70246 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

1The President’s memorandum specifically

endorsed the reports of the President’s Advisory

Commission on Consumer Protection and Quality

in the Health Care Industry (the Commission),

which set out specific rights of health care

consumers that should be protected, including the

right ‘‘to a fair and efficient process for resolving

differences with their health plans, health care

providers, and the institutions that service them,

including a rigorous system of internal review and

an independent system of external review.’’

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

29 CFR Part 2560

RIN 1210–AA61

Employee Retirement Income Security

Act of 1974; Rules and Regulations for

Administration and Enforcement;

Claims Procedure

AGENCY: Pension and Welfare Benefits

Administration, Labor.

ACTION: Final regulation.

SUMMARY: This document contains a

final regulation revising the minimum

requirements for benefit claims

procedures of employee benefit plans

covered by Title I of the Employee

Retirement Income Security Act of 1974

(ERISA or the Act). The regulation

establishes new standards for the

processing of claims under group health

plans and plans providing disability

benefits and further clarifies existing

standards for all other employee benefit

plans. The new standards are intended

to ensure more timely benefit

determinations, to improve access to

information on which a benefit

determination is made, and to assure

that participants and beneficiaries will

be afforded a full and fair review of

denied claims. When effective, the

regulation will affect participants and

beneficiaries of employee benefit plans,

employers who sponsor employee

benefit plans, plan fiduciaries, and

others who assist in the provision of

plan benefits, such as third-party

benefits administrators and health

service providers or health maintenance

organizations that provide benefits to

participants and beneficiaries of

employee benefit plans.

DATES: Effective Date: January 20, 2001.

Applicability Date: This regulation

applies to all claims filed on or after

January 1, 2002.

FOR FURTHER INFORMATION CONTACT:

Susan M. Halliday or Susan G. Lahne,

Office of Regulations and

Interpretations, Pension and Welfare

Benefits Administration, Department of

Labor, 200 Constitution Avenue NW.,

Washington, DC 20210, telephone (202)

219–7461. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Background

On September 9, 1998, the

Department of Labor (the Department)

published a notice in the Federal

Register (63 FR 48390) containing a

proposed regulation, designated as

proposed § 2560.503–1 of Title 29 (the

proposal), intended to substantially

revise the minimum requirements for

benefit claims procedures of all

employee benefit plans covered under

Title I of ERISA. The reforms contained

in the proposal, as explained in the

preamble that accompanied it, were

based in part on comments the

Department had previously received in

response to a Request for Information

(the RFI) published in the Federal

Register (62 FR 47262) on September 8,

1997. In addition, the proposal was

developed to respond to a memorandum

from the President, dated February 20,

1998, directing the Secretary of Labor to

‘‘propose regulations to strengthen the

internal appeals process for all

Employee Retirement Income Security

Act (ERISA) health plans to ensure that

decisions regarding urgent care are

resolved within not more than 72 hours

and generally resolved within 15 days

for non-urgent care’’ and ‘‘to ensure the

information [group health plans]

provide to plan participants is

consistent with the Patients’ Bill of

Rights.’’ 1

In response to the RFI comments, the

President’s directives, and the

recommendations of the Commission,

the Department developed a proposal to

substantially reform the standards for

the resolution of benefit claims under

all employee benefit plans covered by

the Act. The revised standards derive

from section 503 of ERISA, which

requires every employee benefit plan, in

accordance with regulations of the

Department, to ‘‘provide adequate

notice in writing to every participant or

beneficiary whose claim for benefits

under the plan has been denied, setting

forth the specific reasons for such

denial, written in a manner calculated

to be understood by the participant’’

and to ‘‘afford a reasonable opportunity

to any participant whose claim for

benefits has been denied for a full and

fair review by the appropriate named

fiduciary of the decision denying the

claim.’’ While focusing primarily on

group health plans and plans providing

disability benefits, the proposal

contained provisions altering the benefit

claims procedures for all employee

benefit plans. Among other reforms, the

proposal imposed new notice

requirements with respect to incomplete

or incorrectly filed claims, altered the

standards for appeals of denied claims,

and increased or made more specific the

disclosure obligations of plans generally

with respect to procedural rights and

denials of claims. With respect to group

health plans and plans providing

disability benefits specifically, the

proposal shortened the time periods for

making initial benefit claims decisions

and decisions on appeal of denied

claims and imposed additional

obligations with respect to group health

claims that involved urgent care.

The Department received more than

700 letters of comment in response to

the proposal. A public hearing on the

proposal was held in Washington, DC.,

on February 17, 18, and 19, 1999. More

than 60 speakers, representing a fair

cross-section of the interested public,

including benefit plan sponsors, service

providers, health care professionals,

benefit claimants, health care

organizations, and insurance

companies, presented testimony and

were questioned by a panel of

Departmental officials.

After due consideration of the issues

raised by the written comments and oral

testimony, the Department has modified

the scope of the proposal, refined its

requirements as to minimum procedural

standards for the resolution of benefit

claims disputes, and is now publishing

in this notice, in final form, regulation

§ 2560.503–1, establishing new

minimum procedural requirements for

benefit claims under employee benefit

plans. In the course of developing this

final regulation, the Department took

serious notice of the issues raised by

commenters on behalf of the employers

that sponsor employee benefit plans and

the institutions that aid in their

administration or provide the promised

benefits. In making changes in the

regulation that respond to those issues,

the Department has attempted to

reconcile the need for procedural

protections with the purely voluntary

nature of the system through which

these vital benefits are delivered. The

Department believes, however, that the

procedural reforms contained in this

regulation are necessary to guarantee

important procedural rights to benefit

claimants.

While the Department has made a

number of significant changes to the

proposal, in particular by limiting the

scope of its reforms principally to group

health plans and plans providing

disability benefits and by moderating

the severity of the decisionmaking time

frames applicable to such plans, the

regulation preserves the core reforms of

the proposal. In publishing this

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70247

2 It should be noted that the regulation as it

applies to such plans is not identical to the 1977

regulation. In some respects, the language of the

regulation has been updated to reflect current

practices and to incorporate the Department’s

longstanding interpretations of the 1977 regulation.

In addition, as noted specifically below, some

provisions of the 1977 regulation have been

clarified in this regulation, and such clarifications

apply uniformly to all employee benefit plans

covered under the Act.

3The proposal required urgent care claims

decisions to be made during a stringent maximum

72-hour period at both the initial and review stages.

All other group health claims were required under

the proposal to be resolved within not more than

15 days, with respect to both initial and review

decisions. The proposal did not provide for any

extensions of these periods by plans in any

circumstances, although it did not prohibit

consensual agreements between claimants and

plans on the timing of decisions.

4Where a single plan provides more than one

type of benefit, it is the Department’s intention that

the nature of the benefit should determine which

procedural standards apply to a specific claim,

rather than the manner in which the plan itself is

characterized.

5The proposal also eliminated, for group health

plans and plans providing disability benefits, the

time extension on review available, under the 1977

regulation, to plans administered by boards of

directors or committees that meet at least quarterly.

6The rules contained in subparagraph (f)(2)(i)

regarding treatment of claims involving urgent care

are, therefore, largely unchanged from those

contained in the proposal. A few commenters

suggested that the definition of ‘‘claims involving

urgent care’’ be expanded to include the concept of

‘‘maintaining’’ maximum function, as well as

regaining maximum function. The Department has

not made this change, but it is the view of the

Department that the definition as proposed, and as

adopted in this regulation, addresses the concern

for protecting ‘‘maximum function’’ by providing

Continued

regulation, the Department believes it

has responded to the needs of

employers and employees and has

successfully implemented, to the extent

of its regulatory authority under the Act,

the protections recommended by the

President’s Commission. This action,

the Department believes, will ensure

that benefit claimants, at least in ERISAcovered plans, are provided faster,

fuller, and fairer decisions on their

benefit claims.

The following summarizes the most

important modifications that the

Department adopted in developing this

regulation. It further describes generally

the comments that gave rise to those

changes and explains the Department’s

reasons for those modifications.

Scope

The proposal contained a number of

provisions that would have established

new, substantially uniform procedural

requirements for all employee benefit

plans, including improved notice and

disclosure protections and strengthened

standards of conduct on review. A

substantial number of commenters

expressed concern about the scope of

the proposal, pointing out that the

Department’s expressed reasons for

procedural reform, as set forth in the

preamble to the proposal, focused

almost exclusively on perceived

problems arising specifically under

group health plans and plans providing

disability benefits. These commenters

claimed that the Department’s record

does not demonstrate a clear need to

change the procedural rules in effect for

plans other than group health plans and

plans providing disability benefits.

The Department believes, in light of

the comments received on this issue,

that it is premature to conclude that the

proposed reforms are equally

appropriate for all plans. In particular,

the Department is concerned that it may

not have an adequate record regarding

the need for reform of procedural

standards for pension plans.

Accordingly, the Department has

determined to limit more narrowly to

group health plans and plans providing

disability benefits the reforms presently

adopted in the regulation and to reserve

for further consideration the question of

the appropriateness of extending these

reforms to pension plans and welfare

plans other than group health plans and

plans providing disability benefits. The

regulation, thus, contains standards

respecting benefit claims procedures for

pension and other welfare plans that are

substantially similar to those currently

in effect under the regulation

promulgated by the Department in 1977

(the 1977 regulation).2 As a result,

under the regulation, pension plans and

welfare plans other than group health

plans and plans providing disability

benefits will not generally be required to

revise their procedures.

In revising the proposal in this

manner, however, the Department notes

its continuing interest in assessing the

appropriateness of the 1977 regulation’s

standards for pension and other welfare

plans. In this regard, the Department is

soliciting public comment on this issue

to facilitate development of an adequate

record upon which to consider

additional reforms.

One commenter requested

clarification as to the application of the

proposed regulation to ‘‘long-term care

benefits.’’ This commenter described

long-term care benefits as clearly

distinguishable from group health or

disability benefits. Long-term care

benefits, it was suggested, have been

designed uniquely to provide assistance

in tasks of daily living to individuals

with disabilities or chronic conditions.

Eligibility for long-term care benefits is

based, according to the commenter,

solely on whether an individual is

‘‘unable to perform a requisite number

of the activities of daily living due to the

loss of functional capacity or requires

substantial supervision due to severe

cognitive impairment.’’ The commenter

reported that ‘‘long term-care benefits’’

generally include a wide range of

services, including respite care,

coverage for home modifications for the

disabled, nursing-home care, and

payment for family care givers, all

directed towards meeting the routine

needs of daily life, but do not include

‘‘medical care’’ within the meaning of

section 733(a)(2) of the Act or

replacement income as is usual under

disability plans. It is the view of the

Department that the provision of the

type of benefits described by the

commenter would not, in and of itself,

cause a plan to be treated as a group

health plan or a plan providing

disability benefits for purposes of this

regulation.

Time Frames for Decisionmaking

The proposal contained new time

frames for claims decisions by group

health plans and plans providing

disability benefits at both the initial

claims decision stage and on review. In

its treatment of group health claims, the

proposal distinguished between claims

involving urgent care and all other

group health claims, setting different

maximum time periods for the two

categories of group health claims,3 and,

with respect to disability claims,4 the

proposal provided a separate set of

maximum time periods somewhat

longer than for group health plans. In

proposing these relatively short time

frames, the Department emphasized that

they reflected specific ‘‘best practices’’

discussed in the RFI comments and the

Department’s belief that speedy

decisionmaking is a crucial protection

for claimants who need either medical

care or the replacement income that

disability benefits provide.5 The

Department specifically solicited further

public comment on the adequacy of the

proposal’s definition of claims involving

urgent care, explaining that speedy

decisionmaking has increased

significance when a claim must be

approved prior to a claimant’s receiving

medical care.

There was relatively little objection

among the commenters regarding the

proposed decisionmaking time frames

for urgent care group health claims. The

majority of those commenting either

actively supported or accepted the

necessity for this reform, indicating that

at the present time urgent care decisions

are generally being made within the

proposed time frames.6 In discussing

70248 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

that if delaying deciding a claim could seriously

jeopardize the claimant’s ‘‘life’’ or ‘‘health,’’ the

claim involves urgent care. Any effect on a

claimant’s ‘‘maximum function’’ that is less than

serious jeopardy to life or health should not be

considered a ‘‘claim involving urgent care.’’

7The record indicates also that representatives of

claimants do not generally oppose making this

distinction.

8As in the 1977 regulation and the proposal, the

times established for decisionmaking are maximum

times only. Decisions are required to be made,

generally, within a reasonable period of time

appropriate to the circumstances. Accordingly, in

some cases, delaying a decision until the end of the

applicable maximum period may be unreasonable

under the circumstances and thus a violation of the

procedural standards.

9 Various commenters requested clarification as to

whether the term ‘‘days’’ as used in the proposal

was intended to refer to calendar days or to some

other more limited construct, such as ‘‘business’’

days. It was the Department’s intention in the

proposal, and it continues to be the Department’s

position with respect to this regulation, that the

term ‘‘days’’ means calendar days. In light of the

need for speedy decisionmaking in many of the

time frames involved, the Department has

determined not to restrict the counting of days as

used in the regulation to less than every calendar

day, but rather to provide reasonable periods of

time determined by reference to calendar days.

10The regulation’s provisions for extension of

time for group health plans and plans providing

disability benefits are discussed generally below. In

addition, the regulation leaves in place a restricted

form of the ‘‘quarterly meeting’’ rule contained in

the 1977 regulation, permitting extension of the

decisionmaking time on review, under

subparagraph (i)(2)(iii)(B) for post-service claims

and under subparagraph (i)(3)(ii) for claims for

disability benefits. The extension of time for plans

administered by boards of trustees or committees

that meet at least quarterly is available, under the

regulation, only for multiemployer plans. It is the

Department’s view that such plans, in which

employee representation is guaranteed, will delay

decisionmaking by exercising this privilege only

when it is necessary and not harmful to claimants.

11The regulation calls this type of

decisionmaking ‘‘concurrent care decisions’’

because the decision to reduce the treatment is

made concurrently with the treatment itself. The

regulation clarifies that the provision applies to

ongoing treatment covering either a period of time

or a number of treatments. If a plan approves a

course of treatment that has no finite termination

date, such as treatments to be provided ‘‘as long as

medically necessary,’’ a reduction or termination of

that course of treatment is considered a concurrent

care decision under the regulation.

the time frames proposed for other

group health and disability

decisionmaking, however, a large

number of commenters objected to the

shortness of the time frames.

With respect to the proposed time

frames for non-urgent group health

claims, many commenters

acknowledged the legitimacy of the

Department’s concern for affording

claimants speedy access to medical care,

but asserted that the Department’s

concerns regarding access to care did

not justify treating all non-urgent claims

the same. These commenters asserted

that it would be extremely difficult and

expensive, if not impossible, to satisfy

the proposal’s requirement that all nonurgent group health claims be decided

within not more than 15 days. They

urged the Department to consider

distinguishing between ‘‘pre-service’’

claims, that is, those claims that must be

decided before a claimant will be

afforded access to health care, and

claims that involve only the payment or

reimbursement of the cost for medical

care that has already been provided

(‘‘post-service’’ claims). 7 The preservice claims, the commenters argued,

should be subject to a shorter

decisionmaking time frame. Other nonurgent group health claims, these

commenters argued, do not raise the

same degree of concern since they do

not represent cases in which claimants

may actually be denied medical care. In

many instances, the commenters

asserted, a longer decisionmaking

period for these post-service claims may

be appropriate, even necessary, since a

longer period of deliberation may in

some proportion of cases result in the

grant of benefits that might otherwise be

denied.

The Department has seriously

considered the arguments and testimony

put forth on this issue, and it has

concluded that there is substantial

justification for treating non-urgent

health care claims along the lines

suggested in the comments.

Accordingly, the regulation makes a

distinction, in setting the maximum

time periods for deciding non-urgent

group health claims, between group

health claims that involve access to

medical care (pre-service claims) and

group health claims that involve purely

the payment or reimbursement of costs

for medical care that has already been

provided (post-service claims).

Subparagraph (m)(2) defines a ‘‘preservice claim’’ as any request for

approval of a benefit with respect to

which the terms of the plan condition

receipt of the benefit, in whole or in

part, on approval of the benefit in

advance of obtaining medical care. In

this regard, it is the Department’s view

that any review or approval that a plan

requires as part of the process of

receiving a benefit, even if such review

or approval does not guarantee that the

plan will ultimately grant the benefit,

involves a ‘‘claim’’ and must be treated

as such for purposes of this regulation.

For example, a request for pre-approval

under a utilization review program or

for a prior authorization of health care

items or service would be a ‘‘pre-service

claim’’ under this definition, as would

any request for a preauthorization that

a plan requires a claimant to obtain as

a precondition to the claimant’s

receiving a larger benefit (e.g., payment

of 80% of the cost of the preauthorized

service, rather than 50%). ‘‘Post-service

claims’’ are defined in subparagraph

(m)(3) as all claims under a group health

plan that are not pre-service claims.

Subparagraph (f)(2)(iii)(A) requires

that pre-service claims be decided

within a maximum 8 of 15 days at the

initial level, and subparagraph (i)(2)(ii)

permits a maximum of 30 days on

review of an adverse benefit

determination.9 Post-service claims are

subject to a maximum time period of 30

days for the initial decision under

subparagraph (f)(2)(iii)(B) and a

maximum of 60 days on review under

subparagraph (i)(2)(iii)(A). With respect

to both pre- and post-service claims, the

regulation further provides for limited

extensions of time.10 In the

Department’s view, establishing

separate time frames for these two

groups of claims, and providing more

generous time frames for each group,

will balance the needs of claimants and

the business considerations raised by

the commenters representing plans,

employers, and administrators. These

time frames accommodate both the need

for additional time in some cases and

the need for speedy decisionmaking

when access to medical care is at stake.

Concurrent Care Decisions

The proposal contained a provision

that would accelerate decisionmaking in

the case of an urgent care claim arising

out of a termination or reduction of

previously granted benefits being

provided over a period of time. Under

the proposal, any such termination or

reduction would be treated as an

adverse benefit determination, and

plans would be required to provide

notice in such circumstances of the

termination or reduction of benefits at a

time sufficiently in advance of the

termination or reduction so as to allow

the claimant to appeal the denial before

the termination or reduction takes

effect. This proposal was intended to

address RFI comments that expressed

concern over the harm that patients

suffer from interruptions in treatment

that should have been provided on a

continuous basis. The Department

believed that the dangers of this harm

could be minimized if patients are

provided an opportunity to argue in

favor of uninterrupted continuing care

before treatment is cut short or reduced.

No serious objections to this provision

were raised in the comment record.

In finalizing the regulation, the

Department has concluded that there is

no strong basis for providing this

protection only for terminations or

reductions involving urgent care. 11 Any

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70249

12Of course, any request to extend a course of

treatment that does not involve urgent care is a

claim under the regulation and is governed by the

standards generally applicable to such claims.

13Under the proposal, disability claims were

subject to a 30-day maximum initial

decisionmaking period, with the possibility of a 15-

day unilateral extension; review of adverse benefit

determinations of such claims were made subject to

a 45-day maximum period, with a possible 45-day

unilateral extension.

14Under the regulation, a plan cannot impose

more than two levels of mandatory review with

respect to denial of a disability claim.

