the free clinic may receive a voluntary donation from
the individual served.
Eligible health professionals must provide qualifying
services (i.e., otherwise available for Medicaid reimbursement)
at a free clinic or through programs or events conducted by the
clinic. These programs or events may include the provision of
health services in a clinic-owned or clinic-operated mobile van
or at a booth in a health fair. They may not include the
provision of health services in a private physician's office
following a referral from the free clinic. The health care
professional or the free clinic must provide prior written
notice of the extent of the limited liability to the
individual. This notice should include written disclosure,
understandable to a reasonable person, given a reasonable
amount of time prior to the provision of services. Separate
notice need not be provided by each professional nor prior to
each discrete service but adequate written notice must be
received by each individual.
The free clinic must be licensed or certified under
applicable law and may not impose a charge on or accept
reimbursement from any private or public third-party payor. The
free clinic may, however, receive voluntary donations from
individuals receiving health care services and is not precluded
from receiving donations, grants, contracts, or awards from
private or public sources for the general support of the
clinic, or for specific purposes other than for payment or
reimbursement for a health care service.
A free clinic must apply, consistent with the provisions
applicable to community health centers, to have each health
care professional ``deemed'' an employee of the Public Health
Service Act, and therefore eligible for coverage under the
Federal Tort Claims Act. A free clinic may not be deemed such
an employee under this provision.
The Committee is aware that each of the 50 states have
passed laws to limit the liability of volunteers in a variety
of circumstances. This provision does not preempt those laws
beyond the preemption provided in the Federal Tort Claims Act.
Instead, the United States shall be liable in the same manner
and to the same extent as a private individual in the same
circumstances under State law.
The provision applies only to causes of action filed
against a health professional for acts or omissions occurring
on or after the date on which the health professional is
determined by the Secretary to be a ``free clinic health
professional.''
The provision establishes for free clinics funding and
estimating mechanisms that match to the extent possible those
for community health centers. No funds appropriated for
purposes of community health centers will be available to free
clinics.
4. Other provisions
I. Extension of Medicare Secondary Payer Provisions
(Sec. 621 of Senate Amendment.)
Current law
Generally Medicare is the ``primary payer,'' that is, it
pays health claims first, with an individual's private or other
public insurance filling in some or all of Medicare's coverage
gaps. However, in certain instances, the individual's other
coverage pays first, while Medicare is the secondary payer.
This phenomenon is referred to as the MSP program. A group
health plan offered by an employer (with 20 or more employees
is required to offer workers age 65 or over (and workers
spouses age 65 or over) the same group health insurance
coverage as is offered to younger workers. If the worker
accepts the coverage, the employer is the primary payer, with
Medicare becoming the secondary payer.
Similarly, a group health plan offered by a large
employer (100 or more employees) is the primary payer for
employees or their dependents who are on the Medicare
disability program. The provision applies only to persons
covered under the group plan because the employee is in
``current employment status'' (i.e. is an employee or is
treated as an employee by the employer). The MSP provision for
the disabled population expires October 1, 1998.
The MSP provisions apply to end-stage renal (ESRD)
beneficiaries with employer group health plans, regardless of
employer size. The group health plan is the primary payer for
18 months for persons who become eligible for Medicare ESRD
benefits. The employer's role as primary payer is limited to a
maximum of 21 months (18 months plus the usual 3-month waiting
period for Medicare ESRD coverage). The 18-month MSP provisions
for the ESRD population expire October 1, 1998; at that time
the period would revert to 12 months.
The law authorizes a data match program which is intended
to identify potential secondary payer situations. Medicare
beneficiaries are matched against data contained in Social
Security Administration (SSA) and Internal Revenue Service
(IRS) files to identify cases in which a working beneficiary
(or working spouse) may have employer-based health insurance
coverage. Cases of previous incorrect Medicare payments are
identified and recoveries are attempted. The authority for the
program extends through Sept. 30, 1998.
House bill
No provision.
Senate Amendment
The provision would make permanent the MSP provisions for
the disabled and the 18-month period for the ESRD population.
It would also make permanent the data match requirement.
Conference agreement
The conference agreement does not include the Senate
provision.
Title III. Tax-Related Health Provisions
a. medical savings accounts
(Sec. 301 of the House bill.)
Present law
The tax treatment of health expenses depends on whether
the individual is an employee or self employed, and whether the
individual is covered under an employer-sponsored health plan.
Employer contributions to a health plan for coverage for the
employee and the employee's spouse and dependents is excludable
from the employee's income and wages for social security tax
purposes. Self-employed individuals are entitled to deduct 30
percent of the amount paid for health insurance for a self-
employed individual and his or her spouse or dependents. Any
individual who itemizes tax deductions may deduct unreimbursed
medical expenses (including expenses for medical insurance)
paid during the year to the extent that the total of such
expenses exceeds 7.5 percent of the individual's adjusted gross
income (``AGI''). Present law does not contain any special
rules for medical savings accounts.
House bill
In general
Within limits, contributions to a medical savings account
(``MSA'') are deductible if made by an eligible individual and
are excludable from income (and wages for social security
purposes) if made by the employer of an eligible individual.
Earnings on amounts in an MSA are not currently taxable.
Distributions from an MSA for medical expenses are not taxable.
Eligible individuals
An individual is eligible to make a deductible
contribution to an MSA (or to have employer contributions made
on his or her behalf) if the individual is covered under a high
deductible health plan and is not covered under another health
plan (other than a plan that provides certain permitted
coverage). An individual with other coverage in addition to a
high deductible plan is still eligible for an MSA if such other
coverage is certain permitted insurance or is coverage (whether
provided through insurance to otherwise) for accidents,
disability, dental care, vision care, or long-term care.
Permitted insurance is (1) Medicare supplemental insurance; (2)
insurance if substantially all of the coverage provided under
such insurance relates to (a) liabilities incurred under
worker's compensation law, (b) tort liabilities, (c)
liabilities relating to ownership or use of property (e.g.,
auto insurance), or (d) such other similar liabilities as the
Secretary may prescribe by regulations, (3) insurance for a
specified disease or illness, and (4) insurance that provides a
fixed payment for hospitalization. An individual is not
eligible to make deductible contributions to an MSA for a year
if any employer contributions are made to an MSA on behalf of
the individual for the year.
Tax treatment of and limits on contributions
Individuals contributions to an MSA are deductible
(within limits) in determining AGI. Employer contributions are
excludable (within the same limits) from gross income and wages
for employment tax purposes, except that this exclusion does
not apply to contributions made through a cafeteria plan. The
maximum amount of contributions that can be deducted or
excluded for a year is equal to the lesser of (1) the
deductible under the high deductible health plan or (2) $2,000
in the case of single coverage and $4,000 if the high
deductible plan covers the individual and a spouse or
dependent. The annual limit is the sum of the limits determined
separately for each month, based on the individual's status as
of the first day of the month. The maximum contribution limit
to an MSA is determined separately for each spouse in a married
couple. In no event can the maximum contribution limit exceed
$4,000 for a family. The dollar limits are indexed for medical
inflation and rounded to the nearest multiple of $50.
Definition of high deductible health plan
A high deductible health plan is a health plan with a
deductible of at least $1,500 in the case of single coverage
and $3,000 in the case of coverage of more than one individual.
These dollar limits are indexed for medical inflation, rounded
to the nearest multiple of $50.
Tax treatment of MSAs
Earnings on amounts in an MSA are not currently
includible in income.
Taxation of distributions
Distributions from an MSA for the medical expenses of the
individual and his or her spouse or dependents are excludable
from income. For this purpose, medical expenses do not include
expenses for insurance other than long-term care insurance,
premiums for health care continuation coverage, and premiums
for health care coverage while an individual is receiving
unemployment compensation under Federal or State law.
Distributions that are not for medical expenses are
includible in income. Such distributions are also subject to an
additional 10-percent tax unless made after age 59\1/2\, death
or disability.
Upon death, if the beneficiary is the individual's
surviving spouse, the spouse may continue the MSA as his or her
own. Otherwise, the beneficiary must include the MSA balance in
income in the year of death. If there is no beneficiary, the
MSA balance is includible on the final return of the decedent.
In any case, no estate tax applies.
Definition of MSA
In general, an MSA is a trust or custodial account
created exclusively for the benefit of the account holder and
is subject to rules similar to those applicable to individual
retirement arrangements.
Effective date
Taxable years beginning after December 31, 1996.
Senate amendment
The Senate amendment does not contain provisions
providing favorable tax treatment for MSAs. However, the Senate
amendment amends the Public Health Services Act to permit
health maintenance organizations to charge deductibles to
individuals with an MSA. In addition, the Senate amendment
provides that it is the sense of the Committee on Labor and
Human Resources that the establishment of MSAs should be
encouraged as part of any health insurance legislation passed
by the Senate through the use of tax incentives relating to
contributions to, the income growth of, and the qualified use
of, MSAs. The Senate amendment also provides that it is the
sense of the Senate that the Congress should take measures to
further the purposes of the Senate amendment, including any
necessary changes to the Internal Revenue Code to encourage
groups and individuals to obtain health coverage, and to
promote access, equity, portability, affordability, and
security of health benefits.
Conference agreement
The conference agreement follows the House bill, with
modifications.
In general
Within limits, contributions to a medical savings account
(``MSA'') are deductible if made by an eligible individual and
are excludable if made by the employer of an eligible
individual. Earnings on amounts in an MSA are not currently
taxable. Distributions from an MSA for medical expenses are not
taxable.
Eligible individuals
Beginning in 1997, MSAs are available to employees
covered under an employer-sponsored high deductible plan of a
small employer and self-employed individuals. An employer is a
small employer if it employed, on average, no more than 50
employees during either the preceding or the second preceding
year.
In determining whether an employer is a small employer, a
preceding year is not taken into account unless the employer
was in existence throughout such year. In the case of an
employer that was not in existence through the first preceding
year, the determination of whether the employer has no more
than 50 employees is based on the average number of employees
that the employer reasonably expects to employ in the current
year. In determining the number of employees of an employer,
employers under common control are treated as a single
employer.
In order for an employee of an eligible employer to be
eligible to make MSA contributions (or to have employer
contributions made on his or her behalf), the employee must be
covered under an employer-sponsored high deductible health plan
and must not be covered under any other health plan (other than
a plan that provides certain permitted coverage). In the case
of an employee, contributions can be made to an MSA either by
the individual or by the individual's employer. However, an
individual is not eligible to make contributions to an MSA for
a year if any employer contributions are made to an MSA on
behalf of the individual for the year.
Similarly, in order to be eligible to make contributions
to an MSA, a self-employed individual must be covered under a
high deductible health plan and no other health plan (other
than a plan that provides certain permitted coverage).
An individual with other coverage in addition to a high
deductible plan is still eligible for an MSA if such other
coverage is certain permitted insurance or is coverage (whether
provided through insurance to otherwise) for accidents,
disability, dental care, vision care, or long-term care.
Permitted insurance is: (1) Medicare supplemental insurance;
(2) insurance if substantially all of the coverage provided
under such insurance relates to (a) liabilities incurred under
worker's compensation law, (b) tort liabilities, (c)
liabilities relating to ownership or use of property (e.g.,
auto insurance), or (d) such other similar liabilities as the
Secretary may prescribe by regulations, (3) insurance for a
specified disease or illness, and (4) insurance that provides a
fixed payment for hospitalization.
If a small employer with an MSA plan (i.e., the employer
or its employees made contributions to an MSA) ceases to become
a small employer (i.e., exceeds the 50-employee limit), then
the employer (and its employees) can continue to establish and
make contributions to MSAs (including contributions for new
employees and employees that did not previously have an MSA)
until the year following the first year in which the employer
has more than 200 employees. After that, those employees who
had an MSA (to which individual or employer contributions were
made in any year) can continue to make contributions (or have
contributions made on their behalf) even if the employer has
more than 200 employees. For example, suppose Employer A has 48
employees in 1995 and 1996, and 205 employees in 1997 and 1998.
A would be a small employer in 1997 and 1998 because it has 50
or fewer employees in the preceding or the second preceding
year. Employer A would still be considered a small employer in
1999. However, in years after 1999, Employer A would not be
considered a small employer (even if the number of employees
fell to 50 or below), and in years after 1999, only employees
who previously had MSA contributions could make new MSA
contributions (or have employer contributions made on their
behalf).
Tax treatment of and limits on contributions
Individual contributions to an MSA are deductible (within
limits) in determining AGI (i.e., ``above the line''). In
addition, employer contributions are excludable (within the
same limits), except that this exclusion does not apply to
contributions made through a cafeteria plan.
In the case of a self-employed individual, the deduction
cannot exceed the individual's earned income from the trade or
business with respect to which the high deductible plan is
established. In the case of an employee, the deduction cannot
exceed the individual's compensation attributable to the
employer sponsoring the high deductible plan in which the
individual is enrolled.
The maximum annual contribution that can be made to an
MSA for a year is 65 percent of the deductible under the high
deductible plan in the case of individual coverage and 75
percent of the deductible in the case of family coverage. No
other dollar limits on the maximum contribution apply. The
annual contribution limit is the sum of the limits determined
separately for each month, based on the individual's status and
health plan coverage as of the first day of the month.
Contributions for a year can be made until the due date
for the individual's tax return for the year (determined
without regard to extensions).
In order to facilitate application of the cap on the
number of MSA participants, described below, the employer is
required to report employer MSA contributions, and the
individual is required to report such employer MSA
contributions on the individual's tax return.
Comparability rule for employer contributions
If an employer provides high deductible health plan
coverage coupled with an MSA to employees and makes employer
contributions to the MSAs, the employer must make available a
comparable contribution on behalf of all employees with
comparable coverage during the same period. Contributions are
considered comparable if they are either of the same amount or
the same percentage of the deductible under the high deductible
plan. The comparability rule is applied separately to part-time
employees (i.e., employees who are customarily employed for
fewer than 30 hours per week). No restrictions are placed on
the ability of the employer to offer different plans to
different groups of employees.
For example, suppose an employer maintains two high
deductible plans, Plan A, with a deductible of $1,500 for
individual coverage and $3,000 for family coverage, and Plan B,
with a deductible of $2,000 for individual coverage and $4,000
for family coverage. The employer offers an MSA contribution to
full-time employees in Plan A of $500 for individual coverage
and $750 for family coverage. In order to satisfy the
comparability rule, the employer would have to offer full-time
employees covered under Plan B one of the following MSA
contributions: (1) $500 for employees with individual coverage
and $750 for employees with family coverage or (2) $667 for
employees with individual coverage and $1,000 for employees
with family coverage. Different contributions (or no
contributions) could be made for part-time employees covered
under either high deductible plan.
If employer contributions do not comply with the
comparability rule during a period, then the employer is
subject to an excise tax equal to 35 percent of the aggregate
amount contributed by the employer to MSAs of the employer for
that period. The excise tax is designed as a proxy for the
denial of employer contributions. In the case of a failure to
comply with the comparability rule which is due to reasonable
cause and not to willful neglect, the Secretary may waive part
of all of the tax imposed to the extent that the payment of the
tax would be excessive relative to the failure involved.
For purposes of the comparability rule, employers under
common control are aggregated in the same manner as in
determining whether the employer is a small employer. The
comparability rule does not fail to be satisfied in a year if
the employer is precluded from making contributions for all
employees with high deductible plan coverage because the
employer has more than 200 employees or due to operation of the
cap during the initial 4-year period.
Definition of high deductible plan
A high deductible plan is a health plan with an annual
deductible of at least $1,500 and no more than $2,250 in the
case of individual coverage and at least $3,000 and no more
than $4,500 in the case of family coverage. In addition, the
maximum out-of-pocket expenses with respect to allowed costs
(including the deductible) must be no more than $3,000 in the
case of individual coverage and no more than $5,500 in the case
of family coverage. Beginning after 1998, these dollar amounts
are indexed for inflation in $50 dollar increments based on the
consumer price index. A plan does not fail to qualify as a high
deductible plan merely because it does not have a deductible
for preventive care as required by State law.
As under present law, State insurance commissions would
have oversight over the issuance of high deductible plans
issued in conjunction with MSAs and could impose additional
consumer protections. It is intended that the National
Association of Insurance Commissioners (``NAIC'') will develop
model standards for high deductible plans that individual
States could adopt.
Tax treatment of MSAs
Earnings on amounts in an MSA are not currently
includible in income.
Taxation of distributions
Distributions from an MSA for the medical expenses of the
individual and his or her spouse or dependents generally are
excludable from income. However, in any year for which a
contribution is made to an MSA, withdrawals from an MSA
maintained by that individual are excludable from income only
if the individual for whom the expenses were incurred was
eligible to make an MSA contribution at the time the expenses
were incurred. This rule is designed to ensure that MSAs are in
fact used in conjunction with a high deductible plan, and that
they are not primarily used by other individuals who have
health plans that are not high deductible plans. For example,
suppose that, in 1997, individual A is covered by a high
deductible plan, and A's spouse (``B'') is covered by a health
plan that is not a high deductible plan. A makes contributions
to an MSA for 1997. Withdrawals from the MSA to pay B's medical
expenses incurred in 1997 would be includible in income (and
subject to the additional tax on nonmedical withdrawals)
because B is not covered by a high deductible plan.
For this purpose, medical expenses are defined as under
the itemized deduction for medical expenses, except that
medical expenses do not include expenses for insurance other
than long-term care insurance, premiums for health care
continuation coverage, and premiums for health care coverage
while an individual is receiving unemployment compensation
under Federal or State law.
Distributions that are not for medical expenses are
includible in income. Such distributions are also subject to an
additional 15-percent tax unless made after age 65, death, or
disability.
Estate tax treatment
Upon death, any balance remaining in the decedent's MSA
is includible in his or her gross estate.
If the account holder's surviving spouse is the named
beneficiary of the MSA, then, after the death of the account
holder, the MSA becomes the MSA of the surviving spouse and the
amount of the MSA balance may be deducted in computing the
decedent's taxable estate, pursuant to the estate tax marital
deduction provided in Code section 2056. The MSA qualifies for
the marital deduction because the account holder has sole
control over disposition of the assets in the MSA. The
surviving spouse is not required to include any amount in
income as a result of the death; the general rules applicable
to MSAs apply to the surviving spouse's MSA (e.g., the
surviving spouse is subject to income tax only on distributions
from the MSA for nonmedical purposes). The surviving spouse can
exclude from income amounts withdrawn from the MSA for expenses
incurred by the decedent prior to death, to the extent they
otherwise are qualified medical expenses.
If, upon death, the MSA passes to a named beneficiary
other than the decedent's surviving spouse, the MSA ceases to
be an MSA as of the date of the decedent's death, and the
beneficiary is required to include the fair market value of MSA
assets as of the date of death in gross income for the taxable
year that includes the date of death. The amount includable in
income is reduced by the amount in the MSA used, within one
year of the death, to pay qualified medical expenses incurred
prior to the death. As is the case with other MSA
distributions, whether the expenses are qualified medical
expenses is determined as of the time the expenses were
incurred. In computing taxable income, the beneficiary may
claim a deduction for that portion of the Federal estate tax on
the decendent's estate that was attributable to the amount of
the MSA balance (calculated in accordance with the present-law
rules relating to income in respect of a decedent set forth in
sec. 691(c)).
If there is no named beneficiary for the decedent's MSA,
the MSA ceases to be an MSA as of the date of death, and the
fair market value of the assets in the MSA as of such date are
includible in the decedent's gross income for the year of the
death. This rule applies in all cases in which there is no
named beneficiary, even if the surviving spouse ultimately
obtains the right to MSA assets (e.g., if the surviving spouse
is the sole beneficiary of the decedent's estate). Because of
the significant tax consequences if a married individual fails
to name his or her spouse as the MSA beneficiary, even if the
rights to MSA assets are otherwise acquired by the surviving
spouse, it is anticipated that the marketing materials
describing other tax aspects of MSAs will explain the
consequences of failure to name the spouse as the beneficiary.
Cap on taxpayers utilizing MSAs
In general.--The number of taxpayers benefiting annually
from an MSA contribution is limited to a threshold level
(generally 750,000 taxpayers). If it is determined in a year
that the threshold level has been exceeded (called a ``cut-
off'' year) then, in general, for succeeding years during the
4-year pilot period 1997-2000, only those individuals who (1)
made an MSA contribution or had an employer MSA contribution
for the year or a preceding year (i.e. are active MSA
participants) or (2) are employed by a participating employer,
would be eligible for an MSA contribution. In determining
whether the threshold for any year has been exceeded, MSAs of
individuals who were not covered under a health insurance plan
for the six month period ending on the date on which coverage
under a high deductible plan commences would not be taken into
account.\1\ However, if the threshold level is exceeded in a
year, previously uninsured individuals would be subject to the
same restriction on contributions in succeeding years as other
individuals. That is, they would not be eligible for an MSA
contribution for a year following a cut-off-year unless they
are an active MSA participant (i.e. had an MSA contribution for
the year or a preceding year) or are employed by a
participating employer.
---------------------------------------------------------------------------
\1\ Permitted coverage, as described above, does not constitute
coverage under a health insurance plan for this purpose.
---------------------------------------------------------------------------
In a year after a cut-off year, employees of a
participating employer can establish new MSAs and make new
contributions (even if the employee is a new employee or did
not previously have an MSA). An employer is a participating
employer if (1) the employer made any MSA contributions on
behalf of employees in any preceding year or (2) at least 20
percent of the employees covered under a high deductible plan
made an MSA contribution of at least $100 in the preceding
year.
