[Federal Register Volume 62, Number 8 (Monday, January 13, 1997)]
[Notices]
[Pages 1768-1776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-672]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
[BPD-882-N]


Notification Procedures for States Implementing ``Alternative 
Mechanisms'' in the Individual Health Insurance Market

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Notice.

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SUMMARY: This notice generally describes the statutory provisions under 
section 111 of the Health Insurance Portability and Accountability Act 
of 1996 (HIPAA) that guarantee availability of individual health 
insurance coverage to certain individuals with prior group coverage. It 
also provides procedural guidance for States that intend to implement 
an alternative mechanism under section 111 of HIPAA. Finally, this 
notice describes the statutory provisions that will apply in a State 
that does not implement an acceptable alternative mechanism.
    This notice does not establish new policy or requirements.

FOR FURTHER INFORMATION CONTACT: Gertrude Saunders of the Insurance 
Reform Implementation Task Force (IRITF), (410) 786-5888 or e-mail 
(<a href="/cdn-cgi/l/email-protection#19706b706d7f59717a7f78377e766f"><span class="__cf_email__" data-cfemail="c5acb7acb1a385ada6a3a4eba2aab3">[email protected]</span></a>).

ADDRESSES: All correspondence regarding this notice should be submitted 
to the following address: HCFA, Bureau of Policy Development, Office of 
Chronic Care and Insurance Policy, Insurance Reform Implementation Task 
Force, S-LL-17, Attention: Marc Thomas, 7500 Security Boulevard, 
Baltimore, Maryland 21244-1850.

SUPPLEMENTARY INFORMATION:

I. Background--Summary of Recent Legislation

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA, Pub. L. 104-191) was enacted on August 21, 1996. HIPAA amended 
the Public Health Service (PHS) Act to provide for, among other things, 
improved access, portability, and renewability of health insurance in 
both the group and individual health insurance markets. Group health 
plans are regulated, in part, by the Federal government under the 
Employee Retirement Income Security Act of 1974 (ERISA) and the 
Internal Revenue Code and, to the extent they purchase insurance, in 
part, by the States under State insurance law. Policies sold in the 
individual health insurance market are regulated by the States. This 
notice pertains to only the individual market changes made by section 
111 of HIPAA.
    Section 2741 of the PHS Act, as added by section 111 of HIPAA, 
essentially gives a State two options to ensure that ``eligible 
individuals'' have access to the individual health insurance market. 
Under the first option, assuming there is appropriate authority in 
State law, the State may simply enforce the Federal statutory 
provisions that require all issuers who offer coverage in the 
individual market to make all their individual policies available to 
all eligible individuals on a guaranteed basis, without preexisting 
condition exclusions. (These provisions are commonly referred to as the 
``Federal default'' provisions.) If the State chooses this option, 
individual issuers may elect to impose certain limitations on the 
policies that they are required to offer under the Federal default 
provisions. (For additional information on these limitations see 
section VIII of this notice.)
    Under the second option, States may choose to implement an 
``alternative mechanism'' to ensure that eligible individuals have 
access to the individual health insurance market or comparable 
coverage. States that choose this option must submit to us a timely 
notice with sufficient documentation to enable us to determine whether 
it is an acceptable alternative mechanism. (This process is discussed 
in more detail under section VI of this notice, which includes the 
address for written submissions.)

[[Page 1769]]

II. Preemption

    Section 2762 of the PHS Act specifies that the Federal statutory 
provisions pertaining to health insurance issuers in the individual 
market generally do not preempt State regulation of individual 
insurance. Nevertheless, if the State standards and requirements 
prevent the application of a Federal requirement, the statute preempts 
the State standards and requirements and the Federal requirements 
prevail.
    Accordingly, the State standards and requirements must ensure at a 
minimum that every eligible individual in the State is provided access 
to coverage that comports with Federal requirements. The State 
standards may not depart from the Federal requirements in a way that 
diminishes this minimum coverage. The State, however, is permitted to 
adopt standards that expand the number of individuals who are 
protected. For example, as discussed below, an eligible individual must 
have an aggregate of at least 18 months of ``creditable coverage,'' 
with no breaks in coverage that exceed 62 days. The same concept of 
creditable coverage is used in section 2701 of the PHS Act, which 
limits the use of preexisting condition exclusions in the group market. 
Under section 2723(b)(2)(iii) of the PHS Act, States may permit breaks 
in coverage that exceed 62 days. If the State adopts this provision in 
the group market, it would not be precluded from applying the same rule 
in the individual market, since it would potentially extend coverage to 
people whose breaks in coverage would otherwise exclude them from the 
definition of an eligible individual.
    Section 2762 of the PHS Act also specifies that nothing in the 
individual market provisions of HIPAA shall be construed to affect or 
modify the provisions of section 514 of ERISA, which preempts State 
regulation of employee welfare benefit plans, including group health 
plans, except through the regulation of insurance.

