[Federal Register Volume 62, Number 67 (Tuesday, April 8, 1997)]
[Rules and Regulations]
[Pages 16985-17004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8217]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 148

[BPD-882-IFC]
RIN 0938-AH75


Individual Market Health Insurance Reform: Portability From Group 
to Individual Coverage; Federal Rules for Access in the Individual 
Market; State Alternative Mechanisms to Federal Rules

AGENCY: Department of Health and Human Services.

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule with comment period implements section 
111 of the Health Insurance Portability and Accountability Act of 1996, 
which sets forth Federal requirements designed to improve access to the 
individual health insurance market. Certain ``eligible individuals'' 
who lose group health insurance coverage are assured availability of 
coverage in the individual market, on a guaranteed issue basis, without 
preexisting condition exclusions. In addition, all individual health 
insurance coverage must be guaranteed renewable. This rule also sets 
forth procedures that apply to States that choose to implement a

[[Page 16986]]

mechanism under State law, as an alternative to the Federal 
requirements, with respect to guaranteed availability for eligible 
individuals. It also sets forth the rules that apply if a State does 
not substantially enforce the statutory requirements.

DATES: Effective date: These regulations are effective April 8, 1997.
    However, affected parties do not have to comply with the 
information collection requirements in Secs. 148.120, 148.122, 148.124, 
148.126, 148.200, and 148.202 until the Department has published in the 
Federal Register the control numbers assigned by the Office of 
Management and Budget (OMB) to these information collection 
requirements. Section 148.128 is currently approved under emergency OMB 
approval number 0938-0699, which will expire on July 31, 1997, but will 
be reapproved with the sections referenced above. Publication of the 
control numbers notifies the public that OMB has approved these 
information collection requirements under the Paperwork Reduction Act 
of 1995.
    Comment date: Comments will be considered if we receive them at the 
appropriate address, as provided below, no later than 5 p.m. on July 7, 
1997.
    Applicability dates: The various dates that these regulations are 
applicable are set forth in the Supplementary Information section of 
the preamble.

ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: BPD-882-IFC, P.O. Box 26676, 
Baltimore, MD 21207-0488.
    If you prefer, you may deliver your written comments (1 original 
and 3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or
Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) or E-mail transmission. In commenting, 
please refer to file code BPD-882-IFC. Comments received timely will be 
available for pubic inspection as they are received, generally 
beginning approximately 3 weeks after publication of a document, in 
Room 309-G of the Department's offices at 200 Independence Avenue, SW., 
Washington, DC, on Monday through Friday of each week from 8:30 a.m. to 
5 p.m. (phone: (202) 690-7890).
    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
the Superintendent of Documents, or enclose your Visa or Master Card 
number and expiration date. Credit card orders can also be placed by 
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
2250. The cost for each copy is $8. As an alternative, you can view and 
photocopy the Federal Register document at most libraries designated as 
Federal Depository Libraries and at many other public and academic 
libraries throughout the country that receive the Federal Register.

FOR FURTHER INFORMATION CONTACT:
Gertrude Saunders of the Insurance Reform Implementation Task Force 
(IRITF), (410) 786-5888.

SUPPLEMENTARY INFORMATION:

I. Summary of Recent Legislation

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA, Pub. L. 104-191) was enacted on August 21, 1996. Title I of the 
statute enacted reforms in both the group and individual health 
insurance markets, in part, to help many individuals maintain insurance 
coverage if they lose or leave their jobs. Sections 101 through 103 of 
HIPAA amended the Employee Retirement Income Security Act of 1974 
(ERISA), the Public Health Service Act (PHS Act), and the Internal 
Revenue Code of 1986 (Code) to provide for improved access and 
renewability with respect to employment-related group health plans 
(GHPs), and health insurance coverage sold in connection with GHPs. 
Section 111 of HIPAA amends the PHS Act to improve availability and 
renewability in the individual market.
    Group health plans are generally regulated by the Department of 
Labor under ERISA, and by the Internal Revenue Service under the Code. 
For health insurance coverage sold to group health plans, and sold in 
the individual market, the insurance issuers are regulated by the 
States under State law.
    We believe that the individual health insurance market provisions 
of HIPAA recognize that States play the primary role in the regulation 
of insurance, and afford the States great flexibility in implementing 
the reforms required by the statute. While the statute provides 
enforcement authority to HHS in the event that a State substantially 
fails to enforce Federal requirements, the primary authority clearly 
rests with the States.
    This rule only pertains to the individual market changes made to 
sections 2741 through 2763 and 2791 of the PHS Act by section 111 of 
HIPAA. For rules implementing the group market provisions of HIPAA, see 
the ``Interim Rules for Health Insurance Portability for Group Health 
Plans'' (BPD-890-IFC), which is published elsewhere in this Federal 
Register.

II. Provisions of This Interim Final Rule

A. Guaranteed Availability--General

    The statue requires all health insurance issuers offering coverage 
in the individual market to accept any ``eligible individuals'' who 
apply for coverage, without imposing a preexisting condition exclusion.
    A health insurance issuer means an insurance company, insurance 
service, or insurance organization (including an HMO) that is licensed 
to engage in the business of insurance in a State and that is subject 
to State law that regulates insurance within the meaning of section 
514(b)(2) of the ERISA. The term does not include a group health plan. 
For purposes of this rule, we will use the term ``issuer'' to mean a 
health insurance issuer.
1. Definition of an Eligible Individual (Sec. 148.103)
    An eligible individual must met several criteria:
    <bullet> The individual must have at least 18 months of creditable 
coverage without a significant break in coverage.
    The rules for determining creditable coverage are set forth in the 
group market regulations at Sec. 146.113 and explained in the preamble 
to that regulation. In general, creditable coverage includes almost any 
type of health care coverage. A significant break in coverage is 63 
days without any creditable coverage. This requirement is related to 
the group market rules, since an individual in the group market is 
protected against preexisting condition exclusions under any 
circumstances if the individual has 18 months of creditable coverage 
without a significant break. As with the group market rules, States may 
have requirements that are more generous to individuals. For instance, 
a State may require less than 18 months of creditable coverage in order 
to be considered an eligible individual in the individual market. It 
may also lengthen the significant break in coverage period from 63 days 
to some longer period.
    We are also including a provision in Sec. 148.120(f)(2) that deems 
certain

[[Page 16987]]

children to be eligible individuals, even if they do not have a full 18 
months of creditable coverage. These are children who were covered 
under any creditable coverage within 30 days of birth, adoption, or 
placement for adoption, and have not had a significant break in 
coverage. Under Secs. 146.111(b) and 146.117(b)(5), these children are 
entitled to a special enrollment period under a group health plan or 
group health insurance coverage, and are fully protected from the 
imposition of preexisting condition exclusions under the group 
coverage. We believe that deeming these children to be eligible 
individuals is necessary in order to carry out clear congressional 
intent to provide special protection for them.
    <bullet> The individual's most recent coverage must have been under 
a group health plan.
    There is no limit on the amount of time that must have been spent 
under group coverage--one day is sufficient. The coverage must, 
however, be under a group health plan as defined in Part 146, which 
means it must be employment-related. However, it does not have to be a 
group health plan that is regulated under ERISA. It may be under 
governmental or church plans (or under health insurance coverage 
offered in connection with either type of group health plan). 
Governmental plans are plans for employees of government entities, not 
public welfare or other benefit plans such as Medicare, Medicaid, or 
IHS.
    <bullet> The individual cannot currently be eligible for Medicare 
or Medicaid or covered under any other health insurance.
    This requires that the individual actually be covered under the 
health insurance. Except for COBRA or similar continuation coverage, 
the individual who has the option of purchasing some sort of health 
insurance and does not do so may still meet the definition of an 
eligible individual.
    This interpretation of the law permits an individual to choose 
among options. In addition to the products that are available to him or 
her as an eligible individual, the individual may have available a 
conversion policy, other coverage sold in the individual market on an 
underwritten basis, or coverage through any associations to which the 
individual may be eligible to join. Eligible individuals cannot be 
required to obtain denials of other coverage (a common requirement of 
many risk pools) because the only disqualifying circumstance is 
``having'' other coverage, not having other options available. 
Nevertheless, individuals will want to explore other options to ensure 
that they obtain the best coverage for the lowest cost.
    <bullet> The individual has both elected and exhausted any 
continuation coverage available under COBRA or a similar State program.
    This requirement means that if an individual's qualifying event 
entitles him or her to more than 18 months of COBRA coverage, the 
individual must exhaust all the COBRA coverage that is available to him 
or her before becoming eligible under HIPAA's individual market rules. 
Many State laws, by contrast, require less than 18 months. Therefore, 
an individual would need to aggregate prior group coverage with the 
coverage under the mini-COBRA to reach the minimum of 18 months of 
creditable coverage required to be an eligible individual. Note, 
however, that the exhaustion requirement refers only to the 
continuation coverage that is mandated under Federal law (COBRA) or a 
similar program under State law (sometimes referred to as ``mini-
COBRA''). An individual, however, is not required to accept a 
``conversion'' policy that may be available when continuation coverage 
ends, and should be careful about doing so. Continuation coverage meets 
the criterion of coverage for both the individual and group markets. An 
individual who accepts a conversion policy, however, maintains 
eligibility only for the group market and forfeits the right to be an 
``eligible individual,'' for the individual market. This is so because 
the statute provides no portability from one individual policy to 
another. A conversion policy is an individual policy, not a group 
policy, even though prior group coverage is a prerequisite to 
qualifying for the conversion policy.
    <bullet> Residency requirements. We wish to clarify that States may 
not require a specific period of residency for HIPAA protected eligible 
individuals, however, States may require that an HIPAA eligible 
individual be a State resident to be eligible for protection under 
applicable State law.
2. State Flexibility
    States are given the flexibility either to enforce the Federal 
requirements set forth in Sec. 148.120, or to implement an alternative 
mechanism, under State law, that achieves the statutory mandate of 
providing eligible individuals with access to individual health 
insurance, or comparable coverage, without preexisting condition 
exclusions. The statute provides that if States notify the Secretary no 
later than April 1, 1997, with supporting information, that they intend 
to implement an alternative mechanism by January 1, 1998, they will be 
presumed to be implementing a mechanism as of July 1, 1997 (the 
effective date of the statute). Alternative mechanisms are discussed in 
section II.F. of this preamble.
    If a State chooses to enforce the Federal guaranteed availability 
requirements (sometimes referred to as the ``Federal fallback'' 
requirements), the provisions of Sec. 148.120 apply, and must be 
enforced by the State under State law. If the State implements neither 
an alternative mechanism, nor the Federal fallback requirements, we 
will implement the Federal fallback provisions in that State and will 
enforce those requirements using the penalty provisions specified in 
Secs. 148.200 and 148.202.

B. Alternative Coverage Under the Federal Fallback Provisions

    In accordance with Sec. 148.120(c), if the Federal fallback 
provisions are in effect in a State, an issuer that offers health 
insurance coverage in the individual market in that State may elect to 
limit coverage by making only two policies available to eligible 
individuals.
1. Limitation of Policy Forms--General
    The issuer may limit the individual market coverage it offers as 
long as it offers two different policy forms. 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 Sec. 148.120(c)(2) and 
(c)(3).
    The statute creates an ambiguity when it indicates that policy 
forms that have different cost-sharing arrangements or different riders 
must be considered different policy forms. It is our understanding that 
this is inconsistent with State law definitions of a policy form, which 
refer to a contract form that is filed with the State, which has a 
number assigned to it, and which may have more than one cost-sharing 
arrangement. Since the statute does not define ``policy form,'' we 
believe the statutory intent was to leave the definition to State law.
    However, we also believe the intent of the statutory requirement of 
two different policy forms was to ensure that eligible individuals 
would have some choice of coverage and/or cost for that coverage. 
Because differences in levels of cost sharing in out-of-pocket spending 
are among the most important determinants of price, for Federal 
enforcement purposes, we would interpret this statutory provision to 
mean that significant differences in deductibles or other significantly