15See below for explanation of the ‘‘quarterly

meeting’’ rule.

16Representatives of claimants supported the

proposed rule regarding incomplete claims,

asserting that plans frequently and unnecessarily

delay in informing claimants of obvious

deficiencies in claims, thereby causing claims

decisions to be made later than would otherwise be

the case.

17The 1977 regulation permitted an extension of

time of up to 90 days for processing claims under

‘‘special circumstances.’’ The proposal would have

eliminated this provision and prohibited plans from

taking extensions of time without the claimant’s

consent. Commenters representing plans,

employers, and plan administrators objected to the

prohibition on extensions of time as inappropriately

inflexible.

decision to terminate or reduce benefits

that have already been granted will

cause disruption and potential harm to

patients receiving the ongoing care. In

our view, claimants faced with such a

disruption should be afforded an

adequate opportunity to contest the

termination or reduction of already

granted benefits before it takes effect.

Accordingly, subparagraph (f)(2)(ii)(A)

retains the basic protection provided in

the proposal as to the termination or

reduction of previously granted benefits,

but expands its scope to encompass any

termination or reduction of already

granted benefits.

Some commenters urged the

Department to consider extending the

protection of this special timing rule to

requests for additional care discovered

to be necessary during the course of the

initially prescribed treatment. In

response to these suggestions and to

minimize the possibility of harm from

interruptions in treatment, the

regulation further provides that any

urgent care claim requesting to extend a

course of treatment beyond the initially

prescribed period of time or number of

treatments must be decided within not

more than 24 hours, provided that the

claim is made at least 24 hours prior to

the expiration of the initially prescribed

period. If such a claim is denied, it

would be appealable as an urgent care

claim. 12

Time Frames for Plans Providing

Disability Benefits

The proposal established time frames

for resolution of disability claims that

were shorter than those in the 1977

regulation.13 Commenters representing

disability insurers voiced concern over

this aspect of the proposal. These

commenters argued that disability

claims are often difficult to resolve

inasmuch as they present complex

issues requiring consideration of not

only a claimant’s medical condition, but

also the claimant’s continuing

vocational capabilities. These

commenters asserted that the proposed

time frames were far too short to

accommodate the individualized

decisionmaking process involved in

resolving most disability claims.

Commenters representing claimants,

especially long-term disability

claimants, took an opposite position,

arguing that disability providers

frequently delay resolving these claims

unnecessarily in order to avoid

beginning to make payments. They

emphasized the economic hardships

disabled claimants experience as a

result of any unnecessary delays in

receiving the replacement income that

disability benefits are intended to

provide.

After consideration of the comments

and testimony on this issue, the

Department has resolved to provide a

limited opportunity for extension of

time to resolve disability claims.

Subparagraph (f)(3), in consequence,

provides that disability claims must be

resolved, at the initial level, within 45

days of receipt; a plan may, however,

extend that decisionmaking period for

an additional 30 days for reasons

beyond the control of the plan. If, after

extending the time period for a first

period of 30 days, the plan

administrator determines that it will

still be unable, for reasons beyond the

control of the plan, to make the decision

within the extension period, the plan

may extend decisionmaking for a

second 30-day period. The regulation

requires that the plan provide a

disability claimant with an extension

notice that details the reasons for the

delay. Thus, a plan may take, under

limited and justifiable circumstances,

up to 105 days to resolve a disability

claim at the initial claims stage,

provided that appropriate notice is

provided to the claimant before the end

of the first 45 days and again before the

end of each succeeding 30-day period.

In the Department’s view, this

framework will enable a plan to take

sufficient time to make an informed

decision on what may be a complex

matter, but the plan will be required to

keep the claimant well informed as to

the issues that are retarding

decisionmaking and any additional

information the claimant should

provide. By limiting the reasons for

which decisions may be delayed, the

regulation also requires prompt

decisonmaking when appropriate.

With respect to the review of adverse

benefit determinations involving

disability claims, subparagraph (i)(3)(i)

adopts the basic approach of the

proposal, permitting a maximum of 45

days to complete a review,14 but it

further permits plans providing

disability benefits to extend the

decisionmaking time on review for an

additional 45-day period under the rules

applicable to pension and other welfare

plans, and under subparagraph (i)(3)(ii)

allows multiemployer plans providing

disability benefits that are administered

by boards of trustees or committees

meeting at least quarterly to take

advantage of the ‘‘quarterly meeting’’

extended time period on review.15

Incomplete Claims and Extensions of

Time

The proposal specifically required all

plans to make an early determination as

to whether a filed claim is

‘‘incomplete.’’ Under the proposal,

notification that a claim is incomplete,

including a description of the

information necessary to complete the

claim, would be required to be provided

to a claimant within 5 days of filing the

claim. This provision, which responded

directly to complaints expressed in the

RFI comments, was intended to

eliminate unnecessary causes of delay

in the processing of claims and to speed

communications between plan and

claimant regarding essential

information.

The Department received many

comments on the proposal asserting that

it is often not possible to determine

whether a claim is incomplete without

deciding the claim in its entirety.16 The

requirement to provide notice of

incompleteness within 5 days, these

commenters urged, would essentially

force plans to make complete benefit

determinations within that time. These

commenters further suggested that

providing an opportunity for extending

the time for deciding ‘‘incomplete’’

group health and disability claims

would better serve the purposes

intended to be achieved by the notice of

incompleteness.17

In light of these objections and

arguments, the Department has

reconsidered the structure of its

proposed rule regarding incomplete

claims and extensions of time. The

regulation generally omits the

provisions for incomplete claims except

70250 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

18As was proposed, the regulation requires plans

to provide notice of incompleteness, in the case of

a claim involving urgent care, within 24 hours of

receipt of the claim and does not permit a plan to

unilaterally extend the time period for deciding an

urgent care claim.

19With respect to pension and other welfare

plans, this regulation fully continues the provisions

of the 1977 regulation regarding extensions of time.

20The rules for disability claims are also

described above.

21This tolling period ends on the date on which

the plan receives the claimant’s response to the

notice, without regard to whether the claimant’s

response supplies all of the information necessary

to decide the claim. Once the claimant responds,

the plan will have the benefit of the extension of

time (15 days for group health claims; 30 days for

disability claims) within which to decide the claim.

The plan may take only the extensions described in

the regulation (e.g., one extension for group health

claims) and may not further extend the time for

making its decision unless the claimant agrees to a

further extension.

22The proposal listed a number of individuals

and parties related to the plan and the employer,

communication with whom would trigger the

notice requirement.

23The proposal required written or electronic

notice to be provided with respect to grants of

benefits as well as denials. In view of the negative

comments that the Department received regarding

with respect to urgent care claims.18

Instead, the Department has modified

the 1977 regulation’s provisions for

extensions of time to permit group

health plans and plans providing

disability benefits a limited opportunity

to extend the period for decisionmaking

at the initial level.19 Under

subparagraphs (f)(2)(iii)(A) and (B)

group health plans may extend

decisionmaking on both pre- and postservice claims for one additional period

of 15 days after expiration of the

relevant initial period, if the plan

administrator determines that such an

extension is necessary for reasons

beyond the control of the plan. Under

subparagraph (f)(3), plans providing

disability benefits may avail themselves

of a similar provision permitting a

maximum of two extensions of time,

each of 30 days, when necessary for

reasons beyond the control of the

plan.20

In each case, if the reason for taking

the extension is the failure of a claimant

to provide necessary information, the

time period for making the

determination is tolled from the date on

which notice of the necessary

information is sent to the claimant until

the date on which the claimant

responds to the notice.21 In connection

with providing an opportunity for

extension, subparagraph (f)(4) further

specifies that the time periods for

making a decision are considered to

commence to run when a claim is filed

in accordance with the reasonable filing

procedures of the plan, without regard

to whether all of the information

necessary to decide the claim

accompanies the filing.

In providing a limited extension

opportunity for deciding group health

and disability claims, it is the

Department’s intention to provide plans

with the flexibility necessary to handle

all claims appropriately, whether such

claims are easy or difficult, complete

when filed or needing more

information. The Department

emphasizes that the time periods for

decisionmaking are generally maximum

periods, not automatic entitlements. If a

specific claim presents no difficulty

whatsoever, it may be unreasonable to

delay in deciding that claim until the

end of the maximum period; similarly,

an extension may be imposed only for

reasons beyond the control of the plan.

For example, the Department would not

view delays caused by cyclical or

seasonal fluctuations in claims volume

to be matters beyond the control of the

plan that would justify an extension.

The Department further notes that there

is no provision for extensions of time in

the case of claims involving urgent care.

Notice and Disclosure Requirements

The proposal contained several

amplified notice and disclosure

requirements, some of which were made

applicable to all plans, and some of

which applied specifically only to group

health plans. Among such general new

notice requirements was a provision

requiring all plans to provide a specific

notice, within 5 days (24 hours in the

case of a claim involving urgent care),

in any instance in which a participant

or beneficiary made a request for a

benefit, but failed to follow the plan’s

procedures for filing a claim.22 The

mandated notice for incorrectly filed

claims would explain that the request

for a benefit did not constitute a claim

under the terms of the plan and would

further describe the plan’s procedures

for filing a claim. The Department’s

intention in proposing this new notice

requirement was to ensure that plans

did not ignore, either deliberately or

inadvertently, any reasonable, albeit

unsuccessful, attempt by claimants or

their representatives to make a claim.

Many commenters representing

employers, plans, and plan

administrators objected to this

provision, asserting that plans would

have difficulty determining whether a

communication with the plan was a

‘‘request for a benefit’’ or a simple

inquiry about the plan’s provisions,

unrelated to any specific benefit claim.

These commenters argued that the

notice requirement would be unduly

expensive to implement because of the

large number of plan-related individuals

contact with whom could trigger the

requirement. Commenters further

argued that this notice requirement was

superfluous since a plan’s summary

plan description (SPD) should clearly

describe the requirements for filing a

claim for benefits, and it can be

assumed that claimants read and

understand their plan’s SPD.

After reconsidering this proposal in

light of the comments, the Department

has determined to clarify this notice

requirement to eliminate uncertainty as

to its meaning and to narrow its

application to better target the perceived

problem. Under subparagraph (c)(1)(i),

the requirement to provide a notice

informing claimants that they have

failed to properly file a claim will arise

only if a request is made that involves

a pre-service claim. Further, under

subparagraph (c)(1)(ii), the notice

requirement will be triggered only by a

communication from a claimant or a

health care professional representing the

claimant that specifies the identity of

the claimant, a specific medical

condition or symptom, and a specific

treatment, service, or product for which

approval is requested, and the

communication is received by a person

or organizational unit customarily

responsible for handling benefit matters.

In order to reduce the asserted costs of

compliance, the regulation provides that

the notice may be provided orally to the

claimant or health care professional (as

appropriate), unless the claimant or

representative requests a written notice.

Restricting the scope of this notice

requirement in this manner will reduce

the compliance difficulties posited by

the commenters, while still requiring

notice of a defective filing to be given

in those instances most critical to

claimants.

The proposal clarified the

requirement under the 1977 regulation

that a plan’s claims procedures must be

described in the SPD of the plan. The

proposal specified that the description

in the SPD must include all procedures

for filing claim forms, providing

notification of benefit determinations,

and reviewing denied claims. With

respect to group health plans, the

proposal would require the SPD

description to include any procedures

for obtaining preauthorizations,

approvals, or utilization review

decisions.

As a concomitant to this basic

disclosure, the proposal further clarified

that a notice of adverse benefit

determination (at both the initial level

and on review) 23 must identify

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70251

this requirement, the regulation requires written or

electronic notice of benefit grants to be provided

only in the case of claims involving urgent care and

pre-service claims.

24 It is the Department’s view that such internal

rules, guidelines, protocols, etc. are ‘‘instruments

under which the plan is established or operated’’

within the meaning of section 104(b) of the Act and

as such must be furnished to participants and

beneficiaries upon written request. See Advisory

Opinion 96–14A (July 31, 1996).

25Many commenters representing claimants

affirmed the importance of having access to internal

rules or protocols used in decisionmaking. Other

testimony, in particular from insurers, indicated

that specifically utilized protocols are currently

available and furnished to claimants upon request.

Other testimony indicated that such protocols can

be obtained routinely only through discovery

processes in litigation.

26See, e.g., Lutheran Medical Center v.

Contractors, Laborers, Teamsters and Engineers

Continued

specifically any internal rules,

guidelines, protocols, etc. that served as

a basis for the adverse benefit

determination.24 If such rules had

served as a basis for the decision either

at the initial level or on review, the

proposal further required that a copy of

the protocol be provided to the claimant

upon request.

While there was little comment on the

proposal’s provision for disclosure in

the SPD of the plan’s claims procedures,

some commenters representing plan

administrators and health insurance or

services provider organizations objected

to the requirements regarding

identification and furnishing of a

utilized internal rule or protocol. In the

view of these commenters, these

requirements would impose excessive

burdens on administration of group

health plans and provide little in the

way of useful information to claimants.

While the testimony and comments on

this issue were in some conflict,25 a

large number of commenters asserted

that it would be expensive and difficult

to specify in the notice of adverse

benefit determination the individual

protocol on which the decision was

based because of the computerized

nature of the determination processes.

In addition, these commenters argued

that specification of the protocol would

not provide the claimant with useful

information about why their benefit

claim had been denied. These

commenters also worried that the

language of the proposal could be read

to require plans routinely to furnish a

copy of the specific protocol itself as

part of the notice of adverse benefit

determination. Because protocols can be

of some length and complexity,

providing these documents routinely

with any adverse benefit determination

could impose a large burden on the

administration of group health plans.

The Department continues to believe

that claimants have a need to know the

specific basis for an adverse benefit

determination. Where a plan utilizes a

specific internal rule or protocol,

understanding the terms of the specific

protocol may be crucial to a claimant’s

ability to successfully contest the denial

on review. Therefore, subparagraph

(g)(1)(v) generally retains the

requirements that a plan inform a

claimant that a protocol has been relied

upon and furnish the protocol upon

request. To reduce the potential burden

of complying with these requirements,

the regulation makes clear that the

notice of adverse benefit determination

may either set forth the protocol on

which it was based or a statement that

a protocol was relied upon and that a

copy of such protocol will be made

available to the claimant free of charge

upon request.

Several commenters requested that

the Department amplify the disclosure

requirements for adverse benefit

determinations to require plans to

provide an adequate explanation of the

reason for an adverse benefit

determination based on medical

judgment especially when invoking

plan exclusions based on ‘‘medical

necessity’’ or similar broad terms.

Commenters asserted that the reasons

given in these circumstances were

frequently ‘‘cursory’’ and ‘‘vague and

open ended.’’ One commenter stated

that when claimants receive such

conclusory denials unsupported by

scientific or clinical evidence, ‘‘they are

in the untenable position of having to

refute arguments they are not allowed to

understand.’’

The Department agrees that claimants

would benefit from receiving fuller

explanations when a claim is denied

because the care is not medically

necessary, is experimental in nature, or

some similar plan exclusion or limit is

applied. Consequently, the Department

is adding new subparagraphs (g)(1)(v)(B)

and (j)(5)(ii) to require that the

notification of an adverse benefit

determination (at both the initial level

and on review) based on medical

necessity, experimental treatment, or

other similar exclusion or limit either

explain the scientific or clinical

judgment of the plan in applying the

terms of the plan to the claimant’s

medical circumstances, or include a

statement that such an explanation will

be provided free of charge to the

claimant upon request. In response to

comments, the Department is also

adding subparagraph (j)(5)(iii) to require

inclusion of a statement notifying

claimants that they can seek additional

information about potential alternative

dispute resolution methods.

The preamble to the proposal

discussed the Department’s interest in

providing claimants sufficient access to

information that could aid them in

determining whether a plan and its

agents had acted fairly and consistently

in denying their claims. In particular,

the Department was concerned about

claimants’ difficulties in obtaining

sufficient information to determine

whether a particular claims decision

comported with prior decisions on

similar issues and whether a claimant

would be justified in challenging a

decision as defective under the Act on

that basis. In this regard, the Department

stated in the preamble that it was

considering requiring plans to disclose,

after an adverse benefit determination

on review, documents and records

relating to previous claims involving the

same diagnosis and treatment decided

by the plan within the five years prior

to the adverse benefit determination (up

to a maximum of 50 such claims). The

disclosure obligation would have been

limited to cases in which a claimant

commences litigation over the benefit

determination and would have been

further limited, with respect to insured

benefits, to claims involving the same

plan or insurance contract language.

This proposal was opposed by many

commenters representing employers,

plans, plan administrators, and insurers.

They asserted that such a requirement

would be prohibitively expensive to

implement and would provide

claimants with little information of any

benefit. They also asserted that

requiring this disclosure would be

beyond the Department’s regulatory

authority under section 503 of the Act.

The Department has seriously

considered the objections raised to this

suggestion in the preamble of the

proposal and has altered its approach to

the problem in order to reduce the

potential burden on plans and avoid any

suggestion of possible interference with

the civil discovery processes in

litigation. Subparagraph (b)(5) provides,

as a general requirement for reasonable

claims procedures for all plans, that a

plan’s claims procedures must include

administrative safeguards and processes

designed to ensure and to verify that

benefit claims determinations are made

in accordance with governing plan

documents and that, where appropriate,

the plan provisions have been applied

consistently with respect to similarly

situated claimants. Courts have long

recognized that such consistency is

required even under the most

deferential judicial standard of

review. 26 It is the view of the

70252 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

Health and Welfare Plan, 25 F.3d 616, 620–22 (8th

Cir. 1994); De Nobel v. Vitro Corp., 885 F.2d 1180,

1188 (4th Cir. 1989).

27Representatives of claimants, however, strongly

supported this clarification, complaining that plan

officials occasionally seek to withhold information

that would tend to support granting the claim.

Department that this provision does no

more than to require a plan to formalize,

as a part of its claims procedures, the

administrative processes that it must

already have established and be using in

operating the plan in order to satisfy

basic fiduciary standards of conduct

under the Act. The Department has not

articulated specific requirements as to

how such processes should be designed,

believing that plans should have

flexibility and are capable of monitoring

their internal decisionmaking effectively

and efficiently.

As a concomitant to this general

requirement, subparagraph (m)(8)(iii)

further provides that, among the

information that a plan must provide a

claimant upon request after receiving an

adverse benefit determination, is any

information that the plan has generated

or obtained in the process of ensuring

and verifying that, in making the

particular determination, the plan

complied with its own administrative

processes and safeguards that ensure

and verify appropriately consistent

decisionmaking in accordance with the

plan’s terms. It is not the Department’s

intention in this regard to require plans

to artificially create new systems for the

sole purpose of generating documents

that can be handed to a claimant whose

claim is denied in order to satisfy this

disclosure requirement. The Department

anticipates that plans generally will

have systems for ensuring and verifying

consistent decisionmaking that may or

may not result in there being disclosable

documents or information pertaining to

an individual claims decision.

