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[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4516 Introduced in House (IH)]

103d CONGRESS
  2d Session
                                H. R. 4516

 To amend the Internal Revenue Code of 1986 and other laws to improve 
   and promote the provision of long-term care in the United States.

_______________________________________________________________________

                    IN THE HOUSE OF REPRESENTATIVES

                              May 26, 1994

Mrs. Kennelly (for herself and Mrs. Johnson of Connecticut) introduced 
  the following bill; which was referred jointly to the Committees on 
                 Energy and Commerce and Ways and Means

_______________________________________________________________________

                                 A BILL

 
 To amend the Internal Revenue Code of 1986 and other laws to improve 
   and promote the provision of long-term care in the United States.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Long-Term Care Act 
of 1994''.
    (b) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short title; table of contents.
    TITLE I--ESTABLISHMENT OF FEDERAL STANDARDS FOR LONG-TERM CARE 
                               INSURANCE

Sec. 101. Establishment of Federal standards for long-term care 
                            insurance.
           ``TITLE XXVII--LONG-TERM CARE INSURANCE STANDARDS

         ``Part A--Promulgation of Standards and Model Benefits

        ``Sec. 2701. Standards.
``Part B--Establishment and Implementation of Long-Term Care Insurance 
                            Policy Standards

        ``Sec. 2711. Implementation of policy standards.
        ``Sec. 2712. Regulation of sales practices.
        ``Sec. 2713. Additional responsibilities for carriers.
        ``Sec. 2714. Renewability standards for issuance, and basis for 
                            cancellation of policies.
        ``Sec. 2715. Benefit standards.
        ``Sec. 2716. Option to purchase nonforfeiture benefits.
        ``Sec. 2717. Limit of period of contestability and right to 
                            return.
        ``Sec. 2718. Civil money penalty.
      ``Part C--Long-Term Care Insurance Policies, Definition and 
                              Endorsements

        ``Sec. 2721. Long-term care insurance policy defined.
        ``Sec. 2722. Code of conduct with respect to endorsements.
                   ``Part D--Miscellaneous Provisions

        ``Sec. 2731. Funding for long-term care insurance information, 
                            counseling, and assistance.
        ``Sec. 2732. Definitions.''
                        TITLE II--TAX TREATMENT

                  Subtitle A--Long-Term Care Insurance

Sec. 201. Qualified long-term care insurance defined and treated as 
                            accident or health insurance.
Sec. 202. Qualified long-term care insurance treated as accident and 
                            health insurance for purposes of exclusion 
                            for benefits received under such insurance 
                            and for employer contributions for such 
                            insurance.
Sec. 203. Early distribution penalty tax not to apply to amounts 
                            withdrawn from qualified plans, individual 
                            retirement plans, etc. for qualified long-
                            term insurance.
Sec. 204. Deduction of expenses relating to qualified long-term care.
Sec. 205. Treatment of prefunded long-term care benefits.
Sec. 206. Qualified long-term care insurance permitted to be offered in 
                            cafeteria plans.
 Subtitle B--Payments under Life Insurance Contracts to Terminally Ill 
                              Individuals

Sec. 211. Tax treatment of payments to terminally ill individuals under 
                            life insurance contracts.
Sec. 212. Tax treatment of companies issuing qualified terminal illness 
                            riders.
     TITLE III--ELIMINATION OF MEDICAID RESTRICTION ON STATE ASSET 
                          PROTECTION PROGRAMS

Sec. 301. Elimination of medicaid restriction on State asset protection 
                            programs.
Sec. 302. Protection of assets through use of qualified long-term care 
                            insurance.
  TITLE IV--STATE PROGRAMS FOR HOME AND COMMUNITY-BASED SERVICES FOR 
                     INDIVIDUALS WITH DISABILITIES

Sec. 401. State programs for home and community-based services for 
                            individuals with disabilities.
Sec. 402. State plans.
Sec. 403. Individuals with disabilities defined.
Sec. 404. Home and community-based services covered under State plan.
Sec. 405. Cost sharing.
Sec. 406. Quality assurance and safeguards.
Sec. 407. Advisory groups.
Sec. 408. Payments to States.
Sec. 409. Total Federal budget; allotments to States.
                TITLE V--REBASING MEDICARE PAYMENT RATES

                  Subtitle A--Rehabilitation Hospitals

Sec. 501. Definition of rehabilitation hospitals.
Sec. 502. Payment rules.
Sec. 503. Payment for operating costs of rehabilitation hospitals.
                    Subtitle B--Long-Term Hospitals

Sec. 511. Payment rules.

    TITLE I--ESTABLISHMENT OF FEDERAL STANDARDS FOR LONG-TERM CARE 
                               INSURANCE

SEC. 101. ESTABLISHMENT OF FEDERAL STANDARDS FOR LONG-TERM CARE 
              INSURANCE.

    (a) In General.--The Public Health Service Act is amended--
            (1) by redesignating title XXVII (42 U.S.C. 300cc et seq.) 
        as title XXVIII; and
            (2) by inserting after title XXVI the following new title:

           ``TITLE XXVII--LONG-TERM CARE INSURANCE STANDARDS

         ``Part A--Promulgation of Standards and Model Benefits

``SEC. 2701. STANDARDS.

    ``(a) Application of Standards.--
            ``(1) NAIC.--The Secretary shall request that the National 
        Association of Insurance Commissioners (hereinafter in this 
        title referred to as the `NAIC')--
                    ``(A) develop specific standards that incorporate 
                the requirements of this title; and
                    ``(B) report to the Secretary on such standards,
        by not later than 12 months after enactment of this title. If 
        the NAIC develops such model standards that incorporate the 
        requirements of this title within such period and the Secretary 
        finds that such standards implement the requirements of this 
        title, such standards shall be the standards applied under this 
        title.
            ``(2) Default.--If the NAIC does not promulgate the model 
        standards under paragraph (1) by the deadline established in 
        that paragraph, the Secretary shall promulgate, within 12 
        months after such deadline, a regulation that provides 
        standards that incorporate the requirements of this title and 
        such standards shall apply as provided for in this title.
            ``(3) Relation to state law.--Nothing in this title shall 
        be construed as preventing a State from applying standards if--
                    ``(A) the standards provide greater protection to 
                policyholders of long-term care insurance policies than 
                the standards promulgated under this title, except that 
                such State standards may not be inconsistent or in 
                conflict with any of the requirements of this title; or
                    ``(B) the Secretary finds that the standards do not 
                unduly burden interstate commerce, or adversely impact 
                the quality and availability of affordable long-term 
                care insurance.
    ``(b) Deadline for Application of Standards.--
            ``(1) In general.--Subject to paragraph (2), the date 
        specified in this subsection for a State is--
                    ``(A) the date the State adopts the standards 
                established under subsection (a)(1); or
                    ``(B) the date that is 1 year after the first day 
                of the first regular legislative session that begins 
                after the date such standards are first established 
                under subsection (a)(2);
        whichever is earlier.
            ``(2) State requiring legislation.--In the case of a State 
        which the Secretary identifies, in consultation with the NAIC, 
        as--
                    ``(A) requiring State legislation (other than 
                legislation appropriating funds) in order for the 
                standards established under subsection (a) to be 
                applied; but
                    ``(B) having a legislature which is not scheduled 
                to meet within 1 year following the beginning of the 
                next regular legislative session in which such 
                legislation may be considered;
        the date specified in this subsection is the first day of the 
        first calendar quarter beginning after the close of the first 
        legislative session of the State legislature that begins on or 
        after January 1, 1994. For purposes of the previous sentence, 
        in the case of a State that has a 2-year legislative session, 
        each year of such session shall be deemed to be a separate 
        regular session of the State legislature.
    ``(c) Items Included in Standards.--The standards promulgated under 
subsection (a) shall include--
            ``(1) minimum Federal standards for long-term care 
        insurance consistent with the provisions of this title;
            ``(2) standards for the enhanced protection of consumers 
        with long-term care insurance;
            ``(3) procedures for the modification of the standards 
        established under paragraph (1) in a manner consistent with 
        future laws to expand existing Federal or State long-term care 
        benefits or establish a comprehensive Federal or State long-
        term care benefit program; and
            ``(4) other activities determined appropriate by Congress.
    ``(d) Consultation.--In establishing standards and models of 
benefits under this section, the Secretary shall provide for and 
consult with an advisory committee to be chosen by the Secretary, and 
composed of--
            ``(1) three individuals who are representatives of 
        carriers;
            ``(2) three individuals who are representatives of consumer 
        groups;
            ``(3) three representatives who are representatives of 
        providers of long-term care services;
            ``(4) three other individuals who are not representatives 
        of carriers or of providers of long-term care services and who 
        have expertise in the delivery and financing of such services; 
        and
            ``(5) the Secretary of Veterans Affairs.
    ``(e) Duties.--The advisory committee established under subsection 
(d) shall--
            ``(1) recommend the appropriate inflationary index to be 
        used with respect to the inflation protection benefit portion 
        of the standards;
            ``(2) recommend the uniform needs assessment mechanism to 
        be used in determining the eligibility of individuals for 
        benefits under a policy;
            ``(3) recommend appropriate standards for benefits under 
        section 2715(c); and
            ``(4) perform such other activities as determined 
        appropriate by the Secretary.
    ``(f) Administrative Provisions.--The following provisions of 
section 1886(e)(6) of the Social Security Act shall apply to the 
advisory committee chosen under subsection (d) in the same manner as 
such provisions apply under such section:
            ``(1) Subparagraph (C) (relating to staffing and 
        administration).
            ``(2) Subparagraph (D) (relating to compensation of 
        members).
            ``(3) Subparagraph (F) (relating to access to information).
            ``(4) Subparagraph (G) (relating to use of funds).
            ``(5) Subparagraph (H) (relating to periodic GAO audits).
            ``(6) Subparagraph (J) (relating to requests for 
        appropriations).

``Part B--Establishment and Implementation of Long-Term Care Insurance 
                            Policy Standards

``SEC. 2711. IMPLEMENTATION OF POLICY STANDARDS.