[[Page 16988]]

different cost-sharing arrangements provide sufficient choice.
2. Most Popular Policies
    Under Sec. 148.120(c)(2), the health insurance issuer may choose to 
offer the policy forms for individual health insurance coverage with 
the largest, and the second largest, premium volume of all similar 
policy forms offered by the issuer in the State, or applicable 
marketing or service area, for the period involved. In the absence of 
applicable State standards, ``premium volume'' means earned premiums 
for the last reporting year. In the absence of applicable State 
standards, the last reporting year is the period from October 1 through 
September 30 of the preceding year. Blocks of business closed under 
applicable State law are not included in calculating premium volume.
3. Representative Policy Forms
    Under Sec. 148.120(c)(3), the health insurance issuer may choose, 
instead, to offer a lower-level and higher-level coverage policy form. 
Each of these policy forms must meet the requirements of 
Sec. 148.120(c)(3)(ii), which state that issuers must include benefits 
substantially similar to other individual health insurance coverage 
offered by the issuer in the State; and must be covered under a method 
described in Sec. 148.120(c)(3)(ii)(D) pertaining to risk adjustment, 
risk spreading, risk spreading mechanism, or financial subsidization; 
and must meet all applicable State requirements.
    In a State that chooses to enforce the Federal fallback provisions 
instead of an alternative mechanism, the issuer must provide the 
appropriate state authorities with any documentation required by the 
State (Sec. 148.120(c)(5)(i)). In a State where we enforce the 
individual market provisions, the issuer must provide us with 
documentation that we determine to be necessary 
(Sec. 148,120(c)(5)(ii)). The following is an example of what we would 
expect to be a minimum level of documentation:
    (A) Issuer name, address, and explanation of corporate and company 
structure.
    (B) Information on all products offered by the issuer in the 
individual market.
    (C) If the issuer elects the option for--
    (i) The most popular policies, data on premium volumes of all 
policy forms offered by the issuer in the individual market; or
    (ii) Representative coverage, data, assumptions, and methods used 
to calculate the actuarial values of the two representative policy 
forms.
    (D) Explanation of how the issuer is complying with the provisions 
of HIPAA.
    (E) List of all products the issuer is making or will make 
available to eligible individuals and an explanation of how the issuer 
will inform eligible individuals of these policy forms, with copies of 
all marketing material.
    (F) Description of risk spreading and financial subsidization 
mechanism.
    For policy forms already being marketed as of July 1, 1997 (the 
effective date of the Federal fallback provisions), the issuer must 
submit the information to HCFA no later than September 1, 1997. For 
other policy forms, the issuer must submit the information 90 days 
before the beginning of the calendar year in which the issuer wants to 
market the policy form.
4. Special Rules for Network Plans
    An issuer that offers coverage in the individual market through a 
network plan may require that eligible individuals live, reside, or 
work within the service area for the plan (Sec. 148.120(d)). An issuer 
may also deny coverage if it has demonstrated the following, if 
required, to the appropriate State authority:
    <bullet> It does not have the capacity to deliver services 
adequately to additional individual enrollees because of the volume of 
current group contract holders and enrollees, and to current individual 
enrollees. In addition, the issuer must not offer any coverage in the 
individual market within that service area for a period of 180 days 
after the coverage is denied.
    <bullet> It uniformly denies coverage to an individual without 
regard to any health status-related factor or whether the individual is 
an eligible individual.
5. Application of Financial Capacity Limits
    A health insurance issuer may deny coverage in the individual 
market to an eligible individual if the issuer has demonstrated the 
following, if required, to the applicable State authority 
(Sec. 148.120(e)(1)):
    <bullet> It does not have the financial reserves necessary to 
underwrite additional coverage.
    <bullet> It uniformly denies coverage to an individual without 
regard to any health status-related factor or whether the individual is 
an eligible individual.
    In those States under Federal enforcement of the individual market 
provisions, the demonstration of a lack of capacity to provide 
services, or a lack of financial capacity, must be made to us rather 
than the State (Sec. 148.120(e)(2)). The issuer must not deny coverage 
to any eligible individual until 30 days after we receive and do not 
reject the required information. We are currently developing reporting 
requirements for this information and we request comments regarding 
criteria that would be fair to all issuers, and at the same time 
promote the intent of the law to guarantee access to health insurance 
coverage for all eligible individuals.
    An issuer that denies coverage in any service area is provided in 
Sec. 148.120(e)(1), as prohibited from offering that coverage in the 
individual market for a period of 180 days after the later of the date 
coverage is denied or the issuer demonstrates to the applicable State 
authority (if required under applicable State law) that the issuer has 
sufficient financial reserves to underwrite additional coverage. A 
State may apply the 180 day suspension described in Sec. 148.120(e)(3) 
on a service-area-specific basis.
6. Dependent Coverage
    In general, if an issuer offers policies in the individual market 
that provide dependent coverage, the issuer may apply a preexisting 
condition exclusion, as allowed under applicable State law, to 
dependents who are not eligible individuals (Sec. 148.120(f)). However, 
the issuer may not apply a preexisting condition exclusion on certain 
children who have less than 18 months creditable coverage but are 
protected from an exclusion under the group market rules of Part 146.
    These children are dependents who were enrolled as a dependent 
under a group health plan within 30 days of birth, adoption, or 
placement for adoption and have not had a significant break in 
coverage. We believe that the statute did not intend to eliminate this 
protection for children who could not have been enrolled any earlier 
(that is, before birth, adoption, or placement for adoption), and thus 
could not possibly have aggregated 18 months of creditable coverage.
7. Construction of Provisions
    The regulation clarifies several areas that are not affected by 
this regulation (Sec. 148.120(g)). A health insurance issuer offering 
health insurance coverage only in connection with group health plans, 
or only through one or more bona fide associations, or both, is not 
required to offer that type of coverage in the individual market. 
Similarly, an issuer that only offers a conversion policy in connection 
with a group health plan is not considered to be an issuer offering 
individual health insurance coverage. The premium amount that an issuer 
charges for coverage in the individual

[[Page 16989]]

market is only restricted by applicable State law. An issuer offering 
coverage in the individual market is not prohibited from establishing 
premium discounts or rebates, or modifying applicable copayments or 
deductibles, in return for adherence to programs of health promotion 
and disease prevention. Also, issuers are not required to reopen blocks 
of business that have been closed under applicable State law, and an 
issuer in the individual market is not required to offer a family 
coverage option with any policy form unless State law requires the 
issuer to do so.
    In addition, if an issuer elects to sell coverage to an individual 
who is not an eligible individual, the issuer may apply a preexisting 
condition exclusion period as permitted under State law. The HIPAA 
group rules relating to reduction of preexisting condition exclusion 
periods do not apply in the individual market unless a State chooses to 
apply them.
8. Broad Preclusion of Preexisting Condition Exclusions for Eligible 
Individuals
    The individual market provisions (Sec. 148.120(a)(2)) preclude an 
issuer from imposing on an eligible individual a preexisting condition 
exclusion as defined under section 2701(b)(1)(A) of the PHS Act. That 
definition is very broad, including any limitation relating to a 
condition based on the fact that the condition was present before the 
date of enrollment under the coverage, whether or not any medical 
advice, diagnosis, care, or treatment was recommended or received 
before that date.
9. Treatment of Coverage Under the Federal Employee Health Benefit Plan 
(FEHBP)
    Federal employees are not subject to COBRA, but they may elect 
Federal Employee Temporary Continuation Coverage (TCC). This 
continuation coverage, like COBRA, is considered group coverage. While 
the individual is under the continuation coverage, the individual is 
still eligible for group coverage until that coverage has been 
exhausted. Therefore, the individual does not qualify as an eligible 
individual in the individual market by simply failing to exhaust TCC.

C. Guaranteed Renewability

    Section 148.122 requires that a health insurance issuer providing 
individual health insurance coverage to an individual, renew or 
``continue in force'' the coverage at the option of the individual. 
``Continue in force'' means that the issuer maintains the same policy 
form that the individual purchased. The requirements in this section 
apply to all individuals purchasing health insurance coverage in the 
individual market, not only eligible individuals.
    A health insurance issuer may nonrenew or discontinue health 
insurance coverage of an individual in the individual market only for 
the following reasons: nonpayment of premiums, fraud, termination of 
plan, movement outside service area, and cessation of association 
membership. If coverage is terminated based on movement outside the 
service area and cessation of association membership, coverage must be 
terminated uniformly without regard to the health status-related factor 
of any covered individuals. Health status-related factor is defined in 
Sec. 144.103 (definitions for the group and individual health insurance 
markets.)
    Becoming eligible for Medicare by reason of age or otherwise is not 
a basis for nonrenewal or termination of an individual's health 
insurance coverage in the individual market, because it is not included 
in the statute's specifically defined list of permissible reasons for 
nonrenewal. If permitted by State law, however, policies that are sold 
to individuals before they attain Medicare eligibility may contain 
coordination of benefit clauses that exclude payment under the policy 
to the extent that Medicare pays.
    Issuers who decide to discontinue offering a particular type or all 
coverage in the individual market are subject to certain requirements 
outlined in Sec. 148.122 (d) and (e). Issuers discontinuing all 
coverage in the individual market are prohibited from issuing coverage 
in the market and State involved for 5 years following the date of 
discontinuation of the last coverage policy not renewed 
(Sec. 148.122(f)).
    Issuers may modify the health insurance coverage for a policy form 
only at the time of coverage renewal, if the modification is consistent 
with State law and effective uniformly for all individuals with that 
policy form (Sec. 148.122(g)).
    In the case of health insurance coverage made available by a health 
insurance issuer in the individual market to individuals only through 
one or more associations, the reference to an ``individual'' is deemed 
to include a reference to the association (Sec. 148.122(h)).

D. Certification of Coverage

    Section 148.124 specifies that an issuer in the individual market 
must provide a certificate of creditable coverage, and, if required, 
make certain other disclosures regarding an individual's coverage under 
an individual policy. In general, the certificates and disclosure 
requirements are substantially identical to the relevant provisions of 
Sec. 146.115 that apply to health insurance coverage offered by issuers 
in the group market. The preamble accompanying the group market 
regulation published elsewhere in this Federal Register explains these 
procedures in detail. The certificates and other disclosure of 
information are intended to enable individuals to avoid or reduce 
preexisting condition exclusions included under subsequent group health 
insurance coverage the individual may obtain.
    The following model is different from the model certificate in the 
group market regulation. The individual market model certificate 
provides for the date that the substantially completed application was 
received from the policyholder. This date tolls the significant break 
period.

Certificate of Individual Health Insurance Coverage

    * IMPORTANT--This certificate provides evidence of your health 
coverage. You may need to furnish this certificate if you become 
eligible under a group health plan that excludes coverage for 
medical conditions you have before you enroll, if medical advice, 
diagnosis, care, or treatment is recommended or received for the 
condition during the 6 months before you enroll in the new plan. If 
you become covered under another group health plan, check with the 
plan administrator to see if you need to provide this certificate. 
You may also need this certificate to establish your right to buy 
coverage for yourself or your family, with no exclusion for previous 
medical conditions, if you are not covered under a group health 
plan.
    1. Date of this certificate: __________
    2. Name of policyholder: __________
    3. Identification number of policyholder: __________
    4. Name of any dependents to whom this certificate applies: 
__________
    5. Name, address, and telephone number of issuer responsible for 
providing this certificate:
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------

    6. For further information, call: __________
    7. If all individual(s) identified in items 2 and 4 have at 
least 18 months of creditable coverage (disregarding periods of 
coverage before a 63-day break), check here ______ and skip items 8 
and 9.
    8. Date coverage began: __________
    9. Date that a substantially completed application was received 
from the policyholder: __________
    10. Date coverage ended: __________ (or check here if coverage 
is continuing as of the date of this certificate:__________)


[[Page 16990]]


    Note: Separate certificates will be furnished if information is 
not identical for the policyholder and each dependent.

    Individuals have the right to receive a certificate automatically 
(an automatic certificate) when they lose coverage under an individual 
policy. A certificate must also be provided upon a request by, or on 
behalf of, an individual no later than 24 months after coverage ceases. 
The certificate must be provided at the earliest time that an issuer, 
acting in a reasonable and prompt fashion, can provide the certificate. 
The certificate must also be provided consistent with State law.
    An issuer of an individual policy is required, to the same extent 
as an issuer of insurance in the group market, to prepare certificates 
with respect to the coverage of any of the individual's dependents that 
are covered under the individual policy. During a transitional period 
until July 1, 1998, an issuer may satisfy its obligation to provide a 
written certificate regarding the coverage of a dependent of a 
policyholder by providing the name of the policyholder covered by the 
policy and specifying the type of coverage as family coverage. If 
requested to provide a certificate related to a dependent, however, the 
issuer must make reasonable efforts to obtain and provide the name of 
the dependent.
    For certain types of creditable coverage, including under a State 
health benefits risk pool, a public health plan, and section 5(e) of 
the Peace Corps Act, the statute does not identify a particular entity 
that is responsible for providing a certificate. However, any issuer 
that provides coverage in connection with those programs must provide 
certificates.

E. Determination of an Eligible Individual

    An issuer is potentially subject to civil money penalties if it 
denies coverage, or applies a preexisting condition exclusion to, an 
eligible individual, unless it can show that it did not know, or 
exercising reasonable diligence could not have known, of the violation. 
Section 148.126 specifies that the issuer is responsible for 
determining whether an applicant is an eligible individual, and must 
exercise reasonable diligence in making this determination. An issuer 
could, for example, include questions on the application form that 
would be designed to elicit information that would indicate that the 
applicant may be an eligible individual.
    An individual seeking to establish that he or she is an eligible 
individual may not have a certificate of creditable coverage that 
establishes 18 months of creditable coverage, and that the most recent 
period of creditable coverage is in a group health plan. The individual 
has the same right to demonstrate periods of creditable coverage as in 
the group market. Thus the issuer must take into account all 
information that the individual presents, and must treat the individual 
as having furnished a certificate if the individual attests to the 
period of creditable coverage, the individual presents relevant 
corroborating evidence of some creditable coverage during the period, 
and the individual cooperates with the issuer's efforts to verify the 
individual's coverage.