The proposal attempted to clarify the

1977 regulation’s requirement that

claimants be afforded access, after a

benefit denial, to ‘‘pertinent

documents.’’ Based on its conclusion

from RFI comments that there was

substantial public confusion concerning

the meaning of the term ‘‘pertinent,’’ the

Department proposed to replace that

term with the term ‘‘relevant.’’ The

proposal further stated that a document

would be considered ‘‘relevant’’ to a

claim whether or not such document

was in fact relied upon by the plan in

making the adverse benefit

determination. As stated in the

preamble to the proposal, the

Department believed that these changes

would make clear that claimants must

be provided access to all of the

information present in the claims

record, whether or not that information

was relied upon by the plan in denying

the claim and whether or not that

information was favorable to the

claimant. Such full disclosure, which is

what the 1977 regulation contemplated,

is necessary to enable claimants to

understand the record on which the

decision was made and to assess

whether a further appeal would be

justified.

Commenters representing plans,

employers, insurers, and plan

administrators expressed dissatisfaction

with this attempted clarification.27 The

main source of their objection was that

the proposal failed to define adequately

the scope of the intended disclosure. In

their view, the use of the term

‘‘relevant,’’ particularly when coupled

with the modifier that information need

not have been relied upon to be

relevant, would impose an unlimited

burden on plans to search their records

for any information relevant in the

broadest sense to the claim, whether it

was in any way related to the actual

claims process. These commenters

feared that plans would face added costs

of keeping track of, and disclosing, a

large amount of information generally

accessible to the decisionmaker, without

regard to whether such information was

in any way utilized in the

decisionmaking process.

The regulation responds to this

concern. While retaining the term

‘‘relevant’’ in subparagraph (j)(3) to

describe the documents and other

information that must be made available

to a claimant free of charge upon request

after receiving an adverse benefit

determination, the regulation provides a

specific definition of that term.

Subparagraph (m)(8) states that a

document, record, or other information

is considered ‘‘relevant’’ if it was relied

upon in making the determination, or

was submitted to the plan, considered

by the plan, or generated in the course

of making the benefit determination,

without regard to whether such

document, record, or other information

was relied upon in making the

determination. Subparagraph (m)(8)

further provides that the claimant

should receive any information

demonstrating that, in making the

adverse benefit determination, the plan

complied with its own processes for

ensuring appropriate decisionmaking

and consistency. Additionally with

respect to group health and disability

claims under subparagraph (m)(8), a

document, record, or other information

is considered ‘‘relevant’’ if it constitutes

a statement of policy or guidance with

respect to the plan concerning the

denied treatment option or benefit for

that claimant’s diagnosis, without

regard to whether such advice or

statement was relied upon in making

the determination. The Department

believes that this specification of the

scope of the required disclosure of

‘‘relevant’’ documents will serve the

interests of both claimants and plans by

providing clarity as to plans’ disclosure

obligations, while providing claimants

with adequate access to the information

necessary to determine whether to

pursue further appeal.

Standards of Review

The proposal adopted new standards

for a full and fair appeal of an adverse

benefit determination. The proposal

required that the review be conducted

by an appropriate named fiduciary who

is neither the party who made the initial

adverse determination, nor the

subordinate of such party; that the

review not afford deference to the initial

adverse benefit determination; and that

the review take into account all

comments, documents, records, and

other information submitted by the

claimant, without regard to whether

such information was previously

submitted or relied upon in the initial

determination. In addition, with respect

to group health claims, the proposal

required fiduciaries reviewing any

determination based on a medical

judgment to consult with a health care

professional with appropriate training

and experience in the field of medicine

involved in the medical judgment. Such

health care professional was required to

be ‘‘independent’’ of any health care

professional consulted in making the

initial adverse benefit determination.

Most commenters considering this

aspect of the proposal strongly

supported these reforms, agreeing that

there is a need to ensure that claims

decisions are reviewed by a party with

sufficient independence to provide a

full and fair review. A significant

number of commenters urged the

Department to extend the requirement

of consultation with an appropriate

health care professional to the review of

decisions on disability claims. Some

commenters, however, voiced concern

regarding the additional cost that would

be imposed by the requirement of a

separate decisionmaker and

consultation with health care

professionals. In particular, it was

argued that small employers, whose

plans, it was asserted, generally are

administered solely by a single

individual who is either the owner of

the business or the general manager of

the business, would be caused

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70253

28As with other aspects of the regulation’s

procedural reforms, this limit is imposed only with

respect to group health plans and plans providing

disability benefits. The Department solicits

comments on whether this reform should be

extended to other employee benefit plans. 29 If a group health plan provides only one level

of appeal, it may take up to 30 days to resolve an

appeal of a pre-service claim denial; if it provides

two levels of appeal, both levels must be concluded

within that 30 days. For appeals of post-service

claims denials, a plan with a single level of appeal

may take up to 60 days to conclude that appeal;

plans with two levels of appeal must complete both

appeals within the same 60 days.

30The issue of the 1977 regulation’s special

treatment of grievance procedures, including

arbitration, adopted by collectively bargained,

single employer plans through the collective

bargaining agreement, is discussed separately

below.

substantial additional expense to obtain

the independent review. Some

commenters further urged the

Department to clarify the type of

‘‘independence’’ that would satisfy the

Department’s requirement for the health

care professional who must be

consulted on review.

Subparagraphs (h)(3) and (4) generally

retain the proposed standards for the

conduct of reviews of adverse benefit

determinations with respect to group

health plans and plans providing

disability benefits. By limiting the scope

of this reform to group health plans and

plans providing disability benefits, the

regulation greatly reduces, the

Department believes, the cost

implications for small employers. In

addition, the regulation requires

consultation with an appropriately

qualified health care professional on

review of denied disability claims

involving medical judgments.

Subparagraph (h)(3)(v) further clarifies

that the standards for ‘‘independence’’

of a health care professional who is

consulted in connection with a review

are the same as those that apply to the

appropriate named fiduciary under

subparagraph (h)(3)(ii), that is, the

individual who is consulted must be an

individual different from, and not

subordinate to, any individual who was

consulted in connection with the initial

decision. The Department believes that

these changes will accommodate the

interests of benefit claimants in having

a full opportunity for an adequate

review and the needs of employers and

plans to limit the costs of providing

such a review.

Permitted Levels of Review

The proposal provided that a plan

may require only one appeal of a denied

claim. This limitation was intended to

assure that claimants whose claims are

denied have the ability to take their

claims to court without undue delay, as

the Department believes was intended

by section 503 of the Act. Nothing in the

proposal, however, was intended to

preclude a plan from offering, or a

claimant from agreeing to utilize,

additional voluntary administrative

appeals processes. The proposal further

banned plans from requiring that denied

claims be submitted to arbitration or

that any costs be imposed on a claimant

as a condition for filing or appealing a

claim.

These aspects of the proposal were

opposed by many commenters

representing employers, plans, plan

administrators, benefit providers, and

insurers. These commenters asserted

that it is common practice among a large

number of plans to provide more than

one level of appeal for a denied claim

and that such a practice generally

benefits claimants by providing a less

costly alternative to taking a denied

claim to court. Such a practice is

particularly common, it appears, with

respect to insured benefits, where initial

decisions and one or more appeals are

handled within the insurer, and appeals

at additional levels are to the plan or

employer. Commenters representing

claimants, on the other hand, supported

the limitation on the number of

mandatory appeals, arguing that

multiple levels of administrative appeal

often hamper and frustrate claimants,

causing them to abandon claims. Such

multiple levels often serve no actual

purpose, these commenters assert, and

provide no independent review.

The Department continues to believe

that allowing plans to impose an

unlimited number of levels of

administrative appeals of denied claims

does not serve the best interests of

claimants. However, it has concluded

that the strict limitation of appeals to a

single level may be unnecessarily

limiting. In the interests of providing

plans some flexibility in creating claims

processes, and to accommodate what

appears to be a common practice,

subparagraph (c)(2) permits two levels

of mandatory appeal of an adverse

benefit determination. 28 In order to

promote speedy resolution of group

health claims, however, subparagraph

(i)(2) limits the overall time period

within which plans must decide appeals

of denied claims. 29

With respect to the proposal’s ban on

arbitration, a significant number of

commenters representing unions, 30

multiemployer plans, and employers

objected that this reform was contrary to

the general approach of the Federal

government, as expressed in the Federal

Arbitration Act, to encourage the

appropriate use of alternative dispute

resolution. In addition, these

commenters suggested that arbitration

generally provides a useful and less

costly means of resolving benefit

disputes than litigation. An equal

number of commenters representing

claimants, however, supported the

proposed ban on mandatory arbitration,

asserting that, as applied to claims

disputes, arbitration is inherently unfair

because of the difference in status

between the typical benefit claimant

and the typical plan or employer.

Commenters also suggested that the

practice of requiring plan participants to

agree to arbitrate all benefits disputes as

a condition of participation in the plan

is inherently unfair due to the

inequality in bargaining power between

employers and employees. Further, they

argued that the traditional methods of

cost-sharing involved in commercial

arbitration, in which each party pays

half of the costs of the arbitration, may

be prohibitively expensive for most

claimants.

After careful deliberation on the

issues raised by the commenters

regarding the use of alternative dispute

resolution for benefit claims disputes,

the Department has revised its approach

to permit plans, pursuant to

subparagraph (c)(4), to require some

limited forms of mandatory arbitration.

In addition, in subparagraph (c)(3), the

Department addresses more generally

the subject of plans’ offering additional,

voluntary processes, including

voluntary binding arbitration, after

conclusion of the required claims

review process. By retaining the

complete prohibition on imposing costs

on claimants in connection with filing

or appealing a claim, however,

subparagraph (b)(3) makes clear that any

process used by a plan to resolve a

claim dispute, including arbitration,

must be conducted without imposing

fees on the claimant. These restrictions

apply, under the regulation, only to

group health plans and plans providing

disability benefits.

With respect to mandatory arbitration

used as part of the claims process,

subparagraph (c)(4) provides that a plan

may require arbitration as one (or both)

of the permitted levels of review of a

denied claim, provided, first, that the

arbitration is conducted in accordance

with the requirements of the regulation

applicable to such appeals and, second,

that the claimant is not thereby

precluded from challenging the

arbitrator’s decision, including pursuing

the claim in court pursuant to section

502(a) of the Act. With respect to

voluntary additional levels of appeal

offered by a plan, including voluntary

binding arbitration or other methods of

dispute resolution, subparagraph

(c)(3)(iii) provides that a plan may offer

70254 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

31 In this regard, the regulation requires that any

plan intending to offer an additional voluntary level

of appeal must include, in the notice of adverse

benefit determination on review, a statement

describing the voluntary appeal procedure and the

claimant’s right to obtain the information about the

process described in subparagraph (c)(3)(iv) free of

charge before deciding to submit the claim to the

voluntary level of appeal.

32See, e.g., Pegram v. Herdrich, 120 S. Ct. 2143

(2000); Unum Life Ins. Co. v. Ward, 526 U.S. 358,

(1999); Boggs v. Boggs, 520 U.S. 833 (1997); N.Y.

State Conf. of Blue Cross & Blue Shield Plans v.

Travelers Ins. Co., 514 U.S. 645 (1995); John

Hancock Mut. Life Ins. Co. v. Harris Trust & Savings

Bank, 510 U.S. 86 (1993).

33 It is the view of the Department that claimants

would be entitled to have a claim dispute

adjudicated in court pursuant to section 502(a) of

the Act after exhausting the plan’s claims

procedures, but without regard to State law

procedures described in subparagraph (k)(2),

regardless of whether such State law procedures are

mandatory pursuant to State law.

34Nothing in this regulation should be construed

to limit a claimant’s ability to pursue any state law

remedy that may be available as a result of a

medical decision, even where such decision

implicates eligibility for benefits under a plan. See

Pegram v. Herdrich, 120 S. Ct. 2143 (2000).

such voluntary additional levels of

appeal to a claimant as a method of

resolving a benefit dispute only after the

dispute has arisen. Subparagraph

(c)(3)(iv) further requires the plan to

provide the claimant with sufficient

information about the voluntary process

to permit the claimant to make an

informed judgment about whether to

submit the dispute to the voluntary

process; this requirement includes

information about the applicable rules,

the process for selecting the

decisionmaker, and the circumstances,

if any, that may affect the impartiality

of the decisionmaker, such as any

financial or personal interests in the

result or any past or present relationship

with any party to the review process.

The plan must also make clear to the

claimant that the decision as to whether

or not to submit a benefit dispute to the

voluntary level of appeal will have no

effect on the claimant’s rights to any

other benefits under the plan.31 In

addition, subparagraph (c)(3) includes

two protections intended to make sure

that additional appeal levels offered by

a plan remain truly voluntary. First,

subparagraph (c)(3)(i) requires any plan

offering a voluntary appeal to agree not

to later assert a defense of failure to

exhaust available administrative

remedies against a claimant who

chooses not to make use of the

voluntary appeal process. Second,

subparagraph (c)(3)(ii) requires such

plans to agree that any statute of

limitations or other defense based on

timeliness is tolled while the dispute is

under submission to the voluntary

process. The Department considers

these protections to be essential to

procedural fairness for a claimant who

is offered or pursues voluntary

administrative processes as an

alternative to pursuing a claim in court.

Preemption of State Law

Section 514(a) of the Act provides that

the provisions of the Act generally

supersede State laws ‘‘insofar as they

may now or hereafter relate to any

employee benefit plan [covered under

the Act].’’ Section 514(b)(2)(A),

however, saves from the general

preemption of section 514(a) State laws

that regulate insurance, banking, or

securities. The scope and meaning of

the general preemption provision of

section 514(a) and the savings clause

contained in section 514(b)(2)(A) have

been the subject of controversy since

enactment of the Act.32 The proposal

did not address section 514 of the Act

or in any way propose to regulate the

relationship between the proposed

minimum standards for benefit claims

procedures of employee benefit plans

and State law that might affect or relate

to such standards.

Many commenters, including several

State insurance commissioners, urged

the Department to consider addressing

the question of the preemptive effect of

a final regulation on State law. Such

commenters suggested that a failure to

do so would exacerbate existing

confusion about the possible

preemption of State law efforts seeking

to improve the quality of health care,

especially those that seek to protect

patients’ rights by providing Statemandated systems for the review of

disputes between patients and health

care providers or insurers. Such State

law, the commenters argued, may be

considered to be preempted to the

extent that the State-law requirements

differ from or conflict with the

requirements of this regulation. Some

commenters urged the Department to

provide in this regulation for the

complete preemption of State law that

provides procedures for the resolution

of benefit claims disputes. Others urged

the Department to model the extent of

the regulation’s preemptive effect on

section 731(a) of the Act, which

provides special, more limited

preemption with respect to the

provisions of the Part 7 of the Act,

concerning portability, renewability,

nondiscrimination, and other rights

relating to group health plans. Overall,

a large number of commenters agreed

that there would be benefit to the public

in general in the Department’s clarifying

its views as to the preemptive effect of

the regulatory standards.

In response to these comments, the

Department has added to the regulation

a new paragraph (k) providing

interpretive guidance on the question of

the relationship of the substantive

regulatory standards to State law.

Subparagraph (k)(1) states that the

regulatory standards should not be read

to supersede State law regulating

insurance (even when such State law

prescribes standards for claims

processes and internal review of claims)

unless such State law prevents the

application of a requirement of the

regulation. For example, a State may

have a law requiring insurers to allow

oral appeals of all claims or to decide

claims within shorter periods of time.

These laws would not prevent the

application of the regulation because

plans could comply with both the

regulation and the State laws.

Subparagraph (k)(2)(i) explains that a

State law regulating insurance should

not be considered to prevent the

application of a requirement of the

regulation merely because the State law

establishes a review procedure to

evaluate and resolve disputes involving

adverse benefit determinations under

group health plans, so long as the

review procedure is conducted by

parties other than the insurer, the plan,

the plan’s fiduciaries, the employer, or

any employee or agent of any of the

foregoing. Subparagraph (k)(2)(ii)

further explains that, in the

Department’s view, the types of

procedures described in subparagraph

(k)(2)(i) are not part of the claims

procedures contemplated by section 503

of the Act, but are ‘‘external reviews’’

that are beyond the scope of the

regulation. As a result, while such

procedures as established by State law

are not preempted by the regulation,

under subparagraph (k)(2)(ii), claimants

cannot be required to submit their

claims to such procedures in order to be

entitled to file suit under section 502(a)

of the Act.33 There is nothing in the

regulation, however, that would

preclude a claimant from voluntarily

submitting a claim for review pursuant

to a State-provided external review

process.

By providing that only State

insurance law that does not prevent the

application of the regulatory standards

will be saved from preemption,

subparagraph (k)(1) preserves the

procedural protections required by the

regulation, which the Department finds

essential to the full and fair review

mandated by section 503 of the Act,34

but recognizes that States may impose

non-conflicting standards for internal

processes. Subparagraph (k)(2) of the

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70255

35Whether a party conducting a review procedure

should be considered to act as the ‘‘agent’’ of a party

related to the plan will depend on the independent

authority with which the party is vested. That an

insurer is required, under State law, to provide

funds to pay for a review will not, in and of itself,

cause the party who conducts the review to be

considered an ‘‘agent’’ of the insurer.

36This provision, which is a clarification of

current law, applies to all employee benefit plans

covered under the Act.

37 In this regard, the Department notes that all

such claims for benefits are covered by this

regulation, regardless of the reason or reasons a

plan may have for denying the claim. For example,

a claim for a health care service, even a health care

service that is specifically excluded by the plan’s

governing documents, would be covered by the

regulation.

38The Department notes that persons who need

to establish their status as participants or

beneficiaries under a plan have a number of ways

to do so without implicating the claims procedures.

Eligibility information is generally provided

through the plan administrator, the summary plan

description, and plan documents. If a person is

unable to determine his or her status under the plan

or if there is disagreement about a person’s status

under the plan, section 502(a)(1)(B) of the Act

provides that participants and beneficiaries may

bring a civil action to clarify their rights to future

benefits under the terms of the plan.

39Sections 206(d)(3) and 609(a)(5) of the Act

mandate certain specific plan procedures for

determining the qualified status of domestic

relations orders and medical child support orders,

respectively, and for administering qualified

domestic relations orders (QDROs) and qualified

medical child support orders (QMCSOs). It is the

view of the Department that issues pertaining to

such orders must be resolved pursuant to the

procedures described in section 206(d)(3) or

609(a)(5) of the Act, as appropriate, and not the

claims procedures governed by section 503 of the

Act and the current regulation.

regulation clarifies the extent to which

State law reform efforts regarding

patients’ rights may be affected by the

preemption provided for in paragraph

(k)(1). Subparagraph (k)(2) articulates

the Department’s view that procedural

remedies established by State law that

are ‘‘external’’ to the plan will not be

preempted by the regulation. In this

regard, subparagraph (k)(2)(i) defines

the processes that will be considered

‘‘external’’ to the plan by reference to

the party who is responsible for

conducting the procedures. It is the

Department’s view that procedures that

are conducted by parties other than the

insurer providing benefits under the

plan, the plan itself, the plan’s

fiduciaries, or the employer sponsoring

the plan (or by any employee or agent

of any of these parties) 35 are procedures

sufficiently independent of the plan to

be considered outside the scope of the

process required by section 503 of the

Act.

Other Issues

The regulation makes a number of

additional changes to the proposal in

response to comments. Other aspects of

the proposal have been retained

unchanged, despite comments, in light

of the Department’s conclusions as to

their importance. The following briefly

summarizes these other issues.