    ``(a) In General.--
            ``(1) Regulatory program.--No long-term care policy (as 
        defined in section (2721)) may be issued, sold, or offered for 
        sale as a long-term care insurance policy in a State on or 
        after the date specified in section 2701(b) unless--
                    ``(A) the Secretary determines that the State has 
                established a regulatory program that--
                            ``(i) provides for the application and 
                        enforcement of the standards established under 
                        section 2701(a); and
                            ``(ii) complies with the requirements of 
                        subsection (b);
                by the date specified in section 2701(b), and the 
                policy has been approved by the State commissioner or 
                superintendent of insurance under such program; or
                    ``(B) if the State has not established such a 
                program, or if the State's regulatory program has been 
                decertified, the policy has been certified by the 
                Secretary (in accordance with such procedures as the 
                Secretary may establish) as meeting the standards 
                established under section 2701(a) by the date specified 
                in section 2701(b).
        For purposes of this subsection, the advertising or soliciting 
        with respect to a policy, directly or indirectly, shall be 
        deemed the offering for sale of the policy.
            ``(2) Review of state regulatory programs.--The Secretary 
        periodically shall review regulatory programs described in 
        paragraph (1)(A) to determine if they continue to provide for 
        the application and enforcement of the standards and procedures 
        established under section 2701(a) and (b). If the Secretary 
        determines that a State regulatory program no longer meets such 
        standards and requirements, before making a final 
        determination, the Secretary shall provide the State an 
        opportunity to adopt such a plan of correction as would permit 
        the program to continue to meet such standards and 
        requirements. If the Secretary makes a final determination that 
        the State regulatory program, after such an opportunity, fails 
        to meet such standards and requirements, the Secretary shall 
        assume responsibility under paragraph (1)(B) with respect to 
        certifying policies in the State and shall exercise full 
        authority under section 2701 for carriers, agents, or 
        associations or its subsidiary in the State plans in the State.
    ``(b) Additional Requirements for Approval of State Regulatory 
Programs.--For purposes of subsection (a)(1)(A)(ii), the requirements 
of this subsection for a State regulatory program are as follows:
            ``(1) Enforcement.--The enforcement under the program--
                    ``(A) shall be designed in a manner so as to secure 
                compliance with the standards within 30 days after the 
                date of a finding of noncompliance with such standards; 
                and
                    ``(B) shall provide for notice in the annual report 
                required under paragraph (5) to the Secretary of cases 
                where such compliance is not secured within such 30-day 
                period.
            ``(2) Process.--The enforcement process under each State 
        regulatory program shall provide for--
                    ``(A) procedures for individuals and entities to 
                file written, signed complaints respecting alleged 
                violations of the standards;
                    ``(B) responding on a timely basis to such 
                complaints;
                    ``(C) the investigation of--
                            ``(i) those complaints which have a 
                        reasonable probability of validity, and
                            ``(ii) such other alleged violations of the 
                        standards as the program finds appropriate; and
                    ``(D) the imposition of appropriate sanctions 
                (which include, in appropriate cases, the imposition of 
                a civil money penalty as provided for in section 2718) 
                in the case of a carrier, agent, or association or its 
                subsidiary determined to have violated the standards.
            ``(3) Consumer access to compliance information.--
                    ``(A) In general.--A State regulatory program must 
                provide for consumer access to complaints filed with 
                the State commissioner or superintendent of insurance 
                with respect to long-term care insurance policies.
                    ``(B) Confidentiality.--The access provided under 
                subparagraph (A) shall be limited to the extent 
                required to protect the confidentiality of the identity 
                of individual policyholders and certificate holders.
            ``(4) Process for approval of premiums.--
                    ``(A) In general.--Each State regulatory program 
                shall--
                            ``(i) provide for a process for approving 
                        or disapproving proposed premium increases or 
                        decreases with respect to long-term care 
                        insurance policies; and
                            ``(ii) establish a policy for receipt and 
                        consideration of public comments before 
                        approving such a premium increase or decrease.
                    ``(B) Conditions for approval.--No premium increase 
                shall be approved (or deemed approved) under 
                subparagraph (A) unless the proposed increase is 
                accompanied by an actuarial memorandum which--
                            ``(i) includes a description of the 
                        assumptions that justify the increase;
                            ``(ii) contains such information as may be 
                        required under the Standards; and
                            ``(iii) is made available to the public.
                    ``(C) Application.--Except as provided in 
                subparagraph (D), this paragraph shall not apply to a 
                group long-term care insurance policy issued to a group 
                described in section 4(E)(1) of the NAIC Long Term Care 
                Insurance Model Act (effective January 1991), except 
                that such group policy shall, pursuant to guidelines 
                developed by the NAIC, provide notice to policyholders 
                and certificate holders of any premium change under 
                such group policy.
                    ``(D) Exception.--Subparagraph (C) shall not apply 
                to--
                            ``(i) group conversion policies;
                            ``(ii) the group continuation feature of a 
                        group policy if the insurer separately rates 
                        employee and continuation coverages; and
                            ``(iii) group policies where the function 
                        of the employer is limited solely to collecting 
                        premiums (through payroll deductions or dues 
                        checkoff) and remitting them to the insurer.
                    ``(E) Construction.--Nothing in this paragraph 
                shall be construed as preventing the NAIC from 
                promulgating standards, or a State from enacting and 
                enforcing laws, with respect to premium rates or loss 
                ratios for all, including group, long-term care 
                insurance policies.
            ``(5) Annual reports.--Each State regulatory program shall 
        provide for annual reports to be submitted to the Secretary on 
        the implementation and enforcement of the standards in the 
        State, including information concerning violations in excess of 
        30 days.
            ``(6) Access to other information.--The State regulatory 
        program must provide for consumer access to actuarial memoranda 
        provided under paragraph (4).
            ``(7) Default.--In the case of a State without a regulatory 
        program approved under subsection (a), the Secretary shall 
        provide for the enforcement activities described in subsection 
        (c).
    ``(c) Secretarial Enforcement Authority.--
            ``(1) In general.--The Secretary shall exercise authority 
        under this section in the case of a State that does not have a 
        regulatory program approved under this section.
            ``(2) Complaints and investigations.--The Secretary shall 
        establish procedures--
                    ``(A) for individuals and entities to file written, 
                signed complaints respecting alleged violations of the 
                requirements of this title;
                    ``(B) for responding on a timely basis to such 
                complaints; and
                    ``(C) for the investigation of--
                            ``(i) those complaints that have a 
                        reasonable probability of validity; and
                            ``(ii) such other alleged violations of the 
                        requirements of this title as the Secretary 
                        determines to be appropriate.
        In conducting investigations under this subsection, agents of 
        the Secretary shall have reasonable access necessary to enable 
        such agents to examine evidence of any carrier, agent, or 
        association or its subsidiary being investigated.
            ``(3) Hearings.--
                    ``(A) In general.--Prior to imposing an order 
                described in paragraph (4) against a carrier, agent, or 
                association or its subsidiary under this section for a 
                violation of the requirements of this title, the 
                Secretary shall provide the carrier, agent, association 
                or subsidiary with notice and, upon request made within 
                a reasonable time (of not less than 30 days, as 
                established by the Secretary by regulation) of the date 
                of the notice, a hearing respecting the violation.
                    ``(B) Conduct of hearing.--Any hearing requested 
                under subparagraph (A) shall be conducted before an 
                administrative law judge. If no hearing is so 
                requested, the Secretary's imposition of the order 
                shall constitute a final and unappealable order.
                    ``(C) Authority in hearings.--In conducting 
                hearings under this paragraph--
                            ``(i) agents of the Secretary and 
                        administrative law judges shall have reasonable 
                        access necessary to enable such agents and 
                        judges to examine evidence of any carrier, 
                        agent, or association or its subsidiary being 
                        investigated; and
                            ``(ii) administrative law judges, may, if 
                        necessary, compel by subpoena the attendance of 
                        witnesses and the production of evidence at any 
                        designated place or hearing.
                In case of contumacy or refusal to obey a subpoena 
                lawfully issued under this subparagraph and upon 
                application of the Secretary, an appropriate district 
                court of the United States may issue an order requiring 
                compliance with such subpoena and any failure to obey 
                such order may be punished by such court as a contempt 
                thereof.
                    ``(D) Issuance of orders.--If an administrative law 
                judge determines in a hearing under this paragraph, 
                upon the preponderance of the evidence received, that a 
                carrier, agent, or association or its subsidiary named 
                in the complaint has violated the requirements of this 
                title, the administrative law judge shall state the 
                findings of fact and issue and cause to be served on 
                such carrier, agent, association, or subsidiary an 
                order described in paragraph (4).
            ``(4) Cease and desist order with civil money penalty.--
                    ``(A) In general.--Subject to the provisions of 
                subparagraphs (B) through (F), an order under this 
                paragraph--
                            ``(i) shall require the agent, association 
                        or its subsidiary, or a carrier--
                                    ``(I) to cease and desist from such 
                                violations; and
                                    ``(II) to pay a civil penalty in an 
                                amount not to exceed $15,000 in the 
                                case of each agent, and not to exceed 
                                $25,000 for each association or its 
                                subsidiary or a carrier for each such 
                                violation; and
                            ``(ii) may require the agent, association 
                        or its subsidiary, or a carrier to take such 
                        other remedial action as is appropriate.
                    ``(B) Corrections within 30 days.--No order shall 
                be imposed under this paragraph by reason of any 
                violation if the carrier, agent, or association or its 
                subsidiary establishes to the satisfaction of the 
                Secretary that--
                            ``(i) such violation was due to reasonable 
                        cause and was not intentional and was not due 
                        to willful neglect; and
                            ``(ii) such violation is corrected within 
                        the 30-day period beginning on the earliest 
                        date the carrier, agent, association, or 
                        subsidiary knew, or exercising reasonable 
                        diligence could have known, that such a 
                        violation was occurring.
                    ``(C) Waiver by secretary.--In the case of a 
                violation under this title that is due to reasonable 
                cause and not to willful neglect, the Secretary may 
                waive part or all of the civil money penalty imposed 
                under subparagraph (A)(i)(II) to the extent that 
                payment of such penalty would be grossly excessive 
                relative to the violation involved and to the need for 
                deterrence of violations.
                    ``(D) Administrative appellate review.--The 
                decision and order of an administrative law judge under 
                this paragraph shall become the final agency decision 
                and order of the Secretary unless, within 30 days, the 
                Secretary modifies or vacates the decision and order, 
                in which case the decision and order of the Secretary 
                shall become a final order under this paragraph.
                    ``(E) Judicial review.--A carrier, agent, or 
                association or its subsidiary or any other individual 
                adversely affected by a final order issued under this 
                paragraph may, within 45 days after the date the final 
                order is issued, file a petition in the Court of 
                Appeals for the appropriate circuit for review of the 
                order.
                    ``(F) Enforcement of orders.--If a carrier, agent, 
                or association or its subsidiary fails to comply with a 
                final order issued under this paragraph against the 
                carrier, agent, association or subsidiary after 
                opportunity for judicial review under subparagraph (E), 
                the Secretary shall file a suit to seek compliance with 
                the order in any appropriate district court of the 
                United States. In any such suit, the validity and 
                appropriateness of the final order shall not be subject 
                to review.
    ``(d) Demonstration Grant Program.--
            ``(1) In general.--The Secretary may award grants to States 
        for the establishment of demonstration programs to improve the 
        enforcement within such States of long-term care insurance 
        standards applicable under this title.
            ``(2) Application.--To be eligible to receive a grant under 
        paragraph (1), a State shall prepare and submit to the 
        Secretary an application at such time, in such manner, and 
        containing such information as the Secretary may require, 
        including a description of the program for which the State 
        intends to use the amounts provided under the grant.
            ``(3) Minimum amount of grants.--The amount of a grant 
        awarded under this subsection shall not be less than $100,000.
            ``(4) Evaluation.--A State that receives a grant under this 
        subsection shall comply with such evaluation procedures as the 
        Secretary shall by regulation establish. The Secretary shall 
        utilize such evaluations to conduct an overall evaluation of 
        the results of the demonstration programs established under 
        this section.
            ``(5) Authorization of appropriations.--There are 
        authorized to be appropriated to carry out this subsection, 
        $5,000,000 for each of the fiscal years 1993 through 1997.

``SEC. 2712. REGULATION OF SALES PRACTICES.

    ``(a) Duty of Good Faith and Fair Dealing.--
            ``(1) In general.--Each agent (as defined in section 2733) 
        or association that is selling or offering for sale a long-term 
        care insurance policy has the duty of good faith and fair 
        dealing to the purchaser or potential purchaser of such a 
        policy.
            ``(2) Prohibited practices.--An agent or association is 
        considered to have violated paragraph (1) if the agent or 
        association engages in any of the following practices:
                    ``(A) Twisting.--
                            ``(i) In general.--Knowingly making any 
                        misleading representation (including the 
                        inaccurate completion of medical histories) or 
                        incomplete or fraudulent comparison of any 
                        long-term care insurance policy or insurers for 
                        the purpose of inducing, or tending to induce, 
                        any person to retain or effect a change with 
                        respect to a long-term care insurance policy.
                            ``(ii) Policy replacement form.--With 
                        respect to any person who elects to replace or 
                        effect a change in a long-term care insurance 
                        policy, the individual that is selling such 
                        policy shall ensure that such person completes 
                        a policy replacement form developed by the 
                        NAIC. A copy of such form shall be provided to 
                        such person and additional copies shall be 
                        delivered by the selling individual to the old 
                        policy issuer and the new issuer and kept on 
                        file for inspection by the State regulatory 
                        agency.
                    ``(B) High pressure tactics.--Employing any method 
                of marketing having the effect of, or intending to, 
                induce the purchase of a long-term care insurance 
                policy through force, fright, threat or undue pressure, 
                whether explicit or implicit.
                    ``(C) Cold lead advertising.--Making use directly 
                or indirectly of any method of marketing which fails to 
                disclose in a conspicuous manner that a purpose of the 
                method of marketing is solicitation of insurance and 
                that contact will be made by an insurance agent or 
                insurance company.
                    ``(D) Others.--Engaging in such other practices 
                determined inappropriate under guidelines issued by the 
                NAIC.
    ``(b) Financial Standards.--The NAIC shall develop recommended 
minimum financial standards (including both income and asset criteria) 
for the purpose of advising individuals considering the purchase of a 
long-term care insurance policy.
    ``(c) Prohibition of Sale or Issuance to Medicaid Beneficiaries.--
An agent, an association, or a carrier may not knowingly sell or issue 
a long-term care insurance policy to an individual who is eligible for 
medical assistance under title XIX of the Social Security Act.
    ``(d) Prohibition of Sale or Issuance of Duplicate Service Benefit 
Policies.--An agent, association or its subsidiary, or a carrier may 
not sell or issue a service-benefit long-term care insurance policy to 
an individual--
            ``(1) knowing that the policy provides for coverage that 
        duplicates coverage already provided in another service-benefit 
        long-term care insurance policy held by such individual (unless 
        the policy is intended to replace such other policy); or
            ``(2) for the benefit of an individual unless the 
        individual (or a representative of the individual) provides a 
        written statement to the effect that the coverage--
                    ``(A) does not duplicate other coverage in effect 
                under a service-benefit long-term care insurance 
                policy; or
                    ``(B) will replace another service-benefit long-
                term care insurance policy.
In this subsection, the term `service-benefit long-term care insurance 
policy' means a long-term care insurance policy which provides for 
benefits based on the type and amount of services furnished.
    ``(e) Prohibition Based on Eligibility for Other Benefits.--A 
carrier may not sell or issue a long-term care insurance policy that 
reduces, limits or coordinates the benefits provided under the policy 
on the basis that the policyholder has or is eligible for other long-
term care insurance coverage or benefits.
    ``(f) Provision of Outline of Coverage.--No agent, association or 
its subsidiary, or carrier may sell or offer for a sale a long-term 
care insurance policy (or for a certificate under a group long-term 
care insurance policy) without providing to the purchaser or potential 
purchaser (or representative) an outline of coverage that complies with 
the standards established under section 2701(a).
    ``(g) Penalties.--Any agent who sells, offers for sale, or issues a 
long-term care insurance policy in violation of this section may be 
imprisoned not more than 5 years, or fined in accordance with title 18, 
United States Code, and, in addition, is subject to a civil money 
penalty of not to exceed $15,000 for each such violation. Any 
association or its subsidiary or carrier that sells, offers for sale, 
or issues a long-term care insurance policy in violation of this 
section may be fined in accordance with title 18, United States Code, 
and in addition, is subject to a civil money penalty of not to exceed 
$25,000 for each violation.
    ``(h) Agent Training and Certification Requirements.--The NAIC 
shall establish requirements for long-term care insurance agent 
training and certification that--
            ``(1) specify requirements for training insurance agents 
        who desire to sell or offer for sale long-term care insurance 
        policies; and
            ``(2) specify procedures for certifying agents who have 
        completed such training and who are as qualified to sell or 
        offer for sale long-term care insurance policies.

``SEC. 2713. ADDITIONAL RESPONSIBILITIES FOR CARRIERS.

    ``(a) Refund of Premiums.--If an application for a long-term care 
insurance policy (or for a certificate under a group long-term care 
insurance policy) is denied or an applicant returns a policy or 
certificate within 30 days of the date of its issuance pursuant to 
subsection 2717, the carrier shall refund directly to the applicant, or 
in the case of an employer to whomever remits the premium, and not by 
delivery by the agent, not later than 30 days after the date of the 
denial or return, any premiums paid with respect to such a policy (or 
certificate).
    ``(b) Mailing of Policy.--If an application for a long-term care 
insurance policy (or for a certificate under a group long-term care 
insurance policy) is approved, the carrier shall provide the applicant, 
or in the case of a group plan the employer, the policy (or 
certificate) of insurance not later than 30 days after the date of the 
approval.
    ``(c) Information on Denials of Claims.--If a claim under a long-
term care insurance policy is denied, the carrier shall, within 30 days 
of the date of a written request by the policyholder or certificate 
holder (or representative)--
            ``(1) provide a written explanation of the reasons for the 
        denial; and
            ``(2) make available all medical and patient records 
        directly relating to such denial.
Except as provided in subsection (e) of section 2715, no claim under 
such a policy may be denied on the basis of a failure to disclose a 
condition at the time of issuance of the policy if the application for 
the policy failed to request information respecting the condition.
    ``(d) Reporting of Information.--A carrier that issues one or more 
long-term care insurance policies shall periodically (not less often 
than annually) report, in a form and in a manner determined by the 
NAIC, to the Commissioner, superintendent or director of insurance of 
each State in which the policy is delivered, and shall make available 
to the Secretary, upon request, information in a form and manner 
determined by the NAIC concerning--
            ``(1) the long-term care insurance policies of the carrier 
        that are in force;
            ``(2) the most recent premiums for such policies and the 
        premiums imposed for such policies since their initial 
        issuance;
            ``(3) the lapse rate, replacement rate, and rescission 
        rates by policy;
            ``(4) the names of that 10 percent of its agents that--
                    ``(A) have the greatest lapse and replacement rate; 
                and
                    ``(B) have produced at least $50,000 of long-term 
                care insurance sales in the previous year; and
            ``(5) the claims denied (expressed as a number and as a 
        percentage of claims submitted) by policy.
Information required under this subsection shall be reported in a 
format specified in the standards established under section 2701(a). 
For purposes of paragraph (3), there shall be included (but reported 
separately) data concerning lapses due to the death of the 
policyholder. For purposes of paragraph (4), there shall not be 
included as a claim any claim that is denied solely because of the 
failure to meet a deductible, waiting period, or exclusionary period.
    ``(e) Standards on Compensation for Sale of Policies.--
            ``(1) In general.--A carrier that issues one or more long-
        term care insurance policies may provide a commission or other 
        compensation to an agent or other representative for the sale 
        of such a policy only if the first year commission or other 
        first year compensation to be paid does not exceed 200 percent 
        of the commission or other compensation paid for selling or 
        servicing the policy in the second year, or if the first year 
        commission or other compensation to be paid does not exceed 50 
        percent of the premium paid on the first year policy, until the 
        NAIC promulgates mandatory standards concerning compensation 
        for the sale of such policies.
            ``(2) Subsequent years.--The commission or other 
        compensation provided for the sale of long-term care insurance 
        policies in years subsequent to the first year of the policy 
        shall be the same as that provided in the second subsequent 
        year and shall be provided for no fewer than 5 subsequent 
        years.
            ``(3) Limitation.--No carrier shall provide compensation to 
        its agents for the sale of a long-term care insurance policy 
        and no agent shall receive compensation greater than the 
        renewal compensation payable by the replacing carrier on 
        renewal policies if an existing policy is replaced.
            ``(4) Compensation defined.--As used in this subsection, 
        the term `compensation' includes pecuniary or nonpecuniary 
        remuneration of any kind relating to the sale or renewal of the 
        policy, including but not limited to deferred compensation, 
        bonuses, gifts, prizes, awards, and finders fees.