III. Federal Definitions

    The individual market rules of HIPAA provide health insurance 
protection to an ``eligible individual.'' This term is defined in 
section 2741(b) of the PHS Act. It includes an individual who meets all 
of the following criteria:
    <bullet> The individual has aggregate periods of ``creditable 
coverage'' (as defined in section 2701(c) of the PHS Act) totaling 18 
or more months at the time the individual seeks individual market 
coverage. In general, under section 2701(c) of the PHS Act, multiple 
periods of coverage are aggregated only if there has been no more than 
a 62-day break between periods of creditable coverage.
    <bullet> The individual's most recent creditable coverage must have 
been provided under a group health plan (including a governmental plan 
or church plan), as defined under section 2791 of the PHS Act, or 
health insurance offered in connection with that plan.
    <bullet> The individual is not eligible for coverage under a group 
health plan, is not eligible for Medicare or Medicaid coverage, and 
does not have other health insurance coverage.
    <bullet> The termination of the individual's most recent health 
plan coverage is not related to nonpayment of premiums or fraud, as 
described in sections 2712(b)(1) or (b)(2) of the PHS Act.
    <bullet> The individual must have elected any continuation coverage 
offered by an employer plan under the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (COBRA, Pub. L. 99-272) or under a similar 
State requirement, and must have exhausted that coverage. (Federal 
COBRA provisions only apply to plans of an employer that normally 
employed at least 20 employees on a typical business day in the 
preceding calendar year. In some cases, there are State requirements 
similar to COBRA that require continuation coverage for insurance 
policies not subject to the Federal COBRA provisions.)
    ``Group health plan'' is defined in section 2791(a)(1) of the PHS 
Act to mean an employee welfare benefit plan (as defined in section 
3(1) of ERISA) to the extent that the plan provides medical care (as 
defined below), including items and services paid for as medical care 
to employees or their dependents (as defined under the terms of the 
plan) directly or through insurance, reimbursement, or otherwise.
    ``Health insurance coverage'' is defined in section 2791(b)(1) of 
the PHS Act to mean benefits consisting of medical care (provided 
directly, through insurance or reimbursement, or otherwise and 
including items and services paid for as medical care) under any 
hospital or medical service policy or certificate, hospital, or medical 
service plan contract, or health maintenance organization contract 
offered by a health insurance issuer.
    ``Health insurance issuer'' is defined in section 2791(b)(2) of the 
PHS Act as an insurance company, insurance service, or insurance 
organization (including a health maintenance organization, as defined 
in section 2791(b)(3) of the PHS Act) which is licensed to engage in 
the business of insurance in the State and which is subject to State 
laws that regulate insurance. The term ``health insurance issuer'' does 
not include a group health plan.
    ``Individual health insurance coverage'' is defined in section 
2791(b)(5) of the PHS Act to mean health insurance coverage offered to 
individuals in the individual market, but does not include short-term 
limited duration insurance.
    Section 2791(a)(2) of the PHS Act defines ``medical care'' as 
amounts paid for the diagnosis, cure, mitigation, treatment, or 
prevention of disease, or amounts paid for the purpose of affecting any 
structure or function of the body; including transportation primarily 
for and essential to the medical care and insurance covering the 
medical care.

IV. Alternative Mechanisms; Minimum Requirements

    Although the law recognizes diversity among the States by allowing 
for alternative mechanisms, there are minimum requirements for 
alternative mechanisms. Under section 2744(a)(1) of the PHS Act, an 
alternative mechanism must meet the following requirements:
    <bullet> Provide a choice of health insurance coverage to all 
eligible individuals.
    <bullet> Not impose any preexisting condition exclusions on 
eligible individuals.
    <bullet> Include at least one policy form of coverage that is 
comparable to either one of the following:

+ Comprehensive health insurance coverage offered in the individual 
market in the State.
+ A standard option of coverage available under the group or individual 
health insurance laws in the State.

    <bullet> Implement one of the following:

+ The National Association of Insurance Commissioners (NAIC) Small 
Employer and Individual Health Insurance Availability Model Act, as it 
applies to individual health insurance coverage, or the Individual 
Health Insurance Portability Model Act, as adopted on June 3, 1996.
+ A qualified high-risk pool that provides for the following:
--Health insurance coverage (or comparable coverage) to all eligible 
individuals that does not impose any preexisting condition exclusion 
with respect to this coverage for all eligible individuals.
--Premium rates and covered benefits for that coverage consistent with 
standards included in the NAIC Model Health Plan for Uninsurable

[[Page 1770]]

Individuals Act in effect on August 21, 1996.
+ Another mechanism--
--That provides for risk adjustment, risk spreading, or a risk-
spreading mechanism (among issuers or policies of issuers) or otherwise 
provides for some financial subsidization for eligible individuals, 
including through assistance to participating issuers, or
--Under which each eligible individual is provided a choice of all 
individual health insurance coverage otherwise available.