In the case of a cut-off year before 2000, an individual
is not an eligible individual or an active MSA participant
unless the individual was first covered under a high deductible
plan on or before the cut-off date. The cut-off date is
generally October 1 of the cut-off year. However, if the
individual was enrolled in a plan pursuant to a regularly
scheduled enrollment period, then the cut-off date is December
31. Similarly, an employer is not considered a participating
employer if it first offered coverage after October 1 of a cut-
off year unless the high deductible plan is offered pursuant to
a regularly scheduled enrollment period. In addition, a self-
employed individual is not considered an eligible individual or
an active MSA participant unless the individual was covered
under a high deductible plan on or before November 1 of a cut-
off year.
These rules are designed to prevent high deductible plans
from being first offered just before the limitation on MSAs is
effective in order to avoid application of the cap. They are
not, however, intended to preclude individuals who first enroll
in an employer-sponsored high deductible health plan or
employees of employers that adopt a high deductible plan in a
cut-off year due to normal health plan operation from having
MSAs. For example, suppose a small employer offers a high
deductible plan that provides that new employees may be covered
under the plan beginning the first day of the month after the
month in which they are hired. New employee A (whose previous
coverage was not high deductible coverage) is hired on October
15, and is enrolled in the high deductible plan November 1 of
that year. If the year is a cut-off year, Employee A is an
eligible individual and, if he has an MSA contribution for the
year, an active participant for the year because he was
enrolled pursuant to a regularly scheduled enrollment period.
Similarly, suppose that employer A is a small employer and does
not currently offer health care coverage. In 1997, A decides to
offer health plan coverage to its employees, including a high
deductible plan coupled with an MSA. A takes steps to provide
such coverage on or before October 1 of the year (e.g., making
arrangements with insurance companies or distributing plan
material to employees). The first enrollment period for the
health plans begins September 1, and coverage under the plan
will begin November 1. If the year is a cut-off year, the
employer is a participating employer because the plan was
established pursuant to a regularly scheduled enrollment
period.
Under certain circumstances, MSA participation may be
reopened after a cut-off year so that MSAs are again available
to all individuals in the qualifying group of self-employed
individuals and employees of small employers.
For the 1997 tax year, taxpayers are permitted to
establish MSAs provided that they are in the qualifying group
of self-employed individuals or employees working for small
employers.
Rules for 1997
On or before June 1, 1997, each trustee or custodian of
an MSA (e.g., insurance company or financial institution) is
required to report to the Internal Revenue Service (``IRS'')
the total number of MSAs established as of April 30, 1997, for
which it acts as trustee or custodian, including the number of
MSAs established for previously uninsured individuals.\2\ If,
based on this reporting, the number of MSAs established (but
excluding those established for previously uninsured
individuals) as of April 30, 1997, exceeds 375,000 (50 percent
of 750,000), on or before September 1, 1997, the IRS would
publish guidance providing that only active MSA participants or
employees of participating employers would be eligible for an
MSA contribution for the 1998 tax year and thereafter. If this
threshold is exceeded, an individual who is first covered by an
employer-sponsored high deductible health plan after September
1, 1997, is not an eligible individual or an active MSA
participant (and therefore cannot have an MSA for 1997 or a
subsequent year) unless the high deductible coverage is elected
pursuant to a regularly scheduled enrollment period. Similarly,
an employer is not considered a participating employer if it
first offered a high deductible plan after September 1, 1997,
unless the plan was offered pursuant to a regularly scheduled
enrollment period. Also, a self-employed individual would not
be an eligible individual or an active MSA participant unless
the individual was first covered under a high deductible plan
on or before October 1, 1997.
---------------------------------------------------------------------------
\2\ This report would include the name and social security number
of taxpayers establishing an MSA. Failures to report are subject to a
penalty of $25 for each MSA up to a maximum of $5,000. A trustee or
custodian required to report could elect to do so on a company-wide or
branch-by-branch basis.
---------------------------------------------------------------------------
If the 375,000 cap is not exceeded, then another
determination of MSA participation will be made, as follows. On
or before August 1, 1997, each trustee or custodian of an MSA
(e.g., insurance company or financial institution) is required
to report to the Internal Revenue Service (``IRS'') the total
number of MSAs established as of June 30, 1997, for which it
acts as trustee or custodian, including the number of MSAs
established for previously uninsured individuals. If, based on
this reporting, the number of MSAs established (but excluding
those established for previously uninsured individuals) exceeds
the 1997 threshold level of 525,000 (70 percent of 750,000), on
or before October 1, 1997, the IRS would publish guidance
providing that only active MSA participants or employees of
participating employers would be eligible for an MSA
contribution for the 1998 tax year and thereafter. If the 1997
threshold is exceeded, an individual who is first covered by an
employer-sponsored high deductible health plan after October 1,
1997, is not an eligible individual or an active MSA
participant (and therefore cannot have an MSA for 1997 or a
subsequent year) unless the high deductible coverage is elected
pursuant to a regularly scheduled enrollment period. Similarly,
an employer is not considered a participating employer if it
first offered a high deductible plan after October 1, 1997,
unless the plan was offered pursuant to a regularly scheduled
enrollment period. Also, a self-employed individual would not
be an eligible individual or an active MSA participant unless
the individual was first covered under a high deductible plan
on or before November 1, 1997.
If the 1997 threshold level is not exceeded, all
taxpayers in the qualifying eligible group (i.e., self-employed
individuals and employees working for employers with 50 or
fewer employees) would be permitted to have MSA contributions
for the 1998 tax year.
Rules for 1998 and succeeding years
In general.--In 1998 and succeeding years, on or before
August 1 of the year, each trustee or custodian of an MSA is
required to report to the IRS the total number of MSAs
established as of June 30 for the current year,\3\ including
the number of such MSAs established for previously uninsured
individuals. In addition, the IRS is directed to collect data
with respect to the number of taxpayers showing an MSA
contribution on their individual income tax returns for the
prior year and the extent to which such taxpayers were
previously uninsured.\4\ If, based on this information, the IRS
determines as described below that the number of taxpayers
anticipated to have MSA contributions (disregarding previously
uninsured individuals) exceeds the applicable threshold level,
the IRS is required to issue guidance to the public by no later
than October 1. If this guidance is issued, then only taxpayers
who are active MSA participants or who are employed by a
participating employer would be entitled to MSA contributions
in tax years following the year the guidance is issued.
---------------------------------------------------------------------------
\3\ That is, the report would not include MSAs to which
contributions are made for the prior year.
\4\ Each income tax return on which an MSA contribution is shown is
treated as one taxpayer for purposes of the cap. It is anticipated that
the IRS would adjust the actual return information to take into account
MSAs that may have been established by late filers.
---------------------------------------------------------------------------
For 1998 and succeeding years, the threshold is exceeded
if either of the following limits are exceeded. The numerical
limit is exceeded if: (1) the number of MSA returns filed on or
before April 1 of the year, plus the estimate of the number of
MSA returns for such year that will be filed after such date
exceeds the threshold, or (2) 90 percent of the amount
determined under (1), plus 15/6ths of the MSAs established for
the year before July 1 exceeds $750,000.
1998.--In 1998, the IRS would analyze the return data
from the filing of 1997 tax year returns and would determine,
based on this data, the number of taxpayers with MSA
contributions for 1997 and who were not previously uninsured.
If the IRS determines that (1) MSA returns filed on or before
April 15, 1998, plus the estimated number of MSA returns for
1997 filed after such date exceeds 600,000, or (2) that 90
percent of the MSA returns in (1), plus 15/6ths of the number
of MSAs established for 1998 between January 1 and July 1,
1998, the IRS would publish guidance on or before October 1,
1998, advising taxpayers that only taxpayers who had previously
had MSA contributions (i.e., for either the 1997 or 1998 tax
year) or who are employed by a participating employer would be
eligible for MSA contributions in succeeding tax years. If the
1998 threshold is exceeded, an individual who is first covered
by an employer-sponsored high deductible health plan after
October 1, 1998, is not an eligible individual or an active MSA
participant (and therefore cannot have an MSA for 1998 or a
subsequent year) unless the high deductible coverage is elected
pursuant to a regularly scheduled enrollment period. Similarly,
an employer is not considered a participating employer if it
first offered a high deductible plan after October 1, 1998,
unless the plan was offered pursuant to a regularly scheduled
enrollment period. Also, a self-employed individual would not
be an eligible individual or an active MSA participant unless
the individual was first covered under a high deductible plan
on or before November 1, 1998.
In the event that the threshold level had not been
exceeded, all taxpayers in the qualifying eligible group would
be permitted to establish MSAs during the 1999 tax year.
1999.--In 1999, the IRS would analyze the return data
from the filing of 1998 tax year returns and would determine,
based on this data, the number of taxpayers with MSA
contributions for 1998 and who were not previously uninsured.
If the IRS determines that (1) MSA returns filed on or before
April 15, 1999, plus the estimated number of MSA returns for
1998 filed after such date exceeds 600,000, or (2) that 90
percent of the MSA returns in (1), plus 1\5/6\ths of the number
of MSAs established for 1998 between January 1 and July 1,
1999, the IRS would publish guidance on or before October 1,
1999, advising taxpayers that only taxpayers who had previously
had MSA contributions (i.e., for the 1997, 1998, or 1999 tax
year) or who are employed by a participating employer would be
eligible for MSA contributions in succeeding tax years. If the
1999 threshold is exceeded, an individual who is first covered
by an employer-sponsored high deductible health plan after
October 1, 1999, is not an eligible individual or an active MSA
participant (and therefore cannot have an MSA for 1999 or a
subsequent year) unless the high deductible coverage is elected
pursuant to a regularly scheduled enrollment period. Similarly,
an employer is not considered a participating employer if it
first offered a high deductible plan after October 1, 1999,
unless the plan was offered pursuant to a regularly scheduled
enrollment period. Also, a self-employed individual would not
be an eligible individual or an active MSA participant unless
the individual was first covered under a high deductible plan
on or before November 1, 1999.
In the event that the threshold level had not been
exceeded, all taxpayers in the qualifying eligible group would
be permitted to establish MSAs during the 2000 tax year.
Reopening of MSA participation.--If 1997 is a cut-off
year, then in 1998, the IRS would (as described above) analyze
the return data from the filing of 1997 tax year returns and
would determine, based on this data, the number of taxpayers
with MSA contributions for 1997 and who were not previously
uninsured. If the IRS determines that MSA returns filed on or
before April 15, 1998, plus the estimated number of MSA returns
for 1997 filed after such date (disregarding MSAs of previously
uninsured individuals) exceeds 750,000, then the IRS will
announce by October 1, 1998, that MSAs will be available to all
eligible individuals in the qualifying eligible group of self-
employed individuals and employees of small employers covered
under a high deductible health plan during the first 6 months
of 1999. Similarly, if 1998 is a cut-off year, then in 1999,
MSA returns filed on or before April 15, 1999, plus the
estimated number of MSA returns for 1998 filed after such date
(disregarding MSAs of previously uninsured individuals) exceeds
750,000, then IRS will announce by October 1, 1998, that MSAs
will be available to all eligible individuals in the qualifying
eligible group of self-employed individuals and employees of
small employers with high deductible plan coverage during the
first 6 months of 2000.
End of pilot project
After December 31, 2000, no new contributions may be made
to MSAs except by or on behalf of individuals who previously
had MSA contributions and employees who are employed by a
participating employer. An employer is a participating employer
if (1) the employer made any MSA contributions for any year to
an MSA on behalf of employees or (2) at least 20 percent of the
employees covered under a high deductible plan made MSA
contributions of at least $100 in the year 2000.
Self-employed individuals who made contributions to an
MSA during the period 1997-2000 also may continue to make
contributions after 2000.
Measuring the effects of MSAs
During 1997-2000, the Department of the Treasury will
evaluate MSA participation and the reduction in Federal
revenues due to such participation and make such reports of
such evaluations to the Congress as the Secretary determines
appropriate.
The General Accounting Office is directed to contract
with an organization with expertise in health economics, health
insurance markets and actuarial science to conduct a study
regarding the effects of MSAs in the small group market on (1)
selection (including adverse selection), (2) health costs,
including the impact on premiums of individuals with
comprehensive coverage, (3) use of preventive care, (4)
consumer choice, (5) the scope of coverage of high deductible
plans purchased in conjunction with an MSA and (6) other
relevant issues, to be submitted to the Congress by January 1,
1999.
The conferees intend that the study be broad in scope,
gather sufficient data to fully evaluate the relevant issues,
and be adequately funded. The conferees expect the study to
utilize appropriate techniques to measure the impact of MSAs on
the broader health care market, including in-depth analysis of
local markets with high penetration. The conferees expect the
study to evaluate the impact of MSAs on individuals and
families experiencing high health care costs, especially low-
and middle-income families.
Definiton of MSA
In general, an MSA is a trust or custodial account
created exclusively for the benefit of the account holder and
subject to rules similar to those applicable to individual
retirement arrangements.
Effective date
The provisions are effective for taxable years beginning
after December 31, 1996.
b. increase in deduction for health insurance expenses of Self-employed
individuals
(Sec. 311 of the House bill and sec. 401 of the Senate
amendment.)
Present law
Under present law, self-employed individuals are entitled
to deduct 30 percent of the amount paid for health insurance
for the self-employed individual and the individual's spouse
and dependents. The deduction is not available for any month in
which the taxpayer is eligible to participate in a subsidized
health plan maintained by the employer of the taxpayer or the
taxpayer's spouse. The 30-percent deduction is available in the
case of self insurance as well as commercial insurance. The
self-insured plan must in fact be insurance (e.g., there must
be appropriate risk shifting) and not merely a reimbursement
arrangement.
House bill
Under the House bill, the deduction for health insurance
for self-employed individuals is phased up to 50 percent as
follows: for taxable years beginning in 1998, the amount of the
deduction would be 35 percent of health insurance expenses; for
taxable years beginning in 1999, 2000, and 2001, 40 percent;
for taxable years beginning in 2002, 45 percent; and for
taxable years beginning in 2003 and thereafter, 50 percent.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Senate amendment
Beginning in 1997, the Senate amendment phases up the
deduction in 5 percent increments until it is 80 percent in
2006 and thereafter.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1996.
Conference agreement
The conference agreement increases the deduction for
health insurance of self-employed individuals as follows: the
deduction would be 40 percent in 1997; 45 percent in 1998
through 2002; 50 percent in 2003; 60 percent in 2004; 70
percent in 2005; and 80 percent in 2006 and thereafter.
The conference agreement also provides that payments for
personal injury or sickness through an arrangements having the
effect of accident or health insurance (and that are not merely
reimbursement arrangements) are excludable from income. In
order for the exclusion to apply, the arrangement must be
insurance (e.g., there must be adequate risk shifting). This
provision equalizes the treatment of payments under commercial
insurance and arrangements other than commercial insurance that
have the effect of insurance. Under this provision, a self-
employed individual who receives payments from such an
arrangement could exclude the payments from income.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1996. No inference is
intended with respect to the excludability of payments under
arrangements having the effect of accident or health insurance
under present law.
c. treatment of long-term care insurance and services
(Secs. 321-323 and 325-328 of the House bill and secs.
411-415 and 421-424 of the Senate amendment.)
Present law
In general
Present law generally does not provide explicit rules
relating to the tax treatment of long-term care insurance
contracts or long-term care services. Thus, the treatment of
long-term care contracts and services is unclear. Present law
does provide rules relating to medical expenses and accident or
health insurance.
Itemized deduction for medical expenses
In determining taxable income for Federal income tax
purposes, a taxpayer is allowed an itemized deduction for
unreimbursed expenses that are paid by the taxpayer during the
taxable year for medical care of the taxpayer, the taxpayer's
spouse, or a dependent of the taxpayer, to the extent that such
expenses exceed 7.5 percent of the adjusted gross income of the
taxpayer for such year (sec. 213). For this purpose, expenses
paid for medical care generally are defined as amounts paid:
(1) for the diagnosis, cure, mitigation, treatment, or
prevention of disease (including prescription medicines or
drugs and insulin), or for the purpose of affecting any
structure or function of the body (other than cosmetic surgery
not related to disease, deformity, or accident); (2) for
transportation primarily for, and essential to, medical care
referred to in (1); or (3) for insurance (including Part B
Medicare premiums) covering medical care referred to in (1) and
(2).
Exclusion for amounts received under accident or health
insurance
Amounts received by a taxpayer under accident or health
insurance for personal injuries or sickness generally are
excluded from gross income to the extent that the amounts
received are not attributable to medical expenses that were
allowed as a deduction for a prior taxable year (sec. 104).
Treatment of accident or health plans maintained by
employers
Contributions of an employer to an accident or health
plan that provides compensation (through insurance or
otherwise) to an employee for personal injuries or sickness of
the employee, the employee's spouse, or a dependent of the
employee, are excluded from the gross income of the employee
(sec. 106). In addition, amounts received by an employee under
such a plan generally are excluded from gross income to the
extent that the amounts received are paid, directly or
indirectly, to reimburse the employee for expenses for the
medical care of the employee, the employee's spouse, or a
dependent of the employee (sec. 105). for this purpose,
expenses incurred for medical care are defined in the same
manner as under the rules regarding the deduction for medical
expenses.
A cafeteria plan is an employer-sponsored arrangement
under which employees can elect among cash and certain
employer-provided qualified benefits. No amount is included in
the gross income of a participant in a cafeteria plan merely
because the participant has the opportunity to make such an
election (sec. 125). Employer-provided accident or health
coverage is one of the benefits that may be offered under a
cafeteria plan.
A flexible spending arrangement (``FSA'') is an
arrangement under which an employee is reimbursed for medical
expenses or other nontaxable employer-provided benefits, such
as dependent care, and under which the maximum amount of
reimbursement that is reasonably available to a participant for
a period of coverage is not substantially in excess of the
total premium (including both employee-paid and employer-paid
portions of the premium) for such participant's coverage. Under
proposed Treasury regulations, a maximum amount of
reimbursement is not substantially in excess of the total
premium if such maximum amount is less than 500 percent of the
premium. An FSA may be part of a cafeteria plan or provided by
an employer outside a cafeteria plan. FSAs are commonly used to
reimburse employees for medical expenses not covered by
insurance. If certain requirements are satisfied,\5\ amounts
reimbursed for nontaxable benefits from an FSA are excludable
from income.
---------------------------------------------------------------------------
\5\ These requirements include a requirement that a health FSA can
only provide reimbursement for medical expenses (as defined in sec.
213) and cannot provide reimbursement for premium payments for other
health coverage and that the maximum amount of reimbursement under a
health FSA must be available at all times during the period of
coverage.
---------------------------------------------------------------------------
Health care continuation rules
The health care continuation rules require that an
employer must provide qualified beneficiaries the opportunity
to continue to participate for a specified period in the
employer's health plan after the occurrence of certain events
(such as termination of employment) that would have terminated
such participation (sec. 4980B). Individuals electing
continuation coverage can be required to pay for such coverage.
House bill
Tax treatment and definition of long-term care insurance
contracts and qualified long-term care services
Exclusion of long-term care proceeds.--A long-term care
insurance contract generally is treated as an accident and
health insurance contract. Amounts (other than policyholder
dividends or premium refunds) received under a long-term care
insurance contract generally are excludable as amounts received
for personal injuries and sickness, subject to a cap of $175
per day, or $63,875 annually, on per diem contracts only. If
the aggregate amount of periodic payments under all qualified
long-term care contracts exceeds the dollar cap for the period,
then the amount of such excess payments is excludable only to
the extent of the individual's costs (that are not otherwise
compensated for by insurance or otherwise) for long-term care
services during the period. The dollar cap is indexed by the
medical care cost component of the consumer price index.
Exclusion for employer-provided long-term care
coverage.--A plan of an employer providing coverage under a
long-term care insurance contract generally is treated as an
accident and health plan. Employer-provided coverage under a
long-term care insurance contract is not, however, excludable
by an employee if provided through a cafeteria plan; similarly,
expenses for long-term care services cannot be reimbursed under
an FSA.\6\
---------------------------------------------------------------------------
\6\ The bill does not otherwise modify the requirements relating to
FSAs. An FSA is defined as a benefit program providing employees with
coverage under which specified incurred expenses may be reimbursed
(subject to maximums and other reasonable conditions), and the maximum
amount of reimbursement that is reasonably available to a participant
is less than 500 percent of the value of the coverage.
---------------------------------------------------------------------------
Definition of long-term care insurance contract.--A long-
term care insurance contract is defined as any insurance
contract that provides only coverage of qualified long-term
care services and that meets other requirements. The other
requirements are that (1) the contract is guaranteed renewable,
(2) the contract does not provide for a cash surrender value or
other money that can be paid, assigned, pledged or borrowed,
(3) refunds (other than refunds on the death of the insured or
complete surrender or cancellation of the contract) and
dividends under the contract may be used only to reduce future
premiums or increase future benefits, and (4) the contract
generally does not pay or reimburse expenses reimbursable under
Medicare (except where Medicare is a secondary payor, or the
contract makes per diem or other periodic payments without
regard to expenses).
A contract does not fail to be treated as a long-term
care insurance contract solely because it provides for payments
on a per diem or other periodic basis without regard to
expenses incurred during the period.
Medicare duplication rules.--The bill provides that no
provision of law shall be construed or applied so as to
prohibit the offering of a long-term care insurance contract on
the basis that the contract coordinates its benefits with those
provided under Medicare. Thus, long-term care insurance
contracts are not subject to the rules requiring duplication of
Medicare benefits.
Definition of qualified long-term care services.--
Qualified long-term care services means necessary diagnostic,
preventive, therapeutic, curing, treating, mitigating and
rehabilitative services, and maintenance or personal care
services that are required by a chronically ill individual and
that are provided pursuant to a plan of care prescribed by a
licensed health care practitioner.