``SEC. 2714. RENEWABILITY STANDARDS FOR ISSUANCE, AND BASIS FOR 
              CANCELLATION OF POLICIES.

    ``(a) In General.--No long-term care insurance policy may be 
canceled or nonrenewed for any reason other than nonpayment of premium, 
material misrepresentation or fraud.
    ``(b) Continuation and Conversion Rights for Group Policies.--
            ``(1) In general.--Each group long-term care insurance 
        policy shall provide covered individuals with a basis for 
        continuation or conversion in accordance with this subsection.
            ``(2) Basis for continuation.--For purposes of paragraph 
        (1), a policy provides a basis for continuation of coverage if 
        the policy maintains coverage under the existing group policy 
        when such coverage would otherwise terminate and which is 
        subject only to the continued timely payment of premium when 
        due. A group policy which restricts provision of benefits and 
        services to or contains incentives to use certain providers or 
        facility, may provide continuation benefits which are 
        substantially equivalent to the benefits of the existing group 
        policy.
            ``(3) Basis for conversion.--For purposes of paragraph (1), 
        a policy provides a basis for conversion of coverage if the 
        policy entitles each individual--
                    ``(A) whose coverage under the group policy would 
                otherwise be terminated for any reason; and
                    ``(B) who has been continuously insured under the 
                policy (or group policy which was replaced) for at 
                least 6 months before the date of the termination;
        to issuance of a policy providing benefits identical to, 
        substantially equivalent to, or in excess of, those of the 
        policy being terminated, without evidence of insurability.
            ``(4) Treatment of substantial equivalence.--In determining 
        under this subsection whether benefits are substantially 
        equivalent, consideration should be given to the difference 
        between managed care and non-managed care plans.
            ``(5) Group replacement of policies.--If a group long-term 
        care insurance policy is replaced by another long-term care 
        insurance policy purchased by the same policyholder, the 
        succeeding issuer shall offer coverage to all persons covered 
        under the old group policy on its date of termination. Coverage 
        under the new group policy shall not result in any exclusion 
        for preexisting conditions that would have been covered under 
        the group policy being replaced.
    ``(c) Standards for Issuance.--
            ``(1) In general.--
                    ``(A) Guarantee.--An agent, association or carrier 
                that sells or issues long-term care insurance policies 
                shall guarantee that such policies shall be sold or 
                issued to an individual, or eligible individual in the 
                case of a group plan, if such individual meets the 
                minimum medical underwriting requirements of such 
                policy.
                    ``(B) Premium for converted policy.--If a group 
                policy from which conversion is made is a replacement 
                for a previous group policy, the premium for the 
                converted policy shall be calculated on the basis of 
                the insured's age at the inception of coverage under 
                the group policy from which conversion is made. Where 
                the group policy from which conversion is made replaced 
                previous group coverage, the premium for the converted 
                policy shall be calculated on the basis of the 
                insured's age at inception of coverage under the group 
                policy replaced.
            ``(2) Upgrade for current policies.--The NAIC shall 
        establish standards, including those providing guidance on 
        medical underwriting and age rating, with respect to the access 
        of individuals to policies offering upgraded benefits.
    ``(d) Effect of Incapacitation.--
            ``(1) In general.--
                    ``(A) Prohibition.--Except as provided in paragraph 
                (2), a long-term care insurance policy in effect as of 
                the effective date of the standards established under 
                section 2701(a) may not be canceled for nonpayment if 
                the policy holder is determined by a long-term care 
                provider, physician or other health care provider, 
                independent of the issuer of the policy, to be 
                cognitively or mentally incapacitated so as to not make 
                payments in a timely manner.
                    ``(B) Reinstatement.--A long-term care policy shall 
                include a provision that provides for the reinstatement 
                of such coverage, in the event of lapse, if the insurer 
                is provided with proof of cognitive or mental 
                incapacitation. Such reinstatement option shall remain 
                available for a period of not less than 5 months after 
                termination and shall allow for the collection of past 
                due premium.
            ``(2) Permitted cancellation.--A long-term care insurance 
        policy may be canceled under paragraph (1) for nonpayment if--
                    ``(A) the period of such nonpayment is in excess of 
                30 days; and
                    ``(B) notice of intent to cancel is provided to the 
                policyholder or designated representative of the policy 
                holder not less than 30 days prior to such 
                cancellation, except that notice may not be provided 
                until the expiration of 30 days after a premium is due 
                and unpaid.
        Notice under this paragraph shall be deemed to have been given 
        as of 5 days after the mailing date.

``SEC. 2715. BENEFIT STANDARDS.

    ``(a) Use of Standard Definitions and Terminology, Uniform Format, 
and Standard Benefits.--Each long-term care insurance policy shall, 
with respect to services, providers or facilities, pursuant to 
standards established under section 2701(a)--
            ``(1) use uniform language and definitions, except that 
        such language and definitions may take into account the 
        differences between States with respect to definitions and 
        terminology used for long-term care services and providers;
            ``(2) use a uniform format for presenting the outline of 
        coverage under such a policy; and
            ``(3) provide coverage for at least one standard benefits 
        package (of those developed by the NAIC);
as prescribed under guidelines issued by the NAIC and periodically 
updated.
    ``(b) Disclosure.--
            ``(1) Outline of coverage.--
                    ``(A) Requirement.--Each carrier that sells or 
                offers for sale a long-term care insurance policy shall 
                provide an outline of coverage under such policy that 
                meets the applicable standards established pursuant to 
                section 2701(a), complies with the requirements of 
                subparagraph (B), and is in a uniform format as 
                prescribed in guidelines issued by the NAIC and 
                periodically updated.
                    ``(B) Contents.--The outline of coverage for each 
                long-term care insurance policy shall include at least 
                the following:
                            ``(i) A description of the principal 
                        benefits and coverage under the policy.
                            ``(ii) A statement of the principal 
                        exclusions, reductions, and limitations 
                        contained in the policy.
                            ``(iii) A statement of the terms under 
                        which the policy (or certificate) may be 
                        continued in force or discontinued, the terms 
                        for continuation or conversion, and any 
                        reservation in the policy of a right to change 
                        premiums.
                            ``(iv) A statement, in bold face type on 
                        the face of the document in language that is 
                        understandable to an average individual, that 
                        the outline of coverage is a summary only, not 
                        a contract of insurance, and that the policy 
                        (or master policy) contains the contractual 
                        provisions that govern, except that such 
                        summary shall substantially and accurately 
                        reflect the contents of the policy or the 
                        master policy.
                            ``(v) A description of the terms, specified 
                        in section 2717, under which a policy or 
                        certificate may be returned and premium 
                        refunded.
                            ``(vi) Information on national average 
                        costs for nursing facility and home health care 
                        and information (in graphic form) on the 
                        relationship of the value of the benefits 
                        provided under the policy to such national 
                        average costs and State average costs, where 
                        available.
                            ``(vii) A statement of the percentage limit 
                        on annual premium increases that is provided 
                        under the policy pursuant to this section.
            ``(2) Certificates.--A certificate issued pursuant to a 
        group long-term care insurance policy shall include--
                    ``(A) a description of the principal benefits and 
                coverage provided in the policy;
                    ``(B) a statement of the principal exclusions, 
                reductions, and limitations contained in the policy; 
                and
                    ``(C) a statement that the group master policy 
                determines governing contractual provisions.
            ``(3) Long-term care as part of life insurance.--In the 
        case of a long-term care insurance policy issued as a part of, 
        or a rider on, a life insurance policy, at the time of policy 
        delivery there shall be provided a policy summary that 
        includes--
                    ``(A) an explanation of how the long-term care 
                benefits interact with other components of the policy 
                (including deductions from death benefits);
                    ``(B) an illustration of the amount of benefits, 
                the length of benefit, and the guaranteed lifetime 
                benefits (if any) for each covered person; and
                    ``(C) any exclusions, reductions, and limitations 
                on benefits of long-term care.
            ``(4) Additional information.--The NAIC shall develop 
        recommendations with respect to informing consumers of the 
        long-term economic viability of carriers issuing long-term care 
        insurance policies.
    ``(c) Limiting Conditions on Benefits; Minimum Benefits.--
            ``(1) In general.--A long-term care insurance policy may 
        not condition or limit eligibility--
                    ``(A) for benefits for a type of services to the 
                need for or receipt of any other services;
                    ``(B) for any benefit on the medical necessity for 
                such benefit;
                    ``(C) for benefits furnished by licensed or 
                certified providers in compliance with conditions which 
                are in addition to those required for licensure or 
                certification under State law, except that if no State 
                licensure or certification laws exists, in compliance 
                with qualifications developed by the NAIC; or
                    ``(D) for residential care (if covered under the 
                policy) only--
                            ``(i) to care provided in facilities which 
                        provide a higher level of care; or
                            ``(ii) to care provided in facilities which 
                        provide for 24-hour or other nursing care not 
                        required in order to be licensed by the State.
            ``(2) Home health care or community-based services.--If a 
        long-term care insurance policy provides benefits for the 
        payment of specified home health care or community-based 
        services, the policy--
                    ``(A) may not limit such benefits to services 
                provided by registered nurses or licensed practical 
                nurses;
                    ``(B) may not require benefits for such services to 
                be provided by a nurse or therapist that can be 
                provided by a home health aide or licensed or certified 
                home care worker, except that if no State licensure or 
                certification laws exists, in compliance with 
                qualifications developed by the NAIC;
                    ``(C) may not limit such benefits to services 
                provided by agencies or providers certified under title 
                XVIII of the Social Security Act; and
                    ``(D) must provide, at a minimum, benefits for 
                personal care services (including home health aide and 
                home care worker services as defined by the NAIC) home 
                health services, adult day care, and respite care in an 
                individual's home or in another setting in the 
                community, or any of these benefits on a respite care 
                basis.
            ``(3) Nursing facility services.--If a long-term care 
        insurance policy provides benefits for the payment of specified 
        nursing facility services, the policy must provide such 
        benefits with respect to all nursing facilities (as defined in 
        section 1919(a) of the Social Security Act or until such time 
        as subsequently provided for by the NAIC in establishing 
        uniform language and definitions under section 2715(a)(1)) in 
        the State.
            ``(4) Per diem policies.--
                    ``(A) Definition.--For purposes of this title, the 
                term `per diem long-term care insurance policy' means a 
                long-term care insurance policy (or certificate under a 
                group long-term care insurance policy) that provides 
                for benefit payments on a periodic basis due to 
                cognitive impairment or loss of functional capacity 
                without regard to the expenses incurred or services 
                rendered during the period to which the payments 
                relate.
                    ``(B) Limitation.--No per diem long-term care 
                insurance policy (or certificate) may condition or 
                otherwise exclude benefit payments based on the receipt 
                of any type of nursing facility, home health care or 
                community-based services.
    ``(d) Prohibition of Discrimination.--A long-term care insurance 
policy may not treat benefits under the policy in the case of an 
individual with Alzheimer's disease, with any related progressive 
degenerative dementia of an organic origin, with any organic or 
inorganic mental illness, or with mental retardation or any other 
cognitive or mental impairment differently from an individual having 
another medical condition for which benefits may be made available.
    ``(e) Limitation on Use of Preexisting Condition Limits.--
            ``(1) Initial issuance.--
                    ``(A) In general.--Subject to subparagraph (B), a 
                long-term care insurance policy may not exclude or 
                condition benefits based on a medical condition for 
                which the policyholder received treatment or was 
                otherwise diagnosed before the issuance of the policy.
                    ``(B) 6-month limit.--
                            ``(i) In general.--No long-term care 
                        insurance policy or certificate issued under 
                        this title shall utilize a definition of 
                        `preexisting condition' that is more 
                        restrictive than the following: The term 
                        `preexisting condition' means a condition for 
                        which medical advice or treatment was 
                        recommended by, or received from a provider of 
                        health care services, within 6 months preceding 
                        the effective date of coverage of an insured 
                        individual.
                            ``(ii) Prohibition on exclusion of 
                        coverage.--No long-term care insurance policy 
                        or certificate may exclude coverage for a loss 
                        or confinement that is the result of a 
                        preexisting condition unless such loss or 
                        confinement begins within 6 months following 
                        the effective date of the coverage of the 
                        insured individual.
            ``(2) Replacement policies.--If a long-term care insurance 
        policy replaces another long-term care insurance policy, the 
        issuer of the replacing policy shall waive any time periods 
        applicable to preexisting conditions, waiting period, 
        elimination periods and probationary periods in the new policy 
        for similar benefits to the extent such time was spent under 
        the original policy.
    ``(f) Eligibility for Benefits.--
            ``(1) Long-term care policies.--Each long-term care 
        insurance policy shall--
                    ``(A) describe the level of benefits available 
                under the policy; and
                    ``(B) specify in clear, understandable terms, the 
                level (or levels) of physical, cognitive, or mental 
                impairment required in order to receive benefits under 
                the policy.
            ``(2) Functional assessment.--In order to submit a claim 
        under any long-term care insurance policy, each claimant shall 
        have a professional functional assessment of his or her 
        physical, cognitive, and mental abilities. Such initial 
        assessment shall be conducted by an individual or entity, 
        meeting the qualifications established by the NAIC to assure 
        the professional competence and credibility of such individual 
        or entity and that such individual meets any applicable State 
        licensure and certification requirements. The individual or 
        entity conducting such assessment may not control, or be 
        controlled by, the issuer of the policy. For purposes of this 
        paragraph and paragraph (4), the term `control' means the 
        direct or indirect possession of the power to direct the 
        management and policies of a person. Control is presumed to 
        exist, if any person directly or indirectly, owns, controls, 
        holds with the power to vote, or holds proxies representing 10 
        percent of the voting securities of another person.
            ``(3) Claims review.--Except as provided in paragraph (4), 
        each long-term care insurance policy shall be subject to final 
        claims review by the carrier pursuant to the terms of the long-
        term care insurance policy.
            ``(4) Appeals process.--
                    ``(A) In general.--Each long-term care insurance 
                policy shall provide for a timely and independent 
                appeals process, meeting standards established by the 
                NAIC, for individuals who dispute the results of the 
                claims review, conducted under paragraph (3), of the 
                claimant's functional assessment, conducted under 
                paragraph (2).
                    ``(B) Independent assessment.--An appeals process 
                under this paragraph shall include, at the request of 
                the claimant, an independent assessment of the 
                claimant's physical, cognitive or mental abilities.
                    ``(C) Conduct.--An independent assessment under 
                subparagraph (B) shall be conducted by an individual or 
                entity meeting the qualifications established by the 
                NAIC to assure the professional competence and 
                credibility of such individual or entity and any 
                applicable State licensure and certification 
                requirements and may not be conducted--
                            ``(i) by an individual who has a direct or 
                        indirect significant or controlling interest 
                        in, or direct affiliation or relationship with, 
                        the issuer of the policy;
                            ``(ii) by an entity that provides services 
                        to the policyholder or certificateholder for 
                        which benefits are available under the long-
                        term care insurance policy; or
                            ``(iii) by an individual or entity in 
                        control of, or controlled by, the issuer of the 
                        policy.
            ``(5) Standard assessments.--Not later than 2 years after 
        the date of enactment of this title, the advisory committee 
        established under section 2701(d) shall recommend uniform needs 
        assessment mechanisms for the determination of eligibility for 
        benefits under such assessments.
    ``(g) Inflation Protection.--
            ``(1) Option to purchase.--A carrier may not offer a long-
        term care insurance policy unless the carrier also offers to 
        the proposed policyholder, including each group policyholder, 
        the option to purchase a policy that provides for increases in 
        benefit levels, with benefit maximums or reasonable durations 
        that are meaningful, to account for reasonably anticipated 
        increases in the costs of long-term care services covered by 
        the policy. A carrier may not offer to a policyholder an 
        inflation protection feature that is less favorable to the 
        policyholder than one of the following:
                    ``(A) With respect to policies that provide for 
                automatic periodic increases in benefits, the policy 
                provides for an annual increase in benefits in a manner 
                so that such increases are computed annually at a rate 
                of not less than 5 percent.
                    ``(B) With respect to policies that provide for 
                periodic opportunities to elect an increase in 
                benefits, the policy guarantees that the insured 
                individual will have the right to periodically increase 
                the benefit levels under the policy without providing 
                evidence of insurability or health status so long as 
                the option for the previous period was not declined. 
                The amount of any such additional benefit may not be 
                less than the difference between--
                            ``(i) the existing policy benefit; and
                            ``(ii) such existing benefit compounded 
                        annually at a rate of at least 5 percent for 
                        the period beginning on the date on which the 
                        existing benefit is purchased and extending 
                        until the year in which the offer of increase 
                        is made.
                    ``(C) With respect to service benefit policies, the 
                policy covers a specified percentage of the actual or 
                reasonable charges and does not include a maximum 
                specified indemnity amount or limit.
            ``(2) Exception.--The requirements of paragraph (1) shall 
        not apply to life insurance policies or riders containing 
        accelerated long-term care benefits.
            ``(3) Required information.--Carriers shall include the 
        following information in or together with the outline of 
        coverage provided under this title:
                    ``(A) A graphic comparison of the benefit levels of 
                a policy that increases benefits over the policy period 
                with a policy that does not increase benefits. Such 
                comparison shall show benefit levels over not less than 
                a 20-year period.
                    ``(B) Any expected premium increases or additional 
                premiums required to pay for any automatic or optional 
                benefit increases, whether the individual who purchases 
                the policy obtains the inflation protection initially 
                or whether such individual delays purchasing such 
                protection until a future time.
            ``(4) Continuation of protection.--Inflation protection 
        benefit increases under this subsection under a policy that 
        contains such protection shall continue without regard to an 
        insured's age, claim status or claim history, or the length of 
        time the individual has been insured under the policy.
            ``(5) Constant premium.--An offer of inflation protection 
        under this subsection that provides for automatic benefit 
        increases shall include an offer of a premium that the carrier 
        expects to remain constant. Such offer shall disclose in a 
        conspicuous manner that the premium may change in the future 
        unless the premium is guaranteed to remain constant.
            ``(6) Rejection.--Inflation protection under this 
        subsection shall be included in a long-term care insurance 
        policy unless a carrier obtains a written rejection of such 
        protection signed by the policyholder.