    If a State adopts into law or regulation any provisions from the 
NAIC Model Acts cited in section 2744 of the PHS Act, it must verify 
that none of the Model Acts would prevent the application of a 
requirement of the PHS Act, and therefore be preempted. Since those 
Model Acts predate the enactment of HIPAA, they do not fully conform 
with HIPAA requirements that apply to eligible individuals. The NAIC is 
currently analyzing these Model Acts to provide guidance to States in 
identifying revisions that would conform with the provisions of the PHS 
Act. (See later discussion in section VI.C.3. of this notice.)
    State options for ensuring that eligible individuals have access to 
the individual health insurance market are illustrated in the chart 
below.

BILLING CODE 4120-01-P

[[Page 1771]]

[GRAPHIC] [TIFF OMITTED] TN13JA97.000



BILLING CODE 4120-01-C

[[Page 1772]]

V. Presumption of an Acceptable Alternative Mechanism

    An acceptable alternative mechanism includes a private or public 
individual health insurance mechanism that is designed to provide 
access to health benefits for individuals in the individual market in 
the State in accordance with section 2744 of the PHS Act. Examples of 
an acceptable alternative mechanism may include a health insurance 
coverage pool or program, a mandatory group conversion policy, 
guaranteed issue of one or more plans of individual health insurance 
coverage, open enrollment by one or more health insurance issuers, or a 
combination of these mechanisms that meet at least the minimum 
standards under section 2744.

A. State Submission by April 1, 1997

    A State is presumed to be implementing an acceptable alternative 
mechanism as of July 1, 1997, if, by not later than April 1, 1997, the 
Chief Executive Officer (generally the Governor) of the State notifies 
us that the State has enacted or intends to enact any necessary 
legislation as of January 1, 1998, and provides us with the information 
necessary to review the mechanism and its implementation (or proposed 
implementation), and, if, within 90 days after receiving the State's 
submission, we do not disapprove it as described in section VII.B. of 
this notice. (If we notify the State of our need for additional 
information or further discussions on its submission, we will suspend 
the review period until the State provides the necessary information or 
participates in the necessary discussions. If the State chooses not to 
provide the necessary information or our discussions with the State 
cannot be concluded satisfactorily, we may disapprove the State's 
submission.) The State must provide information necessary for us to 
review the mechanism's implementation every 3 years to continue to be 
presumed to have an acceptable alternative mechanism.

B. State Submission After April 1, 1997

    A State may presume that we have accepted its proposed alternative 
mechanism if--
    <bullet> After April 1, 1997, the State submits notice and 
sufficient documentation (see section VI of this notice) for either an 
initial proposed alternative mechanism or revisions to an already 
submitted proposed alternative mechanism, and
    <bullet> We make no determination disapproving the mechanism within 
90 days (or a longer period if we suspended the 90-day review period 
awaiting additional information or to conduct further discussion with 
the State).
    After an additional 90 days, the State may presume its alternative 
mechanism to be an acceptable alternative mechanism. (For further 
information on future adoptions and revisions see section VI.D.5. of 
this notice.)

VI. Notification, Documentation, and Review

A. Notification

    Under section 2744(b) of the PHS Act, except as described below in 
section VII.B., a State is presumed to be implementing an acceptable 
alternative mechanism as of July 1, 1997, if, by not later than April 
1, 1997, the Chief Executive Officer (generally the Governor) of the 
State takes the following two actions:
    <bullet> Notifies us that the State has enacted, or intends to 
enact, by January 1, 1998 (or July 1, 1998 if the State legislature 
cannot meet before August 21, 1997) any necessary legislation to 
provide for the implementation of a mechanism reasonably designed to be 
an acceptable alternative mechanism as of January 1, 1998 (or July 1, 
1998 if the State legislature cannot meet before August 21, 1997).
    <bullet> Provides us with the information necessary for us to 
review the mechanism and its implementation (or its proposed 
implementation).

