[Federal Register Volume 62, Number 67 (Tuesday, April 8, 1997)]
[Rules and Regulations]
[Pages 16894-16976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8275]



[[Page 16893]]

_______________________________________________________________________

Part II





Department of the Treasury





Internal Revenue Service



26 CFR Part 54





Department of Labor





Pension and Welfare Benefits Administration



29 CFR Part 2590





Department of Health and Human Services





Health Care Financing Administration



45 CFR Subtitle A, Parts 144 and 146



45 CFR Part 148



_______________________________________________________________________



Health Insurance Portability for Group Health Plans; Interim Rules and 
Proposed Rule

Federal Register / Vol. 62, No. 67 / Tuesday, April 8, 1997 / Rules 
and Regulations

[[Page 16894]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[T.D. 8716]
RIN 1545-AV05

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2590

RIN 1210-AA54

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

45 CFR Subtitle A, Parts 144 and 146

RIN 0938-AI08


Interim Rules for Health Insurance Portability for Group Health 
Plans

AGENCIES: Internal Revenue Service, Department of the Treasury; Pension 
and Welfare Benefits Administration, Department of Labor; Health Care 
Financing Administration, Department of Health and Human Services.

ACTION: Interim rules with request for comments.

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SUMMARY: This document contains interim rules governing access, 
portability and renewability requirements for group health plans and 
issuers of health insurance coverage offered in connection with a group 
health plan. The rules contained in this document implement changes 
made to certain provisions of the Internal Revenue Code of 1986 (Code), 
the Employee Retirement Income Security Act of 1974 (ERISA), and the 
Public Health Service Act (PHS Act) enacted as part of the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA). 
Interested persons are invited to submit comments on the interim rules 
for consideration by the Department of Health and Human Services, the 
Department of Labor, and the Department of the Treasury (Departments) 
in developing final rules. The rules contained in this document are 
being adopted in an interim basis to accommodate statutorily 
established time frames intended to ensure that sponsors and 
administrators of group health plans, participants and beneficiaries, 
States, and issuers of group health insurance coverage have timely 
guidance concerning compliance with the recently enacted requirements 
of HIPAA.

DATES: Effective date: These interim rules are effective on June 7, 
1997.
    Comment dates: Written comments on these interim rules are invited 
and must be received by the Departments on or before July 7, 1997.
    Applicability dates: For group health plans maintained pursuant to 
one or more collective bargaining agreements ratified before August 21, 
1996, the rules (other than the certification requirements) do not 
apply to plan years beginning before the later of July 1, 1997 or the 
date on which the last collective bargaining agreement relating to the 
plan terminates without regard to any extension agreed to after August 
21, 1996.
    The rules implementing the certification provisions do not require 
any action to be taken before June 1, 1997, although certain 
certification requirements apply to periods of coverage and events that 
occur after June 30, 1996. The certification requirement for events 
that occurred on or after October 1, 1996 and before June 1, 1997 may 
be satisfied using an optional notice described in this preamble.
    Information collection: Affected parties do not have to comply with 
the information collection requirements in these interim rules until 
the Departments publish in the Federal Register the control numbers 
assigned by the Office of Management and Budget (OMB) to these 
information collection requirements. Publication of the control numbers 
notifies the public that OMB has approved these information collection 
requirements under the Paperwork Reduction Act of 1995. The Departments 
have asked for OMB clearance as soon as possible, and OMB approval is 
anticipated by the applicable effective date.

ADDRESSES: Written comments should be submitted with a signed original 
and three copies to any of the addresses specified below. All comments 
will be available for public inspection and copying in their entirety. 
Interested persons are invited to submit written comments on these 
interim rules to:

Health Care Financing Administration, Department of Health and Human 
Services, Attention: [BPD-890-IFC], P.O. Box 26688, Baltimore, Maryland 
21207
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Room N-5669, 200 Constitution Avenue, NW., Washington, DC 20210. 
Attention: Interim Portability and Renewability Rules
CC:DOM:CORP:T:R (REG-253578-96), Room 5228, Internal Revenue Service, 
POB 7604, Ben Franklin Station, Washington, DC 20044

    Alternatively, comments may be submitted electronically via the 
Internet by selecting the ``Tax Regs'' option on the IRS Home Page, or 
by submitting comments directly to the IRS Internet site at <a href="http://
www.irs.ustreas.gov/tax__regs/comments.html">http://
www.irs.ustreas.gov/tax__regs/comments.html</a>
    In the alternative:
    Written comments for the Department of Health and Human Services 
may be hand delivered from 8:30 a.m. to 5:00 p.m. to:

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

    Written comments for the Department of Labor may be hand delivered 
from 8:15 a.m. to 4:45 p.m. to the above address for the Pension and 
Welfare Benefits Administration, U.S. Department of Labor.
    Written comments for the Internal Revenue Service may be hand 
delivered between the hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:T:R(REG-253578-96), Courier's Desk, Internal Revenue 
Service, room 5228, 1111 Constitution Avenue, NW., Washington, DC.

    All submissions to the Department of Health and Human Services will 
be open to public inspection as they are received, generally beginning 
three weeks after publication, in room 309-G of the Department of 
Health and Human Services offices at 200 Independence Avenue, SW., 
Washington, DC, from 8:30 a.m. to 5:00 p.m. All submissions to the 
Department of Labor will be open to public inspection at the Public 
Documents Room, Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5638, 200 Constitution Avenue NW., 
Washington, DC, from 8:30 a.m. to 5:30 p.m. All submissions to the 
Internal Revenue Service will be open to public inspection and copying 
in room 1621, 1111 Constitution Avenue, NW., Washington, DC, from 9:00 
a.m. to 4:00 p.m.

FOR FURTHER INFORMATION CONTACT: Julie Walton, Health Care Financing 
Administration, at 410-786-1565; Mark Connor, Office of Regulations and 
Interpretations, Pension and Welfare Benefits Administration, 
Department of Labor, at 202-219-4377; Diane Pedulla, Plan Benefits 
Security Division, Office of the Solicitor, Department of Labor, at 
202-219-4377; or Russ Weinheimer, Internal Revenue Service, at 202-622-

[[Page 16895]]

4695. These are not toll-free numbers.

 Customer Service Information: Individuals interested in obtaining a 
copy of the Department of Labor's booklet entitled ``Questions and 
Answers: Recent Changes in Health Care Law'' may obtain a copy by 
calling the following toll-free number 1-800-998-7542.

SUPPLEMENTARY INFORMATION:

A. Background

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA), Pub. L. 104-191, was enacted on August 21, 1996. HIPAA amended 
the Public Health Service Act (PHS Act), the Employee Retirement Income 
Security Act of 1974 (ERISA), and the Internal Revenue Code of 1986 
(Code) to provide for, among other things, improved portability and 
continuity of health insurance coverage in the group and individual 
insurance markets, and group health plan coverage provided in 
connection with employment. Sections 102(c)(4), 101(g)(4), and 
401(c)(4) of HIPAA require the Secretaries of Health and Human 
Services, Labor, and the Treasury, each to issue regulations necessary 
to carry out these provisions.\1\
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    \1\ In addition to the group market regulations in this 
document, the Department of the Treasury is issuing a proposed 
Treasury regulation that cross-references these regulations and the 
Department of Labor is issuing an interim regulation relating to 
certain disclosure requirements under HIPAA. Each of these 
regulations appears separately in this issue of the Federal 
Register.
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B. Overview of HIPAA and the Interim Rules

    Area of Guidance. The access, portability, and renewability 
provisions of HIPAA affect group health plans and health insurance 
issuers. Group health plans are generally plans sponsored by employers 
or employee organizations or both. These HIPAA provisions are designed 
to improve the availability and portability of health coverage by:
    <bullet> Limiting exclusions for preexisting medical conditions;
    <bullet> Providing credit for prior health coverage and a process 
for transmitting certificates and other information concerning prior 
coverage to a new group health plan or issuer;
    <bullet> Providing new rights that allow individuals to enroll for 
health coverage when they lose other health coverage or have a new 
dependent;
    <bullet> Prohibiting discrimination in enrollment and premiums 
against employees and their dependents based on health status;
    <bullet> Guaranteeing availability of health insurance coverage for 
small employers and renewability of health insurance coverage in both 
the small and large group markets; and
    <bullet> Preserving, through narrow preemption provisions, the 
States' traditional role in regulating health insurance, including 
State flexibility to provide greater protections.
    The regulations provide guidance with respect to these provisions. 
In implementing these new rules, the regulations provide protections 
for individuals seeking health coverage while minimizing burdens on 
employers and insurers.
    Reducing Burdens. The regulations reduce burdens by:
    <bullet> Providing for a simple model certificate that can be used 
by plans and issuers;
    <bullet> Reducing unnecessary duplication in the issuance of 
certificates;
    <bullet> Including flexible rules for dependents to receive the 
coverage information they need;
    <bullet> Allowing coverage information to be provided by telephone 
if all parties agree;
    <bullet> Relieving plans and issuers of the need to report the 
starting date of coverage and waiting period information where a 
certificate shows 18 months of credible coverage;
    <bullet> Including a transition rule permitting plans and issuers 
to give individuals a notice in lieu of a certificate where coverage 
ended before June 1, 1997; and
    <bullet> Providing for a model notice that may be used to satisfy 
the transition rule and a model notice for information relating to 
categories of benefits provided under a plan.
    Implementing Individual Protections. The regulations protect and 
assist participants and their dependents by:
    <bullet> Ensuring that individuals are notified of the length of 
time that a preexisting condition exclusion clause in any new health 
plan may apply to them after taking into account their prior creditable 
coverage;
    <bullet> Ensuring that individuals are notified of their rights to 
special enrollment under a plan;
    <bullet> Permitting individuals to obtain a certificate before 
coverage under a plan ceases; and
    <bullet> Creating practical ways for individuals to demonstrate 
creditable coverage to a new plan (where the individual's prior plan 
fails to provide the certificate).

C. Overview of Coordination of Group Market Regulation Among 
Departments

    The HIPAA portability provisions relating to group health plans and 
health insurance coverage offered in connection with group health plans 
(referred to below as the ``group market'' provisions) are set forth 
under a new Part A of Title XXVII of the PHS Act, a new Part 7 of 
Subtitle B of Title I of ERISA, and a new Subtitle K of the Internal 
Revenue Code. HIPAA also added provisions governing insurance in the 
individual market that are contained only in the PHS Act, and thus are 
not within the regulatory jurisdiction of the Department of Labor or 
the Department of the Treasury. (These portability provisions are 
referred to below as the ``individual market'' provisions.)
    In general, the group market provisions create concurrent 
jurisdiction for the Secretaries of Health and Human Services, Labor, 
and the Treasury. The provisions include similar rules relating to 
preexisting conditions exclusions, special enrollment rights, and 
prohibition of discrimination against individuals based on health 
status-related factors. (These group market provisions are referred to 
below as the ``shared group market'' provisions.) Accordingly, the 
three Departments share regulatory responsibility for most, but not 
all, of the group market provisions.
    The shared group market provisions are substantially similar, 
except as follows:
    <bullet> The shared group market provisions in the PHS Act apply 
generally to insurance issuers that offer health insurance in 
connection with group health plans (subject to an exception that may 
apply for plans with fewer than two participants who are current 
employees (``very small plans'')), and certain State and local 
government plans. Only the PHS Act contains group market provisions 
relating to availability and renewability of health insurance.\2\ In 
addition, the PHS Act imposes certification requirements on certain 
federal entities not otherwise subject to the HIPAA portability 
provisions. Further, the States, in the first instance, will enforce 
the PHS Act with respect to issuers. In addition, individuals may be 
able to pursue claims through State mechanisms. Only if a State does 
not substantially enforce any provisions under its insurance laws, will 
the Department of Health and Human Services enforce the provisions, 
through the imposition of civil money penalties. (The group market 
provisions relating to guaranteed renewability for multiemployer plans 
and multiple employer welfare arrangements

[[Page 16896]]

(MEWAs) are in ERISA and the Internal Revenue Code, but not the PHS 
Act.)
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    \2\ The PHS Act does not include requirements on availability of 
insurance for employers in the large group market. Under section 
2711(b)(3) of the PHS Act, however, the General Accounting Office 
(GAO) is to report to Congress on such availability in 1998.
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    <bullet> The ERISA shared group market provisions apply generally 
to all group health plans other than governmental plans, church plans, 
very small plans, and certain other plans. The shared group market 
provisions of ERISA also apply to health insurance issuers that offer 
health insurance in connection with such group health plans. Generally, 
the Secretary of Labor enforces the Provisions of HIPAA that amend 
ERISA, except that no enforcement action may be taken by the Secretary 
against issuers relating to the new shared group market provisions in 
part 7 of ERISA. However, individuals may generally pursue actions 
against issuers under ERISA and, in some circumstances, under State 
laws.
    <bullet> The shared group market provisions in the Internal Revenue 
Code generally apply to all group health plans other than governmental 
plans and very small plans, but not to health insurance issuers. A 
taxpayer that fails to comply with these provisions may be subject to 
an excise tax under section 4980D of the Code. (The group market 
provisions relating to preemption and affiliation periods for HMOs are 
in the PHS Act and ERISA, but not in the Internal Revenue Code.)
    The regulation being issued today by the Secretaries of Health and 
Human Services, Labor, and the Treasury have been developed on a 
coordinated basis by the Departments. Except to the extent needed to 
reflect the statutory differences described above, the shared group 
market provisions in these regulations of each Department are 
substantively identical. However, there are certain nonsubstantive 
differences. The PHS Act regulations are numbered and organized 
differently. Also, there are differences in the regulations that are 
necessary because of statutory provisions that are not common to all 
three Departments (in the definitions sections, for example). Further, 
the regulations reflect certain stylistic differences in language and 
structure to conform to conventions used by a particular Department. 
These differences have been minimized and any differences in wording 
are not intended to create any substantive difference, so that these 
regulations will have the same effect with respect to overlapping 
statutory provisions, as required by section 104 of HIPAA.

D. Special Information Concerning State Insurance Law

    For purposes of the PHS Act and sections 144 through 148 in the PHS 
Act regulations, all health insurance coverage in a State generally is 
sold in one of two markets: the group market (See section 146) and the 
individual market (see section 148). The group market is further 
divided into the large group market and the small group market. Section 
146 of the PHS Act regulations applies the group market provisions only 
to insurance sold to group health plans (which are generally plans 
sponsored by employers or employee organizations or both), regardless 
of whether State law provides otherwise. State law may expand the 
definition of the small group market to include certain coverage that, 
under the federal law, would otherwise be considered coverage in the 
large group market or the individual market.
    The protections provided in the PHS Act to particular individuals 
and employers are different depending on whether the coverage involved 
is obtained in the small group market, the large group market, or the 
individual market. Small employers are guaranteed availability of 
insurance coverage sold in the small group market under the PHS Act. 
Small and large employers are guaranteed the right to renew their group 
coverage under the PHS Act, subject to certain exceptions. Eligible 
individuals are guaranteed availability of coverage sold in the 
individual market under the PHS Act, and all coverage in the individual 
market must be guaranteed renewable under the PHS Act.
    Coverage that is provided to associations, but is not related to 
employment (so that the coverage is not in connection with a group 
health plan), is not coverage in the group market under HIPAA. This 
coverage is instead coverage in the individual market under the PHS 
Act, regardless of whether it is considered group coverage under State 
law.

E. Discussion of the Shared Group Market Provisions in the 
Regulations

    The most significant items relating to the shared group market in 
these regulations are discussed in detail below.

Definitions--26 CFR 54.9801-2, 29 CFR 2590.701-2, 45 CFR 144.103

    This section provides most of the definitions used in the 
regulations implementing the provisions of HIPAA that were added to the 
PHS Act, ERISA, and the Code, relating to the group market.\3\ The 
definitions in this section of the regulations include both statutory 
definitions provided in HIPAA, as well as certain others used in the 
regulations.
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    \3\ The regulations for the PHS Act also contain certain 
definitions relating to those provisions added under the PHS Act 
regarding the individual market, in order to create a single, 
comprehensive reference for the definitions necessary under the PHS 
Act regulations.
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Limitation on Preexisting Condition Exclusion Period--26 CFR 54.9801-3, 
29 CFR 2590.71-3, 45 CFR 146.111

Definition of Preexisting Condition Exclusion
    A preexisting condition exclusion is defined broadly to be any 
limitation or exclusion of benefits based on the fact the condition was 
present before the first day of coverage, whether or not any medical 
advice, diagnosis, care, or treatment was recommended or received 
before that day. HIPAA imposes certain limitations (described below) on 
the use of such an exclusion in the group market (and also uses this 
definition for purposes of the individual market rules, under which no 
preexisting condition exclusion is permitted to be imposed on an 
eligible individual). HIPAA's broad definition of a preexisting 
condition exclusion is at variance with some State laws and regulations 
because the relevant National Association of Insurance Commissioners 
(NAIC) models, on which many State laws are based, have imposed 
limitations on coverage for preexisting conditions without use of such 
a definition.
    New Limitations on Preexisting Condition Exclusions. Paragraph (a) 
of this section \4\ of the regulations describes the limitations on the 
preexisting condition exclusion period. A group health plan, and a 
health insurance issuer offering group health insurance coverage, is 
permitted to impose a preexisting condition exclusion with respect to a 
participant or beneficiary only if the following conditions are met:
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    \4\ References to paragraphs of a section refer to paragraphs of 
each regulation section identified in the heading. For example, this 
reference is to paragraph (a) in each of 45 CFR 146.111, 29 CFR 
2590.701-3, and 26 CFR 54.9801-3.
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    1. 6-month look-back rule. The preexisting condition exclusion must 
relate to a condition (whether physical or mental, and regardless of 
the cause of the condition) for which medical advice, diagnosis, care, 
or treatment was recommended or received within the 6-month period 
ending on the enrollment date. For these purposes, genetic information 
is not a condition.\5\ In order

[[Page 16897]]

to be taken into account, the medical advice, diagnosis, care, or 
treatment must have been recommended or received from an individual 
licensed or similarly authorized to provide such services under State 
law and operating within the scope of practice authorized by the State 
law. Under the new HIPAA standard, a plan would generally determine 
that an individual has a preexisting condition through medical records 
(such as diagnosis codes on bills, a physician's notes of a visit or 
telephone call, pharmacy prescription records, HMO encounter data, or 
other records indicating that medical services were actually 
recommended or received during the 6-month look-back period). The 
``prudent person'' standard of some State laws (under which a condition 
is taken into account if a prudent person would have sought care 
whether or not care is actually received) no longer may be used to 
determine a preexisting condition.
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    \5\ The definition of genetic information in the regulations was 
developed taking into account hearing testimony related to genetic 
information given in connection with Senate Report 104-156, other 
legislative initiatives, and public comments (including those 
submitted in response to the request for information published by 
the Departments on December 30, 1996).
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    This 6-month ``look-back'' period is based on the 6-month 
``anniversary date'' of the enrollment date. As a result, an individual 
whose enrollment date is August 1, 1998 has a 6-month look-back period 
from February 1, 1998 through July 31, 1998.
    2. Length of preexisting condition exclusion period. The exclusion 
period cannot extend for more than 12 months (18 months for late 
enrollees) after the enrollment date. the 12- or 18-month ``look-
forward'' period is also based on the anniversary date of the 
enrollment date. A late enrollee is defined as an individual who 
enrolls in a plan at a time other than at the first time the individual 
is eligible to enroll or during a special enrollment period (described 
below). If an individual loses eligibility for coverage as a result of 
terminating employment or a general suspension of coverage under the 
plan, then upon becoming eligible again due to resumption of employment 
or due to resumption of plan coverage, only the most recent period of 
eligibility is considered for purposes of determining whether the 
individual is a late enrollee.
    3. Reduction of preexisting condition exclusion period by prior 
coverage. In general, the preexisting condition exclusion period is 
reduced by the individual's days of creditable coverage \6\ as of the 
enrollment date. Creditable coverage is defined as coverage of an 
individual from a wide range of specified sources, including group 
health plans, health insurance coverage, Medicare, and Medicaid.
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    \6\ The phrase ``days of creditable coverage'' is used instead 
of the statutory phrase ``aggregate periods of creditable coverage'' 
for administrative ease in the calculation of creditable coverage. 
Use of days of creditable coverage also conforms to the practice of 
many States for crediting prior coverage under pre-HIPAA small group 
market reforms.
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    Definition of Enrollment Date. The limitations on preexisting 
condition exclusions are measured from an individual's ``enrollment 
date.'' The enrollment date is defined as the first day of coverage or, 
if there is a waiting period, the first day of the waiting period 
(typically the date employment begins).
    The term ``first day of coverage'' is used in the regulations in 
place of the term ``date of enrollment'' in the statute, such as in the 
definitions of the terms ``preexisting condition exclusion'' and 
``enrollment date.'' This is intended to clarify the difference between 
the statutory terms ``date of enrollment'' and ``enrollment date'' 
(which have no difference in common useage).
    The term ``waiting period'' generally refers to the period in which 
there is a delay between the first day of employment and the first day 
of coverage under the plan. Accordingly, because the preexisting 
condition exclusion period runs from the enrollment date, any waiting 
period would run concurrently with any preexisting condition exclusion 
period. Further:
    <bullet> The enrollment date for a late enrollee or anyone who 
enrolls on a special enrollment date (see the section on special 
enrollment periods below) is the first date of coverage. Thus, the time 
between the date a late enrollee or special enrollee first becomes 
eligible for enrollment under the plan and the first day of coverage is 
not treated as a waiting period.
    <bullet> Because the 6-month look-back limitation runs from the 
beginning of any applicable waiting period, the current practice of 
some plans that require physical examinations prior to commencement of 
coverage for the purpose of identifying preexisting conditions may be 
affected. If the examination is conducted during the waiting period 
(after employment begins and before enrollment), rather than before 
employment begins, a plan may not exclude coverage for any condition 
identified in the examination (unless, independent of the examination, 
medical advice, diagnosis, care, or treatment was in fact recommended 
or received for the condition during the 6-month look-back period). The 
use of such examinations for other purposes, such as worker safety, is 
not affected.\7\
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    \7\ However, to avoid violating the Americans with Disabilities 
Act, Pub. L. 101-336, as amended by Pub. L. 102-166, the examination 
should generally be conducted only after the employer has offered 
employment to the individual.
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    Elimination of Preexisting Condition Exclusion for Pregnancy and 
for Certain Children. A preexisting condition exclusion cannot apply to 
pregnancy. In addition, a preexisting condition exclusion period cannot 
be applied to a newborn, an adopted child under age 18, or a child 
placed for adoption under age 18, if the child becomes covered within 
30 days of birth, adoption, or placement for adoption. This exception 
does not apply after the child has a significant break in coverage (63 
or more consecutive days). (An example in paragraph (b)(1) of the 
regulations illustrates these rules.)

Rules Relating to Creditable Coverage--26 CFR 54.9801-4, 29 CFR 
2590.701-4, 45 CFR 146.113

    As noted above, a plan or issuer that imposes a preexisting 
condition exclusion must reduce the length of the exclusion by an 
individual's creditable coverage. This section defines the term 
``creditable coverage'' and sets forth the rules for how creditable 
coverage is applied to reduce such an exclusion period.
    Creditable coverage includes health insurance coverage and other 
health coverage, such as coverage under group health plans (whether or 
not provided through an issuer), Medicaid, Medicare, and public health 
plans, as well as other types of coverage set forth in HIPAA and the 
regulations. Comments are requested on whether the definition of a 
public health plan should include the public health systems of other 
countries.
    Under the definition of creditable coverage, all forms of health 
insurance coverage are included, whether in the individual market or 
group market, and whether the coverage is short-term, limited-duration 
coverage or other coverage for benefits for medical care for which no 
certificate of creditable coverage is required. Creditable coverage 
does not include coverage consisting solely of excepted benefits as 
defined in the regulations and described below.\8\
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    \8\ However, if an individual has coverage of excepted benefits 
in addition to other forms of creditable coverage, coverage of 
excepted benefits is creditable coverage. This would make a 
difference only if a plan or issuer uses the alternative method of 
determining creditable coverage (described below) with respect to a 
category that includes excepted benefits. For example, coverage of 
excepted benefits such as limited vision or limited dental benefits, 
when offered in combination with other creditable coverage, may be 
used to offset a preexisting condition exclusion period for a 
category that includes those benefits under the alternative method 
in paragraph (c).
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    Under paragraph (a)(3) of this section of the regulation, a group 
health plan or health insurance issuer offering group

[[Page 16898]]

health insurance coverage may determine the amount of creditable 
coverage of an individual for purposes of reducing the period of a 
preexisting condition exclusion by using either the standard method 
described in paragraph (b) or the alternative method described in 
paragraph (c).
Standard Method
    1. Counting. Under the standard method, the plan or issuer 
determines the amount of an individual's creditable coverage by 
determining all days during which the individual had one or more types 
of creditable coverage. This determination is made without regard to 
the specific benefits included in the coverage. If creditable coverage 
is derived from more than one source on a particular day, all of the 
creditable coverage that the individual had on that day is counted as 
one day of creditable coverage.
    2. Significant break in coverage. Days of creditable coverage that 
occur before a significant break in coverage are not required to be 
counted by the plan or issuer in reducing a preexisting condition 
exclusion. A significant break in coverage means a period of 63 
consecutive days during all of which the individual did not have any 
creditable coverage.
    a. Waiting and affiliation periods. Waiting periods and affiliation 
periods, as defined in the regulation, are not taken into account in 
determining a significant break in coverage. This is the case 
regardless of whether the person ultimately fails to obtain coverage 
under the plan (such as, where termination of employment occurs before 
coverage begins). However, days in a waiting period or affiliation 
period are not counted as creditable coverage.
    The regulations specify that the period between the date an 
individual files a substantially complete application for coverage in 
the individual market and the effective date of such coverage is a 
waiting period, so that the period is not taken into account in 
determining a significant break in coverage. In this way, an 
application processing delay or omission of details on a form would not 
cause an applicant to incur a significant break in coverage, which 
could adversely affect an individual who seeks coverage under a group 
health plan after purchasing coverage in the individual market.
    However, the waiting period for purchase of an individual policy 
tolls a break in coverage only if the filing of the application for the 
individual market insurance actually results in purchase of the 
coverage by the individual. (See Examples 7 and 8 in paragraph 
(b)(2)(iv)). By contrast, days in a waiting period for coverage under a 
group health plan toll a significant break in coverage regardless of 
whether coverage under the plan is ultimately obtained. (See Example 
6.) The rule regarding the individual market prevents an individual 
from avoiding a significant break in coverage by repeatedly submitting 
applications to individual market issuers without ever purchasing 
coverage. This rule responds to comments sent to the Departments in 
response to the December 30, 1996 request for public comments. The 
comments asked for clear rules on when a significant break is tolled in 
the case of an application for individual market insurance.
    Issuers of health insurance coverage in the individual market are 
subject to the same certification requirements that apply to plans and 
issuers in the group market. Therefore, issuers in the individual 
market must provide individuals with certificates that reflect 
information regarding the beginning of the waiting period (the date of 
application), the effective date of coverage, and the date coverage 
ends. This will assist people with coverage in the individual market 
who later become covered by a group health plan in demonstrating their 
creditable coverage to the plan or issuer in the group market.
    b. Effect of State insurance law. HIPAA provides that the 
significant break in coverage rule does not preempt State insurance 
laws that provide longer periods than 63 days for a break in coverage. 
(The preemption provisions are described more fully below.) 
Accordingly, while federal law may allow a plan to disregard prior 
coverage before a 63-day significant break in coverage, an issuer may 
be required to take such coverage into account in order to comply with 
State insurance law. As a result, application of the break rules can 
vary between issuers located in different States. Similarly, the break 
rules may vary between insured plans and self-insured plans (which are 
not subject to State insurance laws) within a State, as well as between 
the insured and self-insured portions of a single plan. As illustrated 
by Example 3 in paragraph (b)(2)(iv), the laws of the State applicable 
to the insurance policy that has the preexisting condition exclusion 
are determinative of which break rule applies.
    Alternative Method. Under the alternative method of counting 
creditable coverage, the plan or issuer determines the amount of an 
individual's creditable coverage for any of five identified categories 
of benefits. Those categories are coverage for mental health, substance 
abuse treatment, prescription drugs, dental care, and vision care. The 
plan or issuer may use the alternative method for any or all of the 
categories and may apply a different preexisting condition exclusion 
period with respect to each category (as well as to coverage not within 
a category). The creditable coverage determined for a category of 
benefits applies only for purposes of reducing the preexisting 
condition exclusion period with respect to that category. The standard 
method is used to determine an individual's creditable coverage for 
benefits that are not within any category for which the alternative 
method is being used. Disclosure statements concerning the plan must 
indicate that the alternative method is being used, and this disclosure 
must also be given to each enrollee at the time of enrollment. These 
statements must include a description of the effect of using the 
alternative method. Any issuer in the group market must provide similar 
statements to each employer at the time of offer or sale of the 
coverage.
    For purposes of reducing the preexisting condition exclusion period 
under the alternative method, the plan or issuer determines under the 
standard method the amount of the individual's creditable coverage that 
can be counted, up to a total of 365 days of the most recent creditable 
coverage of the individual (546 days for a late enrollee). The period 
of this creditable coverage is referred to as the ``determination 
period.'' The plan or issuer counts all days of coverage within the 
applicable category that occurred during the determination period 
(without regard to any significant breaks in that category of 
coverage). Those days reduce the preexisting condition exclusion for 
coverage within that category.
    The regulations do not provide detailed definitions of the benefit 
categories. Comments are invited on whether additional guidance is 
needed.
    The regulations under the alternative method of counting creditable 
coverage do not include a category relating to significant differences 
in deductible amounts. Commentators expressed concerns about adverse 
selection if individuals can change from a high deductible plan when 
they become ill and obtain ``first dollar'' coverage from an HMO or 
other issuer that provides broad, comprehensive care with only low 
deductibles or copayments.\9\ However, it is unclear how such a

[[Page 16899]]

category would be defined or applied. Accordingly, the Departments 
solicit comments on this issue.
---------------------------------------------------------------------------

    \9\ See also the discussion below under the heading ``HMO 
Affiliation as Alternative to Preexisting Condition Exclusion.''
---------------------------------------------------------------------------

Certificates and Disclosure of Previous Coverage--26 CFR 54.9801-5, 29 
CFR 2590.701-5, 45 CFR 146.115

    This section of the regulations sets forth guidance regarding the 
certification requirements and other requirements concerning disclosure 
of information relating to prior creditable coverage. The provision of 
a certificate and other disclosures of information are intended to 
enable an individual to establish his or her prior creditable coverage 
for purposes of reducing any preexisting condition exclusion imposed on 
the individual by any subsequent group health plan coverage.
    Form of Certificate. In general, the certificate must be provided 
in writing, including any form approved by the Secretaries as a 
writing. In certain circumstances, where the individual requests that 
the certificate be sent to another plan or issuer instead of to the 
individual, and the other plan or issuer agrees, the certification 
information may be provided by other means, such as by telephone. In 
some States, issuers transfer coverage information by telephone. 
Comments are requested as to whether, and under what conditions, other 
methods of transmitting certification information (including electronic 
communication) should be permitted in future guidance.
    Information in Certificate. Paragraph (a)(3) of this section of the 
regulations sets forth the information that must be included in a 
certificate. The regulations allow a plan or issuer in an appropriate 
case simply to state in the certificate that the individual has at 
least 18 months of creditable coverage that was not interrupted by a 
significant break in coverage and to indicate the date coverage ended. 
(A certificate would never have to reflect coverage in excess of 18 
months without a 63-day break because this is the maximum creditable 
coverage that an individual could need under the preexisting condition 
exclusion rules and the rules for access to the individual market.) In 
any other case, the certificate must disclose (1) the date any waiting 
or affiliation period began,\10\ (2) the date coverage began, and (3) 
the date coverage ended (or indicate if coverage is continuing).\11\ 
For individuals with fewer than 18 months of coverage without a 
significant break in coverage, the information about specific dates is 
essential in order for a subsequent plan or issuer in the group or 
individual market to be able to apply the break rules, especially in 
light of the possibility that an individual may have other coverage 
from various sources and the potential differences among State break 
rules (described above).
---------------------------------------------------------------------------

    \10\ Because the ending date for a waiting or affiliation period 
will always be the date coverage begins, the ending date does not 
have to be separately stated in a certificate.
    \11\ These dates would include any period of COBRA continuation 
coverage. A COBRA continuation coverage period does not have to be 
separately identified.
---------------------------------------------------------------------------

    Certification Events and Timing. Paragraph (a)(5) describes the 
rights of participants and dependents to receive certificates. In 
general, individuals have the right to receive a certificate 
automatically (an ``automatic certificate'') when they lose coverage 
under a plan and when they have a right to elect COBRA continuation 
coverage. The certificate must be furnished within the time periods 
described below:
    <bullet> First, for an individual who is a qualified beneficiary 
entitled to elect COBRA continuation coverage, the certificate is 
required to be provided no later than when a notice is required to be 
provided for a qualifying event under COBRA.
    <bullet> Second, for an individual who loses coverage under a group 
health plan and who is not a qualified beneficiary entitled to elect 
COBRA continuation coverage, the certificate is required to be provided 
within a reasonable time after the coverage ceases. (Typically, this 
would apply to small employers' plans that are not subject to COBRA.) 
This requirement is satisfied if the certificate is provided by the 
time a notice is required to be provided under a State program similar 
to COBRA.
    <bullet> Third, for an individual who is a qualified beneficiary 
and has elected COBRA continuation coverage, the certificate is 
required to be provided within a reasonable time after either cessation 
of COBRA continuation coverage or, if applicable, after the expiration 
of any grace period for the payment of COBRA premiums.
In each of these three events, the regulations require the certificate 
to reflect only the most recent period of continuous coverage under the 
plan.
    Under COBRA, multiemployer plans may provide notices within such 
longer period of time as provided for such notices under the terms of 
the plan. Under the general certification timing rule described above, 
multiemployer plans may use the same extended time period for providing 
certificates. Comments are requested on how this may affect a 
multiemployer plan and its participants and their families.
    A certificate may be mailed by first class mail to the 
participant's last known address. A certificate for a participant's 
spouse with an address different from the participant's is to be sent 
to the spouse's address. A certificate may provide information with 
respect to both a participant and the participant's dependents if the 
information is identical for each individual, or if the information is 
not identical, a certificate may provide information sufficient to 
satisfy the requirements of the regulations with respect to each 
individual on one document.
    A certificate is also required to be provided upon the request of, 
or on behalf of, an individual (whether the individual is a 
participant, the participant's spouse, or any other dependent) if the 
request is made within 24 months after the individual loses coverage 
under the plan. The certificate is required to be provided at the 
earliest time that the plan or issuer, acting in a reasonable and 
prompt fashion, can provide the certificate. In this case, the 
certificate reflects each period of continuous coverage ending within 
the 24 months prior to the date of request.\12\
---------------------------------------------------------------------------

    \12\ For example, for participation who has had a number of 
interruptions in coverage, a requested certificate could consist of 
copies of all of the automatic certificates that were previously 
provided to the individual for each of these periods.
---------------------------------------------------------------------------

    Responsibilities of Plans and Issuers. Paragraph (a)(1) clarifies 
the statutory obligation of plans and issuers to provide certificates. 
The statutory obligation to furnish a written certificate of 
information regarding creditable coverage is imposed on both the group 
health plan and the health insurance issuer offering group health 
insurance coverage. This dual obligation was the subject of many of the 
comments received by the three Departments in response to the December 
30, 1996 request for public comments published in the Federal Register. 
Concerns were raised about superfluous, duplicate certificates being 
issued and the potential responsibility of issuers for reporting on an 
individual's coverage under the plan after one issuer has been replaced 
by another.
    Paragraph (a)(1) addresses these concerns by providing that the 
obligation to furnish a certificate is imposed on both the plan and 
each health insurance issuer that provides group health insurance 
coverage under the plan, subject to four exceptions.
    First, paragraph (a)(1)(ii) provides that an entity required to 
provide a certificate is deemed to have satisfied this requirement to 
the extent that any other party provides the certificate and the 
certificate discloses the creditable coverage (including the waiting 
period

[[Page 16900]]

information) that was to be provided by the entity.
    Second, paragraph (a)(1)(iii) provides that a plan is deemed to 
have satisfied its obligation if there is an agreement between an 
issuer and a plan under which the issuer agrees to provide certificates 
for individuals covered under the plan.
    Third, paragraph (a)(1)(iv)(A) provides that an issuer is not 
required to provide any coverage information regarding coverage periods 
for which it was not responsible.
    Fourth, paragraph (a)(1)(iv)(B) provides that if an individual 
switches from one issuer to another option allowed under the plan, or 
an issuer is replaced by another before an individual's coverage in the 
plan ceases, the first issuer is required to provide sufficient 
information to the plan (or to another party designated by the plan), 
so that when the individual leaves the plan, a certificate can be 
provided that includes the period of coverage under the policy of the 
first issuer. In this situation, no certificate is required to be 
provided to the individual, but the issuer must also cooperate with the 
plan by providing any information that may be requested later pursuant 
to the alternative method. (This rule will reduce unnecessary and 
potentially misleading information from being received while the 
individual's coverage under the plan is uninterrupted.) An issuer may 
presume that it is the final issuer for an individual if the 
individual's coverage under the policy ends at a time other than in 
connection with the plan's open season.
    Other Entities Issuing Certificates. Paragraph (a)(6) identifies 
the various statutory authorities that create responsibility for other 
entities (that are not subject to a particular Department's 
regulations) to provide certificates. As described above, there are 
forms of creditable coverage other than coverage provided by group 
health plans and health insurance coverage offered in connection with a 
group health plan. Accordingly, individuals who leave coverage provided 
by any such other entity are entitled to have that coverage counted by 
a group health plan and may in many cases receive certificates for 
their creditable coverage. This information is included in the 
regulations because plans that impose a preexisting condition exclusion 
may find it helpful to know when creditable coverage will be provable 
through presentation of a certificate and when other forms of 
documentation or attestation may be needed.
    In cases where certifications are provided by entities not subject 
to ERISA's requirements, such as Medicaid, the Indian Health Service, 
and CHAMPUS, certain adjustments in the certification rules may be 
appropriate. The regulations do not address how the certification 
process applies to these other programs. Comments are requested on how 
the certification requirements may be adapted to entities responsible 
for providing this coverage.
    Dependent Coverage Information. Dependents are entitled to a 
written certificate of creditable coverage. Concerns were raised in 
comments received from the public regarding the certification of 
dependent coverage where information regarding dependents of 
participants in plans was not available. Plans and issuers, the 
commenters stated, often do not know the existence of dependents or 
their coverage periods until claims are filed. To address these 
concerns, the regulations have adopted two special rules.
    First, under a transition rule that lasts through June 30, 1998, a 
plan or issuer may satisfy its obligation to provide a written 
certificate regarding the coverage of a dependent of a participant by 
providing the name of the participant covered by the plan and 
specifying the type of coverage provided in the certificate (such as 
family coverage or employee-plus-spouse coverage). However, if asked to 
provide a certificate relating to a dependent, the plan must make 
reasonable efforts to obtain and provide the name of the dependent. 
This rule will provide plans and issuers with a transition period to 
update their data systems to include information on dependents.
    Second, the regulations include a special rule regarding dependent 
coverage that is not limited to the transition period. Under this rule, 
a plan or issuer must make a reasonable effort to collect the necessary 
information for dependents and include it on the certificate. However, 
under this special rule, an automatic certificate is not required to be 
issued until the plan or issuer knows (or, making reasonable efforts, 
should know) of the dependent's cessation of coverage. This information 
can be collected annually (during open enrollment).
    Under the transition rule and the special rule, an individual may 
use the provisions described below to establish creditable coverage 
(and waiting and affiliation period information).
    Information for Alternative Method of Counting Creditable Coverage. 
Following receipt of the certificate, an entity that uses the 
alternative method of counting creditable coverage may request that the 
entity that issued the certificate disclose additional information in 
order for the requesting entity to determine the individual's 
creditable coverage with respect to any category of benefits described 
in paragraph (b). The requested entity may charge the requesting entity 
the reasonable cost of disclosing the information. The requesting 
entity may ask for a copy of the summary plan description (SPD) that 
applied to the individual's coverage or may ask for more specific 
information. Set forth below is a model form that may be used for 
specific coverage information about the categories of benefits:

Information on Categories of Benefits

1. Date of original certificate:---------------------------------------
2. Name of group health plan
providing the coverage:------------------------------------------------
3. Name of participant:------------------------------------------------
4. Identification number of participant:-------------------------------
5. Name of individual(s) to whom this information applies: ____

6. The following information applies to the coverage in the 
certificate that was provided to the individual(s) identified above:

a. Mental Health:------------------------------------------------------
b. Substance Abuse Treatment:------------------------------------------
c. Prescription Drugs:-------------------------------------------------
d. Dental Care:--------------------------------------------------------
e. Vision Care:--------------------------------------------------------
    For each category above, enter ``N/A'' if the individual had no 
coverage within the category and either (i) enter both the date that 
the individual's coverage within the category began and the date 
that the individual's coverage within the category ended (or 
indicate if continuing), or (ii) enter ``same'' on the line if the 
beginning and ending dates for coverage within the category are the 
same as the beginning and ending dates for the coverage in the 
certificate.
    Demonstration of Coverage if Certificate is Not Provided. Under 
HIPAA, in order to prevent an individual from being adversely affected 
if the individual does not receive a certificate, the individual has a 
right to demonstrate creditable coverage through the presentation of 
documentation or other means. For example, an individual may not have a 
certificate because: an entity failed to provide a certificate within 
the required time period; an entity was not required to provide a 
certificate; the coverage of the individual was for a period before 
July 1, 1996; or, the individual has an urgent medical condition that 
necessitates an immediate determination of creditable coverage by the 
plan or issuer. Under these circumstances, an individual may present 
evidence of creditable coverage through documents, records, third party 
statements, or other means, including telephone calls by the plan or 
issuer to a third party provider. The plan administrator is required to 
take into

[[Page 16901]]

account all information presented in determining whether to offset any 
or all of a preexisting condition exclusion. A plan or issuer is 
required to treat the individual as having furnished a certificate 
provided by a plan or issuer 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 plan's or issuer's efforts to verify the 
individual's coverage.
    If an individual needs to demonstrate his or her status as a 
dependent of a participant, the plan or issuer is required to treat the 
individual as having furnished a certificate if an attestation to such 
dependency and the period of such status is provided, and if the 
individual cooperates with the plan's or issuer's efforts to verify the 
dependent status.
    Similar rules apply relating to determining creditable coverage 
under the alternative method.
    Notice to Individual of Period of Preexisting Condition Exclusion. 
Within a reasonable time following the receipt of the certificate, 
information relating to the alternative method, or other evidence of 
coverage, a plan or issuer is required to make a determination 
regarding the length of any preexisting condition exclusion period that 
applies to the individual and notify the individual of its 
determination. Whether a determination and notification is made within 
a reasonable period of time depends upon the relevant facts and 
circumstances including whether the application of the preexisting 
condition exclusion period would prevent access to urgent medical 
services. The plan or issuer is required to notify the individual, 
however, only if, after considering the evidence, it has determined 
that a preexisting condition exclusion period will still be imposed on 
the individual. The basis of the determination, including the source 
and substance of any information on which the plan or issuer relied, 
must be included in the notification. The notification must also 
explain the plan's appeals procedures and the opportunity of the 
individual to present additional evidence.
    The plan or issuer may reconsider and modify its initial 
determination if it determines that the individual did not have the 
claimed creditable coverage. In this circumstance, the plan or issuer 
must notify the individual of such reconsideration and, until a final 
determination is made, must act in accordance with its initial 
determination for purposes of approving medical services.
    Model Certificate. The following model certificate has been 
authorized by the Secretary of each of the Departments. Use of the 
model certificate will satisfy the requirements of paragraph (a)(3)(ii) 
of the regulations.

Certificate of Group Health Plan Coverage

    * IMPORTANT--This certificate provides evidence of your prior 
health coverage. You may need to furnish this certificate if you 
become eligible under a group health plan that excludes coverage for 
certain medical conditions that you have before you enroll. This 
certificate may need to be provided if medical advice, diagnosis, 
care, or treatment was recommended or received for the condition 
within the 6-month period prior to your enrollment 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 buy, for yourself 
or your family, an insurance policy that does not exclude coverage 
for medical conditions that are present before you enroll.

1. Date of this certificate:-------------------------------------------
2. Name of group health plan:------------------------------------------
3. Name of participant:------------------------------------------------
4. Identification number of participant:-------------------------------
5. Name of any dependents to whom
this certificate applies:----------------------------------------------
6. Name, address, and telephone number of plan administrator or 
issuer responsible for providing this certificate:

----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
7. For further information, call:--------------------------------------
8. If the individual(s) identified in line 3 and line 5 has at least 
18 months of creditable coverage (disregarding periods of coverage 
before a 63-day break), check here______ and skip lines 9 and 10.
9. Date waiting period or affiliation period
(if any) began:--------------------------------------------------------
10. Date coverage began:-----------------------------------------------
11. Date coverage ended: ______ (or check if coverage is continuing 
as of the date of this certificate: ______).

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

Special Enrollment Periods--26 CFR 54.9801-6, 29 CFR 2590.701-6, 45 CFR 
146.117

    This section of the regulations provides guidance regarding the new 
enrollment rights provided to employees and dependents under HIPAA. A 
group health plan and a health insurance issuer offering group health 
insurance coverage are required to provide for special enrollment 
periods during which individuals who previously declined coverage are 
allowed to enroll (without having to wait until the plan's next regular 
open enrollment period). A special enrollment period can occur if a 
person with other health coverage loses that coverage or if a person 
becomes a dependent through marriage, birth, adoption, or placement for 
adoption.
    A plan must provide a description of the special enrollment rights 
to anyone who declines coverage. The regulations provide a model of 
such a description.
    A person who enrolls during a special enrollment period (even if 
the period also corresponds to a regular open enrollment period) is not 
treated as a late enrollee. (Accordingly, the plan or issuer may not 
impose a preexisting condition exclusion period longer than 12 months 
with respect to the person.)
    Special Enrollment for Loss of Other Coverage. The special 
enrollment period for loss of other coverage is available to employees 
and their dependents who meet certain requirements. The employee or 
dependent must otherwise be eligible for coverage under the terms of 
the plan. When the coverage was previously declined, the employee or 
dependent must have been covered under another group health plan or 
must have had other health insurance coverage. The plan can require 
that, when coverage in the plan was previously declined, the employee 
must have declared in writing that the reason was other coverage, in 
which case the plan must at that time have provided notice of this 
requirement and the consequences of the employee's failure to provide 
the statement.
    The special enrollment rights may apply with respect to an 
employee, a dependent of the employee, or both. An employee who has not 
previously enrolled can enroll under these rules if it is the employee 
who loses other coverage. An employee's dependent can be enrolled under 
these rules if it is the dependent who loses other coverage and the 
employee is already enrolled. In addition, both the employee and a 
dependent can be enrolled together under these rules if either the 
employee or the dependent loses other coverage.
    If the other coverage is COBRA continuation coverage, the special 
enrollment can only be requested after exhausting COBRA continuation 
coverage. If the other coverage is not COBRA continuation coverage, 
special enrollment can only be requested after losing eligibility for 
the other coverage or after cessation of employer contributions for the 
other coverage. In each case, the employee has 30 days to request 
special enrollment. An individual does not have to elect COBRA 
continuation coverage or exercise similar continuation rights in order 
to preserve the right to special enrollment. However, an individual 
does not have a special enrollment right if the individual loses the 
other coverage as a result of the individual's

[[Page 16902]]

failure to pay premiums or for cause (such as making a fraudulent 
claim). Coverage under special enrollment must be effective no later 
than the first day of the month after an employee request the 
enrollment for himself or herself or on behalf of a dependent.
    Special Enrollment for New Dependents. A special enrollment period 
also occurs if a person has a new dependent by birth, marriage, 
adoption, or placement for adoption. The election to enroll can be made 
within 30 days following the birth, marriage, adoption, or placement 
for adoption. In the case of a plan that does not offer any coverage 
for dependents and is then modified to offer dependent coverage, the 
election to enroll can instead be made during the 30 days beginning on 
the date dependent coverage is made available.
    The special enrollment rules allow an eligible employee to enroll 
when he or she marries or has a new child (as a result of marriage, 
birth, adoption, or placement for adoption). A spouse of a participant 
can be enrolled separately at the time of marriage or when a child is 
born, adopted or placed for adoption. The spouse can be enrolled 
together with the employee when they marry or when a child is born, 
adopted, or placed for adoption. A child who becomes a dependent of a 
participant as a result of marriage, birth, adoption, or placement for 
adoption can be enrolled when the child becomes a dependent. Similarly, 
a child who becomes a dependent of an eligible employee as a result of 
marriage, birth, adoption, or placement for adoption can be enrolled if 
the employee enrolls at the same time.
    In the case of a dependent special enrollment period, HIPAA 
provides that coverage with respect to a marriage is effective no later 
than the first day of the month after the date the request for 
enrollment is received and coverage with respect to a birth, adoption, 
or placement for adoption is effective on the date of the birth, 
adoption, or placement for adoption.