F. State Flexibility

1. Alternative Mechanism
    If a State implements an alternative mechanism as described in 
Sec. 148.128, the State does not have to enforce the ``Federal 
fallback'' provisions for guaranteed availability, although it must 
still enforce the guaranteed renewability provisions set forth in 
Sec. 148.122. Although the law recognizes diversity among the States by 
allowing for an alternative mechanism, there are minimum requirements 
for an alternative mechanism. Under Sec. 148.128, 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 and 
affiliation periods for coverage of an eligible individual.
    <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 of 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, and as revised in 
State regulations to meet all the requirements of Part 148 of this rule 
and Part 144 published elsewhere in this Federal Register with the 
group market rules.
+ The Individual Health Insurance Portability Model Act, as adopted on 
June 3, 1996, and revised in State regulations to meet all the 
requirements of Part 148 of this rule and Part 144 published elsewhere 
in this Federal Register with the group market rules.
+ 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 or affiliation periods 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 
Individuals Act in effect on August 21, 1996, and revised in State 
regulations to meet all the requirements of Part 148 of this rule and 
Part 144 published elsewhere in this Federal Register with the group 
market rules.
+ Another mechanism--
    --That provides for risk adjustment, risk spreading, or a risk-
spreading mechanism (among issuers or policies of an issuer) or 
otherwise provides for some financial subsidization for eligible 
individuals, including through assistance to participating issuers, or
    --Under which each eligible individual is provided a choice of all 
individual health insurance coverage otherwise available.
2. Permissible Forms of Mechanisms
    A private or public individual health insurance mechanism (such as 
a health insurance coverage pool or program, mandatory group conversion 
policy, guaranteed issue of one or more plans of individual health 
insurance coverage, or open enrollment by one or more health insurance 
issuers), or combination of these mechanisms, that is designed to 
provide access to health benefits for individuals in the individual 
market in the State, may constitute an acceptable alternative 
mechanism.
3. Transition Rules for Establishing an Acceptable Alternative 
Mechanism
    We presume a State to be implementing an acceptable alternative 
mechanism as of July 1, 1997, if the State submits a notice and 
required information that meets the notice and information requirements 
for an acceptable alternative mechanism described in Sec. 148.128(c), 
no later than April 1, 1997, and we do not make a determination within 
90 days (except as provided in Sec. 148.128(e)(3)(ii) for suspensions 
of the review period) that the State will not be implementing a

[[Page 16991]]

mechanism reasonably designed to be an acceptable alternative mechanism 
as of January 1, 1998. To assist States in meeting the April 1, 1997, 
statutory deadline for notifying HCFA and submitting the necessary 
information, HCFA will consider postmark dates, special delivery 
service dates or other such dates as the date of receipt.
4. Delay Permitted for Certain States
    If a State notifies us that its legislature is not meeting in a 
regular session between August 21, 1996, and August 20, 1997, our 
presumption that the State is implementing an acceptable alternative 
mechanism will continue until July 1, 1998, if the State meets the 
notice and information requirements in Sec. 148.128(d).
5. General Rules for Establishing an Alternative Mechanism
    A State that chooses to implement an acceptable alternative 
mechanism must submit the notice and supporting information specified 
in Sec. 148.128(e). After receiving the information, if we do not make 
a preliminary determination as described in Sec. 148.128(e)(2), within 
90 days of receiving the State's information (except as provided in 
Sec. 148.128(e)(3)(ii), that the mechanism is not accepted, the 
(proposed) alternative mechanism is presumed to be an acceptable 
alternative mechanism. If we do make a preliminary determination, after 
consultation with the chief executive officer of the State, that an 
alternative mechanism is not acceptable, we will notify the State, in 
writing, of the consequences of failing to implement an acceptable 
alternative mechanism and permit the State a reasonable opportunity to 
modify the mechanism or adopt another mechanism. In determining a 
reasonable opportunity, we will take into consideration a State's 
legislative calendar and process. If after taking all of these actions, 
our final determination is that a State's alternative mechanism is not 
an acceptable mechanism or the State is not substantially enforcing an 
acceptable mechanism, we will notify the State, in writing, as provided 
in Sec. 148.128(e)(4)(ii).
    A State may request that we notify it, after reviewing the material 
submitted, if we did not make a preliminary determination that the 
mechanism is not an acceptable alternative mechanism 
(Sec. 148.128(e)(4)).
6. Suspension of Review Period
    If we notify a State of our need for additional information or 
further discussions on its submission, we will suspend the review 
period, as described in Sec. 148.128(e)(3)(ii) until the State provides 
the necessary information. If the State chooses not to provide the 
necessary information or our discussions with the State cannot be 
concluded satisfactorily, we may make a preliminary determination that 
the mechanism is not an acceptable alternative mechanism.
7. Review Criteria
    The law gives States substantial flexibility in devising 
alternative mechanisms. If a State chooses to submit a proposed 
alternative mechanism, the State determines what to submit. We must, 
however, be able to determine whether the mechanism is designed to 
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. These 
requirements are described in Sec. 148.128(g).
8. Continued Application and Effective Dates
    A State must provide information necessary for us to review its 
mechanism's implementation every 3 years, or before implementing any 
significant change, to continue to be presumed to have an acceptable 
alternative mechanism (Sec. 148.128(f)). We suggest that a State inform 
us of any significant change to its alternative mechanism 120 days 
before implementing the change.
    For alternative mechanisms submitted after April 1, 1997, if we do 
not make a preliminary determination within the review period, the 
alternative mechanism is effective 90 days after the end of the 90-day 
review period (except as provided in Sec. 148.128(e)(3)(ii).
9. Limitation on HCFA's Authority
    We do not make a preliminary or final determination on any basis 
other than that a mechanism is not considered an acceptable alternative 
mechanism or is not being implemented by the State (Sec. 148.128(h)).

G. Enforcement

    Sections 2741 through 2763 and 2791 of the PHS Act, as implemented 
by Part 148 of these regulations, impose requirements on health 
insurance issuers that offer coverage in the individual market in a 
State. The statute makes clear that it is solely within the discretion 
of the States, in the first instance, whether to take on the 
responsibility for enforcing those requirements, or whether to leave 
enforcement to the Federal government. We anticipate that the States 
will choose to enforce the requirements. However, the statute also 
makes clear that if a State does not substantially enforce the 
requirements, we must enforce them. Section 148.200 sets forth the 
procedures that we will follow in the event that a question is raised 
about the State's enforcement. The procedures are designed to give the 
State every opportunity to show why Federal enforcement is not 
required. The regulation also makes clear that the process will not be 
triggered unless we are satisfied that there has been a reasonable 
effort to exhaust any State remedies. However, if, after giving the 
State a reasonable opportunity to enforce, we make a final 
determination that a State is not substantially enforcing these 
requirements, we will enforce the requirements using the civil money 
penalties provided for under Sec. 148.202.
    Section 148.202 describes the process for imposing civil money 
penalties against issuers that fail to comply with the requirements of 
Part 148 requiring them to make coverage available to eligible 
individuals, to renew all individual coverage, and to provide 
certificates of creditable coverage. If we receive a complaint or other 
information that indicates that the issuer is not in compliance with 
these requirements, we will give the issuer an opportunity to respond. 
If we assess the penalty, which can consist of up to $100 for each day, 
for each individual whose rights are violated, the regulation provides 
appeal rights.

H. Preemption

    Section 2762 of the PHS Act specifies that, in general, State laws 
regarding health insurance issuers are not preempted unless they 
``prevent the application of'' a requirement of the individual market 
rules in Part 148 of this rule or Part 144 published elsewhere in this 
Federal Register with the group market rules. Within these 
restrictions, however, the conference report makes clear that the 
conferees intended ``the narrowest preemption'' of State law, and 
indicates that State laws that are ``broader'' than Federal 
requirements would not ``prevent the application of'' the HIPAA 
requirements.
    The statute, however, makes clear that nothing in sections 2741 
through 2763 and 2791 of the PHS Act can be construed to affect or 
modify the

[[Page 16992]]

provisions of section 514 of ERISA, which limits State regulation of 
group health plans.

I. Excepted Benefits

    Section 146.145 specifies that certain benefits are excluded from 
certain requirements of the group market only if they are provided 
under a separate policy, certificate, or contract of insurance, or are 
otherwise not an integral part of the plan. Under Sec. 148.220, for 
purposes of the individual market, these benefits are excluded if 
provided under a separate policy certificate, or contract of insurance. 
The term ``integral to a plan'' does not apply in the individual 
market.
    In addition, in the group market, coverage for only a specified 
disease or illness or hospital indemnity or other fixed dollar 
indemnity insurance is excepted only if the following applies:
    <bullet> It is provided under a separate policy, certificate, or 
contract of insurance.
    <bullet> There is no coordination between the provision of the 
benefits and an exclusion of benefits under any group health plan 
maintained by the same plan sponsor. (This does not apply in the 
individual market.)
    <bullet> The benefits are paid with respect to an event without 
regard to whether benefits are provided with respect to the event under 
any group health plan maintained by the same plan sponsor. (This does 
not apply in the individual market.)
    The requirements of Part 148 do not apply to ``excepted benefits,'' 
which are benefits under one or more (or any combination) of the 
following:
    <bullet> Fully excepted benefits--

--Coverage only for accident (including accidental death and 
dismemberment);
--Disability income insurance;
--Liability insurance, including general liability insurance and 
automobile liability insurance;
--Coverage issued as a supplement to liability insurance;
--Workers' compensation or similar insurance;
--Automobile medical payment insurance;
--Credit-only insurance (for example, mortgage insurance); and
--Coverage for onsite medical clinics.

    <bullet> Other excepted benefits, which are excepted only if they 
are provided under a separate policy, certificate, or contract of 
insurance--

--Limited scope dental or vision benefits;
--Benefits for long-term care;
--Coverage only for a specified disease or illness (for example, cancer 
policies) as long as the policy does not coordinate benefits;
--Hospital indemnity or other fixed indemnity insurance (for example, 
$100 per day) as long as the policy does not coordinate benefits;
--Medicare supplemental health insurance, also known as Medigap or 
MedSup insurance (as defined in section 1882(g)(1) of the Social 
Security Act);
--Supplemental coverage provided under Chapter 55 Title 10 of the 
United States Code (also known as CHAMPUS supplemental programs); and
--Similar supplemental coverage provided under a group health plan.

J. Associations in the Individual Market

    As we discuss in the preamble to the interim final rules for the 
group market rules published elsewhere in this Federal Register, an 
association policy that is not offered in connection with an 
employment-related group health plan falls under the individual market 
provisions of HIPAA, even if a State otherwise regulates it as 
``association group'' coverage. In response to the notice published in 
the Federal Register on December 30, 1996 (61 FR 68697), we received a 
large number of comments relating to coverage under ``college plans,'' 
which provide association group coverage for students (as distinguished 
from employees of a college or university).
    The following discussion of college plans, which generally applies 
to any association coverage in the individual market, addresses the 
commenters' concerns.
    <bullet> College plans are clearly creditable coverage under 
Sec. 146.113(a)(1) because they meet the definition of ``health 
insurance coverage'' under part 144 of the group market rules.
    <bullet> If an issuer offers student coverage through a ``bona fide 
association,'' that meets all six requirements set forth in the 
definition of these entities in part 144 of the group market rules, the 
issuer benefits because it does not have to make the coverage available 
in the individual market to eligible individuals, and does not have to 
renew coverage for a student who leaves the association. The student 
also benefits because a bona fide association must make the coverage 
available to all association members regardless of any health status-
related factors. If the college plan is not a bona fide association, 
however, it does have to guarantee coverage to all eligible individuals 
in the individual market and must renew the coverage indefinitely at 
the option of former students. In addition, State laws may be more 
stringent than the Federal definition of bona fide association.
    <bullet> The commenters were concerned that students should be able 
to move from coverage under an employment-related group health plan 
(through their own or their parents' employment) to a college plan, 
between college plans, and from a college plan to individual coverage, 
with guaranteed availability and without preexisting condition 
exclusions. These concerns cannot be fully addressed under the current 
law. Because HIPAA provides for full portability from individual 
products to group market coverage, moving from a college plan to a 
employer plan presents no problem, since the coverage under the college 
plan constitutes creditable coverage that reduces any preexisting 
condition exclusion under the group health plan. However, a student 
moving from a group health plan to college or other individual coverage 
will not qualify for these protections unless he or she qualifies as an 
``eligible individual'' as defined in Sec. 148.103. To gain this 
status, a student must exhaust any COBRA or State ``mini-COBRA'' 
continuation coverage available. A child aging out of a parent's 
coverage generally qualifies for 36 months of COBRA. This puts the 
student in the position of either paying the higher cost of 
continuation coverage for the duration of the continuation coverage, or 
taking the lower-cost student coverage subject to a preexisting 
condition exclusion of any length permitted under State law. HIPAA 
places no limits on preexisting condition exclusion in the individual 
market for noneligible individuals.
    Moreover, HIPPA does not provide any guaranteed availability or 
protection against preexisting condition exclusions for students moving 
from one individual policy to another. This is true even if the student 
originally enrolled in a student plan as an eligible individual, since 
that status is applicable only when the student's most recent coverage 
is under a group health plan.