``SEC. 2716. OPTION TO PURCHASE NONFORFEITURE BENEFITS.

    ``A carrier may not offer a long-term care insurance policy unless 
the carrier also offers to the proposed policyholder, including each 
group policyholder, the option to purchase a policy that provides that 
if the policy lapses after the policy has been in effect for a 
specified minimum period, the policy will provide, without payment of 
any additional premiums, nonforfeiture benefits which--
            ``(1) are not less favorable to the policyholder than the 
        benefits specified under the standards under section 2701(a), 
        and
            ``(2) provide that the percentage or amount of benefits 
        increase based upon the policyholder's equity in the policy.
    ``(b) Establishment of Standards.--The standards under section 
2701(a) shall provide that the percentage or amount of benefits under 
subsection (a) must increase based upon the policyholder's equity in 
the policy.

``SEC. 2717. LIMIT OF PERIOD OF CONTESTABILITY AND RIGHT TO RETURN.

    ``(a) Contestability.--A carrier may not cancel or renew a long-
term care insurance policy or deny a claim under the policy based on 
fraud or material misrepresentation relating to the issuance of the 
policy unless notice of such fraud or material misrepresentation is 
provided within a time period to be determined by the NAIC.
    ``(b) Right to Return.--Each applicant for a long-term care 
insurance policy shall have the right to return the policy (or 
certificates) within 30 days of the date of its delivery (and to have 
the premium refunded) if, after examination of the policy or 
certificate, the applicant is not satisfied for any reason.

``SEC. 2718. CIVIL MONEY PENALTY.

    ``(a) Carrier.--Any carrier, association or its subsidiary that 
sells or offers for sale a long-term care insurance policy and that--
            ``(1) fails to make a refund in accordance with section 
        2713(a);
            ``(2) fails to transmit a policy in accordance with section 
        2713(b);
            ``(3) fails to provide, make available, or report 
        information in accordance with subsections (c) or (d) of 
        section 2713;
            ``(4) provides a commission or compensation in violation of 
        section 2713(e);
            ``(5) fails to provide an outline of coverage in violation 
        of section 2715(b)(1); or
            ``(6) issues a policy without obtaining certain information 
        in violation of section 2715(f);
is subject to a civil money penalty of not to exceed $25,000 for each 
such violation.
    ``(b) Agents.--Any agent that sells or offers for sale a long-term 
care insurance policy and that--
            ``(1) fails to make a refund in accordance with section 
        2713(a);
            ``(2) fails to transmit a policy in accordance with section 
        2713(b);
            ``(3) fails to provide, make available, or report 
        information in accordance with subsections (c) or (d) of 
        section 2713;
            ``(4) fails to provide an outline of coverage in violation 
        of section 2715(b)(1); or
            ``(5) issues a policy without obtaining certain information 
        in violation of section 2715(f);
is subject to a civil money penalty of not to exceed $15,000 for each 
such violation.

      ``Part C--Long-Term Care Insurance Policies, Definition and 
                              Endorsements

``SEC. 2721. LONG-TERM CARE INSURANCE POLICY DEFINED.

    ``(a) In General.--As used in this section, the term `long-term 
care insurance policy' means any insurance policy, rider or certificate 
advertised, marketed, offered or designed to provide coverage for not 
less than 12 consecutive months for each covered person on an expense 
incurred, indemnity prepaid or other basis, for one or more necessary 
diagnostic, preventive, therapeutic, rehabilitative, maintenance or 
personal care services, provided in a setting other than an acute care 
unit of a hospital. Such term includes--
            ``(1) group and individual annuities and life insurance 
        policies, riders or certificates that provide directly, or that 
        supplement long-term care insurance; and
            ``(2) a policy, rider or certificates that provides for 
        payment of benefits based on cognitive impairment or the loss 
        of functional capacity.
    ``(b) Issuance.--Long-term care insurance policies may be issued 
by--
            ``(1) carriers;
            ``(2) fraternal benefit societies;
            ``(3) nonprofit health, hospital, and medical service 
        corporations;
            ``(4) prepaid health plans;
            ``(5) health maintenance organizations; or
            ``(6) any similar organization to the extent they are 
        otherwise authorized to issue life or health insurance.
    ``(c) Policies Excluded.--The term `long-term care insurance 
policy' shall not include any insurance policy, rider or certificate 
that is offered primarily to provide basic Medicare supplement 
coverage, basic hospital expense coverage, basic medical-surgical 
expense coverage, hospital confinement indemnity coverage, major 
medical expense coverage, disability income or related asset-protection 
coverage, accident only coverage, specified disease or specified 
accident coverage, or limited benefit health coverage. With respect to 
life insurance, such term shall not include life insurance policies, 
riders or certificates that accelerate the death benefit specifically 
for one or more of the qualifying events of terminal illness, medical 
conditions requiring extraordinary medical intervention, or permanent 
institutional confinement, and that provide the option of a lump-sum 
payment for those benefits and in which neither the benefits nor the 
eligibility for the benefits is conditioned upon the receipt of long-
term care.
    ``(d) Applications.--Notwithstanding any other provision of this 
title, this title shall apply to any product advertised, marketed or 
offered as a long-term insurance policy, rider or certificate.

``SEC. 2722. CODE OF CONDUCT WITH RESPECT TO ENDORSEMENTS.

    ``Not later than 1 year after the date of enactment of this title 
the NAIC shall issue guidelines that shall apply to organizations and 
associations, other than employers and labor organizations that do not 
accept compensation, and their subsidiaries that provide endorsements 
of long-term care insurance policies, or that permit such policies to 
be offered for sale through the organization or association. Such 
guidelines shall include at minimum the following:
            ``(1) In endorsing or selling long-term care insurance 
        policies, the primary responsibility of an organization or 
        association shall be to educate their members concerning such 
        policies and assist such members in making informed decisions. 
        Such organizations and associations may not function primarily 
        as sales agents for insurance companies.
            ``(2) Organizations and associations shall provide 
        objective information regarding long-term care insurance 
        policies sold or endorsed by such organizations and 
        associations to ensure that members of such organizations and 
        associations have a balanced and complete understanding of both 
        the strengths and weaknesses of the policies that are being 
        endorsed or sold.
            ``(3) Organizations and associations selling or endorsing 
        long-term care insurance policies shall disclose in marketing 
        literature provided to their members concerning such policies 
        the manner in which such policies and the insurance company 
        issuing such policies were selected. If the organization or 
        association and the insurance company have interlocking 
        directorates, the organization or association shall disclose 
        such fact to their members.
            ``(4) Organizations and associations selling or endorsing 
        long-term care insurance policies shall disclose in marketing 
        literature provided to their members concerning such policies 
        the nature and amount of the compensation arrangements 
        (including all fees, commissions, administrative fees and other 
        forms of financial support that the organization or association 
        receives) from the endorsement or sale of the policy to its 
        members.
            ``(5) The Boards of Directors of organizations and 
        associations selling or endorsing long-term care insurance 
        policies, if such organizations and associations have a Board 
        of Directors, shall review and approve such insurance policies, 
        the compensation arrangements and the marketing materials used 
        to promote sales of such policies.

                   ``Part D--Miscellaneous Provisions

``SEC. 2731. FUNDING FOR LONG-TERM CARE INSURANCE INFORMATION, 
              COUNSELING, AND ASSISTANCE.

    ``(a) In General.--The Secretary, acting through the Public Health 
Service, may award grants to States, and national organizations with 
demonstrated experience in long-term care insurance, for the 
establishment of programs to provide information, counseling, and 
assistance relating to the procurement of adequate and appropriate 
long-term care insurance.
    ``(b) Application.--To be eligible to receive a grant under 
subsection (a), a State or national organization shall prepare and 
submit to the Secretary an application at such time, in such manner, 
and containing such information as the Secretary may require, including 
a description of the program for which the State or organization 
intends to use the amounts provided under the grant.
    ``(c) Authorization of Appropriations.--
            ``(1) In general.--There are authorized to be appropriate 
        for grants to States under subsection (a), $10,000,000 for each 
        of the fiscal years 1994 through 1996.
            ``(2) National organizations.--There are authorized to be 
        appropriate for grants to national organizations under 
        subsection (a), $1,000,000 for each of the fiscal years 1994 
        through 1996.

``SEC. 2732. DEFINITIONS.

    ``As used in this title:
            ``(1) Agent.--The term `agent' means--
                    ``(A) prior to 2 years after the date of enactment 
                of this Act, an individual who sells or offers for sale 
                a long-term care insurance policy subject to the 
                requirements of this title and is licensed or required 
                to be licensed under State law for such purpose; and
                    ``(B) after the date referred to in subparagraph 
                (A), an individual who meets the training and 
                certification requirements established under section 
                2712(f).
            ``(2) Association.--The term `association' includes the 
        association and its subsidiaries.
            ``(3) Carrier.--The term `carrier' means any person that 
        offers a health benefit plan, whether through insurance or 
        otherwise, including a licensed insurance company, a prepaid 
        hospital or medical service plan, a health maintenance 
        organization, a self-insured carrier, a reinsurance carrier, 
        and a multiple employer welfare arrangement (a combination of 
        employers associated for the purpose of providing health 
        benefit plan coverage for their employees).''.
    (b) Conforming Amendments.--
            (1) Sections 2701 through 2714 of the Public Health Service 
        Act (42 U.S.C. 300cc through 300cc-15) are redesignated as 
        sections 2801 through 2814, respectively.
            (2) Sections 465(f) and 497 of such Act (42 U.S.C. 286(f) 
        and 289(f)) are amended by striking out ``2701'' each place 
        that such appears and inserting in lieu thereof ``2801''.