HMO Affiliation Period as Alternative to Preexisting Condition 
Exclusion--29 CFR 2590.701-7 and 45 CFR 146.119

    This section of the regulations permits a group health plan 
offering health insurance through an HMO, or an HMO that offers health 
insurance coverage in connection with a group health plan, to impose an 
affiliation period, but only if certain other requirements are met. An 
``affiliation period'' is defined in the regulations as a period of 
time that must expire before health insurance coverage provided by the 
HMO becomes effective, and during which the HMO is not required to 
provide benefits.
    The regulations specify the following requirements for imposing an 
affiliation period:
    <bullet> No preexisting condition exclusion may be imposed with 
respect to coverage through the HMO;
    <bullet> No premium may be charged to a participant or beneficiary 
for the affiliation period;
    <bullet> The affiliation period must be applied uniformly without 
regard to any health status-related factors; and
    <bullet> The affiliation period must begin on the enrollment date, 
cannot exceed two months (three months for a late enrollee), and must 
run concurrently with any waiting period under the plan.
The regulations provide for the affiliation period to begin on the 
enrollment date in the plan, not when coverage with the HMO begins. 
Accordingly, if a plan offers multiple coverage options simultaneously, 
the HMO cannot impose an affiliation period on plan participants who 
change to the HMO option. Comments are requested on this rule.
    The regulations permit an HMO to use alternatives in lieu of an 
affiliation period to address adverse selection, as approved by the 
State insurance commissioner or other official designated to regulate 
HMOs. Because an affiliation period may be imposed only if no 
preexisting condition exclusion is used, an alternative to an 
affiliation period may not encompass an arrangement that is in the 
nature of such an exclusion.\13\
---------------------------------------------------------------------------

    \13\ These alternative that may be used in lieu of an 
affiliation period to address adverse selection should not be 
confused with the use of the alternative method for counting 
creditable coverage discussed in the next paragraph.
---------------------------------------------------------------------------

    While HMOs usually do not impose preexisting condition exclusions, 
they could choose to apply a preexisting condition exclusion period for 
all enrollees based on the alternative method of counting creditable 
coverage if the regulations were to add a category relating to 
deductibles. However, as described above under the heading 
``Alternative Method,'' the regulations currently do not include such a 
category.

Nondiscrimination in Eligibility and Premiums in the Group Market--26 
CFR 54.9802-1, 29 CFR 2590.702, 45 CFR 146.121

    The regulations include provisions implementing the 
nondiscrimination provisions in HIPAA. Comments are welcomed on these 
provisions, and, in particular, comments are requested on whether 
guidance is needed concerning:
    <bullet> The extent to which the statute prohibits discrimination 
against individuals in eligibility for particular benefits;
    <bullet> The extent to which the statute may permit benefit 
limitations based on the source of an injury;
    <bullet> The permissible standards for defining groups of similarly 
situated individuals;
    <bullet> Application of the prohibitions on discrimination between 
groups of similarly situated individuals; and
    <bullet> The permissible standards for determining bona fide 
wellness programs.
    The Departments intend to issue further regulations on the 
nondiscrimination rules in the near future. In no event will the period 
for good faith compliance (specified in HIPAA sections 102(c)(5), 
101(g)(5), and 401(c)(5)) with respect to section 2702 of the PHS Act, 
section 702 of ERISA, and section 9802 of the Code end before the 
additional guidance is provided.
    A plan or issuer may not establish rules for eligibility (including 
continued eligibility) of an individual to enroll under the terms of 
the plan based on a health status-related factor. HIPAA and the 
regulations provide a list of health status-related factors. The 
Departments are considering interpreting the statutory language 
relating to eligibility to enroll so that a plan or issuer would be 
prohibited from providing lower benefits to certain individuals based 
on health status-related factors. Comments are welcomed on this 
interpretation.
    Among the health status-related factors listed in the statute is 
``evidence of insurability (including conditions arising out of acts of 
domestic violence).'' The Conference Report states that the inclusion 
of evidence of insurability in the list of health status-related 
factors ``is intended to ensure, among other things, that individuals 
are not excluded from health care coverage due to their participation 
in activities such as motorcycling, snowmobiling, all-terrain vehicle 
riding, horseback riding, skiing and other similar activities.'' 
However, HIPAA also provides that a plan or issuer is not required to 
provide particular benefits other than those provided under the terms 
of the plan. Moreover, HIPAA provides that a plan or issuer may 
establish limitations or restrictions on the amount, level, extent, or 
nature of the benefits or coverage for similarly situated individuals 
enrolled in the plan. Comments have been received indicating that some 
plans contain provisions that exclude coverage for benefits based on 
the source of injury (such as benefits for injuries sustained

[[Page 16903]]

in a motorcycle accident, injuries sustained in a motorcycle accident 
as the result of not wearing a helmet, or injuries sustained in the 
commission of a felony). Accordingly, comments are requested on how 
future guidance should treat benefit limitations based on the source of 
an injury.
    The Conference Report also states that ``[t]he term `similarly 
situated' means that a plan or coverage would be permitted to vary 
benefits available to different groups of employees, such as full-time 
versus part-time employees or employees in different geographic 
locations. In addition, a plan or coverage could have different benefit 
schedules for different collective bargaining units.'' Accordingly, 
comments are requested concerning the appropriate standards for 
determining ``similarly situated individuals,'' including whether a 
plan is permitted to vary benefits based on an employee's occupation. 
Because these standards could impact on the small group market, the 
Department of Health and Human Services is particularly interested in 
receiving comments from States with respect to how varying benefits 
based on occupation could affect rate setting.
    The Departments also request comments regarding how the 
prohibitions on discrimination should be applied between groups of 
similarly situated individuals. For example, is guidance needed on 
whether a plan covering employees in two different locations could have 
a longer waiting period for employees at one location because the 
health status of those employees results in higher health costs?
    A plan or issuer may not require any individual (as a condition of 
enrollment or continued enrollment) to pay a premium or contribution, 
that is greater than that for a similarly situated individual enrolled 
in the plan, based on a health status-related factor. However, this 
limitation does not restrict the amount that an issuer can charge an 
employer for the coverage. In addition, this limitation does not 
prevent a plan or issuer from establishing premium discounts or rebates 
or otherwise modifying applicable copayments or deductibles in return 
for adherence to programs of health promotion and disease prevention 
(bona fide wellness programs). Comments are requested regarding the 
standards for determining bona fide wellness programs, including 
whether such a program may provide a discount for non-smokers.

Special Rules--Excepted Plans and Excepted Benefits--26 CFR 54.9804-1, 
29 CFR 2590.732, 45 CFR 146.145

    This section of the regulations provides special rules for certain 
plans and certain benefits.
    Very Small Plans. The group market requirements of HIPAA do not 
apply to a group health plan, or to group health insurance coverage 
offered in connection with a group health plan, for any plan year if, 
on the first day of the plan year, the plan has fewer than 2 
participants who are current employees. However, a State may apply the 
group market provisions in the PHS Act to plans with fewer than two 
participants who are current employees. In this case, the State would 
apply its group market insurance law requirements to such small group 
plans (and such plans would not be subject to the individual market 
requirements).
    Excepted Benefits. The group market provisions and the related 
regulations also do not apply to any group health plan or group health 
insurance issuer in relation to its provision of excepted benefits. The 
benefits identified in paragraph (b)(2) are generally not health 
insurance coverage and are excepted in all circumstances. In contrast, 
the benefits identified in paragraphs (b) (3), (4), and (5) are 
generally health insurance coverage but are excepted if certain 
conditions are met.
    Limited-scope dental benefits, limited-scope vision benefits, and 
long-term care benefits are excepted if they are provided under a 
separate policy, certificate, or contract of insurance, or are 
otherwise not an integral part of the plan. For this purpose, limited-
scope dental coverage typically provides benefits for non-medical 
services such as routine dental cleanings, x-rays, and other preventive 
procedures. Such coverage may also provide discounts on the cost of 
common dental procedures such as fillings, root canals, crowns, full or 
partial plates, or orthodontic services. Limited-scope dental coverage 
typically does not provide benefits for medical services, such as those 
procedures associated with oral cancer or with a mouth injury that 
results in broken, displaced, or lost teeth.
    Similarly, limited-scope vision coverage provides benefits for 
routine eye examinations or the fitting of eyeglasses or contact 
lenses. This coverage does not include benefits for such 
ophthalmological services as treatment of an eye disease (e.g., 
glaucoma or a bacterial eye infection) or an eye injury.
    Noncoordinated benefits may be excepted benefits. The term 
``noncoordinated benefits'' refers to coverage for a specified disease 
or illness (such as cancer-only coverage) or hospital indemnity or 
other fixed dollar indemnity insurance (such as insurance that pays 
$100/day for a hospital stay as its only insurance benefit) if three 
conditions are met. First, the benefits are provided under a separate 
policy, certificate, or contract for insurance. Second, there is no 
coordination between the provision of these benefits and another 
exclusion of benefits under a plan maintained by the same plan sponsor. 
Third, benefits are paid without regard to whether benefits are 
provided with respect to the same event under a group health plan 
maintained by the same plan sponsor.
    Certain supplemental benefits are excepted only if they are 
provided under a separate policy, certificate, or contract of 
insurance. This category of excepted benefits includes Medicare 
supplemental (commonly called ``Medigap'' or ``MedSupp'') policies, 
CHAMPUS supplements, and supplements to certain employer group health 
plans. Such supplemental coverage cannot duplicate primary coverage and 
must be specifically designed to fill gaps in primary coverage, 
coinsurance, or deductibles.\14\
---------------------------------------------------------------------------

    \14\ Note that a group health plan, which provides primary 
coverage while an individual is an active employee, is often 
extended to retirees. When the retiree becomes eligible for 
Medicare, the group health plan commonly coordinates with Medicare 
and may serve a supplemental function similar to that of a Medigap 
policy. However, such employer-provided retiree ``wrap around'' 
benefits are not excepted benefits (because they are expressly 
excluded from the definition of a Medicare supplement policy in 
section 1882(g)(1) of the Social Security Act).
---------------------------------------------------------------------------

    The regulations do not address section 2721(e) of the PHS Act or 
section 705(d) of ERISA relating to the treatment of partnerships (or 
the application of the Code's group market rules to partnerships). 
Comments are requested on these provisions, including how these 
provisions coordinate with other provisions relating to self-employed 
individuals and partnerships.

F. Other Group Market Provisions\15\
---------------------------------------------------------------------------

    \15\ In this section (``Other Group Market Provisions''), 
references conform to usage in 45 CFR Part 146, which uses ``HCFA'' 
in place of ``Department of Health and Human Services'' or 
``Secretary of Health and Human Services'' and ``HCFA regulations'' 
in place of ``PHS Act regulations.''
---------------------------------------------------------------------------

Guaranteed Renewability in Multiemployer Plans and Multiple Employer 
Welfare Arrangements--Section 703 of ERISA and Section 9803 of the Code

    Requirements relating to guaranteed renewability in multiemployer 
plans

[[Page 16904]]

and multiple employer welfare arrangements are set forth in section 703 
of ERISA and section 9803 of the Code (but not in the PHS Act). These 
provisions state that a group health plan that is a multiemployer plan 
or that is a multiple employer welfare arrangement may not deny an 
employer whose employees are covered under such a plan continued access 
to the same or different coverage under the terms of such plan, other 
than for certain specified reasons. The Departments are not issuing 
regulations under section 703 of ERISA or section 9803 of the Code at 
this time, but anticipate issuing regulations under these sections and 
solicit comments regarding these sections.
    In these provisions, the terms ``continued access'' and ``same or 
different coverage'' are not defined. Comments are requested on how 
rules under these provisions might address variations and changes in a 
plan's benefit packages and contribution rates, differences in the 
characteristics of multiemployer plans and multiple employer welfare 
arrangements, and any possible implications for the financial integrity 
of affected plans.

Preemption of State Laws; State Flexibility--29 CFR 2590.731 and 45 CFR 
146.190

    The McCarran-Ferguson Act of 1945 (Pub. L. 79-15) exempts the 
business of insurance from federal antitrust regulation to the extent 
that it is regulated by the States and indicates that no federal law 
should be interpreted as overriding State insurance regulation unless 
it does so explicitly. Section 514(a) of ERISA preempts State laws 
relating to employee benefit plans (including group health plans). 
However, section 514(b)(2) of the ERISA saves from preemption any State 
law that regulates insurance. Section 2723 of the PHS Act and section 
731 of ERISA make clear that Part A of Title XXVII of the PHS Act and 
Part 7 of Subtitle B of Title I of ERISA do not in any way affect or 
modify section 514 of ERISA.
    In addition, section 2723 of the PHS Act and section 731(a) of 
ERISA preempt State insurance laws to the extent such laws ``prevent 
the application of'' Part A of Title XXVII of the PHS Act and Part 7 of 
Subtitle B of Title I of ERISA. (There is no corresponding provision in 
the Code.) In this regard, the Conference Report states that the 
conferees intended the narrowest preemption of State laws with regard 
to health insurance issuers (not group health plans) with respect to 
all the provisions of Part A of Title XXVII of the PHS Act and Part 7 
of Subtitle B of Title I of ERISA (except for preemption with respect 
to the provisions of section 2701 of the PHS Act and section 701 of 
ERISA.) Consequently, the Conference Report states that State laws with 
regard to health insurance issuers that are broader than federal 
requirements in certain areas would not ``prevent the application of'' 
the provisions of Part A of Title XXVII of the PHS Act or Part 7 of 
Subtitle B of Title I of ERISA.
    However, the preemption is broader for the statutory requirements 
of section 2701 of the PHS Act and 701 of ERISA that limit the 
application of preexisting condition exclusions. State laws cannot 
``differ'' from the preexisting condition exclusion requirements of 
section 2701 of the PHS Act or section 701 of ERISA, except as 
specifically permitted under section 2723(b)(2) of the PHS Act and 
section 731(b)(2) of ERISA. These specific exceptions permit a State to 
impose on health insurance issuers certain stricter limitations 
relating to preexisting condition exclusions.
    Comments are also solicited on issues relating to the coordination 
of the new requirements under HIPAA and State requirements for 
associations that may be multiple employer welfare arrangements as 
defined in section 3(40) of ERISA.

Guaranteed Availability of Coverage for Small Employers Under the PHS 
Act Group Market Provisions--45 CFR 146.150

    Rules relating to guaranteed availability of coverage for employers 
in the small group market appear only in the PHS Act (at section 2711). 
In general, this section requires health insurance issuers that offer 
coverage in the small group market to offer to any small employer all 
of the products they actively market in that market. This is generally 
referred to as an all-products guarantee. However, as allowed under 
applicable State law, the issuer can require that the employer make a 
minimum contribution toward the premium charged and have a minimum 
level of participation by eligible individuals. The issuer must also 
accept for enrollment every eligible individual without regard to 
health status. For purposes of this section, an eligible individual is 
one who meets the applicable requirements of the group health plan, the 
issuer, and State law for coverage under the plan.
    Some States have, in recent years, made reforms in their small 
group markets that only require guaranteed issue of a basic and a 
standard policy, rather than an all-products guarantee. They have urged 
that an all-products guarantee not be adopted, arguing that the law 
does not specifically require it. However, sections 2711 and 2741 of 
the PHS Act, as added by HIPAA, contain virtually identical 
requirements requiring issuers that offer health insurance coverage in 
either the small group or individual market to make ``such coverage'' 
available to, respectively, small employers or eligible individuals. 
While section 2741 explicitly permits issuers to limit to two policies 
the offerings they are required to make in the individual market, the 
small group market provisions contain no similar exception. In fact, 
section 2713(b)(1)(D) requires that an issuer that offers health 
insurance to any small employer must provide information concerning 
``the benefits and premiums available under all health insurance 
coverage for which the employer is qualified.'' (Emphasis added.) This 
indicates that Congress intended to require an all-products guarantee 
in the small group market. (However, a State that implements an 
``alternative mechanism'' in the individual market under section 2744 
of the PHS Act has the flexibility either to impose an all-products 
guarantee or to use a completely different mechanism for making 
insurance available to individuals guaranteed coverage under the 
statute.)
    Various industry groups and persons responding to the notice that 
the three Departments published on December 30, 1996 asked that the 
term ``offer'' be interpreted to mean ``actively marketed,'' so that 
issuers would not be required to reopen closed blocks of business. The 
regulations make this clear.
    Section 2711 also requires issuers to accept for enrollment any 
individuals who are eligible to enroll under the terms of the plan, and 
who satisfy the requirements of the issuer and applicable State law, 
during the period in which the individual ``first becomes eligible'' to 
enroll under the terms of the group health plan. Thus, the issuer is 
not required to accept late enrollees. The regulations make it clear 
that this protection extends to individuals if they ``first become 
eligible'' to enroll during a special enrollment period. The special 
enrollment provisions of the statute evidence the intent that 
individuals who qualify for special enrollment be given the same 
protections given to newly-hired employees and their dependents.

[[Page 16905]]

    An issue has also been raised as to whether the statutory 
definitions of premium contributions and group participation rules, 
which are repeated in the regulations, related only to percentages of 
employees or premium dollars or to absolute numbers of employees or 
premium amounts. If the latter interpretation were permitted, the 
effect would be to undermine the all-products guarantee by allowing, 
for example, some products to be available to ``larger'' small 
employers, but not to the smallest employers. The regulations currently 
leave interpretation of this language to the States, but comments are 
welcomed on this issue.
    Section 146.150 also includes rules regarding the circumstances 
under which issuers are permitted to deny coverage to employers. If the 
product is a network plan, under which services are furnished by a 
defined set of providers, the issuer can deny coverage to an employer 
whose eligible individuals do not live, work, or reside in the network 
plan's service area. It can also deny coverage if it has demonstrated 
to the State that its network does not have the capacity to deliver 
services to additional groups, but is then barred for 180 days from 
offering coverage in that service area. An issuer may also deny 
coverage if it demonstrates that it lacks sufficient financial reserves 
to underwrite additional coverage, but is barred for 180 days from 
offering coverage in the small group market in the State. Both of these 
exceptions must be applied to all employers uniformly without 
consideration of the health status or claims experience of an 
employer's employees or dependents. Neither of these exceptions 
relieves a network plan of its responsibility to continue servicing its 
in-force business under the guaranteed renewability requirements of the 
regulations.
    Finally, Sec. 146.150 provides that if the coverage is only made 
available to members of ``bona fide associations'' as that term is 
defined in the regulations, it is not subject to the guaranteed 
availability requirements. (Accordingly, the coverage does not have to 
be offered to non-members.) However, employers that obtain coverage 
through a bona fide association are assured of guaranteed access to the 
association's coverage options as long as they remain members of the 
association. This is because a bona fide association cannot condition 
membership in the association on health status-related factors. 
Moreover, it must offer coverage to all employers who are members 
without regard to health status-related factors relating to their 
employees or dependents. Therefore, an association cannot legally 
refuse enrollment to members on a selective basis so long as they meet 
the association's membership criteria.

Guaranteed Renewability of Coverage for Employers Under the PHS Act 
Group Market Provisions--45 CFR 146.152

    Section 146.152 of the Health Care Financing Administration (HCFA) 
regulations implements section 2712 of the PHS Act, which requires 
issuers to renew or continue in force any coverage in the large or 
small group market at the option of the plan sponsor. The exceptions to 
this requirement include nonpayment of premiums, fraud, and violation 
of minimum participation or contribution rules, as permitted under 
applicable State law. Also, the issuer can cease to offer either a 
particular product or all coverage it offers in the particular market, 
and can refuse to renew if the group health plan's participants all 
leave the service area of a network plan, or if the coverage is 
provided through a bona fide association and the employer's membership 
ends.
    Issuers that decide to discontinue offering a particular product or 
all coverage in the small or large group market are subject to certain 
requirements outlined in paragraphs (c) and (d) of this section of the 
regulations. Issuers discontinuing only a particular product must give 
90 days' notice, must offer the plan sponsor the option to purchase 
other coverage the issuer offers in that market, and must discontinue 
the product uniformly, without regard to claims experience or health 
status of participants or dependents under a particular group health 
plan. If the issuer terminates all coverage in a market or markets, it 
must provide 180 days' notice to each plan sponsor, and it is 
prohibited from issuing coverage in the market(s) or State involved for 
five years following the date of discontinuation. Plans or issuers may 
modify the health insurance coverage at the time of coverage renewal, 
provided the modification is consistent with State law and, for the 
small group market, is effective uniformly among group health plans 
with coverage under that product.
    Some States have asked whether an issuer that chooses to stop 
selling comprehensive products, such as a basic or standard policy, in 
a particular State's group market, must also cease selling policies 
consisting of excepted benefits. Because Congress permitted these types 
of supplemental policies and limited benefit plans to be excepted from 
the requirements of HIPAA in both the group and individual markets, 
HCFA intends to defer to the States' judgment on this issue, and 
solicit comments.
    State law may limit the extent to which an issuer can abandon a 
product or market, and under what circumstances. For example, a State 
may choose to require an issuer vacating the market to transfer its 
business to another issuer through assumption reinsurance, or some 
other means permitted under State law.
    Paragraph (g) of this section of the regulations provides that, 
with respect to group coverage offered only through associations, the 
option of guaranteed renewability extends to include employer members 
of an association. This provision means that all employers covered by 
an issuer through an association have the right to renew the coverage 
they received if the association ceases to serve its members, 
regardless of the reason.

Disclosure of Information by Issuers to Employers Seeking Coverage in 
the Small Group Market--45 CFR 146.160

    Section 146.160 of the HCFA regulations implements section 2713 of 
the PHS Act by setting forth rules relating to disclosure of 
information by issuers to employers seeking coverage in the small group 
market. In its solicitation and sales materials, the issuer must make a 
reasonable disclosure that the specified information is available on 
request. The information that must be provided includes the issuer's 
right to change premium rates and the factors that may affect changes 
in premium rates, renewability of coverage, any preexisting condition 
exclusion (including use of the alternative method of counting 
creditable coverage), any affiliation periods applied by HMOs, the 
geographic areas served by HMOs, and the benefits and premiums 
available under all health insurance coverage for which the employer is 
qualified under minimum contribution and participation rules, as 
permitted by State law. The issuer is exempted from disclosing 
proprietary or trade secret information under applicable law.
    ``Factors that may affect changes in premium rates'' and 
``proprietary and trade secret information under applicable law'' have 
not been defined. Comments are requested regarding whether they should 
be defined.
    The information described in this section must be provided in 
language that is understandable by the average small employer and 
sufficient to reasonably inform small employers of their rights and 
obligations under the health insurance coverage. This requirement can 
be satisfied by using as

[[Page 16906]]

a model the outlines of coverage provided under Medicare Supplement 
insurance. (These outlines are required to provide easy comparison of 
the coverage and cost of all available products.) Reasonable 
information includes rating schedules for each product to which more 
than one rate applies, and, with respect to network plans, maps of 
service areas or lists of counties served.

Exclusion of Certain Plans From the PHS Act Group Market Requirements--
45 CFR 146.180

    Section 146.180 of the HCFA regulations implements section 2721 of 
the PHS Act, which permits certain nonfederal governmental plans to 
elect to be exempted from some or all of the group market requirements 
of the HCFA regulations, although they are subject to the certification 
and disclosure requirements of Sec. 146.115. With respect to nonfederal 
governmental plans that are collectively bargained, this section does 
not preempt State and local collective bargaining laws. The regulation 
establishes the form and manner of the election, and requires a 
nonfederal governmental plan making this election to notify plan 
participants, at the time of enrollment and on an annual basis, that it 
has made the election and what effect the election has. The participant 
notice and certification and disclosure obligations are integral parts 
of the election. Failure to comply with these obligations invalidates 
an election and subjects the nonfederal governmental plan to the 
requirements the election would have permitted the plan to avoid.
    Only nonfederal governmental plans that are self-funded (in whole 
or in part) can make the election, and the election only applies to the 
self-funded portion. A health insurance issuer that sells insurance 
coverage to a nonfederal plan must comply with all the group market 
requirements.

Enforcement of PHS Act Requirements--45 CFR 146.184

    Part 146 imposes requirements on health insurance issuers that 
offer coverage in the group market in a State, and on nonfederal 
governmental (i.e., State and local) group health plans. With respect 
to issuers, the statute makes it 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. HCFA anticipates 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, HCFA must enforce them. The statute also requires HCFA to 
enforce the requirements applicable to nonfederal governmental plans.
    Section 146.184(b)(2) sets forth the procedures that HCFA will 
follow if a question is raised about the State's enforcement with 
respect to issuers. Under the procedures, States are given every 
opportunity to demonstrate why federal enforcement is not required. The 
regulations also make it clear that the procedures will not be 
triggered unless HCFA is satisfied that there has first been a 
reasonable effort to exhaust any State remedies. However, if, after 
giving the State a reasonable opportunity to enforce, HCFA makes a 
final determination that a State is not substantially enforcing these 
requirements, HCFA will enforce the requirements using the civil money 
penalties provided for under the statute.
    Parargarph (d) describes the process for imposing civil money 
penalties against issuers or nonfederal plans that fail to comply with 
the group market requirements in the PHS Act. If HCFA receives a 
complaint or other information that indicates that a right guaranteed 
by the group market rules is being denied, HCFA will first determine 
which entity is potentially responsible for any penalty. If the failure 
is by an issuer, the issuer will be responsible. If a nonfederal 
governmental plan is sponsored by a single employer, the employer will 
be liable, but if the plan is sponsored by two or more employers, the 
plan will be liable. If, after giving the entity or entities an 
opportunity to respond, HCFA assesses a penalty, the regulation 
provides appeal rights. The penalty can consist of up to $100 for each 
day, for each individual whose rights are violated.

Effective Dates--26 CFR 54.9806-1, 29 CFR 2590.736, 45 CFR 146.125

    The group market provisions are generally effective for plan years 
beginning after June 30, 1997.\16\ In many cases, no preexisting 
condition exclusion may be imposed with respect to an individual on the 
effective date because any permitted preexisting condition exclusion 
period is measured from the individual's enrollment date in the plan 
(even if the enrollment date is before the statutory effective date). 
An individual who has not completed the maximum permitted exclusion 
period under HIPAA before the effective date for his or her plan may 
use creditable coverage to reduce the remaining preexisting condition 
exclusion period. The regulations contain examples illustrating the 
effect of these rules.
---------------------------------------------------------------------------

    \16\ In the case of a group health plan maintained pursuant to 
one or more collective bargaining agreements between employee 
representatives and one or more employers ratified before August 21, 
1996, the group market provision (other than the requirements to 
provide certifications) do not apply to plan years beginning before 
the later of July 1, 1997 or the date on which the last of the 
collective bargaining agreements relating to the plan terminates 
(determined without regard to any extension agreed to after August 
21, 1996).
---------------------------------------------------------------------------

    The requirement that a plan or issuer provide certificates to show 
creditable coverage applies to events occurring on or after July 1, 
1996, except that in no case is a certificate required to be provided 
before June 1, 1997 or to reflect coverage before July 1, 1996.
    For events occurring on or after July 1, 1996 but before October 1, 
1996, a certificate is required to be provided only upon a written 
request by or on behalf of the individual to whom the certificate 
applies. For events occurring on or after October 1, 1996 and before 
June 1, 1997, a certificate must be furnished no later than June 1, 
1997 (or, if later, any date that would otherwise apply under the 
standard rules).
    The regulations include an optional transition rule for events 
before June 1, 1997. (The transition rule applies to automatic 
certificate events; it does not apply where a certificate is 
requested.) A group health plan or health insurance issuer offering 
group health coverage is deemed to satisfy the automatic certificate 
requirements if a special notice is provided no later than June 1, 
1997. The notice must be in writing and must include information 
substantially similar to the information included in a model notice 
authorized by the Secretaries. For this purpose, the following model 
notice is authorized:

IMPORTANT NOTICE OF YOUR RIGHT TO DOCUMENTATION OF HEALTH COVERAGE

    Recent changes in Federal law may affect your health coverage if 
you are enrolled or become eligible to enroll in health coverage 
that excludes coverage for preexisting medical conditions.
    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA) limits the circumstances under which coverage may be 
excluded for medical conditions present before you enroll. Under the 
law, a preexisting condition exclusion generally may not be imposed 
for more than 12 months (18 months for a late enrollee). The 12-
month (or 18-month) exclusion period is reduced by your prior health 
coverage. You are entitled to a certificate that will show evidence 
of your prior health coverage. If you buy health insurance other 
than through an employer group health plan, a certificate of prior 
coverage may help you obtain coverage without a preexisting 
condition exclusion. Contact your State insurance department for 
further information.

[[Page 16907]]

    For employer group health plans, these changes generally take 
effect at the beginning of the first plan year starting after June 
30, 1997. For example, if your employer's plan year begins on 
January 1, 1998, the plan is not required to give you credit for 
your prior coverage until January 1, 1998.
    You have the right to receive a certificate or prior health 
coverage since July 1, 1996. You may need to provide other 
documentation for earlier periods of health care coverage. Check 
with your new plan administrator to see if your new plan excludes 
coverage for preexisting conditions and if you need to provide a 
certificate or other documentation of your previous coverage.
    To get a certificate, complete the attached form and return it 
to:

[Insert Name of Entity:]
[Insert Address]:
For additional information contact: [Insert Telephone Number]

    The certificate must be provided to you promptly. Keep a copy of 
this completed form. You may also request certificates for any of 
your dependents (including your spouse) who were enrolled under your 
health coverage.

REQUEST FOR CERTIFICATE OF HEALTH COVERAGE

Name of Participant:---------------------------------------------------

Date:------------------------------------------------------------------

Address:---------------------------------------------------------------

Telephone Number:------------------------------------------------------

    Name and relationship of any dependents for whom certificates 
are requested (and their address if different from above):
----------------------------------------------------------------------

----------------------------------------------------------------------

    The provisions in the regulations relating to method of delivery 
and entities required to provide a certificate apply with respect to 
the provision of the notice. If an individual requests a certificate 
following receipt of the notice, the certificate must be provided at 
the time of the request as set forth in the regulations relating to 
certificates provided upon request.
    HIPAA provides that no enforcement action is to be taken against a 
group health plan or health insurance issuer with respect to a 
violation of the group market rules before January 1, 1998 if the plan 
or issuer has sought to comply in good faith with such requirements. 
Compliance with the regulations is deemed to be good faith compliance 
with the group market rules.

G. Interim Rules and Request for Comments

    Section 707 of ERISA (redesignated as section 734 by section 
603(a)(3) of the NMHPA), Section 2707 of the PHS Act, and Section 9806 
of the Code added by HIPAA, provide, in part, that the Secretaries of 
Labor, Treasury and HHS may promulgate any interim final rules as they 
determine are appropriate to carry out the portability provisions of 
HIPAA.
    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 because the 
Secretaries have determined that without prompt guidance, some members 
of the regulated community will have difficulty complying with the 
HIPAA's certification requirements, and will be in violation of the 
statute. Congress expressly intended that the certification and prior 
creditable coverage provisions serve as the mechanism for increasing 
the portability of health coverage for plan participants and their 
beneficiaries. Without the Departments' guidance, plans would likely be 
unable to produce the necessary amendments to plan documents reflecting 
HIPAA's new requirements, as well as the appropriate certifications of 
prior coverage that would help participants and beneficiaries reduce 
any applicable preexisting condition exclusion periods imposed by a new 
health plan. Thus, without the Departments' prompt guidance, 
participants and beneficiaries will not have the benefit of a 
convenient certificate of prior coverage to present upon changing 
health coverage, and will likely have greater difficulty proving that 
they are entitled to health coverage immediately, or soon after joining 
a new health plan.
    Moreover, HIPAA's portability requirements will affect the 
regulated community in the immediate future. HIPAA's certification 
requirements are effective for all group health plans on June 1, 1997. 
HIPAA's underlying requirements concerning establishing periods of 
prior creditable coverage, pre-existing condition exclusion provisions, 
and the special enrollment requirements, are generally applicable for 
group health plans for plan years beginning on or after July 1, 1997. 
Plan administrators and sponsors, and participants and beneficiaries 
will need guidance on how to comply with the new statutory provisions 
before these effective dates. These rules have been written in order to 
ensure that plan sponsors and administrators of group health plans, as 
well as participants and beneficiaries, are provided timely guidance 
concerning compliance with these recently enacted amendments to ERISA, 
the PHS Act and the Code. These rules provide guidance on these 
statutory changes, and are being adopted on an interim basis because 
the Departments find 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 group health plans and health 
insurance issuers. In addition, these rules are necessary to ensure 
that plan sponsors and administrators of group health plans, as well as 
participants and beneficiaries, are provided timely guidance concerning 
compliance with new and important disclosure obligations imposed by 
HIPAA.
    Sections 101(g)(4), 102(c)(4), and 401(c)(4) of HIPAA also mandate 
that the Secretaries issue regulations necessary to carry out the 
portability amendments by April 1, 1997. Issuance of a notice of 
proposed rule making with pubic comment thereon prior to issuing a 
final rule could delay significantly the issuance of essential guidance 
and prevent the Departments from complying with their statutory rule 
making deadline. Furthermore, these rules are being adopted on an 
interim basis and the Departments are inviting interested persons to 
submit written comments on the rules for consideration in the 
development of the final rules relating to HIPAA. Such final rules may 
be issued in advance of January 1, 1998, after affording the public an 
opportunity to review and comment.
    For the foregoing reasons, the Departments find that the 
publication of a proposed regulation, for the purpose of notice and 
public comment thereon, would be impracticable, unnecessary, and 
contrary to the public interest.

H. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to rules which would have significant 
economic impact on a substantial number of small entities. Section 603 
of the RFA requires an agency publishing a general notice of proposed 
rulemaking (NPRM) under section 553 of the APA to present at the time 
of the publication of its NPRM an initial regulatory flexibility 
analysis, describing the impact of the rule on small entities, and 
seeking public comment on such impact.
    Small entities include small business, non-profit organizations, 
and governmental agencies. A ``rule'' under the Regulatory Flexibility 
Act is one for which a general notice of proposed rulemaking is 
required under section 553(b) of the APA.
    Since these rules are issued as interim rules, and not as a general 
notice of

[[Page 16908]]

proposed rulemaking, for the reasons stated above, an Initial 
Regulatory Flexibility analysis has not been prepared.
    While these rules are being promulgated as interim final rules, the 
Departments nevertheless invite interested persons to submit comments 
for consideration in the development of the final rules regulating to 
HIPAA. Consistent with the policy of the Regulatory Flexibility Act, 
the public is encouraged to submit comments that suggest alternative 
rules that accomplish the stated purpose of the statute and minimize 
the impact on small entities. Specifically, the public in encouraged to 
address:
    <bullet> What information relating to prior coverage, preexisting 
condition exclusion, health status, waiting periods and similar issues 
do employers, plans and issuers currently rely on in maintaining health 
care coverage systems?
    <bullet> What are the estimated costs of complying with the 
statute's requirements on certification of periods of prior creditable 
coverage?
    <bullet> How many small issuers offer products that may be subject 
to the regulations? Is there an anticipated effect on these small 
companies' competitiveness due to the regulations?
    <bullet> To what extent do group health plans currently use service 
providers to fulfill the administrative obligations, including 
reporting and disclosure, previously imposed by ERISA? To what extent 
would group health plans also use service providers to comply with this 
regulation's certification requirements?

I. Executive Order 12866, the Unfunded Mandates Reform Act and the 
Small Business Regulatory Enforcement Fairness Act of 1995

    These rules have been determined to be a significant regulatory 
action under Section 3(f) of Executive Order 12866. The following 
analysis is consistent with Section 6(a)(3)(C) of the Order.
    These rules are not subject to the Unfunded Mandates Reform Act of 
1995 (Pub. L. 104-4), because they are interim final rules. However, 
consistent with the policy embodied in the Unfunded Mandates Reform 
Act, the regulation has been designed to be the least burdensome 
alternative for state, local and tribal governments and the private 
sector, while achieving the objectives of HIPAA. In addition, the 
following analysis provides information concerning the effects of the 
regulation on state, local, and tribal governments and the private 
sector.
    Throughout the regulatory process, HHS met and consulted with 
representatives of affected state, local and tribal governments. These 
groups include the National Association of Insurance Commissioners, the 
National Governors' Association, the National Council for State 
Legislatures, the Indian Health Service, and the American Public 
Welfare Association. HHS also provided technical advice regarding its 
interpretation of the statute to state insurance commissioners and 
state legislatures at their request. Generally, these groups have 
concerns regarding:
    <bullet> The statute's preemption of state laws that would prevent 
the implementation of statutory provisions;
    <bullet> The burden on issuers and plans to implement the statutory 
provisions, especially with regard to certification of prior creditable 
coverage; and
    <bullet> State's desires to have considerable flexibility in 
complying with the statue, and continuing their traditional role as 
regulators of insurance.
    After serious consideration of these concerns, HHS narrowly 
interpreted the preemption of state law, taking the least burdensome 
alternatives provided states considerable flexibility in complying with 
the statute, and recognized the limited authority of federal agencies 
in the regulation of health insurance.
    The Administrator of the Office of Information and Regulatory 
Affairs of the Office of Management and Budget has determined that this 
is a major rule for purposes of the Small Business Regulatory 
Enforcement Fairness Act of 1996 (5 U.S.C. Section 801 et seq.).
    Set forth below is a discussion regarding the impact of the statute 
and a discussion of the costs and benefits of the regulations 
implementing the statute.

J. Extensions of Coverage Under the Statute

    These regulations implement certain provisions of HIPAA. The 
statute was enacted to, among other things, ``improve portability and 
continuity of health care coverage in the group and individual 
markets,'' as stated in the Conference Report. The statute accomplishes 
these goals by instituting reforms in the group and individual 
insurance markets, including provisions limiting the use of pre-
existing condition exclusions, and requiring guaranteed access to 
health care coverage and guaranteed renewability for certain groups and 
individuals. There are also non-discrimination provisions and special 
enrollment rights in the statute.
    The pre-existing condition exclusion periods that HIPAA restricts 
are widespread. According to the Bureau of Labor Statistics (BLS), 46 
percent of participants in private-sector, employer-sponsored health 
plans are in plans with pre-existing condition exclusions (1993-1994 
data). The same is true of 41 percent of participants in state and 
local government employer-sponsored plans (1994 data.)
    The duration of exclusion periods varies from plan to plan. Based 
on Peat Marwick's 1995 employer survey, an estimated 57 percent of 
participants in plans with exclusions are in plans with exclusions that 
last 12 months. The remainder are distributed as follows: 13 percent in 
plans with 3-month exclusions, 22 percent in plans with 6-month 
exclusions, 7 percent in plans with 9-month exclusions, and 1 percent 
in plans with exclusions that last more than 12 months.
    HIPAA's portability provisions resemble provisions of many current 
state laws. Importantly, however, HIPAA extends these provisions of 
self-insured ERISA plans which federal law shields from state 
regulation. In addition, it sets a minimum uniform threshold for 
insured group plans and individual markets across all states.
    HIPAA's portability provisions will result in both direct and 
social costs and benefits.
    In general, direct costs and benefits arise directly from the 
application of HIPAA's insurance portability and access provisions. 
Direct costs and benefits are often best understood as transfers of 
resources among economic agents, which do not necessarily represent 
changes in overall social welfare. Stated differently, they represent 
changes in how the economic pie is divided (in this case, mainly with 
respect to health care), and not changes in the size of the pie. Direct 
costs and benefits are often easier to quantify than social costs, as 
they are often directly observable as transactions in the marketplace.
    With respect to HIPAA's portability and access provisions, direct 
costs and benefits arise from the extension of insurance coverage to 
individuals and conditions not otherwise covered. Direct benefits to 
individuals include the payment of individuals' claims for those 
services and conditions. Direct costs of individuals include the 
premiums associated with that coverage. Some available estimates of 
these direct costs and benefits are presented below.
    Social costs and benefits, in contrast, do result in net changes in 
overall social welfare. Social benefits generally reflect social 
welfare gains that arise in

[[Page 16909]]

connection with statutory or regulatory interventions that remedy 
market failure. Likewise, social costs generally reflect welfare losses 
arising from interventions in otherwise efficient markets. Social 
welfare changes often play out through a complex set of behavorial 
responses to interventions. They are more difficult to quantify than 
direct costs and benefits.
    With respect to HIPAA, social welfare changes generally arise 
indirectly from HIPAA's portability and access provisions. They reflect 
dynamic behavioral responses to HIPAA's portability and access 
provisions. Expected social benefits, primarily improved access to 
health insurance and also improved job mobility, cannot be meaningfully 
quantified. Expected social costs, which could include erosions in 
coverage arising from direct premium costs, are expected to be small. 
Since no measures of HIPAA's many social welfare effects are available, 
a mostly qualitative discussion of major effects is offered below. A 
more quantitative discussion of direct costs and benefits follows 
later.
1. Social Welfare Effects of HIPAA's Portability and Access Provisions
    The primary direct benefits of the law are improved access to 
insurance coverage, and more comprehensive coverage, through employers 
and in the individual insurance market. Increased access and 
comprehensiveness helps protect individuals from catastrophic expenses.
    There are a number of social benefits associated with improved 
access:
    <bullet> It reduces individual's risk of incurring large out-of-
pocket costs;
    <bullet> It is often more cost effective to provide timely 
preventive and remedial care than to delay care until conditions 
worsen. Therefore, to the extent that individuals receive more timely 
and appropriate care as a result of HIPAA, over time, the long-term, 
cumulative cost of their care may be lower. This has the potential to 
reduce premiums for all individuals within a risk pool, not just the 
individuals directly affected by HIPAA. Similarly, the Medicare program 
may benefit from reduced expenditures because more individuals who 
become newly entitled to Medicare will have had insurance coverage 
during the course of their working life or through the individual 
insurance market.
    <bullet> To the extent that more timely care results in improved 
health, worker attendance and productivity might improve.
    <bullet> HIPAA's portability provisions likewise help individuals 
transitioning from state and federal welfare programs to paid work. 
Individuals with health conditions can offset their new health plan's 
preexisting condition exclusions against prior coverage from any 
source, including Medicaid.
    <bullet> Reductions in job benefit both individuals and the economy 
at large. Increased mobility can boost individual workers' career 
opportunities. Increased mobility also strengthens U.S. economic 
efficiency and competitiveness;
    <bullet> HIPAA's federal minimum standards for small group and 
individual access to insurance coverage may improve the functioning of 
small group and individual markets. The standards will alleviate 
disruptions that might otherwise arise when ``riskier'' groups and 
individuals are denied or dropped from coverage.
    <bullet> To the extent that HIPAA results, on net, in more 
insurance payment for otherwise uncompensated care, cost-shifting and 
associated inefficiencies in health care markets could be reduced.
    HIPAA's group-to-individual portability provisions may provide a 
benefit for employees who move to jobs without health coverage. Some 
small employers that do not currently offer health care coverage may be 
able to do so more easily under HIPAA's guaranteed issue provisions. 
This may help level the playing for small employers to compete with 
larger ones in recruiting employees. While premium increases resulting 
from HIPAA may reduce the affordability of coverage for some employers, 
this effect is expected to be small, as noted below.
    HIPAA also requires that issuers offering health insurance coverage 
in the individual market renew coverage for all individuals purchasing 
health insurance coverage in the individual market, not only eligible 
individuals. However, when an eligible individual elects family 
coverage, the issuer may apply a pre-existing condition exclusion, 
under applicable State law, to any of the individual's family members 
who are not eligible individuals under the statute.
    The group-to-group portability regulation is likely to benefit 
individuals who maintain employer-sponsored health benefit coverage and 
change jobs or health plans, the dependents of such individuals, and 
workers who face ``job lock'' due to health coverage concerns.
    Under HIPAA, health insurance coverage provided under a COBRA 
continuation policy qualifies as group health coverage. This 
distinction is particularly important for individuals moving from the 
group to the individual market, or from one group health plan to 
another, since electing this coverage would enable these individuals to 
maintain continuous creditable coverage. In addition, individuals 
seeking coverage in the individual market must elect and exhaust COBRA 
continuation coverage in order to qualify as an ``eligible individual'' 
in the individual market.
    Thus, the statute provide an additional incentive for those 
individuals who lose coverage when they change jobs to elect COBRA 
continuation coverage in order to avoid a break in coverage. The 
statute also provides an incentive for those individuals who are 
seeking coverage in the individual market without a preexisting 
condition exclusion. Consequently, we expect more individuals to elect 
COBRA continuation coverage.
    Absent HIPAA's group-to-group portability standards, individuals 
with employer-sponsored health coverage who have preexisting medical 
conditions and who change health plans could be denied coverage for 
their conditions. In that case, individuals would have to pay out of 
pocket for necessary medial services, or forgo some services, thereby 
risking adverse health consequences and higher future costs. Other 
individuals with preexisting medical conditions who change health plans 
and face preexisting condition exclusions may pay for COBRA 
continuation coverage in addition to paying for their new health plan 
to ensure coverage for the preexisting condition. Other workers who are 
concerned about losing health care coverage would stay in their jobs or 
turn down job offers.
    According to the U.S. General Accounting Office, over 20 million 
individuals changed jobs in 1993 (General Accounting Office, Report 
HEHS-95-257, ``Health Insurance Portability: Reform Could Ensure 
Continued Coverage for up to 25 Million Americans,'' September 1995, 
pg. 7). Approximately 12 million of these workers had employer-
sponsored health care coverage. Additionally, nearly 7 million non-
working dependents received employer-sponsored health care coverage 
through these job changers. According to GAO, many of these 20 million 
could benefit from the regulation's requirement that prior health care 
coverage be credited against a new health plan's preexisting condition 
exclusion period. GAO concludes that the statute will allow 
approximately 9 million job changers (who have at least 12 months of 
prior creditable coverage), with 5 million dependents, to change jobs 
without the

[[Page 16910]]

risk of facing any preexisting condition exclusions. Another 3 million 
workers who change jobs (who have some smaller amount of prior 
coverage), with 2 million dependents, would face reduced waiting 
periods before receiving full coverage.
    The number of workers and dependents actually gaining coverage for 
a preexisting condition due to credit for prior coverage following a 
job change under HIPAA will be smaller than this, however. GAO's 
estimates of people who could benefit include all job changers with 
prior coverage and their dependents, irrespective of whether their new 
employer offers a plan, whether their new plan imposed a preexisting 
condition exclusion period, and whether they actually suffer from a 
preexisting condition. Accounting for these narrower criteria, as 
discussed below, CBO estimates that 100,000 will actually receive 
additional coverage under HIPAA's credit for prior coverage at any 
point in time.
    In addition, employers, especially smaller employers, that offer 
health care benefits to their employees often change health insurance 
issuers, exposing workers or their dependents with preexisting medical 
conditions to gaps in coverage. Small employers generally change 
insurance issuers every 3 to 4 years (Senate Committee on Labor and 
Human Resources, Report 104-156, Oct. 12, 1995, pg. 4). The provisions 
of the statute that allow crediting of prior coverage should reduce the 
likelihood of gaps in coverage.
    One of the benefits of HIPAA to individuals is that it alleviates 
``job lock.'' That is, employees who have stayed in a particular job in 
order to continue health care coverage can now change to a job that the 
person might not otherwise have taken because he or she (or a 
dependent) would have been subject to a pre-existing condition 
exclusion; or the person can seek coverage in the individual insurance 
market as a result of HIPAA's provisions requiring guaranteed issue for 
individuals coming from the group market. According to the GAO, there 
are one to four million Americans ``who at some time have been 
unwilling to leave their jobs because of concerns about losing their 
health care coverage'' (Health Insurance Portability: Reform Could 
Ensure Continued Coverage for Up to 25 Million Americans, HEHS-95-257, 
September 1995). The GAO notes that ``surveys have found that between 
11 and 30 percent of individuals report that they or a family member 
have remained in a job at some time because they did not want to lose 
health care coverage.'' Among those individuals, twenty percent stated 
that pre-existing conditions exclusions constituted the basis for their 
reluctance to change jobs.
    These figures, reflecting individuals stated intentions, may not 
accurately predict their behavior under different circumstances, 
however. Moreover, HIPAA's portability provisions will alleviate only 
some causes of ``job lock''--for example, employees might still be 
somewhat impeded from taking jobs where no coverage is offered. 
Eligible individuals might benefit in this case from HIPAA's group-to-
individual portability provisions, but would have to pay the premium 
themselves. Therefore, many individuals who report job lock will not 
necessarily change jobs as a result of HIPAA.
    There also appears to be a difference by age categories of the 
extent of job lock. The Health and Retirement Study (HRS), conducted by 
the University of Michigan's Institute for Social Research, which 
provides an emerging portrait of Americans age 51 through 61 and their 
spouses, found that job flexibility is a key issue for this age group. 
``Almost three-quarters of HRS respondents would prefer to phase down 
from full-time work to part-time work when they retire, in sharp 
contrast to actual behavior, where most people who retire leave the 
workforce entirely. About one-third of the people who would not look 
for another job are victims of `job lock,' unable to leave because they 
might give up valuable pensions or health insurance benefits if they 
switched employers'' (HRS National Institute on Aging Press Release, 
June 17, 1993).
    Empirical evidence for job lock is mixed. Buchmueller and Valletta 
found strong evidence of job lock among women but weak evidence among 
men (``The Effects of Employer-provided Health Insurance on Worker 
Mobility,'' Industrial and Labor Relations Review, volume 49, number 3, 
April 1996). Monheit and Cooper conclude that the magnitude and 
importance of job lock, which some studies report as causing a 20 to 40 
percent reduction in mobility, is not as great as generally thought 
(``Health Insurance and Job Mobility: Theory and Evidence,'' Industrial 
and Labor Relations Review, volume 48, number 1, October 1994). Kapur 
found that job lock does not have a significant effect on job mobility 
(``The Impact of Pre-existing Health Conditions on Job Mobility: A 
Measure of Job Lock,'' WP-95-25, Institute for Policy Research), while 
Gruber and Madrian found that COBRA continuation provisions, and 
similar state laws (allowing individuals to continue coverage through 
their employer group health plan for a specified period), have led to a 
significant increase in job mobility (``Health Insurance and Job 
Mobility: the Effects of Public Policy on Job-lock,'' Industrial and 
Labor Relations Review, volume 48, number 1, October 1994).
    CBO does not quantify potential relief from ``job lock,'' which is 
a social, rather than a direct, benefit of HIPAA. Because people freed 
from job lock are going from one type of insurance to another (moving 
to a different group health plan or to an individual insurance policy 
under HIPAA portability), CBO also views freedom from job lock as 
consisting of ``insured expenses * * * transferred among different 
insurers * * * [that] * * * are not * * * direct costs.''
    The majority of evidence indicates that job lock is a concern for 
many workers. HIPAA will address this concern, though the number of 
workers who will gain an advantage is unclear and how the value of the 
benefit can be measured is also unclear.
    As the forgoing discussion illustrates, HIPAA's social benefits are 
expected to be far ranging, but they cannot be meaningfully quantified.
    HIPAA might also pose social costs. In particular, increases in 
premiums under HIPAA's portability and access provisions could erode 
coverage. These costs are expected to be small, however, particularly 
in the group market where premium increases are estimated to be very 
small relative to the overall market.
    In summary, HIPAA's portability and access provisions are expected 
to result in a number of largely unquantifiable social benefits. These 
include greater continuity of coverage, improved access to health care 
and possible corollary improvements in health and productivity, 
improved stability and efficiency in insurance health care markets, 
eased movement from public assistance to work, and gains in job 
mobility that are favorable to individual careers and to U.S. 
competitiveness.
2. Direct Costs and Benefits of HIPAA's Portability and Access 
Provisions
    HIPAA's portability and access provisions impose direct costs and 
provide direct benefits to a broad range of entities, as well as to 
individual citizens. Costs will be incurred by employers, group plans, 
insurance companies and managed care plans (``issuers''); states, in 
their capacity as regulators, and states and localities as entities 
providing health care coverage for their employees, retirees and 
dependents; the federal government as regulator and as the source of 
health care coverage for employees, annuitants and dependents, and for 
others through programs such as Medicaid and

[[Page 16911]]

Medicare. Benefits will accrue to individuals and to small employers 
whose access to comprehensive insurance is improved.
    A number of studies have evaluated the direct economic impact of 
the law. The CBO found that ``to the extent that states have not 
already implemented similar rules, these changes would clarify the 
insurance situation and possibly reduce gaps in coverage for many 
people.''
    The CBO notes that because HIPAA does not impose limits on premiums 
issuers may charge, insurance coverage, though available, may be 
expensive. Consequently, CBO observes that the law would ``make 
insurance more portable for some people, [but] it would not 
dramatically increase the availability of insurance in general.'' The 
controversial question of the extent to which there will be increases 
in issuer premiums is discussed more extensively below.
    CBO prepared estimates of the direct effects of the provisions of 
the legislation included in these regulations (Letter to the Honorable 
Bill Archer, August 1, 1996; notes are also from earlier CBO cost 
estimates; see table below). The direct cost estimates can reasonably 
be read as representing direct benefits as well, since they generally 
reflect transfers from a pre-HIPAA payer to a post-HIPAA payer. Certain 
medical expenses that individuals would pay out of pocket absent HIPAA 
will be paid by insurance programs under HIPAA. In CBO's estimates, 
this is reflected as a similar transfer in responsibility for payment 
from individuals to insurance programs. However, the actual transfer 
would be more complex. For example, to pay the additional claims, 
insurers must collect additional premiums, which in turn will be paid 
by the individuals gaining greater coverage and (in most cases) by 
other covered individuals, or by their employers. CBO's estimates 
represent gross costs to plans and gross benefits to individuals, and 
do not account for these complexities.