The proposal eliminated a provision

in the 1977 regulation that seemed to

imply that representatives of a claimant

must be ‘‘duly authorized’’ to act on

behalf of the claimant. This change

reflected the perception of the

Department that no single Federal

standard governs the authorization of a

representative and that claimants

should be able to freely name

representatives to act on their behalf.

Many commenters representing

employers and plans responded that

elimination of the concept of an

‘‘authorized’’ representative could be

read to require plans to accept anyone

who claimed to be a representative of a

claimant, without permitting plans to

establish reasonable procedures to

verify that status. This could prevent

plans from protecting the privacy or

other rights of claimants. The regulation

responds to this concern by reinstituting

a concept of authorization with respect

to claimants’ representatives.36

Specifically, subparagraph (b)(4)

provides that a plan’s claims procedures

may not preclude an authorized

representative (including a health care

provider) from acting on behalf of a

claimant and further provides that a

plan may establish reasonable

procedures for verifying that an

individual has been authorized to act on

behalf of a claimant. However,

subparagraph (b)(4) requires a group

health plan to recognize a health care

professional with knowledge of a

claimant’s medical condition as the

claimant’s representative in connection

with an urgent care claim.

The proposal provided that a ‘‘claim’’

is any request for a plan benefit or

benefits, made by a claimant or by a

representative of a claimant, that

complies with a plan’s reasonable

procedure for making benefit claims.37

It further specified that, in the case of

a group health plan, a request for a

benefit includes a request for a coverage

determination, for preauthorization or

approval of a plan benefit, or for a

utilization review determination in

accordance with the terms of the plan.

One commenter argued that the

reference to ‘‘coverage determination’’

in this provision could be read to

include determinations of eligibility

under a group health plan, and that

such determinations should not be

treated as claims. The Department

agrees that all requests for

determinations of eligibility under a

group health plan should not be

required to be treated as claims for

benefits for purposes of ERISA’s claims

procedure under section 503.38 On the

other hand, the Department also

believes that where a claim for benefits

is made in accordance with reasonable

procedures and the claim is denied

because the claimant is not eligible for

benefits under the terms of the plan, the

claimant should be afforded the right to

appeal that determination in accordance

with the claims procedures of the plan

and this regulation.39 In this regard, the

reference to ‘‘coverage determination’’

has been eliminated from the

description of a claim for benefits in

paragraph (e). In an effort to clarify the

application of the regulation to benefit

claim denials based on eligibility, the

Department has amended the definition

of ‘‘adverse benefit determination’’ in

subparagraph (m)(4) to include denials

of benefits based on a determination of

a claimant’s eligibility to participate in

the plan. The Department, nonetheless,

is interested in receiving public

comments concerning whether, and to

what extent, questions to a plan

regarding eligibility should be governed

by a prescribed process, with timing and

notice standards.

The proposal contained a provision

setting forth the Department’s view of

the consequences that ensue when a

plan fails to provide procedures that

meet the requirements of section 503 as

set forth in regulations. The proposal

stated that if a plan fails to provide

processes that meet the regulatory

minimum standards, the claimant is

deemed to have exhausted the available

administrative remedies and is free to

pursue the remedies available under

section 502(a) of the Act on the basis

that the plan has failed to provide a

reasonable claims procedure that would

yield a decision on the merits of the

claim. The Department’s intentions in

including this provision in the proposal

were to clarify that the procedural

minimums of the regulation are

essential to procedural fairness and that

a decision made in the absence of the

mandated procedural protections

should not be entitled to any judicial

deference.

Many commenters representing

employers and plans argued that this

provision would impose unnecessarily

harsh consequences on plans that

substantially fulfill the requirements of

the regulation, but fall short in minor

respects. These commenters suggested

that the Department adopt instead a

standard of good faith compliance as the

70256 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

40The 1977 regulation provides that such

collectively bargained plans may substitute, for the

provisions of the regulation, a collectively

bargained procedure that either provides for filing,

initial disposition of claims, and grievance and

arbitration of benefit claims, or provides only for

grievance and arbitration of such claims.

41The 1977 regulation provides that plans that

provide benefits through membership in a qualified

HMO, as defined in section 1310(d) of the Public

Service Act, 42 U.S.C. 300e–9(d), are deemed to

satisfy the regulation with respect to such benefits

if the HMO satisfies the requirements of section

1310 of the Public Service Act. 42See 42 FR 27426 (May 27, 1977).

measure for requiring administrative

exhaustion. Alternatively, they

suggested that the Department recognize

the judicial doctrine under which

exhaustion is required unless the

administrative processes impose actual

harm on the claimant.

Upon consideration, the Department

has determined to retain this provision

in paragraph (l). Inasmuch as the

regulation makes substantial revisions

in the severity of the standards imposed

on plans, we believe that plans should

be held to the articulated standards as

representing the minimum procedural

regularity that warrants imposing an

exhaustion requirement on claimants. In

the view of the Department, the

standards in the regulation represent

essential aspects of the process to which

a claimant should be entitled under

section 503 of the Act. A plan’s failure

to provide procedures consistent with

these standards would effectively deny

a claimant access to the administrative

review process mandated by the Act.

Claimants should not be required to

continue to pursue claims through an

administrative process that does not

comply with the law. At a minimum,

claimants denied access to the statutory

administrative review process should be

entitled to take that claim to a court

under section 502(a) of the Act for a full

and fair hearing on the merits of the

claim. Further, the Department believes

that it is unlikely that this provision, in

and of itself, will result in an increase

in benefit claims litigation. Given the

limited remedies available in a suit

under section 502(a) of the Act,

claimants will have little incentive to

invoke this provision unless they

believe they will be unable to receive a

fair consideration from the plan.

The proposal eliminated several

special provisions contained in the 1977

regulations, including the special

treatment provided for grievance

procedures of collectively bargained,

single-employer plans 40 and for benefits

provided through Federally qualified

health maintenance organizations

(‘‘HMOs’’).41 With respect to each of

these special provisions, the Department

requested comment on whether, in the

interests of uniform treatment of benefit

claims, these special treatments could

be eliminated.

Comments on these subjects were

relatively sparse. With respect to the

special HMO exception, the Department

has determined to retain the proposal’s

elimination of the special treatment.

With respect to treatment of collectively

bargained, single-employer plans, the

Department received a few comments

from interested parties, arguing that

elimination of the special treatment

would interfere unduly with the

collective bargaining process and citing

the Department’s policy, articulated in

the preamble to the 1977 regulation,42

not to interfere with the operation of

such agreements merely because they

involve employee benefit plans. On

review of the record, the Department

has concluded that there is no reason to

alter its policy position with regard to

collective bargaining agreements that

establish grievance procedures for

single-employer collectively bargained

plans and, accordingly, has determined

to reinstate in subparagraph (b)(6) the

special treatment provided in the 1977

regulation for such single-employer,

collectively bargained plans.

The proposal stated that the

regulation, when finalized, would be

applicable to plans on the later of the

effective date of the final regulation or

the first day of the plan year beginning

on or after the effective date, with a

delayed compliance date for collectively

bargained plans. Commenters argued

that these applicability dates would be

too soon, delineating the significant

changes that would be required to

achieve compliance with the proposal’s

requirements, such as review of third

party administrator relationships,

revisions to vendor contracts, systems

redesign, amendment of documents, and

preparation of appropriate disclosures

for participants and beneficiaries.

Several of these commenters requested

a period of twelve months between

publication of the final regulation and

its applicability to plans. Recognizing

these concerns, the Department has

determined to provide a more

substantial period of time for orderly

and deliberate compliance efforts.

Therefore, the regulation provides that

its provisions will apply to claims filed

under a plan on or after January 1, 2002.

B. Economic Analysis Under Executive

Order 12866

Overview

In developing the regulation, the

Department considered the potential

economic effects of available alternative

approaches. The regulation is crafted to

maximize economic benefits net of

costs. The Department believes that the

regulation’s benefits will substantially

outweigh its costs.

The regulation will have two major,

direct effects: it will change the timing

and outcomes of some health and

disability claims decisions, and it will

require affected plans to modify claims

decision-making processes.

The regulation will cause plans to

promptly approve some valid claims

that otherwise would have been denied.

In economic terms, these changes in

claims outcomes can be characterized as

financial transfers that produce societal

benefits. The cost to the plan of the

services provided is offset by a benefit

of equal financial value to the claimant,

so the net cost to society is zero. The

amount of the transfer cannot be

estimated because there are no data on

the number of valid claims that are

denied today.

At least two societal benefits will

derive from the prompt approval of

valid benefit claims. The first benefit

will be improved health outcomes and

financial security. Claimants will be

assured access to needed health care

when ill or injured and financial

support when disabled. The second will

be more efficient labor and insurance

markets, which should facilitate more

and better health and disability benefit

coverage. Employers will be more able

and inclined to provide these benefits if

employees are confident that valid

claims will be approved. These benefits

generally cannot be quantified, but they

are expected to be large.

In estimating plans’ cost to comply

with the regulation, the Department

considered the degree to which current

claims handling practices conform to

the regulation’s requirements. Many

claims are already handled in

satisfaction of all or some applicable

requirements, but assuring that all

claims meet all the requirements will

require at least some modifications to all

plans’ claims procedures. These

modifications will entail one-time,

‘‘start-up’’ costs to establish the new

processes, and ongoing costs to operate

them.

The Department anticipates that all

health and disability benefit plans will

incur some start-up cost. Start-up costs

are estimated at $119 million in 2001.

Most of that cost, $103 million, is

attributable to health plans, while the

remaining $16 million is attributable to

disability plans. Health plan start-up

costs amount to an estimated $37 per

plan and $0.75 per enrollee on average,

while disability plan start-up costs are

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70257

estimated to average $9 per plan and

$0.24 per enrollee. Since most claims

administrators serve many plans so

costs generally will be spread widely

across plans.

Ongoing costs will be incurred in

connection with the subset of health

and disability benefit claims that must

be handled differently to satisfy the

regulation’s requirements. That subset

will be small in connection with many

of these requirements. Many claims are

already handled in satisfaction of some

requirements, such as the regulation’s

time frames for claims decisions, and

many requirements apply only to a

small subset of claims, such as urgent

care claims or health benefit claims that

are denied. Ongoing costs attributable to

the regulation are estimated to be $399

million in 2002. Costs will fall over time

with increased automation. Most of the

ongoing cost, $379 million, is

attributable to health benefit claims,

while the remaining $21 million is

attributable to disability benefit claims.

Annual health plan costs amount to an

average of $135 per plan. This is

equivalent to $2.77 per enrollee on

average, or approximately one-tenth of

one percent of total plan premium.

Disability plan ongoing costs average

$12 per plan and $0.31 per enrollee. The

cost to carry out any particular claims

transaction in satisfaction of the

regulation is likely to be low, but claims

volume is high (1.4 billion health

benefit claims per year), so aggregate

costs are substantial.

The single largest ongoing cost is

attributable to the regulation’s time

frames for health claims decisions. The

Department believes that under plans’

current practices up to 1 percent of

claims decisions are not made within

the regulation’s maximum time periods.

Accelerating these 14 million decisions

to comply with the regulation is

estimated to cost $222 million in 2002.

The economic costs of the regulation

will be very small relative to the overall

cost of providing and administering

health and disability benefits. Health

plans’ ongoing cost of complying with

the regulation will amount to just 0.1

percent of total plan expenditures. Costs

of this relative magnitude are not

expected to adversely affect employers’

propensity to offer health and disability

benefits.

The regulation does not substantially

change the standards applicable to

pension benefit claims or welfare

benefit claims other than health and

disability benefit claims. Its economic

effects are therefore are limited to those

associated with health and disability

benefit claims.

The ongoing cost estimates for the

regulation, presented here, are higher

than the Department’s ongoing cost

estimates for the proposed regulation,

previously presented in that proposed

regulation’s preamble. This should not

be interpreted as an indication that the

regulation will carry greater cost than

would the proposed regulation. On the

contrary, the regulation relaxes certain

provisions of the proposed regulation,

such as time frames for certain health

benefit claims, in ways that will reduce

economic costs without sacrificing

economic benefits. The Department’s

estimation of the cost of the regulation

incorporates new information, not

available for estimating the cost of the

proposed regulation, including the

extensive public comments received in

response to the proposed regulation.

Based on this new information, the

Department revised its estimations of

the cost of certain provisions.

Required Analyses of Economic Impact

1. Executive Order 12866

Under Executive Order 12866, the

Department must determine whether the

regulatory action is ‘‘significant’’ and

therefore subject to the requirements of

the Executive Order and subject to

review by the Office of Management and

Budget (OMB). Under section 3(f), the

order defines a ‘‘significant regulatory

action’’ as an action that is likely to

result in a rule: (1) having an annual

effect on the economy of $100 million

or more, or adversely and materially

affecting a sector of the economy,

productivity, competition, jobs, the

environment, public health or safety, or

State, local or tribal governments or

communities (also referred to as

‘‘economically significant’’); (2) creating

serious inconsistency or otherwise

interfering with an action taken or

planned by another agency; (3)

materially altering the budgetary

impacts of entitlement grants, user fees,

or loan programs, or the rights and

obligations of recipients thereof; or (4)

raising novel legal or policy issues

arising out of legal mandates, the

President’s priorities, or the principles

set forth in the Executive Order.

Pursuant to the terms of the Executive

Order, it has been determined that this

action is consistent with the President’s

priorities as articulated in the

President’s February 20, 1998, directive

to the Secretary of Labor to propose

regulations that, among other things,

implement the recommendations of the

President’s Advisory Commission on

Consumer Protection and Quality in the

Health Care Industry. In addition, the

Department estimates that this

regulatory action will have an economic

impact exceeding $100 million in the

year 2002, the year in which this

regulation will be applicable to benefit

claims. The total cost of this regulation

is expected to be $399 million in 2002,

and to decrease thereafter. This amount

is approximately $2.77 per group health

plan enrollee and $.31 per disability

plan enrollee. Therefore, this notice is

‘‘significant’’ and subject to OMB review

under Sections 3(f)(1) and 3(f)(4) of the

Executive Order. Accordingly, the

Department has undertaken to assess the

costs and benefits of this regulatory

action. The benefits of the regulation,

although not quantifiable, are expected

to exceed its cost. The Department’s

assessment of the regulation’s costs and

benefits is summarized above and

detailed later in this preamble.

2. Regulatory Flexibility Act

The Regulatory Flexibility Act (5

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

certain requirements with respect to

Federal rules that are subject to the

notice and comment requirements of

section 553(b) of the Administrative

Procedure Act (5 U.S.C. 551 et seq.) and

that are likely to have a significant

economic impact on a substantial

number of small entities. Unless an

agency certifies that a final rule will not

have a significant economic impact on

a substantial number of small entities,

section 604 of the RFA requires the

agency to present a final regulatory

flexibility analysis describing the

impact of the rule on small entities at

the time of publication of the notice of

final rulemaking. Small entities include

small businesses, organizations, and

governmental jurisdictions.

For purposes of analysis under the

RFA, PWBA continues to consider a

small entity to be an employee benefit

plan with fewer than 100 participants.

The basis of this definition is found in

section 104(a)(2) of ERISA, which

permits the Secretary of Labor to

prescribe simplified annual reports for

pension plans that cover fewer than 100

participants. Under section 104(a)(3),

the Secretary may also provide for

simplified annual reporting and

disclosure if the statutory requirements

of part 1 of Title I of ERISA would

otherwise be inappropriate for welfare

benefit plans.

PWBA believes that assessing the

impact of this rule on small plans is an

appropriate substitute for evaluating the

effect on small entities. Because this

definition differs from the definition of

small business based on size standards,

which is promulgated by the Small

Business Administration (SBA) (13 CFR

121.201) pursuant to the Small Business

70258 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

Act (5 U.S.C. 631 et seq.), PWBA

solicited comments on its use of its

standard for evaluating the effects of the

proposal on small entities.

A few comments concerning the size

standard were received from

Congressional and administrative

representatives. One commenter was

concerned that prior to adopting the

proposed size standard, the Department

first consult with the Office of Advocacy

of the Small Business Administration

(SBA) and provide an opportunity for

public comment. The Department

consulted with the SBA regarding its

proposed size standard prior to

publication of the proposed regulation

in the Federal Register. The SBA agreed

with the proposed alternate size

standard, indicating that Department

provided a reasonable justification for

its definition. No other comments were

received with respect to this size

standard.

A summary of the final regulatory

flexibility analysis based on the 100

participant size standard is presented

below.

This regulation applies to all small

employee benefit plans covered by

ERISA. Employee benefit plans with

fewer than 100 participants include

631,000 pension plans, 2.8 million

health plans, 1.7 million disability

plans, and 1.7 million other welfare

plans. The regulation makes substantial

changes to the 1977 regulation, which it

replaces, only in its provisions

applicable to health and disability

plans.

The final rule amends the

Department’s existing benefits claims

regulation, which implements ERISA’s

claims and appeals requirements. Both

ERISA and the existing regulation

require plans to maintain procedures to

determine claims and to review

disputed claims determinations. The

compliance requirements assumed for

purposes of this regulation consist of

new standards for claims and appeals

procedures.

The objective of this revised

regulation is to improve the accuracy

and timeliness of health and disability

benefit claims and appeals

determinations. Certain provisions

pertaining to group health plans are

being implemented in response to the

President’s February 20, 1998, directive

to the Secretary of Labor to propose

regulations that among other things

implements the recommendations of the

President’s Advisory Commission on

Consumer Protection and Quality in the

Health Care Industry. An extensive list

of authorities may be found in the

Statutory Authority section, below.

The Department believes that

modifying and operating claims and

appeals procedures in compliance with

the regulation will require a

combination of professional and clerical

skills.

The Department estimates that the

added cost to small plans of complying

with the regulation will amount to $94

million over the years 2001 to 2002.

This figure includes $24 million in onetime, start-up costs incurred in 2001 to

revise health and disability benefit

claims procedures and related systems,

and $71 million in annual, ongoing

added costs beginning in 2002 to handle

health and disability benefit claims in

compliance with the regulation’s new

standards. The annual ongoing cost in

later years will change with claims

volume and mix, and is expected to

decrease with increasing automation in

claims processing. The $71 million

annual cost in 2002 averages $25 for

each small health plan and $2.77 for

each small health plan enrollee, and $1

for each small disability plan and $0.15

for each small disability plan enrollee.

By contrast, the ongoing cost to large

plans in 2002 is estimated at $329

million, or $6,183 for each large health

plan and $2.77 for each large health

plan enrollee, and $481 for each large

disability plan and $0.35 for each large

disability plan enrollee.

Start-up costs for small plans will be

modest because a large majority of such

plans purchase claims administration

services from a relatively small number

of insurers, HMOs, and other service

providers. Service providers typically

use a single claims processing system to

service a large number of customers.

Thus, the cost of revising and

implementing a relatively small number

of claims and appeals procedures is

spread thinly over a far larger number

of small plans. The regulation therefore

is not expected to adversely affect small

plans. Small and large plans and their

respective enrollees will benefit equally

from improved accuracy and timeliness

in claims and appeals determinations.

The Department’s assessment of the

regulation’s costs and benefits is

detailed later in this preamble.