Chronically ill individual.--A chronically ill individual
is one who has been certified within the previous 12 months by
a licensed health care practitioner as (1) being unable to
perform (without substantial assistance) at least 2 activities
of daily living for at least 90 days \7\ due to a loss of
functional capacity, (2) having a similar level of disability
as determined by the Secretary of the Treasury in consultation
with the Secretary of Health and Human Services, or (3)
requiring substantial supervision to protect such individual
from threats to health and safety due to severe cognitive
impairment. Activities of daily living are eating, toileting,
transferring, bathing, dressing and continence.\8\
---------------------------------------------------------------------------
\7\ The 90-day period is not a waiting period. Thus, for example,
an individual can be certified was chronically ill if the licensed
health care practitioner certifies that the individual will be unable
to perform at least 2 activities of daily living for at least 90 days.
\8\ Nothing in the bill requires the contract to take into account
all of the activities of daily living. For example, a contract could
require that an individual be unable to perform (without substantial
assistance) 2 out of any 5 such activities, or for another example, 3
out of the 6 activities.
---------------------------------------------------------------------------
It is intended that an individual who is physically able
but has a cognitive impairment such as Alzheimer's disease or
another form of irreversible loss of mental capacity be treated
similarly to an individual who is unable to perform (without
substantial assistance) at least 2 activities of daily living.
Because of the concern that eligibility for the medical expense
deduction not be diagnosis-driven, the provision requires the
cognitive impairment to be severe. It is intended that severe
cognitive impairment mean a deterioration or loss in
intellectual capacity that is measured by clinical evidence and
standardized tests which reliably measure impairment in: (1)
short- or long-term memory; (2) orientation to people, places
or time; and (3) deductive or abstract reasoning. In addition,
it is intended that such deterioration or loss place the
individual in jeopardy of harming self or others and therefore
require substantial supervision by another individual.
A licensed health care practitioner is a physician (as
defined in sec. 1861(r)(1) of the Social Security Act) and any
registered professional nurse, licensed social worker or other
individual who meets such requirements as may be prescribed by
the Secretary of the Treasury.
Expenses for long-term care services treated as medical
expenses.--Unreimbursed expenses for qualified long-term care
services provided to the taxpayer or the taxpayer's spouse or
dependents are treated as medical expenses for purposes of the
itemized deduction for medical expenses (subject to the
present-law floor of 7.5 percent of adjusted gross income). For
this purpose, amounts received under a long-term care insurance
contract (regardless of whether the contract reimburses
expenses or pays benefits on a per diem or other periodic
basis) are treated as reimbursement for expenses actually
incurred for medical care.
For purposes of the deduction for medical expenses,
qualified long-term care services do not include services
provided to an individual by a relative or spouse (directly, or
through a partnership, corporation, or other entity), unless
the relative is a licensed professional with respect to such
services, or by a related corporation (within the meaning of
Code section 267(b) or 707(b)).\9\
---------------------------------------------------------------------------
\9\ The rule limiting such services provided by a relative or a
related corporation does not apply for purposes of the exclusion for
amounts received under a long-term care insurance contract, whether the
contract is employer-provided or purchased by an individual. The
limitation in unnecessary in such cases because it is anticipated that
the insurer will monitor reimbursements to limit opportunities for
fraud in connection with the performance of services by the taxpayer's
relative or a related corporation.
---------------------------------------------------------------------------
Long-term care insurance premiums treated as medical
expenses.--Long-term care insurance premiums that do not exceed
specified dollar limits are treated as medical expenses for
purposes of the itemized deduction for medical expenses.\10\
The limits are as follows:
\10\ Similarly, within certain limits, in the case of a rider to a
life insurance contract, charges against the life insurance contract's
cash surrender value that are includible in income are treated as
medical expenses (provided the rider constitutes a long-term care
insurance contract).
In the case of an individual with an attained age before the close of
the taxable yearThe limitation on premiums paid for such taxable
years is:
Not more than 40.......................................... $200
More than 40 but not more than 50......................... 375
More than 50 but not more than 60......................... 750
More than 60 but not more than 70......................... 2,000
More than 70.............................................. 2,500
For taxable years beginning after 1997, these dollar
limits are indexed for increases in the medical care component
of the consumer price index. The Secretary of the Treasury, in
consultation with the Secretary of Health and Human Services,
is directed to develop a more appropriate index to be applied
in lieu of the foregoing. Such an alternative might
appropriately be based on increases in skilled nursing facility
and home health care costs. It is intended that the Treasury
Secretary annually publish the indexed amount of the limits as
early in the year as they can be calculated.
Deduction for long-term care insurance of self-employed
individuals.--The present-law 30 percent deduction for health
insurance expenses of self-employed individuals is phased up to
50 percent under the bill. Because the bill treats payments of
eligible long-term care insurance premiums in the same manner
as medical insurance premiums, the self-employed health
insurance deduction applies to eligible long-term care
insurance premiums under the bill.
Long-term care riders on life insurance contracts.--In
the case of long-term care insurance coverage provided by a
rider on or as part of a life insurance contract, the
requirements applicable to long-term care insurance contracts
apply as if the portion of the contract providing such coverage
were a separate contract. The term ``portion'' means only the
terms and benefits that are in addition to the terms and
benefits under the life insurance contract without regard to
long-term care coverage. As a result, if the applicable
requirements are met by the long-term care portion of the
contract, amounts received under the contract as provided by
the rider are treated in the same manner as long-term care
insurance benefits, whether or not the payment of such amounts
causes a reduction in the contract's death benefit or cash
surrender value. The guideline premium limitation applicable
under section 7702(c)(2) is increased by the sum of charges
(but not premium payments) against the life insurance
contract's cash surrender value, the imposition of which
reduces premiums paid for the contract (within the meaning of
sec. 7702(f)(1)). In addition, it is anticipated that Treasury
regulations will provide for appropriate reduction in premiums
paid (within the meaning of sec. 7702(f)(1)) to reflect the
payment of benefits under the rider that reduce the cash
surrender value of the life insurance contract. A similar rule
should apply in the case of a contract governed by section
101(f) and in the case of the payments under a rider that are
excludable under section 101(g) of the Code (as added by this
bill).
Health care continuation rules.--The health care
continuation rules do not apply to coverage under a long-term
care insurance contract.
Inclusion of excess long-term care benefits
In general, the bill provides that the maximum annual
amount of long-term care benefits under a per diem type
contract that is excludable from income with respect to an
insured who is chronically ill (not including amounts received
by reason of the individual being terminally ill) \11\ cannot
exceed the equivalent of $175 per day for each day the
individual is chronically ill. Thus, for per diem type
contracts, the maximum annual exclusion for long-term care
benefits with respect to any chronically ill individual (not
including amounts received by reason of the individual being
terminally ill) is $63,875 (for 1997). If payments under such
contracts exceed the dollar limit, then the excess is
excludable only to the extent the individual has incurred
actual costs for long-term care services. If the insured is not
the same as the holder of the contract, the insured may assign
some or all of this limit to the contract holder at the time
and manner prescribed by the Secretary.
---------------------------------------------------------------------------
\11\ Terminally ill is defined as under the provision of the bill
relating to accelerated death benefits. In general, under that
provision, an individual is considered to be terminally ill if he or
she is certified as having an illness or physical condition that
reasonably can be expected to result in death within 24 months of the
date of the certification.
---------------------------------------------------------------------------
This $175 per day limit is indexed for inflation after
1997 for increases in the medical care component of the
consumer price index. The Treasury Secretary, in consultation
with the Secretary of Health and Human Services, is directed to
develop a more appropriate index, to be applied in lieu of the
foregoing. Such an alternative might appropriately be based on
increases in skilled nursing facility and home health care
costs. It is intended that the Treasury Secretary annually
publish the indexed amount of the limit as early in the year as
it can be calculated.
A payor of long-term care benefits (defined for this
purpose to include any amount paid under a product advertised,
marketed or offered as long-term care insurance) is required to
report to the IRS the aggregate amount of such benefits paid to
any individual during any calendar year, and the name, address
and taxypayer identification number of such individual. A copy
of the report must be provided to the payee by January 31
following the year of payment, showing the name of the payor
and the aggregate amount of benefits paid to the individual
during the calendar year. Failure to file the report or provide
the copy to the payee is subject to the generally applicable
penalties for failure to file similar information reports.
Consumer protection provisions
Under the bill, long-term care insurance contracts, and
issuers of contracts, are required to satisfy certain
provisions of the long-term care insurance model Act and model
regulations promulgated by the National Association of
Insurance Commissioners (as adopted as of January 1993). The
policy requirements relate to disclosure, nonforfeitability,
guaranteed renewal or noncancellability, prohibitions on
limitations and exclusions, extension of benefits, continuation
or conversion of coverage, discontinuance and replacement of
policies, unintentional lapse, post-claims underwriting,
minimum standards, inflation protection, preexisting
conditions, and prior hospitalization. The bill also provides
disclosure and nonforfeiture requirements. The nonforfeiture
provision gives consumers the option of selecting reduced paid-
up insurance, extended term insurance, or a shortened benefit
period in the event a policyholder who elects a nonforfeiture
provision is unable to continue to pay premiums. The
requirements for issuers of long-term care insurance contracts
relate to application forms, reporting requirements, marketing,
appropriateness of purchase, format, delivering a shopper's
guide, right to return, outline of coverage, group plans,
policy summary, monthly reports on accelerated death benefits,
and incontestability period. A tax is imposed equal to $100 per
policy per day for failure to satisfy these requirements.
Nothing in the bill prevents a State from establishing,
implementing or continuing standards related to the protection
of policyholders of long-term care insurance policies, if such
standards are not inconsistent with standards established under
the bill.
Effective date
The provisions defining long-term care insurance
contracts and qualified long-term care services apply to
contracts issued after December 31, 1996. Any contract issued
before January 1, 1997, that met the long-term care insurance
requirements in the State in which the policy was sitused at
the time it was issued shall be treated as a long-term care
insurance contract, and services provided under or reimbursed
by the contract treated as qualified long-term care services.
A contract providing for long-term care insurance may be
exchanged for a long-term care insurance contract (or the
former cancelled and the proceeds reinvested in the latter
within 60 days) tax free between the date of enactment and
January 1, 1998. Taxable gain would be recognized to the extent
money or other property is received in the exchange.
The issuance or conformance of a rider to a life
insurance contract providing long-term care insurance coverage
is not treated as a modification or a material change for
purposes of applying sections 101(f), 7702, and 7702A of the
Code.
The provision relating to treatment of eligible long-term
care premiums as a medical expense is effective for taxable
years beginning after December 31, 1996. The provision treating
amounts paid for long-term care services as a medical expense
(for purposes of the medical expense deduction) is effective
for services furnished in taxable years beginning after
December 31, 1997.
The provisions relating to the maximum exclusion for
certain long-term care benefits and reporting are effective for
taxable years beginning after December 31, 1996. Thus, the
initial year in which reports will be filed with the IRS and
copies provided to the payee will be 1998, with respect to
long-term care benefits paid in 1997.
Senate amendment
The Senate amendment is the same as the House bill,
except as follows.
Life insurance company reserves
In determining reserves for insurance company tax
purposes, the Senate amendment provides that the Federal income
tax reserve method applicable for a long-term care insurance
contract issued after December 31, 1996, is the method
prescribed by the National Association of Insurance
Commissioners (``NAIC'') (or, if no reserve method has been so
prescribed, a method consistent with the tax reserve method for
life insurance, annuity or noncancellable accident and health
insurance contracts, whichever is most appropriate). The method
currently prescribed by the NAIC for long-term care insurance
contracts is the one-year full preliminary term method. As
under present law, however, in no event may the tax reserve for
a contract as of any time exceed the amount which would be
taken into account with respect to the contract as of such time
in determining statutory reserves.
Exchanges of life insurance and other contracts for long-
term care insurance contracts
The exchange of a life insurance contract or an endowment
or annuity contract for a qualified long-term care insurance
contract is not taxable under the Senate amendment.
Distributions from IRAs and retirement plans for long-term
care insurance
The Senate amendment permits certain plans to make
distributions to pay premiums for long-term care insurance for
the individual or the individual's spouse and provides that the
10-percent tax on early withdrawals does not apply to such
distributions. The provision applies to distributions from
individual retirement arrangements (``IRAs'') and distributions
attributable to elective deferrals to qualified cash or
deferred arrangements (sec. 401(k) plans), tax-sheltered
annuities (sec. 403(b) plans), nonqualified deferred
compensation plans of governmental or tax-exempt employers
(sec. 457 plans), and section 501(c)(18) plans used to pay
premiums for long-term care insurance for the individual or the
individual's spouse. Such distributions are includable in
income (as under present law).
Effective dates
The effective dates are the same as the House bill,
except as follows.
The provision treating long-term care services as a
medical expense is effective for taxable years beginning after
December 31, 1996.
The change in treatment of reserves for long-term care
insurance contracts is effective for contracts issued after
December 31, 1996.
The provision relating to tax-free exchanges of life
insurance, endowment and annuity contracts for long-term care
insurance contracts is effective for taxable years beginning
after December 31, 1997.
The provision relating to certain distributions from IRAs
and elective deferrals used to pay long-term care insurance
premiums is effective for payments and distributions after
December 31, 1996.
Conference agreement
The conference agreement generally follows the House
bill, except as follows.
Tax treatment and definition of long-term care insurance
contracts and qualified long-term care services
Chronically ill individual.--The conference agreement
provides that, for purposes of determining whether an
individual is chronically ill, the number of activities of
daily living that are taken into account under the contract may
not be less than five. For example, a contract could require
that an individual be unable to perform (without substantial
assistance) two out of any five of the activities listed in the
bill. By contrast, a contract does not meet this requirement if
it required that an individual be unable to perform two out of
any four of the activities listed in the bill.
In addition, the conference agreement modifies the second
test for whether an individual is chronically ill (i.e., that
the individual has a level of disability similar to an
individual who is unable to perform (without substantial
assistance) at least two activities of daily living). Under the
conference agreement, this test is met if the individual has
been certified within the previous 12 months by a licensed
health care practitioner as having a similar level of
disability, as determined under regulations prescribed by the
Secretary in consultation with the Secretary of Health and
Human Services.
Health care continuation rules.--The health care
continuation rules do not apply to coverage under a plan,
substantially all of the coverage under which is for qualified
long-term care services.
State-maintained plans.--The conference agreement
modifies the definition of a qualified long-term care insurance
contract. Under the conference agreement, an arrangement is
treated as a qualified long-term care insurance contract if an
individual receives coverage for qualified long-term care
services under a State long-term care plan, and the terms of
the arrangement would satisfy the requirements for a long-term
care insurance contract under the provision, were the
arrangement an insurance contract. For this purpose, a State
long-term care plan is any plan established and maintained by a
State (or instrumentality of such State) under which only
employees (and former employees, including retirees) of a State
or of a political subdivision or instrumentality of the State,
and their relatives, and their spouses and spouses' relatives,
may receive coverage only for qualified long-term care
services. Relative is defined as under section 152(a)(1)-(8).
No inference is intended with respect to the tax consequences
of such arrangements under present law.
Inclusions of excess long-term care benefits
The conference agreement modifies the calculation of the
dollar cap applicable to aggregate payments under per diem type
long-term care insurance contracts and amounts received with
respect to a chronically ill individual pursuant to a life
insurance contract.\12\ The amount of the dollar cap with
respect to any one chronically ill individual (who is not
terminally ill) is $175 per day ($63,875 annually, as indexed),
reduced by the amount of reimbursements and payments received
by anyone for the cost of qualified long-term care services for
the chronically ill individual. If more than one payee receives
payments with respect to any one chronically ill individual,
then everyone receiving periodic payments with respect to the
same insured is treated as one person for purposes of the
dollar cap. The amount of the dollar cap is utilized first by
the chronically ill person, and any remaining amount is
allocated in accordance with Treasury regulations. If payments
under such contracts exceed the dollar cap, then the excess is
excludable only to the extent of actual costs (in excess of the
dollar cap) incurred for long-term care services. Amounts in
excess of the dollar cap, with respect to which no actual costs
were incurred for long-term care services, are fully includable
in income without regard to rules relating to return of basis
under Code section 72.
---------------------------------------------------------------------------
\12\ See item D, below.
---------------------------------------------------------------------------
The managers of the bill wish to clarify that, although
the legislation imposes a daily (or equivalent) dollar cap on
the amount of excludable benefits under certain types of long-
term care insurance in certain circumstances, this limitation
is not intended to suggest a preference or otherwise convey or
facilitate a competitive advantage to one type of long-term
care insurance compared to another type of long-term care
insurance.
The Chairmen of the House Committee on Ways and Means and
the Senate Finance Committee shall jointly request that the
NAIC, in consultation with representatives of the insurance
industry and consumer organizations, develop and conduct a
study to determine the marketing and other effects, if any, of
the dollar limit on excludable long-term care benefits under
certain types of long-term care insurance contracts under the
bill. Such Chairmen are to request that the NAIC, if it agrees
to such request, shall submit the results of its study to the
such Committees by no later than two years after agreeing to
the request.
The conference agreement modifies the reporting
requirement for payors of amounts excludable under the
provision. Thus, in addition to the reporting requirements of
the House bill, a payor is required to report the name,
address, and taxpayer identification number of the chronically
ill individual on account of whose condition such amounts are
paid, and whether the contract under which the amount is paid
is a per diem-type contract.
A grandfather rule is provided under the conference
agreement in the case of a per diem type contract issued to a
policyholder on or before July 31, 1996. Under the grandfather
rule, the amount of the dollar cap with respect to such a per
diem contract is calculated without any reduction for
reimbursements for qualified long-term care services under any
other contract issued with respect to the same insured on or
before July 31, 1996. The other provisions of the dollar cap
are not affected by the grandfather rule. The grandfather rule
ceases to apply as of the time that any of the contracts issued
on or before July 31, 1996, with respect to the insured are
exchanged, or benefits are increased.
Life insurance company reserves
The conference agreement includes the Senate amendment
provision with respect to life insurance reserves. Thus, under
the conference agreement, in determining reserves for insurance
company tax purposes, the Senate amendment provides that the
Federal income tax reserve method applicable for a long-term
care insurance contract is the method prescribed by the NAIC
(or, if no reserve method has been so prescribed, a method
consistent with the tax reserve method for life insurance,
annuity or noncancellable accident and health insurance
contracts, whichever is most appropriate). As under present
law, in no event may the tax reserve for a contract as of any
time exceed the amount which would be taken into account with
respect to the contract as of such time in determining
statutory reserves.
Consumer protection provisions
The conference agreement clarifies and modifies the
category of contracts to which the consumer protection
provisions apply. The conference agreement clarifies that the
consumer protection provisions that apply with respect to the
terms of the contract apply only for purposes of determining
whether a contract is a qualified long-term care insurance
contract (within the meaning of the bill).
The conference agreement provides that, for purposes of
both the requirements as to contract terms and the requirements
relating to issuers of contracts, the determination of whether
any requirement of a model regulation or model Act has been met
is made by the Secretary of the Treasury. It is not intended
that the Secretary create a Federal standard, but rather, look
to applicable or appropriate State standards or to those
provided specifically in the model regulation or model Act.
The conference agreement modifies the $100-per-day tax on
failure to satisfy the requirements for issuers of contracts,
to provide that the amount of the tax imposed is $100 per
insured per day. The conference agreement provides that the
consumer protection requirements for issuers of contracts apply
with respect to contracts that are qualified long-term care
insurance contracts (within the meaning of the bill).
The conference agreement modifies the rule relating to
State establishment of standards relating to contract terms or
issuers of contracts. The conference agreement provides that an
otherwise qualified long-term care insurance contract will not
fail to be a qualified long-term care insurance contract, and
will not be treated as failing to meet the analogous
requirement under the conference agreement, solely because it
satisfies a consumer protection standard imposed under
applicable State law that is more stringent than the analogous
standard provided in the bill. The conference agreement does
not preclude States from enacting more stringent consumer
protection provisions than the analogous standards under the
bill.
Effective date
The conference agreement follows the Senate amendment
with respect to the effective date of the provision treating
long-term care services as a medical expense. Thus, under the
conference agreement, this provision is effective for taxable
years beginning after December 31, 1996.
The conference agreement provides that the provision
relating to life insurance company reserves is effective for
contracts issued after December 31, 1997.
d. treatment of accelerated death benefits under life insurance
contracts
(Secs. 331-332 of the House bill and secs. 431-432 of the
Senate amendment).
Present law
Treatment of amounts received under a life insurance
contract
If a contract meets the definition of a life insurance
contract, gross income does not include insurance proceeds that
are paid pursuant to the contract by reason of the death of the
insured (sec. 101(a)). In addition, the undistributed
investment income (``inside buildup'') earned on premiums
credited under the contract is not subject to current taxation
to the owner of the contract. The exclusion under section 101
applies regardless of whether the death benefits are paid as a
lump sum or otherwise.
Amounts received under a life insurance contract (other
than a modified endowment contract) prior to the death of the
insured are includible in the gross income of the recipient to
the extent that the amount received constitutes cash value in
excess of the taxpayer's investment in the contract (generally,
the investment in the contract is the aggregate amount of
premiums paid less amounts previously received that were
excluded from gross income).
If a contract fails to be treated as a life insurance
contract under section 7702(a), inside buildup on the contract
is generally subject to tax (sec. 7702(g)).
Requirements for a life insurance contract
To qualify as a life insurance contract for Federal
income tax purposes, a contract must be a life insurance
contract under the applicable State or foreign law and must
satisfy either of two alternative tests: (1) cash value
accumulation test or (2) a test consisting of a guideline
premium requirement and a cash value corridor requirement (sec.