III. Regulatory Impact Analysis

    Ordinarily, we would include a Regulatory Impact Statement in this 
section of the document. We have chosen, however, to address the 
economic impact analysis of this regulation in a combined impact 
statement contained in the interim final rule for the group market 
provisions (BPD-890-IFC). A combined impact analysis has been prepared 
because of the close connection between the effects of HIPAA's group 
market reforms and the reforms in the individual insurance

[[Page 16993]]

market, and because of the overlap of issuers participating in both the 
group and individual market. The regulatory burdens placed on entities 
in the group and individual markets are virtually identical in many 
respects, notably in the certification process. There are also economic 
effects that crossover from one market segment to the other because of 
HIPPA provisions, such as the group-to-individual portability 
provision, which may have an effect on premiums in either or both 
market segments. We believe a single discussion of the economic impact 
is the most appropriate means of highlighting the similarities and 
discussing the interactions between the two market segments.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we 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. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are, however, requesting an emergency review of this notice. In 
compliance with the requirement of section 3506(c)(2)(A) of the 
Paperwork Reduction Act of 1995, we have submitted to the Office of 
Management and Budget (OMB) the following requirements 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. This is necessary 
to ensure compliance with section 111 of HIPAA necessary to implement 
congressional intent with respect to guaranteeing availability of 
individual health insurance coverage to certain individuals with prior 
group coverage. We cannot reasonably comply with the normal clearance 
procedures because public harm is likely to result because eligible 
individuals will not receive the health insurance protections under the 
statute.
    We are requesting that OMB provide a 30-day public comment period, 
from the date of publication, with OMB approval by June 1, 1997 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: Individual Health Insurance.
    Reform: Portability from Group to Individual Coverage; Federal 
Rules for Access in the Individual Market; State Alternative Mechanisms 
to Federal Rules BPD-882-IFC.
    Form Number: HCFA-R-205.
    Use: These rules ensure access to the individual insurance market 
for certain individuals and allows the States to implement their own 
program to meet the HIPAA requirements for access to the individual 
market. The information collection requirements outlined in this rule 
document the record keeping necessary for issuers and States to ensure 
individuals receive protection under section 111 of HIPAA.
    Frequency: On occasion.
    Affected Public: States, businesses or other for profit, not-for-
profit institutions, Federal Government, individuals or households.
    Number of Respondents: 1,035.
    Total Annual Responses: 3.5 million in 1997; 3 million each in 1998 
and 1999;
    Total Annual Hours Requested: 335,000 to 586,000 hours in 1997; 
384,000 to 882,000 in 1998; and 377,000 to 882,000 in 1999.
    Total Annual Cost: $4.9 million to $6.8 million in 1997; $5.1 
million to $8.7 million in 1998; and $5.4 million to $8.7 million in 
1999.
    Sections 148.120, 148.122, 148.124, 148.126, 148.128, 148.200, and 
148.202 of this document contain information collection requirements. 
As required by section 3504(h) of the Paperwork Reduction Act of 1995, 
we have submitted a copy of this document to OMB for its review of 
these information collection requirements.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements:

Section 148.120  Guaranteed availability of individual health insurance 
coverage to certain individuals with prior group coverage.

    States are given the flexibility either to enforce the Federal 
requirements set forth in Sec. 148.120, or to implement an alternative 
mechanism, under State law, that achieves the statutory mandate of 
providing eligible individuals with access to individual health 
insurance, or comparable coverage, without preexisting condition 
exclusions. However, a State could choose to do nothing, resulting in 
Federal enforcement of the individual market regulations under HIPAA. 
Thirty States have indicated to us an intent to implement an 
alternative mechanism under Sec. 148.128. The information collection 
requirements associated with implementing and enforcing the alternative 
mechanism are discussed below for Sec. 148.128.
    If a State chooses to enforce the Federal guaranteed availability 
requirements (sometimes referred to as the ``Federal fall back'' 
requirements), the provisions of Sec. 148.120 apply, and must be 
enforced by the State under State law. Since many of these requirements 
are enforced under existing State law, for these instances, they are 
exempt from the Paperwork Reduction Act (PRA) as described under 5 CFR 
1320.3(b)(3). Although applicable PRA burden will vary by State and 
issuer, we anticipate that ten States will be required to review 
materials submitted by at most 325 issuers per State on an annual basis 
to ensure compliance with the requirements of all products guaranteed 
or alternative coverage, which are not currently required under State 
laws and regulations. Therefore, the PRA burden imposed under this 
option is the time required by the ten States to review the materials 
submitted by the issuers. This burden is 1,625 hours based on each of 
the ten States reviewing the material for 30 minutes for each issuer on 
an annual basis. We estimate the cost associated with this burden to be 
$24,375.
    If a State implements neither an alternative mechanism, nor the 
Federal fall back requirements, we will implement the Federal fall back 
provisions in that State and will enforce those requirements using the 
penalty provisions specified in Secs. 148.200 and 148.202. We 
anticipate that fewer than ten States will rely on Federal enforcement 
of the statute. In particular, the only jurisdictions that we believe

[[Page 16994]]

will choose this option are the five U.S. territories.
    This section also requires an issuer who elects the alternative 
coverage option to document any actuarial calculations necessary to 
satisfy State and/or Federal oversight provisions referenced in 
Sec. 148.120. Since the majority of issuers rely on automated means of 
storing their calculations, we estimate the annual burden for this 
record keeping activity to be 25 hours. This is based on the assumption 
that it will take approximately 10 issuers per State, in 15 States, on 
an annual basis, 10 minutes per issuer, to electronically store and 
verify the storage of their calculations. We estimate the cost 
associated with this burden to be $375.

Section 148.122  Guaranteed renewability of individual health insurance 
coverage.

    In this section issuers are only required to report if they are 
discontinuing a particular type of coverage or discontinuing all 
coverage. This requirement exists in the absence of this regulation 
because under current insurance practices, State insurance departments 
oversee discontinuance of insurance products in their State as a normal 
business practice. Therefore, these information collection requirements 
are exempt from the PRA under 5 CFR 1320.3(b)(2) and 5 CFR 
1320.3(b)(3). However, under HIPAA, States must review policies during 
their oversite process to make sure there is a guarantee renewability 
clause in each policy. For the 21 States that currently require 
guaranteed renewability, it is our understanding that this is normal 
business practice. For the other 34 States, however, we see this State 
burden to be about 10 minutes per policy, since States already review 
policies for other requirements and this process does not prescribe a 
timetable for reviewing the policies. We see this as a total annual 
burden of 20,000 hours. We estimate the cost associated with this 
burden to be $300,000. If the State identifies a violation and a State 
has to take some action, we believe that each State will be required to 
initiate fewer than 10 administrative actions on an annual basis 
against specific individuals or entities who failed to implement the 
Federal guarantee renewability requirements.

Section 148.124  Certification and disclosure of coverage.

    Section 148.124 specifies that an issuer in the individual market 
must provide a written certificate of creditable coverage, and, if 
required, make other certain disclosures regarding an individual's 
coverage under an individual policy. In general, the certification and 
disclosure requirements are substantially identical to the relevant 
provisions of Sec. 146.115 that apply to health insurance coverage 
offered by issuers in the group market. The preamble accompanying the 
group market regulation explains these procedures in detail. In 
general, the certificates from issuers in the individual market and 
other disclosure of information are intended to enable individuals to 
avoid or reduce preexisting condition exclusions included under 
subsequent group health insurance coverage the individual may obtain.
    Individuals have the right to receive a certificate automatically 
(an automatic certificate) when they lose coverage under an individual 
policy. A certificate must also be provided upon a request by, or on 
behalf of, an individual for the period not later than 24 months after 
coverage ceases. The certificate must be provided at the earliest time 
that an issuer, acting in a reasonable and prompt fashion, can provide 
the certificate. The certificate must also be provided consistent with 
State law.
    An issuer of an individual policy is required, to the same extent 
as an issuer of insurance in the group market, to prepare certificates 
with respect to the coverage of any of the individual's dependents that 
are covered under the individual policy.
    We anticipate that 3 million individual market-based certificates 
will be generated on an annual basis. We are assuming that the majority 
of certificates issued in the individual market will require issuers to 
find out the application date since many individuals will have less 
than 18 months of credible coverage with that issuer.
    The range of time estimates, shown in the table below, are based on 
discussions with industry individuals. We believe that as a routine 
business practice, the issuers' administrative staff have the necessary 
information readily available to generate the required certificates. In 
addition, we have determined that the majority of issuers have or will 
have the capability to automatically computer generate and disseminate 
the necessary certification when appropriate.

----------------------------------------------------------------------------------------------------------------
                                                                   Average time                                 
                                       Total           Total       (in minutes)    Burden hours                 
              Year                  respondents      responses     per response       (range)      Cost (range) 
                                                                      (range)                                   
----------------------------------------------------------------------------------------------------------------
1997............................           1,000       3,418,052            4.63         263,548      $3,897,932
                                                                            8.95         509,665       5,716,826
1998............................           1,000       2,929,759            6.94         338,781       4,542,924
                                                                           17.11         835,517       8,035,131
1999............................           1,000       2,929,759            6.81         332,480       4,746,736
                                                                           17.11         835,517       8,035,131
----------------------------------------------------------------------------------------------------------------

Section 148.126  Determination of an eligible individual.

    In this section, issuers may maintain records for those individuals 
who they determine are not HIPAA eligible individuals. We estimate this 
to be on average less than 50 individuals per the 1,000 issuers 
nationwide each year. At 20 minutes per record, this represents an 
annual burden of 16,667 hours. We estimate the cost associated with 
this burden to be $183,000.

Section 148.128  State flexibility in individual market reforms--
alternative mechanisms.

    As explained above, 30 or more States may implement acceptable 
alternative mechanisms as allowed under this section. It is estimated 
that this reporting burden will range from 33,000 to 38,500 hours 
depending on the number of States that choose to submit the required 
information. We estimate the cost associated with this burden to be 
$495,000 to $577,500.
    The information collection requirements associated with submitting 
the required documentation outlining a State's alternative mechanism is 
currently approved under emergency OMB approval number 0938-0699 which 
expires on 07/31/97. The information collection requirements

[[Page 16995]]

currently approved in this section will be re-approved with the 
remaining information collection requirements referenced in the HHS PRA 
section.

Section 148.200  Enforcement and Section 148.202 Civil money penalties.

    We anticipate identifying violations through individual 
nonstandardized consumer complaints. Therefore, the complaints 
submitted and our enforcement activities do not fall within the 
requirements of the PRA, as outlined in 5 CFR 1320.3(c) and 5 CFR 
1320.4(a).
    We have submitted a copy of this notice to 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 the burden or any other aspect of 
these collections of information requirements.
    If you comment on these information collection and record keeping 
requirements, please mail copies directly to the following addresses:

Health Care Financing Administration, Office of Financial and Human 
Resources, Management Planning and Analysis Staff, Room C2-26-17, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
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.

V. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the DATES 
section of this preamble, and, if we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document.

VI. Interim Rules and Request for Comments

    Section 2792 of the PHS Act, provides in part, that HHS may 
promulgate any interim final rules as they determine are appropriate to 
carry out the provisions of the new Part B of the PHS Act. Under 
section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et 
seq.), a general notice of proposed rulemaking is not required when the 
agency, for good cause, finds that notice and public comment thereon 
are impracticable, unnecessary or contrary to the public interest.
    These rules are being adopted on an interim basis, rather than as 
proposed rules, because the Department has determined that, without 
prompt guidance, some members of the regulated community will have 
difficulty complying with the HIPAA's certification requirements and 
could be in violation of the statute. The Congress expressly intended 
that the certification and prior creditable coverage provisions serve 
as the mechanism for increasing the portability of health coverage for 
individuals. Without the Department's guidance, issuers will likely be 
unable to produce the necessary amendments to policy documents 
reflecting HIPAA's new requirements, as well as the appropriate 
certifications of prior coverage that would eliminate preexisting 
condition exclusion periods for eligible individuals. Moreover, without 
the Department's prompt guidance, insured individuals will not 
understand the benefit to them of having a certificate of prior 
coverage to present upon entering the individual health insurance 
market and will likely have greater difficulty proving that they are 
entitled to health coverage.
    HIPAA's portability requirements will affect the regulated 
community in the immediate future. HIPAA's certification requirements 
are effective for all issuers on June 1, 1997. HIPAA's underlying 
requirements concerning establishing periods of prior creditable 
coverage and eliminating pre-existing condition exclusions in the 
individual market are generally applicable July 1, 1997. Issuers and 
individuals will need guidance on how to comply with the new statutory 
provisions before this effective date. The rules have been written in 
order to ensure that issuers of individual health insurance, as well as 
individuals, are provided timely guidance concerning compliance with 
these recently enacted amendments to the PHS Act. The rules provide 
guidance on these statutory changes, and are being adopted on an 
interim basis because the Department finds that issuance of such 
regulations in interim final form with a request for comments is 
appropriate to carry out the new regulatory structure imposed by HIPAA 
on health insurance issuers. In addition, the rules are necessary to 
ensure that issuers, as well as individuals, are provided timely 
guidance concerning compliance with new and important disclosure 
obligations imposed by HIPAA.
    Section 2792 of the PHS Act authorizes the Department to issue 
regulations necessary to carry out the amendments made by section 111 
of HIPAA by April 1, 1997. Issuance of a notice of proposed rule making 
with public comment prior to issuing a final rule could delay 
significantly the issuance of essential guidance and prevent the 
Department from complying with its statutory rulemaking deadline. 
Furthermore, although these rules are being adopted on an interim 
basis, the Department is inviting interested persons to submit written 
comments on the rules for consideration in the development of the final 
rules relating to HIPAA. Development of subsequent rules may be issued 
in advance of January 1, 1998.
    For the foregoing reasons, the Department finds that the 
publication of a proposed regulation, for the purpose of notice and 
public comment, would be impracticable, unnecessary, and contrary to 
the public interest. However, we are providing a 90-day period for 
public comment, as indicated at the beginning of this rule.