                        TITLE II--TAX TREATMENT

                  Subtitle A--Long-Term Care Insurance

SEC. 201. QUALIFIED LONG-TERM CARE INSURANCE DEFINED AND TREATED AS 
              ACCIDENT OR HEALTH INSURANCE.

    (a) In General.--Section 818 of the Internal Revenue Code of 1986 
(relating to definitions) is amended by adding at the end thereof the 
following new subsection:
    ``(g) Qualified Long-Term Care Insurance Treated as Accident or 
Health Insurance.--For purposes of this subchapter:
            ``(1) In general.--Any reference to noncancellable accident 
        or health insurance contracts shall be treated as including a 
        reference to qualified long-term care insurance.
            ``(2) Qualified long-term care insurance.--For purposes of 
        this subsection:
                    ``(A) In general.--Subject to subparagraphs (B) and 
                (C), the term `qualified long-term care insurance' 
                means insurance under a policy or rider, issued by a 
                qualified issuer, to be advertised, marketed, offered, 
                or designed to provide coverage--
                            ``(i) for not less than 12 consecutive 
                        months for each covered person,
                            ``(ii) on an expense incurred, indemnity, 
                        prepaid or other basis,
                            ``(iii) for 1 or more necessary or 
                        medically necessary diagnostic services, 
                        preventive services, therapeutic services, 
                        rehabilitation services, maintenance services, 
                        or personal care services,
                            ``(iv) for the loss of functional capacity, 
                        and
                            ``(v) provided in a setting other than an 
                        acute care unit of a hospital.
                    ``(B) Qualified issuer.--For purposes of 
                subparagraph (A), the term `qualified issuer' means any 
                of the following provided they are subject to the 
                jurisdiction and regulation of at least one State 
                insurance department:
                            ``(i) Private insurance company.
                            ``(ii) Fraternal benefit society.
                            ``(iii) Nonprofit health corporation.
                            ``(iv) Nonprofit hospital corporation.
                            ``(v) Nonprofit medical service 
                        corporation.
                            ``(vi) Prepaid health plan.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1994.

SEC. 202. QUALIFIED LONG-TERM CARE INSURANCE TREATED AS ACCIDENT AND 
              HEALTH INSURANCE FOR PURPOSES OF EXCLUSION FOR BENEFITS 
              RECEIVED UNDER SUCH INSURANCE AND FOR EMPLOYER 
              CONTRIBUTIONS FOR SUCH INSURANCE.

    (a) In General.--Section 105 of the Internal Revenue Code of 1986 
(relating to amounts received under accident and health plans) is 
amended by adding at the end thereof the following new subsection:
    ``(j) Special Rules Relating to Qualified Long-Term Care 
Insurance.--For purposes of section 104, this section, and section 106:
            ``(1) Benefits treated as payable for sickness, etc.--Any 
        benefit received through qualified long-term care insurance (as 
        defined in section 818(g)) shall be treated as amounts received 
        through accident or health insurance for personal injuries or 
        sickness.
            ``(2) Expenses for which reimbursement provided under 
        qualified long-term care insurance treated as incurred for 
        medical care or functional loss.--Expenses incurred by an 
        individual to the extent of benefits paid under qualified long-
        term care insurance (as defined in section 818(g)) shall be 
        treated for purposes of subsection (b) as incurred for medical 
        care (as defined in section 213(d)) and for purposes of 
        subsection (c) as payment for the permanent loss or loss of use 
        of a member or function of the body or the permanent 
        disfigurement of the taxpayer, his spouse, any dependent of the 
        taxpayer, or any parent of the taxpayer of his spouse.
            ``(3) References to accident and health plans.--Any 
        reference to an accident or health plan shall be treated as 
        including a reference to a plan providing qualified long-term 
        care insurance (as defined in section 818(g)).''
    (b) Current Deduction for Employer Premiums for Long-Term Care 
Policies.--Subparagraph (B) of section 404(b)(2) of such Code (relating 
to plans providing certain deferred benefits) is amended by striking 
``or'' at the end of clause (i), by striking the period at the end of 
clause (ii) and inserting ``, or'', and by adding at the end thereof 
the following new clause:
                            ``(iii) any benefit provided under a policy 
                        of qualified long-term care insurance (as 
                        defined in section 818(g)) through the payment 
                        (in whole or in part) of premiums by an 
                        employer pursuant to a plan for its active or 
                        retired employees, but only if any refund of 
                        premiums is applied to reduce the future costs 
                        of the plan or increase benefits under the 
                        plan.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

SEC. 203. EARLY DISTRIBUTION PENALTY TAX NOT TO APPLY TO AMOUNTS 
              WITHDRAWN FROM QUALIFIED PLANS, INDIVIDUAL RETIREMENT 
              PLANS, ETC. FOR QUALIFIED LONG-TERM INSURANCE.

    (a) In General.--Paragraph (1) of section 72(t) of the Internal 
Revenue Code of 1986 (relating to 10-percent additional tax on early 
distributions from qualified retirement plans) is amended by adding at 
the end thereof the following new subparagraph:
                    ``(D) Distributions for qualified long-term care 
                insurance premiums.--Any distribution to the extent 
                used during the taxable year to pay premiums for any 
                policy of qualified long-term care insurance (as 
                defined in section 818(g)) or to pay for services 
                described in section 818(g)(2)(A)(iii) (relating to 
                services provided under long-term care insurance) for 
                the benefit of the payee or distributee, the spouse of 
                the payee or distributee, any dependent of the payee or 
                distributee, or any parent of the payee or distributee 
                or such spouse.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1994.

SEC. 204. DEDUCTION OF EXPENSES RELATING TO QUALIFIED LONG-TERM CARE.

    (a) In General.--Paragraph (1) of section 213(d) of the Internal 
Revenue Code of 1986 (relating to the definition of medical care) is 
amended--
            (1) by striking ``or'' at the end of subparagraph (B), and
            (2) by redesignating subparagraph (C) as subparagraph (D) 
        and by inserting after subparagraph (B) the following new 
        subparagraph:
                    ``(C) for those services described in section 
                818(g)(2)(A)(iii) (relating to services provided under 
                qualified long-term care insurance), or''.
    (b) Deduction for Long-Term Care Expenses for Parent or 
Grandparent.--Section 213 of such Code (relating to deduction for 
medical expenses) is amended by adding at the end the following new 
subsection:
    ``(g) Special Rule for Certain Long-Term Care Expenses.--For 
purposes of subsection (a), the term `dependent' shall include any 
parent or grandparent of the taxpayer for whom the taxpayer has 
expenses for long-term care services described in section 
818(g)(2)(A)(iii), but only to the extent of such expenses.''
    (c) Technical Amendments.--
            (1) Subparagraph (D) of section 213(d)(1) of such Code, as 
        redesignated by subsection (a), is amended by striking 
        ``subparagraphs (A) and (B)'' and inserting ``subparagraphs 
        (A), (B), and (C)''.
            (2) Paragraph (6) of section 213(d) of such Code is 
        amended--
                    (A) by striking ``subparagraphs (A) and (B)'' and 
                inserting ``subparagraphs (A), (B), and (C)'', and
                    (B) by striking ``paragraph (1)(C)'' and inserting 
                ``paragraph (1)(D)''.
            (3) Paragraph (7) of section 213(d) of such Code is amended 
        by striking ``subparagraphs (A) and (B)'' and inserting 
        ``subparagraphs (A), (B), and (C)''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

SEC. 205. TREATMENT OF PREFUNDED LONG-TERM CARE BENEFITS.

    (a) In General.--
            (1) Paragraph (2) of section 419A(c) of the Internal 
        Revenue Code of 1986 (relating to additional reserve for post-
        retirement medical and life insurance benefits) is amended by 
        striking ``or'' at the end of subparagraph (A), by striking the 
        period at the end of subparagraph (B) and inserting ``, or'', 
        and by adding at the end thereof the following new 
        subparagraph:
                    ``(C) post-retirement long-term care benefits (as 
                defined in section 818(g)) to be provided to covered 
                employees.''
            (2) The paragraph heading for such paragraph (2) is amended 
        by inserting ``, long-term care,'' after ``medical''.
    (b) Reserve for Long-term Care Benefits Must Be 
Nondiscriminatory.--
            (1) Paragraph (1) of section 419A(e) of such Code (relating 
        to special limitations on reserves for medical benefits or life 
        insurance benefits provided to retired employees) is amended by 
        inserting ``, long-term care benefits,'' after ``medical 
        benefits'' each place it appears.
            (2) The subsection heading for section 419A(e) of such Code 
        is amended by inserting ``, long-term care benefits,'' after 
        ``medical benefits''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

SEC. 206. QUALIFIED LONG-TERM CARE INSURANCE PERMITTED TO BE OFFERED IN 
              CAFETERIA PLANS.

    (a) In General.--Paragraph (2) of section 125(c) of the Internal 
Revenue Code of 1986 (relating to the exclusion of deferred 
compensation) is amended by adding at the end thereof the following new 
subparagraph:
                    ``(D) Exception for long-term care insurance.--For 
                purposes of subparagraph (A), a plan shall not be 
                treated as providing deferred compensation by reason of 
                providing qualified long-term care insurance (as 
                defined in section 818(g)) if--
                            ``(i) the employee may not surrender such 
                        insurance for cash, and
                            ``(ii) the terms of the plan permits, the 
                        employee may elect to continue the insurance 
                        upon cessation of participation in the plan.''
    (b) Long-term Care Insurance Included as Qualified Benefit.--
Paragraph (2) of section 125(e) of such Code (defining qualified 
benefits) is amended by striking ``and'' at the end of subparagraph 
(A), by striking the period at the end of subparagraph (B) and 
inserting ``, and'', and by adding at the end thereof the following new 
subparagraph:
                    ``(C) qualified long-term care insurance (as 
                defined in section 818(g)).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

 Subtitle B--Payments under Life Insurance Contracts to Terminally Ill 
                              Individuals

SEC. 211. TAX TREATMENT OF PAYMENTS TO TERMINALLY ILL INDIVIDUALS UNDER 
              LIFE INSURANCE CONTRACTS.

    (a) General Rule.--Section 101 of the Internal Revenue Code of 1986 
(relating to certain death benefits) is amended by adding at the end 
thereof the following new subsection:
    ``(g) Treatment of Amounts Paid to Terminally Ill Individuals.--
            ``(1) In general.--For purposes of this section, any amount 
        paid under a life insurance contract to an insured who is a 
        terminally ill individual shall be treated as an amount paid by 
        reason of the death of such insured.
            ``(2) Terminally ill individual.--For purposes of this 
        subsection, the term `terminally ill individual' means an 
        individual who has been certified by a physician, licensed 
        under State law, as having an illness or physical condition 
        which can reasonably be expected to result in death in 12 
        months or less.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1994.

SEC. 212. TAX TREATMENT OF COMPANIES ISSUING QUALIFIED TERMINAL ILLNESS 
              RIDERS.

    (a) Qualified Terminal Illness Rider Treated as Life Insurance.--
Section 818 of the Internal Revenue Code of 1986 (relating to other 
definitions and special rules), as amended by section 201(a), is 
further amended by adding at the end thereof the following new 
subsection:
    ``(h) Qualified Terminal Illness Rider Treated as Life Insurance.--
For purposes of this part:
            ``(1) In general.--Any reference to life insurance shall be 
        treated as including a reference to a qualified terminal 
        illness rider.
            ``(2) Qualified terminal illness rider.--For purposes of 
        this subsection, the term `qualified terminal illness rider' 
        means any rider on a life insurance contract which provides for 
        payments to an insured upon such insured becoming a terminally 
        ill individual (as defined in section 101(g)(2)).''
    (b) Definitions of Life Insurance and Modified Endowment 
Contracts.--
            (1) Rider treated as qualified additional benefit.--
        Paragraph (5)(A) of section 7702(f) of such Code is amended by 
        striking ``or'' at the end of clause (iv), by redesignating 
        clause (v) as clause (vi), and by inserting after clause (iv) 
        the following new clause:
                            ``(v) any qualified terminal illness rider 
                        (as defined in section 818(h)(2)), or''.
            (2) Transitional rule.--For purposes of applying section 
        7702 or 7702A of the Internal Revenue Code of 1986 to any 
        contract (or determining whether either such section applies to 
        such contract), the issuance of a qualified terminal illness 
        rider (as defined in section 818(h)(2) of such Code) with 
        respect to any contract shall not be treated as a modification 
        or material change of such contract.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

     TITLE III--ELIMINATION OF MEDICAID RESTRICTION ON STATE ASSET 
                          PROTECTION PROGRAMS

SEC. 301. ELIMINATION OF MEDICAID RESTRICTION ON STATE ASSET PROTECTION 
              PROGRAMS.

    (a) In General.--Section 1917(b) of the Social Security Act (42 
U.S.C. 1396p(b)), as amended by section 13612 of the Omnibus Budget 
Reconciliation Act of 1993, is amended--
            (1) in paragraph (1), by striking subparagraph (C),
            (2) in paragraph (3), by striking ``(other than paragraph 
        (1)(C))'', and
            (3) in paragraph (4), by striking all that follows 
        ``deceased individual'' and inserting ``shall include all real 
        and personal property and other assets included within the 
        individual's estate, as defined for purposes of State probate 
        law''.
    (b) Effective Date.--The amendments made by subsection (a) shall 
apply to calendar quarters beginning on or after October 1, 1993.

SEC. 302. PROTECTION OF ASSETS THROUGH USE OF QUALIFIED LONG-TERM CARE 
              INSURANCE.