7702(a)). A contract satisfies the cash value accumulation test
if the cash surrender value of the contract may not at any time
exceed the net single premium that would have to be paid at
such time to fund future benefits under the contract. A
contract satisfies the guideline premium and cash value
corridor tests if the premiums paid under the contract do not
at any time exceed the greater of the guideline single premium
or the sum of the guideline level premiums, and if the death
benefit under the contract is not less than a varying statutory
percentage of the cash surrender value of the contract.
Proposed regulations on accelerated death benefits
The Treasury Department has issued proposed regulations
\13\ under which certain ``qualified accelerated death
benefits'' paid by reason of the terminal illness of an insured
would be treated as paid by reason of the death of the insured
and therefore qualify for exclusion under section 101. In
addition, the proposed regulations would permit an insurance
contract that includes a qualified accelerated death benefit
rider to qualify as a life insurance contract under section
7702. Thus, the proposed regulations provide that including
this benefit would not cause an insurance contract to fail to
meet the definition of a life insurance contract.
---------------------------------------------------------------------------
\13\ Prop. Treas. Reg. Secs. 1.101-8, 1.7702-0, 1.7702-2, and
1.7702A-1 (December 15, 1992).
---------------------------------------------------------------------------
Under the proposed regulations, a benefit would qualify
as a qualified accelerated death benefit only if it meets three
requirements. First, the accelerated death benefit can be
payable only if the insured becomes terminally ill. Second, the
amount of the benefit must equal or exceed the present value of
the reduction in the death benefit otherwise payable.\14\
Third, the cash surrender value and the death benefit payable
under the policy must be reduced proportionately as a result of
the accelerated death benefit.
---------------------------------------------------------------------------
\14\ For purposes of determining the present value under the
proposed regulations, the maximum permissible discount rate would be
the greater of (1) the applicable Federal rate that applies under the
discounting rules for property and casualty insurance loss reserves,
and (2) the interest rate applicable to policy loans under the
contract. Also, the present value would be determined assuming that the
death benefit would have been paid twelve months after payment of the
accelerated death benefit.
---------------------------------------------------------------------------
For purposes of the proposed regulations, an insured
would be treated as terminally ill if he or she has an illness
that, despite appropriate medical care, the insurer reasonably
expects to result in death within twelve months from the
payment of the accelerated death benefit. The proposed
regulations would not apply to viatical settlements.
House bill
The House bill provides an exclusion from gross income as
an amount paid by reason of the death of an insured for (1)
amounts received under a life insurance contract and (2) amount
received for the sale or assignment of a life insurance
contract to a qualified viatical settlement provider, provided
that the insured under the life insurance contract is either
terminally ill or chronically ill. The exclusion for amounts
received under a life insurance contract on the life of an
insured who is chronically ill applies if the amount is
received under a rider or other provision of the contract that
is treated as a long-term care insurance contract under section
7702B (as added by the bill), and the amount is excludable as a
payment for long-term care services under section 7702B
(including under the dollar cap on per diem type payments ($175
per day, or $63,875 annually, in 1997).
The provision does not apply in the case of an amount
paid to any taxpayer other than the insured, if such taxpayer
has an insurable interest by reason of the insured being a
director, officer or employee of the taxpayer, or by reason of
the insured being financial interested in any trade or business
carried on by the taxpayer.
A terminally ill individual is defined as one who has
been certified by a physician as having an illness or physical
condition that reasonably can be expected to result in death
within 24 months of the date of certification. A physician is
defined for this purpose in the same manner as under the long-
term care insurance rules of the bill.\15\
---------------------------------------------------------------------------
\15\ A physician is defined for these purposes as in section
1861(r)(1) of the Social Security Act, which provides that a physician
means a doctor of medicine or osteopathy legally authorized to practice
medicine and surgery by the State in which he performs such function or
action (including a physician within the meaning of section 1101(a)(7)
of that Act). Section 1101(a)(7) of that Act provides that the term
physician includes osteopathic practitioners within the scope of their
practice as defined by State law.
---------------------------------------------------------------------------
A chronically ill individual is defined under the long-
term care provisions of the bill.\16\ In the case of amounts
received with respect to a chronically ill individual (but not
amounts received by reason of the individual being terminally
ill), the $175 per day ($63,875 annual) limitation on
excludable benefits that applies for per diem type long-term
care insurance contracts also limits amounts that are
excludable with respect to such contracts under this provision.
---------------------------------------------------------------------------
\16\ Thus, a chronically ill individual is one who has been
certified within the previous 12 months by a licensed health care
practitioner as (1) being unable to perform (without substantial
assistance) at least 2 activities of daily living for at least 90 days
due to a loss of functional capacity, (2) having a similar level of
disability as determined by the Secretary of the Treasury in
consultation with the Secretary of Health and Human Services, or (3)
requiring substantial supervision to protect such individual from
threats to health and safety due to severe cognitive impairment.
Activities of daily living are eating, toileting, transferring,
bathing, dressing and continence. Nothing in the bill requires the
contract to take into account all of the activities of daily living.
---------------------------------------------------------------------------
The payor of a payment to which this provision applies is
required to report to the IRS the aggregate amount of such
benefits paid to any individual during any calendar year, and
the name, address and taxpayer identification number of such
individual. A copy of the report must be provided to the payee
by January 31 following the year of payment, showing the name
of the payer and the aggregate amount of such benefits paid to
the individual during the calendar year. Failure to file the
report or provide the copy to the payee is subject to the
generally applicable penalties for failure to file similar
information reports.
A qualified viatical settlement provider is any person
that regularly purchases or takes assignments of life insurance
contracts on the lives of the terminally ill individuals and
either (1) is licensed for such purposes in the State in which
the insured resides; or (2) if the person is not required to be
licensed by that State, menets the requirements of sections 8
and 9 of the Viatical Settlements Model Act (issued by the
National Association of Insurance Commissioners (NAIC)), and
also meets the section of the NAIC Viatical Settlements Model
Regulation relating to standards for evaluation of reasonable
payments, including discount rates, in determining amounts paid
by the viatical settlement provider.
For life insurance company tax purposes, the bill
provides that a life insurance contract is treated as including
a reference to a qualified accelerated death benefit rider to a
life insurance contract (except in the case of any rider that
is treated as a long-term care insurance contract under section
7702B, as added by the bill). A qualified accelerated death
benefit rider is any rider on a life insurance contract that
provides only for payments of a type that are excludable under
this provision.
Effective date
The provision applies to amounts received after December
31, 1996. The provision treating a qualified accelerated death
benefit rider as life insurance for life insurance company tax
purposes takes effect on January 1, 1997. The issuance of a
qualified accelerated death benefit rider to a life insurance
contract, or the addition of any provision required to conform
an accelerated death benefit rider to these provisions, is not
treated as a modification or material change to the contract
(and is not intended to affect the issue date of any contract
under section 101(f)).
Senate amendment
The Senate amendment is the same as the House bill,
except that, in the case of a chronically ill insured, while
the Senate amendment does provide that the exclusion for
amounts received under a life insurance contract applies if the
amount is received under a rider or other provision of the
contract that is treated as a long-term care insurance contract
under section 7702B (as added by the bill), the Senate
amendment does not include the explicit language of the House
bill requiring that the amount be treated as a payment for
long-term care services under section 7702B.
Conference agreement
The conference agreement follows the House bill and the
Senate amendment, with technical modifications and
clarifications.
The conference agreement provides that the amount paid
for the sale or assignment of any portion of the death benefit
under a life insurance contract on the life of a terminally or
chronically ill individual to a viatical settlement provider is
excludable by the recipient as an amount paid under the
contract by reason of the death of the insured. For example,
the sale or assignment of a life insurance contract that has a
rider providing for long-term care insurance, payments under
which rider are funded by and reduce the death benefit, is
considered the sale or assignment of the death benefit. Sale or
assignment of a stand-alone rider providing for long-term care
insurance (where payments under the rider are not funded by
reductions in the death benefit), however, is not considered
the sale or assignment of the death benefit.
The conference agreement provides that a viatical
settlement provider is any person regularly engaged in the
trade or business of purchasing or taking assignments of life
insurance contracts on the lives of insured individuals who are
terminally ill or chronically ill, so long as the viatical
settlement provider meets certain requirements. The viatical
settlement provider must either (1) be licensed, in the State
where the insured resides, to engage in such transactions with
terminally ill individuals (if the insured is terminally ill)
or with chronically ill individuals (if the insured is
chronically ill), or (2) if such licensing with respect to the
insured individual is not required in the State, meet other
requirements depending on whether the insured is terminally or
chronically ill. If the insured is terminally ill, the viatical
settlement provider must meet the requirements of sections 8
and 9 of the Viatical Settlements Model Act, relating to
disclosure and general rules (issued by the National
Association of Insurance Commissioner (NAIC)), and also meet
the section of the NAIC Viatical Settlements Model Regulation
relating to standards for evaluation of reasonable payments,
including discount rates, in determining amounts paid by the
viatical settlement provider. If the insured is chronically
ill, the viatical settlement provider must meet requirements
similar to those of sections 8 and 9 of the NAIC Viatical
Settlements Model Act, and also must meet the standards, if
any, promulgated by the NAIC for evaluating the reasonableness
of amounts paid in viatical settlement transactions with
chronically ill individuals.
The conference agreement clarifies the rules for
chronically ill insureds so that the tax treatment of payments
with respect to chronically ill individuals is reasonably
similar under the long-term care rules of the bill and under
this provision. In the case of a chronically ill individual,
the exclusion under this provision with respect to amounts paid
under a life insurance contract and amounts paid in a sale or
assignment to a viatical settlement provider applies if the
payment received is for costs incurred by the payee (not
compensated by insurance or otherwise) for qualified long-term
care services (as defined under the long-term care rules of the
bill) for the insured person for the period, and two other
requirements (similar to requirements applicable to long-term
care insurance contracts under the bill) are met. The first
requirement is that under the terms of the contract giving rise
to the payment, the payment is not a payment or reimbursement
of expenses reimbursable under Medicare (except where Medicare
is a secondary payor under the arrangement, or the arrangement
provides for per diem or other periodic payments without regard
to expenses for qualified long-term care services). The
conference agreement provides that no provision of law shall be
construed or applied so as to prohibit the offering of such a
contract giving rise to such a payment on the basis that the
contract coordinates its payments with those provided under
Medicare. The second requirement is that the arrangement
complies with those consumer protection provisions applicable
under the bill to long-term care insurance contracts and
issuers that are specified in Treasury regulations. It is
intended that such guidance incorporate rules similar to those
of section 6F (relating to right to return, permitting the
payee 30 days to rescind the arrangement) of the NAIC Long-Term
Care Insurance Model Act, and section 13 (relating to
requirements for application, requiring that the payee be asked
if he or she already has long-term care insurance, Medicaid, or
similar coverage) of the NAIC Long-Term Care Insurance Model
Regulations. If the NAIC or the State in which the policyholder
resides issues standards relating to chronically ill
individuals, then the analogous requirements under Treasury
regulations cease to apply.
An individual who meets the definition of a terminally
ill individual is not treated as chronically ill, for purposes
of this provision.
Payments made on a per diem or other periodic basis,
without regard to expenses incurred for qualified long-term
care services, are nevertheless excludable under this
provision, subject to the dollar cap on excludable benefits
that applies for amounts that are excludable under per diem
type long-term care insurance contracts. The conference
agreement modifies the calculation of the dollar cap applicable
to aggregate payments under per diem type long-term care
insurance contracts and amounts received with respect to a
chronically ill individual pursuant to a life insurance
contract.\17\ The amount of the dollar cap with respect to the
aggregate amount received under per diem type long-term care
insurance contracts and this provision with respect to any one
chronically ill individual (who is not terminally ill) is $175
per day ($63,875 annually) (indexed), reduced by the amount of
reimbursements and payments received by anyone for the cost of
qualified long-term care services for the chronically ill
individual. If more than one payee receives payments with
respect to any one chronically ill individual, the amount of
the dollar cap is utilized first by the chronically ill person,
and any remaining amount is allocated in accordance with
Treasury regulations. If payments under such contracts exceed
the dollar cap, then the excess is excludable only to the
extent of actual costs incurred for long-term care services.
Amounts in excess of the dollar cap, with respect to which no
actual costs (in excess of the dollar cap) were incurred for
long-term care services, are fully includable in income without
regard to rules relating to return of basis under Code section
72.
---------------------------------------------------------------------------
\17\ See item C, above.
---------------------------------------------------------------------------
The conference agreement modifies the reporting
requirement for payors of amounts excludable under the
provision. Thus, in addition to the reporting requirements of
the House bill, a payor is required to report the name,
address, and taxpayer identification number of the chronically
ill individual on account of whose condition such amounts are
paid, and whether the contract under which the amount is paid
is a per diem-type contract.
e. exemption from income tax for state-sponsored organizations
providing health coverage for high-risk individuals; exemption from
income tax for state-sponsored workers' compensation reinsurance
organizations
(Sec. 341 of the House bill and sec. 451 of the Senate
amendment).
Present law
In general, the Internal Revenue Service (``IRS'') takes
the position that organizations that provide insurance for
their members or other individuals are not considered to be
engaged in a tax-exempt activity. The IRS maintains that such
insurance activity is either (1) a regular business of a kind
ordinarily carried on for profit, or (2) an economy or
convenience in the conduct of members' businesses because it
relieves the members from obtaining insurance on an individual
basis.
Certain insurance risk pools have qualified for tax
exemption under Code section 501(c)(6). In general, these
organizations (1) assign any insurance policies and
administrative functions to their member organizations
(although they may reimburse their members for amounts paid and
expenses), (2) serve an important common business interest of
their members, and (3) must be membership organizations
financed, at least in part, by membership dues.
State insurance risk pools may also qualify for tax-
exempt status under section 501(c)(4) as a social welfare
organization or under section 115 as serving an essential
governmental function of a State. In seeking qualification
under section 501(c)(4), insurance organizations generally are
constrained by the restrictions on the provision of
``commercial-type insurance'' contained in section 501(m).
Section 115 generally provides that gross income does not
include income derived from the exercise of any essential
governmental function and accruing to a State or any political
subdivision thereof. However, the IRS may be reluctant to rule
that particular State risk-pooling entities satisfy the section
501(c)(4) or 115 requirements for tax-exempt status.
House bill
Health coverage for high-risk individuals
The House bill provides tax-exempt status to any
membership organization that is established by a State
exclusively to provide coverage for medical care on a nonprofit
basis to certain high-risk individuals, provided certain
criteria are satisfied.\18\ The organization may provide
coverage for medical care either by issuing insurance itself or
by entering into an arrangement with a health maintenance
organization (``HMO'').
---------------------------------------------------------------------------
\18\ No inference is intended as to the tax treatment of other
types of State-sponsored organizations.
---------------------------------------------------------------------------
High-risk individuals eligible to receive medical care
coverage from the organization must be residents of the State
who, due to a pre-existing medical condition, are unable to
obtain health coverage for such condition through insurance or
an HMO, or are able to acquire such coverage only at a rate
that is substantially higher than the rate charged for such
coverage by the organization. The State must determine the
composition of membership in the organization. For example, a
State could mandate that all organizations that are subject to
insurance regulation by the State must be members of the
organization.
The House bill further requires the State or members of
the organization to fund the liabilities of the organization to
the extent that premiums charged to eligible individuals are
insufficient to cover such liabilities. Finally, no part of the
net earnings of the organization can inure to the benefit of
any private shareholder or individual.
Effective date.--The provision applies to taxable years
beginning after December 31, 1996.
Workers' compensation reinsurance organizations
No provision.
Senate amendment
The Senate amendment is the same as the House bill.
Conference agreement
Health coverage for high-risk individuals
The conference agreement follows the House bill and the
Senate amendment.
Workers' compensation reinsurance organizations
The conference agreement provides tax-exempt status to
any membership organization that is established by a State
before June 1, 1996, exclusively to reimburse its members for
workers' compensation insurance losses, and that satisfies
certain other conditions. A State must require that the
membership of the organization consist of all persons who issue
insurance covering workers' compensation losses in such State,
and all persons and governmental entities who self-insure
against such losses. In addition, the organization must operate
as a nonprofit organization by returning surplus income to
members or to workers' compensation policyholders on a periodic
basis and by reducing initial premiums in anticipation of
investment income.
Effective date.--The provision applies to taxable years
ending after the date of enactment.
f. health insurance organizations eligible for benefits of section 833
(Sec. 351 of the House bill).
Present law
An organization described in sections 501(c)(3) or (4) of
the Code is exempt from tax only if no substantial part of its
activities consists of providing commercial-type insurance
(sec. 501(m)). Special rules apply to certain eligible health
insurance organizations. Eligible health insurance
organizations are (1) Blue Cross and Blue Shield organizations
existing on August 16, 1986, which have not experienced a
material change in structure or operations since that date, and
(2) other organizations that meet certain community-service
related requirements and substantially all of whose activities
involve the providing of health insurance. Section 833 provides
that eligible organizations are generally treated as stock
property and casualty insurance companies.
Section 833 provides a special deduction for eligible
organizations, equal to 25 percent of the claims and expenses
incurred during the year, less the adjusted surplus at the
beginning of the year. This deduction is calculated by
computing surplus, taxable income, claims incurred, expenses
incurred, tax-exempt income, net operating loss carryovers, and
other items attributable to health expenses. The deduction may
not exceed taxable income attributable to health business for
the year (calculated without regard to this deduction).
In addition, section 833 eliminates, for eligible
organizations, the 20 percent reduction in unearned premium
reserves that applies generally to all property and casualty
insurance companies.
House bill
The House bill applies the special rules under section
833 to the same extent they are provided to certain existing
Blue Cross or Blue Shield organizations, in the case of any
organization that (1) is not a Blue Cross or Blue Shield
organization existing on August 16, 1986, and (2) otherwise
meets the requirements of section 833(c)(2) (including the
requirement of no material change in operations or structure
since August 16, 1986). Under the provision, an organization
qualifies for this treatment only if (1) it is not a health
maintenance organization and (2) it is organized under and
governed by State laws which are specifically and exclusively
applicable to not-for-profit health insurance or health service
type organizations.
Effective date.--The provision is effective for taxable
years ending after December 31, 1996.
Senate amendment
No provision.
Conference agreement
The conference agreement follows the House bill.
g. penalty-free withdrawals from iras for medical expenses
(Sec. 461 of the Senate amendment).
Present law
Amounts withdrawn from an individual retirement
arrangement (``IRA'') are includible in income (except to the
extent of any nondeductible contributions). In addition, a 10-
percent additional tax applies to withdrawals from IRAs made
before age 59\1/2\, unless the withdrawal is made on account of
death or disability or is made in the form of annuity payments.
A similar additional tax applies to early withdrawals
from employer-sponsored tax-qualified pension plans. However,
the 10-percent additional tax does not apply to withdrawals
from such plans to the extent used for medical expenses that
exceed 7.5 percent of adjusted gross income (``AGI'').
House bill
No provision.
Senate amendment
The Senate amendment extends the exception to the 10-
percent tax for medical expenses in excess of 7.5 percent of
AGI to withdrawals from IRAs. In addition, the Senate amendment
provides that the 10-percent additional tax does not apply to
withdrawals for medical insurance (without regard to the 7.5
percent of AGI floor) if the individual (including a self-
employed individual) has received unemployment compensation
under Federal or State law for at least 12 weeks, and the
withdrawal is made in the year such unemployment compensation
is received or the following year. If a self-employed
individual is not eligible for unemployment compensation under
applicable law, then, to the extent provided in regulations, a
self-employed individual is treated as having received
unemployment compensation for at least 12 weeks if the
individual would have received unemployment compensation but
for the fact that the individual was self-employed.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1996.
Conference agreement
The conference agreement follows the Senate amendment,
with the modification that the exception ceases to apply if the
individual has been reemployed for at least 60 days.
h. require treasury to include organ and tissue donation information
with tax refunds
(Sec. 307 of the Senate amendment).
Present law
There is no statutory requirement that Treasury include
organ and tissue donation information with any payment of a
refund of individual income taxes.
House bill
No provision.
Senate amendment
The Senate amendment requires Treasury to include organ
and tissue donation information with any payment of a refund of
individual income taxes made on or after February 1, 1997,
through June 30, 1997.
Effective date.--The provision is effective for refunds
made on or after February 1, 1997, through June 30, 1997.
Conference agreement
The conference agreement generally follows the Senate
amendment, with two technical modifications. The first
modification requires that the organ donor card be included to
the extent particable. The second modification clarifies that
the organ donor card is to be included with the mailing of any
payment of a refund of individual income taxes.
Effective date.--The provision is effective for refunds
made on or after February 1, 1997, through June 30, 1997.
Title IV. Application and Enforcement of Group Health Plan Requirements
a. application and enforcement of group health plan portability,
access, and renewability requirements
(Sec. 104(b) of the House bill).
Present Law
Under present law, the health care continuation rules
(referred to as ``COBRA'' rules, after the Consolidated Omnibus
Budget Reconciliation Act of 1985 in which they were enacted)
require that most employer-sponsored group health plans must
offer certain employees and their dependents (``qualified
beneficiaries'') the option of purchasing continued health
coverage in the case of certain qualifying events. These
qualifying events include: termination or reduction in hours of
employment, death, divorce or legal separation, enrollment in
Medicare, or the end of a child's dependency under a parent's
health plan. In general, the maximum period of COBRA coverage
is 18 months. An employer is permitted to charge qualified
beneficiaries 102 percent of the applicable premium for COBRA
coverage.