B. Documentation

    Since the law gives States substantial flexibility in devising 
alternative mechanisms, we do not intend that this notice set forth a 
checklist of criteria. If a State chooses to submit a proposed 
alternative mechanism, the State must determine what to submit. We 
must, however, be able to determine whether the mechanism will be both 
designed and enforced in a way that will ensure that eligible 
individuals are given the required access to insurance coverage. Our 
review will focus on results for eligible individuals. Our main concern 
is that the State submission show the analysis and the reasoning behind 
the design of the proposed alternative mechanism, and a reasonable 
assessment of the likelihood that the mechanism will achieve the 
legislative objectives.
    Since time will be of the essence in reviewing a large volume of 
submissions and responding to the States timely, we recommend that a 
State provide summaries and full text of any critical supporting 
information (such as the text (or proposed text) of legislation or 
regulations) in its initial State submission. If we notify the State of 
our need for additional information or further discussions on its 
submission, we will suspend the review period until the State provides 
the necessary information or participates in the necessary discussions. 
If the State chooses not to provide the necessary information or our 
discussions with the State cannot be concluded satisfactorily, we may 
disapprove the State's submission. We discuss disapproval and the 
consequences of disapproval in sections VII.B. and C. of this notice.
    The submission must include sufficient information to provide us 
with a reasonable basis for concluding that the proposed alternative 
mechanism meets the requirements described in section VI.C. of this 
notice. Along with a detailed description of the alternative mechanism 
and how it will be implemented and function, we recommend the State 
include the following information:
    <bullet> Contact Person--The name, position title, address, and 
telephone number of the person to whom we should address all questions 
and contacts concerning the proposed alternative mechanism.
    <bullet> State Legislative Calendar--Clear and prominent 
identification of needed State legislative action and the State 
legislature's sessions. We need to know of any legislative issues 
affecting a State's ability to implement an alternative mechanism so 
that we can determine priorities for reviewing State submissions. Also, 
the State should submit a description of the authority and procedures 
it follows for calling a special or emergency legislative session, if 
these exist.
    <bullet> State Laws and Regulations--A summary and copies of the 
full text of existing State laws and regulations pertaining to the 
individual health insurance market. Laws and regulations that could be 
critical to an adequate analysis include the following:

+ Medical underwriting and rating restrictions.
+ Restrictions on preexisting condition exclusions.
+ Guaranteed issue requirements.
+ Solvency requirements.

    If a State chooses to implement an ``other mechanism'' described in 
section 2744(c)(3) of the Act, we recommend that the State submit a 
more detailed description of the mechanism than it would if it planned 
to implement a mechanism that relies on one of the three NAIC Model 
Acts referenced in section 2744 of the PHS Act. In particular, unless 
the State chooses to

[[Page 1773]]

provide a choice to eligible individuals of all individual policies 
sold in the State, the State should describe in detail how the risk 
associated with serving all anticipated eligible individuals would be 
spread under the mechanism and how the additional cost associated with 
serving this new population would be subsidized.
    The following examples illustrate the differences in documentation 
that a State may submit, based on differences in the State's 
legislation and proposed alternative mechanism.
    <bullet> Example 1--State A has already adopted a comprehensive 
reform for its individual health insurance market. The State now 
prohibits preexisting condition limitations on coverage, provides for 
guaranteed issue and guaranteed renewability, and has taken active 
steps to ensure the participation of insurers in the State individual 
health insurance market. State A submits, in addition to its recent law 
(which was adopted before August 21, 1996, the enactment date of 
HIPAA), two analyses: the first identifies technical amendments to make 
its recent law consistent with HIPAA; the second shows that any 
eligible individual under HIPAA also would be eligible for the 
individual market under the State law. The State's submission also 
shows that the State's residency requirements would not prevent any 
HIPAA-eligible individual from entering the individual market without 
causing a break in coverage.
    <bullet> Example 2--State B has a State high-risk pool, but that 
pool has a significant waiting list or appears to be entering a 
``premium death spiral.'' State B offers an improved risk pool 
legislative and funding package. Because the financial stability of the 
existing risk pool is known to be in question, State B includes, in 
considerable detail, analyses of the projected revenue, subsidies, and 
financial condition of the pool under the proposed law. State B also 
specifies how HIPAA-eligible individuals will be able to enter the risk 
pool without causing a break in coverage.
    A State may wish to submit other information, depending on the 
extent of the changes the State is planning and its relevance to the 
State's proposed alternative mechanism. Some examples follow:
    <bullet> Characteristics of the Existing Individual Market--
Analysis of information relating to the existing availability and sale 
of individual health insurance to the current population of the State. 
Examples of this information might be a description of the policy forms 
currently available in the individual market in the State; numbers of 
policies held under each form; current population of the State; 
estimated percentage of that population currently covered under group 
plans or coverage other than individual coverage; and estimated 
uninsured population.
    <bullet> Projected Market Impact of the Alternative Mechanism--The 
State's best estimate of the number of eligible individuals who will 
need to be served under the proposed alternative mechanism, including a 
description of the factors the State considered in determining the size 
of the affected population, how the mechanism will serve the needs of 
the affected population, how much the mechanism serving this population 
will cost, and how those costs will be borne. In describing its 
population of eligible individuals or potentially eligible individuals 
in the individual health insurance market, the State may want to 
consider the relative prevalence of certain groups of individuals in 
the State and how the alternative mechanism will affect the likely 
number of individuals eligible for coverage under the mechanism. For a 
mechanism that will rely on State-supported operations such as risk 
pools and other risk-spreading mechanisms, the State should show the 
level and source of funding needed to provide for the needs of the 
eligible or potentially-eligible individuals.
    Groups whose relative size may be large enough to have substantial 
impact on the number of eligible, as well as ineligible, individuals 
include the following:

+ Individuals eligible for Medicaid (especially if the State has a 
waiver under section 1115 of the Social Security Act that expands 
eligibility for Medicaid and would thus make these people ineligible 
under HIPAA for transition to the individual market).
+ Individuals eligible for Medicare.
+ Individuals who are receiving medical coverage under special programs 
such as the Indian Health Service. These individuals may meet the 
definition of an ``eligible individual,'' but their eligibility for 
coverage under the Indian Health Service program may make it unlikely 
that they would purchase private health insurance.
+ Individuals who elect and exhaust their continued group health plan 
coverage under COBRA or coverage under a similar State requirement.
+ Individuals who do not have the COBRA protection (or similar 
protection under a State requirement) and will be entering the 
alternative mechanism directly as an eligible individual. For example, 
an individual whose employer stops offering health insurance coverage 
may be eligible for coverage under the alternative mechanism without 
waiting for the COBRA continuation period to end.
C. Standard of Review
1. General
    We will base our review on certain principles set forth in the 
statute and legislative history. The statute clearly requires us to 
make a substantive determination whether a mechanism is an ``acceptable 
alternative mechanism'' that meets all of the requirements set forth in 
the statute. However, while, as noted in section II of this notice, no 
State requirement can prevent the application of a requirement of 
HIPAA, the Conference Report that accompanied that legislation states 
that the conferees intended the narrowest preemption. This notice 
describes how we intend to apply these principles.
2. Statutory Requirements
    We will review each State's submission to determine whether it 
addresses each of the following requirements:
    <bullet> Is the mechanism reasonably designed to provide all 
eligible individuals with a choice of health insurance coverage?

    <bullet> Does the choice offered to eligible individuals include at 
least one policy form that meets the following requirements?
+ Is comparable to comprehensive health insurance coverage offered in 
the individual market in the State.
+ Is comparable to a standard option of coverage available under the 
group or individual health insurance laws of the State.

    <bullet> Does the mechanism provide access to coverage for all 
eligible individuals within Federal time frames?
    <bullet> Does the mechanism prohibit preexisting condition 
exclusions for all eligible individuals?
    <bullet> Is the State implementing one of the following?

+ The NAIC Small Employer and Individual Health Insurance Availability 
Model Act (Availability Model), adopted on June 3, 1996.
+ The Individual Health Insurance Portability Model Act (Portability 
Model), adopted on June 3, 1996.
+ A qualified high-risk pool that provides eligible individuals health 
insurance or comparable coverage without a preexisting condition

[[Page 1774]]

exclusion, and with premiums and benefits consistent with the NAIC 
Model Health Plan for Uninsurable Individuals Act (as in effect August 
21, 1996).
+ A mechanism that provides for risk spreading or provides eligible 
individuals with a choice of all available individual health insurance 
coverage.

    <bullet> Has the State enacted all legislation necessary for 
implementing the alternative mechanism?
+ If not, will the necessary legislation be enacted by January 1, 1998?
+ If not, is the State legislature meeting during the 12-month period 
beginning August 21, 1996 and ending August 20, 1997?
3. Concern About Using NAIC Models
    As discussed previously, while the statute recommends the use of 
certain NAIC Model Acts and references them by specific adoption dates, 
these Model Acts contain certain provisions that are inconsistent with 
HIPAA requirements. If inconsistencies exist, a State must alter these 
provisions as they apply to eligible individuals under HIPAA so that 
its mechanism conforms with the Federal requirements. For example, if a 
State uses the Portability Model (which permits the use of preexisting 
condition exclusions and affiliation periods), it must distinguish 
between Federally-eligible individuals and all others served under the 
State's rules. As long as it exempts all Federally-eligible individuals 
from any preexisting condition exclusions or affiliation periods, the 
State may still use (with respect to non-Federally-eligible individuals 
in the individual market) the preexisting condition and affiliation 
rules of the Portability Model.
    Although the following is not an all-inclusive list, we note the 
following additional discrepancies between the NAIC Model Acts and 
HIPAA requirements:
    <bullet> The Portability Model permits only a 31-day break in 
coverage for individuals rather than the 62-day break permitted by 
section 2701(c)(2) of the PHS Act. Federally-eligible individuals must 
be given at least the 62-day break required under section 2701(c)(2).
    <bullet> The Availability Model contains a definition of 
``qualifying coverage'' that excludes coverage under a group health 
plan that is regulated under ERISA. Under HIPAA, however, the 
definition of ``creditable coverage'' clearly includes coverage under a 
``group health plan,'' which is defined to include self-insured plans 
regulated under ERISA.
    <bullet> Certain key concepts (for example, ``eligible person,'' 
``preexisting condition,'' and ``qualifying coverage'') are defined in 
both the Availability and Portability Models somewhat differently than 
in HIPAA. To the extent that State law incorporates or plans to 
incorporate portions of the Models that use those terms, the State must 
ensure that use of these terms does not prevent the application of 
HIPAA protections to eligible individuals. This may be done simply by 
applying special provisions to those eligible individuals.
    <bullet> The Availability and Portability Models also contain 
residency requirements that cannot be applied to HIPAA-eligible 
individuals.
    <bullet> If a State uses the NAIC Model Health Plan for Uninsurable 
Individuals Act, certain otherwise acceptable high-risk pool practices 
such as ``wait-listing'' individuals or applying preexisting condition 
exclusions are not permitted with respect to HIPAA-eligible 
individuals.
    4. Interim Response to Frequently Asked Questions
    We recognize that States would like to have answers now to 
questions such as whether a difference in deductibles constitutes 
enough choice or how comprehensive a policy must be to be an acceptable 
offering. However, this document is a procedural notice and not a 
regulation. Until we issue regulations dealing with these and other 
issues, States must make a good faith effort to interpret the statute 
as best they can when proposing an alternative mechanism before April 
1, 1997. Should any discrepancies later emerge between a State's 
interpretation of the statute and our interpretation, as expressed in 
the interim final rule that we expect to publish by April 1, 1997, we 
plan that the Federal rules will apply prospectively and will afford a 
transition period that will give a State an adequate opportunity to 
amend its mechanism to conform with any new regulation requirements. We 
will include rules on the transition period in the interim final rule.