    (a) In General.--Title XIX of the Social Security Act is amended by 
adding at the end the following new section:

``special rules for asset disregard in the case of qualified long-term 
                        care insurance contracts

    ``Sec. 1931. (a) In General.--Each State plan under this title, as 
a condition for the receipt of payment under section 1903(a) with 
respect to long-term care services (as defined in subsection (c)(1)), 
shall provide that in determining the eligibility of an individual for 
medical assistance under the plan with respect to such services there 
shall be disregarded some or all of the individual's assets which are 
attributable (as determined under subsection (c)(2)) to coverage under 
a qualified long-term care insurance contract (as defined in subsection 
(b)).
    ``(b) Qualified Long-Term Care Insurance Contract Defined.--In this 
section, the term `qualified long-term care insurance contract' means, 
with respect to a State, a long-term care insurance contract (as 
defined in section 818A(b) of the Internal Revenue Code of 1986) 
which--
            ``(1) provides such protection against the costs of 
        receiving long-term care services as the State may require by 
        law;
            ``(2) provides that benefits under the contract shall be 
        paid without regard to eligibility for medical assistance under 
        this title; and
            ``(3) meets such other requirements (such as requirements 
        relating to premiums, disclosure, minimum benefits, rights of 
        conversion, and standards for claims processing) as the State 
        may determine to be appropriate.
    ``(c) Other Definitions.--In this section:
            ``(1) Long-term care services.--The term `long-term care 
        services' means nursing facility services, home health care 
        services, and home and community-based services, and includes 
        such other similar items and services described in section 
        1905(a) as a State may specify.
            ``(2) Attribution rules.--An individual's assets are 
        considered to be `attributable' to a qualified long-term care 
        insurance contract to the extent specified under the State 
        plan. Such a plan shall provide for at least one of the 
        following:
                    ``(A) All assets are considered attributable if the 
                insurance contract provides coverage for at least a 
                period of coverage (of not less than 1 year and of not 
                more than 6 years) for long-term care services 
                specified in the contract.
                    ``(B) An amount of assets, up to the dollar 
                limitation on benefits for long-term care services 
                under the contract, is considered attributable to the 
                contract.''.
    (b) Conforming Amendment.--Section 1902(a)(17)(A) of such Act (42 
U.S.C. 1396a(a)(17)(A)) is amended by inserting ``and section 1931'' 
after ``objectives of this title''.
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply (except as provided under paragraph (2)) to payments to 
        States under title XIX of the Social Security Act for calendar 
        quarters beginning on or after one year after the date of the 
        enactment of this Act, without regard to whether regulations to 
        implement such amendment are promulgated by such date.
            (2) Delay permitted if state legislation required.--In the 
        case of a State plan for medical assistance under title XIX of 
        the Social Security Act which the Secretary of Health and Human 
        Services determines requires State legislation (other than 
        legislation authorizing or appropriating funds) in order for 
        the plan to meet the additional requirements imposed by the 
        amendments made by this section, the State plan shall not be 
        regarded as failing to comply with the requirements of such 
        title solely on the basis of its failure to meet these 
        additional requirements before the first day of the first 
        calendar quarter beginning after the close of the first regular 
        session of the State legislature that begins after the date of 
        the enactment of this Act. For purposes of the previous 
        sentence, in the case of a State that has a 2-year legislative 
        session, each year of such session shall be deemed to be a 
        separate regular session of the State legislature.

  TITLE IV--STATE PROGRAMS FOR HOME AND COMMUNITY-BASED SERVICES FOR 
                     INDIVIDUALS WITH DISABILITIES

SEC. 401. STATE PROGRAMS FOR HOME AND COMMUNITY-BASED SERVICES FOR 
              INDIVIDUALS WITH DISABILITIES.

    (a) In General.--Each State that has a plan for the home and 
community-based services to individuals with disabilities submitted to 
and approved by the Secretary under section 402(b) is entitled to 
payment in accordance with section 408.
    (b) No Individual Entitlement Established.--Nothing in this title 
shall be construed to create an entitlement for individuals or a 
requirement that a State with such an approved plan expend the entire 
amount of funds to which it is entitled in any year.

SEC. 402. STATE PLANS.

    (a) Plan Requirements.--In order to be approved under subsection 
(b), a State plan for home and community-based services for individuals 
with disabilities must meet the following requirements:
            (1) Eligibility.--
                    (A) In general.--Within the amounts provided by the 
                State (and under section 408) for such plan, the plan 
                shall provide that services under the plan will be 
                available to individuals with disabilities (as defined 
                in section 403(a)) in the State who meet the income 
                standard described in subparagraph (E).
                    (B) Initial screening.--The plan shall provide a 
                process for the initial screening of individuals who 
                appear to have some reasonable likelihood of being an 
                individual with disabilities.
                    (C) Restrictions.--The plan may not limit the 
                eligibility of individuals with disabilities based on--
                            (i) income (except as provided in 
                        subparagraph (E)),
                            (ii) age,
                            (iii) geography,
                            (iv) nature, severity, or category of 
                        disability,
                            (v) residential setting (other than an 
                        institutional setting), or
                            (vi) other grounds specified by the 
                        Secretary.
                    (D) Maintenance of effort.--The plan must provide 
                assurances that, in the case of an individual receiving 
                medical assistance for home and community-based 
                services under the State medicaid plan as of the date 
                of the enactment of this Act, the State will continue 
                to make available (either under this plan, under the 
                State medicaid plan, or otherwise) to such individual 
                an appropriate level of assistance for home and 
                community-based services, taking into account the level 
                of assistance provided as of such date and the 
                individual's need for home and community-based 
                services.
                    (E) Income limitation.--No individual shall be 
                provided services under the plan unless the individual 
                is determined to have income below 250 percent of the 
                official poverty line (as defined by the Office of 
                Management and Budget, and revised annually in 
                accordance with section 673(2) of the Omnibus Budget 
                Reconciliation Act of 1981) applicable to a family of 
                the size involved.
            (2) Services.--
                    (A) Specification.--Consistent with section 404, 
                the plan shall specify--
                            (i) the services made available under the 
                        plan,
                            (ii) the extent and manner in which such 
                        services are allocated and made available to 
                        individuals with disabilities, and
                            (iii) the manner in which services under 
                        the plan are coordinated with each other and 
                        with health and long-term care services 
                        available outside the plan for individuals with 
                        disabilities.
                    (B) Allocation.--The State plan--
                            (i) shall specify how it will allocate 
                        services under the plan, during and after the 
                        7-fiscal-year phase-in period beginning with 
                        fiscal year 1996, among covered individuals 
                        with disabilities, and
                            (ii) may not allocate such services based 
                        on the income or other financial resources of 
                        such individuals.
                    (C) Limitation on licensure or certification.--The 
                State may not subject consumer-directed providers of 
                personal assistance services to licensure, 
                certification, or other requirements which the 
                Secretary finds not to be necessary for the health and 
                safety of individuals with disabilities.
                    (D) Consumer choice.--To the extent possible, the 
                choice of an individual with disabilities (and that 
                individual's family) regarding which covered services 
                to receive and the providers who will provide such 
                services shall be followed.
                    (E) Requirement to serve low-income individuals.--
                The plan shall assure that--
                            (i) the proportion of the population of 
                        low-income individuals with disabilities in the 
                        State that represents individuals with 
                        disabilities who are provided home and 
                        community-based services either under the plan, 
                        under the State medicaid plan, or under both, 
                        is not less than
                            (ii) the proportion of the population of 
                        the State that represents individuals who are 
                        low-income individuals.
            (3) Cost sharing.--The plan shall impose cost sharing with 
        respect to covered services only in accordance with section 
        405.
            (4) Types of providers and requirements for 
        participation.--The plan shall specify--
                    (A) the types of service providers eligible to 
                participate in the program under the plan, which shall 
                include consumer-directed providers, and
                    (B) any requirements for participation applicable 
                to each type of service provider.
            (5) Budget.--The plan shall specify how the State will 
        manage Federal and State funds available under the plan for 
        each fiscal year during the period beginning with fiscal year 
        1996 and ending with fiscal year 2003 and for each 5-fiscal-
        year periods thereafter to serve all categories of individuals 
        with disabilities and meet the requirements of this subsection.
            (6) Provider reimbursement.--
                    (A) Payment methods.--The plan shall specify the 
                payment methods to be used to reimburse providers for 
                services furnished under the plan. Such methods may 
                include retrospective reimbursement on a fee-for-
                service basis, prepayment on a capitation basis, 
                payment by cash or vouchers to individuals with 
                disabilities, or any combination of these methods. In 
                the case of the use of cash or vouchers, the plan shall 
                specify how the plan will assure compliance with 
                applicable employment tax provisions.
                    (B) Payment rates.--The plan shall specify the 
                methods and criteria to be used to set payment rates 
                for services furnished under the plan (including rates 
                for cash payments or vouchers to individuals with 
                disabilities).
                    (C) Plan payment as payment in full.--The plan 
                shall restrict payment under the plan for covered 
                services to those providers that agree to accept the 
                payment under the plan (at the rates established 
                pursuant to subparagraph (B)) and any cost sharing 
                permitted or provided for under section 405 as payment 
                in full for services furnished under the plan.
            (7) Quality assurance and safeguards.--The State plan shall 
        provide for quality assurance and safeguards for applicants and 
        beneficiaries in accordance with section 406.
            (8) Advisory group.--The State plan shall--
                    (A) assure the establishment and maintenance of an 
                advisory group under section 407(b), and
                    (B) include the documentation prepared by the group 
                under section 407(b)(4).
            (9) Administration.--
                    (A) State agency.--The plan shall designate a State 
                agency or agencies to administer (or to supervise the 
                administration of) the plan.
                    (B) Administrative expenditures.--Effective 
                beginning with fiscal year 2003, the plan shall contain 
                assurances that not more than 10 percent of 
                expenditures under the plan for all quarters in any 
                fiscal year shall be for administrative costs.
                    (C) Coordination.--The plan shall specify how the 
                plan--
                            (i) will be integrated with the State 
                        medicaid plan, titles V and XX of the Social 
                        Security Act, programs under the Older 
                        Americans Act of 1965, programs under the 
                        Developmental Disabilities Assistance and Bill 
                        of Rights Act, the Individuals with 
                        Disabilities Education Act, and any other 
                        Federal or State programs that provide services 
                        or assistance targeted to individuals with 
                        disabilities, and
                            (ii) will be coordinated with health plans.
            (10) Reports and information to secretary; audits.--The 
        plan shall provide that the State will furnish to the 
        Secretary--
                    (A) such reports, and will cooperate with such 
                audits, as the Secretary determines are needed 
                concerning the State's administration of its plan under 
                this title, including the processing of claims under 
                the plan, and
                    (B) such data and information as the Secretary may 
                require in order to carry out the Secretary's 
                responsibilities.
            (11) Use of state funds for matching.--The plan shall 
        provide assurances that Federal funds will not be used to 
        provide for the State share of expenditures under this title.
    (b) Approval of Plans.--The Secretary shall approve a plan 
submitted by a State if the Secretary determines that the plan--
            (1) was developed by the State after consultation with 
        individuals with disabilities and representatives of groups of 
        such individuals, and
            (2) meets the requirements of subsection (a).
The approval of such a plan shall take effect as of the first day of 
the first fiscal year beginning after the date of such approval (except 
that any approval made before January 1, 1996, shall be effective as of 
January 1, 1996). In order to budget funds allotted under this title, 
the Secretary may establish a deadline for the submission of such a 
plan before the beginning of a fiscal year as a condition of its 
approval effective with that fiscal year.
    (c) Monitoring.--The Secretary shall monitor the compliance of 
State plans with the eligibility requirements of section 403 and may 
monitor the compliance of such plans with other requirements of this 
title.
    (d) Regulations.--The Secretary shall issue such regulations as may 
be appropriate to carry out this title on a timely basis.

SEC. 403. INDIVIDUALS WITH DISABILITIES DEFINED.

    (a) In General.--In this title, the term ``individual with 
disabilities'' means any individual within one or more of the following 
4 categories of individuals:
            (1) Individuals requiring help with activities of daily 
        living.--An individual of any age who--
                    (A) requires hands-on or standby assistance, 
                supervision, or cueing (as defined in regulations) to 
                perform three or more activities of daily living (as 
                defined in subsection (c)), and
                    (B) is expected to require such assistance, 
                supervision, or cueing over a period of at least 100 
                days.
            (2) Individuals with severe cognitive or mental 
        impairment.--An individual of any age--
                    (A) whose score, on a standard mental status 
                protocol (or protocols) appropriate for measuring the 
                individual's particular condition specified by the 
                Secretary, indicates either severe cognitive impairment 
                or severe mental impairment, or both;
                    (B) who--
                            (i) requires hands-on or standby 
                        assistance, supervision, or cueing with one or 
                        more activities of daily living,
                            (ii) requires hands-on or standby 
                        assistance, supervision, or cueing with at 
                        least such instrumental activity (or 
                        activities) of daily living related to 
                        cognitive or mental impairment as the Secretary 
                        specifies, or
                            (iii) displays symptoms of one or more 
                        serious behavioral problems (that is on a list 
                        of such problems specified by the Secretary) 
                        which create a need for supervision to prevent 
                        harm to self or others; and
                    (C) whose is expected to meet the requirements of 
                subparagraphs (A) and (B) over a period of at least 100 
                days.
            (3) Individuals with severe or profound mental 
        retardation.--An individual of any age who has severe or 
        profound mental retardation (as determined according to a 
        protocol specified by the Secretary).
            (4) Severely disabled children.--An individual under 6 
        years of age who--
                    (A) has a severe disability or chronic medical 
                condition,
                    (B) but for receiving personal assistance services 
                or any of the services described in section 404(d)(1), 
                would require institutionalization in a hospital, 
                nursing facility, or intermediate care facility for the 
                mentally retarded, and
                    (C) is expected to have such disability or 
                condition and require such services over a period of at 
                least 100 days.
    (b) Determination.--
            (1) In general.--The determination of whether an individual 
        is an individual with disabilities shall be made, by persons or 
        entities specified under the State plan, using a uniform 
        protocol consisting of an initial screening and assessment 
        specified by the Secretary. A State may collect additional 
        information, at the time of obtaining information to make such 
        determination, in order to provide for the assessment and plan 
        described in section 404(b) or for other purposes. The State 
        shall establish a fair hearing process for appeals of such 
        determinations.
            (2) Periodic reassessment.--The determination that an 
        individual is an individual with disabilities shall be 
        considered to be effective under the State plan for a period of 
        not more than 12 months (or for such longer period in such 
        cases as a significant change in an individual's condition that 
        may affect such determination is unlikely). A reassessment 
        shall be made if there is a significant change in an 
        individual's condition that may affect such determination.
    (c) Activity of Daily Living Defined.--In this title, the term 
``activity of daily living'' means any of the following: eating, 
toileting, dressing, bathing, and transferring.

SEC. 404. HOME AND COMMUNITY-BASED SERVICES COVERED UNDER STATE PLAN.