A tax is imposed on the failure of a group health plan to
satisfy the COBRA rules. The tax may be imposed on the employer
sponsoring the plan in the case of a plan other than a
multiemployer plan, on the plan in the case of a multiemployer
plan, or on each person who is responsible for administering or
providing benefits under the plan if such person has, by
written agreement, assumed responsibility for performing the
act pursuant to which the violation occurs.
The amount of the tax is generally equal to $100 per day
for each day on which there is a violation. The tax applies
separately with respect to each qualified beneficiary for whom
a failure occurs. In general, a tax will not be imposed if the
violation was unintentional and is corrected within 30 days.
The maximum tax for unintentional violations that can be
imposed for a taxable year generally is the lesser of (1) 10
percent of the employer's payments under group health plans (or
under the trust funding the plan in the case of a multiemployer
plan), or (2) $500,000. If the tax is imposed on another person
responsible for administering or providing benefits under the
plan, the maximum penalty for failures during the year is $2
million. The Secretary may waive all or part of the tax to the
extent that payment of the tax would be excessive relative to
the failure involved.
Other than the COBRA rules, there are no other
requirements in the Code which apply to group health plans (or
insurers or health maintenance organizations (``HMOs''))
regarding portability through limitations on preexisting
condition exclusions, prohibitions on excluding individuals
from coverage based on health status, and guaranteed
renewability of health plan coverage.
House bill
Under the House bill, group health plans, insurers, and
HMOs are subject to certain requirements regarding portability
through limitations on preexisting condition exclusions and
prohibitions on excluding individuals from coverage based on
health status. The House bill generally extends the tax for
failures to satisfy the COBRA rules to failures to comply with
these requirements.
No tax is imposed on an insurer or HMO that is governed
under a State law that the Secretary of Health and Human
Services has determined to provide enforcement of similar
requirements. In addition, no tax may be imposed on a small
employer (defined as an employer who employs at least 2, but
fewer than 51 employees on a typical business day) that
provides health care benefits through a contract with an
insurer or HMO and the violation is solely because of the
product offered by the insurer or HMO under such contract. In
addition, no tax is imposed if there has been enforcement by
the Secretary of Labor or the Secretary of Health and Human
Services.
Effective date.--The provision generally is effective
with respect to plan years beginning on or after January 1,
1998.
Senate amendment
No provision. The requirements in the Senate amendment on
group health plans, insurers, and HMOs regarding portability
through limitations on preexisting condition exclusions and
prohibitions on excluding individuals from coverage based on
health status are not applied or enforced through the Code.
Conference agreement
Under the conference agreement, group health plans are
subject to certain requirements regarding portability through
limitations on preexisting condition exclusions, prohibitions
on excluding individuals from coverage based on health status,
and guaranteed renewability of health insurance coverage.\19\
The conference agreement incorporates these requirements into
the Code and generally imposes a tax with respect to any
failure of a group health plan to comply with the requirements.
The tax may generally be imposed on the employer sponsoring the
plan. However, the tax may be imposed on the plan in the case
of a multiemployer plan, and, with respect to violations of the
requirements relating to guaranteed renewability, on the
arrangement in the case of a multiple employer welfare
arrangement.
---------------------------------------------------------------------------
\19\ These requirements are discussed earlier in greater detail.
---------------------------------------------------------------------------
The group health plan requirements contained in the Code
do not apply to governmental plans and plans which on the first
day of the plan year cover less than 2 current employees. In
addition, no tax may be imposed on a small employer (defined as
an employer who employed an average of 50 or fewer employees on
business days during the preceding calendar year) that provides
health care benefits through a contract with an insurer or HMO
and the violation is solely because of the coverage offered by
the insurer or HMO.
The amount of the tax is generally equal to $100 per day
for each day during which a failure occurs until the failure is
corrected. The tax applies separately with respect to each
individual affected by the failure. In general, a tax will not
be imposed if the violation was unintentional and is corrected
within 30 days.\20\ The maximum tax for unintentional
violations that can be imposed generally is the lesser of (1)
10 percent of the employer's payments during the taxable year
in which the failure occurred under group health plans (or 10
percent of the amount paid by the multiemployer plan or
multiple employer welfare arrangement during the plan year in
which the failure occurred for medical care, if applicable), or
(2) $500,000. The Secretary may waive all or part of the tax to
the extent that payment of the tax would be excessive relative
to the failure involved.
---------------------------------------------------------------------------
\20\ In the case of a church plan, this correction is generally
extended to 270 days after the date of mailing by the Secretary of a
notice of default with respect to a failure to comply with the group
health plan requirements.
---------------------------------------------------------------------------
Effective date.--The provision applies with respect to
failures of group health plans to satisfy the requirements
regarding portability through limitations on preexisting
condition exclusions, prohibitions on excluding individuals
from coverage based on health status, and guaranteed
renewability of health insurance coverage.
b. clarification of certain cobra health care continuation requirements
(Sec. 121 of the Senate amendment).
Present law
Under present law, the health care continuation rules
(referred to as ``COBRA'' rules, after the Consolidated Omnibus
Budget Reconciliation Act of 1985 in which they were enacted)
require that most employer-sponsored group health plans must
offer certain employees and their dependents (``qualified
beneficiaries'') the option of purchasing continued health
coverage in the case of certain qualifying events. These
qualifying events include; termination or reduction in hours of
employment, death, divorce or legal separation, enrollment in
Medicare, or the end of a child's dependency under a parent's
health plan. In general, the maximum period of COBRA coverage
is 18 months. An employer is permitted to charge qualified
beneficiaries 102 percent of the applicable premium for COBRA
coverage. A $100 per day tax generally may be assessed against
employers (plans in the case of multiemployer plans) for
failures to comply with the COBRA rules, subject to certain
exceptions and limitations.
The 18-month maximum COBRA coverage period is extended to
29 months if the qualified beneficiary is determined under the
Social Security Act to have been disabled at the time of the
qualifying event and the qualified beneficiary provides notice
of such determination to the employer before the end of the 18-
month period. A qualified beneficiary has 60 days to notify the
employer of a disability determination. During the 11-month
period of extended COBRA coverage, the qualified beneficiary
may be charged 150 percent of the applicable premium.
COBRA coverage may be terminated before the 18-month
maximum coverage period in the case of certain events. These
include: the employer ceases to maintain any group health plan,
the qualified beneficiary fails to pay the premium, the
qualified beneficiary becomes covered under another group
health plan with no preexisting condition limitation or
exclusion, or the qualified beneficiary becomes entitled to
Medicare.
Under present law, the term qualified beneficiary only
includes individuals who were either the spouse or the
dependent of the covered employee at the time of the qualifying
event.
A group health plan is required to notify each covered
employee and the covered employee's spouse of their COBRA
rights upon commencement of participation in the plan. Further,
the group health plan administrator must notify each qualified
beneficiary of their COBRA rights within 14 days after
notification of the occurrence of a qualifying event.
House bill
No provision. However, the House bill modifies the COBRA
rules so that the penalties applicable to failures to comply
with the COBRA rules generally apply to failures to comply with
the requirements in the House bill on group health plans,
insurers, and health maintenance organizations (``HMOs'')
regarding portability through limitations on preexisting
condition exclusions and prohibitions on excluding individuals
from coverage based on health status.
Senate amendment
The Senate amendment modifies the COBRA rules by
clarifying that the extended maximum COBRA coverage period of
29 months in cases of disability also applies to the disabled
qualified beneficiary of the covered employee. In addition, the
Senate amendment provides the extended COBRA coverage if the
disability exists at any time during the initial 18-month COBRA
coverage period as opposed to requiring the disability to exist
at the time of the qualifying event. As under present law, the
disability determination still has to be made, and the notice
of the disability still has to be given, before the end of the
initial COBRA coverage period.
The Senate amendment coordinates the COBRA rules with the
new requirements regarding preexisting condition exclusions so
that COBRA coverage can be terminated if a qualified
beneficiary becomes covered under another group health plan,
even if such group health plan contains a preexisting condition
limitation or exclusion, provided the preexisting condition
limitation or exclusion does not apply to the qualified
beneficiary by reason of the new requirements restricting the
application of preexisting condition limitations and
exclusions.
The Senate amendment also modifies the definition of
qualified beneficiary to include a child born to our placed for
adoption with the covered employee during the period of COBRA
coverage. Consequently, since the health care availability
provisions in the Senate amendment require group health plans
to allow participants to change their coverage status (i.e., to
change from individual coverage to family coverage, or to add
on the new child) upon the birth or adoption of a new child,
COBRA participants would also be allowed to change their
coverage status upon the birth or adoption of a new child.
The Senate amendment requires a group health plan to
notify each qualified beneficiary who has elected COBRA
coverage of the changes to the COBRA rules contained in the
Senate amendment no later than November 1, 1996.
Effective date.--The provision applies to qualifying
events occurring on or after the date of enactment for plan
years beginning after December 31, 1997.
Conference agreement
The conference agreement follows the Senate amendment,
except the extended period of COBRA coverage in cases of
disability applies if the disability exists at any time during
the first 60 days of COBRA coverage.
Effective date.--The provision is effective on January 1,
1997, regardless of whether the qualifying event occurred
before, on, or after such date.
TITLE V. REVENUE OFFSETS
a. disallow interest deduction for corporate-owned life insurance
policy loans
(Sec. 495 of the Senate amendment).
Present law
No Federal income tax generally is imposed on a
policyholder with respect to the earnings under a life
insurance contract (``inside buildup''). \21\ Further, an
exclusion from Federal income tax is provided for amounts
received under a life insurance contract paid by reason of the
death of the insured (sec. 101(a)). The policyholder may borrow
with respect to the life insurance contract without affecting
these exclusions, subject to certain limitations.
---------------------------------------------------------------------------
\21\ This favorable tax treatment is available only if a life
insurance contract meets certain requirements designed to limit the
investment character of the contract (sec. 7702). Distributions from a
life insurance contract (other than a modified endowment contract) that
are made prior to the death of the insured generally are includible in
income, to the extent that the amounts distributed exceed the
taxpayer's basis in the contract; such distributions generally are
treated first as a tax-free recovery of basis, and then as income (sec.
72(e)). In the case of a modified endowment contract, however, in
general, distributions are treated as income first, loans are treated
as distributions (i.e., income rather than basis recovery first), and
an additional 10 percent tax is imposed on the income portion of
distributions made before age 59\1/2\ and in certain other
circumstances (secs. 72 (e) and (v)). A modified endowment contract is
a life insurance contract that does not meet a statutory ``7-pay''
test, i.e., generally is funded more rapidly than 7 annual level
premiums (sec. 7702A).
---------------------------------------------------------------------------
The limitations on borrowing with respect to a life
insurance contract under present law provide that no deduction
is allowed for any interest paid or accrued on any indebtedness
with respect to one or more life insurance policies owned by
the taxpayer covering the life of any individual who (1) is an
officer or employee of, or (2) is financially interested in,
any trade or business carried on by the taxpayer to the extent
that the aggregate amount of such debt with respect to policies
covering the individual exceeds $50,000 (sec. 264(a)(4)).
Further, no deduction is allowed for any amount paid or
accrued on debt incurred or continued to purchase or carry a
life insurance, endowment, or annuity contract pursuant to a
plan of purchase that contemplates the systematic direct or
indirect borrowing of part or all of the increases in the cash
value of the contract.\22\ An exception to the latter rule is
provided, permitting deductibility of interest on bona fide
debt that is part of such a plan, if no part of 4 of the annual
premiums due during the first 7 years is paid by means of debt
(the ``4-out-of-7 rule'') (sec. 264(c)(1)). Provided the
transaction gives rise to debt for Federal income tax purposes,
and provided the 4-out-of-7 rule is met,\23\ a company may
under present law borrow up to $50,000 per employee, officer,
or financially interested person to purchase or carry a life
insurance contract covering such a person, and is not precluded
under section 264 from deducting the interest on the debt, even
though the earnings inside the life insurance contract (inside
buildup) are tax-free, and in fact the taxpayer has full use of
the borrowed funds.
---------------------------------------------------------------------------
\22\ The statute provides that the $50,000 limitation applies only
with respect to contracts purchased after June 20, 1986. However,
additional limitations are imposed on the deductibility of interest
with respect to single premium contracts (sec. 264(a)(2)), and on the
deductibility of premiums paid on a life insurance contract covering
the life of any officer or employee or person financially interested in
a trade or business of the taxpayer when the taxpayer is directly or
indirectly a beneficiary under the contract (sec. 264(a)(1)).
\23\ Interest deductions are disallowed if any of the disallowance
rules of section 264(a)(2)-(4) apply. The disallowance rule of section
264(a)(3) is not applicable if one of the exceptions of section 264(c),
such as the 4-out-of-7 rule (sec. 264(c)(1)) is satisfied. In addition
to the specific disallowance rules of section 264, generally applicable
principles of tax law apply.
---------------------------------------------------------------------------
House bill
No provision.
Senate amendment
Under the Senate amendment, no deduction is allowed for
interest paid or accrued on any indebtedness with respect to
one or more life insurance policies or annuity or endowment
contracts owned by the taxpayer covering any individual who is
(1) an officer or employee of, or (2) financially interested
in, any trade or business carried on by the taxpayer,
regardless of the aggregate amount of debt with respect to
policies or contracts covering the individual.
An exception is provided retaining present law for
interest on indebtedness with respect to life insurance
policies covering up to 10 key persons. A key person is an
individual who is either an officer or a 20-percent owner of
the taxpayer. The number of individuals that can be treated as
key persons may not exceed the greater of (1) 5 individuals, or
(2) the lesser of 5 percent of the total number of officers and
employees of the taxpayer or 10 individuals. Interest paid or
accrued on debt with respect to a life insurance contract
covering a key person is deductible only to the extent the rate
of interest does not exceed Moody's Corporate Bond Yield
Average--Monthly Average Corporates for each month interest is
paid or accrued.
Effective date.--The Senate amendment provision generally
is effective with respect to interest paid or accrued after
December 31, 1995 (subject to a phase-in rule).
The phase-in rule provides that with respect to debt
incurred before January 1, 1996, any otherwise deductible
interest paid or accrued after October 13, 1995, and before
January 1, 1999, is allowed to the extent the rate of interest
does not exceed the lesser of (1) the borrowing rate specified
in the contract as of October 13, 1995, or (2) a percentage of
Moody's Corporate Bond Yield Average--Monthly Average
Corporates for each month the interest is paid or accrued. For
interest paid or accrued after October 13, 1995, and before
January 1, 1996, the percentage of the Moody's rate is 100
percent; for interest paid or accrued in 1996, the percentage
is 90 percent; for interest paid or accrued in 1997, the
percentage is 80 percent; for 1998, the percentage is 70
percent; for 1999 and thereafter, the percentage is 0 percent.
Only interest that would have been allowed as a deduction but
for the provision is allowed under the phase-in. Interest that
is deductible under the phase-in rules does not include
interest on borrowings by the taxpayer with respect to
contracts on the lives of more than 20,000 insured individuals,
effective for interest paid or accrued after December 31, 1995.
For this purpose, all persons treated as a single employer are
treated as one taxpayer.
An exception is provided under the effective date with
respect to any life insurance contract entered into during 1994
or 1995. In the case of such contracts, with respect to debt
incurred before January 1, 1997, a deduction is allowed for
interest (that is otherwise deductible) only (1) with respect
to policies that satisfy the key person exception, and (2) as
provided under the phase-in rule. Thus, with respect to
interest on amounts borrowed during 1996 with respect to such a
contract, the phase-in rule applies, capping the rate for
determining the amount of deductible interest at the lesser of
(1) the borrowing rate specified in the contract as of October
13, 1995, or (2) the applicable percentage of Moody's Corporate
Bond Yield Average--Monthly Average Corporates for each month
the interest is paid or accrued. For example, for interest paid
or accrued in 1996 on amounts borrowed in 1996 with respect to
such a contract, the applicable percentage is 90 percent.
The provision generally does not apply to interest on
debt with respect to contracts purchased on or before June 20,
1986 (thus generally continuing the effective date provision of
the $50,000 limitation enacted in the 1986 Act.) If the policy
loan interest rate under such a contract provides for a fixed
rate of interest, then interest on such a contract paid or
accrued after October 13, 1995, is allowable only to the extent
the fixed rate of interest does not exceed Moody's Corporate
Bond Yield Average--Monthly Average Corporates for the month in
which the contract was purchased. If the policy loan interest
rate under such a contract does not provide for a fixed rate of
interest, then interest on such a contract paid or accrued
after October 13, 1995, is allowable only to the extent the
rate of interest for each fixed period selected by the taxpayer
does not exceed Moody's Corporate Bond Yield Average--Monthly
Average Corporates, for the month immediately preceding the
beginning of the fixed period. The fixed period must be 12
months or less. It is intended that conforming a contract to
satisfy this interest rate limitation not be treated as a
material modification for purposes of this grandfather rule or
sections 101(f), 7702 or 7702A. No inference is intended as to
whether such a change is a material modification under present
law.
Any amount included in income during 1996, 1997, or 1998,
that is received under a contract described in the proposal on
the complete surrender, redemption or maturity of the contract
or in full discharge of the obligation under the contract that
is in the nature of a refund of the consideration paid for the
contract, is includable ratably over the first 4 taxable years
beginning with the taxable year the amount would otherwise have
been includable. Utilization of this 4-year income-spreading
rule does not cause interest paid or accrued prior to January
1, 1999, to be nondeductible solely by reason of (1) failure to
meet the 4-out-or-7 rule, or (2) causing the contract to be
treated as single premium contract within the meaning of
section 264(b)(1) (i.e., a contract in which substantially all
of the premiums are paid within 4 years after the date of
purchase). In addition, the lapse of a contract after October
13, 1995, due to nonpayment of premiums does not cause interest
paid or accrued prior to January 1, 1999, to be nondeductible
solely by reason of (1) failure to meet the 4-out-of-7 rule, or
(2) causing the contract to be treated as a single premium
contract within the meaning of section 264(b)(1).
In the case of an insurance company, the unamortized
balance of policy expense attributable to a contract with
respect to which the 4-year income-spreading treatment is
allowed to the policyholder is deductible in the year in which
the transaction giving rise to income-spreading occurs.
No inference, is intended as to the treatment of interest
paid or accrued under present law.
Conference agreement
The conference agreement follows the Senate amendment,
with the following modifications.
The exception relating to key persons is modified to
apply to life insurance policies covering up to 20 key persons.
Thus, under the conference agreement, the number of individuals
that can be treated as key persons may not exceed the greater
of (1) 5 individuals, or (2) the lesser of 5 percent of the
total number of officers and employees of the taxpayer or 20
individuals.
The cap (based on Moody's Corporate Bond Yield Average--
Monthly Average Corporates) on deductible interest paid or
accrued with respect to (1) interest paid or accrued on debt
with respect to a life insurance contract covering a key
person, and (2) interest on debt with respect to contracts
purchased on or before June 20, 1986, applies only for interest
paid or accrued for any month beginning after December 31,
1995.
In addition, in the case of a contract purchased on or
before June 20, 1986, where the policy loan interest rate under
the contract does not provide for a fixed rate of interest, the
interest is allowable only to the extent the rate of interest
for each period does not exceed Moody's Corporate Bond Yield
Average--Monthly Average Corporates for the third month
preceding the first month preceding the period.
Effective date.--The conference agreement modifies the
percentages of the Moody's Corporate Bond Yield Average--
Monthly Average Corporates that apply with respect to qualified
interest under the phase-in rule. Thus, under the conference
agreement, the percentage of the Moody's rate is 100 percent
for interest paid or accrued in 1996; 90 percent for interest
paid or accrued in 1997; 80 percent for interest paid or
accrued in 1998; and 0 percent thereafter. The rule limiting
deductible interest to the applicable percentage of the Moody's
rate does not apply for interest paid or accrued in any month
beginning before January 1, 1996.
B. Expatriation Tax Provisions
(Secs. 421-423 of the House bill and secs. 471-473 of the
Senate amendment.)
Present law
Individuals who relinquish U.S. citizenship with a
principal purpose of avoiding U.S. taxes are subject to special
tax provisions for 10 years after expatriation. The
determination of who is a U.S. citizen for tax purposes, and
when such citizenship is lost, is governed by the provisions of
the Immigration and Nationality Act, 8 U.S.C. section 1401, et
seq.
An individual who relinquishes his U.S. citizenship with
a principal purpose of avoiding U.S. taxes is subject to tax on
his or her U.S. source income at the rates applicable to U.S.
citizens, rather than the rates applicable to other non-
resident aliens, for 10 years after expatriation. In addition,
the scope of items treated as U.S. source income for this
purpose is broader than those items generally considered to be
U.S. source income. For example, gains on the sale of personal
property located in the United States and gains on the sale or
exchange of stock or securities issued by U.S. persons are
treated as U.S. source income. This alternative method of
income taxation applies only if it results in higher U.S. tax
liability.
Rules applicable in the estate and gift tax contexts
expand the categories of items that are subject to the gift and
estate taxes in the case of a U.S. citizen who relinquished
citizenship with a principal purpose of avoiding U.S. taxes
within the 10-year period ending on the date of the transfer.
For example, U.S. property held through a foreign corporation
controlled by such individual and related persons is included
in his or her estate and gifts of U.S.-situs intangible
property by such individual are subject to the gift tax.