                                CBO Cost Estimates and Number of People Affected                                
----------------------------------------------------------------------------------------------------------------
                                         Yearly cost (direct        Number of people                            
              Provision                cost to private sector)          affected         Other effects; comments
----------------------------------------------------------------------------------------------------------------
Group: Limiting Length of Pre-         $50 million in first     300,000 people ``would   Assumes ``surge'' in   
 Existing Condition Exclusions to 12    year (1997); $200        gain coverage'' at any   claims costs; state   
 Months.                                million per year in      point in time, or 0.3%   laws taken into       
                                        subsequent years.        of people with private   account.              
                                                                 employment-based                               
                                                                 coverage.                                      
Group: Creditable Coverage Reducing    $25 million in first     100,000 people ``would   Small No. of people    
 Pre-Ex.                                year; $100 million per   receive added            affected reflects     
                                        year thereafter.         coverage'' at any        ``restrictive         
                                                                 point in time.           eligibility           
                                                                                          criteria''.           
Group: Above two combined............  $300 million...........                                                  
(1)Comments: about .2% of total                                                                                 
 premiums in group and employer-                                                                                
 sponsored market; but may be                                                                                   
 overstated because HMOs, now the                                                                               
 dominant option, often do not use                                                                              
 pre-ex exclusions.                                                                                             
Individual (group-to-individual        $50 million............  45,000 people covered    Provisions would apply 
 portability, no pre-existing                                    by end of first year.    in states that        
 condition exclusion, no denial                                                           currently have 5.4    
 because of health condition,                                                             million of estimated  
 guaranteed renewal). First year                                                          13.4 million people in
 estimates.                                                                               indiv. market (but see
                                                                                          analyses below).      
Individual: Subsequent years.........  $200 million by fifth    ``In about four years,   Level of premiums to be
                                        year.                    the number of people     charged is unknown;   
                                                                 covered; would plateau   states may limit      
                                                                 at around 150,000''.     allowable premiums,   
                                                                                          but such limits may   
                                                                                          impose indirect costs.
----------------------------------------------------------------------------------------------------------------

    Virtually all of the insurance market reform provisions of HIPAA 
that are implemented through these regulations have the potential to 
increase premiums in the group market. Group plans may have to bear 
higher costs because of the statutory limits on pre-existing condition 
exclusions and the creditable coverage provisions reducing the 
application of permissible pre-existing condition exclusions. CBO has 
estimated the total costs of these two provisions at $300 million 
annually after full implementation, or 0.2% of total premiums in the 
group market. This reflects coverage for services which would have been 
excluded under current law due to pre-existing condition exclusions in 
insurance contracts, but which would be covered under HIPAA due to 
HIPAA's 12-months cap on exclusions and its provisions requiring credit 
for prior coverage.
    CBO's $300 million cost figure reflects only the costs of the 
statute's limits on pre-existing conditions exclusion, and its prior 
creditable coverage provisions. It does not include the administrative 
costs to plans and issuers of the HIPAA's certification requirement, 
which the Department of Labor has measured in its Paperwork Reduction 
Act analysis below. Similarly, CBO's $300 million figure does not 
include any other increased premium costs that might be associated with 
the statute's health status nondiscrimination or guaranteed 
renewability provisions. CBO's figure does try to estimate (a) how many 
people would benefit from the statute's limits on preexisting condition 
exclusions, and its prior creditable coverage provision, and (b) the 
average cost to insurers of the extension of coverage to those 
individuals.
    Preexisting condition exclusion limitation: CBO derived its $300 
million figure by estimating that approximately 300,000 people with 
private employment-based coverage would gain coverage under the 
statute's preexisting condition exclusion limitation provision, at a 
direct private sector cost of $200 million per year. CBO adjusted this 
estimate to exclude people who reported being limited by a preexisting 
condition restriction, but who also had secondary health coverage to 
pick up the cost of their preexisting condition. CBO reasoned that 
under these circumstances, the preexisting condition exclusion 
limitation would not raise the aggregate costs imposed on employment-
based plans. CBO likewise adjusted its estimate to reflect the 
existence of state laws which limited preexisting condition exclusion 
limitations to one year or less and require that previous coverage be 
credited against those exclusions. These state laws generally apply to 
group plans of 50 or fewer employees, and do

[[Page 16912]]

not include self-funded health benefit plans subject to ERISA rather 
than state laws. Since plans covered by such state laws would not have 
to change their provisions as a result of HIPAA, CBO lowered its 
initial estimate of the people affected by the bill.
    Crediting Prior Coverage: CBO's $300 million figure also includes 
an estimate that 100,000 people, at a private sector cost of about $100 
million per year, would receive some added coverage as a result of 
HIPAA's prior creditable coverage provision.
    CBO reports that these estimates are subject to considerable 
uncertainty for several reasons. First, they are based on individuals' 
responses to surveys, which should be treated with caution. Likewise, 
unforeseen changes in the health insurance market, such as changes in 
medical costs or the growth of managed care plans, could raise or lower 
the direct costs of the law. Increases in medical costs would obviously 
raise the costs, while the expansion of HMO penetration in the market 
would tend to reduce the law's effect, since HMOs generally do not use 
preexisting condition exclusions.
    CBO also reports that in particular, distribution of the costs 
these provisions would be uneven across health plans. CBO notes that 
``[o]nly plans that currently use pre-existing condition exclusions of 
more than 12 months would face the $200 million direct costs of the 
statute's exclusion limitation.'' Data from a Peat Marwick survey used 
by CBO indicate that 2.5% of employees are in such plans. Consequently, 
``the costs to health plans that use long preexisting condition 
exclusions would be about 4.5% of their premium costs.'' Likewise, only 
those plans that use preexisting condition exclusions would face the 
$100 million direct cost of the mandate to credit prior coverage 
against the preexisting conditions exclusion. CBO reports that ``almost 
half of employees are in such plans--implying that the plans directly 
affected by this mandate would have direct costs equal to about one-
tenth of one percent of their premiums'' absent the statute.
    The increased costs may be shared by insurers, plans, and insured 
individuals. Additionally, costs also may be borne directly by plans 
that an issuer ``experience rates,'' i.e. the insurer determines rates 
according to the utilization of the group being insured. Costs may also 
be borne by others insured through an issuer that uses some form of 
community rating, which spreads risk over a greater number of ``insured 
lives'' beyond the particular group that is the source of the 
additional costs. To a certain extent, a group may have a choice in the 
degree of burden: if the group knows that its members incur lower costs 
than the average of the issuer's pool, the group can avoid a community-
rated pool by becoming self-insured.
    There is also the possibility that group market premiums may 
increase as a result of the HIPAA reforms in the individual market if 
insurers spread the costs of claims in the individual market across a 
pool that includes group members. HIPAA expressly provides for this 
possibility as one of the elements of an acceptable state alternative 
mechanism. (Such issues relating to the individual market are discussed 
in more detail below.)
    Assuming that the CBO is correct in projecting that the premium 
effect translates into 0.2 percent of total premiums in the group 
market, a minimal premium effect is likely.
    CBO did not quantify the cost of nondiscrimination or special 
enrollment provisions.
    With respect to nondiscrimination, approximately 135,000 workers 
reported in 1993 that they were excluded from their employer's health 
plan because of their health, according to DOL tabulations of the April 
1993 Current Population Survey. In general, HIPAA would require plans 
to offer benefits to such individuals.
    With respect to special enrollments, HIPAA provides that 
individuals, under certain conditions, are permitted to enroll for 
health coverage on the same terms as new participants, rather than as 
late enrollees. The conditions triggering eligibility for special 
enrollment generally include events in which an individual loses 
coverage (such as when a spouse changes jobs when couples legally 
separate or divorce) or joins a family that is eligible for coverage 
(through marriage, birth, or adoption).
    Special enrollment requirements benefit individuals. Absent this 
provision, eligible individuals could be subject to pre-existing 
conditions exclusion periods of up to 18 months, and therefore would 
might need 18 months of prior creditable coverage to fully offset a 
preexisting condition exclusion period. Under the provision, eligible 
individuals' exclusion periods are limited to 12 months. This special 
enrollment provision also permits eligible individuals to enroll 
immediately in plans which otherwise prohibit late enrollment, or which 
allow late enrollments only during annual open enrollment periods.
    Considering some of the major groups that could benefit, the 
Departments estimate that 734,000 families would gain eligibility for 
special enrollments due to marriage, as would 701,000 due to births, 
and 292,000 due to job changes in the family. These estimates, based on 
the Survey of Income and Program Participation, reflect an annual count 
of such events following which the relevant spouse or new born was 
uninsured, or covered under an individual policy or Medicaid.
    Special enrollments may result in a marginal increase in aggregate 
premiums and claims paid, but no change in average premium levels for 
any one individual, since eligible individuals are not likely to have 
any higher health care costs than the average new health plan 
participant.
    In summary, HIPAA's portability and access provisions will result 
in a number of direct costs and benefits. These direct costs represent 
transfers among parties and not changes in overall social welfare. CBO 
estimates that HIPAA's group portability provisions will result in $300 
million of additional annual direct costs to insurance programs, which 
in turn represents a direct benefit of $300 million in added coverage 
for individuals. Additional direct costs and benefits will arise from 
similar extensions of coverage under HIPAA's group-to-individual 
portability, special enrollment, and nondiscrimination provisions. 
Various estimates of the costs and benefits of the group-to-individual 
provisions are offered below. Costs and benefits of the special 
enrollment and nondiscrimination provisions have not been quantified.

3. Affected Market Segments

(1). Impact on State, Local and Tribal Governments
    The statute establishes federal standards and allows for federal 
enforcement in an area that has traditionally been the domain of the 
states, the regulation of insurance. However, the statute also permits 
states to use alternative, state-specific mechanisms to achieve greater 
portability and continuity in a manner similar to the federal 
standards. Many states have undertaken insurance reforms similar to the 
HIPAA provisions and are likely to seek approval for the continuation 
of these alternative mechanisms. The statute provides that enforcement 
of the requirements of the law will be the responsibility of the states 
(for those states implementing alternative mechanisms as well as for 
those states implementing the federal standards), unless a state is 
unwilling or unable to enforce the law. Only in the latter case of 
unwillingness or inability to enforce the law will the federal

[[Page 16913]]

government implement and enforce the law in a given state. It is highly 
unlikely that there will be any instance of the federal government 
assuming such a role, with the exception perhaps of the territories. 
There is no federal financial assistance or resources to implement 
these provisions.
    The CBO has generally determined that there will be a negligible 
impact on these governmental entities, even in the event that, in their 
capacity as sponsor of employee health care coverage, they choose not 
to ``opt out'' of having certain provisions of the statute apply to 
them. HIPAA provides that states and localities that self-insure their 
health care coverage for employees, are permitted, under the statute, 
to ``opt out'' of the provisions of the law affecting them with respect 
to rules governing pre-existing condition limitations. Some entities 
that have the option available will ``opt out.'' However, this does not 
relieve them of the responsibility of providing certifications of 
creditable coverage for their covered individuals. HIPAA does not 
preempt state and local government collective bargaining laws. If there 
were no opt-out entities, CBO projects that state and local governments 
would see an increase in health care costs of less than $50 million, or 
0.1% of the $40 billion annually in state and local total health 
insurance expenditures.
    Those who would benefit from the imposition of HIPAA requirements 
on state and local governments are individuals who are subject to a 
pre-existing condition exclusion that would have been shortened in 
length by HIPAA either under the 12-month limit or the crediting or 
prior creditable coverage provision. As the CBO points out, this 
benefit (for some) is coupled with a cost to (all covered) individuals 
because it is assumed that states and localities would pass the cost 
off to their employees through reduced compensation or benefits.
    According to CBO, the impact of the law on the states in their 
capacity as regulators enforcing new insurance provision is marginal. 
For states that have been enacting insurance reform measures in the 
small group and individual markets, it could be argued that HIPAA 
provides a benefit to the extent that the introduction of federal 
standards facilitates the states' ability to continue insurance reforms 
in these markets. According to the Intergovernmental Health Policy 
Project (IHPP), in a report dated June of 1996, all but two states had 
enacted some type of small group market reform, and 35 states had 
enacted some type of individual insurance market reform. The presence 
of a federal standard that may be viewed as constituting a ``floor'' of 
requirements imposed on issuers in these two markets may also benefit 
the states.
    The individual insurance market has traditionally been regulated by 
the states, and Congress intended that, to the maximum extent possible, 
the states should continue this regulatory role. To this end, the law 
provides states with these options: (1) implement an alternative, 
state-specific mechanism to ensure access to individual health care 
coverage; (2) adopt and administer the federal standards of HIPAA; or 
(3) allow the federal government to administer the law.
    In devising the first option, the implementation of an alternative 
mechanism, Congress afforded states a good deal of flexibility in 
establishing an alternative mechanism. At least 30 states are expected 
to implement alternative mechanism, each unique to the state's 
demographics and market conditions. States are encouraged to explore 
innovative options and intend to afford states as much flexibility as 
possible in the design of their alternative mechanisms. Throughout the 
process of reviewing proposed alternative mechanisms, the states' need 
for flexibility must be balanced with the rights of the individuals 
afforded protection under the law.
    Our main concern is that the primary goal of HIPAA be achieve: that 
eligible individuals are guaranteed coverage in the individual market, 
to the extent that policies are available, without a preexisting 
condition exclusion period. HHS intends to review states' mechanisms 
with this goal in mind; so the information presented should present a 
clear picture of the mechanism's impact on eligible individuals. The 
information requested in these regulations (section 148.126(h)) closely 
parallels the statutory provisions. While such information collection 
requirements may impose a burden on each state that chooses to 
implement an alternative mechanism, such information is necessary in 
order to effectively evaluate the mechanism and ensure that the 
mechanism will provide eligible individuals the protection guaranteed 
by the law.
    The states are unlikely to choose the option whereby the Secretary 
(HCFA) implements and enforces HIPAA in the states. Eight states, 
however, may choose the ``federal fall-back'' option of incorporating 
the HIPAA standards into state law rather than developing an 
alternative mechanism.
    The statutes provides that a state is presumed to be implementing 
an acceptable alternative mechanism as of January 1, 1998, unless the 
Secretary of HHS notifies a state of her disapproval of the mechanism 
by July 1, 1997. In states where the legislature does not meet in a 
regular session between August 21, 1996 and August 20, 1997, the state 
is presumed to be implementing an acceptable alternative mechanism as 
of July 1, 1998. To our knowledge, only Kentucky qualifies for this 
exception. The statute also provides an extension. Before making an 
initial determination, HHS intend to make every effort to consult with 
the appropriate state officials. After consultation with appropriate 
state officials, should there still be cause for disapproval, HHS will 
allow the state a reasonable opportunity to revise the mechanism or 
submit a new mechanism. Throughout this process, HHS may require 
further information from state officials regarding particular aspects 
of their insurance market reform. While such requests for information 
may also impose an additional burden on the state, this information 
will be necessary to insure that the mechanism will provide the 
protections guaranteed to eligible individuals under the law.
    As required by law, the Secretary of HHS will review each 
alternative mechanism every three years. In this respect, the 
regulation adheres closely to the statutory burden and merely clarified 
that resubmission is required on every three-year anniversary of the 
last submission date. HHS has also provided a process for review of 
future mechanisms, should a state may wish to revise an existing 
mechanism or propose a new mechanism.
    In addition to implementing an alternative mechanism, a state may 
choose to adopt and administer the federal statutory provisions. Our 
regulations in this regard do not differ from the statutory provisions. 
As noted above, it is likely that up to eight states would choose this 
option.
    Finally, a state may choose to allow the federal government to 
administer the federal statutory provisions in the state. Although this 
is a possibility contemplated in the statute, it is unlikely that any 
state would choose this option. However, the impact of the regulations 
that implement this option is discussed below.
    In states that have an acceptable alternative mechanism for 
ensuring access to individual insurance or health care coverage, the 
implementation of laws and determination of compliance with those laws 
is exclusively a state matter. For other states, HIPAA gives the 
Secretary authority to issue

[[Page 16914]]

regulations to carry out the implementation and enforcement of HIPAA 
provisions for the states that choose the ``federal fallback'' option 
(using federal standards), and for states in which the federal 
government will directly administer the HIPAA provisions. These 
regulations specify the following:
    <bullet> Documentation that must be submitted to the state (federal 
default) or to HCFA (direct regulation by the federal government) 
demonstrating compliance with the statute;
    <bullet> The manner in which an insurer markets individual 
policies;
    <bullet> The procedure and time frames the issuer follows in 
determining whether someone is an eligible individual, and the 
effective date of the individual's coverage;
    <bullet> The procedure to follow for a request to limit enrollment 
in the case of an HMO's or insurer's capacity limitations (network 
capacity or financial capacity); and
    <bullet> The procedure for determining whether the benefit packages 
offered in the individual market are consistent with statutory 
requirements.
    In states electing the federal fall-back approach, the state 
determines the level of documentation required to establish compliance 
with the HIPAA provisions. The Departments do not know the extent of 
burden states will impose on plans as a result of HIPAA. Although there 
is not likely to be direct federal enforcement in any state, in those 
states in which HCFA does administer the law, issuers have 90 days 
after July 1, 1997, to provide documentation concerning individual 
policy forms the issuer already markets; and 90 days prior to the 
beginning of the calendar year prior to marketing a new policy form. 
With regard to these time frames, the 90-day period should not be 
burdensome. Much of the information required to be submitted regarding 
the policy forms in the individual market is material the issuer will 
generally have filed with a state insurance commissioner (``information 
on all products offered in the individual market''; marketing material, 
often submitted to states on a ``file and use,'' or informational 
basis). For such information the submission to the federal government 
is burdensome only in that it is duplicative of material given to the 
state. The HIPAA-specific materials are generally not duplicative and 
constitute a burden on issuers to provide HCFA with the following 
information:
    <bullet> An explanation of how the issuer is complying with the 
provisions of HIPAA, including how the issuer will inform eligible 
individuals of available policy forms;
    <bullet> Premium volumes or actuarial values (depending on which 
election is made regarding compliance with rules on the type of policy 
to be offered); and
    <bullet> A description of the risk spreading/financial 
subsidization mechanism to be used for individual policy forms.
    The last two items represent requirements of the statute, while the 
first item is necessary to ensure that there is effective 
implementation of the statute. For the first item, issuers will have to 
become familiar with the provisions of HIPAA in order to comply with 
the documentation requirement, which can be a considerable burden, but 
the other information requirements should not be burdensome. One way in 
which these regulations lessen the burden for plans electing to offer 
``representative coverage'' rather than the most popular policy forms 
is by not prescribing the method of determining the actuarial value of 
representative coverage. Issuers may make their own determinations of 
actuarial value and present them to HCFA for verification.
(2). Impact of the Law in Different States
    The impact of the law on individuals, employers, group plans, and 
issuers may vary somewhat from state to state. Many state reforms 
resemble HIPAA's portability provisions, often meeting or exceeding 
particular HIPAA standards. The CBO notes that it ``lowered its initial 
estimate of the number of people affected by the bill'' in recognition 
of such state reforms. Where state laws resembling HIPAA exist, the 
marginal impact of HIPAA is reduced.
    The degree to which a state's reforms lessen the impact of HIPAA's 
portability provisions depends on the degree to which the state's 
requirements exceed these provisions, and on what proportion of insured 
individuals in the state are covered by the state's reforms. In 
general, individuals not covered by state reforms are those enrolled in 
programs for which such state reforms are preempted by federal law. 
These include individuals enrolled in federal programs such as Medicare 
and the Federal Employees Health Benefits Program or in self-insured 
ERISA plans. Individuals enrolled in ERISA plans that are not self 
insured are covered by such state reforms that are specifically saved 
from preemption by HIPAA.
    According to a study by Jacob Klerman of RAND, New Estimates of the 
Effect of Kassebaum-Kennedy's Group-to-Individual Conversion Provision 
on Premiums for Individual Health Insurance (1996), 42 states have 
guaranteed issue rules in the individual market or a high-risk pool 
that could qualify the states as meeting the alternative mechanism 
requirements of HIPAA. This is consistent with other information the 
Departments have received to the effect that only eight states may 
adopt the federal HIPAA standards (to be administered by the states). 
(The individual market issues are discussed in greater detail below.)
    An analysis prepared by staff of the Pension and Welfare Benefits 
Administration (PWBA) of the Department of Labor found, for the group 
market, that 41 states have small group guaranteed issue; of that 
number five do not conform with (or are not more generous than) HIPAA 
rules on guaranteed issue, and 21 define a small group differently from 
HIPAA by starting the small group category at three individuals (rather 
than HIPAA's two)--the situation in 11 states--or by extending the 
provisions to groups not reaching HIPAA's 50 (4 states define a small 
group as up to 49; one as 40; and ten as either 24 or 25). These states 
are likely to make relatively small changes as necessary to conform 
their laws to HIPAA standards. The National Association of Insurance 
Commissioners has also engaged in extensive efforts to help the states 
conform their laws.
    Thirty-one states already have provisions which require that group 
health plans offer additional enrollment opportunities to employees 
under circumstances similar to HIPAA's special enrollment 
opportunities. The statute expands the state baseline by adding legal 
separation as a grounds for special enrollment eligibility, and 
expressly includes COBRA as prior group health coverage. The statute 
further requires retroactive coverage for newborns and adopted children 
if special enrollment is requested within 30 days of birth, placement 
for adoption, or adoption. Current state requirements reduce the 
overall economic impact of the special enrollment requirements on the 
group health market.
    For pre-existing conditions limitations in group health plans, 
HIPAA provides that the maximum allowable period is 12 months (``look-
forward''), or 18 months for a late enrollee (someone enrolling outside 
of an initial or special enrollment period) for conditions arising 
within the six months (``look-back'') preceding the enrollment date in 
a group health plan. HIPAA also provides that prior coverage for which 
there was not a break in coverage of 63 days or more would be credited 
against the pre-existing condition exclusion. Using the PWBA analysis 
and information from the IHPP,

[[Page 16915]]

as of mid-1996, 30 states had time limits on pre-existing condition 
exclusion periods that are the same as, or more favorable to 
individuals, than the HIPAA provisions for the group market; and 14 
other states have limits on pre-existing condition time limits. Among 
these 44 states, ten states allow crediting or prior coverage for which 
the duration of the break in coverage equals or exceeds 63 days (more 
generous than HIPAA); eight states allowed breaks in coverage of 60 
days; 18 states allowed 30 or 31 days of a break in coverage; and four 
states had no crediting of prior coverage. State laws which exceed 
HIPAA standards will not be pre-emptied by HIPAA.
(3). Group Plans
    HIPAA sets minimum standards for all group health plans, including 
self-funded plans that are shielded by ERISA from states' HIPAA-like 
requirements. The General Accounting Office has estimated that about 
27% of the Nation's population received health care coverage through 
ERISA self-funded plans (17%).
    Although the GAO report indicated that the number of people covered 
by self-insured plans is increasing, other data indicate that there has 
been a decline in such coverage because of the increasing number of 
individuals covered by HMOs that operate as insured plans. However, an 
HMO network may constitute an exclusive provider organization for a 
self-insured plan. Liston and Patterson (Analysis of the Number of 
Workers Covered by Self-Insured Health Plans Under the Employee 
Retirement Income Security Act of 1974--1993 and 1995, prepared for the 
Henry J. Kaiser Family Foundation, August 1996) found that from 1993 to 
1995 the number of Americans covered by fully or partly self-insured 
plans declined from 37.6 million to 32.5 million (a 14% decline). The 
rate of decline was greatest in smaller firms: for firms with fewer 
than 100 workers, the number of workers covered under fully or 
partially self-insured plans declined form 8.2 million to 5.4 million 
(a 34% decline). For firms with 25 or fewer employees, the numbers 
declined from 2.9 million to 2.2 million from 1993 to 1995 (a 24% 
decline).
    The relevance of these numbers to an analysis of HIPAA has to do 
both with the number of people that can potentially benefit from the 
HIPAA provisions (if the employees moving to ERISA-insured plans are in 
states that already have provisions similar to HIPAA, effects will be 
smaller), as well as the related issue (partially a consequence of the 
former) of the extent to which the small group market in a given state 
may be ``disrupted'' because of the effects of HIPAA. (For example, 
will the HIPAA provisions create a situation in which either insurers 
will abandon markets or employers will discontinue health care 
coverage?) Although the Departments' economic impact analysis does not 
contain a state-by-state analysis of the relationship between employees 
covered under self-insured plans (and any changes in those numbers) and 
the states that have reforms similar to HIPAA, Liston and Patterson 
found that the South was the only region of the country in which there 
was an increase in the number of employees covered by self-insured or 
partially self-insured (reflecting the lower penetration of HMOs in 
Southern states). Data about individual states do not appear to be 
available. A recent GAO report notes that ``no analysis exists on the 
number of individuals affected by these state [insurance] reforms'' 
(Health Insurance Portability: Reform Could Ensure Continued Coverage 
for Up to 25 Million Americans, HEHS-95-257, September 1995).
    For 1995, the South (stretching, under the Liston-Patterson 
definition, from the South Atlantic states to the West South Central 
states of Arkansas, Louisiana, Oklahoma and Texas) had 35% of all 
employees covered by self-insured or partially self-insured plans, 
while those same states had 30% of the private-sector employees with 
health care coverage. Three of the seven states that had no pre-
existing condition limitations regulations in the PWBA analysis were 
Southern states; of the 11 states that had no guaranteed renewal 
provisions for group health plans, four were in Southern states. It 
would appear then, that to the extent that practices in the ERISA small 
group market in Southern states diverge significantly from HIPAA 
provisions employers will have to adhere to, there are possible major 
impacts of HIPAA in those markets.
(4). The Individual Insurance Market
    In the individual insurance market the statute provides for 
guaranteed issue of a policy to ``eligible individuals'' (individuals 
coming from the group market, who have 18 months of aggregate 
creditable coverage, from any of various types of health care 
coverage). In addition to this guaranteed issue requirement, insurers 
are not permitted to apply any per-existing condition exclusions to 
this group. Individual policies are guaranteed renewable except under 
certain circumstances. The statute does not place any limits on the 
premiums insurers may charge for the policies made available to 
eligible individuals. States are permitted to have alternative 
mechanisms that achieve the same ends as the HIPAA requirements, though 
any alternative is required to have no pre-existing condition 
exclusions.
    The individual insurance market reforms are of greatest benefit to 
individuals who voluntarily or involuntarily leave their jobs and wish 
to maintain some level of health insurance. As discussed above, the 
availability of individual insurance may decrease ``job lock'' by 
allowing people to maintain continuous protection as they move between 
jobs. Individuals who enter the individual market from the group market 
may choose to do so because their new employer may not offer insurance 
or the employer's coverage is limited; or they may expect to be without 
a job for a period of time (for example, because they are ``early 
retirees'' who do not yet have Medicare entitlement and do not have 
employment-based retiree health care coverage). The CBO projects, in 
data cited above, that the number of people benefiting from the HIPAA 
(getting coverage when it would have been denied absent HIPAA) 
individual market reforms would ``plateau'' at the 150,000 range by the 
fourth year of the law. The GAO (HEHS-95-257, cited above) determined 
that about two million people each year could convert to individual 
insurance from group coverage, based on turnover rates among small 
employers and rates of COBRA continuation of coverage.
    Individual market premium effects vary by state. In state 
regulatory activity, fewer states have provisions similar to HIPAA's in 
the individual market as compared to state reforms in the small group 
market. HIPAA will affect the individual insurance markets in many 
states. The RAND and IHPP data indicate that only eleven states have 
guaranteed issue laws for the individual market. Eight additional 
states have an insurer (Blue Cross-Blue Shield) offering open 
enrollment in the individual market. Twenty-three states have laws 
limiting the period of pre-existing condition exclusions, but only one 
state allows no such exclusion period, with most states allowing a 12-
month exclusion period with a 6- or 12-month ``look back.''
    One of the most contentious issues in discussions of HIPAA's effect 
on the individual insurance market has been the issue of premiums in 
that market. HIPAA does not impose any rating requirements on insurers 
in the

[[Page 16916]]

individual market, meaning that the insurers are free to price their 
individual products in any manner that is consistent with state law. 
IHPP data show that for the individual market, seven states have rating 
bands (premiums must be within certain upper and lower bounds in 
relation to a ``standard'' premium), and eight states require community 
rating of some form (a form of rating that can be roughly described as 
rating across a larger pool of insured individuals, for example, across 
all of an issuer's insured individuals, across defined age categories, 
etc.). Rating bands and community rating requirements have the same 
intended effect as HIPAA, to increase the availability of insurance, 
but they additionally seek to assure affordable coverage. There will be 
interactions between the HIPAA approach to increased availability 
(guaranteed issue and elimination of pre-existing condition exclusions 
for certain individuals with prior coverage) and the rating approach in 
those states in which guaranteed issue rules and pre-existing condition 
exclusion rules differ from HIPAA's provisions.
    Affordability of individual coverage is a significant issue with 
HIPAA. The Health Insurance Association of America (HIAA) has projected 
that the individual market reform provisions of HIPAA will cause an 
eventual 22% increase in premiums in that market (``The Cost of Ending 
`Job Lock' or How Much Would Health Insurance Costs Go Up If 
`Portability' of Health Insurance Were Guaranteed?'', February 20, 
1996). HIAA projects, on that basis, that eventually 500,000 to one 
million people would leave the individual insurance market because of 
rate increases necessitated by the HIPAA reforms. HIAA bases this 
estimate on the current number of people insured in the individual 
market, the number of new entrants in the market, their costs, and the 
price-sensitivity of purchasers of insurance.
    Other studies have arrived at conclusions that are very different 
from the HIAA conclusions. The main difference with other studies is 
that HIAA assumes that HIPAA will cause states to impose restrictions 
on the level of premiums insurers may charge in the individual market. 
There are no such requirements in HIPAA. The HIAA assumes that people 
currently covered in the individual market will be included in the 
rating pool that includes individuals who are newly insured under HIPAA 
provisions. The American Academy of Actuaries (AAA), for example, found 
that the premium increases in the individual market would be in the 
range of two to five percent, and the increases would take effect over 
a longer time span that one year. The AAA took into account current 
state laws, including state laws related rate restrictions in the small 
group market.
    Jacob Klerman, or RAND, examined HIAA's assumptions and methodology 
and found that (a) using HIAA's assumptions, but employing more up-to-
date or otherwise improved data (``better estimates of the underlying 
figures''), the increase in individual premiums would be 5.7%; and (b) 
using different assumptions, the premium effect would be 2.3% and may 
be as little as 1% or less (New Estimates of the Effect of Kassebaum-
Kennedy's Group-to-Individual Conversion Provision on Premiums for 
Individual Health Insurance, RAND, 1996). For the latter projections, 
Klerman assumed a different level of claims costs for new entrants 
(150%, based on studies of the costs for COBRA continuation policies, 
versus the HIAA's 200%), that the premium pricing for the new policies 
would not be pooled with others in the individual market, and that 
state laws would have effects that the HIAA analysis did not consider. 
Note that, as with the GAO report quoted above, these analyses are 
based on an earlier version of an insurance reform bill, S. 1028, in 
which the guaranteed issue was available only to those with 18 months 
of group coverage. This analysis does not measure how many more people 
are encompassed in the larger HIPAA ``eligible individual'' group 
comprising individuals whose last type of coverage was group coverage 
but who had prior coverage during the 18-month period from a different 
source; this will slightly increase the cost.
    Another study, done for HHS, by Actuarial Research Corporation 
(ARC), had results that were similar to the RAND results. ARC projects 
possible increases in individual premiums ranging from 1.4 percent to 
2.8 percent.

K. Statutory Provisions Affecting Administrative Processes

    While these rules implement the statute's goal of expanding 
coverage and portability of coverage by reducing the use of pre-
existing condition exclusions, for purposes of performing this economic 
impact analysis, it is appropriate to break the regulations down into 
the following components: certifications and notices informing 
individuals of their right to request a certification; notification of 
the application of a pre-existing condition exclusion period; 
alternative methods of crediting coverage; and guidelines for 
implementing the statue's special enrollment requirements. The notice 
and notification requirements are largely a result of this rulemaking. 
The certification requirements are largely prescribed by HIPAA, with 
certain aspects that mitigate the impact of the statute resulting from 
this rulemaking. While the alternative method of counting compliance is 
authorized by HIPAA, the classes and categories of coverage to be 
measured were created at the discretion of the three Departments.

1. Staggered Effective Dates

    In general, the effective dates of HIPAA's group health plan 
provisions are tied to plans' fiscal years and to the expiration of 
collective bargaining agreements under which some plans are maintained. 
Provisions whose effective dates are so tied included those pertaining 
to pre-existing condition exclusions, crediting prior coverage, and 
special enrollments. (The effective dates of HIPAA's certification 
provisions are not so tied.) Non-collectively bargained plans become 
subject to these provisions of HIPAA in the first plan year beginning 
on or after the July 1, 1997. Collectively bargained plans become 
subject the first plan year beginning on or after the later of July 1, 
1997 or the expiration of a collective bargaining agreement that was in 
place prior to HIPAA's date of enactment, August 21, 1996.
    More than one-half of plans begin their fiscal years on January 1. 
Therefore, there is a large concentration of plans and participants 
that become subject to HIPAA in January 1998. Overall, the proportions 
of participants and plans (respectively) that become subject to HIPAA 
in 1997 are 15 percent and 24 percent; in 1998, 68 percent and 69 
percent; in 1999, 11 percent and 4 percent; and in 2000, 5 percent and 
2 percent.
    The compliance costs of these regulations regarding certification 
and notice, pre-existing condition exclusion notification, and notice 
of enrollment rights was estimated based upon information in the public 
domain and data available to the Departments on industry practices. To 
derive data on health coverage and employment shifts of individuals, 
for the purposes of this analysis the Departments referred to data 
collected from the Census Bureau's Current Population Survey and Survey 
of Income and Program Participation, as well as the National Health 
Interview Survey and the Department of Labor's database of 1993 Form 
5500 information, the most current available. Supplemental data on 
employer-sponsored health care was obtained

[[Page 16917]]

from the Peat Marwick Benefits Survey and the BLS Employee Benefits 
Survey.

2. Initial vs. Ongoing Costs

    Costs may be separated into initial costs and ongoing costs. 
Initial costs of the new certification, notice, pre-existing condition 
exclusion notification, and special enrollment requirements have 
several components, including capital costs of preparations for 
collecting information such as purchasing or upgrading computers and 
software, and record storage facilities. Initial costs may also be 
expected to include programming or reprogramming automated systems to 
track periods of prior creditable coverage, and to track plan 
participants and the type of coverage they hold, e.g. individual or 
family coverage. Initial costs also include up-front expenditures for 
revisions of plan documents to comply with the new statutory and 
regulatory requirements. These costs were annualized over the estimated 
``life'' of the regulation, 10 years, in order to show such costs on an 
annual basis. It is estimated that the 15,604 plans that will process 
certifications internally (rather than use a service provider) will 
incur an average cost of $5,000 per plan to revise their automated 
records systems to accommodate this information for a total cost of $78 
million over 10 years beginning in 1997. Presented here as direct 
costs, initial costs are a component of overall social costs.
    Ongoing expenditures incurred annually include the costs to group 
health plans, health insurance issuers and self-funded plans of 
performing the continuing administrative tasks of calculating periods 
of creditable coverage, printing forms for notices, preparing an 
original and a copy of notices and certifications for participants with 
dependants having identical coverage, and mailing these documents to 
individuals. Also included in ongoing expenditures is the cost to plans 
which use pre-existing condition exclusions to notify participants of 
the plans' provisions, and calculating periods of pre-existing 
condition exclusions for new participants, and issuing an 
individualized notification, as necessary, to each individual who would 
be subject to a pre-existing condition exclusion of any duration. Total 
annualized initial costs and ongoing costs were aggregated to estimate 
total annual costs.

3. The Certification Process

    The statute specifies that every individual leaving a group health 
plan, ending COBRA coverage, ending individual insurance coverage, or 
leaving other types of health coverage must receive a written 
certification of creditable coverage containing specific information 
about the individual and his or her coverage, including information on 
the coverage of dependents. This requirement constitutes a burden in 
information collection and processing.
    Despite recent incremental state reforms in the laws affecting the 
group health insurance market, no states have required group health 
plans or health insurance issuers to provide participants and their 
dependents with certifications or notices regarding prior health 
coverage. Therefore, the statute imposes discrete new burdens on all 
group health plans and health insurance issuers in connection with 
providing certifications, and issuing to individuals of their right to 
receive a certification.
    Respondents preparing certification forms must collect the 
appropriate information about a person, prepare a certification form, 
and, in most cases, mail the information. One certification can serve 
to provide information about dependents covered under the same policy. 
The respondent may have to prepare multiple certification forms for an 
individual, or for dependents, in the event that the certificate is 
lost or misplaced. The process may require the development of new 
information systems or, more likely, modifications to existing 
information systems, to collect and process the necessary information.
    The statute makes the certification requirement a key 
implementation component of the portability provision in both the group 
and individual markets.
    The cost of providing certifications for private group plans 
(absent the regulatory relief described below) is estimated to be at 
least $98 million for 69 million certifications in 1997 and $84 million 
for 59 million in each subsequent year. Absent transition relief 
provided under the regulations, early year costs could be far higher. 
The direct cost of certifications contributes to the overall social 
cost of the statute.

L. Impact of Regulatory Discretion

    These regulations mitigate the impact of the statutory requirements 
on the regulated public, while preserving protections, in several ways. 
These regulations will reduce implementation costs.
    The Departments exercised discretion in connection with group plan 
provisions, as follows:
    First, intermediate issuers will not have to issue a certification 
when an individual changes options under the same health plan. In lieu 
of the certification, they could simply transfer the start and stop 
dates of coverage to the plan. An individual would retain the right to 
get a certification upon request if they leave the plan.
    Second, telephonic certification will fulfill the requirement to 
sent a certification if the receiving plan and the prior plan mutually 
agree to that arrangement. The individual can always get a written 
certification upon request.
    Third, the requirement to send certifications on June 1, 1997 to 
those who have left plans between October 1, 1996 and May 31, 1997 can 
be satisfied by sending a notice; the Departments have offered a model 
notice in these regulations for that purpose.
    Fourth, until July 1, 1998, plans and issuers that do not collect 
individual information on dependants can comply with the requirement to 
send each dependant a separate certification by simply listing the 
category of coverage (e.g., individual, spouse or family).
    Fifth, in situations where the issuer and the plan contract for the 
issuer to complete the certifications, the plan would not remain liable 
if the issuer failed to send the certifications.
    Thus, plans would not need to keep data and files on this 
information.
    Sixth, the period of coverage listed on automatic certifications 
will only be the last continuous period of coverage without any break. 
This is the most efficient and simplest method of record keeping for 
plans and issuers.
    Seventh, the period of coverage contained in the on-request 
certification will be all periods of coverage ending within 24 months 
before the date of the request. Essentially, a plan may simply look 
back two years and send copies of any automatic certifications issued 
during that period.
    The above reductions in burdens on plans and issuers may cause more 
frequent circumstances in which participants are required to prove 
creditable coverage and the status of their dependants. In order to 
help offset some of the additional burdens that will be shifted to the 
participants, the regulations provide the following protections:
    First, if an individual is required to demonstrate dependent 
status, the group health plan or issuer is required to treat the 
individual as having furnished a certificate showing the dependent 
status if the individual attests to such dependency and the period of 
such status, and the individual cooperates with the plan's or issuer's 
efforts to verify the dependent status.