    (a) Specification.--
            (1) In general.--Subject to the succeeding provisions of 
        this section, the State plan under this title shall specify--
                    (A) the home and community-based services available 
                under the plan to individuals with disabilities (or to 
                such categories of such individuals), and
                    (B) any limits with respect to such services.
            (2) Flexibility in meeting individual needs.--The services 
        shall be specified in a manner that permits sufficient 
        flexibility for providers to meet the needs of individuals with 
        disabilities in a cost effective manner. Subject to subsection 
        (e)(1)(B), such services may be delivered in an individual's 
        home, a range of community residential arrangements, or outside 
        the home.
    (b) Requirement for Needs Assessment and Plan of Care.--
            (1) In general.--The State plan shall provide for home and 
        community-based services to an individual with disabilities 
        only if--
                    (A) a comprehensive assessment of the individual's 
                need for home and community-based services (regardless 
                of whether all needed services are available under the 
                plan) has been made,
                    (B) an individualized plan of care based on such 
                assessment is developed, and
                    (C) such services are provided consistent with such 
                plan of care.
            (2) Involvement of individuals.--The individualized plan of 
        care under paragraph (1)(B) for an individual with disabilities 
        shall--
                    (A) be developed by qualified individuals 
                (specified under the State plan),
                    (B) be developed and implemented in close 
                consultation with the individual and the individual's 
                family,
                    (C) be approved by the individual (or the 
                individual's representative), and
                    (D) be reviewed and updated not less often than 
                every 6 months.
            (3) Plan of care.--The plan of care under paragraph (1)(B) 
        shall--
                    (A) specify which services specified under the 
                individual plan will be provided under the State plan 
                under this title,
                    (B) identify (to the extent possible) how the 
                individual will be provided any services specified 
                under the plan of care and not provided under the State 
                plan, and
                    (C) specify how the provision of services to the 
                individual under the plan will be coordinated with the 
                provision of other health care services to the 
                individual.
        The State shall make reasonable efforts to identify and arrange 
        for services described in subparagraph (B). Nothing in this 
        subsection shall be construed as requiring a State (under the 
        State plan or otherwise) to provide all the services specified 
        in such a plan.
    (c) Mandatory Coverage of Personal Assistance Services.--The State 
plan shall include, in the array of services made available to each 
category of individuals with disabilities, both agency-administered and 
consumer-directed personal assistance services (as defined in 
subsection (g)).
    (d) Additional Services.--
            (1) Types of services.--Subject to subsection (e), services 
        available under a State plan under this title shall include any 
        (or all) of the following:
                    (A) Case management.
                    (B) Homemaker and chore assistance.
                    (C) Home modifications.
                    (D) Respite services.
                    (E) Assistive devices.
                    (F) Adult day services.
                    (G) Habilitation and rehabilitation.
                    (H) Supported employment.
                    (I) Home health services.
                    (J) Any other care or assistive services (approved 
                by the Secretary) that the State determines will help 
                individuals with disabilities to remain in their homes 
                and communities.
            (2) Criteria for selection of services.--The State plan 
        shall specify--
                    (A) the methods and standards used to select the 
                types, and the amount, duration, and scope, of services 
                to be covered under the plan and to be available to 
                each category of individuals with disabilities, and
                    (B) how the types, and the amount, duration, and 
                scope, of services specified meet the needs of 
                individuals within each of the 4 categories of 
                individuals with disabilities.
    (e) Exclusions and Limitations.--
            (1) In general.--A State plan may not provide for coverage 
        of--
                    (A) room and board,
                    (B) services furnished in a hospital, nursing 
                facility, intermediate care facility for the mentally 
                retarded, or other institutional setting specified by 
                the Secretary, or
                    (C) items and services to the extent coverage is 
                provided for the individual under a health plan or the 
                medicare program.
            (2) Taking into account informal care.--A State plan may 
        take into account, in determining the amount and array of 
        services made available to covered individuals with disability, 
        the availability of informal care.
    (f) Payment for Services.--A State plan may provide for the use 
of--
            (1) vouchers,
            (2) cash payments directly to individuals with 
        disabilities,
            (3) capitation payments to health plans, and
            (4) payment to providers,
to pay for covered services.
    (g) Personal Assistance Services.--
            (1) In general.--In this section, the term ``personal 
        assistance services'' means those services specified under the 
        State plan as personal assistance services and shall include at 
        least hands-on and standby assistance, supervision, and cueing 
        with activities of daily living, whether agency-administered or 
        consumer-directed (as defined in paragraph (2)).
            (2) Consumer-directed; agency-administered.--In this title:
                    (A) The term ``consumer-directed'' means, with 
                reference to personal assistance services or the 
                provider of such services, services that are provided 
                by an individual who is selected and managed (and, at 
                the individual's option, trained) by the individual 
                receiving the services.
                    (B) The term ``agency-administered'' means, with 
                respect to such services, services that are not 
                consumer-directed.

SEC. 405. COST SHARING.

    (a) No or Nominal Cost Sharing for Poorest.--The State plan may not 
impose any cost sharing (other than nominal cost sharing) for 
individuals with income (as determined under subsection (c)) less than 
150 percent of the official poverty line (referred to in section 
402(a)(1)(E)) applicable to a family of the size involved.
    (b) Sliding Scale for Remainder.--The State plan shall impose cost 
sharing in the form of coinsurance (based on the amount paid under the 
State plan for a service)--
            (1) at a rate of 10 percent for individuals with 
        disabilities with income not less than 150 percent, and less 
        than 200 percent, of such official poverty line (as so 
        applied); and
            (2) at a rate of 20 percent for such individuals with 
        income not less than 200 percent, and less than 250 percent, of 
        such official poverty line (as so applied).
    (c) Determination of Income for Purposes of Cost Sharing.--The 
State plan shall specify the process to be used to determine the income 
of an individual with disabilities for purposes of this section. Such 
process shall be consistent with standards specified by the Secretary.

SEC. 406. QUALITY ASSURANCE AND SAFEGUARDS.

    (a) Quality Assurance.--The State plan shall specify how the State 
will ensure and monitor the quality of services, including--
            (1) safeguarding the health and safety of individuals with 
        disabilities,
            (2) the minimum standards for agency providers and how such 
        standards will be enforced,
            (3) the minimum competency requirements for agency provider 
        employees who provide direct services under this title and how 
        the competency of such employees will be enforced,
            (4) obtaining meaningful consumer input, including consumer 
        surveys that measure the extent to which participants receive 
        the services described in the plan of care and participant 
        satisfaction with such services,
            (5) participation in quality assurance activities, and
            (6) specifying the role of the long-term care ombudsman 
        (under the Older Americans Act of 1965) and the Protection and 
        Advocacy Agency (under the Developmental Disabilities 
        Assistance and Bill of Rights Act) in assuring quality of 
        services and protecting the rights of individuals with 
        disabilities.
    (b) Safeguards.--
            (1) Confidentiality.--The State plan shall provide 
        safeguards which restrict the use or disclosure of information 
        concerning applicants and beneficiaries to purposes directly 
        connected with the administration of the plan.
            (2) Safeguards against abuse.--The State plans shall 
        provide safeguards against physical, emotional, or financial 
        abuse or exploitation (specifically including appropriate 
        safeguards in cases where payment for program benefits is made 
        by cash payments or vouchers given directly to individuals with 
        disabilities).

SEC. 407. ADVISORY GROUPS.

    (a) Federal Advisory Group.--
            (1) Establishment.--The Secretary shall establish an 
        advisory group, to advise the Secretary and States on all 
        aspects of the program under this title.
            (2) Composition.--The group shall be composed of 
        individuals with disabilities and their representatives, 
        providers, Federal and State officials, and local community 
        implementing agencies. A majority of its members shall be 
        individuals with disabilities and their representatives.
    (b) State Advisory Groups.--
            (1) In general.--Each State plan shall provide for the 
        establishment and maintenance of an advisory group to advise 
        the State on all aspects of the State plan under this title.
            (2) Composition.--Members of each advisory group shall be 
        appointed by the Governor (or other chief executive officer of 
        the State) and shall include individuals with disabilities and 
        their representatives, providers, State officials, and local 
        community implementing agencies. A majority of its members 
        shall be individuals with disabilities and their 
        representatives.
            (3) Selection of members.--Each State shall establish a 
        process whereby all residents of the State, including 
        individuals with disabilities and their representatives, shall 
        be given the opportunity to nominate members to the advisory 
        group.
            (4) Particular concerns.--Each advisory group shall--
                    (A) before the State plan is developed, advise the 
                State on guiding principles and values, policy 
                directions, and specific components of the plan,
                    (B) meet regularly with State officials involved in 
                developing the plan, during the development phase, to 
                review and comment on all aspects of the plan,
                    (C) participate in the public hearings to help 
                assure that public comments are addressed to the extent 
                practicable,
                    (D) document any differences between the group's 
                recommendations and the plan,
                    (E) document specifically the degree to which the 
                plan is consumer-directed, and
                    (F) meet regularly with officials of the designated 
                State agency (or agencies) to provide advice on all 
                aspects of implementation and evaluation of the plan.

SEC. 408. PAYMENTS TO STATES.

    (a) In General.--Subject to section 402(a)(9)(B) (relating to 
limitation on payment for administrative costs), the Secretary, in 
accordance with the Cash Management Improvement Act, shall authorize 
payment to each State with a plan approved under this title, for each 
quarter (beginning on or after January 1, 1996), from its allotment 
under section 409(b), an amount equal to--
            (1) the Federal matching percentage (as defined in 
        subsection (b)) of amount demonstrated by State claims to have 
        been expended during the quarter for home and community-based 
        services under the plan for individuals with disabilities; plus
            (2) an amount equal to 90 percent of amount expended during 
        the quarter under the plan for activities (including 
        preliminary screening) relating to determination of eligibility 
        and performance of needs assessment; plus
            (3) an amount equal to 90 percent (or, beginning with 
        quarters in fiscal year 2003, 75 percent) of the amount 
        expended during the quarter for the design, development, and 
        installation of mechanical claims processing systems and for 
        information retrieval; plus
            (4) an amount equal to 50 percent of the remainder of the 
        amounts expended during the quarter as found necessary by the 
        Secretary for the proper and efficient administration of the 
        State plan.
    (b) Federal Matching Percentage.--
            (1) In general.--In subsection (a), the term ``Federal 
        matching percentage'' means, with respect to a State, the 
        reference percentage specified in paragraph (2) increased by 20 
        percentage points, except that the Federal matching percentage 
        shall in no case be less than 70 percent or more than 88 
        percent.
            (2) Reference percentage.--
                    (A) In general.--The reference percentage specified 
                in this paragraph is 100 percent less the State 
                percentage specified in subparagraph (B), except that--
                            (i) the percentage under this paragraph 
                        shall in no case be less than 50 percent or 
                        more than 83 percent, and
                            (ii) the percentage for Puerto Rico, the 
                        Virgin Islands, Guam, the Northern Mariana 
                        Islands, and American Samoa shall be 50 
                        percent.
                    (B) State percentage.--The State percentage 
                specified in this subparagraph is that percentage which 
                bears the same ratio to 45 percent as the square of the 
                per capita income of such State bears to the square of 
                the per capita income of the continental United States 
                (including Alaska) and Hawaii.
    (c) Payments on Estimates With Retrospective Adjustments.--The 
method of computing and making payments under this section shall be as 
follows:
            (1) The Secretary shall, prior to the beginning of each 
        quarter, estimate the amount to be paid to the State under 
        subsection (a) for such quarter, based on a report filed by the 
        State containing its estimate of the total sum to be expended 
        in such quarter, and such other information as the Secretary 
        may find necessary.
            (2) From the allotment available therefore, the Secretary 
        shall provide for payment of the amount so estimated, reduced 
        or increased, as the case may be, by any sum (not previously 
        adjusted under this section) by which the Secretary finds that 
        the estimate of the amount to be paid the State for any prior 
        period under this section was greater or less than the amount 
        which should have been paid.
    (d) Application of Rules Regarding Limitations on Provider-Related 
Donations and Health Care-Related Taxes.--The provisions of section 
1903(w) of the Social Security Act shall apply to payments to States 
under this section in the same manner as they apply to payments to 
States under section 1903(a) of such Act .

SEC. 409. TOTAL FEDERAL BUDGET; ALLOTMENTS TO STATES.