3. Paperwork Reduction Act

On September 9, 1998, the Pension

and Welfare Benefits Administration

published in the Federal Register (63

FR 48390), a Notice of Proposed

Rulemaking concerning the Employee

Retirement Income Security Act of 1974,

Rules and Regulations for

Administration and Enforcement;

Claims Procedure, which included a

request for comments on its information

collection provisions. That proposal, if

adopted as proposed, would have

revised the information collection

request (ICR) included in the existing

regulation relating to the minimum

requirements for benefits claims

procedures for all employee benefit

plans covered under Title I of ERISA.

Also on September 9, 1998, the

Department submitted the revised ICR

to OMB for review and clearance under

the Paperwork Reduction Act of 1995

(PRA 95), and solicited public

comments concerning the revision of

the information collection request (ICR)

included in the proposal.

OMB has approved the ICR included

in the Final Regulation concerning the

Employee Retirement Income Security

Act of 1974, Rules and Regulations for

Administration and Enforcement;

Claims Procedure. A copy of the ICR,

with applicable supporting

documentation, may be obtained by

contacting the Department of Labor,

Departmental Clearance Officer, Ira

Mills, at (202) 693–4122. (Not a toll-free

number.)

The burden estimates are summarized

below. A more detailed description of

the assumptions and methodology

underlying these estimates will be

found below in the analysis of costs.

Agency: Pension and Welfare Benefits

Administration.

Title: Final Regulation, Employee

Retirement Income Security Act of 1974;

Rules and Regulations for

Administration and Enforcement;

Claims Procedure (Final Revisions to

Benefit Claims Procedure Regulation

Pursuant to 29 CFR 2560.503–1).

OMB Number: 1210–0053.

Affected Public: Individuals or

households; Business or other for-profit;

Not-for-profit institutions.

Frequency of Response: On occasion.

Total Respondents: 6.7 million (2001);

6.7 million (2002); 6.7 million (2003).

Total Responses: 118 million (2001);

118 million (2002); 118 million (2003).

Estimated Burden Hours: 316,000

(annual average 2001–2003).

Estimated Annual Costs (Operating

and Maintenance): $96 million (annual

average 2001–2003).

Persons are not required to respond to

the revised information collection

unless it displays a currently valid OMB

control number.

4. Unfunded Mandates Reform Act

For purposes of the Unfunded

Mandates Reform Act of 1995 (Pub. L.

104–4) (UMRA), as well as Executive

Order 12875, this rule does not include

any Federal mandate that may result in

expenditures by State, local, or tribal

governments, but does include

mandates that may impose an annual

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70259

43 GAO, HMO Complaints and Appeals: Most Key

Procedures in Place, but Others Valued by

Consumers Largely Absent, GAO/HEHS, 98–119,

May 1998; and GAO, Indemnity Health Plans: Key

Features of Consumer Complaint and Appeals

Systems, GAO/HEHS 98–189, June 1998. 44 Dahlia K. Remler et. al., ‘‘What Do Managed

Care Plans Do To Affect Care? Results from a

Survey of Physicians,’’ Inquiry 34: 196–204 (Fall

1997).

45 Kaiser Family Foundation Press Release, ‘‘New

Survey Shows that Providers and Health Plans

Clash Often over Patient Care’’ (July 28, 1999).

46 Kaiser Family Foundation, ‘‘National Survey

on Consumer Experiences with Health Care Plans’’

(June 2000).

47The President’s Advisory Commission on

Consumer Protection and Quality in the Health Care

Industry, Quality First: Better Health Care for All

Americans, Final Report to the President of the

United States. The report points out that some

patients suffer harm when ‘‘inappropriate benefit

coverage decisions . . . impinge on or limit the

delivery of necessary care.’’ A wrongful denial of

coverage ‘‘can lead to a delay in care or to a

decision to forgo care entirely.’’ The report adds

that ‘‘even a small number of mistakes . . . can

have serious, costly, or fatal consequences,’’ such as

‘‘additional health expenses, increased disability,

lost wages, and lost productivity.’’

48See, e.g., David M. Cutler and Elizabeth

Richardson, ‘‘Your Money and Your Life: The Value

of Health and What Affects It,’’ in Frontiers in

Health Policy Research (Alan M. Garber, ed.,

Cambridge: MIT Press, 1999, at 99–132).

expenditure of $100 million or more on

the private sector. The basis for this

statement is described in the analysis of

costs for purposes of Executive Order

12866 and the Regulatory Flexibility

Act. Elsewhere in this preamble we

have identified the authorizing

legislation, presented cost-benefit

analyses, described regulatory

alternatives, and explained how we

selected the least costly alternative as

required by UMRA.

5. Small Business Regulatory

Enforcement Fairness Act

This final rule is subject to the

provisions of the Small Business

Regulatory Enforcement Fairness Act of

1996 (5 U.S.C. 801 et seq.) (SBREFA),

and is a major rule under SBREFA.

Accordingly, this final rule has been

transmitted to Congress and the

Comptroller General for review.

C. Detailed Assessment of Economic

Benefits and Costs of the Regulation

Economic Benefits of the Regulation

The regulation will ensure the prompt

approval of some health and disability

claims that otherwise would have been

wrongly denied. The approval of such

claims can be characterized as financial

transfers that will produce societal

benefits. Quicker and more accurate

health benefit claims determinations

will serve to encourage the delivery of

more beneficial health care. This in turn

will improve health benefit claimants’

health outcomes, productivity, and

quality of life, and possibly avert the

need for some later health care and

associated expense. With respect to

disability claims, timelier

determinations will assure prompt

replacement of lost income for

successful claimants, thereby averting

some financial hardships. Improved

standards for handling health and

disability claims will also increase

enrollee confidence in their health and

disability plans and thereby promote

efficiency in group insurance and labor

markets and employer sponsorship of

health and disability plans.

These benefits of the regulation

generally are impossible to quantify

because of limitations in available data

and the absence of reliable measures for

their assessment. The Department’s

analysis is therefore restricted to

identifying the categories of these

benefits and describing their origins and

anticipated magnitude.

1. Group Health Claims

The regulation updates ERISA’s

requirements for benefit claims

processing in group health plans to

address recent, dramatic changes in the

delivery and financing of health care

services. This will improve health care

quality by averting harmful,

inappropriate delays and denials of

health benefits, thereby yielding

substantial social benefits. It will also

increase confidence in the employmentbased health benefits system, increase

transparency and enrollee access to

information related to their benefit

claims, and help streamline and make

more uniform and predictable claims

and appeals procedures. In so doing, it

can help increase the efficiency of

health benefit plans and of health

insurance, health care markets, and

labor markets at large.

The Department expects that the

economic benefits of the regulation will

be large. Benefits are expected to be

large in part because serious weaknesses

in current claims determination

processes, which the regulation will

help correct, are widespread. Elements

of health claims and appeals processes

that are widely considered to be

essential are often lacking, the U.S.

General Accounting Office has reported.

Just 41 percent of HMOs and 50 percent

of indemnity insurers studied by GAO

provided for appeals decisions to be

made by individuals not involved in the

original denial. Written denial notices

explaining appeal rights were provided

by 97 percent of HMOs, but just 67

percent of indemnity insurers.

Expedited reviews were provided by 94

percent of HMOs, but just 67 percent of

indemnity insurers.43

Improving Health Outcomes

There is broad agreement that more

accurate and timely claims

determinations can yield large economic

benefits in the form of improved health

outcomes. In one survey, 59 percent of

physicians said their decisions

regarding hospital length of stay were

subject to review. Forty-five percent

were subject to review in connection

with site-of-care decisions, as were 39

percent in connection with treatment

appropriateness. On average for various

types of treatment, plans initially

denied between 1.8 percent and 5.8

percent of physician-recommended

actions.44 In another survey, 87% of

physicians reported that managed care

health plans denied one or more

patients’ claims for medical services

during a two-year period, often

adversely affecting patients’ health.45 In

yet another survey, 17 percent of

insured adults under age 65 reported

problems with delayed or denied

coverage, and 12 percent reported

billing or payment problems. Of adults

reporting problems, 21 percent said the

problem resulted in them losing time

from school or work, 21 percent

reported worsened health, and 6 percent

reported suffering a permanent or longlasting disability.46 These figures

demonstrate the potential importance of

prompt and accurate claims

determinations to health outcomes.

The President’s Advisory Commission

on Consumer Protection and Quality in

the Health Care Industry (the

Commission) placed ‘‘highest priority’’

on ‘‘creating systems that minimize

errors and correct them in a timely

fashion,’’ adding that improvements to

appeals processes could avert injuries.47

Lacking data on the number of claims

and appeals that are wrongly denied

and the incidence and severity of

resultant injuries, the Department was

unable to quantify the economic

benefits of improved health outcomes

under the regulation. There is evidence,

however, that additional spending on

appropriate health care increases social

welfare.48 The Department believes that

the economic benefits of improved

health outcomes under the regulation

will be large.

Improving Market Efficiency

By improving claims and appeals

processes, the regulation will increase

efficiency in the operation of employee

benefit systems and health care, health

insurance, and labor markets.

The regulation will increase efficiency

by reducing complexity. Idiosyncratic

70260 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

49For example, a 1997 Kaiser Family Foundation

/ Harvard University survey found that a majority

of Americans say managed care plans have made it

harder for people who are sick to see medical

specialists and have decreased the quality of health

care for the sick. A majority of those in managed

care plans are very or somewhat worried that their

health plan would be more concerned about saving

money than about what is the best treatment for

them if they were sick (Kaiser Family Foundation,

‘‘Is There a Managed Care ‘Backlash’?’’ Press

Release, National Toplines, and Chart Pack,

November 7, 1997).

50See, e.g., Jonathan Gruber and Alan B. Krueger,

‘‘The Incidence of Mandated Employer-Provided

Insurance: Lessons from Workers Compensation

Insurance,’’ Tax Policy and Economy (1991);

Jonathan Gruber, ‘‘The Incidence of Mandated

Maternity Benefits,’’ American Economic Review,

Vol. 84 (June 1994), at 622–641; Lawrence H.

Summers, ‘‘Some Simple Economics of Mandated

Benefits,’’ American Economic Review, Vol. 79, No.

2 (May 1989); Louise Sheiner, ‘‘Health Care Costs,

Wages, and Aging,’’ Federal Reserve Board of

Governors working paper, April 1999; and Edward

Montgomery, Kathryn Shaw, and Mary Ellen

Benedict, ‘‘Pensions and Wages: An Hedonic Price

Theory Approach,’’ International Economic Review,

Vol. 33 No. 1 (Feb. 1992).

51Russell Korobkin, ‘‘The Efficiency of Managed

Care ‘Patient Protection’ Laws: Incomplete

Contracts, Bounded Rationality, and Market

Failure,’’ 85 Cornell Law Review 1 (1999).

requirements, time-frames, and

procedures for claims processing

impose substantial burdens on

participants, their representatives, and

service providers. By establishing a

more complete, uniform set of minimum

requirements the regulation will reduce

the complexity of claims processing

requirements, thereby increasing

efficiency.

The regulation will improve the

efficiency of private employee benefits

systems by enhancing its transparency

and fostering participants’ confidence in

its fairness. In various surveys,

consumers have expressed concern that

plans sometimes withhold care or

benefits.49 The ability to get a promised

benefit, particularly when sick or

disabled, is at the heart of these

consumer concerns. The regulation will

also increase efficiency by better

informing claimants. When information

about the terms and conditions under

which benefits will be provided is

unavailable to enrollees, they will

discount the value of benefits to

compensate for the perceived risk.

The voluntary nature of the

employment-based health benefit

system in conjunction with the open

and dynamic character of labor markets

make explicit as well as implicit

negotiations on compensation a key

determinant of the prevalence of

employee benefits coverage. It is likely

that 80% to 100% of the cost of

employee benefits is borne by workers

through reduced wages.50 The

prevalence of benefits is therefore

largely dependent on the efficacy of this

exchange. If workers perceive that there

is the potential for inappropriate denial

of benefits, they will discount the value

of such benefits to adjust for this risk.

This discount drives a wedge in the

compensation negotiation, limiting its

efficiency. With workers unwilling to

bear the full cost of the benefit, fewer

benefits will be provided. To the extent

that workers perceive that a federal

regulation, supported by enforcement

authority, reduces the risk of

inappropriate denials of benefits, the

differential between the employers’

costs and workers’ willingness to accept

wage offsets is minimized.

Effective claims procedures can also

improve health care, health plan

quality, and market efficiency by

serving as a communication channel,

providing feedback from participants,

beneficiaries, and providers to plans

about quality issues. Aggrieved

claimants are especially likely to

disenroll if they do not understand their

appeal rights, or if they believe that

their plans’ claims and appeals

procedures will not effectively resolve

their difficulties. Unlike appeals,

however, disenrollments fail to alert

plans to the difficulties that prompted

them. More effective appeals procedures

can give participants and beneficiaries

an alternative way to respond to

difficulties with their plans. Plans in

turn can use the information gleaned

from the appeals process to improve

services.

By providing aggrieved claimants

with an alternative to disenrollment,

improved claims and appeals

procedures will reduce disenrollment

rates. Lower disenrollment rates in turn

will increase plans’ incentive to keep

enrollees healthy over the long term,

prompting managed care organizations

(MCOs) to step up efforts to promote

preventive care and healthy lifestyles.

(In contrast, the high disenrollment

rates associated with ineffective claims

and appeals procedures discourage

MCOs from investing in such efforts.)

Such efforts by MCOs may yield long

term improvements in population

health and reductions in national health

care costs.

The disenrollments that will be

discouraged by the regulation would

have been economically inefficient.

Such disenrollments can be

characterized as instances where

aggrieved claimant, lacking access to or

knowledge of a full and fair appeals

process, drop their otherwise preferred

health coverage option in favor of an

inferior option. By discouraging such

disenrollments, the regulation will

increase social welfare.

Reducing economically inefficient

turnover across health coverage options

will also trim administrative costs.

Plans incur costs directly to process

enrollments and disenrollments.

Turnover also imposes indirect

transactions costs on enrollees and

providers, including (sometimes) costs

that arise when enrollees must change

doctors or hospitals and when enrollees

and doctors must become familiar with

new plan provisions, including new

claims procedures.

The Department also expects that the

regulation’s higher standard for claims

adjudication will enhance some

insurers’ and group health plans’

abilities to effectively control costs by

limiting access to inappropriate care.

Providing a more formally sanctioned

framework for internal review and

consultation on difficult claims

facilitates the adoption of cost

containment programs by employers

who, in the absence of a regulation

providing some guidance, may have

opted to pay questionable claims rather

than risk alienating participants or being

deemed to have violated ERISA’s

fiduciary provisions.

Finally, it is worth noting that

economic theory allows for regulation of

managed care practices to be welfareenhancing. For example, Korobkin

contends that ‘‘managed care

organizations (MCOs) have an incentive

to provide an inefficiently low quality of

certain types of benefits because it is

difficult for consumers to evaluate their

quality prior to contracting, and because

consumers who are able to evaluate

quality after contracting are the

customers that MCOs do not wish to

retain.’’ 51

In summary, the regulation’s new,

higher standards for handling health

benefit claims will reduce the incidence

of excessive delays and inappropriate

denials, averting serious, avoidable

lapses in health care quality and

resultant injuries and losses to

enrollees. It will raise enrollees’ level of

confidence in and satisfaction with their

health care benefits. It will improve

plans’ awareness of participant,

beneficiary, and provider concerns,

prompting plan responses that improve

health care quality. Finally, by helping

assure prompt and precise adherence to

contract terms and by improving the

flow of information between plans and

enrollees, the proposed regulation will

bolster the efficiency of labor, health

care, and insurance markets. The

Department therefore concludes that the

economic benefits of the regulation will

outweigh its costs.

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70261

52 John M. McNeil, ‘‘Americans with Disabilities:

1994–95,’’ U.S. Bureau of the Census, Current

Population Reports, P 70–61 (August 1997).

53U.S. Social Security Administration, Social

Security Bulletin, Annual Statistical Supplement,

1998.

54 In the tables that follow, due to rounding,

individual reported estimates may not always add

to reported totals.

2. Disability Benefit Claims

With respect to disability claims,

timelier determinations will assure

prompt replacement of lost income for

successful claimants, thereby averting

some financial hardships. Improving

standards for handling disability claims

will also increase enrollee confidence in

disability plans and promote efficiency

in disability insurance and labor

markets.

Averting Financial Hardship

As with health benefit claims, the

regulation is intended and expected to

improve the timeliness and accuracy of

disability benefit claims determinations.

This will avert financial hardship for

claimants whose claims or appeals

would otherwise have been

inappropriately delayed or denied.

No data are available on how much

financial hardship might be attributable

to such delays or denials, or how much

hardship the regulation might avert, but

the potential magnitudes are large.

Severe disabilities are not uncommon

among the working age population. In

1994, 6 million Americans age 22 to 44

(or 6 percent of all those in the age

group) were severely disabled, as were

3 million of those age 45 to 54 (12

percent) and 5 million of those 55 to 64

(22 percent). Altogether more than onehalf of severely disabled Americans

were age 22 to 64, and nearly one-half

of these were age 44 or younger.

Severe disability often greatly

impedes work and erodes income. The

employment rate for people 21 to 64

years of age was 82 percent among those

with no disability, but 26 percent among

those with severe disabilities. The

proportion of this age group with low

income (less than one-half of the

median) was 13 percent among those

with no disability, but 42 percent among

those with severe disabilities. 52

More than 4 million disabled

individuals under age 65 currently rely

on Supplemental Security Income (SSI),

a federal means-tested cash assistance

program for disabled individuals with

very low incomes and assets. More than

one-half million disabled Americans

join the SSI rolls each year.53

Private, employment-based disability

insurance can help replace income

people lose when disability forces them

to terminate or curtail work. The

Department estimates that in 2002 36

million U.S. private-sector employees

(or 32 percent of all such employees)

will be insured against short-term

disability, and 26 million (or 23 percent)

will be insured against long term

disability. Insured workers may

nonetheless suffer financial hardship,

however, if their claims for disability

benefits are wrongly denied or unduly

delayed. Public comments on the

proposed regulation provide examples

of such hardships.

Improving Market Efficiency

The regulation’s disability claims

provisions will promote market

efficiency in many of the same ways as

its health claims provisions. Fuller

information and fuller and fairer claims

appeals processes will promote enrollee

confidence and discourage workers from

inappropriately discounting the value of

their disability benefits, thereby

fostering efficiency in disability

insurance and labor markets. Fairer and

faster determinations will also spare

claimants and their representatives,

including their health care providers,

the incidental (but potentially large)

costs associated with excessively

cumbersome and lengthy claims and

appeals processes. Finally, by averting

some financial hardships, faster and

more accurate claims determinations

will relieve claimants and their

creditors of some of the costs associated

with borrower delinquency and

bankruptcy.

Economic Costs of the Regulation

1. Cost Estimates

The Department performed a

comprehensive, unified analysis to

estimate the economic cost attributable

to the final regulation for purposes of

compliance with Executive Order

12866, the Regulatory Flexibility Act,

and the Paperwork Reduction Act. The

analysis takes into account a wide range

of information, including public

comments on the Department’s

proposed regulation.