[[Page 16918]]

    Second, a plan shall treat an individual as having furnished a 
certificate if the individual attests to the period of creditable 
coverage, and the individual also presents relevant corroborating 
evidence of some creditable coverage during the period and the 
individual cooperates with the plan's efforts to verify the 
individual's coverage.
    Third, plans and issuers that impose preexisting condition 
exclusions periods must notify participants of this fact. They must 
also explain that prior creditable coverage can reduce the length of a 
preexisting condition exclusion period and offer to request a 
certification on the participant's behalf. An exclusion may not be 
imposed until this notice is given. This is beneficial to participants 
insofar as it forewarns them of potential claim denials and enables 
them to more easily exercise their right to protection from such 
denials under HIPAA's portabliity provisions.
    Fourth, a plan that imposes a preexisting condition exclusion must 
notify a participant if the individual's creditable coverage is not 
enough to completely offset the exclusion period, and give the 
individual the option to provide additional information. An exclusion 
may not be imposed until this notice is given. This provides 
participants an opportunity to correct any failure to establish credit 
for prior coverage before a claim is denied.
    Under the regulation, in the group health plan enrollment materials 
ordinarily provided to most new participants, plans that contain pre-
existing condition exclusion provisions must also provide notice that 
the plan contains these provisions, that the participant has the right 
to prove prior creditable coverage, including the right to secure a 
certificate from a prior plan or issuer, and that the new plan will 
assist in obtaining the certificate. Those plans using the alternative 
method of crediting coverage also must disclose their methods to the 
participant, including an identification of the categories of coverage 
used.
    In addition, a plan seeking to impose a pre-existing condition 
exclusion on a participant or dependant must inform them in writing of 
the determination that they lack adequate prior coverage, and provide 
an opportunity for the individual to submit additional materials 
regarding prior creditable coverage, and provide an explanation of any 
appeals procedure.
    The annual cost of these disclosure procedures to private group 
plans is estimated to be $280,000 in 1997, $2.1 million in 1998, and 
$1.9 million in 1999 (about 20 cents per notice). The same costs for 
state group plans would be $25,500, $51,000, and $51,000, respectively. 
For local plans, they would be $42,000, $84,000, and $84,000. The 
Departments believe the marginal burden of the notice will be modest 
because, irrespective of the notice requirement, under the statute 
plans must make this determination before imposing a preexisting 
condition exclusion. Comments are encouraged as to whether this 
assumption is appropriate. These costs do not include any burdens 
attributable to the use of the alternative method of crediting 
coverage, since it is assumed that any plans incorporating this method 
will do so only if the net cost is less than using the standard method. 
Under the alternative method of crediting coverage, the regulation 
allows the prior plan to charge the receiving plan using the 
alternative method for the reasonable costs of providing evidence of 
classes and categories of prior health coverage.
    On balance, to the extent that the Departments have exercised 
regulatory discretion, they have acted to reduce compliance costs. This 
is particulary true with respect to the certification process.
    These regulations attempt to reduce the burden of certifications by 
limiting the amount of information that needs to be reported and 
offering a model form that can be used to satisfy the requirement of 
the law. In the absence of a written certification, the regulations 
allow for alternative means of establishing creditable coverage, which 
includes having the individual present documentation of coverage or 
conducting telephone verification with the entity that previously 
covered the individual.
    During a transition period, respondents may provide individuals 
with a notice that they have the right to receive a certificate of 
creditable coverage, a requirement that can be met by including the 
information in an evidence of coverage or other generic document 
individuals receive that contains information about their policy. This 
notice may be provided in lieu of a certificate for events that occur 
on or after October 1, 1996 but before June 1, 1997.
    The cost to issuers of the certification requirement is primarily 
in the paperwork production of the certification form. All health 
insurance issuers are likely to have the kinds of systems in place to 
be able to produce the information necessary for a certification, 
although there will be moderate systems start-up costs, and some 
systems modifications for insurers and HMOs. Systems modifications may 
also be necessary to retain the data for the certificates for several 
years, but, like the other requirements, this burden should also be 
limited. The model certification form of the Preamble contains the kind 
of information that is routinely used as the basis for claims 
processing by a health insurance issuer or by an HMO (for example, in 
adjudicating an out-of-network claim).
    For example, in order to deny a claim dating from a period prior to 
the beginning date of coverage of a particular individual, the issuer's 
information system could determine that (1) a particular individual was 
covered by the issuer; (2) the issuer identification number submitted 
with the claim is correct; (3) the individual was insured on the date 
the health care service was provided; (4) the service was provided 
during a waiting period or affiliation period before coverage was 
available; and (5) coverage may have ended prior to the date of 
service. The issuer's information system would also determine the 
limitations of coverage (e.g. high or low option coverage, with or 
without specific riders). The remaining information of the 
certification form could also be available to the issuer, especially 
for COBRA-eligible individuals: whether COBRA continuation coverage is 
involved (given that the premium is charged directly to the individual 
at a specified rate); the beginning and ending dates of coverage and 
waiting periods; and the name, address, phone number and contact person 
(or Department) for information.
    Respondents may need to modify their systems to determine whether, 
for a given insurer's coverage of a particular individual, there was a 
63-day period of interrupted coverage for purposes of specifying this 
information on a certification form. As noted above, the Departments 
have taken into consideration the difficulties insurers have in 
identifying dependents under family coverage, and the regulations make 
appropriate accommodations, in recognition of the need for a transition 
period during which information about dependent coverage information 
may be unavailable from issuers.
    The cost of producing and issuing certifications (or notices in 
lieu of certifications where permitted) for private group plans is 
estimated to be $57 million for 53 million certifications in 1997, $64 
million for 44 million in 1998, and $66 million for 44 million in each 
subsequent year. Medicaid programs would provide 10 million 
certifications annually at an annual cost of $600,000. Medicare would 
issue

[[Page 16919]]

92,000 annually at a cost of $115,000. (Should HHS decide to allow the 
Medicare award and termination letters to suffice as certifications, 
then there would be no cost to the Medicare program for the HIPAA 
certification requirements.) By 1999, the annual cost and volume would 
total $500,000 and 200,000 for OPM, $2.9 million and 1.9 million for 
state plans, and $6.1 million and 4.1 million for local plans, and $4.7 
million and 2.9 million for individual market issuers.
    Relative to the cost implied by the statute alone, regulatory 
provisions directed at the certification process reduce private group 
plans' cost of compliance by a minimum of $41 million (or 42 percent) 
in 1997, $20 million (or 24 percent) in 1998, and $18 million (or 21 
percent) in 1999 and later years, through the creation of transitional 
rules, safe harbors and good faith compliance periods. The regulation 
acts to reduce parallel burdens on issuers and state and local 
government group plans in similar proportion.
    In another discretionary provision, these regulations require group 
plans to notify eligible new employees of their special enrollment 
rights. This provision is necessary to make sure employees are 
sufficiently informed to exercise their rights within the 30-day window 
provided in the statute. The cost of this disclosure is expected to be 
small, since it is a uniform disclosure that can accompany ordinary 
materials provided to new participants. In order to minimize the 
burden, the preamble to these regulations provides model language for 
the notice adequate for meeting the statutory obligation. The cost, 
which would reach $1.72 million in 1999 for private group plans, is 
described in the PRA analysis. In 1999, the cost for State plans would 
reach $167,000; the cost for local plans would reach $290,000.
    The direct cost of certifications and notices contribute to the 
overall social cost of the statute and regulations.
    HHS has exercised regulatory discretion regarding two specific 
provisions that will be enforced exclusively by HHS (also referred to 
as the ``non-shared group market'' provisions).
    These two areas are as follows:
Guaranteed Availability of Coverage for Employers in the PHS Act Group 
Health Market Provisions
    The group market provisions include rules relating to guaranteed 
availability of coverage for employers in the small group market that 
are only in the PHS Act (not in ERISA or the Code). Section 146.150 of 
the HHS regulations implements section 2711 of the PHS Act. In general, 
this section requires health insurance issuers that offer coverage in 
the small group market to offer all policy forms to any eligible small 
employer and to accept for enrollment every eligible individual without 
regard to health status. HHS has interpreted this guaranteed 
availability requirement to apply to all products offered in the small 
group market. Some States and issuers argue that the statute would 
permit guaranteed availability of an issuer's basic and standard plan, 
as opposed to all products offered by the issuer in the small group 
market. HHS does not agree with this interpretation and have proposed 
our interpretation in the regulation. Depending upon State law, this 
decision may provide the benefit of additional choices to small 
employers purchasing coverage in the small group market, while adding 
some potential costs for issuers offering coverage in the small group 
market.
Exclusion of Certain Plans From the PHS Act Group Market Requirements
    The group market provisions also include rules under which certain 
plans are excluded from the group market provisions that are only in 
the PHS Act (not in ERISA or the Code). Section 146.180 of the HHS 
regulations implements section 2721 of the PHS Act. Section 146.180(b) 
includes rules pertaining to non-federal governmental plans, which are 
permitted under HIPAA to elect to be exempted from some or all of 
HIPAA's requirements in the PHS Act. HHS has exercised regulatory 
discretion by prescribing the form and manner of the election and the 
contents of the notice. HHS has also required a non-federal 
governmental plan making this election to notify plan participants, at 
the time of enrollment and on an annual basis, of the fact and 
consequences of the election. HHS has exercised this regulatory 
authority in order to ensure adequate documentation of a non-federal 
governmental plan's proper and appropriate election without placing an 
undue burden on the plan. In addition, HHS has provided a non-federal 
governmental plan the flexibility to elect to opt out of specific 
provisions of the statute and have allowed for this flexibility in the 
contents of the notice. The cost of providing these notices for non-
federal governmental would range from $79,000 to $158,000 in 1997 and 
from $158,000 to $315,000 in 1999.
    HHS has also exercised regulatory discretion in connection with 
individual market provisions by specifying that college health plans 
are treated as bona fide associations. Since, under HIPAA, coverage 
offered through a bona fide association is creditable coverage, 
individuals covered under a college plan would receive credit for this 
coverage. However, because this coverage is offered though a bona fide 
association (as defined 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. This 
regulatory provision is expected to minimally disrupt business 
practices for those college plans.
    HHS also exercised regulatory discretion in connection with 
individual market provisions. When an eligible individual applies for 
coverage in the individual market, the effective date of such coverage 
is deemed, in the regulations, to be the date on which the individual 
applies for such coverage, and assuming the individual's application 
for coverage was accepted.
    The impact of this regulatory provision is that an individual who 
wishes to maintain creditable coverage may delay, for up to 63 days, an 
application for coverage in the individual insurance market, especially 
if he or she is assured of being covered by an issuer (e.g., if the 
person is guaranteed issuance of an individual product as an individual 
coming from group coverage, under the Act's guaranteed availability 
provisions). The individual may forego medical treatment during the 63-
day period of non-coverage, resulting in a deterioration of health on 
entering the new health plan, with a potential for greater costs 
incurred by the insurer or health plan.
    The regulation could have required that the individual apply for 
coverage within a reasonable time period in advance of the 63-day 
period, such as 30 days after the end of prior coverage (which is 
similar to the statutory requirement for a request for enrollment in a 
group health plan following exhaustion of COBRA coverage or other 
exhaustion of coverage); or, the insurer could have been required to 
begin coverage within some specified time period after application. 
However, the approach taken in the regulation is consistent with 
statutory provisions regarding the treatment of waiting periods or HMO 
affiliation periods, which the statute specifically excludes from being 
considered breaks in coverage. The regulatory provision also accords 
the same status to all individuals in any circumstance by making a 63-
day period the maximum during which an individual can be

[[Page 16920]]

without coverage and still receive credit for creditable coverage.

M. Paperwork Reduction Act--Department of Labor and Department of the 
Treasury

    The Department of Labor and the Department of the Treasury have 
submitted this emergency processing public information collection 
request (ICR), consisting of three distinct ICRs, to the OBM for review 
and clearance under the Paperwork Reduction Act of 1995 (Pub. L. 104-
13, 44 U.S.C. Chapter 35). The Departments have asked for OMB clearance 
as soon as possible, and OMB approval is anticipated by or before June, 
1, 1997.
    These regulations contain three distinct ICRs. Two of them 
(Establishing Prior Creditable Coverage and Notice of Enrollment 
Rights) are prescribed by the statute.
    The first ICR implements statutorily prescribed requirements 
necessary to establish prior creditable coverage. This is accomplished 
primarily through the issuance of certificates of prior coverage by 
group health plans or by service providers that the group health plans 
contract with in order to provide these documents. In addition, this 
ICR permits the use of a notice that may be used by the plans to meet 
their obligations in connection with periods of coverage ending during 
the transition period, October 1, 1996 through May 31, 1997, saving the 
respondents both hours and cost during that period. This ICR also 
covers the requests that certain plans will make regarding additional 
information they require because they are using the Alternative Method 
of Crediting Coverage. Finally, this ICR also includes the occasional 
circumstances where a participant is unable to secure a certificate and 
needs to provide some supplemental form of documentation in order to 
establish prior creditable coverage.
    The second ICR, Notice of Special Enrollment Rights, implements the 
statutorily prescribed disclosure obligation of the plans to inform a 
participant, at the time of enrollment, of the plan's special 
enrollment rules.
    The third ICR, Notice of Pre-Existing Condition Exclusion, concerns 
the disclosure requirements on those plans that contain pre-existing 
condition exclusion provisions. This ICR has two components: a notice 
to all participants at the time of enrollment stating the terms of the 
plan's pre-exisiting condition provisions, the participant's right to 
demonstrate creditable coverage, and that the plan or issuer will 
assist in securing a certificate if necessary; and notice by the plan 
of its determination that an exclusion period applies to an individual.

1. Establishing Prior Creditable Coverage

i. Department of Labor
    The Department of Labor, as part of its continuing effort to reduce 
paperwork and respondent burden, conducts a preclearance consultation 
program to provide the general public and federal agencies with an 
opportunity to comment on proposed information collection requests 
(ICR) in accordance with the Paperwork Reduction Act of 1995 (PRA 95) 
(Pub. L. 104-13, 44 U.S.C. chapter 35) and 5 CFR 1320.11. This program 
helps to ensure that requested data can be provided in the desired 
format, reporting burden (time and financial resources) is minimized, 
collection instruments are clearly understood, and the impact of 
collection requirements on respondents can be properly assessed. 
Currently, the Pension and Welfare Benefits Administration is 
soliciting comments concerning the proposed new collection of 
Establishing Prior Creditable Coverage.
    Dates: Written comments must be submitted to the office listed in 
the addressee section below on or before May 31, 1997. In light of the 
request for OMB clearance by June 1, 1997, submission of comments 
within the first 30 days is encouraged to ensure their consideration.
    The Department of Labor is particularly interested in comments 
which:
    <bullet> evaluate whether the proposed collection is necessary for 
the proper performance of the functions of the agency, including 
whether the information will have practical utility;
    <bullet> evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
    <bullet> enhance the quality, utility, and clarity of the 
information to be collected; and
    <bullet> minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submissions of responses.
    Addressee: Gerald B. Lindrew, Office of Policy and Research, U.S. 
Department of Labor, Pension and Welfare Benefits Administration, 200 
Constitution Avenue, Room N-5647, Washington, DC 20210. Telephone: 202-
219-4782 (this is not a toll-free number). Fax: 202-219-4745.
ii. Department of the Treasury
    The collection of information is in Section 54.9801-5T. This 
information is required by the statute so that participants will be 
informed about their rights under HIPAA and about the amount of 
creditable coverage that they have accrued under a group health plan. 
The likely respondents are business or other for-profit institutions, 
non-profit institutions, small businesses or organizations, and Taft-
Hartley trusts. Responses to this collection of information are 
mandatory.
    Books or records relating to a collection of information must be 
retained as long as their contents may be come material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. 
Comments on the collection of information should be received by May 31, 
1997. In light of the request for OMB clearance by June 1, 1997, 
submission of comments within the first 30 days is encouraged to ensure 
their consideration. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How to enhance the quality, utility, and clarity of the information 
to be collected;
    How to minimize the burden of complying with the proposed 
collection of information, including the application of automated 
collection techniques or other forms of information technology; and
    Estimates of capital or start up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    Additonal PRA 95 Information:
    I. Background: In order to meet HIPAA's goal of improving access to 
and portability of health care benefits,

[[Page 16921]]

the statute provides that, after the submission of evidence 
establishing prior creditable coverage, a subsequent health insurance 
provider would be limited in the extent to which it could use pre-
existing condition exclusions to limit coverage. This ICR covers the 
submission of materials sufficient to establish prior creditable 
coverage.
    II. Current Actions: Under 29 CFR 2590.701-5 and 26 CFR 54.9801-5T 
of the interim rule, a group health plan offering group health 
insurance coverage is obligated to provide a written certificate of 
information suitable for establishing the prior creditable coverage of 
a participant or beneficiary. To the extent that a certification is not 
available or inadequate to prove prior creditable coverage, paragraph 
(c) provides other methods for establishing creditable coverage. During 
the transition period for certification (29 CFR 2590.710(e) and 26 CFR 
54.9806-1T(e)), plans have the option of providing notices regarding 
participant's rights to certification rather than the certification 
itself; plans then provide certificates only to those participants who 
request them. 29 CFR 2590.701-5(a)(7) and 26 CFR 54.9801-5T(a)(7) 
provides special rules for establishing prior coverage of defendants, 
and 29 CFR 2590.701-5(b) and 26 CFR 54.9801-5T(b) provides guidance on 
providing evidence of coverage to those plans that use the alternative 
method of crediting coverage.
    These regulations offer model certification and notice forms to be 
used by group health plans and health insurance issuers, containing the 
minimum information mandated by the statute. Based on past experience, 
the staff believes that most of the materials required to be exchanged 
under the certification procedure will be prepared by contract service 
providers such as insurance companies and third-party administrators.
    Type of Review: New
    Agencies: U.S. Department of Labor, Pension and Welfare Benefits 
Administration; U.S. Department of the Treasury, Internal Revenue 
Service.
    Title: Establishing Prior Creditable Coverage
    Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions; Group Health Plans.
    Frequency: On occasion
    Burden:

----------------------------------------------------------------------------------------------------------------
                                                                   Average time                                 
                                       Total           Total       per  response   Burden hours                 
              Year                  respondents      responses        (range)         (range)      Cost (range) 
                                                                     (minutes)                                  
----------------------------------------------------------------------------------------------------------------
1997............................       2,600,000      51,799,410            3.23         502,080     $57,180,000
                                  ..............  ..............            6.12         950,710      84,590,000
1998............................       2,600,000      44,431,970            5.04         672,120      64,480,000
                                  ..............  ..............           11.77       1,569,390     119,310,000
1999............................       2,600,000      44,399,150            5.27         702,360      66,310,000
                                  ..............  ..............           12.01       1,599,630     121,140,000
                                 -------------------------------------------------------------------------------
      Totals....................  ..............  ..............  ..............  ..............  ..............
----------------------------------------------------------------------------------------------------------------

    Start up costs: It is estimated that the 15,604 plans that will 
perform these functions internally (rather than use a service provider) 
will incur an average cost of $5,000 per plan to revise their automated 
records systems to accommodate this information for a total cost of $78 
million over 10 years beginning in 1997.
    Estimated total cost:
    Comments submitted in response to this notice will be summarized 
and/or included in the request for Office of Management and Budget 
approval of the information collection request; they will also become a 
matter of public record.

2. Notice of Enrollment Rights

i. Department of Labor
    The Department of Labor, as part of its continuing effort to reduce 
paperwork and respondent burden, conducts a preclearance consultation 
program to provide the general public and federal agencies with an 
opportunity to comment on proposed information collection requests 
(ICR) in accordance with the Paperwork Reduction Act of 1995 (PRA 95) 
(Pub. L. 104-13, 44 U.S.C. Chapter 35) and 5 CFR 1320.11. This program 
helps to ensure that requested data can be provided in the desired 
format, reporting burden (time and financial resources) is minimized, 
collection instruments are clearly understood, and the impact of 
collection requirements on respondents can be properly assessed. 
Currently, the Pension and Welfare Benefits Administration is 
soliciting comments concerning the proposed new collection of Notice of 
Enrollment Rights.
    Dates: Written comments must be submitted to the office listed in 
the addressee section below on or before May 31, 1997. In light of the 
request for OMB clearance by June 1, 1997, submission of comments 
within the first 30 days is encouraged to ensure their consideration.
    The Department of Labor is particularly interested in comments 
which:
    <bullet> evaluate whether the proposed collection is necessary for 
the proper performance of the functions of the agency, including 
whether the information will have practical utility;
    <bullet> evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
    <bullet> enhance the quality, utility, and clarity of the 
information to be collected; and
    <bullet> minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submissions of responses.
    Addressee: Gerald B. Lindrew, Office of Policy and Research, U.S. 
Department of Labor, Pension and Welfare Benefits Administration, 200 
Constitution Avenue, Room N-5647, Washington, D.C. 20210. Telephone: 
202-219-4782 (this is not a toll-free number). Fax: 202-219-4745.
ii. Department of the Treasury
    The collection of information is in Section 54.9801-6T. This 
information is required by the statute so that participants will be 
informed about their rights under HIPAA and about the amount of 
creditable coverage that they have accrued under a group health plan.

[[Page 16922]]

The likely respondents are business or other for-profit institutions, 
non-profit institutions, small businesses or organizations, and Taft-
Hartly trusts. Responses to this collection of information are 
mandatory.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. 
Comments on the collection of information should be received by May 31, 
1997. In light of the request for OMB clearance by June 1, 1997, 
submission of comments within the first 30 days is encouraged to ensure 
their consideration. Comments are specially requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How to enhance the quality, utility, and clarity of the information 
to be collected;
    How to minimize the burden of complying with the proposed 
collection of information, including the application of automated 
collection techniques or other forms of information technology; and
    Estimates of capital or start up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    Additional PRA 95 Information:
    I. Background: In order to improve participants' understanding of 
their rights under an employer's welfare benefits plan, the statute 
provides that, a participant be provided with a description of a plan's 
special enrollment rules on or before the time when a participant is 
offered the opportunity to enroll in a group health plan.
    II. Current Actions: Under 29 CFR 2590.701-6 and 26 CFR 54.9801-6T 
of the interim rule, a group health plan offering group health 
insurance coverage is obligated to provide a description of the plans' 
special enrollment rules. The special enrollment rules generally apply 
in circumstances when the participant initially declined to enroll in 
the plan, and subsequently would like to have coverage.
    These regulations offer a model form to be used by group health 
plans and health insurance issuers, containing the minimum information 
mandated by the statute. Based on past experience, the staff believes 
that most of the materials required to be supplied under this ICR will 
be prepared by contract service providers such as insurance companies 
and third-party administrators.
    Type of Review: New.
    Agencies: U.S. Department of Labor, Pension and Welfare Benefits 
administration; U.S. Department of the Treasury, Internal Revenue 
Service.
    Title: Notice of Enrollment Rights.
    Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions; Group Health Plans.
    Frequency: On occasion.
    Burden:

----------------------------------------------------------------------------------------------------------------
                                    Total                       Average time per                                
             Year                respondents        Total           response       Burden hours        Cost     
                                    (000)         responses        (minutes)                                    
----------------------------------------------------------------------------------------------------------------
1997.........................       2,600,000         499,080  .50..............             750         100,000
1998.........................       2,600,000       7,622.010  .50..............          11,430       1,460,000
1999.........................       2,000,000       8,959,380  .50..............          13,440       1,720,000
                              ----------------------------------------------------------------------------------
      Totals.................  ..............  ..............  .................  ..............  ..............
----------------------------------------------------------------------------------------------------------------

3. Notice of Pre-Existing Condition Exclusion

i. Department of Labor
    The Department of Labor, as part of its continuing effort to reduce 
paperwork and respondent burden, conducts a preclearance consultation 
program to provide the general public and federal agencies with an 
opportunity to comment on proposed information collection requests 
(ICR) in accordance with the Paperwork Reduction Act of 1995 (PRA 95) 
(Pub. L. 104-13, 44 U.S.C. Chapter 35) and 5 CFR 1320.11. This program 
helps to ensure that requested data can be provided in the desired 
format, reporting burden (time and financial resources) is minimized, 
collection instruments are clearly understood, and the impact of 
collection requirements on respondents can be properly assessed. 
Currently, the Pension and Welfare Benefits Administration is 
soliciting comments concerning the proposed new collection of Notice of 
Pre-Existing Condition Exclusion.
    Dates: Written comments must be submitted to the office listed in 
the addressee section below on or before May 31, 1997. In light of the 
request for OMB clearance by June 1, 1997, submission of comments 
within the first 30 days is encouraged to ensure their consideration.
    The Department of Labor is particularly interested in comments 
which:
    <bullet> evaluate whether the proposed collection is necessary for 
the proper performance of the functions of the agency, including 
whether the information will have practical utility;
    <bullet> evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
    <bullet> enhance, the quality, utility, and clarity of the 
information to be collected; and
    <bullet> minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submissions of responses.
    Addressee: Gerald B. Lindrew, Office of Policy and Research, U.S. 
Department of Labor, Pension and Welfare Benefits Administration, 200 
Constitution Avenue, Room N-5647, Washington, D.C. 20210. Telephone: 
202-219-4782 (this is not a toll-free number) Fax: 202-219-4745.

[[Page 16923]]

ii. Department of the Treasury
    The collection of information is in Sections 54.9801-3T, 54.9801-
4T, and 54.9801-5T. This information is required by the statute so that 
participants will be informed about their rights under HIPAA and about 
the amount of creditable coverage that they have accrued under a group 
health plan. The likely respondents are business or other for-profit 
institutions, non-profit institutions, small businesses or 
organizations, and Taft-Hartley trusts. Responses to this collection of 
information are mandatory.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Officer of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. 
Comments on the collection of information should be received by May 31, 
1997. In light of the request for OMB clearance by June 1, 1997, 
submission of comments within the first 30 days in encouraged to ensure 
their consideration. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How to enhance the quality, utility, and clarity of the information 
to be collected;
    How to minimize the burden of complying with the proposed 
collection of information, including the application of automated 
collection techniques or other forms of information technology; and
    Estimates of capital or start up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    Additional PRA 95 Information:
    I. Background: In order to meet HIPAA's goal of improving 
portability of health care coverage, participants needs to understand 
their rights to show prior creditable coverage when entering a group 
health plan that contain pre-existing condition exclusion provisions. 
In addition, participants entering plans that use the alternative 
method of crediting coverage also need to be informed of the plan's 
provisions. Therefore, the Department has determined that plans that 
contain these provisions must disclose that fact to new participants, 
as well as inform individual participants of the extent to which a pre-
existing condition exclusion applies to them.
    II. Current Actions: 29 CFR 2590.701-3(c) and 26 CFR 54.9801-3T(c) 
requires that a group health plan or health insurance issuer offering 
group health insurance under the plan may not impose any pre-existing 
condition exclusions on a participant unless the participant has been 
notified in writing that the plan contains per-existing condition 
exclusions, that a participant has the right to demonstrate any period 
of prior creditable coverage, and that the plan or issuer will assist 
the participant in obtaining a certificate of prior coverage from any 
prior plan or issuer, if necessary. 29 CFR 2590.701-4(c)(4) and 26 CFR 
54.9801-4T(c)(4) requires that plans that use the alternative method of 
crediting coverage disclose their method at the time of enrollment in 
the plan. No additional cost of preparing or distributing this 
information has been included in this analysis because plans would only 
pursue this option if it were, on net, less costly than the standard 
method.
    In addition, 29 CFR 2590.701-5(d)(2) and 26 CFR 54.9801-5T(d)(2) 
requires that before a plan or issuer imposes a pre-existing condition 
exclusion on a particular participant, it must first disclose that 
determination in writing, including the basis for the decision, and an 
explanation of any appeal procedure established by the plan or issuer.
    Type of Review: New.
    Agencies: U.S. Department of Labor, Pension and Welfare Benefits 
Administration; U.S. Department of the Treasury, Internal Revenue 
Service.
    Title: Notice of Pre-Existing Exclusion Provisions.
    Afffected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions; Group Health Plans.
    Frequency: On occasion.
    Burden:

----------------------------------------------------------------------------------------------------------------
                                                                   Average time                                 
         Cite/reference                Total           Total      per  responses   Burden hours        Cost     
                                    respondents      responses       (minutes)                                  
----------------------------------------------------------------------------------------------------------------
Notice at time of enrollment:                                                                                   
    1997........................       1,261,450         500,800            0.70           2,470        $180,000
    1998........................       1,261,450       7,626,880            0.54          16,300       1,700,000
    1999........................       1,261,450       8,959,700            0.50          13,750       1,730,000
Notice of pre-existing condition                                                                                
 causing lack of coverage:                                                                                      
    1997........................       1,261,450          57,900            2.27           1,800         100,000
    1998........................       1,261,450         862,830            0.84           6,160         410,000
    1999........................       1,261,450       1,008,810            0.52           1,830         210,000
                                 -------------------------------------------------------------------------------
      Totals....................  ..............  ..............  ..............  ..............  ..............
----------------------------------------------------------------------------------------------------------------

    Estimated Total Burden Cost:

N. Paperwork Reduction Act--Department of Health and Human Services

    Under the Paperwork Reduction Act of 1995, HHS is 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.

[[Page 16924]]

    <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 requirement 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, to ensure 
compliance with section 111 of the 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 the publication, with OMB review and 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: Information Requirements 
Referenced in HIPAA for Group Health Plans.
    Form Number: HCFA-R-206.
    Use: This regulation and related information collection 
requirements will ensure that group health plans provide individuals 
with documentation necessary to demonstrate prior creditable coverage, 
and that group health plans notify individuals of their special 
enrollment rights in the group health insurance market.
    Frequency: On occasion.
    Affected Public: State and local governments, Business or other for 
profit, not-for-profit institutions, individuals or households, Federal 
government.
    Number of Respondents: 1,430.
    Total Annual Responses: Due to the rolling effective dates in the 
statute, the number of annual responses is estimated to be 32.5 million 
in 1997, but will increase to 41 million in 1998 and 42.5 million in 
1999.
    Total Annual Hours Requested: 1.8 million to 3.6 million hours in 
1997; 2.3 million to 5.8 million hours in 1998; and 2.6 million to 5.9 
million hours in 1999.
    Total Annual Costs: $36.8 million to $53.9 million in 1997; $42.4 
million to $76.3 million in 1998; and $43.5 million to $77.3 million in 
1999. 45 CFR Secs. 146.120, 146.122, 146.150, 146.152, 146.160, and 
146.180 of this document contain information collection requirements.

45 CFR 146.120  Certificates and Disclosure of Previous Coverage

    Certificates and Disclosure of Prior Coverage.  This section sets 
forth guidance regarding the certification and other disclosure of 
information requirements relating to prior creditable coverage of an 
individual. In general, the certificate must be provided in writing and 
must include the following information: (1) The date any waiting or 
affiliation period began, (2) the date coverage began, and (3) the date 
coverage ended (or indicate if coverage is continuing). The regulations 
also allow a plan or issuer in an appropriate case to simply state in 
the certificate that the individual has at least 18 months of 
creditable coverage that is not interrupted by a significant break and 
indicate the date coverage ended. In general, individuals have the 
right to receive a certificate automatically (an automatic certificate) 
when they lose coverage under a plan and when they have a right to 
elect COBRA continuation coverage.
    We anticipate that approximately 1,400 issuers will be required to 
produce 30 million certifications per year based on the model 
certificate provided. Our estimate of issuers (1,400) includes 
commercial insurers and HMOs, but does not include some types of 
issuers, such as Preferred Provider Organizations (PPOs); however, 
these types of issuers are small in number. The time estimate includes 
the time required to gather the pertinent information, create a 
certificate, and mail the certificate to the plan participant. This 
time estimate is 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.
    These estimates include the certificates required by issuers acting 
as service providers on behalf of group health plans and state and 
local government health plans. We anticipate that most, if not all, 
state and local government health plans will contract with an issuer to 
develop the certificate.

                                                              Estimates for Certifications                                                              
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              Total        Total                                                                                        
                   Year                    respondents   responses   Average time per response (range)        Burden hours (range)         Cost (range) 
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.....................................        1,400   32,698,845  3.32 min.........................  1,809,119 hrs...................     $36,366,106
                                           ...........      6.34min  3,456,036 hrs....................  53,434,628......................                
1998.....................................        1,400   28,072,131  5.19 min.........................  2,242,866 hrs...................      40,928,939
                                           ...........  ...........  12.23 min........................  5,720,198 hrs...................      74,859,759
1999.....................................        1,400   28,055,984  5.37 min.........................  2,510,461 hrs...................      42,124,907
                                           ...........  ...........  12.41 min........................  5,804,408 hrs...................      75,760,119
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The costs above include the costs associated with issuers acting as service providers for group health plans. The costs are also included in the  
  Department of Labor's estimates.                                                                                                                      

    Notice to all participants: Under this section, issuers are 
required to notify all participants at the time of enrollment stating 
the terms of the issuer's pre-existing condition exclusion provisions, 
the participant's right to demonstrate creditable coverage, and that 
the issuer will assist in securing a certificate if necessary.

[[Page 16925]]

    We have estimated the burden associated with this information 
collection requirement to be the time required for issuers to develop 
standardized language outlining the existence and terms of any 
preexisting condition exclusion under the plan and the rights of 
individuals to demonstrate creditable coverage. In specific, we 
anticipate that issuers will be required to develop approximately 
660,000 notices in 1997; 5.6 million notices in 1998; and 6.2 million 
notices in 1999. At 30 seconds for each notice, we estimate the total 
hour burden to be 4,400 hours in 1997; 30,000 hours in 1998; and 34,000 
hours in 1999. The respective costs will be $49,000 in 1997; $330,000 
in 1998; and $377,000 in 1999. These estimates and subsequent estimates 
are based on an hourly wage of $11 for issuers and $15 for State and 
local government employees. These estimates include the notices 
required by issuers on behalf of state and local government health 
plans, since we anticipate that most, if not all state and local 
government health plans will contract with an issuer to develop the 
notice. The estimates have been disaggregated below:

----------------------------------------------------------------------------------------------------------------
                                                                   State health    Local health                 
                      Year                            Issuers          plans           plans       Total notices
----------------------------------------------------------------------------------------------------------------
Total notices:                                                                                                  
    1997........................................         320,000         129,826         214,880         664,706
    1998........................................       4,878,200         259,653         429,761       5,567,614
    1999........................................       5,734,300         259,653         429,761       6,189,714
Total burden hours:                                                                                             
    1997........................................           1,592           1,078           1,784           4,454
    1998........................................          24,293           2,155           3,567          30,015
    1999........................................          28,557           2,155           3,567          34,279
----------------------------------------------------------------------------------------------------------------

    Notice to individual of period of preexisting condition exclusion. 
Within a reasonable time following the receipt of the certificate, 
information relating to the alternative method, or other evidence of 
coverage, a plan or issuer is required to make a determination 
regarding the length of any preexisting condition exclusion period that 
applies to the individual and notify the individual of its 
determination. Whether a determination and notification is made within 
a reasonable period of time will depend upon the relevant facts and 
circumstances including whether the application of the preexisting 
condition exclusion period would prevent access to urgent medical 
services. The individual need only be notified, however, if, after 
considering the evidence, a preexisting condition exclusion period will 
be imposed on the individual. The basis of the determination, including 
the source and substance of any information on which the plan or issuer 
relied, must be included in the notice. The plan's appeals procedures 
and the opportunity of the individual to present additional evidence 
must also be explained in the notification.
    We estimate that issuers will be required to develop approximately 
29,000 notices in 1997; 425,000 notices in 1998; and 498,000 notices in 
1999. At 2 minutes for each notice, we estimate the total hour burden 
to be 960 hours in 1997; 14,000 hours in 1998; and 16,600 hours in 
1999. We estimate the respective costs associated with these burdens to 
be $10,600 in 1997; $156,000 in 1998; and $183,000 in 1999. These 
estimates include the notices required by issuers on behalf of state 
and local government health plans, since we anticipate that most, if 
not all state and local government health plans will contract with an 
issuer to develop the notice. The estimates have been disaggregated 
below:

----------------------------------------------------------------------------------------------------------------
                                                                   State health    Local health                 
                      Year                            Issuers          plans           plans       Total notices
----------------------------------------------------------------------------------------------------------------
Total notices:                                                                                                  
    1997........................................          27,650             588             766          29,004
    1998........................................         422,136           1,176           1,531         425,143
    1999........................................         496,182           1,176           1,531         498,889
Total burden hours:                                                                                             
    1997........................................             921              20              25             966
    1998........................................          14,057              40              51          14,148
    1999........................................          16,553              40              51          16,644
----------------------------------------------------------------------------------------------------------------

45 CFR 146.122 Special Enrollment Periods

    This section in the regulation provides guidance regarding new 
enrollment rights that employees and dependents have under HIPAA. A 
health insurance issuer offering group health insurance coverage is 
required to provide a description of the special enrollment rights to 
anyone who declines coverage at the time of enrollment. The regulations 
provide a model of such a description containing the minimum 
information mandated by the statute.
    The first burden associated with this requirement is the time 
required for health insurance issuers and state and local government 
health plans to incorporate the model notice into the plan's standard 
policy information. We estimate the burden to be 2 hours annually per 
issuer, for a total burden of 2,800 hours. The cost associated with 
this hour burden is estimated to be $30,800 annually.
    The second burden associated with this requirement is the time 
required to disseminate the notice to new enrollees. We estimate that 
issuers will be required to develop approximately 1 million notices in 
1997; 5.3 million notices in 1998; and 5.9 million notices in 1999. At 
30 seconds for each notice, we estimate the total hour burden to be 
8,300 hours in 1997; 43,000 hours in 1998; and 48,000 hours in 1999. We 
have estimated the costs associated with these hour burdens to be 
$91,000 in 1997; $469,000 in 1998; and $527,000 in

[[Page 16926]]

1999. These estimates include the notices required by issuers on behalf 
of state and local government health plans, since we anticipate that 
most, if not all state and local government health plans will contract 
with an issuer to develop the notice. The estimates have been 
disaggregated below:

----------------------------------------------------------------------------------------------------------------
                                                                   State health    Local health                 
                      Year                            Issuers          plans           plans       Total notices
----------------------------------------------------------------------------------------------------------------
Total notices:                                                                                                  
    1997........................................         245,508         287,938         500,750       1,034,196
    1998........................................       3,750,024         575,875       1,001,500       5,327,399
    1999........................................       4,407,828         575,875       1,001,500       5,985,203
Total burden hours:                                                                                             
    1997........................................           1,964           2,304           4,006           8,273
    1998........................................          30,000           4,607           8,012          42,619
    1999........................................          35,263           4,607           8,012          47,881
----------------------------------------------------------------------------------------------------------------

45 CFR 146.150  Guaranteed Availability of Coverage for Employers in 
the PHS Act Group Market Provisions

    This section allows a health insurance issuer to deny health 
insurance coverage in the small group market if the issuer has 
demonstrated to the applicable State authority (if required by the 
State authority) that it does not have the financial reserves necessary 
to underwrite additional coverage and that it is applying this denial 
uniformly to all employers in the small group market in the State 
consistent with applicable State law and without regard to the claims 
experience of those employers and their employees (and their 
dependents) or any health status-related factor relating to those 
employees and dependents. Thus, issuers are only required to report to 
the applicable State authority if they are discontinuing coverage in 
the small group market.
    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 oversight process to make sure there is a guaranteed availability 
clause in each policy. For the 37 States that currently require 
guaranteed availability, it is our understanding that this is normal 
business practice. For the other 18 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 burden of 
10,850 hours. We have estimated the cost associated with this hour 
burden to be $163,000. 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 availability requirements.

45 CFR 146.152  Guaranteed Renewability of Coverage for Employers in 
the PHS Act Group Market Provisions

    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 oversight process to make sure there is a guaranteed availability 
clause in each policy. For the 43 States that currently require 
guaranteed renewability, it is our understanding that this is normal 
business practice. For the other 12 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 burden of 
6,700 hours. We have estimated the cost associated with this hour 
burden to be $100,500. 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.

45 CFR 146.160  Disclosure of Information by Issuers to Employers 
Seeking Coverage in the Small Group Market in the PHS Act Provisions

    This section requires issuers to disclose information to employers 
seeking coverage in the small group market. This section requires 
information to be provided by a health insurance issuer offering any 
health insurance coverage to a small employer. This information 
includes the issuer's right to change premium rates and the factors 
that may affect changes in premium rates, renewability of coverage, any 
preexisting condition exclusion, any affiliation periods applied by 
HMOs, the geographic areas served by HMOs, and the benefits and 
premiums available under all health insurance coverage for which the 
employer is qualified. The issuer is exempted from disclosing 
information that is proprietary or trade secret information under 
applicable law.
    The information described in this section must be language that is 
understandable by the average small employer and sufficient to 
reasonably inform small employers of their rights and obligations under 
the health insurance coverage. This requirement is satisfied if the 
issuer provides an outline of coverage, the minimum contribution and 
group participation rules that apply to any particular type of 
coverage, and any other information required by the State. An outline 
of coverage is defined as a general description of benefits and 
premiums. This would include an outline of coverage similar to the 
manner in which Medigap policies are presented, allowing the employer 
to easily compare one policy form to another to determine what is 
covered and how much the coverage will cost.
    We have estimated the total burden associated with this activity to 
be 2,400 hours. We anticipate that 1,200 issuers will be required to 
provide disclosure to small employers on an annual basis. We

[[Page 16927]]

estimate this time to be approximately 2 hours for each issuer to 
develop and update the standard information related to the general 
description of benefits and premiums on an annual basis and include 
this information in their policy information. We have estimated the 
cost associated with this hour burden to be $36,000.

45 CFR 146.180  Exclusion of Certain Plans From the PHS Act Group 
Market Requirements

    Section 145.180(b) includes rules pertaining to nonfederal 
governmental plans, which are permitted under HIPAA to elect to be 
exempted from some or all of HIPAA's requirements in the PHS Act. The 
regulation establishes the form and manner of the election. In 
particular, a nonfederal governmental plan making this election is 
required to notify plan participants, at the time of enrollment and on 
an annual basis, of the fact and consequences of the election. The 
burden imposed by this is the requirement for plans to disseminate 
standard notification language describing the plans' election and the 
consequences of this election. We anticipate that between 3,500 and 
5,000 nonfederal governmental plans will make this election and will 
therefore be required to disseminate notifications to their 
participants on an annual basis. Since this is standard language that 
will be incorporated into plans' existing policy documents, we see the 
burden as approximately 2 hours per plan to develop and update this 
standardized disclosure statement on an annual basis. Thus, we estimate 
the total burden for this activity to range from 7,000 to 10,000 hours. 
We estimate the cost associated with these hourly burdens to range from 
$77,000 to $110,000 per year.
    The above estimate does not include the cost of disseminating the 
notices to all plan participants on an annual basis and to new 
enrollees at the time of enrollment. Although we do not have an 
accurate estimate of the number of nonfederal governmental plans will 
choose to opt out of these provisions, we have provided for a range of 
50 to 100 percent. Using these ranges, we estimated 400,000 to 800,000 
of these notices would need to be produced in 1997 and 800,000 to 1.6 
million in 1998 and 1999. At 30 seconds per notice, we estimate the 
total burden hours to range from 3,400 to 6,800 in 1997; and 6,800 to 
13,600 in 1998 and 1999. We have estimated the costs associated with 
these hour burdens to range from $37,400 to $74,800 in 1997; and from 
$74,800 to $149,600 in 1998 and 1999.
    We have submitted a copy of this rule 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 this burden or any other aspect of 
these collections of information. 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. Attn: John Burke
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.

Statutory Authorities

    The Department of Labor interim final rule is adopted pursuant to 
the authority contained in Section 707 of ERISA (Pub. L. 93-406, 88 
Stat. 894; 29 U.S.C. 1135) as amended by HIPAA, (Pub. L. 104-91; 101 
Stat. 1936; 29 U.S.C. 1181).
    The Department of Health and Human Services interim final rule is 
adopted pursuant to the authority contained in Sections 2701, 2702, 
2711, 2712, 2713, and 2792 of the PHS Act, as established by HIPAA, 
(Pub. L. 104-191, 42 U.S.C. 300gg-1 through 300gg-13, and 300gg-92).
    The Department of the Treasury temporary rule is adopted pursuant 
to the authority contained in Section.

List of Subjects

26 CFR Part 54

    Excise taxes, Health insurance, Pensions, Reporting and 
recordkeeping requirements.

29 CFR Part 2590

    Employee benefit plans, Employee Retirement Income Security Act, 
Health care, Health insurance, Reporting and recordkeeping 
requirements.

45 CFR Parts 144 and 146

    Health care, Health insurance, Reporting and recordkeeping 
requirements, State regulation of health insurance.

Amendments to the Regulations

Internal Revenue Service

26 CFR Chapter 1
    Accordingly, 26 CFR part 54 is amended as follows:

PART 54--PENSION EXCISE TAXES

    Paragraph 1. The authority citation for part 54 is amended by 
adding entries in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 54.9801-1T also issued under 26 U.S.C. 9806.
    Section 54.9801-2T also issued under 26 U.S.C. 9806.
    Section 54.9801-3T also issued under 26 U.S.C. 9806.
    Section 54.9801-4T also issued under 26 U.S.C. 9806.
    Section 54.9801-5T also issued under 26 U.S.C. 9801(c)(4), 
9801(e)(3), and 9806
    Section 54.9801-6T also issued under 26 U.S.C. 9806.
    Section 54.9802-1T also issued under 26 U.S.C. 9806.
    Section 54.9804-1T also issued under 26 U.S.C. 9806.
    Section 54.9806-1T also issued under 26 U.S.C. 9806.

    Par. 2. Sections 54.9801-1T, 54.9801-2T, 54.9801-3T, 54.9801-4T, 
54.9801-5T, 54.9801-6T, 54.9802-1T, 54.9804-1T, and 54.9806-1T are 
added to read as follows:


Sec. 54.9801-1T  Basis and scope (temporary).

    (a) Statutory basis. Sections 54.9801-1T through 54.9801-6T, 
54.9802-1T, 54.9804-1T, and 54.9806-1T (portability sections) implement 
Chapter 100 of Subtitle K of the Internal Revenue Code of 1986.
    (b) Scope. A group health plan may provide greater rights to 
participants and beneficiaries than those set forth in these 
portability sections. These portability sections set forth minimum 
requirements for group health plans concerning:
    (1) Limitations on a preexisting condition exclusion period.
    (2) Certificates and disclosure of previous coverage.
    (3) Rules relating to creditable coverage.
    (4) Special enrollment periods.
    (c) Similar Requirements Under the Public Health Service Act and 
Employee Retirement Income Security Act. Sections 2701, 2702, 2721, and 
2791 of the Public Health Service Act and sections 701, 702, 703, 705, 
and 706 of the Employee Retirement Income Security Act of 1974 impose 
requirements similar to those imposed under Chapter 100 of Subtitle K 
of the Code with respect to health insurance issuers offering group 
health insurance coverage. See 45 CFR parts 144, 146 and 148 and 29 CFR 
part 2590. See also Part B of Title XXVII of the Public Health Service 
Act and 45 CFR part 148 for other rules applicable to health insurance 
offered in the individual market (defined in Sec. 54.9801-2T).

[[Page 16928]]

Sec. 54.9801-2T  Definitions (temporary).

    Unless otherwise provided, the definitions in this section govern 
in applying the provisions of Secs. 54.9801-1T through 54.9801-6T, 
54.9802-1T, 54.9804-1T, and 54.9806-1T.
    Affiliation period means a period of time that must expire before 
health insurance coverage provided by an HMO becomes effective, and 
during which the HMO is not required to provide benefits.
    COBRA definitions:
    (1) COBRA means Title X of the Consolidated Omnibus Budget 
Reconciliation Act of 1985, as amended.
    (2) COBRA continuation coverage means coverage, under a group 
health plan, that satisfies an applicable COBRA continuation provision.
    (3) COBRA continuation provision means sections 601-608 of the 
ERISA, section 4980B of the Code (other than paragraph (f)(1) of such 
section 4980B insofar as it relates to pediatric vaccines), and Title 
XXII of the PHSA.
    (4) Exhaustion of COBRA continuation coverage means that an 
individual's COBRA continuation coverage ceases for any reason other 
than either failure of the individual to pay premiums on a timely 
basis, or for cause (such as making a fraudulent claim or an 
intentional misrepresentation of a material fact in connection with the 
plan). An individual is considered to have exhausted COBRA continuation 
coverage if such coverage ceases--
    (i) Due to the failure of the employer or other responsible entity 
to remit premiums on a timely basis; or
    (ii) When the individual no longer resides, lives, or works in a 
service area of an HMO or similar program (whether or not within the 
choice of the individual) and there is no other COBRA continuation 
coverage available to the individual.
    Condition means a medical condition.
    Creditable coverage means creditable coverage within the meaning of 
Sec. 54.9801-4T(a).
    Employee Retirement Income Security Act of 1974 (ERISA) means the 
Employee Retirement Income Security Act of 1974, as amended (29 U.S.C. 
1001 et seq.).
    Enroll means to become covered for benefits under a group health 
plan (i.e., when coverage becomes effective), without regard to when 
the individual may have completed or filed any forms that are required 
in order to enroll in the plan. For this purpose, an individual who has 
health insurance coverage under a group health plan is enrolled in the 
plan regardless of whether the individual elects coverage, the 
individual is a dependent who becomes covered as a result of an 
election by a participant, or the individual becomes covered without an 
election.
    Enrollment date definitions (enrollment date and first day of 
coverage) are set forth in Sec. 54.9801-3T(a)(2) (i) and (ii).
    Excepted benefits means the benefits described as excepted in 
Sec. 54.9804-1T(b).
    Genetic information means information about genes, gene products, 
and inherited characteristics that may derive from the individual or a 
family member. This includes information regarding carrier status and 
information derived from laboratory tests that identify mutations in 
specific genes or chromosomes, physical medical examinations, family 
histories, and direct analysis of genes or chromosomes.
    Group health insurance coverage means health insurance coverage 
offered in connection with a group health plan.
    Group health plan means a plan (including a self-insured plan) of, 
or contributed to by, an employer (including a self-employed person) or 
employee organization to provide health care (directly or otherwise) to 
the employees, former employees, the employer, others associated or 
formerly associated with the employer in a business relationship, or 
their families.
    Group market means the market for health insurance coverage offered 
in connection with a group health plan. (However, certain very small 
plans may be treated as being in the individual market, rather than the 
group market; see the definition of individual market in this section.)
    Health insurance coverage means benefits consisting of medical care 
(provided directly, through insurance or reimbursement, or otherwise) 
under any hospital or medical service policy or certificate, hospital 
or medical service plan contract, or HMO contract offered by a health 
insurance issuer. However, benefits described in Sec. 54.9804-1T(b)(2) 
are not treated as benefits consisting of medical care.
    Health insurance issuer or issuer means an insurance company, 
insurance service, or insurance organization (including an HMO) that is 
required to be 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 ERISA). Such term does not include 
a group health plan.
    Health maintenance organization or HMO means--
    (1) A federally qualified health maintenance organization (as 
defined in section 1301(a) of the PHSA);
    (2) An organization recognized under State law as a health 
maintenance organization; or
    (3) A similar organization regulated under State law for solvency 
in the same manner and to the same extent as such a health maintenance 
organization.
    Individual health insurance coverage means health insurance 
coverage offered to individuals in the individual market, but does not 
include short-term, limited duration insurance. For this purpose, 
short-term, limited duration insurance means health insurance coverage 
provided pursuant to a contract with an issuer that has an expiration 
date specified in the contract (taking into account any extensions that 
may be elected by the policyholder without the issuer's consent) that 
is within 12 months of the date such contract becomes effective. 
Individual health insurance coverage can include dependent coverage.
    Individual market means the market for health insurance coverage 
offered to individuals other than in connection with a group health 
plan. Unless a State elects otherwise in accordance with section 
2791(e)(1)(B)(ii) of the PHSA, such term also includes coverage offered 
in connection with a group health plan that has fewer than two 
participants as current employees on the first day of the plan year.
    Issuer means a health insurance issuer.
    Late enrollment definitions (late enrollee and late enrollment) are 
set forth in Sec. 54.9801-3T(a)(2) (iii) and (iv).
    Medical care has the meaning given such term by section 213(d) of 
the Internal Revenue Code, determined without regard to section 
213(d)(1)(C) and so much of section 213(d)(1)(D) as relates to 
qualified long-term care insurance.
    Medical condition on condition means any condition, whether 
physical or mental, including, but not limited to, any condition 
resulting from illness, injury (whether or not the injury is 
accidental), pregnancy, or congenital malformation. However, genetic 
information is not a condition.
    Placement, or being placed, for adoption means the assumption and 
retention of a legal obligation for total or partial support of a child 
by a person with whom the child has been placed in anticipation of the 
child's adoption. The child's placement for adoption with such person 
terminates upon the termination of such legal obligation.
    Plan year means the year that is designated as the plan year in the 
plan

[[Page 16929]]

document of a group health plan, except that if the plan document does 
not designate a plan year or if there is no plan document, the plan 
year is--
    (1) The deductible/limit year used under the plan;
    (2) If the plan does not impose deductibles or limits on a yearly 
basis, then the plan year is the policy year;
    (3) If the plan does not impose deductibles or limits on a yearly 
basis, and either the plan is not insured or the insurance policy is 
not renewed on an annual basis, then the plan year is the employer's 
taxable year; or
    (4) In any other case, the plan year is the calendar year.
    Preexisting condition exclusion means a limitation or exclusion of 
benefits relating to a condition based on the fact that the condition 
was present before the first day of coverage, whether or not any 
medical advice, diagnosis, care, or treatment was recommended or 
received before that day. A preexisting condition exclusion includes 
any exclusion applicable to an individual as a result of information 
that is obtained relating to an individual's health status before the 
individual's first day of coverage, such as a condition identified as a 
result of a pre-enrollment questionnaire or physical examination given 
to the individual, or review of medical records relating to the 
preenrollment period.
    Public health plan means public health plan within the meaning of 
Sec. 54.9801-4T(a)(1)(ix).
    Public Health Service Act (PHSA) means the Public Health Service 
Act (42 U.S.C. 201, et seq.).
    Significant break in coverage means a significant break in coverage 
within the meaning of Sec. 54.9801-4T(b)(2)(iii).
    Special enrollment date means a special enrollment date within the 
meaning of Sec. 54.9801-6T(d).
    State health benefits risk pool means a State health benefits risk 
pool within the meaning of Sec. 54.9801-4T(a)(1)(vii).
    Waiting period means the period that must pass before an employee 
or dependent is eligible to enroll under the terms of a group health 
plan. If an employee or dependent enrolls as a late enrollee or on a 
special enrollment date, any period before such late or special 
enrollment is not a waiting period. If an individual seeks and obtains 
coverage in the individual market, any period after the date the 
individual files a substantially complete application for coverage and 
before the first day of coverage is a waiting period.