D. Notification Procedure

1. Advance Notification Requested
    We request that a State notify us in writing or by e-mail 
(<a href="/cdn-cgi/l/email-protection#6b0219021f0d2b03080d0a450c041d"><span class="__cf_email__" data-cfemail="157c677c6173557d7673743b727a63">[email protected]</span></a>) of its intent to submit or not to submit an 
alternative mechanism. If we do not hear from a State by February 14, 
1997, we will contact the State to find out its intention regarding the 
submission of an alternative State mechanism. The law does not create a 
requirement that States notify us of their intentions, but notification 
will help us plan our work to meet the statutory deadlines.
    If a State does not plan to offer an alternative mechanism, we 
request that the State advise us of its plans to implement the Federal 
requirements.
    If a State does not plan to offer either an alternative mechanism, 
or to implement the Federal requirements, we request that the State 
advise us as soon as possible so that we may begin action to implement 
Federal enforcement of the Federal requirements in the State.
2. Contents of Notification Package
    We request that a State's submission be submitted in duplicate and 
be accompanied by a cover letter, signed by the Chief Executive Officer 
(generally the Governor) of the State. In addition, States should 
include a brief summary of their legislative calendars and note any 
deadlines that are significant to this review process. We are 
requesting that States submit two copies of their proposed alternative 
mechanisms to assist us in timely review of their submissions. Our 
regional offices may assist us in reviewing the States' submissions and 
we wish to avoid any delays that may occur in reproducing these 
submissions.
3. Deadline
    We must receive all submissions from the States no later than April 
1, 1997 in order for the State to qualify for the presumption that it 
is implementing an acceptable alternative mechanism as of July 1, 1997. 
For official confirmation of our receipt date, we suggest that States 
use the postal certification services of the United States Post Office.
    No later than 90 days after we receive a State's proposed 
alternative mechanism, we will take at least one of the following 
actions:
    <bullet> Notify the State that we have accepted its proposed 
alternative mechanism. (This notification may be before the 90-day 
review period ends.)
    <bullet> Make no determination concerning the State's alternative 
mechanism; therefore, the State may presume we have accepted its 
alternative mechanism.
    <bullet> Forward to the State a request for additional information 
or a notification that we need to discuss further with the CEO (or his 
or her designee) the proposed alternative mechanism. We expect to make 
requests for additional information or initiate discussions as soon as 
possible after receiving the State's proposed alternative mechanism. If 
we notify the State of our need for additional information or further 
discussions on its submission, we will suspend the review period until 
the State provides the necessary information or participates in the

[[Page 1775]]

necessary discussions. If the State chooses not to provide the 
necessary information or our discussions with the State cannot be 
concluded satisfactorily, we may disapprove the State's submission. We 
discuss disapproval and the consequences of disapproval in sections 
VII.B. and C. of this notice. The State may contact us for information 
on implementing the Federal default requirements.
4. Where To Submit a Package
    We request each State submit its proposed alternative mechanism, in 
duplicate, to the following address: HCFA, Bureau of Policy 
Development, Office of Chronic Care and Insurance Policy, Insurance 
Reform Implementation Task Force, S-LL-17, Attention: Marc Thomas, 7500 
Security Boulevard, Baltimore, Maryland 21244-1850.
5. Future Adoptions and Revisions
    A State with an approved alternative mechanism may request approval 
of revisions to its alternative mechanism. Similarly, a State operating 
under the Federal default provisions may, at any time, submit a 
proposed alternative mechanism. The State should mail its submission to 
the above address. We request that future revisions to already approved 
mechanisms be submitted no earlier than July 1, 1997.