Table 1 summarizes the Department’s

cost estimates, disaggregated by type of

claim and plan size.54 ‘‘Small’’ plans

have fewer than 100 participants. Health

claims, which at 1.4 billion annually are

far more numerous than disability

claims, account for the majority of costs.

Ongoing costs will change over time

with claims volume and mix, and will

fall over time as health claims

processing becomes more automated.

The Department does not anticipate

any increase in the cost of processing

pension claims or welfare plan claims

other than health and disability claims.

As noted earlier in this preamble, the

regulation’s standards applicable to

pension claims and welfare claims other

than health and disability claims are

substantially similar to those currently

in effect under the 1977 regulation.

TABLE 1.—SUMMARY OF ADMINISTRATIVE COSTS

Plan size

Start-up costs 2001 Annual costs 2002 Total costs 2001–2002

Small Large Total Small Large Total Small Large Total

Dollars in millions:

Health .......................................................................... $20 $82 $103 $68 $310 $379 $88 $393 $481

Disability ...................................................................... 4 13 16 2 18 21 6 31 37

Total ..................................................................... 24 95 119 71 329 399 94 424 518

Dollars per enrollee:

Health .......................................................................... 0.81 0.73 0.75 2.77 2.77 2.77 3.58 3.50 3.51

Disability ...................................................................... 0.24 0.24 0.24 0.15 0.35 0.31 0.40 0.59 0.55

Dollars per plan:

Health .......................................................................... 7 1,642 37 25 6,183 135 32 7,825 172

Disability ...................................................................... 2 332 9 1 481 12 3 814 22

70262 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

The regulation applies different

standards to disability claims and to

different kinds of health benefit claims.

The start-up cost of meeting these

standards reflects the number of claims

processes that must be modified and the

degree of changes to those processes

that are necessary. The ongoing cost of

adhering to the standards reflects the

volume of claims transactions to which

they apply and the necessary degree of

change to bring all transactions into

compliance. Based on public comments

and other information, it is clear that

many health and disability plans

already comply or nearly comply with

many of the regulations’ standards in

connection with a large number of

claims, but that all or most will need to

make at least some changes in their

handling of at least some claims.

Table 2 connects the Department’s

cost estimates with the regulation’s

major provisions and the Department’s

estimates of affected claims processes

and claims transactions. The single

largest ongoing cost is attributable to the

regulation’s time frames for health

claims decisions. The Department

believes that under plans’ current

practices up to 1 percent of claims

decisions would violate this provision.

Accelerating these 14 million decisions

is estimated to cost $222 million in

2002.

In estimating the start-up cost, the

Department considered the major

actions that plans (or their service

providers) would undertake, including

revising processes, modifying forms,

modifying systems, and hiring or

contracting where necessary. The

Department estimated these combined

costs at $119 million in 2001, or a little

more than $12,000 on average for each

entity that processes health or disability

claims.

TABLE 2.—START-UP COSTS, AND ONGOING COSTS BY MAJOR PROVISION

Type of claim

Health benefit claims Disability benefit claims

Affected

procedures

Estimated

cost ($MM)

Affected

procedures

Estimated

cost ($MM)

Start up, 2001 .................................................................................................................. 308,000 $103 24,000 $16

Affected

transactions

(MM)

Estimated

cost ($MM)

Affected

transactions

Estimated

cost ($MM)

Ongoing, 2002 ................................................................................................................. .................... $379 .................... $21

Notices ......................................................................................................................... 114.6 27 179,000 6

Time frames ................................................................................................................. 1,397.6 222 1,421,000 6

Fuller reviews ............................................................................................................... 0.4 32 32,000 3

Disclosure on request .................................................................................................. 2.9 68 57,000 3

Expert consultations ........................................................................................................ 0.2 30 32,000 3

2. Basis for Estimates

The Department’s analysis relies on

various government and private surveys

and studies and the testimony, written

comments, and other materials received

by the Department in response to its

proposed regulation and earlier request

for information. The Department

developed additional assumptions as

necessary where no data were available.

Comments on the Department’s

proposed regulation were helpful to the

Department’s effort to estimate the cost

impact of its regulation. Many

commenters described how the

proposed regulation’s major

requirements compared with, and

would affect, their current business

practices, and how the requirements

would interact with state laws,

accreditation standards, and other

strictures on those practices. In

estimating the cost of the regulation, the

Department relied on these comments to

gauge the differences between plans’

current business practices and the

regulation’s requirements and to

develop reasonable assumptions

regarding the cost of compliance.

The Department separately estimated

the one-time, start-up cost of coming

into compliance with the regulation and

the ongoing, annual cost of complying.

3. Start-Up Costs

In estimating start-up costs, the

Department considered the number of

claims processes that will be affected by

the regulation. The overwhelming

majority of health and disability benefit

plans rely on service providers to

administer their claims processes. Only

a small fraction perform these

administrative functions in-house.

Those that do tend to be very large, selfinsured plans. Service providers, which

are less numerous than plans, tend to

use a single claims process to service a

large number of plans. They may also

provide customized claims processes for

some plans, especially for self-insured

plans, which generally are not subject to

state laws regarding benefit coverage.

The Department expects that the startup cost of revising claims processes,

which for a given claims process may be

large, in most cases will be spread

thinly across plans and participants.

Table 3 presents the Department’s

estimates of the number of affected

health and disability claims processes.

TABLE 3.—AFFECTED PLANS AND CLAIMS PROCESSES

Health benefit

plans

Disability

benefit plans

Number of plans ...................................................................................................................................................... 2,802,000 1,716,000

Number of claims processes ................................................................................................................................... 308,000 35,000

Maintained by plans that self-administer ................................................................................................................. 4,000 3,000

Maintained by service providers .............................................................................................................................. 305,000 32,000

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70263

55This estimate is not intended to include the

cost of developing new explanations of claims

processes for inclusion in plan descriptions. The

Department separately accounts for that cost as part

of the estimated cost of its regulation governing the

content of summary plan descriptions. 56A published 1995 survey of 53 health insurers’

claims systems by the Health Insurance Association

of America.

57A survey of 7 managed care organizations

conducted and provided to the Department in

response to its proposed regulation.

58Primarily, data from the National Center for

Health Statistics and the Social Security

Administration.

59The Department did not attribute cost to certain

other major provisions of the regulation, including

the regulation’s prohibition against unduly

inhibiting or hampering the initiation or processing

of claims for benefits, the requirement that plans

have procedures to ensure and verify appropriately

consistent decisions, and the provisions applicable

to pension plans and welfare plans other than

health and disability benefit plans. These

provisions merely clarify current law and do not

impose new standards. Other provisions, including

the requirement that certain health care

professionals be treated as claimants’

representatives in connection with urgent health

benefit claims, the prohibition against requiring

more than two mandatory levels of administrative

appeal, the restrictions on arbitration, and the

Continued

The Department considered the

following major actions that plans (or

their service providers) would

undertake to come into compliance with

the regulation: revising processes,

revising forms, modifying systems, and

hiring or contracting where necessary.

The Department assumed that all health

and disability plans would have to

revise processes and forms and modify

systems to at least some degree and that

some would hire personnel or contract

for additional or different services in

order to achieve compliance. 55

4. Ongoing Costs

In estimating the ongoing cost of

various provisions, the Department

considered the number of claims

transactions to which they apply, the

degree to which plans already comply

in the course of normal business or in

response to a state law or other mandate

other than ERISA, and, to the degree

that they do not, the likely cost of

coming into compliance.

Claims volume was estimated by

applying estimated claiming rates for

various types of claims to projected

estimates of plan enrollment in 2002. To

estimate the application of the

regulation’s various requirements to

different types of benefit claims, it was

necessary to separately estimate health,

disability, pension, and other benefit

claims volumes. With respect to health

benefit claims, it was necessary to

separately estimate urgent, pre-service,

and post-service claims volume, and the

number of denials that are based on

clinical or medical judgments. With

respect to disability claims, it was

necessary to estimate short-term and

long-term disability claims separately.

The Department also accounted

separately for costs associated with

approved and denied claims and

appeals. Table 4 summarizes estimated

2002 claims volume.

TABLE 4.—SUMMARY OF CLAIMS VOLUME, 2002

Health

(MMs)

Disability

(000s)

Pension

(000s)

Other

(000s)

Claims .............................................................................................................................. 1,369.7 1,389.7 2,122.1 244.5

Approved ...................................................................................................................... 1,328.6 1,304.9 2,104.0 236.4

Denied .......................................................................................................................... 41.0 84.8 18.0 8.1

Appeals ............................................................................................................................ 0.4 31.6 1.8 0.8

Approved ...................................................................................................................... 0.3 6.5 0.9 0.4

Denied .......................................................................................................................... 0.1 25.1 0.9 0.4

Health claims (MMs) ........................................................................................................ 1,369.7 .................... .................... ....................

Urgent pre-service ........................................................................................................ 1.2 .................... .................... ....................

Routine pre-service ...................................................................................................... 40.0 .................... .................... ....................

Post-service .................................................................................................................. 1,328.5 .................... .................... ....................

Denied health claims (MMs) ............................................................................................ 41.0 .................... .................... ....................

Clinical/scientific basis ................................................................................................. 14.5 .................... .................... ....................

Other basis ................................................................................................................... 26.5 .................... .................... ....................

Disability claims (000s) .................................................................................................... 1,389.7 .................... .................... ....................

Short-term .................................................................................................................... 1,162.7 .................... .................... ....................

Long-term ..................................................................................................................... 227.1 .................... .................... ....................

The Department applied estimates of

health and disability benefit claiming

rates and claims mix to its estimates of

enrollment in health and disability

plans to produce its estimates of total

claims volume. The Department

estimated claims volume and mix in

light of comments received in response

to its proposed regulation and other data

that provide reasonable proxies for

private-sector employment-based health

and disability benefit plans’ claim

patterns. For example, comments on the

proposed regulation indicated health

benefit claiming rates ranging from

about 5 to 18 claims per individual per

year. The average rate across all

comments reporting rates was 9 claims

per year, and surveys available to the

Department reported rates of 6 56 and

11 57 claims per year. Many of these

reported figures may omit some health

benefit claims, such as dental claims,

made by the same individuals under

separate plans. The Department

assumed that the health benefit claiming

rates average 10 per covered individual,

believing that this is consistent with

comments received and other available

information.

The Department similarly relied on

comments received and other available

data to assess health benefit claims

denial and appeal rates and the mix of

urgent, pre- and post-service claims.

The Department assessed disability

claiming rates and claims mix based on

comments received (including

information from the life insurance

industry) and available data on the

incidence of temporary and permanent

disability in the working age

population. 58

The Department separately

considered the effect of each of the

regulation’s major provisions on each

type of claim to which it applies. Based

on its analysis, the Department

attributed cost to the application of the

regulation’s notice, timeliness,

disclosure, standard of review, and

expert consultation requirements to

health and disability claims and

appeals. 59 Many plans’ current, normal

70264 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

requirement of at least 180 days for filing appeals,

are expected to have minimal impact on plan costs.

60For example, not all health plans currently

include in denied claim notices statements of

claimants’ rights to request copies of any guidelines

or protocols or explanations of any clinical or

scientific judgments that were applied. Not all

health and disability claims are decided within the

time frames specified in the final regulation. Not all

health and disability plans routinely disclose

relevant information, such as statements of policy

or guidance regarding denied treatments for

claimants’ conditions. Not all provide for

decisionmakers on review who are different from

and not subordinate to initial decisionmakers, or

disclose the identity of medical experts consulted

in connection with reviews.

61 Including the 1995 survey of insurers cited

above and a Mercer/Foster Higgins Survey of

employment-based health plans.

business practices meet or nearly meet

one or more of these requirements.

Nonetheless, the Department believes

that many health and disability benefit

plans will have to modify their claims

processes to some degree in order to

meet all of these requirements in

connection with all claims. 60

As reported in table 2 (above), the

Department attributed the single largest

ongoing cost, $222 million, to the

application of the regulation’s

timeliness requirements to health

benefit claims. The magnitude of this

estimated cost is a function of the large

volume of total health benefit claims

(estimated at 1.4 billion in 2002) and the

proportion of these that will be affected

by the time frames of the regulation. In

light of comments received in response

to its proposed regulation and other

available information, 61 the Department

assumed that 1 percent of claims and

appeals determinations will have to be

accelerated in order to comply with the

regulation. On the same basis, it

assumed that the unit cost of

accelerating determinations will range

from $10 for initial determinations that

do not involve medical judgments to

$50 for determinations on appeal that

do involve such judgments. The low

end of this range represents the use of

administrative staff to accelerate

precessing times, the higher end a

substantially greater cost due to the

need for consultation by a medical

professional in some circumstances. On

average the affected claims are expected

to be close to the low end of the range

because the majority of claims

transactions are initial determinations

that will not hinge on medical

judgments.

The costs attributed to disclosure

following adverse determinations, fuller

reviews on appeal, and expert

consultations in appeals involving

medical judgments reflect the

progressively smaller incidence (relative

to total claims volume) of adverse

determinations, appeals, and appeals

involving medical judgments. Estimated

unit costs associated with these

provisions reflect comments received

and other available information on the

cost of these elements of health benefit

claims processes and the degree to

which plans’ normal business practices

currently conform to the provisions. For

example, in light of such information,

the Department believes that expert

medical consultations for a typical

appeal cost between $350 and $500.

However, most plans’ normal business

practices already provide for some type

of expert consultation in appeals

involving medical judgments. The

Department therefore assumed that the

cost of such consultations will rise by

$100 on average, reflecting the

understanding that plans’ normal

business practices may not always

provide consultations as required by the

regulation’s provisions.

5. Required Estimates

The Department developed estimates

as appropriate for purposes of

compliance with Executive Order

12866, the Regulatory Flexibility Act,

and the Paperwork Reduction Act.

Because the regulation establishes new

standards for, and will have a

substantial economic impact on, health

and disability claims, the Department

estimated the cost of the regulation in

connection with these claims for

purposes of Executive Order 12866 and

the Regulatory Flexibility Act, as well as

for purposes of the Paperwork

Reduction Act. Because it established

no substantial new standards for

pension claims and other welfare

benefit claims, the Department

estimated its cost in connection with

these claims only for purposes of the

Paperwork Reduction Act.

6. Changes in Claims and Appeals

Volume and Disposition

The cost estimates reported above

reflect administrative costs associated

with processing claims and appeals,

based on the assumption that the

volume, mix, and disposition of claims

and appeals remain constant. The

regulation, however, is expected to

change the overall volume and nature of

appeals and to improve the accuracy of

claims and appeals decisions. The

Department was unable to quantify

these changes, but undertook a

qualitative assessment of their likely

nature, magnitude, and social welfare

effects. The Department believes that

changes in the nature of appeals and in

claims and appeals decisions may be

large in number, but will be small as a

fraction of total claims and appeals

volume and will result in a substantial

overall increase in social welfare.

The regulation may increase or

decrease the actual number of appeals.

It is expected to decrease the number of

non-meritorious appeals and to

encourage and help ensure the approval

of meritorious claims. Improved

accuracy of initial claims decisions

under the regulation will serve to

reduce the volume of appeals. The

volume may increase, however, if the

existence of fuller review processes and

information disclosure under the

regulation increases claimants’

propensity to appeal denied claims.

Fuller disclosure of information to

claimants will also tend to encourage

appeals that are meritorious and

discourage those that are not. Improved

accuracy of initial decisions provides

social benefits without the

administrative expense of appeals. Any

new appeals arising as a result of the

regulation are likely to be both

meritorious and successful; such

appeals are likely to deliver social

benefits that are larger than the

associated administrative cost. The

regulation is also expected to reduce

non-meritorious, unsuccessful appeals,

which generally deliver no social

benefits to justify their administrative

cost.

Changes in claims and appeals

decisions under the regulation are also

expected to increase social welfare. The

Department expects that the regulation

will improve the timeliness and

accuracy of decisions. In particular, the

Department expects that some claims

and appeals that otherwise would have

been denied, but in fact should have

been approved under plans’ terms, will

now be paid. Therefore, it is highly

likely that the number and dollar

amount of claims approved will

increase. For example, encouraging

meritorious over non-meritorious

appeals should increase the number of

favorable determinations on appeal. As

noted earlier in this preamble, the

approval of meritorious claims that

otherwise would have been denied can

be characterized as a financial transfer

from plans to claimants that will have

societal benefits. Economic theory

suggests that, all else being equal,

improving adherence to private

voluntary agreements, such as plans’

terms, tends to increase economic

efficiency. In addition, as noted earlier

in this preamble, there is evidence that

additional spending on appropriate

health care increases social welfare.

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70265

62The organizations invited were the National

Governors Association, the National League of

Cities, the National Conference of State

Legislatures, the National Association of Counties,

the U.S. Conference of Mayors, and the Council of

State Governments. The meeting was attended by

representatives of the National Governors

Association, the National Conference of State

Legislatures, and the National Association of

Counties.

D. Federalism Summary Impact

Statement

Although the Department has

identified this regulation as possibly

having federalism implications, those

implications are limited. Therefore, in

compliance with Executive Order

13132, 64 FR 43255 (August 10, 1999),

the Department has taken a number of

steps to consult with affected entities.

First, the Department has, throughout

the process of developing the proposed

regulation and the final regulation,

provided State and local officials with

significant opportunities for meaningful

and timely input. After issuance of the

proposed regulation, the Department

invited public comment from all

affected parties, including States and

local governments, and held the public

comment period open for an extended

period. The Department further held a

three-day public hearing and consulted

separately with the major organizations

that represent state and local

government prior to finalizing the

regulation.

The insurance commissioners of

various states, acting collectively

through the National Association of

Insurance Commissioners (NAIC),

provided substantial public comment on

the proposed regulation and

participated in the public hearing by

submitting written testimony, testifying

personally, and engaging in public

discussion with the Department’s panel

of officials. The Department also invited

all of the ‘‘Big 7’’ organizations 62 that

represent state and local government to

meet separately with the Department to

discuss this regulation.

The NAIC and the Big 7 attendees

have generally praised the Department

for taking this regulatory action

regarding ERISA covered plans because

the Department’s approach has

generally paralleled the approach taken

by many States in regulating the

conduct of insurance companies doing

business in their States. However, both

the NAIC and the Big 7 attendees asked

the Department to limit the application

of the regulation to ‘‘self-funded’’ plans,

which do not provide benefits through

insurance directly regulated by the

States. The NAIC and Big 7 attendees

argued that many States have already

provided protections to participants in

insured plans that are greater than that

contained in the proposed regulation.

The Department has not followed this

suggestion, although the Department has

sought to address the concerns raised by

the NAIC and Big 7 attendees in other

ways. (See, for example, the discussion

below and elsewhere in this preamble

regarding preemption.) It is the view of

the Department that the importance of

establishing uniform minimum

procedural rights for all participants and

beneficiaries in ERISA-covered group

health plans outweighs the concerns of

the State and local governments.

With respect specifically to

preemption, Executive Order 13132

requires agencies taking such action to

act in strict accordance with governing

law and to restrict preemption to the

minimum level necessary to achieve the

objectives of the statute pursuant to

which any regulations are promulgated.

The Department has satisfied these

requirements in this regulation.