Sec. 54.9801-3T  Limitations on preexisting condition exclusion period 
(temporary).

    (a) Preexisting condition exclusion--(1) In general. Subject to 
paragraph (b) of this section, a group health plan may impose, with 
respect to a participant or beneficiary, a preexisting condition 
exclusion only if the requirements of this paragraph (a) are satisfied. 
(See PHSA section 2701 and ERISA section 701 under which this 
prohibition is also imposed on a health insurance issuer offering group 
health insurance coverage.)
    (i) 6-month look-back rule. A preexisting condition exclusion must 
relate to a condition (whether physical or mental), regardless of the 
cause of the condition, for which medical advice, diagnosis, care, or 
treatment was recommended or received within the 6-month period ending 
on the enrollment date.
    (A) For purposes of this paragraph (a)(1)(i), medical advice, 
diagnosis, care, or treatment is taken into account only if it is 
recommended by, or received from, an individual licensed or similarly 
authorized to provide such services under State law and operating 
within the scope of practice authorized by State law.
    (B) For purposes of this paragraph (a)(1)(i), the 6-month period 
ending on the enrollment date begins on the 6-month anniversary date 
preceding the enrollment date. For example, for an enrollment date of 
August 1, 1998, the 6-month period preceding the enrollment date is the 
period commencing on February 1, 1998 and continuing through July 31, 
1998. As another example, for an enrollment date of August 30, 1998, 
the 6-month period preceding the enrollment date is the period 
commencing on February 28, 1998 and continuing through August 29, 1998.
    (C) The rules of this paragraph (a)(1)(i) are illustrated by the 
following examples:

    Example 1. (i) Individual A is treated for a medical condition 7 
months before the enrollment date in Employer R's group health plan. 
As part of such treatment, A's physician recommends that a follow-up 
examination be given 2 months later. Despite this recommendation, A 
does not receive a follow-up examination and no other medical 
advice, diagnosis, care, or treatment for that condition is 
recommended to A or received by A during the 6-month period ending 
on A's enrollment date in Employer R's plan.
    (ii) In this Example 1, Employer R's plan may not impose a 
preexisting condition exclusion period with respect to the condition 
for which A received treatment 7 months prior to the enrollment 
date.
    Example 2. (i) Same facts as Example 1 except that Employer R's 
plan learns of the condition and attaches a rider to A's policy 
excluding coverage for the condition. Three months after enrollment, 
A's condition recurs, and Employer R's plan denies payment under the 
rider.
    (ii) In this Example 2, the rider is a preexisting condition 
exclusion and Employer R's plan may not impose a preexisting 
condition exclusion with respect to the condition for which A 
received treatment 7 months prior to the enrollment date.
    Example 3. (i) Individual B has asthma and is treated for that 
condition several times during the 6-month period before B's 
enrollment date in Employer S's plan. The plan imposes a 12-month 
preexisting condition exclusion. B has no prior creditable coverage 
to reduce the exclusion period. Three months after the enrollment 
date, B begins coverage under Employer S's plan. Two months later, B 
is hospitalized for asthma.
    (ii) In this Example 3, Employer S's plan may exclude payment 
for the hospital stay and the physician services associated with 
this illness because the care is related to a medical condition for 
which treatment was received by B during the 6-month period before 
the enrollment date.
    Example 4. (i) Individual D, who is subject to a preexisting 
condition exclusion imposed by Employer U's plan, has diabetes, as 
well as a foot condition caused by poor circulation and retinal 
degeneration (both of which are conditions that may be directly 
attributed to diabetes). After enrolling in the plan, D stumbles and 
breaks a leg.
    (ii) In this Example 4, the leg fracture is not a condition 
related to D's diabetes, even though poor circulation in D's 
extremities and poor vision may have contributed towards the 
accident. However, any additional medical services that may be 
needed because of D's preexisting diabetic condition that would not 
be needed by another patient with a broken leg who does not have 
diabetes may be subject to the preexisting condition exclusion 
imposed under Employer U's plan.

    (ii) Maximum length of preexisting condition exclusion (the look-
forward rule). A preexisting condition exclusion is not permitted to 
extend for more than 12 months (18 months in the case of a late 
enrollee) after the enrollment date. For purposes of this paragraph 
(a)(1)(ii), the 12-month and 18-month periods after the enrollment date 
are determined by reference to the anniversary of the enrollment date. 
For example, for an enrollment date of August 1, 1998, the 12-month 
period after the enrollment date is the period commencing on August 1, 
1998 and continuing through July 31, 1999.
    (iii) Reducing a preexisting condition exclusion period by 
creditable coverage. The period of any preexisting condition exclusion 
that would otherwise apply to an individual under a group health plan 
is reduced by the number of days of creditable coverage the individual 
has as of the enrollment date, as counted under Sec. 54.9801-4T. For 
purposes of Sec. 54.9801-1T through Sec. 54.9801-6T, the phrase ``days 
of creditable coverage'' has the same meaning as the phrase

[[Page 16930]]

``aggregate of the periods of creditable coverage'' as such term is 
used in section 9801(a)(3) of the Internal Revenue Code.
    (iv) Other standards. See Sec. 54.9802-1T for other standards that 
may apply with respect to certain benefit limitations or restrictions 
under a group health plan.
    (2) Enrollment definitions--(i) Enrollment date means the first day 
of coverage or, if there is a waiting period, the first day of the 
waiting period.
    (ii)(A) First day of coverage means, in the case of an individual 
covered for benefits under a group health plan in the group market, the 
first day of coverage under the plan and, in the case of an individual 
covered by health insurance coverage in the individual market, the 
first day of coverage under the policy.
    (B) The following example illustrates the rule of paragraph 
(a)(2)(ii)(A) of this section:

    Example. (i) Employer V's group health plan provides for 
coverage to begin on the first day of the first payroll period 
following the date an employee is hired and completes the applicable 
enrollment forms, or on any subsequent January 1 after completion of 
the applicable enrollment forms. Employer V's plan imposes a 
preexisting condition exclusion for 12 months (reduced by the 
individual's creditable coverage) following an individual's 
enrollment date. Employee E is hired by Employer V on October 13, 
1998 and then on October 14, 1998 completes and files all the forms 
necessary to enroll in the plan. E's coverage under the plan becomes 
effective on October 25, 1998 (which is the beginning of the first 
payroll period after E's date of hire).
    (ii) In this Example, E's enrollment date is October 13, 1998 
(which is the first day of the waiting period for E's enrollment and 
is also E's date of hire). Accordingly, with respect to E, the 6-
month period in paragraph (a)(1)(i) would be the period from April 
13, 1998 through October 12, 1998, the maximum permissible period 
during which Employer V's plan could apply a preexisting condition 
exclusion under paragraph (a)(1)(ii) would be the period from 
October 13, 1998 through October 12, 1999, and this period would be 
reduced under paragraph (a)(1)(iii) by E's days of creditable 
coverage as of October 13, 1998.

    (iii) Late enrollee means an individual whose enrollment in a plan 
is a late enrollment.
    (iv) (A) Late enrollment means enrollment under a group health plan 
other than on--
    (1) The earliest date on which coverage can become effective under 
the terms of the plan; or
    (2) A special enrollment date for the individual.
    (B) If an individual ceases to be eligible for coverage under the 
plan by terminating employment, and then subsequently becomes eligible 
for coverage under the plan by resuming employment, only eligibility 
during the individual's most recent period of employment is taken into 
account in determining whether the individual is a late enrollee under 
the plan with respect to the most recent period of coverage. Similar 
rules apply if an individual again becomes eligible for coverage 
following a suspension of coverage that applied generally under the 
plan.
    (v) Examples. The rules of this paragraph (a)(2) are illustrated by 
the following examples:

    Example 1. (i) Employee F first becomes eligible to be covered 
by Employer W's group health plan on January 1, 1999, but elects not 
to enroll in the plan until April 1, 1999. April 1, 1999 is not a 
special enrollment date for F.
    (ii) In this Example 1, F would be a late enrollee with respect 
to F's coverage that became effective under the plan on April 1, 
1999.
    Example 2. (i) Same as Example 1, except that F does not enroll 
in the plan on April 1, 1999 and terminates employment with Employer 
W on July 1, 1999, without having had any health insurance coverage 
under the plan. F is rehired by Employer W on January 1, 2000 and is 
eligible for and elects coverage under Employer W's plan effective 
on January 1, 2000.
    (ii) In this Example 2, F would not be a late enrollee with 
respect to F's coverage that became effective on January 1, 2000.

    (b) Exceptions pertaining to preexisting condition exclusions--(1) 
Newborns--
    (i) In general. Subject to paragraph (b)(3) of this section, a 
group health plan may not impose any preexisting condition exclusion 
with regard to a child who, as of the last day of the 30-day period 
beginning with the date of birth, is covered under any creditable 
coverage. Accordingly, if a newborn is enrolled in a group health plan 
(or other creditable coverage) within 30 days after birth and 
subsequently enrolls in another group health plan without a significant 
break in coverage, the other plan may not impose any preexisting 
condition exclusion with regard to the child.
    (ii) Example. The rule of this paragraph (b)(1) is illustrated by 
the following example:

    Example. (i) Seven months after enrollment in Employer W's group 
health plan, Individual E has a child born with a birth defect. 
Because the child is enrolled in Employer W's plan with in 30 days 
of birth, no preexisting condition exclusion may be imposed with 
respect to the child under Employer W's plan. Three months after the 
child's birth, E commences employment with Employer X and enrolls 
with the child in Employer X's plan 45 days after leaving Employer 
W's plan. Employer X's plan imposes a 12-month exclusion for any 
preexisting condition.
    (ii) In this Example, Employer X's plan may not impose any 
preexisting condition exclusion with respect to E's child because 
the child was covered within 30 days of birth and had no significant 
break in coverage. This result applies regardless of whether E's 
child is included in the certificate of creditable coverage provided 
to E by Employer W indicating 300 days of dependent coverage or 
receives a separate certificate indicating 90 days of coverage. 
Employer X's plan may impose a preexisting condition exclusion with 
respect to E for up to 2 months for any preexisting condition of E 
for which medical advice, diagnosis, care, or treatment was 
recommended or received by E within the 6-month period ending on E's 
enrollment date in Employer X's plan.

    (2) Adopted children. Subject to paragraph (b)(3) of this section, 
a group health plan may not impose any preexisting condition exclusion 
in the case of a child who is adopted or placed for adoption before 
attaining 18 years of age and who, as of the last day of the 30-day 
period beginning on the date of the adoption or placement for adoption, 
is covered under creditable coverage. This rule does not apply to 
coverage before the date of such adoption or placement for adoption.
    (3) Break in coverage. Paragraphs (b)(1) and (2) of this section no 
longer apply to a child after a significant break in coverage.
    (4) Pregnancy. A group health plan may not impose a preexisting 
condition exclusion relating to pregnancy as a preexisting condition.
    (5) Special enrollment dates. For special enrollment dates relating 
to new dependents, see Sec. 54.9801-6T(b).
    (c) Notice of plan's preexisting condition exclusion. A group 
health plan may not impose a preexisting condition exclusion with 
respect to a participant or dependent of the participant before 
notifying the participant, in writing, of the existence and terms of 
any preexisting condition exclusion under the plan and of the rights of 
individuals to demonstrate creditable coverage (and any applicable 
waiting periods) as required by Sec. 54.9801-5T. The description of the 
rights of individuals to demonstrate creditable coverage includes a 
description of the right of the individual to request a certificate 
from a prior plan or issuer, if necessary, and a statement that the 
current plan or issuer will assist in obtaining a certificate from any 
prior plan or issuer, if necessary.


Sec. 54.9801-4T  Rules relating to creditable coverage (temporary).

    (a) General rules--(1) Creditable coverage. For purposes of this 
section,

[[Page 16931]]

except as provided in paragraph (a)(2) of this section, the term 
creditable coverage means coverage of an individual under any of the 
following:
    (i) A group health plan as defined in Sec. 54.9801-2T.
    (ii) Health insurance coverage as defined in Sec. 54.9801-2T 
(whether or not the entity offering the coverage is subject to chapter 
100 of Subtitle K, and without regard to whether the coverage is 
offered in the group market, the individual market, or otherwise).
    (iii) Part A or B of Title XVIII of the Social Security Act 
(Medicare).
    (iv) Title XIX of the Social Security Act (Medicaid), other than 
coverage consisting solely of benefits under section 1928 of the Social 
Security Act (the program for distribution of pediatric vaccines).
    (v) Title 10 U.S.C. Chapter 55 (medical and dental care for members 
and certain former members of the uniformed services, and for their 
dependents; for purposes of Title 10 U.S.C. Chapter 55, uniformed 
services means the armed forces and the Commissioned Corps of the 
National Oceanic and Atmospheric Administration and of the Public 
Health Service).
    (vi) A medical care program of the Indian Health Service or of a 
tribal organization.
    (vii) A State health benefits risk pool. For purposes of this 
section, a State health benefits risk pool means--
    (A) An organization qualifying under section 501(c)(26);
    (B) A qualified high risk pool described in section 2744(c)(2) of 
the PHSA; or
    (C) Any other arrangement sponsored by a State, the membership 
composition of which is specified by the State and which is established 
and maintained primarily to provide health insurance coverage for 
individuals who are residents of such State and who, by reason of the 
existence or history of a medical condition--
    (1) Are unable to acquire medical care coverage for such condition 
through insurance or from an HMO; or
    (2) Are able to acquire such coverage only at a rate which is 
substantially in excess of the rate for such coverage through the 
membership organization.
    (viii) A health plan offered under Title 5 U.S.C. Chapter 89 (the 
Federal Employees Health Benefits Program).
    (ix) A public health plan. For purposes of this section, a public 
health plan means any plan established or maintained by a State, 
county, or other political subdivision of a State that provides health 
insurance coverage to individuals who are enrolled in the plan.
    (x) A health benefit plan under section 5(e) of the Peace Corps Act 
(22 U.S.C. 2504(e)).
    (2) Excluded coverage. Creditable coverage does not include 
coverage consisting solely of coverage of expected benefits (described 
in Sec. 54.9804-1T).
    (3) Methods of counting creditable coverage. For purposes of 
reducing any preexisting condition exclusion period, as provided under 
Sec. 54.9801-3T(a)(1)(iii), a group health plan determines the amount 
of an individual's creditable coverage by using the standard method 
described in paragraph (b) of this section, except that the plan may 
use the alternative method under paragraph (c) of this section with 
respect to any or all of the categories of benefits described under 
paragraph (c)(3) of this section or may provide that a health insurance 
issuer offering health insurance coverage under the plan may use the 
alternative method of counting creditable coverage.
    (b) Standard method--(1) Specific benefits not considered. Under 
the standard method, a group health plan determines the amount of 
creditable coverage without regard to the specific benefits included in 
the coverage.
    (2) Counting creditable coverage--(i) Based on days. For purposes 
of reducing the preexisting condition exclusion period, a group health 
plan determines the amount of creditable coverage by counting all the 
days that the individual has under one or more types of creditable 
coverage. Accordingly, if on a particular day, an individual has 
creditable coverage from more than one source, all the creditable 
coverage on that day is counted as one day. Further, any days in a 
waiting period for a plan or policy are not creditable coverage under 
the plan or policy.
    (ii) Days not counted before significant break in coverage. Days of 
creditable coverage that occur before a significant break in coverage 
are not required to be counted.
    (iii) Definition of significant break in coverage. A significant 
break in coverage means a period of 63 consecutive days during all of 
which the individual does not have any creditable coverage, except that 
neither a waiting period nor an affiliation period is taken into 
account in determining a significant break in coverage. (See section 
731(b)(2)(iii) of ERISA and section 2723(b)(2)(iii) of the PHSA which 
exclude from preemption State insurance laws that require a break of 
more than 63 days before an individual has a significant break in 
coverage for purposes of State law.)
    (iv) Examples. The following examples illustrate how creditable 
coverage is counted in reducing preexisting condition exclusion periods 
under this paragraph (b)(2):

    Example 1. (i) Individual A works for Employer P and has 
creditable coverage under Employer P's plan for 18 months before A's 
employment terminates. A is hired by Employer Q, and enrolls in 
Employer Q's group health plan, 64 days after the last date of 
coverage under Employer P's plan. Employer Q's plan has a 12-month 
preexisting condition exclusion period.
    (ii) In this Example 1, because A had a break in coverage of 63 
days, Employer Q's plan may disregard A's prior coverage and A may 
be subject to a 12-month preexisting condition exclusions period.
    Example 2. (i) Same facts as Example 1, except that A is hired 
by Employer Q, and enrolls in Employer Q's plan, on the 63rd day 
after the last date of coverage under Employer P's plan.
    (ii) In this Example 2, A has a break in coverage of 62 days. 
Because A's break in coverage is not a significant break in 
coverage, Employer Q's plan must count A's prior creditable coverage 
for purposes of reducing the plan's preexisting condition exclusion 
as it applies to A.
    Example 3. (i) Same facts as Example 1, except that Employer Q's 
plan provides benefits through an insurance policy that, as required 
by applicable State insurance laws, defines a significant break in 
coverage as 90 days.
    (ii) In this Example 3, the issuer that provides group health 
insurance to Employer Q's plan must count A's period of creditable 
coverage prior to the 63-day break.
    Example 4. (i) Same facts as Example 3, except that Employer Q's 
plan is a self-insured plan, and, thus is not subject to State 
insurance laws.
    (ii) In this Example 4, the plan is not governed by the longer 
break rules under State insurance law and A's previous coverage may 
be disregarded.
    Example 5. (i) Individual B begins employment with Employer R 45 
days after terminating coverage under a prior group health plan. 
Employer R's plan has a 30-day waiting period before coverage 
begins. B enrolls in Employer R's plan when first eligible.
    (ii) In this Example 5, B does not have a significant break in 
coverage for purposes of determining whether B's prior coverage must 
be counted by Employer R's plan. B has only a 44-day break in 
coverage because the 30-day waiting period is not taken into account 
in determining a significant break in coverage.
    Example 6. (i) Individual C works for Employer S and has 
creditable coverage under Employer S's plan for 200 days before C's 
employment is terminated and coverage ceases. C is then unemployed 
for 51 days before being hired by Employer T. Employer T's plan has 
a 3-month waiting period. C works for Employer T for 2 months and 
then terminates employment. Eleven days after terminating employment 
with Employer T, C begins working for Employer U. Employer

[[Page 16932]]

U's plan has no waiting period, but has a 6-month preexisting 
condition exclusion period.
    (ii) In this Example 6, C does not have a significant break in 
coverage because, after disregarding the waiting period under 
Employer T's plan, C had only a 62-break in coverage (51 days plus 
11 days). Accordingly, C has 200 days of creditable coverage and 
Employer U's plan may not apply its 6-month preexisting condition 
exclusion period with respect to C.
    Example 7. (i) Individual D terminates employment with Employer 
V on January 13, 1998 after being covered for 24 months under 
Employer V's group health plan. On March 17, the 63rd day without 
coverage, D applies for a health insurance policy in the individual 
market. D's application is accepted and the coverage is made 
effective May 1.
    (ii) In this Example 7, because D applied for the policy before 
the end of the 63rd day, coverage under the policy ultimately became 
effective, the period between the date of application and the first 
day of coverage is a waiting period and no significant break in 
coverage occurred even though the actual period without coverage was 
107 days.
    Example 8. (i) Same facts as Example 7, except that D's 
application for a policy in the individual market is denied.
    (ii) In this Example 8, because D did not obtain coverage 
following application, D incurred a significant break in coverage on 
the 64th day.

    (v) Other permissible counting methods--(A) Rule. Notwithstandng 
any other provision of this paragraph (b)(2), for purposes of reducing 
a preexisting condition exclusion period (but not for purposes of 
issuing a certificate under Sec. 54,9801-5T), a group health plan may 
determine the amount of creditable coverage in any other manner that is 
at least as favorable to the individual as the method set forth in this 
paragraph (b)(2), subject to the requirements of other applicable law.
    (B) Example. The rule of this paragraph (b)(2)(v) is illustrated by 
the following example:

    Example. (i) Individual F has coverage under group health plan Y 
from January 3, 1997 through March 25, 1997. F then becomes covered 
by group health plan Z. F's enrollment date in Plan Z is May 1, 
1997. Plan Z has a 12-month preexisting condition exclusion period.
    (ii) In this Example, Plan Z may determine, in accordance with 
the rules prescribed in paragraph (b)(2) (i), (ii), and (iii), that 
F has 82 days of creditable coverage (29 days in January, 28 days in 
February, and 25 days in March). Thus, the preexisting condition 
exclusion period will no longer apply to F on February 8, 1998 (82 
days before the 12-month anniversary of her enrollment (May 1)), For 
administrative convenience, however, Plan Z may consider that the 
preexisting condition exclusion period will no longer apply to F on 
the first day of the month (February 1).

    (c) Alternative method--(1) Specific benefits considered. Under the 
alternative method, a group health plan determines the amount of 
creditable coverage based on coverage within any category of benefits 
described in paragraph (c)(3) of this section and not based on coverage 
for any other benefits. The plan may use the alternative method for any 
or all the categories. The plan may apply a different preexisting 
condition exclusion period with respect to each category (and may apply 
a different preexisting condition exclusion period for benefits that 
are not within any category). The creditable coverage determined for a 
category of benefits applies only for purposes of reducing the 
preexisting condition exclusion period with respect to that category. 
An individual's creditable coverage for benefits that are not within 
any category for which the alternative method is being used is 
determined under the standard method of paragraph (b) of this section.
    (2) Uniform application. A plan using the alternative method is 
required to apply it uniformly to all participants and beneficiaries 
under the plan. A plan that provides benefits through one or more 
insurance policies (or in part through one or more insurance policies) 
will not fail the uniform application requirement of this paragraph 
(c)(2) if the alternative method is used (or not used) separately with 
respect to participants and beneficiaries under any policy, provided 
that the alternative method is applied uniformly with respect to all 
coverage under that policy. The use of the alternative method is 
required to be set forth in the plan.
    (3) Categories of benefits. The alternative method for counting 
creditable coverage may be used for coverage for the following 
categories of benefits--
    (i) Mental health;
    (ii) Substance abuse treatment;
    (iii) Prescription drugs;
    (iv) Dental care; or
    (v) Vision care.
    (4) Plan notice. If the alternative method is used, the plan is 
required to--
    (i) State prominently that the plan is using the alternative method 
of counting creditable coverage in disclosure statements concerning the 
plan, and state this to each enrollee at the time of enrollment under 
the plan; and
    (ii) Include in these statements a description of the effect of 
using the alternative method, including an identification of the 
categories used.
    (5) Disclosure of information on previous benefits. See 
Sec. 54.9801-5T(b) for special rules concerning disclosure of coverage 
to a plan (or issuer) using the alternative method of counting 
creditable coverage under this paragraph (c).
    (6) Counting creditable coverage--(i) In general. Under the 
alternative method, the group health plan counts creditable coverage 
within a category if any level of benefits is provided within the 
category. Coverage under a reimbursement account or arrangement such as 
a flexible spending arrangement (as defined in section 106(c)(2) of the 
Internal Revenue Code) does not constitute coverage within any 
category.
    (ii) Special rules. In counting an individual's creditable coverage 
under the alternative method, the group health plan first determines 
the amount of the individual's creditable coverage that may be counted 
under paragraph (b) of this section, up to a total of 365 days of the 
most recent creditable coverage (546 days for a late enrollee). The 
period over which this creditable coverage is determined is referred to 
as the determination period. Then, for the category specified under the 
alternative method, the plan counts within the category all days of 
coverage that occurred during the determination period (whether or not 
a significant break in coverage for that category occurs), and reduces 
the individual's preexisting condition exclusion period for that 
category by that number of days. The plan may determine the amount of 
creditable coverage in any other reasonable manner, uniformly applied, 
this is at least as favorable to the individual.
    (iii) Example. The rules of this paragraph (c)(6) are illustrated 
by the following example:

    Example. (i) Individual D enrolls in Employer V's plan on 
January 1, 2001. Coverage under the plan includes prescription drug 
benefits. On April 1, 2001, the plan ceases providing prescription 
drug benefits. D's employment with Employer V ends on January 1, 
2002, after D was covered under Employer V's group health plan for 
365 days. D enrolls in Employer Y's plan on February 1, 2002 (D's 
enrollment date). Employer Y's plan uses the alternative method of 
counting creditable coverage and imposes a 12-month preexisting 
condition exclusion on prescription drug benefits.
    (ii) In this Example, Employer Y's plan may impose a 275-day 
preexisting condition exclusion with respect to D for prescription 
drug benefits because D had 90 days of creditable coverage relating 
to prescription drug benefits within D's determination period.


Sec. 54.9801-5T  Certification and disclosure of previous coverage 
(temporary).

    (a) Certificate of creditable coverage--(1) Entities required to 
provide certificate--(i) In general. A group

[[Page 16933]]

health plan is required to furnish certificates of creditable coverage 
in accordance with this paragraph (a) of this section. (See PHSA 
section 2701(e) and ERISA section 701(e) under which this obligation is 
also imposed on a health insurance issuer offering group health 
insurance coverage.)
    (ii) Duplicate certificates not required. An entity required to 
provide a certificate under this paragraph (a)(1) for an individual is 
deemed to have satisfied the certification requirements for that 
individual if another party provides the certificate, but only to the 
extent that information relating to the individual's creditable 
coverage and waiting or affiliation period is provided by the other 
party. For example, a group health plan is deemed to have satisfied the 
certification requirement with respect to a participant or beneficiary 
if any other entity actually provides a certificate that includes the 
information required under paragraph (a)(3) of this section with 
respect to the participant or beneficiary.
    (iii) Special rule for group health plans. To the extent coverage 
under a plan consists of group health insurance coverage, the plan is 
deemed to have satisfied the certification requirements under this 
paragraph (a)(1) if any issuer offering the coverage is required to 
provide the certificates pursuant to an agreement between the plan and 
the issuer. For example, if there is an agreement between an issuer and 
the employer sponsoring the plan under which the issuer agrees to 
provide certificates for individuals covered under the plan, and the 
issuer fails to provide a certificate to an individual when the plan 
would have been required to provide one under this paragraph (a), then 
the plan does not violate the certification requirements of this 
paragraph (a) (though the issuer would have violated the certification 
requirements pursuant to section 2701(e) of the PHSA and section 701(e) 
of ERISA).
    (iv) Special rules relating to issuers providing coverage under a 
plan--(A)(1) Responsibility of issuer for coverage period. See 29 CFR 
2590.701-5 and 45 CFR 146.115, under which an issuer is not required to 
provide information regarding coverage provided to an individual by 
another party.
    (2) Example. The rule referenced by this paragraph (a)(1)(iv)(A) is 
illustrated by the following example:

    Example. (i) A plan offers coverage with an HMO option from one 
issuer and an indemnity option from a different issuer. The HMO has 
not entered into an agreement with the plan to provide certificates 
as permitted under paragraph (a)(1)(iii) of this section.
    (ii) In this Example, if an employee switches from the indemnity 
option to the HMO option and later ceases to be covered under the 
plan, any certificate provided by the HMO is not required to provide 
information regarding the employee's coverage under the indemnity 
option.

    (B) (1) Cessation of issuer coverage prior to cessation of coverage 
under a plan. If an individual's coverage under an issuer's policy 
ceases before the individual's coverage under the plan ceases, the 
issuer is required (under section 2701(e) of the PHSA and section 
701(e) of ERISA) to provide sufficient information to the plan (or to 
another party designated by the plan) to enable a certificate to be 
provided by the plan (or other party), after cessation of the 
individual's coverage under the plan, that reflects the period of 
coverage under the policy. The provision of that information to the 
plan will satisfy the issuer's obligation to provide an automatic 
certificate for that period of creditable coverage for the individual 
under paragraph (a)(2)(ii) and (3) of this section. In addition, an 
issuer providing that information is required to cooperate with the 
plan in responding to any request made under paragraph (b)(2) of this 
section (relating to the alternative method of counting creditable 
coverage). If the individual's coverage under the plan ceases at the 
time the individual's coverage under the issuer's policy ceases, the 
issuer must provide an automatic certificate under paragraph (a)(2)(ii) 
of this section. An issuer may presume that an individual whose 
coverage ceases at a time other than the effective date for changing 
enrollment options has ceased to be covered under the plan.
    (2) Example. The rule of this paragraph (a)(1)(iv)(B) is 
illustrated by the following example:

    Example. (i) A group health plan provides coverage under an HMO 
option and an indemnity option with a different issuer, and only 
allows employees to switch on each January 1. Neither the HMO nor 
the indemnity issuer has entered into an agreement with the plan to 
provide automatic certificates as permitted under paragraph 
(a)(2)(ii) of this section.
    (ii) In this Example, if an employee switches from the indemnity 
option to the HMO option on January 1, the issuer must provide the 
plan (or a person designated by the plan) with appropriate 
information with respect to the individual's coverage with the 
indemnity issuer. However, if the individual's coverage with the 
indemnity issuer ceases at a date other than January 1, the issuer 
is instead required to provide the individual with an automatic 
certificate.

    (2) Individuals for whom certificate must be provided; timing of 
issuance--(i) Individuals. A certificate must be provided, without 
charge, for participants or dependents who are or were covered under a 
group health plan upon the occurrence of any of the events described in 
paragraph (a)(2)(ii) or (iii) of this section.
    (ii) Issuance of automatic certificates. The certificates described 
in this paragraph (a)(2)(ii) are referred to as automatic certificates.
    (A) Qualified beneficiaries upon a qualifying event. In the case of 
an individual who is a qualified beneficiary (as defined in section 
4980B(g)(1)) entitled to elect COBRA continuation coverage, an 
automatic certificate is required to be provided at the time the 
individual would lose coverage under the plan in the absence of COBRA 
continuation coverage or alternative coverage elected instead of COBRA 
continuation coverage. A plan satisfies this requirement if it provides 
the automatic certificate no later than the time a notice is required 
to be furnished for a qualifying event under section 4980B(f)(6) 
(relating to notices required under COBRA).
    (B) Other individuals when coverage ceases. In the case of an 
individual who is not a qualified beneficiary entitled to elect COBRA 
continuation coverage, an automatic certificate is required to be 
provided at the time the individual ceases to be covered under the 
plan. A plan satisfies this requirement if it provides the automatic 
certificate within a reasonable time period thereafter. In the case of 
an individual who is entitled to elect to continue coverage under a 
State program similar to COBRA and who receives the automatic 
certificate not later than the time a notice is required to be 
furnished under the State program, the certificate is deemed to be 
provided within a reasonable time period after the cessation of 
coverage under the plan.
    (C) Qualified beneficiaries when COBRA ceases. In the case of an 
individual who is a qualified beneficiary and has elected COBRA 
continuation coverage (or whose coverage has continued after the 
individual became entitled to elect COBRA continuation coverage), an 
automatic certificate is to be provided at the time the individual's 
coverage under the plan ceases. A plan satisfies this requirement if it 
provides the automatic certificate within a reasonable time after 
coverage ceases (or after the expiration of any grace period for 
nonpayment of premiums). An automatic certificate is required to be 
provided to such an individual regardless of whether the individual has 
previously received an automatic certificate under paragraph 
(a)(2)(ii)(A) of this section.

[[Page 16934]]

    (iii) Any individual upon request. Requests for certificates are 
permitted to be made by, or on behalf of, an individual within 24 
months after coverage ceases. Thus, for example, a plan in which an 
individual enrolls may, if authorized by the individual, request a 
certificate of the individual's creditable coverage on behalf of the 
individual from a plan in which the individual was formerly enrolled. 
After the request is received, a plan or issuer is required to provide 
the certificate by the earliest date that the plan, acting in a 
reasonable and prompt fashion, can provide the certificate. A 
certificate is required to be provided under this paragraph (a)(2)(iii) 
even if the individual has previously received an automatic certificate 
under paragraph (a)(2)(ii) of this section.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (a)(2):

    Example 1. (i) Individual A terminates employment with Employer 
Q. A is a qualified beneficiary entitled to elect COBRA continuation 
coverage under Employer q's group health plan. A notice of the 
rights provided under COBRA is typically furnished to qualified 
beneficiaries under the plan within 10 days after a covered employee 
terminates employment.
    (ii) In this Example 1, the automatic certificate may be 
provided at the same time that A is provided the COBRA notice.
    Example 2., (i) Same facts as Example 1, except that the 
automatic certificate for A is not completed by the time the COBRA 
notice is furnished to A.
    (ii) In this Example 2, the automatic certificate may be 
provided within the period permitted by law for the delivery of 
notices under COBRA.
    Example 3. (i) Employer R maintains an insured group health 
plan. R has never had 20 employees and thus R's plan is not subject 
to the COBRA continuation coverage provisions. However, R is in a 
State that has a State program similar to COBRA. B terminates 
employment with R and loses coverage under R's plan.
    (ii) In this Example 3, the automatic certificate may be 
provided not later than the time a notice is required to be 
furnished under the State program.
    Example 4. (i) Individual C terminates employment with Employer 
S and receives both a notice of C's rights under COBRA and an 
automatic certificate. C elects COBRA continuation coverage under 
Employer S's group health plan. After four months of COBRA 
continuation coverage and the expiration of a 30-day grace period, 
S's group health plan determines that C's COBRA continuation 
coverage has ceased due to failure to make a timely payment for 
continuation coverage.
    (ii) In this Example 4, the plan must provide an updated 
automatic certificate to C within a reasonable time after the end of 
the grace period.
    Example 5. (i) Individual D is currently covered under the group 
health plan of Employer T. D requests a certificate, as premitted 
under paragraph (a)(2)(iii). Under the procedure for Employer T's 
plan, certificates are mailed (by first class mail) 7 business days 
following receipt of the request. This date reflects the earliest 
date that the plan, acting in a reasonable and prompt fashion, can 
provide certificates.
    (ii) In this Example 5, the plan's procedure satisfies paragraph 
(a)(2)(iii) of this section.

    (3) Form and content of certificate-- (i) Written certificate--(A) 
In general. Except as provided in paragraph (a)(3)(i)(B) of this 
section, the certificate must be provided in writing (including any 
form approved by the Secretary as a writing).
    (B) Other permissible forms. No written certificate is required to 
be provided under paragraph (a) with respect to a particular event 
described in paragraph (a)(2) (ii) or (iii) of this section if----
    (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 this paragraph (a)(3) through means 
other than a written certificate (e.g., by telephone); and
    (4) The receiving plan or issuer receives such information from the 
sending plan or issuer in such form within the time periods required 
under paragraph (a)(2) of this section.
    (ii) Required information. The certificate must include the 
following----
    (A) The date the certificate is issued;
    (B) The name of the group health plan that provided the coverage 
described in the certificate;
    (C) The name of the participant or dependent with respect to whom 
the certificate applies, and any other information necessary for the 
plan providing the coverage specified in the certificate to identify 
the individual, such as the individual's identification number under 
the plan and the name of the participant if the certificate is for (or 
includes) a dependent;
    (D) The name, address, and telephone number of the plan 
administrator or issuer required to provide the certificate;
    (E) The telephone number to call for further information regarding 
the certificate (if different from paragraph (a)(3)(ii)(D) of this 
section);
    (F) Either--
    (1) A statement that an 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, or
    (2) The date any waiting period (and affiliation period, if 
applicable) began and the date creditable coverage began; and
    (G) 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 certificate. If an automatic 
certificate is provided pursuant to paragraph (a)(2)(ii) 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 pursuant to paragraph 
(a)(2)(iii) 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 such period of 
continuous coverage.
    (iv) Combining information for families. A certificate may provide 
information with respect to both a participant and the participant's 
dependents if the information is identical for each individual or, if 
the information is not identical, certificates may be provided on one 
form if the form provides all the required information for each 
individual and separately states the information that is not identical.
    (v) Model certificate. The requirements of paragraph (a)(3)(ii) of 
this section are satisfied if the plan provides a certificate in 
accordance with a model certificate authorized by the Secretary.
    (vi) Excepted benefits; categories of benefits. No certificate is 
required to be furnished with respect to excepted benefits described in 
Sec. 54.9804-1T. In addition, the information in the certificate 
regarding coverage is not required to specify categories of benefits 
described in Sec. 54.9801-4T(c) (relating to the alternative method of 
counting creditable coverage). However, 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 
(b) of this section.
    (4) Procedures--(i) Method of delivery. The certificate is required 
to be provided to each individual described in paragraph (a)(2) of this 
section or an entity requesting the certificate on behalf of the 
individual. The certificate

[[Page 16935]]

may be provided by first-class mail. If the certificate or certificates 
are provided to the participant and the participant's spouse at the 
participant's last known address, then the requirements of this 
paragraph (a)(4) are satisfied with respect to all individuals residing 
at that address. If a dependent's last known address is different than 
the participant's last known address, a separate certificate is 
required to be provided to the dependent at the dependent's last known 
address. If separate certificates are being provided by mail to 
individuals who reside at the same address, separate mailings of each 
certificate are not required.
    (ii) Procedure for requesting certificates. A plan or issuer must 
establish a procedure for individuals to request and receive 
certificates pursuant to paragraph (a)(2)(iii) of this section.
    (iii) Designated recipients. If an automatic certificate is 
required to be provided under paragraph (a)(2)(ii) of this section, and 
the individual entitled to receive the certificate designates another 
individual or entity to receive the certificate, the plan or issuer 
responsible for providing the certificate is permitted to provide the 
certificate to the designated party. If a certificate is required to be 
provided upon request under paragraph (a)(2)(iii) of this section and 
the individual entitled to receive the certificate designates another 
individual or entity to receive the certificate, the plan or issuer 
responsible for providing the certificate is required to provide the 
certificate to the designated party.
    (5) Special rules concerning dependent coverage--(i)(A) Reasonable 
efforts. A plan is required to use reasonable efforts to determine any 
information needed for a certificate relating to the dependent 
coverage. In any case in which an automatic certificate is required to 
be furnished with respect to a dependent under paragraph (a)(2)(ii) of 
this section, no individual certificate is required to be furnished 
until the plan knows (or making reasonable efforts should know) of the 
dependent's cessation of coverage under the plan.
    (B) Example. The rules of this paragraph (a)(5) are illustrated by 
the following example:

    Example. (i) A group health plan covers employees and their 
dependents. The plan annually requests all employees to provide 
updated information regarding dependents, including the specific 
date on which an employee has a new dependent or on which a person 
ceases to be a dependent of the employee.
    (ii) In this Example, the plan has satisfied the standard in 
this paragraph (a)(5)(i) of this section that it make reasonable 
efforts to determine the cessation of dependents' coverage and the 
related dependent coverage information.

    (ii) Special rules for demonstrating coverage. If a certificate 
furnished by a plan or 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 (c)(4) of 
this section for demonstrating dependent status. In addition, 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. See Sec. 54.9801-3T(b), under which such a child would 
not be subject to a preexisting condition exclusion.
    (iii) Transition rule for dependent coverage through June 30, 
1998--(A) In general. A group health plan 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 (a)(3)(ii)(C) of this section by providing 
the name of the participant covered by the group health plan and 
specifying that the type of coverage described in the certificate is 
for dependent coverage (e.g., family coverage or employee-plus-spouse 
coverage).
    (B) Certificates provided on request. For purposes of certificates 
provided on the request of, or on behalf of, an individual pursuant to 
paragraph (a)(2)(iii) of this section, a plan must make reasonable 
efforts to obtain and provide the names of any dependent covered by the 
certificate where such information is requested to be provided. If a 
certificate does not include the name of any dependent of an individual 
covered by the certificate, the individual may, if necessary, use the 
procedures described in paragraph (c) of this section for submitting 
documentation to establish that the credible coverage in the 
certificate applies to the dependent.
    (C) Demonstrating a dependent's creditable coverage. See paragraph 
(c)(4) of this section for special rules to demonstrate dependent 
status.
    (D) Duration. This paragraph (a)(5)(iii) is only effective for 
certifications provided with respect to events occurring through June 
30, 1998.
    (6) Special specification rules for entities not subject to Chapter 
100 of Subtitle K of the Internal Revenue Code--(i) Issuers. For rules 
requiring that issuers in the group and individual markets provide 
certificates consistent with the rules in this section, see section 
701(e) of ERISA and sections 2701(e), 2721(b)(1)(B), and 2743 of the 
PHSA.
    (ii) Other entities. For special rules requiring that certain other 
entities, not subject to Chapter 100 of Subtitle K of the Internal 
Revenue Code, provide certificates consistent with the rules in the 
section, see section 2791(a)(3) of the PHSA applicable to entities 
described in sections 2701(c)(1) (C), (D), (E), and (F) (relating to 
Medicare, Medicaid, CHAMPUS, and Indian Health Service), section 
2721(b)(1)(A) of the PHSA applicable to nonfederal governmental plans 
generally, and section 2721(b)(2)(C)(ii) of the PHSA applicable to 
nonfederal governmental plans that elect to be excluded from the 
requirements of Subparts 1 and 3 of Part A of Title XXVII of the PHSA.
    (b) Disclosure of coverage to a plan, or issuer, using the 
alternative method of counting creditable coverage--(1) In general. If 
an individual enrolls in a group health plan with respect to which the 
plan (or issuer) uses the alternative method of counting creditable 
coverage described in Sec. 54.9801-4T(c), the individual provides a 
certificate of coverage under paragraph (a) of this section, and the 
plan (or issuer) in which the individual enrolls so requests, the 
entity that issued the certificate (the prior entity) is required to 
disclose promptly to a requesting plan (or issuer) (the requesting 
entity) the information set forth in paragraph (b)(2) of this section.
    (2) Information to be disclosed. The prior entity is required to 
identify to the requesting entity the categories of benefits with 
respect to which the requesting entity is using the alternative method 
of counting creditable coverage, and the requesting entity may identify 
specific information that the requesting entity reasonably needs to 
order to determine the individual's creditable coverage with respect to 
any such category. The prior entity is required to disclose promptly to 
the requesting entity the creditable coverage information so requested.
    (3) Charge for providing information. The prior entity furnishing 
the information under paragraph (b) of this section may charge the 
requesting entity for the reasonable cost of disclosing such 
information.
    (c) Ability of an individual to demonstrate creditable coverage and 
waiting period information--(1) In general. The rules in this paragraph 
(c) implement section 9801(c)(4), which permits individuals to 
establish creditable coverage through means other than certificates, 
and section 9801(e)(3), which requires the Secretary to establish rules 
designed to prevent an

[[Page 16936]]

individual's subsequent coverage under a group health plan or health 
insurance coverage from being adversely affected by an entity's failure 
to provide a certificate with respect to that individual. 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 such a demonstration when--
    (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 pursuant to 
paragraph (a) of this section;
    (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; or
    (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. 
A plan is required to 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 
an individual has creditable coverage and is entitled to offset all or 
a portion of any preexisting condition exclusion period. A plan shall 
treat the individual as having furnished a certificate under paragraph 
(a) of this section if the individual attests to the period of 
creditable coverage, the individual also presents relevant 
corroborating evidence of some creditable coverage during the period, 
and the individual cooperates with the plan's efforts to verify the 
individual's coverage. For this purpose, cooperation includes providing 
(upon the plan's or issuer's request) a written authorization for the 
plan 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 a plan may refuse 
to credit coverage where the individual fails to cooperate with the 
plan's or issuer's efforts to verify coverage, the plan 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 also be established through means 
other than documentation, such as by a telephone call from the plan or 
provider to a third party verifying creditable coverage.
    (iv) Example. The rules of this paragraph (c)(2) are illustrated by 
the following example:

    Example. (i) Individual F terminates employment with Employer W 
and, a month later, is hired by Employer X. Employer X's group 
health plan imposes a preexisting condition exclusion of 12 months 
on new enrollees under the plan and uses the standard method of 
determining creditable coverage. F fails to receive a certificate of 
prior coverage from the self-insured group health plan maintained by 
F's prior employer, Employer W, and requests a certificate. However, 
F (and Employer's X's plan, on F's behalf) is unable to obtain a 
certificate from Employer W's plan. F attests that, to the best of 
F's knowledge, F had at least 12 months of continuous coverage under 
Employer W's plan, and that the coverage ended no earlier than F's 
termination of employment from Employer W. In addition, F presents 
evidence of coverage, such as an explanation of benefits for a claim 
that was made during the relevant period.
    (ii) In this Example, based solely on these facts, F has 
demonstrated creditable coverage for the 12 months of coverage under 
Employer W's plan in the same manner as if F had presented a written 
certificate of creditable coverage.

    (3) Demonstrating categories of creditable coverage. Procedures 
similar to those described in this paragraph (c) apply in order to 
determine an individual's creditable coverage with respect to any 
category under paragraph (b) of this section (relating to determining 
creditable coverage under the alternative method).
    (4) 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 group 
health plan or issuer is required to treat the individual as having 
furnished a certificate showing the dependent status if the individual 
attests to such dependency and the period of such status and the 
individual cooperates with the plan's or issuer's efforts to verify the 
dependent status.
    (d) Determination and notification of creditable coverage--(1) 
Reasonable time period. In the event that a group health plan receives 
information under paragraph (a) of this section (certifications), 
paragraph (b) of this section (disclosure of information relating to 
the alternative method), or paragraph (c) of this section (other 
evidence of creditable coverage), the plan is required, within a 
reasonable time period following receipt of the information, to make a 
determination regarding the indivdiual's period of creditable coverage 
and notify the individual of the determination in accordance with 
paragraph (d)(2) of this section. Whether a determination and 
notification regarding an individual's creditable coverage is made 
within a reasonable time period is determined based on the relevant 
facts and circumstances. Relevant facts and circumstances include 
whether a plan's application of a preexisting condition exclusion would 
prevent an individual from having access to urgent medical services.
    (2) Notification to individual of period of preexisting condition 
exclusion. A plan seeking to impose a preexisting condition exclusion 
is required to disclose to the individual, in writing, its 
determination of any preexisting condition exclusion period that 
applies to the individual, and the basis for such determination, 
including the source and substance of any information on which the plan 
relied. In addition, the plan is required to provide the individual 
with a written explanation of any appeal procedures established by the 
plan, and with a reasonable opportunity to submit additional evidence 
of creditable coverage. However, nothing in this paragraph (d) or 
paragraph (c) of this section prevents a plan from modifying an initial 
determination of creditable coverage if it determines that the 
individual did not have the claimed creditable coverage, provided 
that--
    (i) A notice of such reconsideration, as described in this 
paragraph (d), is provided to the individual; and
    (ii) Until the final determination is made, the plan, for purposes 
of approving access to medical services (such as a pre-surgery 
authorization), acts in a manner consistent with the initial 
determination.
    (3) Examples. The following examples illustrate this paragraph (d):

    Example 1. (i) Individual G is hired by Employer Y. Employer Y's 
group health plan

[[Page 16937]]

imposes a preexisting condition exclusion for 12 months with respect 
to new enrollees and uses the standard method of determining 
creditable coverage. Employer Y's plan determines that G is subject 
to a 4-month preexisting condition exclusion, based on a certificate 
of creditable coverage that is provided by G to Employer Y's plan 
indicating 8 months of coverage under G's prior group health plan.
    (ii) In this Example 1, Employer Y's plan must notify G within a 
reasonable period of time following receipt of the certificate that 
G is subject to a 4-month preexisting condition exclusion beginning 
on G's enrollment date in Y's plan.
    Example 2. (i) Same facts as in Example 1, except that Employer 
Y's plan determines that G has 14 months of creditable coverage 
based on G's certificate indicating 14 months of creditable coverage 
under G's prior plan.
    (ii) In this Example 2. Employer Y's plan is not required to 
notify G that G will not be subject to a preexisting condition 
exclusion.
    Example 3. (i) Individual H is hired by Employer Z. Employer Z's 
group health plan imposes a preexisting condition exclusion for 12 
months with respect to new enrollees and uses the standard method of 
determining creditable coverage. H develops an urgent health 
condition before receiving a certificate of prior coverage. H 
attests to the period of prior coverage, presents corroborating 
documentation of the coverage period, and authorizes the plan to 
request a certificate on H's behalf.
    (ii) In this Example 3, Employer Z's plan must review the 
evidence presented by H. In addition, the plan must make a 
determination and notify H regarding any preexisting condition 
exclusion period that applies to H (and the basis of such 
determination) within a reasonable time period following receipt of 
the evidence that is consistent with the urgency of H's health 
condition (this determination may be modified as permitted under 
paragraph (d)(2) of this section).