House bill
Overview
The House bill expands and substantially strengthens in
several ways the present-law provisions that subject U.S.
citizens who lose their citizenship for tax avoidance purposes
to special tax rules for 10 years after such loss of
citizenship (secs. 877, 2107, and 2501(a)(3)). First, the House
bill extends the expatriation tax provisions to apply not only
to U.S. citizens who lose their citizenship but also to certain
long-term residents of the United States whose U.S. residency
is terminated. Second, the House bill subjects certain
individuals to the expatriation tax provisions without inquiry
as to their motive for losing their U.S. citizenship or
residency, but allows certain categories of citizens to show an
absence of tax-avoidance motive if they request a ruling from
the Secretary of the Treasury as to whether the loss of
citizenship had a principal purpose of tax avoidance. Third,
the House bill expands the categories of income and gains that
are treated as U.S. source (and therefore subject to U.S.
income tax under section 877) if earned by an individual who is
subject to the expatriation tax provisions and includes
provisions designed to eliminate the ability to engage in
certain transactions that under current law partially or
completely circumvent the 10-year reach of section 877.
Further, the House bill provides relief from double taxation in
circumstances where another country imposes tax on items that
would be subject to U.S. tax under the expatriation tax
provisions.
The House bill also contains provisions to enhance
compliance with the expatriation tax provisions. The House bill
imposes information reporting obligations on U.S. citizens who
lose their citizenship and long-term residents whose U.S.
residency is terminated at the time of expatriation. In
addition, the House bill directs the Treasury Department to
undertake a study regarding compliance by individuals living
abroad with their U.S. tax reporting obligations and to make
recommendations with respect to improving such compliance.
Individuals covered
The present-law expatriation tax provisions apply only to
certain U.S. citizens who lose their citizenship. The House
bill extends these expatriation tax provisions to apply also to
long-term residents of the United States whose U.S. residency
is terminated. For this purpose, a long-term resident is any
individual who was a lawful permanent resident of the United
States for at least 8 out of the 15 taxable years ending with
the year in which such termination occurs. In applying this 8-
year test, an individual is not considered to be a lawful
permanent resident for any year in which the individual is
taxed as a resident of another country under a treaty tie-
breaker rule. An individual's U.S. residency is considered to
be terminated when either the individual ceases to be a lawful
permanent resident pursuant to section 7701(b)(6) (i.e., the
individual loses his or her green-card status) or the
individual is treated as a resident of another country under a
tie-breaker provision of a tax treaty (and the individual does
not elect to waive the benefits of such treaty). Furthermore, a
long-term resident may elect to use the fair market value basis
of property on the date the individual became a U.S. resident
(rather than the property's historical basis) to determine the
amount of gain subject to the expatriation tax provisions if
the asset is sold within the 10-year period.
Under present law, the expatriation tax provisions are
applicable to a U.S. citizen who loses his or her citizenship
unless such loss did not have as a principal purpose the
avoidance of taxes. Under the House bill, U.S. citizens who
lose their citizenship and long-term residents whose U.S.
residency is terminated are generally treated as having lost
such citizenship or terminated such residency with a principal
purpose of the avoidance of taxes if either: (1) the
individual's average annual U.S. Federal income tax liability
for the 5 taxable years ending before the date of such loss or
termination is greater than $100,000 (the ``tax liability
test''), or (2) the individual's net worth as of the date of
such loss or termination is $500,000 or more (the ``net worth
test''). The dollar amount thresholds contained in the tax
liability test and the net worth test are indexed for inflation
in the case of a loss of citizenship or termination of
residency occurring in any calendar year after 1996. An
individual who falls below the thresholds specified in both the
tax liability test and the net worth test is subject to the
expatriation tax provisions unless the individual's loss of
citizenship or termination of residency did not have as a
principal purpose the avoidance of tax (as under present law in
the case of U.S. citizens).
A U.S. citizen, who loses his or her citizenship and who
satisfies either the tax liability test or the net worth test,
is not subject to the expatriation tax provisions if such
individual can demonstrate that he or she did not have a
principal purpose of tax avoidance and the individual is within
one of the following categories: (1) the individual was born
with dual citizenship and retains only the non-U.S.
citizenship; (2) the individual becomes a citizen of the
country in which the individual, the individual's spouse, or
one of the individual's parents, was born; (3) the individual
was present in the United States for no more than 30 days
during any year in the 10-year period immediately preceding the
date of his or her loss of citizenship; (4) the individual
relinquishes his or her citizenship before reaching age 18\1/
2\; or (5) any other category of individuals prescribed by
Treasury regulations. In all of these situations, the
individual would have been subject to tax on his or her
worldwide income (as are all U.S. citizens) until the time of
expatriation. In order to qualify for one of these exceptions,
the former U.S. citizen must, within one year from the date of
loss of citizenship, submit a ruling request for a
determination by the Secretary of the Treasury as to whether
such loss had as one of its principal purposes the avoidance of
taxes. A former U.S. citizen who submits such a ruling request
is entitled to challenge an adverse determination by the
Secretary of the Treasury. However, a former U.S. citizen who
fails to submit a timely ruling request is not eligible for
these exceptions. It is expected that in making a determination
as to the presence of a principal purpose of tax avoidance, the
Secretary of the Treasury will take into account factors such
as the substantiality of the former citizen's ties to the
United States (including ownership of U.S. assets) prior to
expatriation, the retention of U.S. citizenship by the former
citizen's spouse, and the extent to which the former citizen
resides in a country that imposes little or no tax.
The foregoing exceptions are not available to long-term
residents whose U.S. residency is terminated. However, the
House bill authorizes the Secretary of the Treasury to
prescribe regulations to exempt certain categories of long-term
residents from the House bill's provisions.
Items subject to section 877
Under section 877, an individual covered by the
expatriation tax provisions is subject to tax on U.S. source
income and gains for a 10-year period after expatriation at the
graduated rates applicable to U.S. citizens.\24\ The tax under
section 877 applies to U.S. source income and gains of the
individual for the 10-year period, without regard to whether
the property giving rise to such income or gains was acquired
before or after the date the individual became subject to the
expatriation tax provisions. For example, a U.S. citizen who
inherits an appreciated asset immediately before losing
citizenship and disposes of the asset immediately after such
loss would not recognize any taxable gain on such disposition
(because of the date of death fair market value basis accorded
to inherited assets), but the individual would continue to be
subject to tax under section 877 on the income or gain derived
from any U.S. property acquired with the proceeds from such
disposition.
---------------------------------------------------------------------------
\24\ Under present law, all nonresident aliens (including
expatriates) are subject to U.S. income tax at graduated rates on
certain types of income. Such income includes income effectively
connected with a U.S. trade or business and gains from the disposition
of interests in U.S. real property. For example, compensation
(including deferred compensation) paid with respect to services
performed in the United States is subject to such tax. Thus, under
current law, a U.S. citizen who earns a stock option while employed in
the United States and delays the exercise of such option until after
such individual loses his or her citizenship is subject to U.S. tax on
the compensation income recognized upon exercise of the stock option
(even if the stock received upon the exercise is stock in a foreign
corporation).
---------------------------------------------------------------------------
In addition, section 877 currently recharacterizes as
U.S. source income certain gains of individuals who are subject
to the expatriation tax provisions, thereby subjecting such
individuals to U.S. income tax on such gains. Under this rule,
gain on the sale or exchange of stock of a U.S. corporation or
debt of a U.S. person is treated as U.S. source income. In this
regard, under current law, the substitution of a foreign
obligor for a U.S. obligor is generally treated as a taxable
exchange of the debt instrument, and therefore any gain on such
exchange is subject to tax under section 877. The House bill
extends this recharacterization to income and gains derived
from property obtained in certain transactions on which gain or
loss is not recognized under present law. An individual covered
by section 877 who exchanges property that would produce U.S.
source income for property that would produce foreign source
income is required to recognize immediately as U.S. source
income any gain on such exchange (determined as if the property
had been sold for its fair market value on such date). To the
extent gain is recognized under this provision, the property
would be accorded the step-up in basis provided under current
law. This rule requiring immediate gain recognition does not
apply if the individual enters into an agreement with the
Secretary of the Treasury specifying that any income or gains
derived from the property received in the exchange during the
10-year period after the loss of citizenship (or termination of
U.S. residency, as applicable) would be treated as U.S. source
income. Such a gain recognition agreement terminates if the
property transferred in the exchange is disposed of by the
acquiror, and any gain that had not been recognized by reason
of such agreement is recognized as U.S. source as of such date.
It is expected that a gain recognition agreement would be
entered into not later than the due date for the tax return for
the year of the exchange. In this regard, the Secretary of the
Treasury is authorized to issue regulations providing similar
treatment for nonrecognition transactions that occur within 5
years immediately prior to the date of loss of citizenship (or
termination of U.S. residency, as applicable).
The Secretary of Treasury is authorized to issue
regulations to treat removal of tangible personal property from
the United States, and other circumstances that result in a
conversion of U.S. source income to foreign source income
without recognition of any unrealized gain, as exchanges for
purposes of computing gain subject to section 877. The taxpayer
may defer the recognition of the gain if he or she enters into
a gain recognition agreement as described above. For example, a
former citizen who removes appreciated artwork that he or she
owns from the United States could be subject to immediate tax
on the appreciation under this provision unless the individual
enters into a gain recognition agreement.
The foregoing rules regarding the treatment under section
877 of nonrecognition transactions are illustrated by the
following examples: Ms. A loses her U.S. citizenship on January
1, 1996, and is subject to section 877. On June 30, 1997, Ms. A
transfers the stock she owns in a U.S. corporation, USCo, to a
wholly-owned foreign corporation, FCo, in a transaction that
qualifies for tax-free treatment under section 351. At the time
of such transfer, A's basis in the stock of USCo is $100,000
and the fair market value of the stock is $150,000. Under
present law, Ms. A. would not be subject to U.S. tax on the
$50,000 of gain realized on the exchange. Moreover, Ms. A would
not be subject to U.S. tax on any distribution of the proceeds
from a subsequent disposition of the USCo stock by FCo. Under
the House bill, if Ms. A does not enter into a gain recognition
agreement with the Secretary of the Treasury, Ms. A would be
deemed to have sold the USCo stock for $150,000 on the date of
the transfer, and would be subject to U.S. tax in 1997 on the
$50,000 of gain realized. Alternatively, if Ms. A enters into a
gain recognition agreement, she would not be required to
recognize for U.S. tax purposes in 1997 the $50,000 of gain
realized upon the transfer of the USCo stock to FCo. However,
under the gain recognition agreement, for the 10-year period
ending on December 31, 2005, any income (e.g., dividends) or
gain with respect to the FCo stock would be treated as U.S.
source, and therefore Ms. A would be subject to tax on such
income or gain under section 877. If FCo disposes of the USCo
stock on January 1, 2002, Ms. A's gain recognition agreement
would terminate on such date, and Ms. A would be required to
recognize as U.S. source income at that time the $50,000 of
gain that she previously deferred under the gain recognition
agreement. (The amount of gain required to be recognized by Ms.
A in this situation would not be affected by any changes in the
value of the USCo stock since her June 30, 1997 transfer of
such stock to FCo.)
The House bill also extends the recharacterization rules
of section 877 to treat as U.S. source any income and gains
derived from stock in a foreign corporation if the individual
losing citizenship or terminating residency owns, directly or
indirectly, more than 50 percent of the vote or value of the
stock of the corporation on the date of such loss or
termination or at any time during the 2 years preceding such
date. Such income and gains are recharacterized as U.S. source
only to the extent of the amount of earnings and profits
attributable to such stock earned or accumulated prior to the
date of loss of citizenship (or termination of residency, as
applicable) and while such ownership requirement is satisfied.
The following example illustrates this rule: Mr. B loses
his U.S. citizenship on July 1, 1996 and is subject to section
877. Mr. B has owned all of the stock of a foreign corporation,
FCo, since its incorporation in 1991. As of FCo's December 31,
1995 year-end, FCo has accumulated earnings and profits of
$500,000. FCo has earnings and profits of $100,000 for 1996 and
does not have any subpart F income (as defined in sec. 952).
FCo makes a $100,000 distribution to Mr. B in each of 1997 and
1998. On January 1, 1999, Mr. B disposes of all his stock of
FCo and realizes $400,000 of gain. Under present law, neither
the distributions from FCo nor the gain on the disposition of
the FCo stock would be subject to U.S. tax. Under the House
bill, the distributions from FCo and the gain on the sale of
the stock of FCo would be treated as U.S. source income and
would be taxed to Mr. B under section 877, subject to the
earnings and profits limitation. For this purpose, the amount
of FCo's earnings and profits for 1996 is prorated based on the
number of days during 1996 that Mr. B is a U.S. citizen. Thus,
the amount of FCo's earnings and profits earned or accumulated
before Mr. B's loss of citizenship is $550,000. Accordingly,
the $100,000 distributions from FCo in 1997 and 1998 would be
treated as U.S. source income taxable to Mr. B under section
877 in such years. In addition, $350,000 of the gain realized
from the sale of the stock of FCo in 1999 would be treated as
U.S. source income taxable to Mr. B under section 877 in that
year.
Special rule for shift in risks of ownership
Section 877 applies to income and gains for the 10-year
period following the loss of citizenship (or termination of
residency, as applicable). For purposes of applying section
877, the House bill suspends this 10-year period for gains
derived from a particular property during any period in which
the individual's risk of loss with respect to such property is
substantially diminished. For example, Ms. C loses her
citizenship on January 1, 1996 and is subject to section 877.
On that date Ms. C owns 10,000 shares of stock of a U.S.
corporation, USCo, with a value of $1 million. On the same date
Ms. C enters into an equity swap with respect to such USCo
stock with a 5-year term. Under the transaction, Ms. C will
transfer to the counter-party an amount equal to the dividends
on the USCo stock and any increase in the value of the USCo
stock for the 5-year period. The counter-party will transfer to
Ms. C an amount equal to a market rate of interest on $1
million and any decrease in the value of the USCo stock for the
same period. Ms. C's risk of loss with respect to the USCo
stock is substantially diminished during the 5-year period in
which the equity swap is in effect, and therefore, under the
House bill, the 10-year period under section 877 is suspended
during such period. Accordingly, under the House bill, if Ms. C
sells her USCo stock for a gain on January 1, 2010, such gain
would be treated as U.S. source income taxable to Ms. C under
section 877. Such gain would not be subject to U.S. tax under
present law.
Double tax relief
In order to avoid the double taxation of individuals
subject to the expatriation tax provisions, the House bill
provides a credit against the U.S. tax imposed under such
provisions for any foreign income, gift, estate or similar
taxes paid with respect to the items subject to such taxation.
This credit is available only against the tax imposed solely as
a result of the expatriation tax provisions, and is not
available to be used to offset any other U.S. tax liability.
For example, Mr. D loses his citizenship on January 1, 1996 and
is subject to section 877. Mr. D becomes a resident of Country
X. During 1996, Mr. D recognizes a $100,000 gain upon the sale
of stock of a U.S. corporation, USCo. Country X imposes $20,000
tax on this capital gain. But for the double tax relief
provision, Mr. D would be subject to tax of $28,000 on this
gain under section 877. However, Mr. D's U.S. tax under section
877 would be reduced by the $20,000 of foreign tax paid, and
Mr. D's resulting U.S. tax on this gain would be $8,000.
Effect on tax treaties
While it is believed that the expatriation tax
provisions, as amended by the House bill, are generally
consistent with the underlying principles of income tax
treaties to the extent the House bill provides a foreign tax
credit for items taxed by another country, it is intended that
the purpose of the expatriation tax provisions, as amended, not
be defeated by any treaty provision. The Treasury Department is
expected to review all outstanding treaties to determine
whether the expatriation tax provisions, as revised,
potentially conflict with treaty provisions and to eliminate
any such potential conflicts through renegotiation of the
affected treaties as necessary. Beginning on the tenth
anniversary of the enactment of the House bill, any conflicting
treaty provisions that remain in force would take precedence
over the expatriation tax provisions as revised.
Required information reporting and sharing
Under the House bill, a U.S. citizen who loses his or her
citizenship is required to provide a statement to the State
Department (or other designated government entity) which
includes the individual's social security number, forwarding
foreign address, new country of residence and citizenship and,
in the case of individuals with a net worth of at least
$500,000, a balance sheet. The entity to which such statement
is to be provided is required to provide the Secretary of the
Treasury copies of all statements received and the names of
individuals who refuse to provide such statements. A long-term
resident whose U.S. residency is terminated is required to
attach a similar statement to his or her U.S. income tax return
for the year of such termination. An individual's failure to
provide the required statement results in the imposition of a
penalty for each year the failure continues equal to the
greater of (1) 5 percent of the individual's expatriation tax
liability for such year, or (2) $1,000.
The House bill requires the State Department to provide
the Secretary of the Treasury with a copy of each certificate
of loss of nationality (CLN) approved by the State Department.
Similarly, the House bill requires the agency administering the
immigration laws to provide the Secretary of the Treasury with
the name of each individual whose status as a lawful permanent
resident has been revoked or has been determined to have been
abandoned.
Further, the House bill requires the Secretary of the
Treasury to publish in the Federal Register the names of all
former U.S. citizens from whom it receives the required
statements or whose names it receives under the foregoing
information-sharing provisions.
Treasury report on tax compliance by U.S. citizens and
residents living abroad
The Treasury Department is directed to undertake a study
on the tax compliance of U.S. citizens and green-card holders
residing outside the United States and to make recommendations
regarding the improvement of such compliance. The findings of
such study and such recommendations are required to be reported
to the House Committee on Ways and Means and the Senate
Committee on Finance within 90 days of the date of enactment.
During the course of the 1995 Joint Committee on Taxation
staff study on expatriation (see Joint Committee on Taxation,
Issues Presented by Proposals to Modify the Tax Treatment of
Expatriation (JCS-17-95), June 1, 1995), a specific issue was
identified regarding the difficulty in determining when a U.S.
citizen has committed an expatriating act with the requisite
intent, and thus no longer has the obligation to continue to
pay U.S. taxes on his or her worldwide income due to the fact
that the individual is no longer a U.S. citizen. Neither the
Immigration and Nationality Act nor any other Federal law
requires an individual to request a CLN within a specified
amount of time after an expatriating act has been committed,
even though the expatriating act terminates the status of the
individual as a U.S. citizen for all purposes, including the
status of being subject to U.S. tax on worldwide income.
Accordingly, it is anticipated that the Treasury report, in
evaluating whether improved coordination between executive
branch agencies could improve compliance with the requirements
of the Internal Revenue Code, will review the process through
which the State Department determines when citizenship has been
lost, and make recommendations regarding changes to such
process to recognize the importance of such date for tax
purposes. In particular, it is anticipated that the Treasury
Department will explore ways of working with the State
Department to insure that the State Department will not issue a
CLN confirming the commission of an expatriating act with the
requisite intent necessary to terminate citizenship in the
absence of adequate evidence of both the occurrence of the
expatriating act (e.g., the joining of a foreign army) and the
existence of the requisite intent.
Effective date
The expatriation tax provisions as modified by the House
bill generally apply to any individual who loses U.S.
citizenship, and any long-term residents whose U.S. residency
is terminated, on or after February 6, 1995. For citizens, the
determination of the date of loss of citizenship remains the
same as under present law (i.e., the date of loss of
citizenship is the date of the expatriating act). However, a
special transition rule applies to individuals who committed an
expatriating act within one year prior to February 6, 1995, but
had not applied for a CLN as of such date. Such an individual
is subject to the expatriation tax provisions as amended by the
House bill as of the date of application for the CLN, but is
not retroactively liable for U.S. income taxes on his or her
worldwide income. In order to qualify for the exceptions
provided for individuals who fall within one of the specified
categories, such individual is required to submit a ruling
request within 1 year after the date of enactment of the House
bill.
The special transition rule is illustrated by the
following example. Mr. E joined a foreign army on October 1,
1994 with the intent to relinquish his U.S. citizenship, but
Mr. E does not apply for a CLN until October 1, 1995. Mr. E
would be subject to the expatriation tax provisions (as
amended) for the 10-year period beginning on October 1, 1995.
Moreover, if Mr. E falls within one of the specified categories
(i.e., Mr. E is age 18 when he joins the foreign army), in
order to qualify for the exception provided for such
individuals, Mr. E would be required to submit his ruling
request within 1 year after the date of enactment of the House
bill. Mr. E would not, however, be liable for U.S. income taxes
on his worldwide income for any period after October 1, 1994.
Senate amendment
In general
The Senate amendment replaces the present-law
expatriation income tax rules with rules that generally subject
certain U.S. citizens who relinquish their U.S. citizenship and
certain long-term U.S. residents who relinquish their U.S.
residency to tax on the net unrealized gain in their property
as if such property were sold for fair market value on the
expatriation date. The Senate amendment also imposes
information reporting obligations on U.S. citizens who
relinquish their citizenship and long-term residents whose U.S.
residency is terminated.
Individuals covered
The Senate amendment applies the expatriation tax to
certain U.S. citizens and long-term residents who terminate
their U.S. citizenship or residency. For this purpose, a long-
term resident is any individual who was a lawful permanent
resident of the United States for at least 8 out of the 15
taxable years ending with the year in which the termination of
residency occurs. In applying this 8-year test, an individual
is not considered to be a lawful permanent resident of the
United States for any year in which the individual is taxed as
a resident of another country under a treaty tie-breaker rule.
An individual's U.S. residency is considered to be terminated
when either the individual ceases to be a lawful permanent
resident pursuant to section 7701(b)(6) (i.e., the individual
loses his or her green-card status) or the individual is
treated as a resident of another country under a tie-breaker
provision of a tax treaty (and the individual does not elect to
waive the benefits of such treaty).
The expatriation tax under the Senate amendment applies
only to individuals whose average income tax liability or net
worth exceeds specified levels. U.S. citizens who lose their
citizenship and long-term residents who terminate U.S.
residency are subject to the expatriation tax if they meet
either of the following tests: (1) the individual's average
annual U.S. Federal income tax liability for the 5 taxable
years ending before the date of such loss or termination is
greater than $100,000, or (2) the individual's net worth as of
the date of such loss or termination is $500,000 or more. The
dollar amount thresholds contained in these tests are indexed
for inflation in the case of a loss of citizenship or
termination of residency occurring in any calendar year after
1996.