List of Subjects in 45 CFR Part 148

    Administrative practice and procedure, Health care, Health 
insurance, Penalties, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, 45 CFR Subtitle A is 
amended as set forth below: A new Part 148, consisting of Secs. 148.101 
through 148.220, is added to Subchapter B to read as follows:

PART 148--REQUIREMENTS FOR THE INDIVIDUAL HEALTH INSURANCE MARKET

Subpart A--General Provisions

Sec.
148.101  Basis and purpose.
148.102  Scope, applicability, and effective dates.
148.103  Definitions.

Subpart B--Requirements Relating to Access and Renewability of Coverage

148.120  Guaranteed availability of individual health insurance 
coverage to certain individuals with prior group coverage.
148.122  Guranteed renewability of individual health insurance 
coverage.
148.124  Certification and disclosure of coverage.
148.126  Determination of an eligible individual.
148.128  State flexibility in individual market reforms--alternative 
mechanisms.

Subpart C--[Reserved]

Subpart D--Enforcement; Penalties; Preemption

Sec.
148.200  Enforcement by State; determination regarding failure to 
enforce.
148.202  Civil money penalties.

[[Page 16996]]

148.210  Preemption.
148.220  Excepted benefits.

    Authority: Secs. 2741 through 2763, 2791, and 2792 of the Public 
Health Service Act (42 U.S.C. 300gg-41 through 300gg-63, 300gg-91, 
and 300gg-92).

Subpart A--General Provisions


Sec. 148.101  Basis and purpose.

    This part implements sections 2741 through 2763 and 2791 and 2792 
of the PHS Act. Its purpose is to improve access to individual health 
insurance coverage for certain eligible individuals who previously had 
group coverage, and to guarantee the renewability of all coverage in 
the individual market.


Sec. 148.102  Scope, applicability, and effective dates.

    (a) Scope and applicability. (1) Individual health insurance 
coverage includes all health insurance coverage (as defined in 45 CFR 
144.103) that is neither health insurance coverage sold in connection 
with an employment-related group health plan, nor short-term, limited 
duration coverage as defined in 45 CFR 144.103. In some cases, coverage 
that may be considered group coverage under State law (such as coverage 
sold through certain associations) is considered individual coverage.
    (2) The requirements of this part that pertain to guaranteed 
availability of individual health insurance coverage for certain 
eligible individuals apply to all issuers of individual health 
insurance coverage in a State, unless the State implements an 
acceptable alternative mechanism as described in Sec. 148.128. The 
requirements that pertain to guaranteed renewability for all 
individuals apply to all issuers of individual health insurance 
coverage in the State, regardless of whether a State implements an 
alternative mechanism.
    (b) Effective date. Except as provided in Sec. 148.124 (certificate 
of coverage) and Sec. 148.128 (alternative State-mechanisms), the 
requirements of this part apply to health insurance coverage offered, 
sold, issued, renewed, in effect, or operated in the individual market 
after June 30, 1997, regardless of when a period of creditable coverage 
occurs.


Sec. 148.103  Definitions.

    Unless otherwise provided, the following definition applies:
    Eligible individual means an individual who meets the following 
conditions:
    (1) The individual has at least 18 months of creditable coverage 
(as determined under 45 CFR 146.113) as of the date on which the 
individual seeks coverage under this part.
    (2) The individual's most recent prior creditable coverage was 
under a group health plan, governmental plan, or church plan (or health 
insurance coverage offered in connection with any of these plans).
    (3) The individual is not eligible for coverage under any of the 
following:
    (i) A group health plan.
    (ii) Part A or Part B of Title XVIII (Medicare) of the Social 
Security Act.
    (iii) A State plan under Title XIX (Medicaid) of the Social 
Security Act (or any successor program).
    (4) The individual does not have other health insurance coverage.
    (5) The individual's most recent coverage was not terminated 
because of nonpayment of premiums or fraud. (For more information about 
nonpayment of premiums or fraud, see 45 CFR 146.152(b)(1) and (b)(2).)
    (6) If the individual has been offered the option of continuing 
coverage under a COBRA continuation provision or a similar State 
program, the individual has both elected and exhausted the continuation 
coverage.

Subpart B--Requirements Relating to Access and Renewability of 
Coverage


Sec. 148.120  Guaranteed availability of individual health insurance 
coverage to certain individuals with prior group coverage.

    (a) General rule. Except as provided for in paragraph (c) of this 
section, an issuer that furnishes health insurance coverage in the 
individual market must meet the following requirements with respect to 
any eligible individual who requests coverage:
    (1) May not decline to offer coverage or deny enrollment under any 
policy forms that it actively markets in the individual market, except 
as permitted in paragraph (c) of this section concerning alternative 
coverage when no State mechanism exists. An issuer is deemed to meet 
this requirement if, upon the request of an eligible individual, it 
acts promptly to do the following:
    (i) Provide information about all available coverage options.
    (ii) Enroll the individual in any coverage option the individual 
selects.
    (2) May not impose any preexisting condition exclusion on the 
individual.
    (b) Exception. The requirements of paragraph (a) of this section do 
not apply to health insurance coverage offered in the individual market 
in a State that chooses to implement an acceptable alternative 
mechanism described in Sec. 148.128.
    (c) Alternative coverage permitted where no State mechanism exists. 
(1) If the State does not implement an acceptable alternative mechanism 
under Sec. 148.128, an issuer may elect to limit the coverage required 
under paragraph (a) of this section if it offers eligible individuals 
at least two policy forms that meet the following requirements:
    (i) Each policy form must be designed for, made generally available 
to, and actively marketed to, and enroll, both eligible and other 
individuals.
    (ii) The policy forms must be either the issuer's two most popular 
policy forms (as described in paragraph (c)(2) of this section) or 
representative samples of individual health insurance offered by the 
issuer in the State (as described in paragraph (c)(3) of this section).
    (2) Most popular policies. The two most popular policy forms means 
the policy forms with the largest, and the second largest, premium 
volume for the last reporting year, for policies offered in that State. 
In the absence of applicable State standards, premium volume means 
earned premiums for the last reporting year. In the absence of 
applicable State standards, the last reporting year is the period from 
October 1 through September 30 of the preceding year. Blocks of 
business closed under applicable State law are not included in 
calculating premium volume.
    (3) Representative policy forms--(i) Definition of weighted 
average. Weighted average means the average actuarial value of the 
benefits provided by all the health insurance coverage issued by one of 
the following:
    (A) An issuer in the individual market in a State during the 
previous calendar year, weighted by enrollment for each policy form, 
but not including coverage issued to eligible individuals.
    (B) All issuers in the individual market in a State if the data are 
available for the previous calendar year, weighted by enrollment for 
each policy form.
    (ii) Requirements. The two representative policy forms must meet 
the following requirements:
    (A) Include a lower-level coverage policy form under which the 
actuarial value of benefits under the coverage is at least 85 percent 
but not greater than 100 percent of the weighted average.
    (B) Include a higher-level coverage policy form under which the 
actuarial value of the benefits under the coverage is at least 15 
percent greater than the actuarial value of the lower-level coverage 
policy form offered by an issuer in that State and at least 100 
percent, but not greater than 120 percent of the weighted average.
    (C) Include benefits substantially similar to other individual 
health

[[Page 16997]]

insurance coverage offered by the issuer in the State.
    (D) Provide for risk adjustment, risk spreading, or a risk 
spreading mechanism, or otherwise provide some financial subsidization 
for eligible individuals.
    (E) Meet all applicable State requirements.
    (iii) Actuarial value of benefits. The actuarial value of benefits 
provided under individual health insurance coverage must be calculated 
based on a standardized population, and a set of standardized 
utilization and cost factors under applicable State law.
    (4) Election. All issuer elections must be applied uniformly to all 
eligible individuals in the State and must be effective for all 
policies offered during a period of at least 2 years.
    (5) Documentation. The issuer must document the actuarial 
calculations it makes as follows:
    (i) Enforcement by State. In a State that elects to enforce the 
provisions of this section in lieu of an alternative mechanism under 
Sec. 148.128, the issuer must provide the appropriate State authorities 
with the documentation required by the State.
    (ii) Enforcement by HCFA. If HCFA acts to enforce the provisions of 
this section under Sec. 148.200, the issuer must provide to HCFA, 
within the following time frames, any documentation HCFA requests:
    (A) For policy forms already being marketed as of July 1, 1997--no 
later than September 1, 1997.
    (B) For other policy forms--90 days before the beginning of the 
calendar year in which the issuer wants to market the policy form.
    (d) Special rules for network plans. (1) An issuer that offers 
coverage in the individual market through a network plan may take the 
following actions:
    (i) Specify that an eligible individual may only enroll if he or 
she lives, resides, or works within the service area for the network 
plan.
    (ii) Deny coverage to an eligible individual if the issuer has 
demonstrated the following to the applicable State authority (if 
required by the State):
    (A) It does not have the capacity to deliver services adequately to 
additional individual enrollees because of its obligations to provide 
services to current group contract holders and enrollees, and to 
current individual enrollees.
    (B) It uniformly denies coverage to individuals without regard to 
any health status-related factor, and without regard to whether the 
individuals are eligible individuals.
    (iii) Not offer any coverage in the individual market, within the 
service area identified for purposes of paragraph (d)(1)(ii) of this 
section, for a period of 180 days after the coverage is denied.
    (2) In those States in which HCFA is enforcing the individual 
market provisions of this part in accordance with Sec. 148.200, the 
issuer must make the demonstration described in paragraph (d)(1)(ii) of 
this section to HCFA rather than to the State, and the issuer may not 
deny coverage to any eligible individual until 30 days after HCFA 
receives and approves the information.
    (e) Application of financial capacity limits. (1) An issuer may 
deny coverage to an eligible individual if the issuer has demonstrated 
the following to the applicable State authority (if required by the 
State):
    (i) It does not have the financial reserves necessary to underwrite 
additional coverage.
    (ii) It uniformly denies coverage to all individuals in the 
individual market, consistent with applicable State law, without regard 
to any health status-related factor of the individuals, and without 
regard to whether the individuals are eligible individuals.
    (2) In those States in which HCFA is enforcing the individual 
market provisions of this part in accordance with Sec. 148.200, the 
issuer must make the demonstration described in paragraph (e)(1) of 
this section to HCFA rather than to the State, and the issuer may not 
deny coverage to any eligible individual until 30 days after HCFA 
receives and approves the information.
    (3) An issuer that denies coverage in any service area according to 
paragraph (e)(1) of this section is prohibited from offering that 
coverage in the individual market for a period of 180 days after the 
later of the date--
    (1) The coverage is denied; or
    (ii) The issuer demonstrates to the applicable State authority (if 
required under applicable State law) that the issuer has sufficient 
financial reserves to underwrite additional coverage.
    (4) A State may apply the 180-day suspension described in paragraph 
(e)(3) of this section on a service-area-specific basis.
    (f) Rules for dependents--(1) General rule. If an eligible 
individual elects to enroll in individual health insurance coverage 
that provides coverage for dependents, the issuer may apply a 
preexisting condition exclusion on any dependent who is not an eligible 
individual.
    (2) Exception for certain children. A child is deemed to be an 
eligible individual if the following conditions are met:
    (i) The child was covered under any creditable coverage within 30 
days of birth, adoption, or placement for adoption (or longer if the 
State provides for a longer special enrollment period than required 
under 45 CFR 146.117).
    (ii) The child has not had a significant break in coverage.
    (3) Examples. The following examples illustrate the requirements of 
this paragraph (f) for certain children:

    Example 1: Individual A had self-only coverage under his 
employer's group health plan for five years. A has two children, 
ages 11 and 15, but never enrolled in family coverage. A leaves his 
job to become self-employed, and qualifies as an eligible individual 
because he is not entitled to any continuation coverage, Medicare or 
Medicaid, and has no other health insurance coverage. He applies to 
Issuer R for coverage in the individual market under a policy with 
family coverage that R makes available to eligible individuals. R 
must sell A the policy, but he may refuse coverage to A's children, 
or may apply a preexisting condition exclusion to them if allowed 
under applicable State law, because they did not have prior 
creditable coverage, and therefore do not qualify as eligible 
individuals.
    Example 2: Individual B was also covered under a group health 
plan for 5 years before losing his job. He originally had coverage 
only for himself and his wife, but 3 months before his employment 
ended, his wife had a baby. B took advantage of the special 
enrollment period that applied, changed to family coverage, and 
enrolled the baby in the group health plan within 20 days. 
Immediately after losing his job, B applied to Issuer R for family 
converge. B and his wife qualify as eligible individuals, and the 
baby is deemed to be an eligible individual even though she has less 
than three months of creditable coverage. Therefore R must make the 
policy available to all three members of the family, and cannot 
impose any preexisting condition exclusions.