E. Continued Presumption for States Entitled to Statutory Delay

    In accordance with section 2744(b) of the PHS Act, States whose 
legislatures do not meet within the 12-month period beginning August 
21, 1996 and ending August 20, 1997, and that need legislative 
authority in order to enact an acceptable alternative mechanism may 
qualify for extended deadlines for implementing an acceptable 
alternative mechanism. To qualify for an extension, the State must 
comply with the following deadlines:
    <bullet> In order for the State to be entitled to the presumption 
that it has an acceptable alternative mechanism in effect as of July 1, 
1997, the Chief Executive Officer (generally the Governor) must notify 
us by April 1, 1997 about the following:

+ The State legislature has not and will not meet during the 12-month 
period beginning August 21, 1996 and ending August 20, 1997.
+ The State intends to implement an alternative mechanism by July 1, 
1998.

    <bullet> In order for the presumption to continue on and after July 
1, 1998, the State must--

+ Notify us by April 1, 1998 that the State has enacted any necessary 
legislation to provide for implementation of an acceptable alternative 
mechanism as of July 1, 1998, and
+ Provide us with the information described in this section to enable 
us to review the mechanism and its implementation.

VII. Notification to the State

A. Time Frames

    For State submissions received by April 1, 1997, we will do a 
preliminary review to determine whether the package appears to be 
complete enough for us to make a determination. If not, we will notify 
the State by telephone and in writing, and provide the State the 
opportunity to submit supplemental information. We will issue a written 
response to each State's request as soon as possible, and no later than 
90 days after receipt of the State's submission.

B. Disapproval

    In accordance with section 2744(b)(2) of the PHS Act, we will 
review the information submitted and make a preliminary determination 
whether the State has or has not submitted an acceptable alternative 
mechanism.
    If our preliminary determination is that the mechanism is not 
acceptable, we will consult with the Chief Executive Officer (generally 
the Governor) of the State, or his or her designee, and the State 
Insurance Commissioner or the Chief Insurance Regulatory Official of 
the State. If after these consultations, we still conclude that the 
State's alternative mechanism is not acceptable, we will--
    <bullet> Notify the State of that determination; and
    <bullet> Inform the State that if the State fails to implement an 
acceptable alternative mechanism, the Federal default provisions will 
take effect.
    If we disapprove a State's proposed alternative mechanism, we will 
give the State a reasonable opportunity to modify the mechanism (or to 
adopt another mechanism).

C. Consequences of Disapproval and Enforcement Action

    If we make a final determination that (1) the design of a State's 
alternative mechanism is not acceptable or (2) the State is not 
substantially enforcing an otherwise acceptable alternative mechanism, 
we will notify the State in writing of our determination. We will 
provide the State with notice that the requirements of section 2741 of 
the PHS Act apply to health insurance coverage offered in the 
individual market in the State, effective as of a date specified in our 
notice.

VIII. Alternative Coverage Where There Is No State Mechanism

    In accordance with section 2741(c) of the PHS Act, if a State is 
not implementing an acceptable alternative mechanism, a health 
insurance issuer may elect to limit coverage offered through the 
individual market within prescribed parameters. The issuer may limit 
the individual market coverage offered as long as there are two 
different policy forms of coverage offered. Both policy forms must be 
designed for, made generally available to, actively marketed to, and 
enroll both eligible and other individuals, and meet one of two 
requirements regarding policy forms described in section 2741(c)(2) or 
(c)(3) of the PHS Act.
    Under section 2741(c)(2), the health insurance issuer must offer 
the policy forms for individual health insurance coverage with the 
largest, and next to largest, premium volume of all similar policy 
forms offered by the issuer in the State or applicable marketing or 
service area by the issuer in the individual market for the period 
involved. Under section 2741(c)(3), the health insurance issuer must 
offer a lower-level coverage policy form that meets the requirements of 
section 2741(c)(3)(B) and a higher-level coverage policy form that 
meets the requirements of section 2741(c)(3)(C). Each of these policy 
forms must include benefits substantially similar to other individual 
health insurance coverage offered by the issuer in the State and each 
must be covered under a method described in section 2744(c)(3)(A) 
pertaining to risk adjustment, risk spreading, or financial 
subsidization.

IX. Information Collection Requirements

    Under the Paperwork Reduction Act of 1995, agencies are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. This 
notice contains information collections that are subject to review by 
OMB under the Paperwork Reduction Act of 1995. The title, description, 
and respondent description of the information collections are shown 
below with an estimate of the annual reporting and recordkeeping 
burden. Included in the estimate is the time for reviewing 
instructions, searching existing data sources, gathering and 
maintaining the data needed, and