Sec. 54.9801-6T  Special enrollment periods (temporary).

    (a) Special enrollment for certain individuals who lose coverage--
(1) In general. A group health plan is required to permit employees and 
dependents described in paragraph (a)(2), (3) or (4) of this section to 
enroll for coverage under the terms of the plan if the conditions in 
paragraph (a)(5) of this section are satisfied and the enrollment is 
requested within the period described in paragraph (a)(6) of this 
section. The enrollment is effective at the time described in paragraph 
(a)(7) of this section. The special enrollment rights under this 
paragraph (a) apply without regard to the dates on which an individual 
would otherwise be able to enroll under the plan. (See PHSA section 
2701(f)(1) and ERISA section 701(f)(1) under which this obligation is 
also imposed on a health insurance issuer offering group health 
insurance coverage.)
    (2) Special enrollment of an employee only. An employee is 
described in this paragraph (a)(2) if the employee is eligible, but not 
enrolled, for coverage under the terms of the plan and, when enrollment 
was previously offered to the employee under the plan and was declined 
by the employee, the employee was covered under another group health 
plan or had other health insurance coverage.
    (3) Special enrollment of dependents only. A dependent is described 
in this paragraph (a)(3) if the dependent is a dependent of an employee 
participating in the plan, the dependent is eligible, but not enrolled, 
for coverage under the terms of the plan, and, when enrollment was 
previously offered under the plan was declined, the dependent was 
covered under another group health plan or had other health insurance 
coverage.
    (4) Special enrollment of both employee and dependent. An employee 
and any dependent of the employee are described in this paragraph 
(a)(4) if they are eligible, but not enrolled, for coverage under the 
terms of the plan and, when enrollment was previously offered to the 
employee or dependent under the plan and was declined, the employee or 
dependent was covered under another group health plan or had other 
health insurance coverage.
    (5) Conditions for special enrollment. An employee or dependent is 
eligible to enroll during a special enrollment period if each of the 
following applicable conditions is met:
    (i) When the employee declined enrollment for the employee or the 
dependent, the employee stated in writing that coverage under another 
group health plan or other health insurance coverage was the reason for 
declining enrollment. This paragraph (a)(5)(i) applies only if--
    (A) The plan required such a statement when the employee declined 
enrollment; and
    (B) The employee is provided with notice of the requirement to 
provide the statement in this paragraph (a)(5)(i) (and the consequences 
of the employee's failure to provide the statement) at the time the 
employee declined enrollment.
    (ii)(A) When the employee declined enrollment for the employee or 
dependent under the plan, the employee or dependent had CORRA 
continuation coverage under another plan and COBRA continuation 
coverage under that other plan has since been exhausted; or
    (B) If the other coverage that applied to the employee or dependent 
when enrollment was declined was not under a COBRA continuation 
provision, either the other coverage has been terminated as a result of 
loss of eligibility for the coverage or employer contributions towards 
the other coverage have been terminated. For this purpose, loss of 
eligibility for coverage includes a loss of coverage as a result of 
legal separation, divorce, death, termination of employment, reduction 
in the number of hours of employment, and any loss of eligibility after 
a period that is measured by reference to any of the foregoing. Thus, 
for example, if an employee's coverage ceases following a termination 
of employment and the employee is eligible for but fails to elect COBRA 
continuation coverage, this is treated as a loss of eligibility under 
this paragraph (a)(5)(ii)(B). However, loss of eligibility does not 
include a loss due to failure of the individual or the participant to 
pay premiums on a timely basis or termination of coverage for cause 
(such as making a fraudulent claim or an intentional misrepresentation 
of a material fact in connection with the plan). In addition, for 
purposes of this paragraph (a)(5)(ii)(B), employer contributions 
include contributions by any current or former employer (of the 
individual or another person) that was contributing to coverage for the 
individual.
    (6) Length of special enrollment period. The employee is required 
to request enrollment (for the employee or the employee's dependent, as 
described in paragraph (a) (2), (3), or (4) of this section) not later 
than 30 days after the exhaustion of the other coverage described in 
paragraph (a)(5)(ii)(A) of this section or termination of the other 
coverage as a result of the loss of eligibility for the other coverage 
for items described in paragraph (a)(5)(ii)(B) of this section or 
following the termination of employer contributions toward that other 
coverage. The plan may impose the same requirements that apply to 
employees who are otherwise eligible under the plan to immediately 
request enrollment for coverage (e.g., that the request be made in 
writing).
    (7) Effective date of enrollment. Enrollment is effective not later 
than the first day of the first calendar month beginning after the date 
the completed request for enrollment is received.
    (b) Special enrollment with respect to certain dependent 
beneficiaries--(1) In general. A group health plan that makes coverage 
available with respect to dependents of a participant is required to 
provide a special enrollment period to permit individuals described in 
paragraph (b) (2), (3), (4), (5), or (6) of this section to be enrolled 
for coverage under the terms of the plan if the enrollment is requested 
within the time

[[Page 16938]]

period described in paragraph (b)(7) of this section. The enrollment is 
effective at the time described in paragraph (b)(8) of this section. 
The special enrollment rights under this paragraph (b) apply without 
regard to the dates on which an individual would otherwise be able to 
enroll under the plan.
    (2) Special enrollment of an employee who is eligible but not 
enrolled. An individual is described in this paragraph (b)(2) if the 
individual is an employee who is eligible, but not enrolled, in the 
plan, the individual would be a participant but for a prior election by 
the individual not to enroll in the plan during a previous enrollment 
period, and a person becomes a dependent of the individual through 
marriage, birth, or adoption or placement for adoption.
    (3) Special enrollment of a spouse of a participant. An individual 
is described in this paragraph (b)(3) if either--
    (i) The individual becomes the spouse of a participant; or
    (ii) The individual is a spouse of the participant and a child 
becomes a dependent of the participant through birth, adoption or 
placement for adoption.
    (4) Special enrollment of an employee who is eligible but not 
enrolled and the spouse of such employee. An employee who is eligible, 
but not enrolled, in the plan, and an individual who is a dependent of 
such employee, are described in this paragraph (b)(4) if the employee 
would be a participant but for a prior election by the employee not to 
enroll in the plan during a previous enrollment period, and either--
    (i) The employee and the individual become married; or
    (ii) The employee and individual are married and a child becomes a 
dependent of the employee through birth, adoption or placement for 
adoption.
    (5) Special enrollment of a dependent of a participant. An 
individual is described in this paragraph (b)(5) if the individual is a 
dependent of a participant and the individual becomes a dependent of 
such participant through marriage, birth, or adoption or placement for 
adoption.
    (6) Special enrollment of an employee who is eligible but not 
enrolled and a new dependent. An employee who is eligible, but not 
enrolled, in the plan, and an individual who is a dependent of the 
employee, are described in this paragraph (b)(6) if the employee would 
be a participant but for a prior election by the employee not to enroll 
in the plan during a previous enrollment period, and the dependent 
becomes a dependent of the employee through marriage, birth, or 
adoption or placement for adoption.
    (7) Length of special enrollment period. The special enrollment 
period under paragraph (b)(1) of this section is a period of not less 
than 30 days and begins on the date of the marriage, birth, or adoption 
or placement for adoption (except that such period does not begin 
earlier than the date the plan makes dependent coverage generally 
available).
    (8) Effective date of enrollment. Enrollment is effective--
    (i) In the case of marriage, not later than the first day of the 
first calendar month beginning after the date the completed request for 
enrollment is received by the plan;
    (ii) In the case of a dependent's birth, the date of such birth; 
and
    (iii) In the case of a dependent's adoption or placement for 
adoption, the date of such adoption or placement for adoption.
    (9) Example. The rules of this paragraph (b) are illustrated by the 
following example:

    Example. (i) Employee A is hired on September 3, 1998 by 
Employer X, which has a group health plan in which A can elect to 
enroll either for employee-only coverage, for employee-plus-spouse 
coverage, or for family coverage, effective on the first day of any 
calendar quarter thereafter. A is married and has no children. A 
does not elect to join Employer X's plan (for employee-only 
coverage, employee-plus-spouse coverage, or family coverage) on 
October 1, 1998 or January 1, 1999. On February 15, 1999, a child is 
placed for adoption with A and A's spouse.
    (ii) In this Example, the conditions for special enrollment of 
an employee with a new dependent under paragraph (b)(2) of this 
section are satisfied, the conditions for special enrollment of an 
employee and a spouse with a new dependent under paragraph (b)(4) of 
this section are satisfied, and the conditions for special 
enrollment of an employee and a new dependent under paragraph (b)(6) 
of this section are satisfied. Accordingly, Employer X's plan will 
satisfy this paragraph (b) if and only if it allows A to elect, by 
filing the required forms by March 16, 1999, to enroll in Employer 
X's plan either with employee-only coverage, with employee-plus-
spouse coverage, or with family coverage, effective as of February 
15, 1999.

    (c) Notice of enrollment rights. On or before the time an employee 
is offered the opportunity to enroll in a group health plan, the plan 
is required to provide the employee with a description of the plan's 
special enrollment rules under this section. For this purpose, the plan 
may use the following model description of the special enrollment rules 
under this section:

    If you are declining enrollment for yourself or your dependents 
(including your spouse) because of other health insurance coverage, 
you may in the future be able to enroll yourself or your dependents 
in this plan, provided that you request enrollment within 30 days 
after your other coverage ends. In addition, if you have a new 
dependent as a result of marriage, birth, adoption, or placement for 
adoption, you may be able to enroll yourself and your dependents, 
provided that you request enrollment within 30 days after the 
marriage, birth, adoption, or placement for adoption.

    (d) (1) Special enrollment date definition. A special enrollment 
date for an individual means any date in paragraph (a)(7) or (b)(8) of 
this section on which the individual has a right to have enrollment in 
a group health plan become effective under this section.
    (2) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. (i)(A) Employer Y maintains a group health plan that 
allows employees to enroll in the plan either--
    (1) Effective on the first day of employment by an election 
filed within three days thereafter;
    (2) Effective on any subsequent January 1 by an election made 
during the preceding months of November or December; or
    (3) Effective as of any special enrollment date described in 
this section.
    (B) Employee B is hired by Employer Y on March 15, 1998 and does 
not elect to enroll in Employer Y's plan until January 31, 1999 when 
B loses coverage under another plan. B elects to enroll in Employer 
Y's plan effective on February 1, 1999, by filing the completed 
request form by January 31, 1999, in accordance with the special 
rule set forth in paragraph (a) of this section.
    (ii) In this Example 1, B has enrolled on a special enrollment 
date because the enrollment is effective at a date described in 
paragraph (a)(7) of this section.
    Example 2. (i) Same facts as Example 1, except that B's loss of 
coverage under the other plan occurs on December 31, 1998 and B 
elects to enroll in Employer Y's plan effective on January 1, 1999 
by filing the completed request form by December 31, 1998, in 
accordance with the special rule set forth in paragraph (a) of this 
section.
    (ii) In this Example 2, B has enrolled on a special enrollment 
date because the enrollment is effective at a date described in 
paragraph (a)(7) of this section (even though this date is also a 
regular enrollment date under the plan).


Sec. 54.9802-1T  Prohibiting discrimination against participants and 
beneficiaries based on a health status-related factor (temporary).

    (a) In eligibility to enroll--(1) In general. Subject to paragraph 
(a)(2) of this section, a group health plan may not establish rules for 
eligibility (including continued eligibility) of any individual to 
enroll under the terms of the plan based on any of the following

[[Page 16939]]

health status-related factors in relation to the individual or a 
dependent of the individual:
    (i) Health status.
    (ii) Medical condition (including both physical and mental 
illnesses), as defined in Sec. 54.9801-2T.
    (iii) Claims experience.
    (iv) Receipt of health care.
    (v) Medical history.
    (vi) Genetic information, as defined in Sec. 54.9801-2T.
    (vii) Evidence of insurability (including conditions arising out of 
acts of domestic violence).
    (viii) Disability.
    (2) No application to benefits or exclusions. To the extent 
consistent with section 9801 and Sec. 54.9801-3T, paragraph (a)(1) of 
this section shall not be construed--
    (i) To require a group health plan to provide particular benefits 
other than those provided under the terms of such plan; or
    (ii) To prevent such a plan from establishing limitations or 
restrictions on the amount, level, extent, or nature of the benefits or 
coverage for similarly situated individuals enrolled in the plan or 
coverage.
    (3) Construction. For purposes of paragraph (a)(1) of this section, 
rules for eligibility to enroll include rules defining any applicable 
waiting (or affiliation) periods for such enrollment and rules relating 
to late and special enrollment.
    (4) Example. The following example illustrates the rules of this 
paragraph (a):

    Example. (i) An employer sponsors a group health plan that is 
available to all employees who enroll within the first 30 days of 
their employment. However, individuals who do not enroll in the 
first 30 days cannot enroll later unless they pass a physical 
examination.
    (ii) In this Example, the plan discriminates on the basis of one 
or more health status-related factors.

    (b) In premiums or contributions--(1) In general. A group health 
plan may not require an individual (as a condition of enrollment or 
continued enrollment under the plan) to pay a premium or contribution 
that is greater than the premium or contribution for a similarly 
situated individual enrolled in the plan based on any health status-
related factor, in relation to the individual or a dependent of the 
individual.
    (2) Construction. Nothing in paragraph (b)(1) of this section shall 
be construed--
    (i) To restrict the amount that an employer may be charged by an 
issuer for coverage under a group health plan; or
    (ii) To prevent a group health plan from establishing premium 
discounts or rebates or modifying otherwise applicable copayments or 
deductibles in return for adherence to a bona fide wellness program. 
For purposes of this section, a bona fide wellness program is a program 
of health promotion and disease prevention.
    (3) Example. The rules of this paragraph (b) are illustrated by the 
following example:

    Example. (i) Plan X offers a premium discount to participants 
who adhere to a cholesterol-reduction wellness program. Enrollees 
are expected to keep a diary of their food intake over 6 weeks. They 
periodically submit the diary to the plan physician who responds 
with suggested diet modifications. Enrollees are to modify their 
diets in accordance with the physician's recommendations. At the end 
of the 6 weeks, enrollees are given a cholesterol test and those who 
achieve a count under 200 receive a premium discount.
    (ii) In this Example, because enrollees who otherwise comply 
with the program may be unable to achieve a cholesterol count under 
200 due to a health status-related factor, this is not a bona fide 
wellness program and such discounts would discriminate impermissibly 
based on one or more health status-related factors. However, if, 
instead, individuals covered by the plan were entitled to receive 
the discount for complying with the diary and dietary requirements 
and were not required to pass a cholesterol test, the program would 
be a bona fide wellness program.


Sec. 54.9804-1T  Special rules relating to group health plans 
(temporary).

    (a) General exception small group health plans. The requirements of 
Chapter 100 of Subtitle K of the Internal Revenue Code do not apply to 
any group health plan for any plan year if, on the first day of the 
plan year, the plan has fewer than 2 participants who are current 
employees.
    (b) Excepted benefits--(1) In general. The requirements of 
Secs. 54.9801-1T through 54.9801-6T and 54.9802-1T do not apply to any 
group health plan in relation to its provision of the benefits 
described in paragraph (b) (2), (3), (4), or (5) of this section (or 
any combination of these benefits).
    (2) Benefits excepted in all circumstances. The following benefits 
are excepted in all circumstances--
    (i) Coverage only for accident (including accidental death and 
dismemberment);
    (ii) Disability income insurance;
    (iii) Liability insurance, including general liability insurance 
and automobile liability insurance;
    (iv) Coverage issued as a supplement to liability insurance;
    (v) Workers' compensation or similar insurance;
    (vi) Automobile medical payment insurance;
    (vii) Credit-only insurance (for example, mortgage insurance); and
    (viii) Coverage for on-site medical clinics.
    (3) Limited excepted benefits--
    (i) In general. Limited-scope dental benefits, limited-scope vision 
benefits, or long-term care benefits are excepted if they are provided 
under a separate policy, certificate, or contract of insurance, or are 
otherwise not an integral part of the plan, as defined in paragraph 
(b)(3)(ii) of this section.
    (ii) Integral. For purposes of paragraph (b)(3)(i) of this section, 
benefits are deemed to be an integral part of a plan unless a 
participate has the right to elect not to receive coverage for the 
benefits and, if the participant elects to receive coverage for the 
benefits, the participant pays an additional premium or contribution 
for that coverage.
    (iii) Limited scope. Limited scope dental or vision benefits are 
dental or vision benefits that are sold under a separate policy or 
rider and that are limited in scope in a narrow range or type of 
benefits that are generally excluded from hospital/medical/surgical 
benefit packages.
    (iv) Long-term care. Long-term care benefits are benefits that are 
either--
    (A) Subject to State long-term care insurance laws;
    (B) For qualified long-term care insurance services; as defined in 
section 7702B(c)(1) of the Internal Revenue Code, or provided under a 
qualified long-term care insurance contract, as defined in section 
7702B(b); or
    (C) Based on cognitive impairment or a loss of functional capacity 
that is expected to be chronic.
    (4) Noncoordinated benefits--(i) Excepted benefits that are not 
coordinated. Covered for only a specified disease or illness (for 
example, cancer-only policies) or hospital indemnity or other fixed 
dollar indemnity insurance (for example, $100/day) is excepted only if 
it meets each of the conditions specified in paragraph (b)(4)(ii) of 
this section.
    (ii) Conditions. Benefits are described in paragraph (b)(4)(i) of 
this section only if--
    (A) The benefits are provided under a separate policy, certificate, 
or contract of insurance;
    (B) There is not coordination between the provision of the benefits 
and an exclusion of benefits under any group health plan maintained by 
the same plan sponsor; and
    (C) The benefits are paid with respect to an event without regard 
to whether benefits are provided with respect to the

[[Page 16940]]

event under any group health plan maintained by the same plan sponsor.
    (5) Supplemental benefits. The following benefits are excepted only 
if they are provided under a separate policy, certificate, or contract 
of insurance--
    (i) Medicare supplemental health insurance (as defined under 
section 1882(g)(1) of the Social Security Act; also known as Medigap or 
MedSupp insurance);
    (ii) Coverage supplemental to the coverage provided under Chapter 
55, Title 10 of the United States Code (also known as CHAMPUS 
supplemental programs); and
    (iii) Similar supplemental coverage provided to coverage under a 
group health plan.
    (c) Treatment of partnerships. [Reserved]


Sec. 54.9806-1T  Effective dates (temporary).

    (a) General effective dates--(1) Non-collectively-bargained plans. 
Except as otherwise provided in this section, Chapter 100 of Subtitle K 
of the Internal Revenue Code and Secs. 54.9801-1T through 54.9804-1T 
apply with respect to group health plans for plan years beginning after 
June 30, 1997.
    (2) Collectively bargained plans. Except as otherwise provided in 
this section (other than paragraph (a)(1) of this section), in the case 
of a group health plan maintained pursuant to one or more collective 
bargaining agreements between employee representatives and one or more 
employers ratified before August 21, 1996, Chapter 100 of Subtitle K of 
the Internal Revenue Code and Secs. 54.9801-1T through 54.9804-1T do 
not apply to plan years beginning before the later of July 1, 1997, or 
the date on which the last of the collective bargaining agreements 
relating to the plan terminates (determined without regard to any 
extension thereof agreed to after August 21, 1996). For these purposes, 
any plan amendment made pursuant to a collective bargaining agreement 
relating to the plan, that amends the plan solely to conform to any 
requirement of such part, is not treated as a termination of the 
collective bargaining agreement.
    (3)(i) Preexisting condition exclusion periods for current 
employees. Any preexisting condition exclusion period permitted under 
Sec. 54.9801-3T is measured from the individual's enrollment date in 
the plan. Such exclusion period, as limited under Sec. 54.9801-3T, may 
be completed prior to the effective date of the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA) for his or her plan. 
Therefore, on the date the individual's plan becomes subject to Chapter 
100 of Subtitle K of the Internal Revenue Code, no preexisting 
condition exclusion may be imposed with respect to an individual beyond 
the limitation in Sec. 54.9801-3T. For an individual who has not 
completed the permitted exclusion period under HIPPA, upon the 
effective date for his or her plan, the individual may use creditable 
coverage that the individual had prior to the enrollment date to reduce 
the remaining preexisting condition exclusion period applicable to the 
individual.
    (ii) Examples. The following examples illustrate the rules of this 
paragraph (a)(3):

    Example 1. (i) Individual A has been working for Employer X and 
has been covered under Employer X's plan since March 1, 1997. Under 
Employer X's plan, as in effect before January 1, 1998, there is no 
coverage for any preexisting condition. Employer X's plan year 
begins on January 1, 1998. A's enrollment date in the plan is March 
1, 1997 and A has no creditable coverage before this date.
    (ii) In this Example 1, Employer X may continue to impose the 
preexisting condition exclusion under the plan through February 28, 
1998 (the end of the 12-month period using anniversary dates).
     Example 2. (i) Same facts as in Example 1, except that A's 
enrollment date was August 1, 1996, instead of March 1, 1997.
    (ii) In this Example 2, on January 1, 1998, Employer X's plan 
may no longer exclude treatment for any preexisting condition that A 
may have; however, because Employer X's plan is not subject to HIPAA 
until January 1, 1998, A is not entitled to claim reimbursement for 
expenses under the plan for treatments for any preexisting condition 
of A received before January 1, 1998.

    (b) Effective date for certification requirement--(1) In general. 
Subject to the transitional rule in Sec. 54.9801-5T(a)(5)(iii), the 
certification rules of Sec. 54.9801-5T apply to events occurring on or 
after July 1, 1996.
    (2) Period covered by certificate. A certificate is not required to 
reflect coverage before July 1, 1996.
    (3) No certificate before June 1, 1997. Notwithstanding any other 
provision of Sec. 54.9801-5T, in no case is a certificate required to 
be provided before June 1, 1997.
    (c) Limitation on actions. No enforcement action is to be taken, 
pursuant to Chapter 100 of Subtitle K of the Internal Revenue Code, 
against a group health plan or health insurance issuer with respect to 
a violation of a requirement imposed by Chapter 100 of Subtitle K of 
the Internal Revenue Code before January 1, 1998 if the plan or issuer 
has sought to comply in good faith with such requirements. Compliance 
with these regulations is deemed to be good faith compliance with the 
requirements of Chapter 100 of Subtitle K.
    (d) Transition rules for counting creditable coverage. An 
individual who seeks to establish creditable coverage for periods 
before July 1, 1996 is entitled to establish such coverage through the 
presentation of documents or other means in accordance with the 
provisions of Sec. 54.9801-5T(c). For coverage relating to an event 
occurring before July 1, 1996, a group health plan and a health 
insurance issuer is not subject to any penalty or enforcement action 
with respect to the plan's or issuer's counting (or not counting) such 
coverage if the plan or issuer has sought to comply in good faith with 
the applicable requirements under Sec. 54.9801-5T(c).
    (e) Transition rules for certificates of creditable coverage--(1) 
Certificates only upon request. For events occurring on or after July 
1, 1996 but before October 1, 1996, a certificate is required to be 
provided only upon a written request by or on behalf of the individual 
to whom the certificate applies.
    (2) Certificates before June 1, 1997. For events occurring on or 
after October 1, 1996 and before June 1, 1997, a certificate must be 
furnished no later than June 1, 1997, or any later date permitted under 
Sec. 54.9801-5T(a)(2) (ii) and (iii).
    (3) Optional notice--(i) In general. This paragraph (e)(3) applies 
with respect to events described in Sec. 54.9801-5T(a)(5)(ii), that 
occur on or after October 1, 1996 but before June 1, 1997. A group 
health plan or health insurance issuer offering group health coverage 
is deemed to satisfy Sec. 54.9801-5T(a) (2) and (3) if a notice is 
provided in accordance with the provisions of paragraphs (e)(3) (i) 
through (iv) of this section.
    (ii) Time of notice. The notice must be provided no later than June 
1, 1997.
    (iii) Form and content of notice. A notice provided pursuant to 
this paragraph (e)(3) must be in writing and must include information 
substantially similar to the information included in a model notice 
authorized by the Secretary. Copies of the model notice are available 
at the following website--http://www.irs.ustreas.gov (or call (202) 
622-4695).
    (iv) Providing certificate after request. If an individual requests 
a certificate following receipt of the notice, the certificate must be 
provided at the time of the request as set forth in Sec. 54.9801-
5T(a)(5)(iii).
    (v) Other certification rules apply. The rules set forth in 
Sec. 54.9801-5T(a)(4)(i) (method of delivery) and

[[Page 16941]]

54.9801-5T(a)(1) (entities required to provide a certificate) apply 
with respect to the provision of the notice.

    Dated: March 24, 1997.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved:
Donald C. Lubick,
Assistant Secretary of the Treasury.

Pension and Welfare Benefits Administration

29 CFR Chapter XXV

    For the reasons set forth above, Chapter XXV of Title 29 of the 
Code of Federal Regulations is amended as set forth below:
    1. A new Subchapter L, consisting of Part 2590, is added to read as 
follows:
Subchapter L--Health Insurance Portability and Renewability for Group 
Health Plans

PART 2590--RULES AND REGULATIONS FOR HEALTH INSURANCE PORTABILITY 
AND RENEWABILITY FOR GROUP HEALTH PLANS

Subpart A--Requirements Relating to Access and Renewability of 
Coverage, and Limitation on Preexisting Condition Exclusion Periods
Sec.
2590.701-1  Basis and scope.
2590.701-2  Definitions.
2590.701-3  Limitations on preexisting condition exclusion period.
2590.701-4  Rules relating to creditable coverage.
2590.701-5  Certification and disclosure of previous coverage.
2590.701-6  Special enrollment periods.
2590.701-7  HMO affiliation period as alternative to preexisting 
condition exclusion.
2590.702  Prohibiting discrimination against participants and 
beneficiaries based on a health status-related factor.
2590.703  Guaranteed renewability in multiemployer plans and 
multiple employer welfare arrangements. [Reserved]

Subpart B--Other Requirements

2590.711  Standards relating to benefits for mothers and newborns. 
[Reserved]
2590.712  Parity in the application of certain limits to mental 
health benefits. [Reserved]

Subpart C--General Provisions

2590.731  Preemption; State flexibility; construction.
2590.732  Special rules relating to group health plans.
2590.734  Enforcement. [Reserved]
2590.736  Effective dates.

    Authority: Sec. 29 U.S.C. 1027, 1059, 1135, 1171, 1194; Sec. 
101, Pub. L. 104-191, 101 Stat. 1936 (29 U.S.C. 1181); Secretary of 
labor's Order No. 1-87, 52 FR 13139, April 21, 1987.

Subpart A--Requirements Relating to Access and Renewability of 
Coverage, and Limitations on Preexisting Condition Exclusion 
Periods


Sec. 2590.701-1  Basis and scope.

    (a) Statutory basis. This subpart implements Part 7 of Subtitle B 
of Title I of the Employee Retirement Income Security Act of 1974, as 
amended (hereinafter ERISA or the Act).
    (b) Scope. A group health plan or health insurance issuer offering 
group health insurance coverage may provide greater rights to 
participants and beneficiaries than those set forth in this subpart. 
This subpart A sets forth minimum requirements for group health plans 
and health insurance issuers offering group health insurance coverage 
concerning:
    (1) Limitations on a preexisting condition exclusion period.
    (2) Certificates and disclosure of previous coverage.
    (3) Rules relating to counting creditable coverage.
    (4) Special enrollment periods.
    (5) Use of an affiliation period by an HMO as an alternative to a 
preexisting condition exclusion.


Sec. 2590.701-2  Definitions.

    Unless otherwise provided, the definitions in this section govern 
in applying the provisions of Secs. 2590.701 through 2590.734.
    Affiliation period means a period of time that must expire before 
health insurance coverage provided by an HMO becomes effective, and 
during which the HMO is not required to provide benefits.
    COBRA definitions:
    (1) COBRA means Title X of the Consolidated Omnibus Budget 
Reconciliation Act of 1985, as amended.
    (2) COBRA continuation coverage means coverage, under a group 
health plan, that satisfies an applicable COBRA continuation provision.
    (3) COBRA continuation provision means sections 601-608 of the Act, 
section 4980B of the Code (other than paragraph (f)(1) of such section 
4980B insofar as it relates to pediatric vaccines), and Title XXII of 
the PHSA.
    (4) Exhaustion of COBRA continuation coverage means that an 
individual's COBRA continuation coverage ceases for any reason other 
than either failure of the individual to pay premiums on a timely 
basis, or for cause (such as making a fraudulent claim or an 
intentional misrepresentation of a material fact in connection with the 
plan). An individual is considered to have exhausted COBRA continuation 
coverage if such coverage ceases--
    (i) Due to the failure of the employer or other responsible entity 
to remit premiums on a timely basis; or
    (ii) When the individual no longer resides, lives, or works in a 
service area of an HMO or similar program (whether or not within the 
choice of the individual) and there is no other COBRA continuation 
coverage available to the individual.
    Condition means a medical condition.
    Creditable coverage means creditable coverage within the meaning of 
Sec. 2590.701-4(a).
    Enroll means to become covered for benefits under a group health 
plan (i.e., when coverage becomes effective), without regard to when 
the individual may have completed or filed any forms that are required 
in order to enroll in the plan. For this purpose, an individual who has 
health insurance coverage under a group health plan is enrolled in the 
plan regardless of whether the individual elects coverage, the 
individual is a dependent who becomes covered as a result of an 
election by a participant, or the individual becomes covered without an 
election.
    Enrollment date definitions (enrollment date and first day of 
coverage) are set forth in Sec. 2590.701-3(a)(2) (i) and (ii).
    Excepted benefits means the benefits described as excepted in 
Sec. 2590.732(b).
    Genetic information means information about genes, gene products, 
and inherited characteristics that may derive from the individual or a 
family member. This includes information regarding carrier status and 
information derived from laboratory tests that identify mutations in 
specific genes or chromosomes, physical medical examinations, family 
histories, and direct analysis of genes or chromosomes.
    Group health insurance coverage means health insurance coverage 
offered in connection with a group health plan.
    Group health plan means an employee welfare benefit plan to the 
extent that the plan provides medical care (including items and 
services paid for as medical care) to employees or their dependents (as 
defined under the terms of the plan) directly or through insurance, 
reimbursement, or otherwise.
    Group market means the market for health insurance coverage offered 
in connection with a group health plan. (However, certain very small 
plans may be treated as being in the individual market, rather than the 
group market; see the definition of individual market in this section.)
    Health insurance coverage means benefits consisting of medical care 
(provided directly, through insurance or

[[Page 16942]]

reimbursement, or otherwise) under any hospital or medical service 
policy or certificate, hospital or medical service plan contract, or 
HMO contract offered by a health insurance issuer.
    Health insurance issuer or issuer means an insurance company, 
insurance service, or insurance organization (including an HMO) that is 
required to be 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 Act). Such term does not 
include a group health plan.
    Health maintenance organization or HMO means--
    (1) A federally qualified health maintenance organization (as 
defined in section 1301(a) of the PHSA);
    (2) An organization recognized under State law as a health 
maintenance organization; or
    (3) A similar organization regulated under State law for solvency 
in the same manner and to the same extent as such a health maintenance 
organization.
    Individual health insurance coverage means health insurance 
coverage offered to individuals in the individual market, but does not 
include short-term, limited duration insurance. For this purpose, 
short-term, limited-duration insurance means health insurance coverage 
provided pursuant to a contract with an issuer that has an expiration 
date specified in the contract (taking into account any extensions that 
may be elected by the policyholder without the issuer's consent) that 
is within 12 months of the date such contract becomes effective. 
Individual health insurance coverage can include dependent coverage.
    Individual market means the market for health insurance coverage 
offered to individuals other than in connection with a group health 
plan. Unless a State elects otherwise in accordance with section 
2791(e)(1)(B)(ii) of the PHSA, such term also includes coverage offered 
in connection with a group health plan that has fewer than two 
participants as current employees on the first day of the plan year.
    Internal Revenue Code (Code) means the Internal Revenue Code of 
1986, as amended (Title 26, United States Code).
    Issuer means a health insurance issuer.
    Late enrollment definitions (late enrollee) and late enrollment) 
are set forth in Sec. 2590.701-3(a)(2) (iii) and (iv).
    Medical care means amounts paid for--
    (1) The diagnosis, cure, mitigation, treatment, or prevention of 
disease, or amounts paid for the purpose of affecting any structure or 
function of the body;
    (2) Transportation primarily for and essential to medical care 
referred to in paragraph (1) of this definition; and
    (3) Insurance covering medical care referred to in paragraphs (1) 
and (2) of this definition.
    Medical condition or condition means any condition, whether 
physical or mental, including, but not limited to, any condition 
resulting from illness, injury (whether or not the injury is 
accidental), pregnancy, or congenital malformation. However, genetic 
information is not a condition.
    Placement, or being placed, for adoption means the assumption and 
retention of a legal obligation for total or partial support of a child 
by a person with whom the child has been placed in anticipation of the 
child's adoption. The child's placement for adoption with such person 
terminates upon the termination of such legal obligation.
    Plan year means the year that is designated as the plan year in the 
plan document of a group health plan, except that if the plan document 
does not designate a plan year or if there is no plan document, the 
plan year is--
    (1) The deductible/limit year used under the plan;
    (2) If the plan does not impose deductibles or limits on a yearly 
basis, then the plan year is the policy year;
    (3) If the plan does not impose deductibles or limits on a yearly 
basis, and either the plan is not insured or the insurance policy is 
not renewed on an annual basis, then the plan year is the employer's 
taxable year; or
    (4) In any other case, the plan year is the calendar year.
    Preexisting condition exclusion means a limitation or exclusion of 
benefits relating to a condition based on the fact that the condition 
was present before the first day of coverage, whether or not any 
medical advice, diagnosis, care, or treatment was recommended or 
received before that day. A preexisting condition exclusion includes 
any exclusion applicable to an individual as a result of information 
that is obtained relating to an individual's health status before the 
individual's first day of coverage, such as a condition identified as a 
result of a pre-enrollment questionnaire or physical examination given 
to the individual, or review of medical records relating to the pre-
enrollment period.
    Public health plan means public health plan within the meaning of 
Sec. 2590.701-4(a)(1)(ix).
    Public Health Service Act (PHSA) means the Public Health Service 
Act (42 U.S.C. 201, et seq.).
    Significant break in coverage means a significant break in coverage 
within the meaning of Sec. 2590.701-4(b)(2)(iii).
    Special enrollment date means a special enrollment date within the 
meaning of Sec. 2590.701-6(d).
    State means each of the several States, the District of Columbia, 
Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern 
Mariana Islands.
    State health benefits risk pool means a State health benefits risk 
pool within the meaning of Sec. 2590.701-4(a)(1)(vii).
    Waiting period means the period that must pass before an employee 
or dependent is eligible to enroll under the terms of a group health 
plan. If an employee or dependent enrolls as a late enrollee or on a 
special enrollment date, any period before such late or special 
enrollment is not a waiting period. If an individual seeks and obtains 
coverage in the individual market, any period after the date the 
individual files a substantially complete application for coverage and 
before the first day of coverage is a waiting period.


Sec. 2590.701-3  Limitations on preexisting condition exclusion period.

    (a) Preexisting condition exclusion--(1) In general. Subject to 
paragraph (b) of this section, a group health plan, and a health 
insurance issuer offering group health insurance coverage, may impose, 
with respect to a participant or beneficiary, a preexisting condition 
exclusion only if the requirements of this paragraph (a) are satisfied.
    (i) 6-month look-back rule. A preexisting condition exclusion must 
relate to a condition (whether physical or mental), regardless of the 
cause of the condition, for which medical advice, diagnosis, care, or 
treatment was recommended or received within the 6-month period ending 
on the enrollment date.
    (A) For purposes of this paragraph (a)(1)(i), medical advice, 
diagnosis, care, or treatment is taken into account only if it is 
recommended by, or received from, an individual licensed or similarly 
authorized to provide such services under State law and operating 
within the scope of practice authorized by State law.
    (B) For purposes of this paragraph (a)(1)(i), the 6-month period 
ending on the enrollment date begins on the 6-month anniversary date 
preceding the enrollment date. For example, for an enrollment date of 
August 1, 1998, the 6-month period preceding the enrollment date is the 
period commencing on February 1, 1998 and continuing through July 31, 
1998. As another example, for an enrollment date

[[Page 16943]]

of August 30, 1998, the 6-month period preceding the enrollment date is 
the period commencing on February 28, 1998 and continuing through 
August 29, 1998.
    (C) The rules of this paragraph (a)(1)(i) are illustrated by the 
following examples:

    Example 1. (i) Individual A is treated for a medical condition 7 
months before the enrollment date in Employer R's group health plan. 
As part of such treatment, A's physician recommends that a follow-up 
examination be given 2 months later. Despite this recommendation. A 
does not receive a follow-up examination and no other medical 
advice, diagnosis, care, or treatment for that condition is 
recommended to A or received by A during the 6-month period ending 
on A's enrollment date in Employer R's plan.
    (ii) In this Example 1, Employer R's plan may not impose a 
preexisting condition exclusion period with respect to the condition 
for which A received treatment 7 months prior to the enrollment 
date.
    Example 2. (i) Same facts as Example 1, except that Employer R's 
plan learns of the condition and attaches a rider to A's policy 
excluding coverage for the condition. Three months after enrollment, 
A's condition recurs, and Employer R's plan denies payment under the 
rider.
    (ii) In this Example 2, The rider is preexisting condition 
exclusion and Employer R's plan may not impose a preexisting 
condition exclusion with respect to the condition for which A 
received treatment 7 months prior to the enrollment date.
    Example 3. (i) Individual B has asthma and is treated for that 
condition several times during the 6-month period before B's 
enrollment date in Employer S's plan. The plan imposes a 12-month 
preexisting condition exclusion. B has no prior creditable coverage 
to reduce the exclusion period. Three months after the enrollment 
date, B begins coverage under Employer S's plan. Two months later, B 
is hospitalized asthma.
    (ii) In this Example 3, Employer S's plan may exclude payment 
for the hospital stay and the physician services associated with 
this illness because the care is related to a medical condition for 
which treatment was received by B during the 6-month period before 
the enrollment date.
    Example 4. (i) Individual D, who is subject to a preexisting 
exclusion imposed by Employer U's plan, has diabetes, as well as a 
foot condition caused by poor circulation and retinal degeneration 
(both of which are conditions that may be directly attributed to 
diabetes). After enrolling in the plan, D stumbles and breaks a leg.
    (ii) In this Example 4, the leg is fracture is not a condition 
related to D's diabetes, even though poor circulation in D's 
extremities and poor vision may have contributed towards the 
accident. However, any additional medical services that may be 
needed because of D's preexisting diabetic condition that would not 
be needed by another patient with a broken leg who does not have 
diabetes may be subject to the preexisting condition exclusion 
imposed under Employer U's plan.

    (ii) Maximum length of preexisting condition exclusion (the look-
forward rule). A preexisting condition exclusion is not permitted to 
extend for more than 12 months (18 months in the case of a late 
enrollee) after the enrollment date. For purposes of this paragraph 
(a)(1)(ii), the 12-month and 18-month periods after the enrollment date 
are determined by reference to the anniversary of the enrollment date. 
For example, for an enrollment date of August 1, 1998, the 12-month 
period after the enrollment date is the period commencing on August 1, 
1998 and continuing through July 31, 1999.
    (iii) Reducing a preexisting condition exclusion period by 
creditable coverage. The period of any preexisting condition exclusion 
that would otherwise apply to an individual under a group health plan 
is reduced by the number of days of creditable coverage the individual 
has as of the enrollment date, as counted under Sec. 2590.701-4. For 
purposes of this subpart the phrase ``days of creditable coverage'' has 
the same meaning as the phrase ``aggregate of the periods of creditable 
coverage'' as such term is used in section 701(a)(3) of the Act.
    (iv) Other Standards. See Sec. 2590.702 for other standards that 
may apply with respect to certain benefits limitations or restrictions 
under a group health plan.
    (2) Enrollment definitions--(i) Enrollment date means the first day 
of coverage or, if there is a waiting period, the first day of the 
waiting period.
    (ii)(A) First day of coverage means, in the case of an individual 
covered for benefits under a group health plan in the group market, the 
first day of coverage under the plan and, in the case of an individual 
covered by health insurance coverage in the individual market, the 
first day of coverage under the policy.
    (B) The following example illustrates the rule of paragraph 
(a)(2)(ii)(A) of this section:

    Example. (i) Employer V's group health plan provides for 
coverage to begin on the first day of the first payroll period 
following the date an employee is hired and completes the applicable 
enrollment forms, or on any subsequent January 1 after completion of 
the applicable enrollment forms. Employer's V's plan imposes a 
preexisting condition exclusion for 12 months (reduced by the 
individual's creditable coverage) following an individual's 
enrollment date. Employee E is hired by Employer V on October 13, 
1998 and then on October 14, 1998 completes and files all the forms 
necessary to enroll in the plan. E's coverage under the plan becomes 
effective on October 25, 1998 (which is the beginning of the first 
payroll period after E's date of hire).
    (ii) In this Example, E's enrollment date is October 13, 1998 
(which is the first day of the waiting period for E's enrollment and 
is also E's date of hire). Accordingly, with respect to E, the 6-
month period in paragraph (a)(1)(i) would be the period from April 
13, 1998 through October 12, 1998, the maximum permissible period 
during which Employer V's plan could apply a preexisting condition 
exclusion under paragraph (a)(1)(ii) would be in the period from 
October 13, 1998 through October 12, 1999, and this period would be 
reduced under paragraph (a)(1)(iii) by E's days of creditable 
coverage as of October 13, 1998.

    (iii) Late enrollee means an individual whose enrollment in a plan 
is a late enrollment.
    (iv)(A) Late enrollment means enrollment under a group health plan 
other than on--
    (1) The earliest date on which coverage can become effective under 
the terms of the plan; or
    (2) A special enrollment date for the individual.
    (B) If an individual ceases to be eligible for coverage under the 
plan by terminating employment, and then subsequently becomes eligible 
for coverage under the plan by resuming employment, only eligibility 
during the individual's most recent period of employment is taken into 
account in determining whether the individual is a late enrollee under 
the plan with respect to the most recent period of coverage. Similar 
rules apply if an individual again becomes eligible for coverage 
following a suspension of coverage that applied generally under the 
plan.
    (v) Examples. The rules of this paragraph (a)(2) are illustrated by 
the following examples:

    Example 1. (i) Employee F first becomes eligible to be covered 
by Employer W's group health plan on January 1, 1999, but elects not 
to enroll in the plan until April 1, 1999. April 1, 1999 is not a 
special enrollment date for F.
    (ii) In this Example 1, F would be a late enrollee with respect 
to F's coverage that became effective under the plan on April 1, 
1999.
    Example 2. (i) Same as Example 1, except that F does not enroll 
in the plan on April 1, 1999 and terminates employment with Employer 
W on July 1, 1999, without having had any health insurance coverage 
under the plan. F is rehired by Employer W on January 1, 2000 and is 
eligible for and elects coverage under Employer W's plan effective 
on January 1, 2000.
    (ii) In this Example 2, F would not be a late enrollee with 
respect to F's coverage that became effective on January 1, 2000.

    (b) Exceptions pertaining to preexisting condition exclusions--(1) 
Newborns--(i) In general. Subject to

[[Page 16944]]

paragraph (b)(3) of this section, a group health plan, and a health 
insurance issuer offering group health insurance coverage, may not 
impose any preexisting condition exclusion with regard to a child who, 
as of the last day of the 30-day period beginning with the date of 
birth, is covered under any creditable coverage. Accordingly, if a 
newborn is enrolled in a group health plan (or other creditable 
coverage) within 30 days after birth and subsequently enrolls in 
another group health plan without a significant break in coverage, the 
other plan may not impose any preexisting condition exclusion with 
regard to the child.
    (ii) Example. The rule of this paragraph (b)(1) is illustrated by 
the following example:

    Example. (i) Seven months after enrollment in Employer W's group 
health plan, Individual E has a child born with a birth defect. 
Because the child is enrolled in Employer W's plan within 30 days of 
birth, no preexisting condition exclusion may be imposed with 
respect to the child under Employer W's plan. Three months after the 
child's birth, E, commences employment with Employer X and enrolls 
with the child in Employer X's plan 45 days after leaving Employer 
W's plan. Employer X's plan imposes a 12-month exclusion for any 
preexisting condition.
    (ii) In this Example, Employer X's plan may not impose any 
preexisting condition exclusion with respect to E's child because 
the child was covered within 30 days of birth and had no significant 
break in coverage. This result applies regardless of whether E's 
child is included in the certificate of creditable coverage provided 
to E by Employer W indicating 300 days of dependent coverage or 
receives a separate certificate indicating 90 days of coverage. 
Employer X's plan may impose a preexisting condition exclusion with 
respect to E for up to 2 months for any preexisting condition of E 
for which medical advice, diagnosis, care, or treatment was 
recommended or received by E within the 6-month period ending on E's 
enrollment date in Employer X's plan.

    (2) Adopted children. Subject to paragraph (b)(3) of this section, 
a group health plan, and a health insurance issuer offering group 
health insurance coverage, may not impose any preexisting condition 
exclusion in the case of a child who is adopted or placed for adoption 
before attaining 18 years of age and who, as of the last day of the 30-
day period beginning on the date of the adoption or placement for 
adoption, is covered under creditable coverage. This rule does not 
apply to coverage before the date of such adoption or placement for 
adoption.
    (3) Break in coverage. Paragraphs (b) (1) and (2) of this section 
no longer apply to a child after a significant break in coverage.
    (4) Pregnancy. A group health plan, and a health insurance issuer 
offering group health insurance coverage, may not impose a preexisting 
condition exclusion relating to pregnancy as a preexisting condition.
    (5) Special enrollment dates. For special enrollment dates relating 
to new dependents, see Sec. 2590.701-6(b).
    (c) Notice of plan's preexisting condition exclusion. A group 
health plan, and health insurance issuer offering group health 
insurance under the plan, may not impose a preexisting condition 
exclusion with respect to a participant or dependent of the participant 
before notifying the participant, in writing, of the existence and 
terms of any preexisting condition exclusion under the plan and of the 
rights of individuals to demonstrate creditable coverage (and any 
applicable waiting periods) as required by Sec. 2590.701-5. The 
description of the rights of individuals to demonstrate creditable 
coverage includes a description of the right of the individual to 
request a certificate from a prior plan or issuer, if necessary, and a 
statement that the current plan or issuer will assist in obtaining a 
certificate from any prior plan or issuer, if necessary.


Sec. 2590.701-4  Rules relating to creditable coverage.