    (g) Clarification of applicability. (1) An issuer in the individual 
market is not required to offer a family coverage option with any 
policy form.
    (2) An issuer offering health insurance coverage only in connection 
with group health plans, or only through one or more bona fide 
associations, or both, is not required to offer that type of coverage 
in the individual market.
    (3) An issuer offering health insurance coverage in connection with 
a group health plan is not deemed to be a health insurance issuer 
offering individual health insurance coverage solely because the issuer 
offers a conversion policy.
    (4) This section does not restrict the amount of the premium rates 
that an issuer may charge an individual under State law for health 
insurance coverage provided in the individual market.

[[Page 16998]]

    (5) This section does not prevent an issuer offering health 
insurance coverage in the individual market from establishing premium 
discounts or rebates, or modifying otherwise applicable copayments or 
deductibles, in return for adherence to programs of health promotion 
and disease prevention.
    (6) This section does not require issuers to reopen blocks of 
business closed under applicable State law.


Sec. 148.122  Guaranteed renewability of individual health insurance 
coverage.

    (a) Applicability. This section applies to all health insurance 
coverage in the individual market.
    (b) General rules. (1) Except as provided in paragraph (c) of this 
section, an issuer must renew or continue in force the coverage at the 
option of the individual.
    (2) Medicare eligibility or entitlement is not a basis for 
nonrenewal or termination of an individual's health insurance coverage 
in the individual market.
    (c) Exceptions to renewing coverage. An issuer may nonrenew or 
discontinue health insurance coverage of an individual in the 
individual market based only on one or more of the following:
    (1) Nonpayment of premiums. The individual has failed to pay 
premiums or contributions in accordance with the terms of health 
insurance coverage, including any timeliness requirements.
    (2) Fraud. The individual has performed an act or practice that 
constitutes fraud or made an intentional misrepresentation of material 
fact under the terms of the coverage.
    (3) Termination of plan. The issuer is ceasing to offer coverage in 
the individual market in accordance with paragraphs (d) and (e) of this 
section and applicable State law.
    (4) Movement outside the service area. For network plans, the 
individual no longer resides, lives, or works in the service area of 
the issuer, or area for which the issuer is authorized to do business, 
but only if coverage is terminated uniformly without regard to any 
health status-related factor of covered individuals.
    (5) Association membership ceases. For coverage made available in 
the individual market only through one or more bona fide associations, 
the individual's membership in the association ceases, but only if the 
coverage is terminated uniformly without regard to any health status-
related factor of covered individuals.
    (d) Discontinuing a particular type of coverage. An issuer may 
discontinue offering a particular type of health insurance coverage 
offered in the individual market only if it meets the following 
requirements:
    (1) Provides notice in writing to each individual provided coverage 
of that type of health insurance at least 90 days before the date the 
coverage will be discontinued.
    (2) Offers to each covered individual, on a guaranteed issue basis, 
the option to purchase any other individual health insurance coverage 
currently being offered by the issuer for individuals in that market.
    (3) Acts uniformly without regard to any health status-related 
factor of covered individuals or dependents of covered individuals who 
may become eligible for coverage.
    (e) Discontinuing all coverage. An issuer may discontinue offering 
all health insurance coverage in the individual market in a State only 
if it meets the following requirements.
    (1) Provides notice in writing to the applicable State authority 
and to each individual of the discontinuation at least 180 days before 
the date the coverage will expire.
    (2) Discontinues and does not renew all health insurance policies 
it issues or delivers for insurance in the State in the individual 
market.
    (3) Acts uniformly without regard to any health status-related 
factor of covered individuals or dependents of covered individuals who 
may become eligible for coverage.
    (f) Prohibition on market reentry. An issuer who elects to 
discontinue offering all health insurance coverage under paragraph (e) 
of this section may not issue coverage in the market and State involved 
during the 5-year period beginning on the date of discontinuation of 
the last coverage not renewed.
    (g) Exception for uniform modification of coverage. An issuer may, 
only at the time of coverage renewal, modify the health insurance 
coverage for a policy form offered in the individual market if the 
modification is consistent with State law and is effective uniformly 
for all individuals with that policy form.
    (h) Application to coverage offered only through associations. In 
the case of health insurance coverage that is made available by a 
health insurance issuer in the individual market only through one or 
more associations, any reference in this section to an ``individual'' 
is deemed to include a reference to the association of which the 
individual is a member.


Sec. 148.124  Certification and disclosure of coverage.

    (a) Applicability--(1) General rule. Except as provided in 
paragraph (a)(2) of this section, this section applies to all issuers 
of health insurance coverage.
    (2) Exception. The provisions of this section do not apply to 
issuers of the following types of coverage:
    (i) Health insurance coverage furnished in connection with a group 
health plan defined in 45 CFR 144.103. (These issuers are regulated 
under 45 CFR 146.115 to provide a certificate of coverage.)
    (ii) Excepted benefits described in Sec. 148.220.
    (b) General rules--(1) Individuals for whom a certificate must be 
provided; timing of issuance. A certificate must be provided, without 
charge, for individuals and dependents, who are or were covered under 
an individual health insurance policy for the following:
    (i) Issuance of automatic certificates. An automatic certificate 
must be provided within a reasonable time period consistent with State 
law after the individual ceases to be covered under the policy.
    (ii) Any individual upon request. A request for a certificate may 
be made by, or on behalf of, an individual within 24 months after 
coverage ends. For example, an entity that provides coverage to an 
individual in the future may, if authorized by the individual, request 
a certificate of the individual's creditable coverage on behalf of the 
individual from the issuer of the individual's prior coverage. After 
the request is received, an issuer must provide the certificate 
promptly. A certificate must be provided under this paragraph even if 
the individual has previously received an automatic certificate under 
paragraph (a)(l)(i) of this section.
    (2) Form and content of certificate--(i) Written certificate--(A) 
General rule. Except as provided in paragraph (b)(2)(i)(B) of this 
section, the issuer must provide the certificate in writing (including 
any form approved by the HCFA) (B) Other permissible forms. No written 
certificate must be provided if the following occurs:
    (1) An individual is entitled to receive a certificate.
    (2) The individual requests that the certificate be sent to another 
plan or issuer instead of to the individual.
    (3) The plan or issuer that would otherwise receive the certificate 
agrees to accept the information in paragraph (a)(3) of this section 
through means other than a written certificate (for example, by 
telephone).

[[Page 16999]]

    (4) The receiving plan or issuer receives the information from the 
sending issuer in the prescribed form within the time periods required 
under paragraph (b)(1) of this section.
    (ii) Required information. The certificate must include the 
following:
    (A) The date the certificate is issued.
    (B) The name of the individual or dependent for whom the 
certificate applies, and any other information necessary for the issuer 
providing the coverage specified in the certificate to identify the 
individual, such as the individual's identification number under the 
policy and the name of the policyholder if the certificate is for (or 
includes) a dependent.
    (C) The name, address, and telephone number of the issuer required 
to provide the certificate.
    (D) The telephone number to call for further information regarding 
the certificate (if different from paragraph (b)(2)(ii)(C) of this 
section).
    (E) Either one of the following:
    (1) A statement that the individual has at least 18 months (for 
this purpose, 546 days is deemed to be 18 months) of creditable 
coverage, disregarding days of creditable coverage before a significant 
break in coverage as defined in 45 CFR 146.113(b)(2)(iii).
    (2) Both the date the individual first sought coverage, as 
evidenced by a substantially complete application, and the date 
creditable coverage began.
    (F) The date creditable coverage ended, unless the certificate 
indicates that creditable coverage is continuing as of the date of the 
certificate.
    (iii) Periods of coverage under a certificate. If any automatic 
certificate is provided under paragraph (b)(1)(i) of this section, the 
period that must be included on the certificate is the last period of 
continuous coverage ending on the date coverage ceased. If an 
individual requests a certificate under paragraph (b)(1)(ii) of this 
section, a certificate must be provided for each period of continuous 
coverage ending within the 24-month period ending on the date of the 
request (or continuing on the date of the request). A separate 
certificate may be provided for each period of continuous coverage.
    (iv) Single certificate permitted for families. An issuer may 
provide a single certificate for both an individual and the 
individual's dependents if it provides all the required information for 
each individual and dependent, and separately states the information 
that is not identical.
    (v) Model certificate. The requirements of paragraph (b)(2)(ii) of 
this section are satisfied if the issuer provides a certificate in 
accordance with a model certificate as provided by HCFA.
    (vi) Excepted benefits; categories of benefits. No certificate is 
required to be furnished with respect to excepted benefits described in 
Sec. 148.220. If excepted benefits are provided concurrently with other 
creditable coverage (so that the coverage does not consist solely of 
excepted benefits), information concerning the benefits may be required 
to be disclosed under paragraph (c) of this section.
    (3) Procedures--(i) Method of delivery. The certificate is required 
to be provided, without charge, to each individual described in 
paragraph (b)(1) of this section or an entity requesting the 
certificate on behalf of the individual. The certificate may be 
provided by first-class mail. If the certificate or certificates are 
provided to the individual and the individual's spouse at the 
individual's last known address, the requirements of this paragraph 
(b)(3) are satisfied with respect to all individuals and dependents 
residing at that address. If a dependent does not reside at the 
individual's last known address, a separate certificate must be 
provided to the dependent at the dependent's last known address. If 
separate certificates are provided by mail to individuals and 
dependents who reside at the same address, separate mailings of each 
certificate are not required.
    (ii) Procedure for requesting certificates. An issuer must 
establish a procedure for individuals and dependents to request and 
receive certificates under paragraph (b)(1)(ii) of this section.
    (iii) Designated recipients. If an automatic certificate is 
required to be provided under paragraph (b)(1)(i) of this section, and 
the individual or dependent entitled to receive the certificate 
designates another individual or entity to receive the certificate, the 
issuer responsible for providing the certificate may provide the 
certificate to the designated party. If a certificate must be provided 
upon request under paragraph (b)(1)(ii) of this section, and the 
individual entitled to receive the certificate designates another 
individual or entity to receive the certificate, the issuer responsible 
for providing the certificates must provide the certificate to the 
designated party.
    (4) Special rules concerning dependent coverage--(i) Reasonable 
efforts. An issuer must use reasonable efforts to determine any 
information needed for a certificate relating to dependent coverage. If 
an automatic certificate must be furnished with respect to a dependent 
under paragraph (b)(1)(i) of this section, no individual certificate 
must be furnished until the issuer knows (or making reasonable efforts 
should know) of the dependent's cessation of coverage under the policy.
    (ii) Special rules for demonstrating coverage. If a certificate 
furnished by an issuer does not provide the name of any dependent of an 
individual covered by the certificate, the individual may, if 
necessary, use the procedures described in paragraph (d)(3) of this 
section for demonstrating dependent status. An individual may, if 
necessary, use these procedures to demonstrate that a child was 
enrolled within 30 days of birth, adoption, or placement for adoption, 
in which case the child would not be subject to a preexisting condition 
exclusion under Sec. 148.120(f)(2).
    (iii) Transition rule for dependent coverage before July 1, 1998--
(A) General rule. An issuer that cannot provide the names of dependents 
(or related coverage information) for purposes of providing a 
certificate of coverage for a dependent may satisfy the requirements of 
paragraph (b)(2)(ii)(C) of this section by providing the name of the 
policyholder and specifying that the type of coverage provided in the 
certificate is for dependent coverage (for example, family coverage or 
individual-plus-spouse coverage).
    (B) Certificates provided on request. For purposes of certificates 
provided on the request of, or on behalf of, an individual under 
paragraph (b)(1)(ii) of this section, an issuer must make reasonable 
efforts to obtain and provide the names of any dependent covered by the 
certificate if the information is requested. If an issuer responsible 
for providing a certificate does not provide the name of any dependent 
of an individual covered by the certificate, the individual may, if 
necessary, use the procedures described in paragraph (d)(3) of this 
section for submitting documentation to establish that the creditable 
coverage in the certificate applies to the dependent.
    (C) Timing. An issuer providing an automatic certificate that does 
not contain the name of a dependent must furnish a certificate within 
21 days after the individual ceases to be covered under the policy.
    (D) Duration. The transitional rules of this paragraph (b)(4)(iii) 
are effective for certifications provided with respect to an event 
occurring before July 1, 1998.
    (E) Optional notice. This paragraph applies to events described in 
Sec. 148.124 (b)(4)(ii), that occur on or after October 1, 1996, but 
before June 1, 1997. An issuer offering individual health insurance 
coverage is deemed to satisfy Sec. 148.124 (b)(1) and (b)(2) if a 
notice is