[[Page 1776]]

collecting and reviewing the collection of information.
    We are, however, requesting an emergency review of this notice. In 
compliance with section 3506(c)(2)(A) of the Paperwork Reduction Act of 
1995, we have submitted to the OMB the following information collection 
for emergency review. We are requesting an emergency review because the 
collection of this information is needed before the expiration of the 
normal time limits under OMB's regulations at 5 CFR, part 1320. So that 
a State does not have to incur the burden of temporarily implementing 
the Federal default requirements or live under Federal enforcement of 
those requirements, HIPAA requires a State to submit to us its proposed 
alternative mechanisms by April 1, 1997. A State may voluntarily submit 
the suggested information collection referenced in this notice when it 
submits its proposed alternative mechanisms. The description of the 
information collection will assist a State in submitting sufficient 
information for our review of its proposed alternative mechanisms.
    We are requesting that OMB provide a 2-day public comment period 
with a 2-day OMB review period and a 180-day approval. During this 180-
day period, we will publish a separate Federal Register notice 
announcing the initiation of an extensive 60-day agency review and 
public comment period on these requirements. We will submit the 
requirements for OMB review and an extension of this emergency 
approval.
    Type of Information Request: New collection.
    Title of Information Collection: Notification Procedures for States 
Implementing ``Alternative Mechanisms'' in the Individual Health 
Insurance Market and Supporting Notice (BPD-882-N).
    Form Number: HCFA-R-202.
    Use: To outline the documentation for States to obtain Federal 
approval of a State's alternative mechanism under section 111 of HIPAA.
    Frequency: On occasion.
    Affected Public: States.
    Number of Respondents: 55.
    Total Annual Responses: 55.
    Total Annual Hours Requested: 66,000.
    In summary, the information collection referenced in section VI. 
``Notification, Documentation, and Review'' provides that each State 
electing to implement an alternative mechanism notify us that the State 
has enacted, or intends to enact, any necessary legislation to provide 
for the implementation of a mechanism reasonably designed to be an 
acceptable alternative mechanism and provides us with the information 
to review the mechanism and its implementation (or proposed 
implementation).
    If a State chooses to submit a proposed alternative mechanism, the 
State must submit sufficient information to provide us with a 
reasonable basis for concluding that the proposed alternative mechanism 
meets the criteria described in section VI.C.2. of this notice. Along 
with a detailed description of the alternative mechanism and how it 
will function, we recommend the State include the name of a contact 
person, State Legislative Calendar, and text of existing State laws and 
regulations pertaining to the individual health insurance market.
    If a State chooses to implement an ``other mechanism'' described in 
section 2744(c)(3) of the Act, we recommend that the State submit a 
more detailed description of the mechanism than it would if it planned 
to implement a mechanism that relies on one of the three NAIC Model 
Acts referenced in section 2744 of the PHS Act.
    To request copies of the proposed information collections 
referenced above, call the Reports Clearance Office on (410) 786-1325.
    The information collections of this notice are not effective until 
they have been approved by the OMB. We have submitted a copy of this 
notice to the OMB for its review of these information collections. A 
notice will be published in the Federal Register when approval is 
obtained. Interested persons are invited to send comments regarding 
this burden or any other aspect of these collections of information, 
including any of the following subjects: (1) The necessity and utility 
of the information collection for the proper performance of the 
agency's functions; (2) the accuracy of the estimated burden; (3) ways 
to enhance the quality, utility, and clarity of the information to be 
collected; and (4) the use of automated collection techniques or other 
forms of information technology to minimize the information collection 
burden.
    Comments on these information collections may be faxed to Allison 
Herron Eydt at 202-395-6974 or mailed directly to the following 
address: Office of Information and Regulatory Affairs, Office of 
Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Allison Herron Eydt, HCFA Desk Officer. A 
copy of the comments may be mailed to the following address: Health 
Care Financing Administration, Office of Financial and Human Resources, 
Management Analysis and Planning Staff, Room C2-26-17, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.

X. Waiver of Solicitation of Comments

    This notice announces the options a State has under section 111 of 
HIPAA to ensure that eligible individuals have access to the individual 
health insurance market. As has been our custom, we use general 
notices, rather than formal notice and comment rulemaking procedures, 
to make these announcements. In doing so, we acknowledge that, under 
the Administrative Procedure Act, interpretive rules, general 
statements of policy, and rules of agency organization, procedure or 
practice are excepted from the requirements of notice and comment 
rulemaking.
    This notice does not establish new policy or requirements beyond 
those found in the statute. We are publishing this notice to assist a 
State that chooses to submit a proposed alternative mechanism under 
section 111 of HIPAA. We intend that the information we have identified 
in this notice provide guidance to a State and assist it in submitting 
sufficient information to enable us to approve the State's proposed 
alternative mechanism. We intend that this information assist a State 
to implement timely HIPAA provisions under its own State requirements. 
This would prevent the need for a State to comply with Federal 
requirements and subsequently transition to the State's requirements 
after we approve a State's proposed alternative mechanism. We wish to 
avoid an unnecessary burden on the State.
    In accordance with the provisions of Executive Order 12866, this 
notice was reviewed by the Office of Management and Budget.

    Authority: Section 2741 of the Public Health Service Act.

    Dated: December 17, 1996.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
    Approved: December 20, 1996.
Donna E. Shalala,
Secretary, Health and Human Services.
[FR Doc. 97-672 Filed 1-10-97; 8:45 am]
BILLING CODE 4120-01-P


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