    (a) Total Federal Budget.--
            (1) Fiscal year 1996.--For purposes of this title, the 
        total Federal budget for State plans under this title for 
        fiscal year 1996 is $11.0 billion.
            (2) Subsequent years.--For purposes of this title, the 
        total Federal budget for State plans under this title for each 
        fiscal year after fiscal year 1996 is the total Federal budget 
        under this subsection for the preceding fiscal year increased 
        by the percentage increase (as estimated by the Secretary) in 
        Federal expenditures under title XVIII of the Social Security 
        Act from the previous fiscal year to the fiscal year involved.
            (3) Constructions.--
                    (A) No duplicate payment.--No payment may be made 
                to a State under this section for any services to the 
                extent that the State received payment for such 
                services under section 1903(a) of the Social Security 
                Act.
                    (B) Construction.--Nothing in this subsection shall 
                be construed as requiring States to determine 
                eligibility for medical assistance under the State 
                medicaid plan on behalf of individuals receiving 
                assistance under this title.
    (b) Allotments to States.--
            (1) In general.--The Secretary shall allot to each State 
        for each fiscal year an amount that bears the same ratio to the 
        total Federal budget for the fiscal year (specified under 
        paragraph (1) or (2) of subsection (a)) as the State allotment 
        factor (under paragraph (2) for the State for the fiscal year) 
        bears to the sum of such factors for all States for that fiscal 
        year.
            (2) State allotment factor.--
                    (A) In general.--For each State for each fiscal 
                year, the Secretary shall compute a State allotment 
                factor equal to the sum of--
                            (i) the base allotment factor (specified in 
                        subparagraph (B)), and
                            (ii) the low income allotment factor 
                        (specified in subparagraph (C)),
                for the State for the fiscal year.
                    (B) Base allotment factor.--The base allotment 
                factor, specified in this subparagraph, for a State for 
                a fiscal year is equal to the product of the following:
                            (i) Number of individuals with 
                        disabilities.--The number of individuals with 
                        disabilities in the State (determined under 
                        paragraph (3)) for the fiscal year.
                            (ii) 80 percent of the national per capita 
                        budget.--80 percent of the national average per 
                        capita budget amount (determined under 
                        paragraph (4)) for the fiscal year.
                            (iii) Wage adjustment factor.--The wage 
                        adjustment factor (determined under paragraph 
                        (5)) for the State for the fiscal year.
                            (iv) Federal matching rate.--The Federal 
                        matching rate (determined under section 408(b)) 
                        for the fiscal year.
                    (C) Low income allotment factor.--The low income 
                allotment factor, specified in this subparagraph, for a 
                State for a fiscal year is equal to the product of the 
                following:
                            (i) Number of individuals with 
                        disabilities.--The number of individuals with 
                        disabilities in the State (determined under 
                        paragraph (3)) for the fiscal year.
                            (ii) 10 percent of the national per capita 
                        budget.--10 percent of the national average per 
                        capita budget amount (determined under 
                        paragraph (4)) for the fiscal year.
                            (iii) Wage adjustment factor.--The wage 
                        adjustment factor (determined under paragraph 
                        (5)) for the State for the fiscal year.
                            (iv) Federal matching rate.--The Federal 
                        matching rate (determined under section 408(b)) 
                        for the fiscal year.
                            (v) Low income index.--The low income index 
                        (determined under paragraph (6)) for the State 
                        for the preceding fiscal year.
            (3) Number of individuals with disabilities.--The number of 
        individuals with disabilities in a State for a fiscal year 
        shall be determined as follows:
                    (A) Base.--The Secretary shall determine the number 
                of individuals in the State by age, sex, and income 
                category, based on the 1990 decennial census, adjusted 
                (as appropriate) by the March 1994 current population 
                survey.
                    (B) Disability prevalence level by population 
                category.--The Secretary shall determine, for each such 
                age, sex, and income category, the national average 
                proportion of the population of such category that 
                represents individuals with disabilities. The Secretary 
                may conduct periodic surveys in order to determine such 
                proportions.
                    (C) Base disabled population in a state.--The 
                number of individuals with disabilities in a State in 
                1994 is equal to the sum of the products, for such age, 
                sex, and income category, of--
                            (i) the population of individuals in the 
                        State in the category (determined under 
                        subparagraph (A)), and
                            (ii) the national average proportion for 
                        such category (determined under subparagraph 
                        (B)).
                    (D) Update.--The Secretary shall determine the 
                number of individuals with disabilities in a State in a 
                fiscal year equal to the number determined under 
                subparagraph (C) for the State increased (or decreased) 
                by the percentage increase (or decrease) in the 
                disabled population of the State as determined under 
                the current population survey from 1994 to the year 
                before the fiscal year involved.
            (4) National per capita budget amount.--The national 
        average per capita budget amount, for a fiscal year, is--
                    (A) the total Federal budget specified under 
                subsection (a) for the fiscal year; divided by
                    (B) the sum, for the fiscal year, of the numbers of 
                individuals with disabilities (determined under 
                paragraph (3)) for all the States for the fiscal year.
            (5) Wage adjustment factor.--The wage adjustment factor, 
        for a State for a fiscal year, is equal to the ratio of--
                    (A) the average hourly wages for service workers 
                (other than household or protective services) in the 
                State, to
                    (B) the national average hourly wages for service 
                workers (other than household or protective services).
        The hourly wages shall be determined under this paragraph based 
        on data from the most recent decennial census for which such 
        data are available.
            (6) Low income index.--The low income index for each State 
        for a fiscal year is the ratio, determined for the preceding 
        fiscal year, of--
                    (A) the percentage of the State's population that 
                has income below 150 percent of the poverty level, to
                    (B) the percentage of the population of the United 
                States that has income below 150 percent of the poverty 
                level.
        Such percentages shall be based on data from the most recent 
        decennial census for which such data are available, adjusted by 
        data from the most recent current population survey as 
        determined appropriate by the Secretary.
    (c) State Entitlement.--This title constitutes budget authority in 
advance of appropriations Acts, and represents the obligation of the 
Federal Government to provide for the payment to States of amounts 
described in subsection (a).

                TITLE V--REBASING MEDICARE PAYMENT RATES

                  Subtitle A--Rehabilitation Hospitals

SEC. 501. DEFINITION OF REHABILITATION HOSPITALS.

    (a) In General.--Clause (ii) of section 1886(d)(1)(B) of the Social 
Security Act (42 U.S.C. 1395ww(d)(1)(B)) is amended to read as follows:
                            ``(ii) a rehabilitation hospital (as 
                        defined by the Secretary) and including a 
                        hospital that provides rehabilitation services 
                        to patients at least 75 percent of whom in any 
                        cost reporting period are determined to require 
                        rehabilitation as a result of any of the 
                        following: stroke, spinal cord injury, 
                        congenital deformity, amputation, major 
                        multiple trauma, fracture of femur, brain 
                        injury, polyarthritis (including rheumatoid 
                        arthritis), neurological disorders, burns, 
                        chronic pain, cardiac conditions, pulmonary 
                        conditions, or oncology,''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
take effect October 1, 1994.

SEC. 502. PAYMENT RULES.

    (a) In General.--Section 1886(b)(3) of the Social Security Act (42 
U.S.C. 1395ww(b)(3)) is amended--
            (1) in subparagraphs (A) and (B)(ii), by striking ``and 
        (E)'' and inserting ``(E), and (F)'', and
            (2) by adding at the end the following new subparagraph:
    ``(F) Notwithstanding any other provision of this title, for cost 
reporting periods beginning on and after October 1, 1994, in the case 
of a hospital described in clause (ii) or (iv) of subsection (d)(1)(B) 
and not described in subparagraph (G)(ii), and a rehabilitation unit as 
described in such subsection, the term `target amount' means--
            ``(i) in the case of a hospital or distinct part unit that 
        is subject to a target amount in the first such period, the 
        allowable operating costs of inpatient hospital services (as 
        defined in subsection (a)(4) for its cost reporting period 
        ending on or before December 31, 1991 (in this subparagraph 
        referred to as `the new base year'), increased by the 
        applicable percentage increases prescribed by subsection 
        (b)(3)(B), except that (I) in no case shall such target amount 
        for any hospital or distinct part unit be less than 70 percent 
        of the national averages for all such hospitals and distinct 
        part units (as determined by the Secretary) and (II) in no case 
        shall payment per discharge to a hospital in a cost reporting 
        period beginning on or after October 1, 1994, be less than the 
        amount paid per discharge in the new base year (including any 
        payments pursuant to paragraph (1)(A)) multiplied by the 
        applicable percentage increase prescribed by subparagraph (B); 
        and
            ``(ii) in the case of a hospital or distinct part unit that 
        is not subject to a target amount in the first such period, the 
        allowable operating costs of inpatient hospital services (as 
        defined in subsection (a)(4)) in the 12-month cost reporting 
        period immediately preceding the first period subject to a 
        target amount shall be increased by the applicable percentage 
        increase prescribed by subparagraph (B), except that in no case 
        shall such target amount for any hospital or unit be not less 
        than 70 percent of the national average for all such hospitals 
        or distinct part units (as determined by the Secretary) of the 
        type of hospital or distinct part unit for which it was granted 
        approval to participate under this title (as determined by the 
        Secretary).''.
    (b) Effective Date.--The amendments made by subsection (a) shall 
apply to cost reporting periods beginning on or after October 1, 1994.

SEC. 503. PAYMENT FOR OPERATING COSTS OF REHABILITATION HOSPITALS.

    (a) In General.--Section 1886(d) of the Social Security Act (42 
U.S.C. 1395ww(d)) is amended by adding at the end the following new 
paragraph:
    ``(11)(A) Notwithstanding section 1814(b), but subject to the 
provision of section 1813, the amount of the payment with respect to 
the operating costs of inpatient hospital services of a rehabilitation 
hospital or a distinct part rehabilitation unit (in this paragraph 
referred to as a `rehabilitation center'), as defined in subparagraph 
(B), in cost reporting periods beginning on and after October 1, 1996, 
shall be determined in accordance with this paragraph.
    ``(B)(i) The Secretary--
            ``(I) shall establish a classification of inpatient 
        hospital discharges of rehabilitation centers by functional-
        related groups (in this paragraph referred to as `FRGs') to 
        include impairment, age and functional capability and such 
        other factors as the Secretary deems appropriate; and
            ``(II) shall establish a methodology for classifying 
        specific discharges from a rehabilitation center within these 
        groups.
    ``(ii) For each such functional-related group the Secretary shall 
assign an appropriate weighting factor which reflects the relative 
hospital resources used with respect to discharges classified within 
that group compared to discharges classified within other groups.
    ``(iii) The Secretary shall, from time to time, adjust the 
classifications and weighting factors established under this clause as 
appropriate to reflect changes in treatment patterns, technology and 
other factors which may change the relative use of resources, except 
that any such adjustments shall be made in a manner that assures that 
the aggregate payments under this paragraph for discharges in the 
fiscal year are not greater or less than those that would have been 
made for discharges in the year without such adjustment.
    ``(C) The Secretary shall determine an FRG payment rate for each 
rehabilitation center discharge for which such rehabilitation center is 
entitled to receive payment under this title. Such payment rate for 
cost reporting periods beginning on and after October 1, 1996, shall be 
the average payment per discharge under this title for inpatient 
operating costs of rehabilitation centers in the fiscal year ending 
September 30, 1996, as estimated by the Secretary, adjusted by--
            ``(i) updating such per-discharge amount by the applicable 
        percentage increase provided by subsection (b)(3)(B)(iv)(IV),
            ``(ii) variations among hospitals by area in the average 
        hospital wage index (as described in subparagraph (H)),
            ``(iii) the FRG weighting factor (as defined in 
        subparagraph (B)), and
            ``(iv) for any hospital or distinct part unit that serves a 
        disproportionate number of low-income patients (as defined in 
        paragraph (5)(F)(v), a factor determined in accordance with 
        subparagraph (F).
    ``(D) The Secretary shall provide for an additional payment to a 
rehabilitation center for any discharges in a functional-related group, 
the length of stay of which exceeded the mean length of stay for 
discharges within that group by a fixed number of days or exceeds such 
mean length of stay by some fixed number of deviations, whichever is 
the fewer number of days.
    ``(E) For cases which are not included in subparagraph (D), a 
rehabilitation center may request additional payments in any case where 
charges, adjusted to cost, exceed a fixed multiple of the applicable 
FRG prospective payment rate, or exceed such other fixed dollar amount, 
whichever is greater, or exceed the FRG prospective payment rate plus a 
fixed dollar amount determined by the Secretary.
    ``(F) The Secretary may provide for such adjustments to the payment 
amounts under this paragraph as the Secretary deems appropriate to take 
into account the unique circumstances of rehabilitation facilities 
located in Alaska and Hawaii.
    ``(G) The Secretary shall provide for publication in the Federal 
Register, on or before September 1 before each fiscal year (beginning 
with fiscal year 1996), of the FRG weighting factors for such fiscal 
year and a description of the methodology and data used in computing 
the adjusted FRG prospective payment rates under this paragraph.
    ``(H) The Secretary shall adjust the proportion (as estimated by 
the Secretary from time-to-time) of rehabilitation centers' costs which 
are attributable to wages and wage-related costs, of the FRG 
prospective payment rates computed under subparagraph (C) for area 
differences in hospital wage levels by a factor (established by the 
Secretary) reflecting the relative hospital wage level in the 
geographic area of the rehabilitation center compared to the national 
average hospital wage level. Not later than October 1, 1997 (and at 
least every 12 months thereafter), the Secretary shall update the 
factor under the preceding sentence on the basis of a survey conducted 
by the Secretary (and updated as appropriate) of the wages and wage-
related costs incurred in furnishing hospital services. Any adjustments 
or updates made under this subparagraph for a fiscal year shall be made 
in a manner that assures that the aggregated payments under this 
paragraph in the fiscal year are not greater or less than those that 
would have been made in the year without such adjustment.
    ``(I) The determinations required by this paragraph shall be made 
in a manner that assures that the aggregated payments under this 
paragraph in the fiscal year beginning October 1, 1996, and subsequent 
fiscal years are not greater or less than those that would have been 
made in any such year had this paragraph not been enacted.
    ``(J) The Secretary also shall provide for an additional payment 
amount for rehabilitation centers with indirect costs of medical 
education in an amount computed in the same manner as is such 
additional payment computed for subsection (d) hospitals under 
paragraph (5)(B).''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to cost reporting periods beginning on or after October 1, 1996.

                    Subtitle B--Long-Term Hospitals

SEC. 511. PAYMENT RULES.

    (a) Assignment of New Base Year for Certified Long-Stay Hospitals 
Serving a Significant Proportion of Low-Income Patients.--Section 
1886(b)(3) of the Social Security Act (42 U.S.C. 1395ww(b)(3)), as 
amended by section 502(a), is amended--
            (1) in subparagraphs (A) and (B)(ii), by striking ``and 
        (F)'' and inserting ``(F), and (G)'', and
            (2) by adding at the end the following new subparagraph:
    ``(G)(i) In the case of a hospital described in clause (ii), the 
term `target amount' means--
            ``(I) with respect to the first 12-month cost reporting 
        period in which this subparagraph is applied to the hospital, 
        the allowable operating costs of inpatient hospital services 
        (as defined in subsection (a)(4)) recognized under this title 
        for the hospital's fiscal year 1991 cost reporting period 
        increased (in a compound manner) by the sum of the applicable 
        percentage increases applied to such hospital under this 
        paragraph for cost reporting periods after the hospital's 
        fiscal year 1991 cost reporting period and up to and including 
        such first 12-month cost reporting period; or
            ``(II) with respect to a later cost reporting period, 
        subject to clause (iii), the target amount for the preceding 
        12-month cost reporting period, increased by the applicable 
        percentage increase under subparagraph (B)(ii) for the cost 
        reporting period.
    ``(ii) A hospital described in this clause is a hospital--
            ``(I) which is described in clause (iv) of subsection 
        (d)(1)(B);
            ``(II) which has not received the additional payment amount 
        described in paragraph (1)(A) for at least 2 consecutive years; 
        and
            ``(III) for which the sum of the amounts described in 
        subclauses (I) and (II) of subsection (d)(5)(F)(vi) in the 
        period described in clause (i) exceeds 25 percent.
    ``(iii) Notwithstanding clause (i)(II), if, after July 1, 1995, a 
hospital is still described in clause (ii), there shall be substituted 
for the base cost reporting period described in clause (i)(I) a 
subsequent reporting period chosen by the Secretary which shall be one 
of the fiscal years described in clause (ii)(II) of the hospital, but 
only if such substitution results in an increase in the target amount 
for the hospital.
    ``(iv) In making available to the hospital the payments described 
in section 1815(e)(2), the Secretary shall take into account the 
enactment of this subparagraph, and, effective as of the date of the 
enactment of this subparagraph, shall increase such payments as if the 
target amount of the hospital had been established pursuant to this 
subparagraph as of such date.''.
    (b) Effective Date.--
            (1) In general.--The amendments made by subsection (a) 
        shall be effective with respect to cost reporting periods 
        beginning on or after July 1, 1993.
            (2) Special rule for hospitals with exception or adjustment 
        requests pending.--In the case of a hospital described in 
        clause (iv) or (v) of section 1886(d)(1)(B) of the Social 
        Security Act and that has filed a request for an exception or 
        adjustment pursuant to section 1886(b)(4) of such Act on or 
        after October 1, 1990, and before June 1, 1993, the provisions 
        of this section shall, at the option of the hospital, apply to 
        the hospital for cost reporting periods during which and after 
        such request was filed.

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