The proposed regulation was silent on

preemption. The Department intended

that the scope of preemption that would

result under the proposed regulation

would be limited to the minimum level

required by section 514 of the Act and

the Supremacy Clause of the

Constitution. The Department’s intent

remains the same with respect to this

final regulation. The NAIC and other

commenters argued that the proposal’s

silence on the subject of preemption

was potentially confusing and asked the

Department to make clear its views as to

the preemptive effect of the final

regulation. The Department has

responded to these comments by adding

paragraph (k) to the final regulation.

Paragraph (k) provides interpretive

guidance on preemption.

The Department’s view of the

preemptive effect of the regulation is

consistent with the Department’s intent

that the regulation’s preemptive effect

be limited to the minimum required by

section 514 and the Supremacy Clause.

As explained elsewhere in this

preamble, paragraph (k) specifically sets

forth the Department view that State

insurance laws are not preempted

unless they ‘‘prevent the application’’ of

a requirement of the regulation. In other

words, State insurance laws are

preempted by the final regulation only

to the extent that those laws are in

conflict with the regulation such that

the State laws could not be read in

harmony with the regulation.

In response to the specific concern

most commonly expressed by state

insurance commissioners, the

Department stated further in paragraph

(k)(2) its view that State-mandated

external review procedures, which

operate outside the scope of plans’

internal review procedures, are not

preempted by promulgation of the

regulation.

Thus, the Department has made every

effort to limit the effect that the

regulation will have on State law to the

minimum imposed by operation of the

statute and the Constitution.

Finally, Executive Order 13132 limits

the extent to which agencies may

impose mandates on State and local

governments. This regulation does not

create a mandate on State or local

governments. The regulation does not

impose any enforceable duties on these

entities. This regulation will be

implemented at the Federal level and

imposes compliance obligations only on

private industry. The regulation

therefore does not require imposition on

States of substantial direct compliance

costs, mandates, duties, or similar

obligations.

List of Subjects in 29 CFR Part 2560

Employee benefit plans, Employee

Retirement Income Security Act, Benefit

Claims Procedures.

For the reasons set out in the

preamble, 29 CFR part 2560 is amended

as follows:

PART 2560—RULES AND

REGULATIONS FOR ADMINISTRATION

AND ENFORCEMENT

1. The authority citation for part 2560

continues to read as follows:

Authority: Secs. 502, 505 of ERISA, 29

U.S.C. 1132, 1135, and Secretary’s Order 1–

87, 52 FR 13139 (April 21, 1987).

Section 2560–502–1 also issued under sec.

502(b)(1), 29 U.S.C. 1132(b)(1).

Section 2560–502i-1 also issued under sec.

502(i), 29 U.S.C. 1132(i).

Section 2560–503–1 also issued under sec.

503, 29 U.S.C. 1133.

2. Section 2560.503–1 is revised to

read as follows:

§ 2560.503–1 Claims procedure.

(a) Scope and purpose. In accordance

with the authority of sections 503 and

505 of the Employee Retirement Income

Security Act of 1974 (ERISA or the Act),

29 U.S.C. 1133, 1135, this section sets

forth minimum requirements for

employee benefit plan procedures

pertaining to claims for benefits by

participants and beneficiaries

(hereinafter referred to as claimants).

Except as otherwise specifically

provided in this section, these

requirements apply to every employee

benefit plan described in section 4(a)

and not exempted under section 4(b) of

the Act.

(b) Obligation to establish and

maintain reasonable claims procedures.

70266 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

Every employee benefit plan shall

establish and maintain reasonable

procedures governing the filing of

benefit claims, notification of benefit

determinations, and appeal of adverse

benefit determinations (hereinafter

collectively referred to as claims

procedures). The claims procedures for

a plan will be deemed to be reasonable

only if—

(1) The claims procedures comply

with the requirements of paragraphs (c),

(d), (e), (f), (g), (h), (i), and (j) of this

section, as appropriate, except to the

extent that the claims procedures are

deemed to comply with some or all of

such provisions pursuant to paragraph

(b)(6) of this section;

(2) A description of all claims

procedures (including, in the case of a

group health plan within the meaning of

paragraph (m)(6) of this section, any

procedures for obtaining prior approval

as a prerequisite for obtaining a benefit,

such as preauthorization procedures or

utilization review procedures) and the

applicable time frames is included as

part of a summary plan description

meeting the requirements of 29 CFR

2520.102–3;

(3) The claims procedures do not

contain any provision, and are not

administered in a way, that unduly

inhibits or hampers the initiation or

processing of claims for benefits. For

example, a provision or practice that

requires payment of a fee or costs as a

condition to making a claim or to

appealing an adverse benefit

determination would be considered to

unduly inhibit the initiation and

processing of claims for benefits. Also,

the denial of a claim for failure to obtain

a prior approval under circumstances

that would make obtaining such prior

approval impossible or where

application of the prior approval

process could seriously jeopardize the

life or health of the claimant (e.g., in the

case of a group health plan, the claimant

is unconscious and in need of

immediate care at the time medical

treatment is required) would constitute

a practice that unduly inhibits the

initiation and processing of a claim;

(4) The claims procedures do not

preclude an authorized representative of

a claimant from acting on behalf of such

claimant in pursuing a benefit claim or

appeal of an adverse benefit

determination. Nevertheless, a plan may

establish reasonable procedures for

determining whether an individual has

been authorized to act on behalf of a

claimant, provided that, in the case of

a claim involving urgent care, within

the meaning of paragraph (m)(1) of this

section, a health care professional,

within the meaning of paragraph (m)(7)

of this section, with knowledge of a

claimant’s medical condition shall be

permitted to act as the authorized

representative of the claimant; and

(5) The claims procedures contain

administrative processes and safeguards

designed to ensure and to verify that

benefit claim determinations are made

in accordance with governing plan

documents and that, where appropriate,

the plan provisions have been applied

consistently with respect to similarly

situated claimants.

(6) In the case of a plan established

and maintained pursuant to a collective

bargaining agreement (other than a plan

subject to the provisions of section

302(c)(5) of the Labor Management

Relations Act, 1947 concerning joint

representation on the board of

trustees)—

(i) Such plan will be deemed to

comply with the provisions of

paragraphs (c) through (j) of this section

if the collective bargaining agreement

pursuant to which the plan is

established or maintained sets forth or

incorporates by specific reference—

(A) Provisions concerning the filing of

benefit claims and the initial disposition

of benefit claims, and

(B) A grievance and arbitration

procedure to which adverse benefit

determinations are subject.

(ii) Such plan will be deemed to

comply with the provisions of

paragraphs (h), (i), and (j) of this section

(but will not be deemed to comply with

paragraphs (c) through (g) of this

section) if the collective bargaining

agreement pursuant to which the plan is

established or maintained sets forth or

incorporates by specific reference a

grievance and arbitration procedure to

which adverse benefit determinations

are subject (but not provisions

concerning the filing and initial

disposition of benefit claims).

(c) Group health plans. The claims

procedures of a group health plan will

be deemed to be reasonable only if, in

addition to complying with the

requirements of paragraph (b) of this

section—

(1)(i) The claims procedures provide

that, in the case of a failure by a

claimant or an authorized representative

of a claimant to follow the plan’s

procedures for filing a pre-service claim,

within the meaning of paragraph (m)(2)

of this section, the claimant or

representative shall be notified of the

failure and the proper procedures to be

followed in filing a claim for benefits.

This notification shall be provided to

the claimant or authorized

representative, as appropriate, as soon

as possible, but not later than 5 days (24

hours in the case of a failure to file a

claim involving urgent care) following

the failure. Notification may be oral,

unless written notification is requested

by the claimant or authorized

representative.

(ii) Paragraph (c)(1)(i) of this section

shall apply only in the case of a failure

that—

(A) Is a communication by a claimant

or an authorized representative of a

claimant that is received by a person or

organizational unit customarily

responsible for handling benefit matters;

and

(B) Is a communication that names a

specific claimant; a specific medical

condition or symptom; and a specific

treatment, service, or product for which

approval is requested.

(2) The claims procedures do not

contain any provision, and are not

administered in a way, that requires a

claimant to file more than two appeals

of an adverse benefit determination

prior to bringing a civil action under

section 502(a) of the Act;

(3) To the extent that a plan offers

voluntary levels of appeal (except to the

extent that the plan is required to do so

by State law), including voluntary

arbitration or any other form of dispute

resolution, in addition to those

permitted by paragraph (c)(2) of this

section, the claims procedures provide

that:

(i) The plan waives any right to assert

that a claimant has failed to exhaust

administrative remedies because the

claimant did not elect to submit a

benefit dispute to any such voluntary

level of appeal provided by the plan;

(ii) The plan agrees that any statute of

limitations or other defense based on

timeliness is tolled during the time that

any such voluntary appeal is pending;

(iii) The claims procedures provide

that a claimant may elect to submit a

benefit dispute to such voluntary level

of appeal only after exhaustion of the

appeals permitted by paragraph (c)(2) of

this section;

(iv) The plan provides to any

claimant, upon request, sufficient

information relating to the voluntary

level of appeal to enable the claimant to

make an informed judgment about

whether to submit a benefit dispute to

the voluntary level of appeal, including

a statement that the decision of a

claimant as to whether or not to submit

a benefit dispute to the voluntary level

of appeal will have no effect on the

claimant’s rights to any other benefits

under the plan and information about

the applicable rules, the claimant’s right

to representation, the process for

selecting the decisionmaker, and the

circumstances, if any, that may affect

the impartiality of the decisionmaker,

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70267

such as any financial or personal

interests in the result or any past or

present relationship with any party to

the review process; and

(v) No fees or costs are imposed on

the claimant as part of the voluntary

level of appeal.

(4) The claims procedures do not

contain any provision for the mandatory

arbitration of adverse benefit

determinations, except to the extent that

the plan or procedures provide that:

(i) The arbitration is conducted as one

of the two appeals described in

paragraph (c)(2) of this section and in

accordance with the requirements

applicable to such appeals; and

(ii) The claimant is not precluded

from challenging the decision under

section 502(a) of the Act or other

applicable law.

(d) Plans providing disability benefits.

The claims procedures of a plan that

provides disability benefits will be

deemed to be reasonable only if the

claims procedures comply, with respect

to claims for disability benefits, with the

requirements of paragraphs (b), (c)(2),

(c)(3), and (c)(4) of this section.

(e) Claim for benefits. For purposes of

this section, a claim for benefits is a

request for a plan benefit or benefits

made by a claimant in accordance with

a plan’s reasonable procedure for filing

benefit claims. In the case of a group

health plan, a claim for benefits

includes any pre-service claims within

the meaning of paragraph (m)(2) of this

section and any post-service claims

within the meaning of paragraph (m)(3)

of this section.

(f) Timing of notification of benefit

determination. (1) In general. Except as

provided in paragraphs (f)(2) and (f)(3)

of this section, if a claim is wholly or

partially denied, the plan administrator

shall notify the claimant, in accordance

with paragraph (g) of this section, of the

plan’s adverse benefit determination

within a reasonable period of time, but

not later than 90 days after receipt of the

claim by the plan, unless the plan

administrator determines that special

circumstances require an extension of

time for processing the claim. If the plan

administrator determines that an

extension of time for processing is

required, written notice of the extension

shall be furnished to the claimant prior

to the termination of the initial 90-day

period. In no event shall such extension

exceed a period of 90 days from the end

of such initial period. The extension

notice shall indicate the special

circumstances requiring an extension of

time and the date by which the plan

expects to render the benefit

determination.

(2) Group health plans. In the case of

a group health plan, the plan

administrator shall notify a claimant of

the plan’s benefit determination in

accordance with paragraph (f)(2)(i),

(f)(2)(ii), or (f)(2)(iii) of this section, as

appropriate.

(i) Urgent care claims. In the case of

a claim involving urgent care, the plan

administrator shall notify the claimant

of the plan’s benefit determination

(whether adverse or not) as soon as

possible, taking into account the

medical exigencies, but not later than 72

hours after receipt of the claim by the

plan, unless the claimant fails to

provide sufficient information to

determine whether, or to what extent,

benefits are covered or payable under

the plan. In the case of such a failure,

the plan administrator shall notify the

claimant as soon as possible, but not

later than 24 hours after receipt of the

claim by the plan, of the specific

information necessary to complete the

claim. The claimant shall be afforded a

reasonable amount of time, taking into

account the circumstances, but not less

than 48 hours, to provide the specified

information. Notification of any adverse

benefit determination pursuant to this

paragraph (f)(2)(i) shall be made in

accordance with paragraph (g) of this

section. The plan administrator shall

notify the claimant of the plan’s benefit

determination as soon as possible, but

in no case later than 48 hours after the

earlier of—

(A) The plan’s receipt of the specified

information, or

(B) The end of the period afforded the

claimant to provide the specified

additional information.

(ii) Concurrent care decisions. If a

group health plan has approved an

ongoing course of treatment to be

provided over a period of time or

number of treatments—

(A) Any reduction or termination by

the plan of such course of treatment

(other than by plan amendment or

termination) before the end of such

period of time or number of treatments

shall constitute an adverse benefit

determination. The plan administrator

shall notify the claimant, in accordance

with paragraph (g) of this section, of the

adverse benefit determination at a time

sufficiently in advance of the reduction

or termination to allow the claimant to

appeal and obtain a determination on

review of that adverse benefit

determination before the benefit is

reduced or terminated.

(B) Any request by a claimant to

extend the course of treatment beyond

the period of time or number of

treatments that is a claim involving

urgent care shall be decided as soon as

possible, taking into account the

medical exigencies, and the plan

administrator shall notify the claimant

of the benefit determination, whether

adverse or not, within 24 hours after

receipt of the claim by the plan,

provided that any such claim is made to

the plan at least 24 hours prior to the

expiration of the prescribed period of

time or number of treatments.

Notification of any adverse benefit

determination concerning a request to

extend the course of treatment, whether

involving urgent care or not, shall be

made in accordance with paragraph (g)

of this section, and appeal shall be

governed by paragraph (i)(2)(i), (i)(2)(ii),

or (i)(2)(iii), as appropriate.

(iii) Other claims. In the case of a

claim not described in paragraphs

(f)(2)(i) or (f)(2)(ii) of this section, the

plan administrator shall notify the

claimant of the plan’s benefit

determination in accordance with either

paragraph (f)(2)(iii)(A) or (f)(2)(iii)(B) of

this section, as appropriate.

(A) Pre-service claims. In the case of

a pre-service claim, the plan

administrator shall notify the claimant

of the plan’s benefit determination

(whether adverse or not) within a

reasonable period of time appropriate to

the medical circumstances, but not later

than 15 days after receipt of the claim

by the plan. This period may be

extended one time by the plan for up to

15 days, provided that the plan

administrator both determines that such

an extension is necessary due to matters

beyond the control of the plan and

notifies the claimant, prior to the

expiration of the initial 15-day period,

of the circumstances requiring the

extension of time and the date by which

the plan expects to render a decision. If

such an extension is necessary due to a

failure of the claimant to submit the

information necessary to decide the

claim, the notice of extension shall

specifically describe the required

information, and the claimant shall be

afforded at least 45 days from receipt of

the notice within which to provide the

specified information. Notification of

any adverse benefit determination

pursuant to this paragraph (f)(2)(iii)(A)

shall be made in accordance with

paragraph (g) of this section.

(B) Post-service claims. In the case of

a post-service claim, the plan

administrator shall notify the claimant,

in accordance with paragraph (g) of this

section, of the plan’s adverse benefit

determination within a reasonable

period of time, but not later than 30

days after receipt of the claim. This

period may be extended one time by the

plan for up to 15 days, provided that the

plan administrator both determines that

70268 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

such an extension is necessary due to

matters beyond the control of the plan

and notifies the claimant, prior to the

expiration of the initial 30-day period,

of the circumstances requiring the

extension of time and the date by which

the plan expects to render a decision. If

such an extension is necessary due to a

failure of the claimant to submit the

information necessary to decide the

claim, the notice of extension shall

specifically describe the required

information, and the claimant shall be

afforded at least 45 days from receipt of

the notice within which to provide the

specified information.

(3) Disability claims. In the case of a

claim for disability benefits, the plan

administrator shall notify the claimant,

in accordance with paragraph (g) of this

section, of the plan’s adverse benefit

determination within a reasonable

period of time, but not later than 45

days after receipt of the claim by the

plan. This period may be extended by

the plan for up to 30 days, provided that

the plan administrator both determines

that such an extension is necessary due

to matters beyond the control of the

plan and notifies the claimant, prior to

the expiration of the initial 45-day

period, of the circumstances requiring

the extension of time and the date by

which the plan expects to render a

decision. If, prior to the end of the first

30-day extension period, the

administrator determines that, due to

matters beyond the control of the plan,

a decision cannot be rendered within

that extension period, the period for

making the determination may be

extended for up to an additional 30

days, provided that the plan

administrator notifies the claimant,

prior to the expiration of the first 30-day

extension period, of the circumstances

requiring the extension and the date as

of which the plan expects to render a

decision. In the case of any extension

under this paragraph (f)(3), the notice of

extension shall specifically explain the

standards on which entitlement to a

benefit is based, the unresolved issues

that prevent a decision on the claim,

and the additional information needed

to resolve those issues, and the claimant

shall be afforded at least 45 days within

which to provide the specified

information.

(4) Calculating time periods. For

purposes of paragraph (f) of this section,

the period of time within which a

benefit determination is required to be

made shall begin at the time a claim is

filed in accordance with the reasonable

procedures of a plan, without regard to

whether all the information necessary to

make a benefit determination

accompanies the filing. In the event that

a period of time is extended as

permitted pursuant to paragraph

(f)(2)(iii) or (f)(3) of this section due to

a claimant’s failure to submit

information necessary to decide a claim,

the period for making the benefit

determination shall be tolled from the

date on which the notification of the

extension is sent to the claimant until

the date on which the claimant

responds to the request for additional

information.

(g) Manner and content of notification

of benefit determination. (1) Except as

provided in paragraph (g)(2) of this

section, the plan administrator shall

provide a claimant with written or

electronic notification of any adverse

benefit determination. Any electronic

notification shall comply with the

standards imposed by 29 CFR

2520.104b–1(c)(1)(i), (iii), and (iv). The

notification shall set forth, in a manner

calculated to be understood by the

claimant —

(i) The specific reason or reasons for

the adverse determination;

(ii) Reference to the specific plan

provisions on which the determination

is based;

(iii) A description of any additional

material or information necessary for

the claimant to perfect the claim and an

explanation of why such material or

information is necessary;

(iv) A description of the plan’s review

procedures and the time limits

applicable to such procedures,

including a statement of the claimant’s

right to bring a civil action under

section 502(a) of the Act following an

adverse benefit determination on

review;

(v) In the case of an adverse benefit

determination by a group health plan or

a plan providing disability benefits,

(A) If an internal rule, guideline,

protocol, or other similar criterion was

relied upon in making the adverse

determination, either the specific rule,

guideline, protocol, or other similar

criterion; or a statement that such a rule,

guideline, protocol, or other similar

criterion was relied upon in making the

adverse determination and that a copy

of such rule, guideline, protocol, or

other criterion will be provided free of

charge to the claimant upon request; or

(B) If the adverse benefit

determination is based on a medical

necessity or experimental treatment or

similar exclusion or limit, either an

explanation of the scientific or clinical

judgment for the determination,

applying the terms of the plan to the

claimant’s medical circumstances, or a

statement that such explanation will be

provided free of charge upon request.