Exceptions from the expatriation tax under the Senate
amendment are provided for individuals in two situations. The
first exception applies to an individual who was born with
citizenship both in the United States and in another country,
provided that (1) as of the date of relinquishment of U.S.
citizenship the individual continues to be a citizen of, and is
taxed as a resident of, such other country, and (2) the
individual was a resident of the United States for no more than
8 out of the 15 taxable years ending with the year in which the
relinquishment of U.S. citizenship occurred. The second
exception applies to a U.S. citizen who relinquishes
citizenship before reaching age 18\1/2\, provided that the
individual was a resident of the United States for no more than
5 taxable years before such relinquishment.
Deemed sale of property upon expatriation
Under the Senate amendment, individuals who are subject
to the expatriation tax generally are treated as having sold
all of their property at fair market value immediately prior to
the relinquishment of citizenship or termination of residency.
Gain or loss from the deemed sale of property is recognized at
that time, generally without regard to provisions of the Code
that would otherwise provide nonrecognition treatment. The net
gain, if any, on the deemed said of all such property is
subject to U.S. tax at such time to the extent it exceeds
$600,000 ($1.2 million in the case of married individuals
filing a joint return, both of whom expatriate).
The deemed sale rule of the Senate amendment generally
applies to all property interests held by the individual on the
date of relinquishment of citizenship or termination of
residency, provided that the gain on such property interest
would be includible in the individual's gross income if such
property interest were sold for its fair market value on such
date. Special rules apply in the case of trust interests (see
``Interests in trusts,'' below). U.S. real property interests,
which remain subject to U.S. taxing jurisdiction in the hands
of nonresident aliens, generally are excepted from the Senate
amendment. An exception also applies to interests in qualified
retirement plans and, subject to a limit of $500,000, interests
in certain foreign pension plans as prescribed by regulations.
The Secretary of the Treasury is authorized to issue
regulations exempting other property interests as appropriate.
For example, an exclusion may be provided for an interest in a
nonqualified compensation plan of a U.S. employer, where
payments from such plan to the individual following
expatriation would continue to be subject to U.S. withholding
tax.
Under the Senate amendment, an individual who is subject
to the expatriation tax is required to pay a tentative tax
equal to the amount of tax that would be due for a hypothetical
short tax year ending on the date the individual relinquished
citizenship or terminated residency. Thus, the tentative tax is
based on all income, gain, deductions, loss and credits of the
individual for the year through such date, including amounts
realized from the deemed sale of property. The tentative tax is
due on the 90th day after the date of relinquishment of
citizenship or termination of residency.
Deferral of payment of tax
Under the Senate amendment, an individual is permitted to
elect to defer payment of the expatriation tax with respect to
the deemed sale of any property. Under this election, the
expatriation tax with respect to a particular property, plus
interest thereon, is due when the property is subsequently
disposed of. For this purpose, except as provided in
regulations, the disposition of property in a nonrecognition
transaction constitutes a disposition. In addition, if an
individual holds property until his or her death, the
individual is treated as having disposed of the property
immediately before death. In order to elect deferral of the
expatriation tax, the individual is required to provide
adequate security to ensure that the deferred expatriation tax
and interest ultimately will be paid. A bond in the amount of
the deferred tax and interest constitutes adequate security.
Other security mechanisms are also permitted provided that the
individual establishes to the satisfaction of the Security of
the Treasury that the security is adequate. In the event that
the security provided with respect to a particular property
subsequently becomes inadequate and the individual fails to
correct such situation, the deferred expatriation tax and
interest with respect to such property will become due. As a
further condition to making this election, the individual is
required to consent to the waiver of any treaty rights that
would preclude the collection of the expatriation tax.
Interests in trusts
In general.--Under the Senate amendment, special rules
apply to trust interests held by the individual at the time of
relinquishment of citizenship or termination of residency. The
treatment of trust interests depends upon whether the trust is
a qualified trust. For this purpose, a ``qualified trust'' is a
trust that is organized under and governed by U.S. law and that
is required by its instruments to have at least one U.S.
trustee.
Constructive ownership rules apply to a trust beneficiary
that is a corporation, partnership, trust or estate. In such
cases, the shareholders, partners or beneficiaries of the
entity are deemed to be the direct beneficiaries of the trust
for purposes of applying these provisions. In addition, an
individual who holds (or who is treated as holding) a trust
interest at the time of relinquishment of citizenship or
termination of residency is required to disclose on his or her
tax return the methodology used to determine his or her
interest in the trust, and whether such individual knows (or
has reason to know) that any other beneficiary of the trust
uses a different method.
Nonqualified trusts.--If an individual holds an interest
in a trust that is not a qualified trust, a special rule
applies for purposes of determining the amount of the
expatriation tax due with respect to such trust interest. The
individuals interest in the trust is treated as a separate
trust consisting of the trust assets allocable to such
interest. Such separate trust is treated as having sold its
assets as of the date of relinquishment of citizenship or
termination of residency and having distributed all proceeds to
the individual, and the individual is treated as having
recontributed such proceeds to the trust. The individual is
subject to the expatriation tax with respect to any net income
or gain arising from the deemed distribution from the trust.
The election to defer payment is available for the expatriation
tax attributable to a nonqualifed trust interest.
A beneficiary's interest in a nonqualified trust is
determined on the basis of all facts and circumstances. These
include the terms of the trust instrument itself, any letter of
wishes or similar document, historical patterns of trust
distributions, and the role of any trust protector or similar
advisor.
Qualified trusts.--If the individual has an interest in a
qualified trust, a different set of rules applies. Under these
rules, the amount of unrealized gain allocable to the
individual's trust interest is calculated at the time of
expatriation. In determining this amount, all contingencies and
discretionary interests are assumed to be resolved in the
individual's favor (i.e., the individual is allocated the
maximum amount that he or she potentially could receive under
the terms of the trust instrument). The expatriation tax
imposed on such gains generally is collected when the
individual receives distributions from the trust, or, if
earlier, upon the individual's death. Interest is charged for
the period between the date of expatriation and the date on
which the tax is paid.
If an individual has an interest in a qualified trust,
the individual is subject to expatriation tax upon the receipt
of any distribution from the trust. Such distributions may also
be subject to U.S. income tax. For any distribution from a
qualified trust made to an individual after he or she has
expatriated, expatriation tax is imposed in an amount equal to
the amount of the distribution multiplied by the highest tax
rate generally applicable to trusts and estates, but in no
event will the tax imposed exceed the deferred tax amount with
respect to such trust interest. The ``deferred tax amount''
would be equal to (1) the tax calculated with respect to the
unrealized gain allocable to the trust interest at the time of
expatriation, (2) increased by interest thereon, and (3)
reduced by the tax imposed under this provision with respect to
prior trust distributions to the individual.
If an individual's interest in a trust is vested as of
the expatriation date (e.g., if the individual's interest in
the trust is non-contingent and non-discretionary), the gain
allocable to the individual's trust interest is determined
based on the truth assets allocable to his or her trust
interest. If the individual's interest in the trust is not
vested as of the expatriation date (e.g., if the individual's
trust interest is a contingent or discretionary interest), the
gain allocable to his or her trust interest is determined based
on all of the trust assets that could be allocable to his or
her trust interest, determined by resolving all contingencies
and discretionary powers in the individual's favor. In the case
where more than one trust beneficiary is subject to the
expatriation tax with respect to trust interests that are not
vested, the rules are intended to apply so that the same
unrealized gain with respect to assets in the trust is not
taxed to both individuals.
If the individual disposes of his or her trust interest,
the trust ceases to be a qualified trust, or the individual
dies, expatriation tax is imposed as of such date. The amount
of such tax equal to the lesser of (1) the tax calculated under
the rules for nonqualified trust interests applied as of such
date or (2) the deferred tax amount with respect to the trust
interest as of such date.
If the individual agrees to waive any treaty rights that
would preclude collection of the tax, the tax is imposed under
this provision with respect to distributions from a qualified
trust to the individual deducted and withheld from
distributions. If the individual does not agree to such a
waiver of treaty rights, the tax with respect to distributions
to the individual is imposed on the trust, the trustee is
personally liable therefore, and any other beneficiary of the
trust has a right of contribution against such individual with
respect to such tax. Similarly, in the case of the tax imposed
in connection with an individual's disposition of a trust
interest, the individual's death while holding a trust interest
or the individual's holding of an interest in a trust that
ceases to be qualified, the tax is imposed on the trust, the
trustee is personnaly liable therefor, and any other
beneficiary of the trust has a right of contribution against
such individual with respect to such tax.
Election to be treated as a U.S. citizen
Under the Senate amendment, an individual is permitted to
make an irrevocable election to continue to be taxed as a U.S.
citizen with respect to all property that otherwise is covered
by the expatriation tax. This election is an ``all-or-nothing''
election; an individual is not permitted to elect this
treatment for some property but not other property. The
election, if made, applies to all property that would be
subject to the expatriation tax and to any property the basis
of which is determined by reference to such property. Under
this election, the individual continues to pay U.S. income
taxes at the rates applicable to U.S. citizens following
expatriation on any income generated by the property and on any
gain realized on the disposition of the property, as well as
any excise tax imposed with respect to property (see, e.g.,
sec. 1491). In addition, the property continues to be subject
to U.S. gift, estate, and generation-shipping taxes. However,
the amount of any transfer tax so imposed is limited to the
amount of income tax that would have been due if the property
had been sold for its fair market value immediately before the
transfer or death. The $600,000 exclusion provided with respect
to the expatriation tax under the Senate amendment is available
to reduce the tax imposed by reason of this election. In order
to make this election, the taxpayer is required to waive any
treaty rights that would preclude the collection of the tax.
The individual is also required to provide security to ensure
payment of the tax under this election in such form, manner,
and amount as the Secretary of the Treasury requires.
Date of relinquishment of citizenship
Under the Senate amendment, as individual is treated as
having relinquished U.S. citizenship on the date that the
individual first makes known to U.S. government of consular
officer his or her intention to relinquish U.S. citizenship.
Thus, a U.S. citizen who relinquishes citizenship by formally
renouncing his or her U.S. nationality before a diplomatic or
consular officer for the United States is treated as having
relinquished ciizenship on that date, provided that the
renunciation is later confirmed by the issuance of a CLN. A
U.S. citizen who furnishes to the State Department a signed
statement of voluntary relinquishment of U.S. nationality
confirming the performance of an expatriating act with the
requisite interest to relinquish his or her citizenship is
treated as having relinquished his or her citizenship on the
date the statement is so furnished (regardless of when the
expatriating act was performed), provided that the voluntary
relinquishment is later confirmed by the issuance of a CLN. If
neither of these circumstances exist, the individual is treated
as having relinquished citizenship on the date a CLN is issued
or a certificate of naturalization is cancelled. The date of
relinquishment of citizenship determined under the Senate
amendment applies for all purposes.
Effect on present-law expatriation provisions
Under the Senate amendment, the present-law income tax
provisions with respect to U.S. citizens who expatriate with a
principal purpose of avoiding tax (sec. 877) and certain aliens
who have a break in residency status (sec. 7701(b)(10)) do
applying to U.S. citizens who are treated as relinquishing
their citizenship on or after February 6, 1995 or to long-term
U.S. residents who terminate their residency on or after such
date. The special estate and gift tax provisions with respect
to individuals who expatriate with a principal purpose of
avoiding tax (secs. 2107 and 2501(a)(3)), however, continue to
apply; a credit against the tax imposed solely by reason of
such special provisions is allowed for the expatriation tax
imposed with respect to the same property.
Treatment of gifts and inheritances from an expatriate
Under the Senate amendment, the exclusion from income
provided in section 102 does not apply to the value of any
property received by gift or inheritance from an individual who
was subject to the expatriation tax (i.e., an individual who
relinquished citizenship or terminated residency and to whom
the expatriation tax was applicable). Accordingly, a U.S.
taxpayer who receives a gift or inheritance from such an
individual is required to include the value of such gift or
inheritance in gross income and is subject to U.S. income tax
on such amount.
Required information reporting and sharing
Under the Senate amendment, an individual who
relinquishes citizenship or terminates residency is required to
provide a statement which includes the individual's social
security number, forwarding foreign address, new country of
residence and citizenship and, in the case of individuals with
a net worth of at least $500,000, a balance sheet. In the case
of a former citizen, such statement is due not later than the
date the individual's citizenship is treated as relinquished
and is to be provided to the State Department (or other
government entity involved in the administration of such
relinquishment). The entity to which the statement is to be
provided by former citizens is required to provide to the
Secretary of the Treasury copies of all statements received and
the names of individuals who refuse to provide such statements.
In the case of a former long-term resident, the statement is
provided to the Secretary of the Treasury with the individual's
tax return for the year in which the individual's U.S.
residency is terminated. An individual's failure to provide the
statement required under this provision results in the
imposition of a penalty for each year the failure continues
equal to the greater of (1) 5 percent of the individual's
expatriation tax liability for such year or (2) $1,000.
The Senate amendment requires the State Department to
provide the Secretary of the Treasury with a copy of each CLN
approved by the State Department. Similarly, the Senate
amendment requires the agency administering the immigration
laws to provide the Secretary of the Treasury with the name of
each individual whose status as a lawful permanent resident has
been revoked or has been determined to have been abandoned.
Further, the Senate amendment requires the Secretary of
the Treasury to publish in the Federal Register the names of
all former U.S. citizens with respect to whom it receives the
required statements or whose names it receives under the
foregoing information-sharing provisions.
Treasury report on tax compliance by U.S. citizens and
residents living abroad
The Treasury Department is directed to undertake a study
on the tax compliance of U.S. citizens and green-card holders
residing outside the United States and to make recommendations
regarding the improvement of such compliance. The findings of
such study and such recommendations are required to be reported
to the House Committee on Ways and Means and the Senate
Committee on Finance within 90 days of the date of enactment.
Effective date
The provision is effective for U.S. citizens whose date
of relinquishment of citizenship (as determined under the
Senate amendment, see ``Date of relinquishment of citizenship''
above) occurs on or after February 6, 1995. Similarly, the
provision is effective for long-term residents who terminate
their U.S. residency on or after February 6, 1995.
U.S. citizens who committed an expatriating act with the
requisite intent to relinquish their U.S. citizenship prior to
February 6, 1995, but whose date of relinquishment of
citizenship (as determined under the Senate amendment) does not
occur until after such date, are subject to the expatriation
tax under the Senate amendment as of date of relinquishment of
citizenship. However, the individual is not subject
retroactively to worldwide tax as a U.S. citizen for the period
after he or she committed the expatriating act (and therefore
ceased being a U.S. citizen for tax purposes under present
law). Such an individual continues to be subject to the
expatriation tax imposed by present-law section 877 until the
individual's date of relinquishment of citizenship (at which
time the individual would be subject to the expatriation tax of
the Senate amendment). The rules described in this paragraph do
not apply to an individual who committed an expatriating act
prior to February 6, 1995, but did not do so with the requisite
intent to relinquish his or her U.S. citizenship.
The tentative tax is not required to be paid, and the
reporting requirements would not be required to be met, until
90 days after the date of enactment. Such provisions apply to
all individuals whose date of relinquishment of U.S.
citizenship or termination of U.S. residency occurs on or after
February 6, 1995.
Conference agreement
The conference agreement follows the House bill with
modifications. Under the conference agreement, modified rules
apply if an individual who is covered by section 877
contributes property that would produce U.S. source income to a
foreign corporation if (1) the individual, directly or
indirectly, owns 10 percent or more (by vote) of the stock of
such corporation and (2) the individual, directly, indirectly
or constructively, owns more than 50 percent (by vote or by
value) of the stock of such corporation. For purposes of
determining indirect and constructive ownership, the rules of
section 958 apply. Under the modified rules, for the ten-year
period following expatriation the individual is treated as
receiving or accruing directly the income or gains received or
accrued by the foreign corporation with respect to the
contributed property (or other property which has a basis
determined by reference to the basis of such contributed
property). Moreover, if the individual disposes of the stock of
the foreign corporation, the individual is subject to U.S. tax
on the gain that would have been recognized if the corporation
had sold such property immediately before the disposition. If
the individual disposes of less than all of his or her stock in
the foreign corporation, such disposition is treated as a
disposition of a pro rata share (determined based on value) of
such contributed property (e.g., if the individual owns 100
shares of the foreign corporation's stock and disposes of 10 of
such shares, such disposition is treated as a disposition of 10
percent of the property contributed to the foreign
corporation). Regulatory authority is provided to prescribe
regulations to prevent the avoidance of this rule. Information
reporting will be required as necessary to carry out the
purposes of this rule. In addition, under the conference
agreement, in the case of any former U.S. citizen, a request
for a ruling that such individual did not have the avoidance of
U.S. tax as a principal purpose for such individual's loss of
citizenship would be due not earlier than 90 days after date of
enactment.
c. treatment of bad debt deductions of thrift institutions
(Sec. 401 of the House bill and and sec. 611 of the
Senate amendment.)
Present law
Generally, a taxpayer engaged in a trade or business may
deduct the amount of any debt that becomes wholly or partially
worthless during the year (the ``specific charge-off'' method
of sec. 166). Certain thrift institutions (building and loan
associations, mutual savings banks, or cooperative banks) are
allowed deductions for bad debts under methods more favorable
than those granted to other taxpayers (and more favorable than
the rules applicable to other financial institutions).
Qualified thrift institutions may compute deductions for bad
debts using either the specific charge-off method or the
reserve method of section 593.
Under section 593, a thrift institution annually may
elect to deduct bad debts under either (1) the ``percentage of
taxable income'' method applicable only to thrift institutions,
or (2) the ``experience'' method that also is available to
small banks. Under the ``percentage of taxable income'' method,
a thrift institution generally is allowed a deduction for an
addition to its bad debt reserve equal to 8 percent of its
taxable income (determined without regard to this deduction and
with additional adjustments). Under the experience method, a
thrift institution generally is allowed a deduction for an
addition to its bad debt reserve equal to the greater of: (1)
an amount based on its actual average experience for losses in
the current and five preceding taxable years, or (2) an amount
necessary to restore the reserve to its balance as of the close
of the base year.
If a thrift institution becomes ineligible to use the
section 593 method, it is required to change its method of
accounting for bad debts and, under proposed Treasury
regulations, is required to recapture all or a portion of its
bad debt reserve. In addition, a thrift institution eligible to
use the section 593 method may be subject to a form of reserve
recapture if the institution makes certain excessive
distributions to its shareholders (sec. 593(e)).
House bill
Repeal of section 593
The House bill repeals the section 593 reserve method of
accounting for bad debts by thrift institutions, effective for
taxable years beginning after 1995. Thrift institutions that
would be treated as small banks are allowed to utilize the
experience method applicable to such institutions, while thrift
institutions that are treated as large banks are required to
use only the specific charge-off method. Thus, the percentage
of taxable income method of accounting for bad debts is no
longer available for any financial institution.
Treatment of recapture of bad debt reserves
A thrift institution required to change its method of
computing reserves for bad debts will treat such change as a
change in a method of accounting, initiated by the taxpayer,
and having been made with the consent of the Secretary of the
Treasury. Any section 481(a) adjustment required to be
recaptured with respect to such change generally will be
determined solely with respect to the ``applicable excess
reserves'' of the taxpayer. The amount of applicable excess
reserves will be taken into account ratably over a six-taxable
year period, beginning with the first taxable year beginning
after 1995, subject to the residential loan requirement
described below. In the case of a thrift institution that
becomes a large bank, the amount of the institution's
applicable excess reserves generally is the excess of (1) the
balances of its reserve for losses on qualifying real property
loans and its reserve for losses on nonqualifying loans as of
the close of its last taxable year beginning before January 1,
1996, over (2) the balances of such reserves as of the close of
its last taxable year beginning before January 1, 1988 (i.e.,
the ``pre-1988 reserves.'') Similar rules are provided for
small banks that are allowed to use the experience method.
For taxable years that begin after December 31, 1995, and
before January 1, 1998, if the taxpayer continues to make a
certain level of residential loans, the recapture of the
applicable excess reserves otherwise required to be taken into
account for such years will be suspended.
The balance of the pre-1988 reserves is subject to the
provisions of section 593(e), as modified by the House bill
(requiring recapture in the case of certain excessive
distributions to shareholders.)
Other special recapture rules are provided if a thrift
institution no longer qualifies as a bank or if a thrift
institution becomes a credit union.
Effective date
The provision generally is effective for taxable years
beginning after December 31, 1995.
Senate amendment
The Senate amendment generally is the same as the House
bill, with certain modifications.
Conference agreement
The conference agreement does not include either the
provision in the House bill or the provision in the Senate
amendment.
d. earned income credit provisions
(Sec. 411 of the House bill.)
Present law
In general
Certain eligible low-income workers are entitled to claim
a refundable credit on their income tax return. The amount of
the credit an eligible individual may claim depends upon
whether the individual has one, more than one or no qualifying
children and is determined by multiplying the credit rate by
the individual's \25\ earned income up to an earned income
amount. The maximum amount of the credit is the product of the
credit rate and the earned income amount. For individuals with
earned income (or adjusted gross income (AGI), if greater) in
excess of the beginning of the phaseout range, the maximum
credit amount is reduced by the phaseout rate multiplied by the
amount of earned income (or AGI, if greater) in excess of the
beginning of the phaseout range. For individuals with earned
income (or AGI, if greater) in excess of the end of the
phaseout range, no credit is allowed.