[[Page 17000]]

provided in accordance with the provisions of Sec. 148.124(b)(4)(iii).
    (c) Disclosure of coverage to a plan, or issuer, electing the 
alternative method of creating coverage--(1) General rule. If an 
individual enrolls in a group health plan and the plan or issuer uses 
the alternative method of determining creditable coverage described in 
45 CFR 146.113(c), the individual provides a certificate of coverage 
under paragraph (b) of this section or demonstrates creditable coverage 
under paragraph (d) of this section, and the plan or coverage in which 
the individual enrolls requests from the prior entity, the prior entity 
must disclose promptly to the requesting plan or issuer (``requesting 
entity'') the information set forth in paragraph (c)(2) of this 
section.
    (2) Information to be disclosed. The prior entity must promptly 
identify for the requesting entity the categories of benefits and 
services used by the individual for which the requesting entity uses 
the alternative method of crediting coverage, and any specific 
information that the requesting entity requests to determine the 
individual's creditable coverage. The prior entity must promptly 
disclose to the requesting entity the creditable coverage information.
    (3) Charge for providing information. The prior entity furnishing 
the information under paragraph (c)(2) of this section may charge the 
requesting entity for the reasonable cost of disclosing the 
information.
    (d) Ability of an individual to demonstrate creditable coverage and 
waiting period information--(1) General rule. Individuals may establish 
creditable coverage through means other than certificates. If the 
accuracy of a certificate is contested or a certificate is unavailable 
when needed by the individual, the individual has the right to 
demonstrate creditable coverage (and waiting or affiliation periods) 
through the presentation of documents or other means. For example, the 
individual may make a demonstration if one of the following occurs:
    (i) An entity has failed to provide a certificate within the 
required time period.
    (ii) The individual has creditable coverage but an entity may not 
be required to provide a certificate of the coverage.
    (iii) The coverage is for a period before July 1, 1996.
    (iv) The individual has an urgent medical condition that 
necessitates a determination before the individual can deliver a 
certificate to the plan.
    (v) The individual lost a certificate that the individual had 
previously received and is unable to obtain another certificate.
    (2) Evidence of creditable coverage--(i) Consideration of evidence. 
An issuer must take into account all information that it obtains or 
that is presented on behalf of an individual to make a determination, 
based on the relevant facts and circumstances, whether or not an 
individual has 18 months of creditable coverage. An issuer must treat 
the individual as having furnished a certificate if the individual 
attests to the period of creditable coverage, the individual presents 
relevant corroborating evidence of some creditable coverage during the 
period, and the individual cooperates with the issuer's efforts to 
verify the individual's coverage. For this purpose, cooperation 
includes providing (upon the issuer's request) a written authorization 
for the issuer to request a certificate on behalf of the individual, 
and cooperating in efforts to determine the validity of the 
corroborating evidence and the dates of creditable coverage. While an 
issuer may refuse to credit coverage if the individual fails to 
cooperate with the issuer's efforts to verify coverage, the issuer may 
not consider an individual's inability to obtain a certificate to be 
evidence of the absence of creditable coverage.
    (ii) Documents. Documents that may establish creditable coverage 
(and waiting periods or affiliation periods) in the absence of a 
certificate include explanations of benefit claims (EOB) or other 
correspondence from a plan or issuer indicating coverage, pay stubs 
showing a payroll deduction for health coverage, a health insurance 
identification card, a certificate of coverage under a group health 
policy, records from medical care providers indicating health coverage, 
third party statements verifying periods of coverage, and any other 
relevant documents that evidence periods of health coverage.
    (iii) Other evidence. Creditable coverage (and waiting period or 
affiliation period information) may be established through means other 
than documentation, such as by a telephone call from the issuer to a 
third party verifying creditable coverage.
    (3) Demonstrating dependent status. If, in the course of providing 
evidence (including a certificate) of creditable coverage, an 
individual is required to demonstrate dependent status, the issuer must 
treat the individual as having furnished a certificate showing the 
dependent status if the individual attests to the dependency and the 
period of the status and the individual cooperates with the issuer's 
efforts to verify the dependent status.


Sec. 148.126  Determination of an eligible individual.

    (a) General rule. Each issuer offering health insurance coverage in 
the individual market is responsible for determining whether an 
applicant for coverage is an eligible individual as defined in 
Sec. 148.103.
    (b) Specific requirements. (1) The issuer must exercise reasonable 
diligence in making this determination.
    (2) The issuer must promptly determine whether an applicant is an 
eligible individual.
    (3) If an issuer determines that an individual is an eligible 
individual, the issuer must promptly issue a policy to that individual.
    (c) Insufficient information--(1) General rule. If the information 
presented in or with an application is substantially insufficient for 
the issuer to make the determination described in paragraph (b)(2) of 
this section, the issuer may immediately request additional information 
from the individual, and must act promptly to make its determination 
after receipt of the requested information
    (2) Failure to provide a certification of creditable coverage. If 
an entity fails to provide the certificate that is required under this 
part or 45 CFR part 146 to the applicant, the issuer is subject to the 
procedures set forth in Sec. 148.124(d)(1) concerning an individual's 
right to demonstrate creditable coverage.


Sec. 148.128  State flexibility in individual market reforms--
alternative mechanisms.

    (a) Waiver of requirements. The requirements of Sec. 148.120, which 
set forth Federal requirements for guaranteed availability in the 
individual market, do not apply in a State that implements an 
acceptable alternative mechanism in accordance with the following 
criteria:
    (1) The alternative mechanism meets the following conditions:
    (i) Offers health insurance coverage to all eligible individuals.
    (ii) Prohibits imposing preexisting condition exclusions and 
affiliation periods for coverage of an eligible individual.
    (iii) Offers an eligible individual a choice of coverage that 
includes at least one policy form of coverage that is comparable to 
either one of the following:
    (A) Comprehensive coverage offered in the individual market in the 
State.
    (B) A standard option of coverage available under the group or 
individual health insurance laws of the State.

[[Page 17001]]

    (2) The State is implementing one of the following provisions 
relating to risk:
    (i) One of the following model acts, as adopted by the NAIC on June 
3, 1996, but only if the model has been revised in State regulations to 
meet all of the requirements of this part and part 144:
    (A) The Small Employer and Individual Health Insurance Availability 
Model Act to the extent it applies to individual health insurance 
coverage.
    (B) The Individual Health Insurance Portability Model Act.
    (ii) A qualified high risk pool, which, for purposes of this 
section, is a high risk pool that meets the following conditions:
    (A) Provides to all eligible individuals health insurance coverage 
(or comparable coverage) that does not impose any preexisting condition 
exclusion or affiliation periods for coverage of an eligible 
individual.
    (B) Provides for premium rates and covered benefits for the 
coverage consistent with standards included in the NAIC Model Health 
Plan for Uninsurable Individuals Act (as in effect as of August 21, 
1996), but only if the model has been revised in State regulations to 
meet all of the requirements of this part and part 144.
    (iii) One of the following mechanisms:
    (A) Any other mechanism that provides for risk adjustment, risk 
spreading, or a risk-spreading mechanism (among issuers or policies of 
an issuer) or otherwise provides for some financial subsidization for 
eligible individuals, including through assistance to participating 
issuers.
    (B) A mechanism that provides a choice for each eligible individual 
of all individual health insurance coverage otherwise available.
    (b) Permissible forms of mechanisms. A private or public individual 
health insurance mechanism (such as a health insurance coverage pool or 
program, a mandatory group conversion policy, guaranteed issue of one 
or more plans of individual health insurance coverage, or open 
enrollment by one or more health insurance issuers), or combination of 
these mechanisms, that is designed to provide access to health benefits 
for individuals in the individual market in the State, in accordance 
with this section, may constitute an acceptable alternative mechanism.
    (c) Establishing an acceptable alternative mechanism--transition 
rules. HCFA presumes a State to be implementing an acceptable 
alternative mechanism as of July 1, 1997 if the following conditions 
are met:
    (1) By not later than April 1, 1997, as evidenced by a postmark 
date, or other such date, the chief executive officer of the State 
takes the following actions:
    (i) Notifies HCFA that the State has enacted or intends to enact by 
not later than January 1, 1998 (unless it is a State described in 
paragraph (d) of this section), any legislation necessary to provide 
for the implementation of a mechanism reasonably designed to be an 
acceptable alternative mechanism as of January 1, 1998.
    (ii) Provides HCFA with the information necessary to review the 
mechanism and its implementation (or proposed implementation).
    (2) HCFA has not made a determination, in accordance with the 
procedure in paragraph (e)(4)(1) of this section, that the State will 
not be implementing a mechanism reasonably designed to be an acceptable 
alternative mechanism as of January 1, 1998.
    (d) Delay permitted for certain States. If a State notifies HCFA 
that its legislature is not meeting in a regular session between August 
21, 1996 and August 20, 1997, HCFA continues to presume until July 1, 
1998 that the State is implementing an acceptable alternative 
mechanism, if the chief executive officer of the State takes the 
following actions:
    (1) Notifies HCFA by April 1, 1997, that the State intends to 
submit an alternative mechanism and intends to enact any necessary 
legislation to provide for the implementation of an acceptable 
alternative mechanism as of July 1, 1998.
    (2) Notifies HCFA by April 1, 1998, that the State has enacted any 
necessary legislation to provide for the implementation of an 
acceptable alternative mechanism as of July 1, 1998.
    (3) Provides HCFA with the information necessary to review the 
mechanism and its implementation (or proposed implementation).
    (e) Submitting an alternative mechanism after April 1, 1997--(1) 
Notice with information. A State that wishes to implement an acceptable 
alternative mechanism must take the following actions:
    (i) Notify HCFA that it has enacted legislation necessary to 
provide for the implementation of a mechanism reasonably designed to be 
an acceptable alternative mechanism, and
    (ii) Provide HCFA with the information necessary for HCFA to review 
the mechanism and its implementation (or proposed implementation).
    (2) If the State takes the actions described in paragraph (e)(1) of 
this section, the mechanism is considered to be an acceptable 
alternative mechanism unless HCFA makes a preliminary determination 
(under paragraph (e)(4)(i) of this section), within the review period 
(defined in paragraph (e)(3) of this section), that the mechanism is 
not an acceptable alternative mechanism.
    (3) Review period--(1) General. The review period begins on the 
date the State's notice and information are received by HCFA, and ends 
90 days later, not counting any days during which the review period is 
suspended under paragraph (e)(3)(ii) of this section.
    (ii) Suspension of review period. During any review period, if HCFA 
notifies the State of the need for additional information or further 
discussion on its submission, HCFA suspends the review period until the 
State provides the necessary information.
    (4) Determination by HCFA--(i) Preliminary determination. If HCFA 
finds after reviewing the submitted information, and after consultation 
with the chief executive officer of the State and the chief insurance 
regulatory official of the State, that the mechanism is not an 
acceptable alternative mechanism, HCFA takes the following actions:
    (A) Notifies the State, in writing, of the preliminary 
determination.
    (B) Informs the State that if it fails to implement an acceptable 
alternative mechanism, the Federal guaranteed availability provisions 
of Sec. 148.120 will take effect.
    (C) Permits the State a reasonable opportunity to modify the 
mechanism (or to adopt another mechanism).
    (ii) Final determination. If, after providing notice and a 
reasonable opportunity for the State to modify its mechanism, HCFA 
makes a final determination that the design of the State's alternative 
mechanism is not acceptable or that the State is not substantially 
enforcing an acceptable alternative mechanism, HCFA notifies the State 
in writing of the following:
    (A) HCFA's final determination.
    (B) That the requirements of Sec. 148.120 concerning guaranteed 
availability apply to health insurance coverage offered in the 
individual market in the State are effective as of a date specified in 
the notice from HCFA.
    (iii) State request for early notice. A State may request that HCFA 
notify the State before the end of the review period if HCFA is not 
making a preliminary determination.
    (5) Effective date. If HCFA does not make a preliminary 
determination within the review period, the acceptable alternative 
mechanism is effective 90 days after the end of the 90-day review

[[Page 17002]]

period described in paragraph (e)(3)(i) of this section.
    (f) Continued application. A State alternative mechanism may 
continue to be presumed to be acceptable, if the State provides 
information to HCFA that meets the following requirements:
    (1) If the State makes a significant change to its alternative 
mechanism, it provides the information before making a change.
    (2) Every 3 years from the later of implementing the alternative 
mechanism or implementing a significant change, it provides HCFA with 
information.
    (g) Review criteria. HCFA reviews each State's submission to 
determine whether it addresses all of the following requirements:
    (1) Is the mechanism reasonably designed to provide all eligible 
individuals with a choice of health insurance coverage?
    (2) Does the choice offered to eligible individuals include at 
least one policy form that meets one of the following requirements?
    (i) Is the policy form comparable to comprehensive health insurance 
coverage offered in the individual market in the State?
    (ii) Is the policy form comparable to a standard option of coverage 
available under the group or individual health insurance laws of the 
State?
    (3) Does the mechanism prohibit preexisting condition exclusions 
for all eligible individuals?
    (4) Is the State implementing one of the following:
    (i) The NAIC Small Employer and Individual Health Insurance 
Availability Model Act (Availability Model), adopted on June 3, 1996, 
revised to reflect HIPAA requirements.
    (ii) The Individual Health Insurance Portability Model Act 
(Portability Model), adopted on June 3, 1996, revised to reflect HIPAA 
requirements.
    (iii) A qualified high-risk pool that provides eligible individuals 
health insurance or comparable coverage without a preexisting condition 
exclusion, and with premiums and benefits consistent with the NAIC 
Model Health Plan for Uninsurable Individuals Act (as in effect August 
21, 1996), revised to reflect HIPAA requirements.
    (iv) A mechanism that provides for risk spreading or provides 
eligible individuals with a choice of all available individual health 
insurance coverage.
    (5) Has the State enacted all legislation necessary for 
implementing the alternative mechanism?
    (6) If the State has not enacted all legislation necessary for 
implementing the alternative mechanism, will the necessary legislation 
be enacted by January 1, 1998?
    (h) Limitation of HCFA's authority. HCFA does not make a 
preliminary or final determination on any basis other than a mechanism 
is not considered an acceptable alternative mechanism or is not being 
implemented.