    (a) General rules--
    (1) Creditable coverage. For purposes of this section, except as 
provided in paragraph (a)(2) of this section, the term creditable 
coverage means coverage of an individual under any of the following:
    (i) A group health plan as defined in Sec. 2590.701-2.
    (ii) Health insurance coverage as defined in Sec. 2590.701-2 
(whether or not the entity offering the coverage is subject to Part 7 
of Subtitle B of Title I of the Act, and without regard to whether the 
coverage is offered in the group market, the individual market, or 
otherwise).
    (iii) Part A or B of Title XVIII of the Social Security Act 
(Medicare).
    (iv) Title XIX of the Social Security Act (Medicaid), other than 
coverage consisting solely of benefits under section 1928 of the Social 
Security Act (the program for distribution of pediatric vaccines).
    (v) Title 10 U.S.C. Chapter 55 (medical and dental care for members 
and certain former members of the uniformed services, and for their 
dependents; for purposes of Title 10 U.S.C. Chapter 55, uniformed 
services means the armed forces and the Commissioned Corps of the 
National Oceanic and Atmospheric Administration and of the Public 
Health Service).
    (vi) A medical care program of the Indian Health Service or of a 
tribal organization.
    (vii) A State health benefits risk pool. For purposes of this 
section, a State health benefits risk pool means--
    (A) An organization qualifying under section 501(c)(26) of the 
Code;
    (B) A qualified high risk pool described in section 2744(c)(2) of 
the PHSA; or
    (C) Any other arrangement sponsored by a State, the membership 
composition of which is specified by the State and which is established 
and maintained primarily to provide health insurance coverage for 
individuals who are residents of such State and who, by reason of the 
existence or history of a medical condition--
    (1) Are unable to acquire medical care coverage for such condition 
through insurance or from an HMO, or
    (2) Are able to acquire such coverage only at a rate which is 
substantially in excess of the rate for such coverage through the 
membership organization.
    (viii) A health plan offered under Title 5 U.S.C. Chapter 89 (the 
Federal Employees Health Benefits Program).
    (ix) A public health plan. For purposes of this section, a public 
health plan means any plan established or maintained by a State, 
county, or other political subdivision of a State that provides health 
insurance coverage to individuals who are enrolled in the plan.
    (x) A health benefit plan under section 5(e) of the Peace Corps Act 
(22 U.S.C. 2504(e)).
    (2) Excluded coverage. Creditable coverage does not include 
coverage consisting solely of coverage of excepted benefits (described 
in Sec. 2590.732).
    (3) Methods of counting creditable coverage. For purposes of 
reducing any preexisting condition exclusion period, as provided under 
Sec. 2590.701-3(a)(1)(iii), a group health plan, and a health insurance 
issuer offering group health insurance coverage, determines the amount 
of an individual's creditable coverage by using the standard method 
described in paragraph (b) of this section, except that the plan, or 
issuer, may use the alternative method under paragraph (c) of this 
section with respect to any or all of the categories of benefits 
described under paragraph (c)(3) of this section.
    (b) Standard method--(1) Specific benefits not considered. Under 
the standard method, a group health plan, and a health insurance issuer 
offering group health insurance coverage, determines the amount of 
creditable

[[Page 16945]]

coverage without regard to the specific benefits included in the 
coverage.
    (2) Counting creditable coverage--(i) Based on days. For purposes 
of reducing the preexisting condition exclusion period, a group health 
plan, and a health insurance issuer offering group health insurance 
coverage, determines the amount of creditable coverage by counting all 
the days that the individual has under one or more types of creditable 
coverage. Accordingly, if on a particular day, an individual has 
creditable coverage from more than one source, all the creditable 
coverage on that day is counted as one day. Further, any days in a 
waiting period for a plan or policy are not creditable coverage under 
the plan or policy.
    (ii) Days not counted before significant break in coverage. Days of 
creditable coverage that occur before a significant break in coverage 
are not required to be counted.
    (iii) Definition of significant break in coverage. A significant 
break in coverage means a period of 63 consecutive days during all of 
which the individual does not have any creditable coverage, except that 
neither a waiting period nor an affiliation period is taken into 
account in determining a significant break in coverage. (See section 
731(b)(2)(iii) of the Act and section 2723(b)(2)(iii) of the PHSA which 
exclude from preemption State insurance laws that require a break of 
more than 63 days before an individual has a significant break in 
coverage for purposes of State law.)
    (iv) Examples. The following examples illustrate how creditable 
coverage is counted in reducing preexisting condition exclusion periods 
under this paragraph (b)(2):

    Example 1. (i) Individual A works for Employer P and has 
creditable coverage under Employer P's plan for 18 months before A's 
employment terminates. A is hired by Employer Q, and enrolls in 
Employer Q's group health plan, 64 days after the last date of 
coverage under Employer P's plan. Employer Q's plan has a 12-month 
preexisting condition exclusion period.
    (ii) In this Example 1, because A had a break in coverage of 63 
days, Employer Q's plan may disregard A's prior coverage and A may 
be subject to a 12-month preexisting condition exclusion period.
    Example 2. (i) Same facts as Example 1, except that A is hired 
by Employer Q, and enrolls in Employer Q's plan, on the 63rd day 
after the last date of coverage under Employer P's plan.
    (ii) In this Example 2, A has a break in coverage of 62 days. 
Because A's break in coverage is not a significant break in 
coverage, Employer Q's plan must count A's prior creditable coverage 
for purposes of reducing the plan's preexisting condition exclusion 
period as it applies to A.
    Example 3. (i) Same facts as Example 1, except that Employer Q's 
plan provides benefits through an insurance policy that, as required 
by applicable State insurance laws, defines a significant break in 
coverage as 90 days.
    (ii) In this Example 3, the issuer that provides group health 
insurance to Employer Q's plan must count A's period of creditable 
coverage prior to the 63-day break.
    Example 4. (i) Same facts as Example 3, except that Employer Q's 
plan is a self-insured plan, and, thus, is not subject to State 
insurance laws.
    (ii) In this Example 4, the plan is not governed by the longer 
break rules under State insurance law and A's previous coverage may 
be disregarded.
    Example 5. (i) Individual B begins employment with Employer R 45 
days after terminating coverage under a prior group health plan. 
Employer R's plan has a 30-day waiting period before coverage 
begins. B enrolls in Employer R's plan when first eligible.
    (ii) In this Example 5, B does not have a significant break in 
coverage for purposes of determining whether B's prior coverage must 
be counted by Employer R's plan. B has only a 44-day break in 
coverage because the 30-day waiting period is not taken into account 
in determining a significant break in coverage.
    Example 6, (i) Individual C works for Employer S and has 
creditable coverage under Employer S's plan for 200 days before C's 
employment is terminated and coverage ceases. C is then unemployed 
for 51 days before being hired by Employer T. Employer T's plan has 
a 3-month waiting period. C works for Employer T for 2 months and 
then terminates employment. Eleven days after terminating employment 
with Employer T, C begins working for Employer U. Employer U's plan 
has no waiting period, but has a 6-month preexisting condition 
exclusion period.
    (ii) In this Example 6, C does not have a significant break in 
coverage because, after disregarding the waiting period under 
Employer T's plan, C had only a 62-day break in coverage (51 days 
plus 11 days). Accordingly, C has 200 days of creditable coverage 
and Employer U's plan may not apply its 6-month preexisting 
condition exclusion period with respect to C.
    Example 7. (i) Individual D terminates employment with Employer 
V on January 13, 1998 after being covered for 24 months under 
Employer V's group health plan. On March 17, the 63rd day without 
coverage, D applies for a health insurance policy in the individual 
market. D's application is accepted and the coverage is made 
effective May 1.
    (ii) In this Example 7, because D applied for the policy before 
the end of the 63rd day, and coverage under the policy ultimately 
became effective, the period between the date of application and the 
first day of coverage is a waiting period and no significant break 
in coverage occurred even though the actual period without coverage 
was 107 days.
    Example 8. (i) Same facts as Example 7, except that D's 
application for a policy in the individual market is denied.
    (ii) In this Example 8, because D did not obtain coverage 
following application, D incurred a significant break in coverage on 
the 64th day.

    (v) Other permissible counting methods--(A) Rule. Notwithstanding 
any other provisions of this paragraph (b)(2), for purposes of reducing 
a preexisting condition exclusion period (but not for purposes of 
issuing a certificate under Sec. 2590.701-5), a group health plan, and 
a health insurance issuer offering group health insurance coverage, may 
determine the amount of creditable coverage in any other manner that is 
at least as favorable to the individual as the method set forth in this 
paragraph (b)(2), subject to the requirements of other applicable law.
    (B) Example. The rule of this paragraph (b)(2)(v) is illustrated by 
the following example:

    Example. (i) Individual F has coverage under group health plan Y 
from January 3, 1997 through March 25, 1997. F then becomes covered 
by group health plan Z. F's enrollment date in Plan Z is May 1, 
1997. Plan Z has a 12-month preexisting condition exclusion period.
    (ii) In this Example, Plan Z may determine, in accordance with 
the rules prescribed in paragraph (b)(2) (i), (ii), and (iii) of 
this section, that F has 82 days of creditable coverage (29 days in 
January, 28 days in February, and 25 days in March). Thus, the 
preexisting condition exclusion period will no longer apply to F on 
February 8, 1998 (82 days before the 12-month anniversary of F's 
enrollment (May 1)). For administrative convenience, however, Plan Z 
may consider that the preexisting condition exclusion period will no 
longer apply to F on the first day of the month (February 1).

    (c) Alternative method--(1) Specific benefits considered. Under the 
alternative method, a group health plan, or a health insurance issuer 
offering group health insurance coverage, determines the amount of 
creditable coverage based on coverage within any category of benefits 
described in paragraph (c)(3) of this section and not based on coverage 
for any other benefits. The plan or issuer may use the alternative 
method for any or all of the categories. The plan may apply a different 
preexisting condition exclusion period with respect to each category 
(and may apply a different preexisting condition exclusion period for 
benefits that are not within any category). The creditable coverage 
determined for a category of benefits applies only for purposes of 
reducing the preexisting condition exclusion period with respect to 
that category. An individual's creditable coverage for benefits that 
are not within any category for which the alternative method is being 
used is determined under the

[[Page 16946]]

standard method of paragraph (b) of this section.
    (2) Uniform application. A plan or issuer using the alternative 
method is required to apply it uniformly to all participants and 
beneficiaries under the plan or policy. The use of the alternative 
method is required to be set forth in the plan.
    (3) Categories of benefits. The alternative method for counting 
creditable coverage may be used for coverage for the following 
categories of benefits--
    (i) Mental health;
    (ii) Substance abuse treatment;
    (iii) Prescription drugs;
    (iv) Dental care; or
    (v) Vision care.
    (4) Plan notice. If the alternative method is used, the plan is 
required to--
    (i) State prominently that the plan is using the alternative method 
of counting creditable coverage in disclosure statements concerning the 
plan, and state this to each enrollee at the time of enrollment under 
the plan; and
    (ii) Include in these statements a description of the effect of 
using the alternative method, including an identification of the 
categories used.
    (5) Disclosure of information on previous benefits. See 
Sec. 2590.701-5(b) for special rules concerning disclosure of coverage 
to a plan, or issuer, using the alternative method of counting 
creditable coverage under this paragraph (c).
    (6) Counting creditable coverage--(i) In general. Under the 
alternative method, the group health plan or issuer counts creditable 
coverage within a category if any level of benefits is provided within 
the category. Coverage under a reimbursement account or arrangement, 
such as a flexible spending arrangement (as defined in section 
106(c)(2) of the Internal Revenue Code), does not constitute coverage 
within any category.
    (ii) Special rules. In counting an individual's creditable coverage 
under the alternative method, the group health plan, or issuer, first 
determines the amount of the individual's creditable coverage that may 
be counted under paragraph (b) of this section, up to a total of 365 
days of the most recent creditable coverage (546 days for a late 
enrollee). The period over which this creditable coverage is determined 
is referred to as the determination period. Then, for the category 
specified under the alternative method, the plan or issuer counts 
within the category all days of coverage that occurred during the 
determination period (whether or not a significant break in coverage 
for that category occurs), and reduces the individual's preexisting 
condition exclusion period for that category by that number of days. 
The plan or issuer may determine the amount of creditable coverage in 
any other reasonable manner, uniformly applied, that is at least as 
favorable to the individual.
    (iii) Example. The rules of this paragraph (c)(6) are illustrated 
by the following example:

    Example. (i) Individual D enrolls in Employer V's plan on 
January 1, 2001. Coverage under the plan includes prescription drug 
benefits. On April 1, 2001, the plan ceases providing prescription 
drug benefits. D's employment with Employer V ends on January 1, 
2002, after D was covered under Employer V's group health plan for 
365 days. D enrolls in Employer Y's plan on February 1, 2002 (D's 
enrollment date). Employer Y's plan uses the alternative method of 
counting creditable coverage and imposes a 12-month preexisting 
condition exclusion on prescription drug benefits.
    (ii) In this Example, Employer Y's plan may impose a 275-day 
preexisting condition exclusion with respect to D for prescription 
drug benefits because D had 90 days of creditable coverage relating 
to prescription drug benefits within D's determination period.


Sec. 2590.701-5   Certification and disclosure of previous coverage.

    (a) Certificate of creditable coverage--(1) Entities required to 
provide certificate--(i) In general. A group health plan, and each 
health insurance issuer offering group health insurance coverage under 
a group health plan, is required to furnish certificates of creditable 
coverage in accordance with this paragraph (a) of this section.
    (ii) Duplicate certificates not required. An entity required to 
provide a certificate under this paragraph (a)(1) for an individual is 
deemed to have satisfied the certification requirements for that 
individual if another party provides the certificate, but only to the 
extent that information relating to the individual's creditable 
coverage and waiting or affiliation period is provided by the other 
party. For example, in the case of a group health plan funded through 
an insurance policy, the issuer is deemed to have satisfied the 
certification requirement with respect to a participant or beneficiary 
if the plan actually provides a certificate that includes the 
information required under paragraph (a)(3) of this section with 
respect to the participant or beneficiary.
    (iii) Special rule for group health plans. To the extent coverage 
under a plan consists of group health insurance coverage, the plan is 
deemed to have satisfied the certification requirements under this 
paragraph (a)(1) if any issuer offering the coverage is required to 
provide the certificates pursuant to an agreement between the plan and 
the issuer. For example, if there is an agreement between an issuer and 
the plan sponsor under which the issuer agrees to provide certificates 
for individuals covered under the plan, and the issuer fails to provide 
a certificate to an individual when the plan would have been required 
to provide one under this paragraph (a), then the issuer, but not the 
plan, violates the certification requirements of this paragraph (a).
    (iv) Special rules for issuers--(A)(1) Responsibility of issuer for 
coverage period. An issuer is not required to provide information 
regarding coverage provided to an individual by another party.
    (2) Example. The rule of this paragraph (a)(1)(iv)(A) is 
illustrated by the following example:

    Example. (i) A plan offers coverage with an HMO option from one 
issuer and an indemnity option from a different issuer. The HMO has 
not entered into an agreement with the plan to provide certificates 
as permitted under paragraph (a)(1)(iii) of this section.
    (ii) In this Example, if an employee switches from the indemnity 
option to the HMO option and later ceases to be covered under the 
plan, any certificate provided by the HMO is not required to provide 
information regarding the employee's coverage under the indemnity 
option.

    (B)(1) Cessation of issuer coverage prior to cessation of coverage 
under a plan. If an individual's coverage under an issuer's policy 
ceases before the individual's coverage under the plan ceases, the 
issuer is required to provide sufficient information to the plan (or to 
another party designated by the plan) to enable a certificate to be 
provided by the plan (or other party), after cessation of the 
individual's coverage under the plan, that reflects the period of 
coverage under the policy. The provision of that information to the 
plan will satisfy the issuer's obligation to provide an automatic 
certificate for that period of creditable coverage for the individual 
under paragraph (a) (2)(ii) and (3) of this section. In addition, an 
issuer providing that information is required to cooperate with the 
plan in responding to any request made under paragraph (b)(2) of this 
section (relating to the alternative method of counting creditable 
coverage). If the individual's coverage under the plan ceases at the 
time the individual's coverage under the issuer's policy ceases, the 
issuer must provide an automatic certificate under paragraph (a)(2)(ii) 
of this section. An issuer may presume that an individual whose 
coverage ceases at a time other than the effective date for changing 
enrollment

[[Page 16947]]

options has ceased to be covered under the plan.
    (2) Example. The rule of this paragraph (a)(1)(iv)(B) is 
illustrated by the following example.

    Example. (i) A group health plan provides coverage under an HMO 
option and an indemnity option with a different issuer, and only 
allows employees to switch on each January 1. Neither the HMO nor 
the indemnity issuer has entered into an agreement with the plan to 
provide automatic certificates as permitted under paragraph 
(a)(2)(ii) of this section.
    (ii) In this Example, if an employee switches from the indemnity 
option to the HMO option on January 1, the issuer must provide the 
plan (or a person designated by the plan) with appropriate 
information with respect to the individual's coverage with the 
indemnity issuer. However, if the individual's coverage with the 
indemnity issuer ceases at a date other than January 1, the issuer 
is instead required to provide the individual with an automatic 
certificate.

    (2) Individuals for whom certificate must be provided; timing of 
issuance--(i) Individuals. A certificate must be provided, without 
charge, for participants or dependents who are or were covered under a 
group health plan upon the occurrence of any of the events described in 
paragraph (a)(2)(ii) or (iii) of this section.
    (ii) Issuance of automatic certificates. The certificates described 
in this paragraph (a)(2)(ii) are referred to as automatic certificates.
    (A) Qualified beneficiaries upon a qualifying event. In the case of 
an individual who is a qualified beneficiary (as defined in section 
607(3) of the Act) entitled to elect COBRA continuation coverage, an 
automatic certificate is required to be provided at the time the 
individual would lose coverage under the plan in the absence of COBRA 
continuation coverage or alternative coverage elected instead of COBRA 
continuation coverage. A plan or issuer satisfies this requirement if 
it provides the automatic certificate no later than the time a notice 
is required to be furnished for a qualifying event under section 606 of 
the Act (relating to notices required under COBRA).
    (B) Other individuals when coverage ceases. In the case of an 
individual who is not a qualified beneficiary entitled to elect COBRA 
continuation coverage, an automatic certificate is required to be 
provided at the time the individual ceases to be covered under the 
plan. A plan or issuer satisfies this requirement if it provides the 
automatic certificate within a reasonable time period thereafter. In 
the case of an individual who is entitled to elect to continue coverage 
under a State program similar to COBRA and who receives the automatic 
certificate not later than the time a notice is required to be 
furnished under the State program, the certificate is deemed to be 
provided within a reasonable time period after the cessation of 
coverage under the plan.
    (C) Qualified beneficiaries when COBRA ceases. In the case of an 
individual who is a qualified beneficiary and has elected COBRA 
continuation coverage (or whose coverage has continued after the 
individual became entitled to elect COBRA continuation coverage), an 
automatic certificate is to be provided at the time the individual's 
coverage under the plan ceases. A plan, or issuer, satisfies this 
requirement if it provides the automatic certificate within a 
reasonable time after coverage ceases (or after the expiration of any 
grace period for nonpayment of premiums). An automatic certificate is 
required to be provided to such an individual regardless of whether the 
individual has previously received an automatic certificate under 
paragraph (a)(2)(ii)(A) of this section.
    (iii) Any individual upon request. Requests for certificates are 
permitted to be made by, or on behalf of, an individual within 24 
months after coverage ceases. Thus, for example, a plan in which an 
individual enrolls may, if authorized by the individual, request a 
certificate of the individual's creditable coverage on behalf of the 
individual from a plan in which the individual was formerly enrolled. 
After the request is received, a plan or issuer is required to provide 
the certificate by the earliest date that the plan or issuer, acting in 
a reasonable and prompt fashion, can provide the certificate. A 
certificate is required to be provided under this paragraph (a)(2)(iii) 
even if the individual has previously received a certificate under this 
paragraph (a)(2)(iii) or an automatic certificate under paragraph 
(a)(2)(ii) of this section.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (a)(2):

    Example 1. (i) Individual A terminates employment with Employer 
Q. A is a qualified beneficiary entitled to elect COBRA continuation 
coverage under Employer Q's group health plan. A notice of the 
rights provided under COBRA is typically furnished to qualified 
beneficiaries under the plan within 10 days after a covered employee 
terminates employment.
    (ii) In this Example 1, the automatic certificate may be 
provided at the same time that A is provided the COBRA notice.
    Example 2. (i) Same facts as Example 1, except that the 
automatic certificate for A is not completed by the time the COBRA 
notice is furnished to A.
    (ii) In this Example 2, the automatic certificate may be 
provided within the period permitted by law for the delivery of 
notices under COBRA.
    Example 3. (i) Employer R maintains an insured group health 
plan. R has never had 20 employees and thus R's plan is not subject 
to the COBRA continuation coverage provisions. However, R is in a 
State that has a State program similar to COBRA. B terminates 
employment with R and loses coverage under R's plan.
    (ii) In this Example 3, the automatic certificate may be 
provided not later than the time a notice is required to be 
furnished under the State program.
    Example 4. (i) Individual C terminates employment with Employer 
S and receives both a notice of C's rights under COBRA and an 
automatic certificate. C elects COBRA continuation coverage under 
Employer S's group health plan. After four months of COBRA 
continuation coverage and the expiration of a 30-day grace period, 
S's group health plan determines that C's COBRA continuation 
coverage has ceased due to failure to make a timely payment for 
continuation coverage.
    (ii) In this Example 4, the plan must provide an updated 
automatic certificate to C within a reasonable time after the end of 
the grace period.
    Example 5. (i) Individual D is currently covered under the group 
health plan of Employer T. D requests a certificate, as permitted 
under paragraph (a)(2)(iii) of this section. Under the procedure for 
Employer T's plan, certificates are mailed (by first class mail) 7 
business days following receipt of the request. This date reflects 
the earliest date that the plan, acting in a reasonable and prompt 
fashion, can provide certificates.
    (ii) In this Example 5, the plan's procedure satisfies paragraph 
(a)(2)(iii) of this section.

    (3) Form and content of certificate-- (i) Written certificate--(A) 
In general. Except as provided in paragraph (a)(3)(i)(B) of this 
section, the certificate must be provided in writing (including any 
form approved by the Secretary as a writing).
    (B) Other permissible forms. No written certificate is required to 
be provided under this paragraph (a) with respect to a particular event 
described in paragraph (a)(2) (ii) or (iii) of this section, if--
    (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 this paragraph (a)(3) through means 
other than a written certificate (e.g., by telephone); and
    (4) The receiving plan or issuer receives such information from the 
sending plan or issuer in such form within the time periods required 
under paragraph (a)(2) of this section.

[[Page 16948]]

    (ii) Required information. The certificate must include the 
following--
    (A) The date the certificate is issued;
    (B) The name of the group health plan that provided the coverage 
described in the certificate;
    (C) The name of the participant or dependent with respect to whom 
the certificate applies, and any other information necessary for the 
plan providing the coverage specified in the certificate to identify 
the individual, such as the individual's identification number under 
the plan and the name of the participant if the certificate is for (or 
includes) a dependent;
    (D) The name, address, and telephone number of the plan 
administrator or issuer required to provide the certificate;
    (E) The telephone number to call for further information regarding 
the certificate (if different from paragraph (a)(3)(ii)(D) of this 
section);
    (F) Either--
    (1) A statement that an 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, or
    (2) The date any waiting period (and affiliation period, if 
applicable) began and the date creditable coverage began; and
    (G) 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 certificate. If an automatic 
certificate is provided pursuant to paragraph (a)(2)(ii) 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 pursuant to paragraph 
(a)(2)(iii) 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 such period of 
continuous coverage.
    (iv) Combining information for families. A certificate may provide 
information with respect to both a participant and the participant's 
dependents if the information is identical for each individual or, if 
the information is not identical, certificates may be provided on one 
form if the form provides all the required information for each 
individual and separately states the information that is not identical.
    (v) Model certificate. The requirements of paragraph (a)(3)(ii) of 
this section are satisfied if the plan or issuer provides a certificate 
in accordance with a model certificate authorized by the Secretary.
    (vi) Excepted benefits; categories of benefits. No certificate is 
required to be furnished with respect to excepted benefits described in 
Sec. 2590.732. In addition, the information in the certificate 
regarding coverage is not required to specify categories of benefits 
described in Sec. 2590.701-4(c) (relating to the alternative method of 
counting creditable coverage). However, 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 
(b) of this section.
    (4) Procedures--(i) Method of delivery. The certificate is required 
to be provided to each individual described in paragraph (a)(2) 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 participant and the 
participant's spouse at the participant's last known address, then the 
requirements of this paragraph (a)(4) are satisfied with respect to all 
individuals residing at that address. If a dependent's last known 
address is different than the participant's last known address, a 
separate certificate is required to be provided to the dependent at the 
dependent's last known address. If separate certificates are being 
provided by mail to individuals who reside at the same address, 
separate mailings of each certificate are not required.
    (ii) Procedure for requesting certificates. A plan or issuer must 
establish a procedure for individuals to request and receive 
certificates pursuant to paragraph (a)(2)(iii) of this section.
    (iii) Designated recipients. If an automatic certificate is 
required to be provided under paragraph (a)(2)(ii) of this section, and 
the individual entitled to receive the certificate designates another 
individual or entity to receive the certificate, the plan or issuer 
responsible for providing the certificate is permitted to provide the 
certificate to the designated party. If a certificate is required to be 
provided upon request under paragraph (a)(2)(iii) of this section and 
the individual entitled to receive the certificate designates another 
individual or entity to receive the certificate, the plan or issuer 
responsible for providing the certificate is required to provide the 
certificate to the designated party.
    (5) Special rules concerning dependent coverage--(i)(A) Reasonable 
efforts. A plan or issuer is required to use reasonable efforts to 
determine any information needed for a certificate relating to the 
dependent coverage. In any case in which an automatic certificate is 
required to be furnished with respect to a dependent under paragraph 
(a)(2)(ii) of this section, no individual certificate is required to be 
furnished until the plan or issuer knows (or making reasonable efforts 
should know) of the dependent's cessation of coverage under the plan.
    (B) Example. The rules of this paragraph (a)(5) are illustrated by 
the following example:

    Example. (i) A group health plan covers employees and their 
dependents. The plan annually requests all employees to provide 
updated information regarding dependents, including the specific 
date on which an employee has a new dependent or on which a person 
ceases to be a dependent of the employee.
    (ii) In this Example, the plan has satisfied the standard in 
this paragraph (a)(5)(i) of this section that it make reasonable 
efforts to determine the cessation of dependents' coverage and the 
related dependent coverage information.

    (ii) Special rules for demonstrating coverage. If a certificate 
furnished by a plan or 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 (c)(4) of 
this section for demonstrating dependent status. In addition, 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. See Sec. 2590.701-3(b), under which such a child would 
not be subject to a preexisting condition exclusion.
    (iii) Transaction rule for dependent coverage through June 30, 
1998--(A) In general. A group health plan or health insurance 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 (a)(3)(ii)(C) of 
this section by providing the name of the participant covered by the 
group health plan or health insurance issuer and specifying that the 
type of coverage described in the certificate is for dependent coverage 
(e.g., family coverage or employee-plus-spouse coverage).
    (B) Certificates provided on request. For purposes of certificates 
provided on the request of, or on behalf of, an individual pursuant to 
paragraph (a)(2)(iii) of this section, a plan or issuer

[[Page 16949]]

must make reasonable efforts to obtain and provide the names of any 
dependent covered by the certificate where such information is 
requested to be provided. If a certificate does not include the name of 
any dependent of an individual covered by the certificate, the 
individual may, if necessary, use the procedures described in paragraph 
(c) of this section for submitting documentation to establish that the 
creditable coverage in the certificate applies to the dependent.
    (C) Demonstrating a dependent's creditable coverage. See paragraph 
(c)(4) of this section for special rules to demonstrate dependent 
status.
    (D) Duration. This paragraph (a)(5)(iii) is only effective for 
certificates provided with respect to events occurring through June 30, 
1998.
    (6) Special certification rules for entities not subject to Part 7 
of Subtitle B of Title I of the Act--(i) Issuers. For special rules 
requiring that issuers, not subject to part 7 of subtitle B of title I 
of the Act, provide certificates consistent with the rules in this 
section, including issuers offering coverage with respect to creditable 
coverage described in sections 701(c)(1)(G) through (c)(1)(J) of the 
Act (coverage under a State health benefits risk pool, the Federal 
Employees Health Benefits Program, a public health plan, and a health 
benefit plan under section 5(e) of the Peace Corps Act), see section 
2721(b)(1)(B) of the PHSA (requiring certificates by issuers offering 
health insurance covering in connection with a group health plan, 
including a church plan or a governmental plan (including the Federal 
Employees Health Benefits Program (FEHBP)). In addition, see section 
2743 of the PHSA applicable to health insurance issuers in the 
individual market. (However, this section does not require a 
certificate to be provided with respect to short-term limited duration 
insurance, as described in the definition of individual health 
insurance coverage in Sec. 2590.701-2, that is not provided by a group 
health plan or issuer offering health insurance in connection with a 
group health plan.)
    (ii) Other entities. For special rules requiring that certain other 
entities, not subject to part 7 of subtitle B of title I of the Act, 
provide certificates consistent with the rules in this section, see 
section 2791(a)(3) of the PHSA applicable to entities described in 
sections 2701(c)(1)(C), (D), (E), and (F) of PHSA (relating to 
Medicare, Medicaid, CHAMPUS, and Indian Health Service), section 
2721(b)(1)(A) of the PHSA applicable to nonfederal governmental plans 
generally, section 2721(b)(2)(C)(ii) of the PHSA applicable to 
nonfederal governmental plans that elect to be excluded from the 
requirements of subparts 1 and 3 of part A of Title XXVII of the PHSA, 
and section 9805(a) of the Internal Revenue Code applicable to group 
health plans, which includes church plans (as defined in section 414(e) 
of the Internal Revenue Code).
    (b) Disclosure of coverage to a plan, or issuer, using the 
alternative method of counting creditable coverage--(1) In general. If 
an individual enrolls in a group health plan with respect to which the 
plan, or issuer, uses the alternative method of counting creditable 
coverage described in Sec. 2590.701-4(c) the individual provides a 
certificate of coverage under paragraph (a) of this section, and the 
plan or issuer in which the individual enrolls so requests, the entity 
that issued the certificate (the prior entity) is required to disclose 
promptly to a requesting plan or issuer (the requesting entity) the 
information set forth in paragraph (b)(2) of this section.
    (2) Information to be disclosed. Information to be disclosed. The 
prior entity is required to identify to the requesting entity the 
categories of benefits with respect to which the requesting entity is 
using the alternative method of counting creditable coverage, and the 
requesting entity may identify specific information that the requesting 
entity reasonably needs in order to determine the individual's 
creditable coverage with respect to any such category. The prior entity 
is required to disclose promptly to the requesting entity the 
creditable coverage information so requested.
    (3) Charge for providing information. The prior entity furnishing 
the information under paragraph (b) of this section may charge the 
requesting entity for the reasonable cost of disclosing such 
information.
    (c) Ability of an individual to demonstrate creditable coverage and 
waiting period information--(1) In general. The rules in this paragraph 
(c) implement section 701(c)(4) of the Act, which permits individuals 
to establish creditable coverage through means other than certificates, 
and section 701(e)(3) of the Act, which requires the Secretary to 
establish rules designed to prevent an individual's subsequent coverage 
under a group health plan or health insurance coverage from being 
adversely affected by an entity's failure to provide a certificate with 
respect to that individual. 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 such 
a demonstration when--
    (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 pursuant to 
paragraph (a) of this section;
    (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; or
    (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. 
A plan or issuer is required to 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 
an individual has creditable coverage and is entitled to offset all or 
a portion of any preexisting condition exclusion period. A plan or 
issuer shall treat the individual as having furnished a certificate 
under paragraph (a) of this section if the individual attests to the 
period of creditable coverage, the individual also presents relevant 
corroborating evidence of some creditable coverage during the period, 
and the individual cooperates with the plan's or issuer's efforts to 
verify the individual's coverage. For this purpose, cooperation 
includes providing (upon the plan's or issuer's request) a written 
authorization for the plan or 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 a plan or issuer may refuse to credit coverage where the 
individual fails to cooperate with the plan's or issuer's efforts to 
verify coverage, the plan or 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,

[[Page 16950]]

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 also be established through means 
other than documentation, such as by a telephone call from the plan or 
provider to a third party verifying creditable coverage.
    (iv) Example. The rules of this paragraph (c)(2) are illustrated by 
the following example:

    Example. (i) Individual F terminates employment with Employer W 
and, a month later, is hired by Employer X. Employer X's group 
health plan imposes a preexisting condition exclusion of 12 months 
on new enrollees under the plan and uses the standard method of 
determining creditable coverage. F fails to receive a certificate of 
prior coverage from the self-insured group health plan maintained by 
F's prior employer, Employer W, and requests a certificate. However, 
F (and Employer X's plan, on F's behalf) is unable to obtain a 
certificate from Employer W's plan. F attests that, to the best of 
F's knowledge, F had at least 12 months of continuous coverage under 
Employer W's plan, and that the coverage ended no earlier than F's 
termination of employment from Employer W. In addition, F presents 
evidence of coverage, such as an explanation of benefits for a claim 
that was made during the relevant period.
    (ii) In this Example, based solely on these facts, F has 
demonstrated creditable coverage for the 12 months of coverage under 
Employer W's plan in the same manner as if F had presented a written 
certificate of creditable coverage.

    (3) Demonstrating categories of creditable coverage. Procedures 
similar to those described in this paragraph (c) apply in order to 
determine an individual's creditable coverage with respect to any 
category under paragraph (b) of this section (relating to determining 
creditable coverage under the alternative method).
    (4) 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 group 
health plan or issuer is required to treat the individual as having 
furnished a certificate showing the dependent status if the individual 
attests to such dependency and the period of such status and the 
individual cooperates with the plan's or issuer's efforts to verify the 
dependent status.
    (d) Determination and notification of creditable coverage--(1) 
Resonable time period. In the event that a group health plan or health 
insurance issuer offering group health insurance coverage receives 
information under paragraph (a) of this section (certifications), 
paragraph (b) of this section (disclosure of information relating to 
the alternative method), or paragraph (c) of this section (other 
evidence of creditable coverage), the entity is required, within a 
reasonable time period following receipt of the information, to make a 
determination regarding the individual's period of creditable coverage 
and notify the individual of the determination in accordance with 
paragraph (d)(2) of this section. Whether a determination and 
notification regarding an individual's creditable coverage is made 
within a reasonable time period is determined based on the relevant 
facts and circumstances. Relevant facts and circumstances include 
whether a plan's application of a preexisting condition exclusion would 
prevent an individual from having access to urgent medical services.
    (2) Notification to individual of period of preexisting condition 
exclusion. A plan or issuer seeking to impose a preexisting condition 
exclusion is required to disclose to the individual, in writing, its 
determination of any preexisting condition exclusion period that 
applies to the individual, and the basis for such determination, 
including the source and substance of any information on which the plan 
or issuer relied. In addition, the plan or issuer is required to 
provide the individual with a written explanation of any appeal 
procedures established by the plan or issuer, and with a reasonable 
opportunity to submit additional evidence of creditable coverage. 
However, nothing in this paragraph (d) or paragraph (c) of this section 
prevents a plan or issuer from modifying an initial determination of 
creditable coverage if it determines that the individual did not have 
the claimed creditable coverage, provided that--
    (i) A notice of such reconsideration, as described in this 
paragraph (d), is provided to the individual; and
    (ii) Until the final determination is made, the plan or issuer, for 
purposes of approving access to medical services (such as a pre-surgery 
authorization), acts in a manner consistent with the initial 
determination.
    (3) Examples. The following examples illustrate this paragraph (d):

    Example 1. (i) Individual G is hired by Employer Y. Employer Y's 
group health plan imposes a preexisting condition exclusion for 12 
months with respect to new enrollees and uses the standard method of 
determining creditable coverage. Employer Y's plan determines that G 
is subject to a 4-month preexisting condition exclusion, based on a 
certificate of creditable coverage that is provided by G to Employer 
Y's plan indicating 8 months of coverage under G's prior group 
health plan.
    (ii) In this Example 1, Employer Y's plan must notify G within a 
reasonable period of time following receipt of the certificate that 
G is subject to a 4-month preexisting condition exclusion beginning 
on G's enrollment date in Y's plan.
    Example 2. (i) Same facts as in Example 1, except that Employer 
Y's plan determines that G has 14 months of creditable coverage 
based on G's certificate indicating 14 months of creditable coverage 
under G's prior plan.
    (ii) In this Example 2, Employer Y's plan is not required to 
notify G that G will not be subject to a preexisting condition 
exclusion.
    Example 3. (i) Individual H is hired by Employer Z. Employer Z's 
group health plan imposes a preexisting condition exclusion for 12 
months with respect to new enrollees and uses the standard method of 
determining creditable coverage. H develops an urgent health 
condition before receiving a certificate of prior coverage. H 
attests to the period of prior coverage, presents corroborating 
documentation of the coverage period, and authorizes the plan to 
request a certificate on H's behalf.
    (ii) In this Example 3, Employer Z's plan must review the 
evidence presented by H. In addition, the plan must make a 
determination and notify H regarding any preexisting condition 
exclusion period that applies to H (and the basis of such 
determination) within a reasonable time period following receipt of 
the evidence that is consistent with the urgency of H's health 
condition (this determination may be modified as permitted under 
paragraph (d)(2) of this section).


Sec. 2590.701-6  Special enrollment periods.

    (a) Special enrollment for certain individuals who lose coverage--
(1) In general. A group health plan, and a health insurance issuer 
offering group health insurance coverage in connection with a group 
health plan, is required to permit employees and dependents described 
in paragraph (a) (2), (3), or (4) of this section to enroll for 
coverage under the terms of the plan if the conditions in paragraph 
(a)(5) of this section are satisfied and the enrollment is requested 
within the period described in paragraph (a)(6) of this section. The 
enrollment is effective at the time described in paragraph (a)(7) of 
this section. The special enrollment rights under this paragraph (a) 
apply without regard to the dates on which an individual would 
otherwise be able to enroll under the plan.
    (2) Special enrollment of an employee only. An employee is 
described in this paragraph (a)(2) if the employee is eligible, but not 
enrolled, for coverage under the terms of the plan and, when enrollment 
was previously offered to the employee under the plan and was declined 
by the employee, the employee

[[Page 16951]]

was covered under another group health plan or had other health 
insurance coverage.
    (3) Special enrollment of dependents only. A dependent is described 
in this paragraph (a)(3) if the dependent is a dependent of an employee 
participating in the plan, the dependent is eligible, but not enrolled, 
for coverage under the terms of the plan, and, when enrollment was 
previously offered under the plan and was declined, the dependent was 
covered under another group health plan or had other health insurance 
coverage.
    (4) Special enrollment of both employee and dependent. An employee 
and any dependent of the employee are described in this paragraph 
(a)(4) if they are eligible, but not enrolled, for coverage under the 
terms of the plan and, when enrollment was previously offered to the 
employee or dependent under the plan and was declined, the employee or 
dependent was covered under another group health plan or had other 
health insurance coverage.
    (5) Conditions for special enrollment. An employee or dependent is 
eligible to enroll during a special enrollment period if each of the 
following applicable conditions is met:
    (i) When the employee declined enrollment for the employee or the 
dependent, the employee stated in writing that coverage under another 
group health plan or other health insurance coverage was the reason for 
declining enrollment. This paragraph (a)(5)(i) applies only if--
    (A) The plan required such a statement when the employee declined 
enrollment; and
    (B) The employee is provided with notice of the requirement to 
provide the statement in this paragraph (a)(5)(i) (and the consequences 
of the employee's failure to provide the statement) at the time the 
employee declined enrollment.
    (ii)(A) When the employee declined enrollment for the employee or 
dependent under the plan, the employee or dependent had COBRA 
continuation coverage under another plan and COBRA continuation 
coverage under that other plan has since been exhausted; or
    (B) If the other coverage that applied to the employee or dependent 
when enrollment was declined was not under a COBRA continuation 
provision, either the other coverage has been terminated as a result of 
loss of eligibility for the coverage or employer contributions towards 
the other coverage has been terminated. For this purpose, loss of 
eligibility for coverage includes a loss of coverage as a result of 
legal separation, divorce, death, termination of employment, reduction 
in the number of hours of employment, and any loss of eligibility after 
a period that is measured by reference to any of the foregoing. Thus, 
for example, if an employee's coverage ceases following a termination 
of employment and the employee is eligible for but fails to elect COBRA 
continuation coverage, this is treated as a loss of eligibility under 
this paragraph (a)(5)(ii)(B). However, loss of eligibility does not 
include a loss due to failure of the individual or the participant to 
pay premiums on a timely basis or termination of coverage for cause 
(such as making a fraudulent claim or an intentional misrepresentation 
of a material fact in connection with the plan). In addition, for 
purposes of this paragraph (a)(5)(ii)(B), employer contributions 
include contributions by any current or former employer (of the 
individual or another person) that was contributing to coverage for the 
individual.
    (6) Length of special enrollment period. The employee is required 
to request enrollment (for the employee or the employee's dependent, as 
described in paragraph (a) (2), (3), or (4) of this section) not later 
than 30 days after the exhaustion of the other coverage described in 
paragraph (a)(5)(ii)(A) of this section or termination of the other 
coverage as a result of the loss of eligibility for the other coverage 
for items described in paragraph (a)(5)(ii)(B) of this section or 
following the termination of employer contributions toward that other 
coverage. The plan may impose the same requirements that apply to 
employees who are otherwise eligible under the plan to immediately 
request enrollment for coverage (e.g., that the request be made in 
writing).
    (7) Effective date of enrollment. Enrollment is effective not later 
than the first day of the first calendar month beginning after the date 
the completed request for enrollment is received.
    (b) Special enrollment with respect to certain dependent 
beneficiaries--(1) In general. A group health plan that makes coverage 
available with respect to dependents of a participant is required to 
provide a special enrollment period to permit individuals described in 
paragraph (b) (2), (3), (4), (5), or (6) of this section to be enrolled 
for coverage under the terms of the plan if the enrollment is requested 
within the time period described in paragraph (b)(7) of this section. 
The enrollment is effective at the time described in paragraph (b)(8) 
of this section. The special enrollment rights under this paragraph (b) 
apply without regard to the dates on which an individual would 
otherwise be able to enroll under the plan.
    (2) Special enrollment of an employee who is eligible but not 
enrolled. An individual is described in this paragraph (b)(2) if the 
individual is an employee who is eligible, but not enrolled, in the 
plan, the individual would be a participant but for a prior election by 
the individual not to enroll in the plan during a previous enrollment 
period, and a person becomes a dependent of the individual through 
marriage, birth, or adoption or placement for adoption.
    (3) Specil enrollment of a spouse of a participant. An individual 
is described in this paragraph (b)(3) if either--
    (i) The individual becomes the spouse of a participant; or
    (ii) The individual is a spouse of the participant and a child 
becomes a dependent of the participant through birth, adoption or 
placement for adoption.
    (4) Special enrollment of an employee who is eligible but not 
enrolled and the spouse of such employee. An employee who is eligible, 
but not enrolled, in the plan, and an individual who is a dependent of 
such employee, are described in this paragraph (b)(4) if the employee 
would be a participant but for a prior election by the employee not to 
enroll in the plan during a previous enrollment period, and either--
    (i) The employee and the individual become married; or
    (ii) The employee and individual are married and a child becomes a 
dependent of the employee through birth, adoption or placement for 
adoption.
    (5) Special enrollment of a dependent of a participant. An 
individual is described in this paragraph (b)(5) if the individual is a 
dependent of a participant and the individual becomes a dependent of 
such participant through marriage, birth, or adoption or placement for 
adoption.
    (6) Sepcial enrollment of an employee who is eligible but not 
enrolled and a new dependent. An employee who is eligible, but not 
enrolled, in the plan, and an individual who is a dependent of the 
employee, are described in this paragraph (b)(6) if the employee would 
be a participant but for a prior election by the employee not to enroll 
in the plan during a previous enrollment period, and the dependent 
becomes a dependent of the employee through marriage, birth, or 
adoption or placement for adoption.
    (7) Length of special enrollment period. The special enrollment 
period under paragraph (b)(1) of this section is a period of not less 
than 30 days and begins on the date of the marriage, birth, or adoption 
or placement for adoption

[[Page 16952]]

(except that such period does not begin earlier than the date the plan 
makes dependent coverage generally available).
    (8) Effective date of enrollment. Enrollment is effective--
    (i) In the case of marriage, not later than the first day of the 
first calendar month beginning after the date the completed request for 
enrollment is received by the plan;
    (ii) In the case of a dependent's birth, the date of such birth; 
and
    (iii) In the case of a dependent's adoption or placement for 
adoption, the date of such adoption or placement for adoption.
    (9) Example. The rules of this paragraph (b) are illustrated by the 
following example:

    Example. (i) Employee A is hired on September 3, 1998 by 
Employer X, which has a group health plan in which A can elect to 
enroll either for employee-only coverage, for employee-plus-spouse 
coverage, or for family coverage, effective on the first day of any 
calendar quarter thereafter. A is married and has no children. A 
does not elect to join Employer X's plan (for employee-only 
coverage, employee-plus-spouse coverage, or family coverage) on 
October 1, 1998 or January 1, 1999. On February 15, 1999, a child is 
placed for adoption with A and A's spouse.
    (ii) In this Example, the conditions for special enrollment of 
an employee with a new dependent under paragraph (b)(2) of this 
section are satisfied, the conditions for special enrollment of an 
employee and a spouse with a new dependent under paragraph (b)(4) of 
this section are satisfied, and the conditions for special 
enrollment of an employee and a new dependent under paragraph (b)(6) 
of this section are satisfied. Accordingly, Employer X's plan will 
satisfy this paragraph (b) if and only if it allows A to elect, by 
filing the required forms by March 16, 1999, to enroll in Employer 
X's plan either with employee-only coverage, with employee-plus-
spouse coverage, or with family coverage, effective as of February 
15, 1999.

    (c) Notice of enrollment rights. On or before the time an employee 
is offered the opportunity to enroll in a group health plan, the plan 
is required to provide the employee with a description of the plan's 
special enrollment rules under this section. For this purpose, the plan 
may use the following model description of the special enrollment rules 
under this section:

    If you are declining enrollment for yourself or your dependents 
(including your spouse) because of other health insurance coverage, 
you may in the future be able to enroll yourself or your dependents 
in this plan, provided that you request enrollment within 30 days 
after your other coverage ends. In addition, if you have a new 
dependent as a result of marriage, birth, adoption, or placement for 
adoption, you may be able to enroll yourself and your dependents, 
provided that you request enrollment within 30 days after the 
marriage, birth, adoption, or placement for adoption.

    (d)(1) Special enrollment date definition. A special enrollment 
date for an individual means any date in paragraph (a)(7) or (b)(8) of 
this section on which the individual has a right to have enrollment in 
a group health plan become effective under this section.
    (2) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. (i)(A) Employer Y maintains a group health plan that 
allows employees to enroll in the plan either--
    (1) Effective on the first day of employment by an election 
filed within three days thereafter;
    (2) Effective on any subsequent January 1 by an election made 
during the preceding months of November or December; or
    (3) Effective as of any special enrollment date described in 
this section.
    (B) Employee B is hired by Employer Y on March 15, 1998 and does 
not elect to enroll in Employer Y's plan until January 31, 1999 when 
B loses coverage under another plan. B elects to enroll in Employer 
Y's plan effective on February 1, 1999, by filing the completed 
request form by January 31, 1999, in accordance with the special 
rule set forth in paragraph (a) of this section.
    (ii) In this Example 1, B has enrolled on a special enrollment 
date because the enrollment is effective at a date described in 
paragraph (a)(7) of this section.
    Example 2. (i) Same facts as Example 1, except that B's loss of 
coverage under the other plan occurs on December 31, 1998 and B 
elect to enroll in Employer Y's plan effective on January 1, 1999 by 
filing the completed request form by December 31, 1998, in 
accordance with the special rule set forth in paragraph (a) of this 
section.
    (ii) In this Example 2, B has enrolled on a special enrollment 
date because the enrollment is effective at a date described in 
paragraph (a)(7) of this section (even though this date is also a 
regular enrollment date under the plan).


Sec. 2590.701-7  HMO affiliation period as alternative to preexisting 
condition exclusion.

    (a) In general. A group health plan offering health insurance 
coverage through an HMO, or an HMO that offers health insurance 
coverage in connection with a group health plan, may impose an 
affiliation period only if each of the requirements in paragraph (b) of 
this section is satisfied.
    (b) Requirements for affiliation period. (1) No preexisting 
condition exclusion is imposed with respect to any coverage offered by 
the HMO in connection with the particular group health plan.
    (2) No premium is charged to a participant or beneficiary for the 
affiliation period.
    (3) The affiliation period for the HMO coverage is applied 
uniformly without regard to any health status-related factors.
    (4) The affiliation period does not exceed 2 months (or 3 months in 
the case of a late enrollee).
    (5) The affiliation period begins on the enrollment date.
    (6) The affiliation period for enrollment in the HMO under a plan 
runs concurrently with any waiting period.
    (c) Alternatives to affiliation period. An HMO may use alternative 
methods in lieu of an affiliation period to address adverse selection, 
as approved by the State insurance commissioner or other official 
designated to regulate HMOs. Nothing in the part requires a State to 
receive proposals for or approve alternatives to affiliation periods.