---------------------------------------------------------------------------
\25\ In the case of a married individual who files a joint return
with his or her spouse, the income for purposes of these tests is the
combined income of the couple.
---------------------------------------------------------------------------
The parameters for the credit depend upon the number of
qualifying children the individual claims. For 1996, the
parameters are given in the following table:
------------------------------------------------------------------------
Two or more One No
qualifying qualifying qualifying
children-- child-- children--
------------------------------------------------------------------------
Credit rate (percent)............ 40.00 34.00 7.65
Earned income amount............. $8,890 $6,330 $4,220
Maximum credit................... $3,356 $2,152 $323
Phaseout begins.................. $11,610 $11,610 $5,280
Phaseout rate (percent).......... 21.06 15.98 7.65
Phaseout ends.................... $28,495 $25,078 $9,500
------------------------------------------------------------------------
For years after 1996, the credit rates and the phaseout
rates will be the same as in the preceding table. The earned
income amount and the beginning of the phaseout range are
indexed for inflation; because the end of the phaseout range
depends on those amounts as well as the phaseout rate and the
credit rate, the end of the phaseout range will also increase
if there is inflation.
In order to claim the credit, an individual must either
have a qualifying child or meet other requirements. A
qualifying child must meet a relationship test, an age test, an
identification test, and a residence test. In order to claim
the credit without a qualifying child, an individual must not
be a dependent and must be over age 24 and under age 65.
To satisfy the identification test, individuals must
include on their tax return the name and age of each qualifying
child. For returns filed with respect to tax year 1996,
individuals must provide a taxpayer identification number (TIN)
for all qualifying children born on or before November 30,
1996. For returns filed with respect to tax year 1997 and all
subsequent years, individuals must provide TINs for all
qualifying children, regardless of their age. An individual's
TIN is generally that individual's social security number.
Mathematical or clerical errors
The IRS may summarily assess additional tax due as a
result of a mathematical or clerical error without sending the
taxpayer a notice of deficiency and giving the taxpayer an
opportunity to petition the Tax Court. Where the IRS uses the
summary assessment procedure for mathematical or clerical
errors, the taxpayer must be given an explanation of the
asserted error and a period of 60 days to request that the IRS
abate its assessment. The IRS may not proceed to collect the
amount of the assessment until the taxpayer has agreed to it or
has allowed the 60-day period for objecting to expire. If the
taxpayer files a request for abatement of the assessment
specified in the notice, the IRS must abate the assessment. Any
reassessment of the abated amount is subject to the ordinary
deficiency procedures. The request for abatement of the
assessment is the only procedure a taxpayer may use prior to
paying the assessed amount in order to contest an assessment
arising out of a mathematical or clerical error. Once the
assessment is satisfied, however, the taxpayer may file a claim
for refund if he or she believes the assessment was made in
error.
House bill
Under the House bill, individuals are not eligible for
the credit if they do not include their taxpayer identification
number (and, if married, their spouse's taxpayer identification
number) on their tax return. Solely for these purposes and for
purposes of the present-law identification test for a
qualifying child, a taxpayer identification number is defined
as a social security number issued to an individual by the
Social Security Administration other than a number issued under
section 205(c)(2)(B)(i)(II) (or that portion of sec.
205(c)(2)(B)(i)(III) relating to it) of the Social Security Act
(regarding the issuance of a number to an individual applying
for or receiving Federally funded benefits).
If an individual fails to provide a correct taxpayer
identification number, such omission will be treated as a
mathematical or clerical error. If an individual who claims the
credit with respect to net earnings from self-employment fails
to pay the proper amount of self-employment tax on such net
earnings, the failure will be treated as a mathematical or
clerical error for purposes of the amount of credit allowed.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1995.
Senate amendment
No provision.
Conference agreement
The conference agreement does not include the House bill
provision.
e. modify treatment of foreign trusts
(Secs. 601-606 of the Senate amendment).
Present law
Inbound grantor trusts with foreign grantors
Under the grantor trust rules (secs. 671-679), a grantor
that retains certain rights or powers generally is treated as
the owner of the trust's assets without regard to whether the
grantor is a domestic or foreign person. Under these rules,
U.S. trust beneficiaries are not subject to U.S. tax on
distributions from a trust where a foreign grantor is treated
as owner of the trust, even though no tax may be imposed on the
trust income by any jurisdiction. In addition, a special rule
provides that if a U.S. beneficiary of an inbound grantor trust
transfers property to the foreign grantor by gift, that U.S.
beneficiary is treated as the grantor of the trust to the
extent of the transfer.
Foreign trusts that are not grantor trusts
Under the accumulation distribution rules (which
generally apply to distributions from a trust in excess of the
trust's distributable net income for the taxable year), a
distribution by a foreign nongrantor trust of previously
accumulated income generally is taxed at the U.S. beneficiary's
average marginal rate for the prior 5 years, plus interest
(secs. 666 and 667). Interest is computed at a fixed annual
rate of 6 percent, with no compounding (sec. 668). If adequate
records of the trust are not available to determine the proper
application of the rules relating to accumulation distributions
to any distribution from a trust, the distribution is treated
as an accumulation distribution out of income earned during the
first year of the trust (sec. 666(d)).
If a foreign nongrantor trust makes a loan to one of its
beneficiaries, the principal of such a loan generally is not
taxable as income to the beneficiary.
Outbound foreign grantor trusts with U.S. grantors
Under the grantor trust rules, a U.S. person that
transfers property to a foreign trust generally is treated as
the owner of the portion of the trust comprising that property
for any taxable year in which there is a U.S. beneficiary of
any portion of the trust (sec. 679(a)). This treatment
generally does not apply, however, to transfers by reason of
death, to transfers made before the transferor became a U.S.
person, or to transfers that represent sales or exchanges of
property at fair market value where gain is recognized to the
transferor.
Residence of trusts and estates
An estate or trust is treated as foreign if it is not
subject to U.S. income taxation on its income that is neither
derived from U.S. sources nor effectively connected with the
conduct of a U.S. trade or business. Thus, if a trust is taxed
in a manner similar to a nonresident alien individual, it is
considered to be a foreign trust. Any other trust is treated as
domestic.
Section 1491 generally imposes a 35-percent excise tax on
a U.S. person that transfers appreciated property to certain
foreign entities, including a foreign trust. In the case of a
domestic trust that changes its situs and becomes a foreign
trust, it is unclear whether property has been transferred from
a U.S. person to a foreign entity and, thus, whether the
transfer is subject to the excise tax.
Information reporting and penalties related to foreign
trusts
Any U.S. person that creates a foreign trust or transfers
money or property to a foreign trust is required to report that
event to the Treasury Department without regard to whether the
trust is a grantor trust or a nongrantor trust. Similarly, any
U.S. person that transfers property to a foreign trust that has
one or more U.S. beneficiaries is required to report annually
to the Treasury Department. In addition, any U.S. person that
makes a transfer described in section 1491 is required to
report the transfer to the Treasury Department.
Any person that fails to file a required report with
respect to the creation of, or a transfer to, a foreign trust
may be subject to a penalty of 5 percent of the amount
transferred to the foreign trust. Similarly, any person that
fails to file a required annual report with respect to a
foreign trust with U.S. beneficiaries may be subject to a
penalty of 5 percent of the value of the corpus of the trust at
the close of the taxable year. The maximum amount of the
penalty imposed under either case may not exceed $1,000. A
reasonable cause exception is available.
Reporting of foreign gifts
There is no requirement to report gifts or bequests from
foreign sources.
House bill
No provision.
Senate amendment
Inbound grantor trusts with foreign grantors
The Senate amendment generally applies the grantor trust
rules only to the extent that they result, directly or
indirectly, in income or other amounts being currently taken
into account in computing the income of a U.S. citizen or
resident or a domestic corporation. Certain exceptions apply to
this general rule. Under one exception, the grantor trust rules
continue to apply to a revocable trust. Under another
exception, the grantor trust rules continue to apply to a trust
where the only amounts distributable during the lifetime of the
grantor are to the grantor or the grantor's spouse. The general
rule denying grantor trust status does not apply to trusts
established to pay compensation, and certain trusts in
existence as of September 19, 1995 provided that such trust is
treated as owned by the grantor under section 676 or 677 (other
than sec. 677(a)(3)).\26\ In addition, the grantor trust rules
generally apply where the grantor is a controlled foreign
corporation (as defined in sec. 957). Finally, the grantor
trust rules continue to apply in determining whether a foreign
corporation is characterized as a passive foreign investment
company (``PFIC''). Thus, a foreign corporation cannot avoid
PFIC status by transferring its assets to a grantor trust.
---------------------------------------------------------------------------
\26\ The exception does not apply to the portion of any such trust
attributable to any transfers made after September 19, 1995.
---------------------------------------------------------------------------
If a U.S. beneficiary of an inbound grantor trust
transfers property to the foreign grantor, such beneficiary
generally is treated as a grantor of a portion of the trust to
the extent of the transfer. This rule applies without regard to
whether the foreign grantor is otherwise treated as the owner
of any portion of such trust. However, this rule does not apply
if the transfer is a gift that qualifies for the annual
exclusion described in section 2503(b).
The Senate amendment provides a special rule that allows
the Secretary of the Treasury to recharacterize a transfer,
directly or indirectly, from a partnership or foreign
corporation which the transferee treats as a gift or bequest,
to prevent the avoidance of the purpose of section 672(f). In a
case where a foreign person (that would be treated as the owner
of a trust but for the above rule) actually pays tax on the
income of the trust to a foreign country, it is anticipated
that Treasury regulations will provide that, for foreign tax
credit purposes, U.S. beneficiaries that are subject to U.S.
income tax on the same income will be treated as having paid
the foreign taxes that are paid by the foreign grantor. Any
resulting foreign tax credits will be subject to applicable
foreign tax credit limitations.
Effective date.--The provisions described in this part
are effective on the date of enactment.
Foreign trusts that are not grantor trusts
The Senate amendment changes the interest rate applicable
to accumulation distributions from foreign trusts from simple
interest at a fixed rate of 6 percent to compound interest
determined in the same manner as interest imposed on
underpayments of tax under section 6621(a)(2). Simple interest
is accrued at the rate of 6 percent through 1995. Beginning on
January 1, 1996 compound interest based on the underpayment
rate is imposed on tax amounts determined under the
accumulation distribution rules and the total simple interest
for pre-1996 periods, if any. For purposes of computing the
interest charge, the accumulation distribution is allocated
proportionately to prior trust years in which the trust has
undistributed net income (and the beneficiary receiving the
distribution was a U.S. citizen or resident), rather than to
the earliest of such years. An accumulation distribution is
treated as reducing proportionately the undistributed net
income from prior years.
In the case of a loan of cash or marketable securities by
the foreign trust to a U.S. grantor or a U.S. beneficiary (or a
U.S. person related to such grantor or beneficiary), except to
the extent provided by Treasury regulations, the Senate
amendment treats the full amount of the loan as distributed to
the grantor or beneficiary. It is expected that the Treasury
regulations will provide an exception from this treatment for
loans with arm's-length terms. In applying this exception, it
is further expected that consideration be given to whether
there is a reasonable expectation that a loan will be repaid.
In addition, any subsequent transaction between the trust and
the original borrower regarding the principal of the loan
(e.g., repayment) is disregarded for all purposes of the Code.
This provision does not apply to loans made to persons that are
exempt from U.S. income tax.
Effective date.--The provision to modify the interest
charge on accumulation distributions applies to distributions
after the date of enactment. The provision with respect to
loans to U.S. grantors, U.S. beneficiaries or a U.S. person
related to such a grantor or beneficiary applies to loans made
after September 19, 1995.
Outbound foreign grantor trusts with U.S. grantors
The Senate amendment makes several modifications to the
general rule of section 679(a)(1) under which a U.S. person who
transfers property to a foreign trust generally is treated as
the owner of the portion of the trust comprising that property
for any taxable year in which there is a U.S. beneficiary of
the trust. The Senate amendment also conforms the definition of
certain foreign corporations the income of which is deemed to
be accumulated for the benefit of a U.S. beneficiary to the
definition of controlled foreign corporations (as defined in
sec. 957(a)).
Sale or exchange at market value.--Present law contains
several exceptions to grantor trust treatment under section
679(a)(1) described above. Under one of the exceptions, grantor
trust treatment does not result from a transfer of property by
a U.S. person to a foreign trust in the form of a sale or
exchange at fair market value where gain is recognized to the
transferor. In determining whether the trust paid fair market
value to the transferor, the Senator amendment provides that
obligations issued (or, to the extent provided by regulations,
guaranteed) by the trust, by any grantor or beneficiary of the
trust, or by any person related to any grantor or beneficiary
(referred to as ``trust obligations'') are not taken into
account except as provided in Treasury regulations. It is
expected that the Treasury regulations will provide an
exception from this treatment for loans with arm's-length
terms. In applying this exception, it is further expected that
consideration be given to whether there is a reasonable
expectation that a loan will be repaid. Principal payments by
the trust on any such trust obligations generally will reduce
the portion of the trust attributable to the property
transferred (i.e., the portion of which the transferor is
treated as the grantor).
Other transfers.--The Senate amendment adds a new
exception to the general rule of section 679(a)(1) described
above. Under the Senate amendment, a transfer of property to
certain charitable trusts is exempt from the application of the
rules treating foreign trusts with U.S. grantors and U.S.
beneficiaries as grantor trusts.
Transferors or beneficiaries who become U.S. persons.--
The Senate amendment applies the rule of section 679(a)(1) to
certain foreign persons who transfer property to a foreign
trust and subsequently become U.S. persons. A nonresident alien
individual who transfers property, directly or indirectly, to a
foreign trust and then becomes a resident of the United States
within 5 years after the transfer generally is treated as
making a transfer to the foreign trust on the individual's U.S.
residency starting date (as defined in sec. 7701(b)(2)(A)). The
amount of the deemed transfer is the portion of the trust
(including undistributed earnings) attributable to the property
previously transferred. Consequently, the individual generally
is treated under section 679(a)(1) as the owner of that portion
of the trust in any taxable year in which the trust has U.S.
beneficiaries.
Outbound trust migrations.--The Senate amendment applies
the rules of section 679(a)(1) to a U.S. person that
transferred property to a domestic trust if the trust
subsequently becomes a foreign trust while the transferor is
still alive. Such a person is deemed to make a transfer to the
foreign trust on the date of the migration. The amount of the
deemed transfer is the portion of the trust (including
undistributed earnings) attributable to the property previously
transferred. Consequently, the individual generally is treated
under the rules of section 679(a)(1) as the owner of that
portion of the trust in any taxable year in which the trust has
U.S. beneficiaries.
Effective date.--The provisions to amend section 679
apply to transfers of property after February 6, 1995.
Anti-abuse regulatory authority
The Senate amendment includes an anti-abuse rule which
authorizes the Secretary of the Treasury to issue regulations,
on or after the date of enactment, that may be necessary or
appropriate to carry out the purposes of the rules applicable
to estates, trusts and beneficiaries, including regulations to
prevent the avoidance of those purposes.
Effective date.--The provision is effective on the date
of enactment.
Residence of trusts and estates
The Senate amendment establishes a two-part objective
test for determining for tax purposes whether a trust is
foreign or domestic. If both parts of the test are satisfied,
the trust is treated as domestic. Only the first part of the
test applies to estates. Under the first part of the test, if a
U.S. court (i.e., Federal, State, or local) exercises primary
supervision over the administration of a trust or estate, the
trust or estate is treated as domestic. Under the second part
of the test, in order for a trust to be treated as domestic,
one or more U.S. fiduciaries must have the authority to control
all substantial decisions of the trust.
Under the Senate amendment, if a domestic trust changes
its situs and becomes a foreign trust, the trust is treated as
having made a transfer of its assets to a foreign trust and is
subject to the 35-percent excise tax imposed by present-law
section 1491 unless one of the exceptions to this excise tax is
applicable.
Effective date.--The provision to modify the treatment of
a trust or estate as a U.S. person applies to taxable years
beginning after December 31, 1996. In addition, if the trustee
of a trust so elects, the provision would apply to taxable
years ending after the date of enactment. The amendment to
section 1491 is effective on the date of enactment.
Information reporting and penalties relating to foreign
trusts
The Senate amendment generally requires the grantor,
transferor or executor (i.e., the ``responsible party'') to
notify the Treasury Department upon the occurrence of certain
reportable events. The term ``reportable event'' means the
creation of any foreign trust by a U.S. person, the direct and
indirect transfer of any money or property to a foreign trust,
including a transfer by reason of death, and the death of a
U.S. citizen or resident if any portion of a foreign trust was
included in the gross estate of the decedent. In addition, a
U.S. owner of any portion of a foreign trust is required to
ensure that the trust files an annual return to provide full
accounting of all the trust activities for the taxable year.
Finally, any U.S. person that relieves (directly or indirectly)
any distribution from a foreign trust is required to file a
return to report the aggregate amount of the distributions
received during the year.
The Senate amendment provides that if a U.S. owner of any
portion of a foreign trust fails to appoint a limited U.S.
agent to accept service of process with respect to any requests
and summons by the Secretary of the Treasury in connection with
the tax treatment of any items related to the trust, the
Secretary of the Treasury may determine the tax consequences of
amounts to be taken into account under the grantor trust rules.
In cases where adequate records are not provided to the
Secretary of Treasury to determine the proper treatment of any
distributions from a foreign trust, the distribution is
includible in the gross income of the U.S. distributee and is
treated as an accumulation distribution from the middle year of
a foreign trust (i.e., computed by taking the number of years
that the trust has been in existence divided by 2) for purposes
of computing the interest charge applicable to such
distribution, unless the foreign trust elects to have a U.S.
agent for the limited purpose of accepting service of process
(as described above).
Under the Senate amendment, a person that fails to
provide the required notice or return in cases involving the
transfer of property to a new or existing foreign trust, or a
distribution by a foreign trust to a U.S. person, is subject to
an initial penalty equal to 35 percent of the gross reportable
amount (generally the value of the property involved in the
transaction). A failure to provide an annual reporting of trust
activities will result in an initial penalty equal to 5 percent
of the gross reportable amount. An additional $10,000 penalty
is imposed for continued failure for each 30-day period (or
fraction thereof) beginning 90 days after the Treasury
Department notifies the responsible party of such failure. Such
penalties are subject to a reasonable cause exception. In no
event will the total amount of penalties exceed the gross
reportable amount.
Effective date.--The reporting requirements and
applicable penalties generally apply to reportable events
occurring or distributions received after the date of
enactment. The annual reporting requirement and penalties
applicable to U.S. grantors apply to taxable years of such
persons beginning after the date of enactment.
Reporting of foreign gifts
The Senate amendment generally requires any U.S. person
(other than certain tax-exempt organizations) that receives
purported gifts or bequests from foreign sources totaling more
than $10,000 during the taxable year to report them to the
Treasury Department. The threshold for this reporting
requirement is indexed for inflation. The definition of a gift
to a U.S. person for this purpose excludes amounts that are
qualified tuition or medical payments made on behalf of the
U.S. person, as defined for gift tax purposes (sec.
2503(e)(2)). If the U.S. person fails, without reasonable
cause, to report foreign gifts as required, the Treasury
Secretary is authorized to determine, in his sole discretion,
the tax treatment of the unreported gifts. In addition, the
U.S. person is subject to a penalty equal to 5 percent of the
amount of the gift for each month that the failure continues,
with the total penalty not to exceed 25 percent of such amount.
Effective date.--The provision applies to amounts
received after the date of enactment.
Conference agreement
The conference agreement does not include the Senate
amendment.
f. repeal of financial institution transition rule to interest
allocation rules
Present law
For foreign tax credit purposes, taxpayers generally are
required to allocate and apportion interest expense between
U.S. and foreign source income based on the proportion of the
taxpayer's total assets in each location. Such allocation and
apportionment is required to be made for affiliated groups (as
defined in sec. 864(e)(5)) as a whole rather than on a
subsidiary-by-subsidiary basis. However, certain types of
financial institutions that are members of an affiliated group
are treated as members of a separate affiliated group for
purposes of allocating and apportioning their interest expense.
Section 1215(c)(5) of the Tax Reform Act of 1986 (P.L. 99-514,
100 Stat. 2548) includes a targeted rule which treats a certain
corporation as a financial institution for this purpose.
House bill
No provision.
Senate amendment
No provision. However, section 1606 of the Senate
amendment to H.R. 3448 (Small Business Job Protection Act of
1996) contained a provision that repeals section 1215(c)(5) of
the Tax Reform Act of 1986.
Effective date.--Taxable years beginning after December
31, 1995.
Conference agreement
The conference agreement includes the provision in the
Senate amendment to H.R. 3448 with one modification. The
conference agreement repeals section 1215(c)(5) of the Tax
Reform Act of 1986 effective on the date of enactment. Under
the conference agreement, a taxpayer will perform two
computations with respect to its taxable year that includes the
enactment date. Under the first computation, the taxpayer's
pre-effective date interest expense is allocated and
apportioned taking into account the targeted rule, and under
the second computation, the taxpayer's post-effective date
interest expense is allocated and apportioned without regard to
the targeted rule. These computations will not require a
closing of a taxpayer's books and records and it is intended
that an administratively simple approach be used in applying
this rule.
Bill Archer,
Bill Thomas,
Tom Bliley,
Michael Bilirakis,
William F. Goodling,
H.W. Fawell,
Henry Hyde,
Bill McCollum,
J. Dennis Hastert,
Managers on the Part of the House.
Bill Roth
Nancy Landon Kassebaum,
Trent Lott,
Ted Kennedy,
Managers on the Part of the Senate.