Subpart C--[Reserved]

Subpart D--Enforcement; Penalties; Preemption


Sec. 148.200  Enforcement by State; determination regarding failure to 
enforce.

    (a) General rule--enforcement by State. Except as provided in 
paragraph (b) of this section, each State enforces the requirements of 
this part with respect to health insurance issuers that issue, sell, 
renew, or offer health insurance coverage in the individual market in 
the State.
    (b) Exception--enforcement by HCFA. HCFA enforces the provisions of 
this part with respect to health insurance issuers, using the 
procedures described in Sec. 148.202, only in the following 
circumstances:
    (1) State election. The State chooses not to enforce the Federal 
requirements.
    (2) State failure to enforce. HCFA determines under paragraph (c) 
of this section that a State has failed to substantially enforce the 
requirements of this part.
    (c) HCFA determination. If HCFA receives information, through a 
complaint or any other means, that raises a question about whether a 
State is substantially enforcing the requirements of this part, HCFA 
follows the following procedures:
    (1) Verification of exhaustion. HCFA makes a threshold 
determination of whether the individuals affected by the alleged 
failure to enforce have made a reasonable effort to exhaust any State 
remedies. This may involve informal contact with State officials about 
the questions raised.
    (2) Notice to the State. If HCFA is satisfied that there is a 
reasonable question about whether there has been a failure to 
substantially enforce the requirements of this part, HCFA sends, in 
writing, the notice described in paragraph (c)(3) of this section, to 
the following State officials:
    (i) The Governor or chief executive officer of the State.
    (ii) The insurance commissioner or chief insurance regulatory 
official.
    (iii) If the alleged failure involves HMOs, the official 
responsible for regulating HMOs, if different than the official listed 
in paragraph (c)(2)(ii) of this section.
    (3) Form and content of notice. HCFA's written notice to the State 
sets forth the following information:
    (i) Describes the facts of the specific violations.
    (ii) Explains that the consequence of a failure to substantially 
enforce the requirements of this part is that HCFA enforces the 
requirements in accordance with paragraph (d) of this section.
    (iii) Advises the State that it has 45 days to respond to the 
notice, unless the time is extended as described in paragraph (c)(4) of 
this section, and that the response should include any information that 
the State wishes HCFA to consider in making the preliminary 
determination described in paragraph (c)(5) of this section.
    (4) Extension. HCFA may, for good cause, grant the State an 
extension of the time period described in paragraph (c)(3)(iii) of this 
section. Examples of good cause include an agreement between HCFA and 
the State that there should be a public hearing on the State's 
enforcement, or evidence that the State is undertaking expedited 
enforcement activities.
    (5) Preliminary determination. If, at the end of the 45-day period 
for a State to respond to HCFA's notice (and any extension), the State 
has not established to HCFA's satisfaction that it is substantially 
enforcing the requirements of this part, HCFA takes the following 
actions:
    (i) Consults with the officials described in paragraph (c)(1) of 
this section.
    (ii) Notifies the State of HCFA's preliminary determination that 
the State has failed to enforce the requirements, and that the failure 
is continuing.
    (iii) Permits the State a reasonable opportunity to show evidence 
of substantial enforcement.
    (6) Final determination. If, after providing notice and the 
opportunity to enforce the requirements of this part, HCFA finds that 
the failure to enforce has not been corrected, HCFA sends the State a 
written notice of that final determination. The notice sets forth the 
following:
    (i) The effective date of HCFA enforcement.
    (ii) The mechanism for establishing in the future that it has 
corrected the failure, and has begun enforcement. This mechanism 
includes transition procedures for ending HCFA's enforcement period.


Sec. 148.202  Civil money penalties.

    (a) General rule. If any health insurance issuer that is subject to 
HCFA's enforcement authority under Sec. 148.200 fails to comply with 
any

[[Page 17003]]

applicable requirement of this part, it may be subject to a civil money 
penalty.
    (b) Complaint. Any person who is entitled to any right under this 
part, and who believes that the right is being denied as a result of an 
issuer's failure to comply with the requirements of this part may file 
a complaint with HCFA.
    (c) Notice to issuer. HCFA sends a written notice to the issuer 
that a complaint or other information has been received alleging a 
violation of this part. The notice sets forth the following:
    (1) A description of the substance of any complaint or other 
allegation.
    (2) A time frame of 30 days for the issuer to respond with 
additional information, which can include the following:
    (i) Information refuting that there has been a violation.
    (ii) Evidence that the issuer did not know, and exercising 
reasonable diligence could not have known, of the violation.
    (iii) Evidence of a previous record of compliance.
    (d) Notice of assessment. If, based on the information provided in 
the complaint, as well as any information submitted by the issuer or 
any other parties, HCFA proposes to assess a civil money penalty, HCFA 
sends written notice of the assessment to the issuer by certified mail, 
return receipt requested. The notice contains the following 
information:
    (1) The name or names of the individuals with respect to whom a 
violation occurred, with relevant identification numbers.
    (2) The facts that support the finding of a violation, and the 
initial date of the violation.
    (3) The amount of the proposed penalty as of the date of the 
notice.
    (4) The basis for calculating the penalty, including consideration 
of prior compliance.
    (5) Instructions for responding to the notice, including the 
following information:
    (i) A specific statement of the issuer's right to a hearing.
    (ii) A statement that failure to request a hearing within 30 days 
permits the imposition of the proposed penalty, without right of 
appeal.
    (e) Amount of penalty--(1) Maximum daily penalty. The penalty 
cannot exceed $100 for each day, for each individual with respect to 
whom a failure occurs.
    (2) Standard for calculating daily penalty. In calculating the 
amount of the penalty, HCFA takes into account the issuer's previous 
record of compliance and the seriousness of the violation.
    (3) Limitations on penalties. No civil money penalty is imposed for 
the following periods:
    (i) A period during which a failure existed, but the issuer did not 
know, and exercising reasonable diligence would not have known, that 
the failure existed.
    (ii) A period occurring immediately after the period during which a 
failure existed, but the issuer did not know, and exercising reasonable 
diligence would not have known, that the failure existed if the 
failure--
    (A) Was due to reasonable cause and was not due to willful neglect; 
and
    (B) Was corrected within 30 days of the first day that the issuer 
knew, or exercising reasonable diligence would have known, that the 
failure existed.
    (iii) The burden is on the issuer to establish to the satisfaction 
of HCFA that it did not know, and exercising reasonable diligence could 
not have known that the failure existed.
    (f) Hearings--(1) Right to a hearing. Any issuer against which a 
penalty is assessed may request a hearing by HCFA. The request must be 
in writing, and must be postmarked within 30 days after the date HCFA 
issues the notice of assessment.
    (2) Failure to request a hearing. If no hearing is requested in 
accordance with this paragraph (f), the notice of assessment 
constitutes a final order that is not subject to appeal.
    (3) Parties to the hearing. Parties to the hearing include the 
issuer and the party who filed the complaint. HCFA sends an 
informational notice to the State.
    (4) Initial agency decision. The initial agency decision is made by 
an administrative law judge. The decision is made on the record under 
section 554 of Title 5, United States Code. The decision becomes a 
final and appealable order after 30 days, unless it is modified in 
accordance with paragraph (g) of this section.
    (5) Review by HCFA. HCFA may modify or vacate the initial agency 
decision. Notice of intent to modify or vacate the decision is issued 
to the parties within 30 days after the date of the decision by the 
administrative law judge.
    (g) Judicial review--(1) Filing of action for review. Any issuer 
against whom a final order imposing a civil money penalty is entered 
may obtain review in the United States District Court for any district 
in which the entity is located or the United States District Court for 
the District of Columbia by--
    (i) Filing a notice of appeal in that court within 30 days from the 
date of a final order; and
    (ii) Simultaneously sending a copy of the notice of appeal by 
registered mail to HCFA.
    (2) Certification of administrative record. HCFA promptly certifies 
and files with the court the record upon which the penalty was imposed.
    (3) Standard of review. The findings of HCFA may not be set aside 
unless they are found to be unsupported by substantial evidence, as 
provided by section 706(2)(E) of Title 5, United States Code.
    (4) Appeal. Any final decision, order, or judgment of the district 
court concerning HCFA's review is subject to appeal as provided in 
Chapter 83 of Title 28, United States Code.
    (h) Failure to pay assessment, maintenance of action--(1) Failure 
to pay assessment. If an issuer fails to pay an assessment after it 
becomes a final order, or after the court has entered final judgment in 
favor of HCFA, HCFA refers the matter to the Attorney General, who 
brings an action against the issuer in the appropriate United States 
district court to recover the amount assessed.
    (2) Final order not subject to review. In an action brought under 
paragraph (h)(1) of this section, the validity and appropriateness of 
the final order described in paragraph (g)(1)(i) of paragraph (g)(3) of 
this section is not subject to review.
    (i) Use of penalty funds. (1) Any funds collected under this 
section are paid to the Administrator or other office imposing the 
penalty.
    (2) The funds are available without appropriation and until 
expended.
    (3) The funds may only be used for the purpose of enforcing the 
provisions for which the penalty was imposed.


Sec. 148.210  Preemption.

    (a) Scope. (1) This section describes the effect of sections 2741 
through 2763 and 2791 of the PHS Act on a State's authority to regulate 
health insurance issuers in the individual market. This section makes 
clear that States remain subject to section 514 of ERISA, which 
generally preempts State law that relates to ERISA-covered plans.
    (2) Sections 2741 through 2763 and 2791 of the PHS Act cannot be 
construed to affect or modify the provisions of section 514 of ERISA.
    (b) Regulation of insurance issuers. The individual market rules of 
this part do not prevent a State law from establishing, implementing, 
or continuing in effect standards or requirements unless the standards 
or requirements prevent the application of a requirement of this part.

[[Page 17004]]

Sec. 148.220  Excepted benefits.

    The requirements of this part do not apply to individual health 
insurance coverage in relation to its provision of the benefits 
described in paragraphs (a) and (b) of this section (or any combination 
of the benefits).
    (a) Benefits excepted in all circumstances. The following benefits 
are excepted in all circumstances:
    (1) Coverage only for accident (including accidental death and 
dismemberment).
    (2) Disability income insurance.
    (3) Liability insurance, including general liability insurance and 
automobile liability insurance.
    (4) Coverage issued as a supplement to liability insurance.
    (5) Workers' compensation or similar insurance.
    (6) Automobile medical payment insurance.
    (7) Credit-only insurance (for example, mortgage insurance).
    (8) Coverage for on-site medical clinics.
    (b) Other excepted benefits. The requirements of this part do not 
apply to individual health insurance coverage described in paragraph 
(b)(1) through (b)(6) of this section if the benefits are provided 
under a separate policy, certificate, or contract of insurance. These 
benefits include the following:
    (1) Limited scope dental or vision benefits. These benefits are 
dental or vision benefits that are limited in scope to a narrow range 
or type of benefits that are generally excluded from benefit packages 
that combine hospital, medical, and surgical benefits.
    (2) Long-term care benefits. These benefits are benefits that are 
either--
    (i) Subject to State long-term care insurance laws;
    (ii) For qualified long-term care insurance services, as defined in 
section 7702B(c)(1) of the Code, or provided under a qualified long-
term care insurance contract, as defined in section 7702B(b) of the 
Code; or
    (iii) Based on cognitive impairment or a loss of functional 
capacity that is expected to be chronic.
    (3) Coverage only for a specified disease or illness (for example, 
cancer policies), or hospital indemnity or other fixed indemnity 
insurance (for example, $100/day) if the policies meet the requirements 
of 45 CFR 146.145(b)(4)(ii)(B) and (b)(4)(ii)(C) regarding 
noncoordination of benefits.
    (4) Medicare supplemental health insurance (as defined under 
section 1882(g)(1) of the Social Security Act. 42 U.S.C. 1395ss, also 
known as Medigap or MedSup insurance).
    (5) Coverage supplemental to the coverage provided under Chapter 
55, Title 10 of the United States Code (also known as CHAMPUS 
supplemental programs).
    (6) Similar supplemental coverage provided to coverage under a 
group health plan.

    Authority: Secs. 2741 through 2763, 2791, and 2792 of the PHS 
Act, 42 U.S.C. 300gg-41 through 300gg-63, 300gg-91, and 300gg-91.

    Dated: March 25, 1997.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
    Dated: March 25, 1997.
Donna E. Shalala,
Secretary.
[FR Doc. 97-8217 Filed 4-1-97; 12:58 pm]
BILLING CODE 4120-01-M