(vi) In the case of an adverse benefit

determination by a group health plan

concerning a claim involving urgent

care, a description of the expedited

review process applicable to such

claims.

(2) In the case of an adverse benefit

determination by a group health plan

concerning a claim involving urgent

care, the information described in

paragraph (g)(1) of this section may be

provided to the claimant orally within

the time frame prescribed in paragraph

(f)(2)(i) of this section, provided that a

written or electronic notification in

accordance with paragraph (g)(1) of this

section is furnished to the claimant not

later than 3 days after the oral

notification.

(h) Appeal of adverse benefit

determinations. (1) In general. Every

employee benefit plan shall establish

and maintain a procedure by which a

claimant shall have a reasonable

opportunity to appeal an adverse benefit

determination to an appropriate named

fiduciary of the plan, and under which

there will be a full and fair review of the

claim and the adverse benefit

determination.

(2) Full and fair review. Except as

provided in paragraphs (h)(3) and (h)(4)

of this section, the claims procedures of

a plan will not be deemed to provide a

claimant with a reasonable opportunity

for a full and fair review of a claim and

adverse benefit determination unless the

claims procedures—

(i) Provide claimants at least 60 days

following receipt of a notification of an

adverse benefit determination within

which to appeal the determination;

(ii) Provide claimants the opportunity

to submit written comments,

documents, records, and other

information relating to the claim for

benefits;

(iii) Provide that a claimant shall be

provided, upon request and free of

charge, reasonable access to, and copies

of, all documents, records, and other

information relevant to the claimant’s

claim for benefits. Whether a document,

record, or other information is relevant

to a claim for benefits shall be

determined by reference to paragraph

(m)(8) of this section;

(iv) Provide for a review that takes

into account all comments, documents,

records, and other information

submitted by the claimant relating to the

claim, without regard to whether such

information was submitted or

considered in the initial benefit

determination.

(3) Group health plans. The claims

procedures of a group health plan will

not be deemed to provide a claimant

with a reasonable opportunity for a full

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70269

and fair review of a claim and adverse

benefit determination unless, in

addition to complying with the

requirements of paragraphs (h)(2)(ii)

through (iv) of this section, the claims

procedures—

(i) Provide claimants at least 180 days

following receipt of a notification of an

adverse benefit determination within

which to appeal the determination;

(ii) Provide for a review that does not

afford deference to the initial adverse

benefit determination and that is

conducted by an appropriate named

fiduciary of the plan who is neither the

individual who made the adverse

benefit determination that is the subject

of the appeal, nor the subordinate of

such individual;

(iii) Provide that, in deciding an

appeal of any adverse benefit

determination that is based in whole or

in part on a medical judgment,

including determinations with regard to

whether a particular treatment, drug, or

other item is experimental,

investigational, or not medically

necessary or appropriate, the

appropriate named fiduciary shall

consult with a health care professional

who has appropriate training and

experience in the field of medicine

involved in the medical judgment;

(iv) Provide for the identification of

medical or vocational experts whose

advice was obtained on behalf of the

plan in connection with a claimant’s

adverse benefit determination, without

regard to whether the advice was relied

upon in making the benefit

determination;

(v) Provide that the health care

professional engaged for purposes of a

consultation under paragraph (h)(3)(iii)

of this section shall be an individual

who is neither an individual who was

consulted in connection with the

adverse benefit determination that is the

subject of the appeal, nor the

subordinate of any such individual; and

(vi) Provide, in the case of a claim

involving urgent care, for an expedited

review process pursuant to which—

(A) A request for an expedited appeal

of an adverse benefit determination may

be submitted orally or in writing by the

claimant; and

(B) All necessary information,

including the plan’s benefit

determination on review, shall be

transmitted between the plan and the

claimant by telephone, facsimile, or

other available similarly expeditious

method.

(4) Plans providing disability benefits.

The claims procedures of a plan

providing disability benefits will not,

with respect to claims for such benefits,

be deemed to provide a claimant with

a reasonable opportunity for a full and

fair review of a claim and adverse

benefit determination unless the claims

procedures comply with the

requirements of paragraphs (h)(2)(ii)

through (iv) and (h)(3)(i) through (v) of

this section.

(i) Timing of notification of benefit

determination on review. (1) In general.

(i) Except as provided in paragraphs

(i)(1)(ii), (i)(2), and (i)(3) of this section,

the plan administrator shall notify a

claimant in accordance with paragraph

(j) of this section of the plan’s benefit

determination on review within a

reasonable period of time, but not later

than 60 days after receipt of the

claimant’s request for review by the

plan, unless the plan administrator

determines that special circumstances

(such as the need to hold a hearing, if

the plan’s procedures provide for a

hearing) require an extension of time for

processing the claim. If the plan

administrator determines that an

extension of time for processing is

required, written notice of the extension

shall be furnished to the claimant prior

to the termination of the initial 60-day

period. In no event shall such extension

exceed a period of 60 days from the end

of the initial period. The extension

notice shall indicate the special

circumstances requiring an extension of

time and the date by which the plan

expects to render the determination on

review.

(ii) In the case of a plan with a

committee or board of trustees

designated as the appropriate named

fiduciary that holds regularly scheduled

meetings at least quarterly, paragraph

(i)(1)(i) of this section shall not apply,

and, except as provided in paragraphs

(i)(2) and (i)(3) of this section, the

appropriate named fiduciary shall

instead make a benefit determination no

later than the date of the meeting of the

committee or board that immediately

follows the plan’s receipt of a request

for review, unless the request for review

is filed within 30 days preceding the

date of such meeting. In such case, a

benefit determination may be made by

no later than the date of the second

meeting following the plan’s receipt of

the request for review. If special

circumstances (such as the need to hold

a hearing, if the plan’s procedures

provide for a hearing) require a further

extension of time for processing, a

benefit determination shall be rendered

not later than the third meeting of the

committee or board following the plan’s

receipt of the request for review. If such

an extension of time for review is

required because of special

circumstances, the plan administrator

shall provide the claimant with written

notice of the extension, describing the

special circumstances and the date as of

which the benefit determination will be

made, prior to the commencement of the

extension. The plan administrator shall

notify the claimant, in accordance with

paragraph (j) of this section, of the

benefit determination as soon as

possible, but not later than 5 days after

the benefit determination is made.

(2) Group health plans. In the case of

a group health plan, the plan

administrator shall notify a claimant of

the plan’s benefit determination on

review in accordance with paragraphs

(i)(2)(i) through (iii), as appropriate.

(i) Urgent care claims. In the case of

a claim involving urgent care, the plan

administrator shall notify the claimant,

in accordance with paragraph (j) of this

section, of the plan’s benefit

determination on review as soon as

possible, taking into account the

medical exigencies, but not later than 72

hours after receipt of the claimant’s

request for review of an adverse benefit

determination by the plan.

(ii) Pre-service claims. In the case of

a pre-service claim, the plan

administrator shall notify the claimant,

in accordance with paragraph (j) of this

section, of the plan’s benefit

determination on review within a

reasonable period of time appropriate to

the medical circumstances. In the case

of a group health plan that provides for

one appeal of an adverse benefit

determination, such notification shall be

provided not later than 30 days after

receipt by the plan of the claimant’s

request for review of an adverse benefit

determination. In the case of a group

health plan that provides for two

appeals of an adverse determination,

such notification shall be provided,

with respect to any one of such two

appeals, not later than 15 days after

receipt by the plan of the claimant’s

request for review of the adverse

determination.

(iii) Post-service claims. (A) In the

case of a post-service claim, except as

provided in paragraph (i)(2)(iii)(B) of

this section, the plan administrator shall

notify the claimant, in accordance with

paragraph (j) of this section, of the

plan’s benefit determination on review

within a reasonable period of time. In

the case of a group health plan that

provides for one appeal of an adverse

benefit determination, such notification

shall be provided not later than 60 days

after receipt by the plan of the

claimant’s request for review of an

adverse benefit determination. In the

case of a group health plan that provides

for two appeals of an adverse

determination, such notification shall be

provided, with respect to any one of

70270 Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations

such two appeals, not later than 30 days

after receipt by the plan of the

claimant’s request for review of the

adverse determination.

(B) In the case of a multiemployer

plan with a committee or board of

trustees designated as the appropriate

named fiduciary that holds regularly

scheduled meetings at least quarterly,

paragraph (i)(2)(iii)(A) of this section

shall not apply, and the appropriate

named fiduciary shall instead make a

benefit determination no later than the

date of the meeting of the committee or

board that immediately follows the

plan’s receipt of a request for review,

unless the request for review is filed

within 30 days preceding the date of

such meeting. In such case, a benefit

determination may be made by no later

than the date of the second meeting

following the plan’s receipt of the

request for review. If special

circumstances (such as the need to hold

a hearing, if the plan’s procedures

provide for a hearing) require a further

extension of time for processing, a

benefit determination shall be rendered

not later than the third meeting of the

committee or board following the plan’s

receipt of the request for review. If such

an extension of time for review is

required because of special

circumstances, the plan administrator

shall notify the claimant in writing of

the extension, describing the special

circumstances and the date as of which

the benefit determination will be made,

prior to the commencement of the

extension. The plan administrator shall

notify the claimant, in accordance with

paragraph (j) of this section, of the

benefit determination as soon as

possible, but not later than 5 days after

the benefit determination is made.

(3) Disability claims. (i) Except as

provided in paragraph (i)(3)(ii) of this

section, claims involving disability

benefits (whether the plan provides for

one or two appeals) shall be governed

by paragraph (i)(1) of this section,

except that a period of 45 days shall

apply instead of 60 days for purposes of

that paragraph.

(ii) In the case of a multiemployer

plan with a committee or board of

trustees designated as the appropriate

named fiduciary that holds regularly

scheduled meetings at least quarterly,

paragraph (i)(3)(i) of this section shall

not apply, and the appropriate named

fiduciary shall instead make a benefit

determination no later than the date of

the meeting of the committee or board

that immediately follows the plan’s

receipt of a request for review, unless

the request for review is filed within 30

days preceding the date of such

meeting. In such case, a benefit

determination may be made by no later

than the date of the second meeting

following the plan’s receipt of the

request for review. If special

circumstances (such as the need to hold

a hearing, if the plan’s procedures

provide for a hearing) require a further

extension of time for processing, a

benefit determination shall be rendered

not later than the third meeting of the

committee or board following the plan’s

receipt of the request for review. If such

an extension of time for review is

required because of special

circumstances, the plan administrator

shall notify the claimant in writing of

the extension, describing the special

circumstances and the date as of which

the benefit determination will be made,

prior to the commencement of the

extension. The plan administrator shall

notify the claimant, in accordance with

paragraph (j) of this section, of the

benefit determination as soon as

possible, but not later than 5 days after

the benefit determination is made.

(4) Calculating time periods. For

purposes of paragraph (i) of this section,

the period of time within which a

benefit determination on review is

required to be made shall begin at the

time an appeal is filed in accordance

with the reasonable procedures of a

plan, without regard to whether all the

information necessary to make a benefit

determination on review accompanies

the filing. In the event that a period of

time is extended as permitted pursuant

to paragraph (i)(1), (i)(2)(iii)(B), or (i)(3)

of this section due to a claimant’s failure

to submit information necessary to

decide a claim, the period for making

the benefit determination on review

shall be tolled from the date on which

the notification of the extension is sent

to the claimant until the date on which

the claimant responds to the request for

additional information.

(5) Furnishing documents. In the case

of an adverse benefit determination on

review, the plan administrator shall

provide such access to, and copies of,

documents, records, and other

information described in paragraphs

(j)(3), (j)(4), and (j)(5) of this section as

is appropriate.

(j) Manner and content of notification

of benefit determination on review. The

plan administrator shall provide a

claimant with written or electronic

notification of a plan’s benefit

determination on review. Any electronic

notification shall comply with the

standards imposed by 29 CFR

2520.104b–1(c)(1)(i), (iii), and (iv). In

the case of an adverse benefit

determination, the notification shall set

forth, in a manner calculated to be

understood by the claimant—

(1) The specific reason or reasons for

the adverse determination;

(2) Reference to the specific plan

provisions on which the benefit

determination is based;

(3) A statement that the claimant is

entitled to receive, upon request and

free of charge, reasonable access to, and

copies of, all documents, records, and

other information relevant to the

claimant’s claim for benefits. Whether a

document, record, or other information

is relevant to a claim for benefits shall

be determined by reference to paragraph

(m)(8) of this section;

(4) A statement describing any

voluntary appeal procedures offered by

the plan and the claimant’s right to

obtain the information about such

procedures described in paragraph

(c)(3)(iv) of this section, and a statement

of the claimant’s right to bring an action

under section 502(a) of the Act; and

(5) In the case of a group health plan

or a plan providing disability benefits—

(i) If an internal rule, guideline,

protocol, or other similar criterion was

relied upon in making the adverse

determination, either the specific rule,

guideline, protocol, or other similar

criterion; or a statement that such rule,

guideline, protocol, or other similar

criterion was relied upon in making the

adverse determination and that a copy

of the rule, guideline, protocol, or other

similar criterion will be provided free of

charge to the claimant upon request;

(ii) If the adverse benefit

determination is based on a medical

necessity or experimental treatment or

similar exclusion or limit, either an

explanation of the scientific or clinical

judgment for the determination,

applying the terms of the plan to the

claimant’s medical circumstances, or a

statement that such explanation will be

provided free of charge upon request;

and

(iii) The following statement: ‘‘You

and your plan may have other voluntary

alternative dispute resolution options,

such as mediation. One way to find out

what may be available is to contact your

local U.S. Department of Labor Office

and your State insurance regulatory

agency.’’

(k) Preemption of State law. (1)

Nothing in this section shall be

construed to supersede any provision of

State law that regulates insurance,

except to the extent that such law

prevents the application of a

requirement of this section.

(2) (i) For purposes of paragraph (k)(1)

of this section, a State law regulating

insurance shall not be considered to

prevent the application of a requirement

of this section merely because such

State law establishes a review procedure

Federal Register / Vol. 65, No. 225 / Tuesday, November 21, 2000 / Rules and Regulations 70271

to evaluate and resolve disputes

involving adverse benefit

determinations under group health

plans so long as the review procedure is

conducted by a person or entity other

than the insurer, the plan, plan

fiduciaries, the employer, or any

employee or agent of any of the

foregoing.

(ii) The State law procedures

described in paragraph (k)(2)(i) of this

section are not part of the full and fair

review required by section 503 of the

Act. Claimants therefore need not

exhaust such State law procedures prior

to bringing suit under section 502(a) of

the Act.

(l) Failure to establish and follow

reasonable claims procedures. In the

case of the failure of a plan to establish

or follow claims procedures consistent

with the requirements of this section, a

claimant shall be deemed to have

exhausted the administrative remedies

available under the plan and shall be

entitled to pursue any available

remedies under section 502(a) of the Act

on the basis that the plan has failed to

provide a reasonable claims procedure

that would yield a decision on the

merits of the claim.

(m) Definitions. The following terms

shall have the meaning ascribed to such

terms in this paragraph (m) whenever

such term is used in this section:

(1)(i) A ‘‘claim involving urgent care’’

is any claim for medical care or

treatment with respect to which the

application of the time periods for

making non-urgent care

determinations—

(A) Could seriously jeopardize the life

or health of the claimant or the ability

of the claimant to regain maximum

function, or,

(B) In the opinion of a physician with

knowledge of the claimant’s medical

condition, would subject the claimant to

severe pain that cannot be adequately

managed without the care or treatment

that is the subject of the claim.

(ii) Except as provided in paragraph

(m)(1)(iii) of this section, whether a

claim is a ‘‘claim involving urgent care’’

within the meaning of paragraph

(m)(1)(i)(A) of this section is to be

determined by an individual acting on

behalf of the plan applying the

judgment of a prudent layperson who

possesses an average knowledge of

health and medicine.

(iii) Any claim that a physician with

knowledge of the claimant’s medical

condition determines is a ‘‘claim

involving urgent care’’ within the

meaning of paragraph (m)(1)(i) of this

section shall be treated as a ‘‘claim

involving urgent care’’ for purposes of

this section.

(2) The term ‘‘pre-service claim’’

means any claim for a benefit under a

group health plan with respect to which

the terms of the plan condition receipt

of the benefit, in whole or in part, on

approval of the benefit in advance of

obtaining medical care.

(3) The term ‘‘post-service claim’’

means any claim for a benefit under a

group health plan that is not a preservice claim within the meaning of

paragraph (m)(2) of this section.

(4) The term ‘‘adverse benefit

determination’’ means any of the

following: a denial, reduction, or

termination of, or a failure to provide or

make payment (in whole or in part) for,

a benefit, including any such denial,

reduction, termination, or failure to

provide or make payment that is based

on a determination of a participant’s or

beneficiary’s eligibility to participate in

a plan, and including, with respect to

group health plans, a denial, reduction,

or termination of, or a failure to provide

or make payment (in whole or in part)

for, a benefit resulting from the

application of any utilization review, as

well as a failure to cover an item or

service for which benefits are otherwise

provided because it is determined to be

experimental or investigational or not

medically necessary or appropriate.

(5) The term ‘‘notice’’ or

‘‘notification’’ means the delivery or

furnishing of information to an

individual in a manner that satisfies the

standards of 29 CFR 2520.104b–1(b) as

appropriate with respect to material

required to be furnished or made

available to an individual.

(6) The term ‘‘group health plan’’

means an employee welfare benefit plan

within the meaning of section 3(1) of the

Act to the extent that such plan

provides ‘‘medical care’’ within the

meaning of section 733(a) of the Act.

(7) The term ‘‘health care

professional’’ means a physician or

other health care professional licensed,

accredited, or certified to perform

specified health services consistent with

State law.

(8) A document, record, or other

information shall be considered

‘‘relevant’’ to a claimant’s claim if such

document, record, or other information

(i) Was relied upon in making the

benefit determination;

(ii) Was submitted, considered, or

generated in the course of making the

benefit determination, without regard to

whether such document, record, or

other information was relied upon in

making the benefit determination;

(iii) Demonstrates compliance with

the administrative processes and

safeguards required pursuant to

paragraph (b)(5) of this section in

making the benefit determination; or

(iv) In the case of a group health plan

or a plan providing disability benefits,

constitutes a statement of policy or

guidance with respect to the plan

concerning the denied treatment option

or benefit for the claimant’s diagnosis,

without regard to whether such advice

or statement was relied upon in making

the benefit determination.

(n) Apprenticeship plans. This section

does not apply to employee benefit

plans that solely provide apprenticeship

training benefits.

(o) Applicability dates. This section

shall apply to claims filed under a plan

on or after January 1, 2002.

Signed at Washington, DC, this 15th day of

November, 2000.

Leslie Kramerich,

Acting Assistant Secretary, Pension and

Welfare Benefits Administration, U.S.

Department of Labor.

[FR Doc. 00–29766 Filed 11–20–00; 8:45 am]

BILLING CODE 4510–29–P