Sec. 2590.702   Prohibiting discrimination against participants and 
beneficiaries based on a health status-related factor.

    (a) In eligibility to enroll--(1) In general. Subject to paragraph 
(a)(2) of this section, a group health plan, and a health insurance 
issuer offering group health insurance coverage in connection with a 
group health plan, may not establish rules for eligibility (including 
continued eligibility) of any individual to enroll under the terms of 
the plan based on any of the following health status-related factors in 
relation to the individual or a dependent of the individual.
    (i) Health status.
    (ii) Medical condition (including both physical and mental 
illnesses), as defined in Sec. 2590.701-2.
    (iii) Claims experience.
    (iv) Receipt of health care.
    (v) Medical history.
    (vi) Genetic information, as defined in Sec. 2590.701-2.
    (vii) Evidence of insurability (including conditions arising out of 
acts of domestic violence).
    (viii) Disability.
    (2) No application to benefits or exclusions. To the extent 
consistent with section 701 of the Act and Sec. 2590.701-3, paragraph 
(a)(1) of this section shall not be construed--
    (i) To require a group health plan, or a health insurance issuer 
offering group health insurance coverage, to provide particular 
benefits other than those provided under the terms of such plan or 
coverage; or
    (ii) To prevent such a plan or issuer from establishing limitation 
or restrictions on the amount, level, extent, or nature of the benefits 
or coverage for similarly situated individuals enrolled in the plan or 
coverage.

[[Page 16953]]

    (3) Construction. For purposes of paragraph (a)(1) of this section, 
rules for eligibility to enroll include rule defining any applicable 
waiting (or affiliation) periods for such enrollment and rules relating 
to late and special enrollment.
    (4) Example. The following example illustrates the rules of this 
paragraph (a):

    Example. (i) An employer sponsors a group health plan that is 
available to all employees who enroll within the first 30 days of 
their employment. However, individuals who do not enroll in the 
first 30 days cannot enroll later unless they pass a physical 
examination.
    (ii) In this Example, the plan discriminates on the basis of one 
or more health status-related factors.

    (b) In premiums or contributions--(1) In general. A group health 
plan, and a health insurance issuer offering health insurance coverage 
in connection with a group health plan, may not require an individual 
(as a condition of enrollment or continued enrollment under the plan) 
to pay a premium or contribution that is greater than the premium or 
contribution for a similarly situated individual enrolled in the plan 
based on any health status-related factor, in relation to the 
individual or a dependent of the individual.
    (2) Construction. Nothing in paragraph (b)(1) of this section shall 
be construed--
    (i) To restrict the amount that an employer may be charged by an 
issuer for coverage under a group health plan; or
    (ii) To prevent a group health plan, and a health insurance issuer 
offering group health insurance coverage, from establishing premium 
discounts or rebates or modifying otherwise applicable copayments or 
deductibles in return for adherence to a bona fide wellness program. 
For purposes of this section, a bona fide wellness program is a program 
of health promotion and disease prevention.
    (3) Example. The rules of this paragraph (b) are illustrated by the 
following example:

    Example. (i) Plan X offers a premium discount to participants 
who adhere to a cholesterol-reduction wellness program. Enrollees 
are expected to keep a diary of their food intake over 6 weeks. They 
periodically submit the diary to the plan physician who responds 
with suggested diet modifications. Enrollees are to modify their 
diets in accordance with the physician's recommendations. At the end 
of the 6 weeks, enrollees are given a cholesterol test and those who 
achieve a count under 200 receive a premium discount.
    (ii) In this Example, because enrollees who otherwise comply 
with the program may be unable to achieve a cholesterol count under 
200 due to a health status-related factor, this is not a bona fide 
wellness program and such discounts would discriminate impermissibly 
based on one or more health status-related factors. However, if, 
instead, individuals covered by the plan were entitled to receive 
the discount for complying with the diary and dietary requirements 
and were not required to pass a cholesterol test, the program would 
be a bona fide wellness program.


Sec. 2590.703   Guaranteed renewability in multiemployer plans and 
multiple employer welfare arrangements. [Reserved]

Subpart B--Other Requirements


Sec. 2590.711  Standard relating to benefits for mothers and newborns. 
[Reserved]


Sec. 2590.712  Parity in the application of certain limits to mental 
health benefits. [Reserved]

Subpart C--General Provisions


Sec. 2590.731  Preemption; State flexibility; construction.

    (a) Continued applicability of State law with respect to health 
insurance issuers. Subject to paragraph (b) of this section and except 
as provided in paragraph (c) of this section, part 7 of subtitle B of 
title I of the Act is not to be construed to supersede any provision of 
State law which establishes, implements, or continues in effect any 
standard or requirement solely relating to health insurance issuers in 
connection with group health insurance coverage except to the extent 
that such standard or requirement prevents the application of a 
requirements of this part.
    (b) Continued preemption with respect to group health plans. 
Nothing in part 7 of subtitle B of title I of the Act affects or 
modifies the provisions of section 514 of the Act with respect to group 
health plans.
    (c) Special rules--(1) In general. Subject to paragraph (c)(2) of 
this section, the provisions of part 7 of subtitle B of title I of the 
Act relating to health insurance coverage offered by a health insurance 
issuer supersede any provision of State law which establishes, 
implements, or continues in effect a standard or requirement applicable 
to imposition of a preexisting condition exclusion specifically 
governed by section 701 which differs from the standards or 
requirements specified in such section.
    (2) Exceptions. Only in relation to health insurance coverage 
offered by a health insurance issuer, the provisions of this part do 
not supersede any provision of State law to the extent that such 
provision--
    (i) Shortens the period of time from the ``6-month period'' 
described in section 701(a)(1) of the Act and Sec. 2590.701-3(a)(1)(i) 
(for purposes of identifying a preexisting condition);
    (ii) Shortens the period of time from the ``12 months'' and ``18 
months'' described in section 701(a)(2) of the Act and Sec. 2590.701-
3(a)(1)(ii) (for purposes of applying a preexisting condition exclusion 
period);
    (iii) Provides for a greater number of days than the ``63 day 
period'' described in sections 701(c)(2)(A) and (d)(4)(A) of the Act 
and Secs. 2590.701-3(a)(1)(iii) and 2590.701-4 (for purposes of 
applying the break in coverage rules);
    (iv) Provides for a greater number of days than the ``30-day 
period'' described in sections 701 (b)(2) and (d)(1) of the Act and 
Sec. 2590.701-3(b) (for purposes of the enrollment period and 
preexisting condition exclusion periods for certain newborns and 
children that are adopted or placed for adoption);
    (v) Prohibits the imposition of any preexisting condition exclusion 
in cases not described in section 701(d) of the Act or expands the 
exceptions described therein;
    (vi) Requires special enrollment periods in addition to those 
required under section 701(f) of the Act; or
    (vii) Reduces the maximum period permitted in an affiliation period 
under section 701(g)(1)(B) of the Act.
    (d) Definitions--(1) State law. For purposes of this Sec. 2590.736 
the term State law includes all laws, decisions, rules, regulations, or 
other State action having the effect of law, of any State. A law of the 
United States applicable only to the District of Columbia is treated as 
a State law rather an a law of the United States.
    (2) State. For purposes of this section the term State includes a 
State, the Northern Mariana Islands, any political subdivisions of a 
State or such Island, or any agency or instrumentality of either.


Sec. 2590.732  Special rule relating to group health plans.

    (a) General exception for certain small group health plans. The 
requirements of this part 7 of subtitle B of title I of the Act do not 
apply to any group health plan (and group health insurance coverage 
offered in connection with a group health plan) for any plan year if, 
on the first day of the plan year, the plan has fewer than 2 
participants who are current employees.
    (b) Excepted benefits--(1) In general. The requirements of subparts 
A and C of this part do not apply to any group health plan (or any 
group health insurance coverage offered in connection with a group 
health plan) in relation to its provision of the benefits

[[Page 16954]]

described in paragraph (b)(92), (3), (4), or (5) of this section (or 
any combination of these benefits).
    (2) Benefits excepted in all circumstances. The following benefits 
are excepted in all circumstances--
    (i) Coverage only for accident (including accidental death and 
dismemberment);
    (ii) Disability income insurance;
    (iii) Liability insurance, including general liability insurance 
and automobile liability insurance;
    (iv) Coverage issued as a supplement to liability insurance;
    (v) Workers' compensation or similar insurance;
    (vi) Automobile medical payment insurance;
    (vii) Credit-only insurance (for example, mortgage insurance); and
    (viii) Coverage for on-site medical clinics.
    (3) Limited excepted benefits--(i) In general. Limited-scope dental 
benefits, limited-scope vision benefits, or long-term care benefits are 
excepted if they are provided under a separate policy, certificate, or 
contract of insurance, or are otherwise not an integral part of the 
plan, as defined in paragraph (b)(3)(ii) of this section.
    (ii) Integral. For purposes of paragraph (b)(3)(i) of this section, 
benefits are deemed to be an integral part of a plan unless a 
participant has the right to elect not to receive coverage for the 
benefits and, if the participant elects to receive coverage for the 
benefits, the participant pays an additional premium or contribution 
for that coverage.
    (iii) Limited scope. Limited scope dental or vision benefits are 
dental or vision benefits that are sold under a separate policy or 
rider and that are limited in scope to a narrow range or type of 
benefits that are generally excluded from hospital/medical/surgical 
benefit packages.
    (iv) Long-term care. Long-term care benefits are benefits that are 
either--
    (A) Subject to State long-term care insurance laws;
    (B) 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 
Internal Revenue Code; or
    (C) Based on cognitive impairment or a loss of functional capacity 
that is expected to be chronic.
    (4) Noncoordinated benefits--(i) Excepted benefits that are not 
coordinated. Coverage for only a specified disease or illness (for 
example, cancer-only policies) or hospital indemnity or other fixed 
dollar indemnity insurance (for example, $100/day) is excepted only if 
it meets each of the conditions specified in paragraph (b)(4)(ii) of 
this section.
    (ii) Conditions. Benefits are described in paragraph (b)(4)(i) of 
this section only if--
    (A) The benefits are provided under a separate policy, certificate, 
or contract of insurance;
    (B) 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; and
    (C) 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.
    (5) Supplemental benefits. The following benefits are excepted only 
if they are provided under a separate policy, certificate, or contract 
of insurance:
    (i) Medicare supplemental health insurance (as defined under 
section 1882(g)(1) of the Social Security Act; also known as Medigap or 
MedSupp insurance);
    (ii) Coverage supplemental to the coverage provided under Chapter 
55, Title 10 of the United States Code (also known as CHAMPUS 
supplemental programs), and
    (iii) Similar supplemental coverage provided to coverage under a 
group health plan.
    (c) Treatment of partnerships. [Reserved]


Sec. 2590.734  Enforcement. [Reserved]


Sec. 2590.736  Effective dates.

    (a) General effective dates--(1) Non-collectively-bargained plans. 
Except as otherwise provided in this section, part 7 of subtitle B of 
title I of the Act and subparts A and C of this part apply with respect 
to group health plans, including health insurance issuers offering 
health insurance coverage in connection with group health plans, for 
plan years beginning after June 30, 1997.
    (2) Collectively bargained plans. Except as otherwise provided in 
this section (other than paragraph (a)(1) of this section), in the case 
of a group health plan maintained pursuant to one or more collective 
bargaining agreements between employee representatives and one or more 
employers ratified before August 21, 1996, Part 7 of subtitle B of 
title I of the Act and subparts A and C of this part do not apply to 
plan years beginning before the later of July 1, 1997, or the date on 
which the last of the collective bargaining agreements relating to the 
plan terminates (determined without regard to any extension thereof 
agreed to after August 21, 1996). For these purposes, any plan 
amendment made pursuant to a collective bargaining agreement relating 
to the plan, that amends the plan solely to conform to any requirement 
of such part, is not treated as a termination of the collective 
bargaining agreement.
    (3)(i) Preexisting condition exclusion periods for current 
employees. Any preexisting condition exclusion period permitted under 
Sec. 2590.701-3 is measured from the individual's enrollment date in 
the plan. Such exclusion period, as limited under Sec. 2590.701-3, may 
be completed prior to the effective date of the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA) for his or her plan. 
Therefore, on the date the individual's plan becomes subject to part 7 
of subtitle B of title I of the Act, no preexisting condition exclusion 
may be imposed with respect to an individual beyond the limitation of 
Sec. 2590.701-3. For an individual who has not completed the permitted 
exclusion period under HIPAA, upon the effective date for his or her 
plan, the individual may use creditable coverage that the individual 
had prior to the enrollment date to reduce the remaining preexisting 
condition exclusion period applicable to the individual.
    (ii) Examples. The following examples illustrate the rules of this 
paragraph (a)(3):

    Example 1. (i) Individual A has been working for Employer X and 
has been covered under Employer X's plan since March 1, 1997. Under 
Employer X's plan, as in effect before January 1, 1998, there is no 
coverage for any preexisting condition. Employer X's plan year 
begins on January 1, 1998. A's enrollment date in the plan is March 
1, 1997 and A has no creditable coverage before this date.
    (ii) In this Example 1, Employer X may continue to impose the 
preexisting condition exclusion under the plan through February 28, 
1998 (the end of the 12-month period using anniversary dates).
    Example 2. (i) Same facts as in Example 1, except that A's 
enrollment date was August 1, 1996, instead of March 1, 1997.
    (ii) In this Example 2, on January 1, 1998, Employer X's plan 
may no longer exclude treatment for any preexisting condition that A 
may have; however, because Employer X's plan is not subject to HIPAA 
until January 1, 1998, A is not entitled to claim reimbursement for 
expenses under the plan for treatments for any preexisting condition 
of A received before January 1, 1998.

    (b) Effective date for certification requirement--(1) In general. 
Subject to the transitional rule in Sec. 2590.701-5(a)(5)(iii), the 
certification rules of

[[Page 16955]]

Sec. 2590.701-5 apply to events occurring on or after July 1, 1996.
    (2) Period covered by certificate. A certificate is not required to 
reflect coverage before July 1, 1996.
    (3) No certificate before June 1, 1997. Notwithstanding any other 
provision of subpart A or C of this part, in no case is a certificate 
required to be provided before June 1, 1997.
    (c) Limitation on actions. No enforcement action is to be taken, 
pursuant to part 7 of subtitle B of title I of the Act, against a group 
health plan or health insurance issuer with respect to a violation of a 
requirement imposed by part 7 of subtitle B of title I of the Act 
before January 1, 1998, if the plan or issuer has sought to comply in 
good faith with such requirements. Compliance with this part is deemed 
to be good faith compliance with the requirements of part 7 of subtitle 
B of title I of the Act.
    (d) Transition rules for counting creditable coverage. An 
individual who seeks to establish creditable coverage for periods 
before July 1, 1996 is entitled to establish such coverage through the 
presentation of documents or other means in accordance with the 
provisions of Sec. 2590.701-5(c). For coverage relating to an event 
occurring before July 1, 1996, a group health plan and a health 
insurance issuer is not subject to any penalty or enforcement action 
with respect to the plan's or issuer's counting (or not counting) such 
coverage if the plan or issuer has sought to comply in good faith with 
the applicable requirements under Sec. 2590.701-5(c).
    (e) Transition rules for certificates of creditable coverage--(1) 
Certificates only upon request. For events occurring on or after July 
1, 1996, but before October 1, 1996, a certificate is required to be 
provided only upon a written request by or on behalf of the individual 
to whom the certificate applies.
    (2) Certificates before June 1, 1997. For events occurring on or 
after October 1, 1996 and before June 1, 1997, a certificate must be 
furnished no later than June 1, 1997, or any later date permitted under 
Sec. 2590.701-5(a)(2) (ii) and (iii).
    (3) Optional notice--(i) In general. This paragraph (e)(3) applies 
with respect to events described in Sec. 2590.701-5(a)(5)(ii), that 
occur on or after October 1, 1996 but before June 1, 1997. A group 
health plan or health insurance issuer offering group health coverage 
is deemed to satisfy Sec. 2590.701-5(a) (2) and (3) if a notice is 
provided in accordance with the provisions of paragraphs (e)(3) (i) 
through (iv) of this section.
    (ii) Time of notice. The notice must be provided no later than June 
1, 1997.
    (iii) Form and content of notice. A notice provided pursuant to 
this paragraph (e)(3) must be in writing and must include information 
substantially similar to the information included in a model notice 
authorized by the Secretary. Copies of the model notice are available 
on the following website--http://www.dol.gov/dol/pwba/ (or call 1-800-
998-7542).
    (iv) Providing certificate after request. If an individual requests 
a certificate following receipt of the notice, the certificate must be 
provided at the time of the request as set forth in Sec. 2590.701-
5(a)(5)(iii).
    (v) Other certification rules apply. The rules set forth in 
Sec. 2590.701-5(a)(4)(i) (method of delivery) and Sec. 2590.701-5(a)(1) 
(entities required to provide a certificate) apply with respect to the 
provision of the notice.

    Signed at Washington, D.C., this 27 day of March, 1997.
Olena Berg,
Assistant Secretary, Pension and Welfare Benefits Administration, U.S. 
Department of Labor.

Department of Health and Human Services

45 CFR Subtitle A

    45 CFR is amended as set forth below:
    1. The heading for subtitle A is revised to read as follows:

SUBTITLE A--DEPARTMENT OF HEALTH AND HUMAN SERVICES

    2. Existing parts 1 through 100 are designated as subchapter A of 
subtitle A and a new subchapter heading is added to read as follows:

SUBCHAPTER A--GENERAL ADMINISTRATION

    3. New subchapter B, consisting of parts 140 through 199, is added 
to read as follows:

SUBCHAPTER B--REQUIREMENTS RELATING TO HEALTH CARE ACCESS

PARTS 140--143 [RESERVED]

PART 144--REQUIREMENTS RELATING TO HEALTH INSURANCE COVERAGE

Subpart A--General Provisions

Sec.
144.101  Basis and purpose.
144.102  Scope and applicability.
144.103  Definitions applicable to both group (45 CFR Part 146) and 
individual (45 CFR Part 148) markets.

Subpart B--[Reserved]

    Authority: Secs. 2701 through 2763, 2791, and 2792 of the Public 
Health Service Act, 42 U.S.C. 300gg through 300gg-63, 300gg-91, and 
300gg-92.

PART 144--REQUIREMENTS RELATING TO HEALTH INSURANCE COVERAGE

Subpart A--General Provisions


Sec. 144.101  Basis and purpose.

    Part 146 of this subchapter implements sections 2701 through 2723 
of the Public Health Service Act (PHS Act, 42 U.S.C. 300gg, et seq.). 
Its purpose is to improve access to group health insurance coverage and 
to guarantee the renewability of all coverage in the group market. Part 
148 of this subchapter implements sections 2741 through 2763 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. Sections 2791 and 2792 of the PHS Act define terms 
used in the regulations in this subchapter and provide the basis for 
issuing these regulations, respectively.


Sec. 144.102   Scope and applicability.

    (a) For purposes of 45 CFR parts 144 through 148, all health 
insurance coverage is generally divided into two markets--the group 
market (set forth in 45 CFR part 146) and the individual market (set 
forth in 45 CFR part 148). 45 CFR part 146 limits the group market to 
insurance sold to employment-related group health plans and further 
divides the group market into the large group market and the small 
group market. Federal law further defines the small group market as 
insurance sold to employer plans with 2 to 50 employees. State law, 
however, may expand the definition of the small group market to include 
certain coverage that would otherwise, under the Federal law, be 
considered coverage in the large group market or the individual market.
    (b) The protections afforded under 45 CFR parts 144 through 148 to 
individuals and employers (and other sponsors of health insurance 
offered in connection with a group health plan) are determined by 
whether the coverage involved is obtained in the small group market, 
the large group market, or the individual market. Small employers, and 
individuals who are eligible to enroll under the employer's plan, are 
guaranteed availability of insurance coverage sold in the small group 
market. Small and large employers are guaranteed the right to renew 
their group coverage, subject to certain

[[Page 16956]]

exceptions. Eligible individuals are guaranteed availability of 
coverage sold in the individual market, and all coverage in the 
individual market must be guaranteed renewable.
    (c) Coverage that is provided to associations, but is not related 
to employment, is not considered group coverage under 45 CFR parts 144 
through 148. The coverage is considered coverage in the individual 
market, regardless of whether it is considered group coverage under 
State law.


Sec. 144.103   Definitions applicable to both group (45 CFR part 146) 
and individual (45 CFR part 148) markets.

    Unless otherwise provided, the following definitions apply:
    Affiliation period means a period of time that must expire before 
health insurance coverage provided by an HMO becomes effective, and 
during which the HMO is not required to provide benefits.
    Applicable State authority means, with respect to a health 
insurance issuer in a State, the State insurance commissioner or 
official or officials designated by the State to enforce the 
requirements of 45 CFR parts 146 and 148 for the State involved with 
respect to the issuer.
    Beneficiary has the meaning given the term under section 3(8) of 
the Employee Retirement Income Security Act of 1974 (ERISA), which 
states, ``a person designated by a participant, or by the terms of an 
employee benefit plan, who is or may become entitled to a benefit'' 
under the plan.
    Bona fide association means, with respect to health insurance 
coverage offered in a State, an association that meets the following 
conditions:
    (1) Has been actively in existence for at least 5 years.
    (2) Has been formed and maintained in good faith for purposes other 
than obtaining insurance.
    (3) Does not condition membership in the association on any health 
status-related factor relating to an individual (including an employee 
of an employer or a dependent of any employee).
    (4) Makes health insurance coverage offered through the association 
available to all members regardless of any health status-related factor 
relating to the members (or individuals eligible for coverage through a 
member).
    (5) Does not make health insurance coverage offered through the 
association available other than in connection with a member of the 
association.
    (6) Meets any additional requirements that may be imposed under 
State law.
    Church plan means a Church plan within the meaning of section 3(33) 
of ERISA.
    COBRA definitions:
    (1) COBRA means Title X of the Consolidated Omnibus Budget 
Reconciliation Act of 1985, as amended.
    (2) COBRA continuation coverage means coverage, under a group 
health plan, that satisfies an applicable COBRA continuation provision.
    (3) COBRA continuation provision means sections 601 through 608 of 
the Employee Retirement Income Security Act of 1974, section 4980B of 
the Internal Revenue Code of 1986 (other than paragraph (f)(1) of 
section 4980B insofar as it relates to pediatric vaccines), and Title 
XXII of the PHS Act.
    (4) Continuation coverage means coverage under a COBRA continuation 
provision or a similar State program. Coverage provided by a plan that 
is subject to a COBRA continuation provision or similar State program, 
but that does not satisfy all the requirements of that provision or 
program, will be deemed to be continuation coverage if it allows an 
individual to elect to continue coverage for a period of at least 18 
months. Continuation coverage does not include coverage under a 
conversion policy required to be offered to an individual upon 
exhaustion of continuation coverage, nor does it include continuation 
coverage under the Federal Employees Health Benefits Program.
    (5) Exhaustion of COBRA continuation coverage means that an 
individual's COBRA continuation coverage ceases for any reason other 
than either failure of the individual to pay premiums on a timely 
basis, or for cause (such as making a fraudulent claim or an 
intentional misrepresentation of a material fact in connection with the 
plan). An individual is considered to have exhausted COBRA continuation 
coverage if such coverage ceases--
    (i) Due to the failure of the employer or other responsible entity 
to remit premiums on a timely basis; or
    (ii) When the individual no longer resides, lives, or works in a 
service area of an HMO or similar program (whether or not within the 
choice of the individual) and there is no other COBRA continuation 
coverage available to the individual.
    (6) Exhaustion of continuation coverage means that an individual's 
continuation coverage ceases for any reason other than either failure 
of the individual to pay premiums on a timely basis, or for cause (such 
as making a fraudulent claim or an intentional misrepresentation of a 
material fact in connection with the plan). An individual is considered 
to have exhausted continuation coverage if--
    (i) Coverage ceases due to the failure of the employer or other 
responsible entity to remit premiums on a timely basis, or
    (ii) When the individual no longer resides, lives, or works in a 
service area of an HMO or similar program (whether or not within the 
choice of the individual) and there is no other continuation coverage 
available to the individual.
    Condition means a medical condition.
    Creditable coverage has the meaning of 45 CFR 146.113(a).
    Eligible individual, for purposes of--
    (1) The group market provisions in 45 CFR part 146, subpart E, the 
term is defined in 45 CFR 146.150(b); and
    (2) The individual market provisions in 45 CFR part 148, the term 
is defined in 45 CFR 148.103.
    Employee has the meaning given the term under section 3(6) of 
ERISA, which states, ``any individual employed by an employer.''
    Employer has the meaning given the term under section 3(5) of 
ERISA, which states, ``any person acting directly as an employer, or 
indirectly in the interest of an employer, in relation to an employee 
benefit plan; and includes a group or association of employers acting 
for an employer in such capacity.''
    Enroll means to become covered for benefits under a group health 
plan (that is, when coverage becomes effective), without regard to when 
the individual may have completed or filed any forms that are required 
in order to enroll in the plan. For this purpose, an individual who has 
health insurance coverage under a group health plan is enrolled in the 
plan regardless of whether the individual elects coverage, the 
individual is a dependent who becomes covered as a result of an 
election by a participant, or the individual becomes covered without an 
election.
    Enrollment date definitions (enrollment date and first day of 
coverage) are set forth in 45 CFR 146.11(a)(2)(i) and (a)(2)(ii).
    ERISA stands for the Employee Retirement Income Security Act of 
1974, as amended (29 U.S.C. 1001 et seq.).
    Excepted benefits for purposes of the--
    (1) Group market provisions in 45 CFR part 146 subpart D, the term 
is defined in 45 CFR 146.145(b); and
    (2) The individual market provisions in 45 CFR part 148, the term 
is defined in 45 CFR 148.220.
    Federal government plan means a governmental plan established or 
maintained for its employees by the Government of the United States or 
by

[[Page 16957]]

any agency or instrumentality of such Government.
    Genetic information means information about genes, gene products, 
and inherited characteristics that may derive from the individual or a 
family member. This includes information regarding carrier status and 
information derived from laboratory tests that identify mutations in 
specific genes or chromosomes, physical medical examinations, family 
histories, and direct analysis of genes or chromosomes.
    Governmental plan means a governmental plan within the meaning of 
section 3(32) of ERISA.
    Group health insurance coverage means health insurance coverage 
offered in connection with a group health plan.
    Group health plan means an employee welfare benefit plan (as 
defined in section 3(1) of ERISA) to the extent that the plan provides 
medical care (as defined in section 2791(a)(2) of the PHS Act and 
including items and services paid for as medical care) to employees or 
their dependents (as defined under the terms of the plan) directly or 
through insurance, reimbursement, or otherwise.
    Group market means the market for health insurance coverage offered 
in connection with a group health plan. (However, unless otherwise 
provided under State law, certain very small plans may be treated as 
being in the individual market, rather than the group market; see the 
definition of ``individual market'' in this section.)
    Health insurance coverage means benefits consisting of medical care 
(provided directly, through insurance or reimbursement, or otherwise) 
under any hospital or medical service policy or certificate, hospital 
or medical service plan contract, or HMO contract offered by a health 
insurance issuer.
    Health insurance issuer or issuer means an insurance company, 
insurance service, or insurance organization (including an HMO) that is 
required to be 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 ERISA). This term does not include 
a group health plan.
    Health maintenance organization or HMO means--
    (1) A Federally qualified health maintenance organization (as 
defined in section 1301(a) of the PHS Act);
    (2) An organization recognized under State law as a health 
maintenance organization; or
    (3) A similar organization regulated under State law for solvency 
in the same manner and to the same extent as such a health maintenance 
organization.
    Health status-related factor means health status, medical condition 
(including both physical and mental illnesses), claims experience, 
receipt of health care, medical history, genetic information, evidence 
of insurability (including conditions arising out of acts of domestic 
violence) and disability.
    Individual health insurance coverage means health insurance 
coverage offered to individuals in the individual market, but does not 
include short-term, limited-duration insurance. Individual health 
insurance coverage can include dependent coverage.
    Indiviual market means the market for health insurance coverage 
offered to individuals other than in connection with a group health 
plan. Unless a State elects otherwise in accordance with section 
2791(e)(1)(B)(ii) of the PHS Act, such term also includes coverage 
offered in connection with a group health plan that has fewer than two 
participants as current employees on the first day of the plan year.
    Internal Revenue Code (Code) means the Internal Revenue Code of 
1986, as amended (Title 26, United States Code).
    Issuer means a health insurance issuer.
    Large employer means, in connection with a group health plan with 
respect to a calendar year and a plan year, an employer who employed an 
average of at least 51 employees on business days during the preceding 
calendar year and who employs at least 2 employees on the first day of 
the plan year, unless otherwise provided under State law.
    Large group market means the health insurance market under which 
individuals obtain health insurance coverage (directly or through any 
arrangement) on behalf of themselves (and their dependents) through a 
group health plan maintained by a large employer, unless otherwise 
provided under State law.
    Late enrollment definitions (late enrollee and late enrollment) are 
set forth in 45 CFR 146.111 (a)(2)(iii) and (a)(2)(iv).
    Medical care or condition means amounts paid for any of the 
following:
    (1) The diagnosis, cure, mitigation, or prevention of disease, or 
amounts paid for the purpose of affecting any structure or function of 
the body.
    (2) Transportation primarily for and essential to medical care 
referred to in paragraph (1) of this definition.
    (3) Insurance covering medical care referred to in paragraphs (1) 
and (2) of this definition.
    Medical condition means any condition, whether physical or mental, 
including, but not limited to, any condition resulting from illness, 
injury (whether or not the injury is accidental), pregnancy, or 
congenital malformation. However, genetic information is not a 
condition.
    NAIC stands for the National Association of Insurance 
Commissioners.
    Network plan means health insurance coverage of a health insurance 
issuer under which the financing and delivery of medical care 
(including items and services paid for as medical care) are provided, 
in whole or in part, through a defined set of providers under contract 
with the issuer.
    Non-Federal governmental plan means a governmental plan that is not 
a Federal government plan.
    Participant has the meaning given the term under section 3(7) of 
ERISA, which states, ``any employee or former employee of an employer, 
or any member or former member of an employee organization, who is or 
may become eligible to receive a benefit of any type from an employee 
benefit plan which covers employees of such employer or members of such 
organization, or whose beneficiaries may be eligible to receive any 
such benefit.''
    PHS Act stands for the Public Health Service Act.
    Placement, or being placed, for adoption means the assumption and 
retention of a legal obligation for total or partial support of a child 
by a person with whom the child has been placed in anticipation of the 
child's adoption. The child's placement for adoption with the person 
terminates upon the termination of the legal obligation.
    Plan sponsor has the meaning given the term under section 3(16)(B) 
of ERISA, which states ``(i) the employer in the case of an employee 
benefit plan established or maintained by a single employer, (ii) the 
employee organization in the case of a plan established or maintained 
by an employee organization, or (iii) in the case of a plan established 
or maintained by two or more employers or jointly by one or more 
employers and one or more employee organizations, the association, 
committee, joint board of trustees, or other similar group of 
representatives of the parties who establish or maintain the plan.''
    Plan year means the year that is designated as the plan year in the 
plan document of a group health plan, except that if the plan document 
does not designate a plan year or if there is no plan document, the 
plan year is:
    (1) THe deductible/limit year used under the plan.

[[Page 16958]]

    (2) If the plan does not impose deductibles or limits on a yearly 
basis, the plan year is the policy year.
    (3) If the plan does not impose deductibles or limits on a yearly 
basis, and either the plan is not insured or the insurance policy is 
not renewed on an annual basis, the plan year is the employer's taxable 
year.
    (4) In any other case, the plan year is the calendar year.
    Preexisting condition exclusion means a limitation or exclusion of 
benefits relating to a condition based on the fact that the condition 
was present before the first day of coverage, whether or not any 
medical advice, diagnosis, care, or treatment was recommended or 
received before that day. A preexisting condition exclusion includes 
any inclusion applicable to an individual as a result of information 
that is obtained relating to an individual's health status before the 
individual's first day of coverage, such as a condition identified as a 
result of a pre-enrollment questionnaire or physical examination given 
to the individual, or review of medical records relating to the pre-
enrollment period.
    Public health plan means ``public health plan'' within the meaning 
of 45 CFR 146.113(a)(1)(ix).
    Short-term limited duration insurance means health insurance 
coverage provided under a contract with an issuer that has an 
expiration date specified in the contract (taking into account any 
extensions that may be elected by the policyholder without the issuer's 
consent) that is within 12 months of the date the contract becomes 
effective.
    Significant break in coverage has the meaning given the term in 45 
CFR 146.113(b)(2)(iii).
    Small employer means, in connection with a group health plan with 
respect to a calendar year and a plan year, an employer who employed an 
average of at least 2 but not more than 50 employees on business days 
during the preceding calendar year and who employs at least 2 employees 
on the first day of the plan year, unless otherwise provided under 
State law.
    Small group market means the health insurance market under which 
individuals obtain health insurance coverage (directly or through any 
arrangement) on behalf of themselves (and their dependents) through a 
group health plan maintained by a small employer.
    Special enrollment date has the meaning given the term in 45 CFR 
146.117(d).
    State means each of the several States, the District of Columbia, 
Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern 
Mariana Islands.
    State health benefits risk pool means a ``State health benefits 
risk pool'' within the meaning of 45 CFR 146.113(a)(1)(vii).
    Waiting period means the period that must pass before an employee 
or dependent is eligible to enroll under the terms of a group health 
plan. If an employee or dependent enrolls as a late enrollee or on a 
special enrollment date, any period before such late or special 
enrollment is not a waiting period. If an individual seeks and obtains 
coverage in the individual market, any period after the date the 
individual files a substantially complete application for coverage and 
before the first day of coverage is a waiting period.

Subpart B--[Reserved]

PART 145--[RESERVED]

PART 146--REQUIREMENTS FOR THE GROUP HEALTH INSURANCE MARKET

Subpart A--General Provisions

Sec.
146.101 Basis and scope.

Subpart B--Requirements Relating to Access and Renewability of 
Coverage, and Limitations on Preexisting Condition Exclusion Periods

Sec.
146.111 Limitations on preexisting condition exclusion period.
146.113 Rules relating to creditable coverage.
146.115 Certification and disclosure of previous coverage.
146.117 Special enrollment periods.
146.119 HMO affiliation period as alternative to preexisting 
condition exclusion.
146.121 Prohibiting discrimination against participants and 
beneficiaries based on health status-related factors.
146.125 Effective dates.

Subpart C--[Reserved]

Subpart D--Preemption and Special Rules

Sec.
146.143 Preemption; State flexibility; construction.
146.145 Special rules relating to group health plans.

Subpart E--Provisions Applicable to Only Health Insurance Issuers

Sec.
146.150 Guaranteed availability of coverage for employers in the 
small group market.
146.152 Guaranteed renewability of coverage for employers in the 
group market.
146.160 Disclosure of information.

Subpart F--Exclusion of Plans and Enforcement

Sec.
146.180 Treatment of non-Federal governmental plans.
146.184 Enforcement.

    Authority: Secs. 2701 through 2763, 2791, and 2792 of the PHS 
Act, 42 U.S.C. 300gg through 300gg-63, 300gg-91, and 300gg-92.

PART 146--REQUIREMENTS FOR THE GROUP HEALTH INSURANCE MARKET

Subpart A--General Provisions


Sec. 146.101  Basis and scope.

    (a) Statutory basis. This part implements sections 2701 through 
2723 of the PHS Act. Its purpose is to improve access to group health 
insurance coverage and to guarantee the renewability of all coverage in 
the group market. Sections 2791 and 2792 of the PHS Act define terms 
used in the regulations in this subchapter and provide the basis for 
issuing these regulations, respectively.
    (b) Scope. A group health plan or health insurance issuer offering 
group health insurance coverage may provide greater rights to 
participants and beneficiaries than those set forth in this part.
    (1) Subpart B. Subpart B of this part sets forth minimum 
requirements for group health plans and health insurance issuers 
offering group health insurance coverage concerning:
    (i) Limitations on a preexisting condition exclusion period.
    (ii) Certificates and disclosure of previous coverage.
    (iii) Methods of counting creditable coverage.
    (iv) Special enrollment periods.
    (v) Use of an affiliation period by an HMO as an alternative to a 
preexisting condition exclusion.
    (2) Subpart D. Subpart D of this part sets forth exceptions to the 
requirements of Subpart B for certain plans and certain types of 
benefits.
    (3) Subpart E. Subpart E of this part implements sections 2711 
through 2713 of the PHS Act, which set forth requirements that apply 
only to health insurance issuers offering health insurance coverage, in 
connection with a group health plan.
    (4) Subpart F. Subpart F of this part addresses the treatment of 
non-Federal governmental plans, and sets forth enforcement procedures.

[[Page 16959]]

Subpart B--Requirements Relating to Access and Renewability of 
Coverage, and Limitations on Preexisting Condition Exclusion 
Periods


Sec. 146.111  Limitations on preexisting condition exclusion period.

    (a) Preexisting condition exclusion--(1) General. Subject to 
paragraph (b) of this section, a group health plan, and a health 
insurance issuer offering group health insurance coverage, may impose, 
with respect to a participant or beneficiary, a preexisting condition 
exclusion only if the requirements of this paragraph (a) are satisfied.
    (1) 6-month look-back rule. A preexisting condition exclusion must 
relate to a condition (whether physical or mental), regardless of the 
cause of the condition, for which medical advice, diagnosis, care, or 
treatment was recommended or received within the 6-month period ending 
on the enrollment date.
    (A) For purposes of this paragraph (a)(1)(i), medical advice, 
diagnosis, care, or treatment is taken into account only if it is 
recommended by, or received from, an individual licensed or similarly 
authorized to provide such services under State law and operating 
within the scope of practice authorized by State law.
    (B) For purposes of this paragraph (a)(1)(i), the 6-month period 
ending on the enrollment date begins on the 6-month anniversary date 
preceding the enrollment date. For example, for an enrollment date of 
August 1, 1998, the 6-month period preceding the enrollment date is the 
period commencing on February 1, 1998 and continuing through July 31, 
1998. As another example, for an enrollment date of August 30, 1998, 
the 6-month period preceding the enrollment date is the period 
commencing on February 28, 1998 and continuing through August 29, 1998.
    (C) The following examples illustrate the requirements of this 
paragraph (a)(1)(i).

    Example 1: (i) Individual A is treated for a medical condition 7 
months before the enrollment date in Employer R's group health plan. 
As part of such treatment, A's physician recommends that a follow-up 
examination be given 2 months later. Despite this recommendation, A 
does not receive a follow-up examination and no other medical 
advice, diagnosis, care, or treatment for that condition is 
recommended to A or received by A during the 6-month period ending 
on A's enrollment date in Employer R's plan.
    (ii) In this Example, Employer R's plan may not impose a 
preexisting condition exclusion period with respect to the condition 
for which A received treatment 7 months prior to the enrollment 
date.
    Example 2: (i) Same facts as Example 1 except that Employer R's 
plan learns of the condition and attaches a rider to A's policy 
excluding coverage for the condition. Three months after enrollment, 
A's condition recurs, and Employer R's plan denies payment under the 
rider.
    (ii) In this Example, the rider is a preexisting condition 
exclusion and Employer R's plan may not impose a preexisting 
condition exclusion with respect to the condition for which A  
received treatment 7 months prior to the enrollment date.
    Example 3: (i) Individual B has asthma and is treated for that 
condition several times during the 6-month period before B's 
enrollment date in Employer S's plan. The plan imposes a 12-month 
preexisting condition exclusion. B has no prior creditable coverage 
to reduce the exclusion period. Three months after the enrollment 
date, B begins coverage under Employer S's plan. B is hospitalized 
for asthma.
    (ii) In this Example, Employer S's plan may exclude payment for 
the hospital stay and the physician services associated with this of 
illness because the care is related to a medical condition for which 
treatment was received by B during the 6-month period before the 
enrollment date.
    Example 4: (i) Individual D, who is subject to a preexisting 
condition exclusion imposed by Employer U's plan, has diabetes, as 
well as a foot condition caused by poor circulation and retinal 
degeneration (both of which are conditions that may be directly 
attributed to diabetes). After enrolling in the plan, D  stumbles 
and breaks a leg.
    (ii) In this Example, the leg fracture is not a condition 
related to D's diabetes, even though poor circulation in D's 
extremities and poor vision may have contributed towards the 
accident. However, any additional medical services that may be 
needed because of D's preexisting diabetic condition that would not 
be needed by another patient with a broken leg who does not have 
diabetes may be subject to the preexisting condition exclusion 
imposed under Employer U's plan.

    (ii) Maximum length of preexisting condition exclusion (the look-
forward rule). A preexisting condition exclusion is not permitted to 
extend for more than 12 months (18 months in the case of a late 
enrollee) after the enrollment date. For purposes of this paragraph 
(a)(1)(ii), the 12-month and 18-month periods after the enrollment date 
are determined by reference to the anniversary of the enrollment date. 
For example, for an enrollment date of August 1, 1998, the 12-month 
period after the enrollment date is the period commencing on August 1, 
1998 and continuing through July 31, 1999.
    (iii) Reducing a preexisting condition exclusion period by 
creditable coverage. The period of any preexisting condition exclusion 
that would otherwise apply to an individual under a group health plan 
is reduced by the number of days of creditable coverage the individual 
has as of the enrollment date, as counted under Sec. 146.113. For 
purposes of this part, the phrase ``days of creditable coverage'' has 
the same meaning as the phrase ``the aggregate of the periods of 
creditable coverage'' as such term is used in section 2701(a)(3) of the 
PHS Act.
    (iv) Other standards. See Sec. 146.121 for other standards that may 
apply with respect to certain benefit limitations or restrictions under 
a group health plan.
    (2) Enrollment definitions--(i) Enrollment date means the first day 
of coverage or, if there is a waiting period, the first day of the 
waiting period.
    (ii) (A) First day of coverage means, in the case of an individual 
covered for benefits under a group health plan in the group market, the 
first day of coverage under the plan and, in the case of an individual 
covered by health insurance coverage in the individual market, the 
first day of coverage under the policy.
    (B) Example. The following example illustrates the requirements of 
paragraph (a)(2)(ii)(A) of this section:

    Example: (i) Employer V's group health plan provides for 
coverage to begin on the first day of the first payroll period 
following the date an employee is hired and completes the applicable 
enrollment forms, or on any subsequent January 1 after completion of 
the applicable enrollment forms. Employer V's plan imposes a 
preexisting condition exclusion for 12 months (reduced by the 
individual's creditable coverage) following an individual's 
enrollment date. Employee E is hired by Employer V on October 13, 
1998 and then on October 14, 1998 completes and files all the forms 
necessary to enroll in the plan. E's coverage under the plan becomes 
effective on October 25, 1998 (which is the beginning of the first 
payroll period after E's date of hire).
    (ii) In this Example, E's enrollment date is October 13, 1998 
(which is the first day of the waiting period for E's enrollment and 
is also E's date of hire). Accordingly, with respect to E, the 6-
month period in paragraph (a)(1)(i) would be the period from April 
13, 1998 through October 12, 1998, the maximum permissible period 
during which Employer V's plan could apply a preexisting condition 
exclusion under paragraph (a)(1)(ii) would be the period from 
October 13, 1998 through October 12, 1999, and this period would be 
reduced under paragraph (a)(1)(iii) by E's days of creditable 
coverage as of October 13, 1998.

    (iii) Late enrollee means an individual whose enrollment in a plan 
is a late enrollment.
    (iv) Late enrollment means enrollment under a group health plan 
other than on--
    (A) The earliest date on which coverage can become effective under 
the terms of the plan; or

[[Page 16960]]

    (B) A special enrollment date for the individual. If an individual 
ceases to be eligible for coverage under the plan by terminating 
employment, and subsequently becomes eligible for coverage under the 
plan by resuming employment, only eligibility during the individual's 
most recent period of employment is taken into account in determining 
whether the individual is a late enrollee under the plan with respect 
to the most recent period of coverage. Similar rules apply if an 
individual again becomes eligible for coverage following a suspension 
of coverage that applied generally under the plan.
    (v) Examples. The following examples illustrate the requirements of 
this paragraph (a)(2):

    Example 1: (i) Employee F first becomes eligible to be covered 
by Employer W's group health plan on January 1, 1999, but elects not 
to enroll in the plan until April 1, 1999. April 1, 1999 is not a 
special enrollment date for F. 
    (ii) In this Example, F would be a late enrollee with respect to 
F's coverage that became effective under the plan on April 1, 1999.
    Example 2: (i) Same as Example 1, except that F does not enroll 
in the plan on April 1, 1999 and terminates employment with Employer 
W on July 1, 1999, without having had any health insurance coverage 
under the plan. F is rehired by Employer W on January 1, 2000 and is 
eligible for and elects coverage under Employer W's plan effective 
on January 1, 2000.
    (ii) In this Example, F would not be a late enrollee with 
respect to F's coverage that became effective on January 1, 2000.

    (b) Exceptions pertaining to preexisting condition exclusions--(1) 
Newborns--(i) General rule. Subject to paragraph (b)(3) of this 
section, a group health plan, and a health insurance issuer offering 
group health insurance coverage, may not impose any preexisting 
condition exclusion with regard to a child who, as of the last day of 
the 30-day period beginning with the date of birth, is covered under 
any creditable coverage. Accordingly, if a newborn is enrolled in a 
group health plan (or other creditable coverage) within 30 days after 
birth and subsequently enrolls in another group health plan without a 
significant break in coverage, the other plan may not impose any 
preexisting condition exclusion with regard to the child.
    (ii) Example. The following example illustrates the requirements of 
this paragraph (b)(1).

    Example: (i) Seven months after enrollment in Employer W's group 
health plan, Individual E has a child born with a birth defect. 
Because the child is enrolled in Employer W's plan within 30 days of 
birth, no preexisting condition exclusion may be imposed with 
respect to the child under Employer W's plan. Three months after the 
child's birth, E commences employment with Employer X and enrolls 
with the child in Employer X's plan within 45 days of leaving 
Employer W's plan. Employer X's plan imposes a 12-month exclusion 
for any preexisting condition.
    (ii) In this Example, Employer X's plan may not impose any 
preexisting condition exclusion with respect to E's child because 
the child was covered within 30 days of birth and had no significant 
break in coverage. This result applies regardless of whether E's 
child is included in the certificate of creditable coverage provided 
to E by Employer W indicating 300 days of dependent coverage or 
receives a separate certificate indicating 90 days of coverage. 
Employer X's plan may impose a preexisting condition exclusion with 
respect to E for up to 2 months for any preexisting condition of E 
for which medical advice, diagnosis, care, or treatment was 
recommended or received by E within the 6-month period ending on E's 
enrollment date in Employer X's plan.

    (2) Adopted Children. Subject to paragraph (b)(3) of this section, 
a group health plan, and a health insurance issuer offering group 
health insurance coverage, may not impose any preexisting condition 
exclusion in the case of a child who is adopted or placed for adoption 
before attaining 18 years of age and who, as of the last day of the 30-
day period beginning on the date of the adoption or placement for 
adoption, is covered under creditable coverage. This rule does not 
apply to coverage before the date of such adoption or placement for 
adoption.
    (3) Break in coverage. Paragraphs (b)(1) and (b)(2) of this section 
no longer apply to a child after a significant break in coverage.
    (4) Pregnancy. A group health plan, and a health insurance issuer 
offering group health insurance coverage, may not impose a preexisting 
condition exclusion relating to pregnancy as a preexisting condition.
    (5) Special enrollment dates. For special enrollment dates relating 
to new dependents, see Sec. 146.117(b).
    (c) Notice of plan's preexisting condition exclusion. A group 
health plan, and health insurance issuer offering group health 
insurance under the plan, may not impose a preexisting condition 
exclusion with respect to a participant or dependent of the participant 
before notifying the participant, in writing, of the existence and 
terms of any preexisting condition exclusion under the plan and of the 
rights of individuals to demonstrate creditable coverage (and any 
applicable waiting periods) as required by Sec. 146.115. The 
description of the rights of individuals to demonstrate creditable 
coverage includes a description of the right of the individual to 
request a certificate from a prior plan or issuer, if necessary, and a 
statement that the current plan or issuer will assist in obtaining a 
certificate from any prior plan or issuer, if necessary.


Sec. 146.113  Rules relating to creditable coverage.

    (a) General rules)--(1) Creditable coverage. For purposes of this 
section, except as provided in paragraph (a)(2), the term creditable 
coverage means coverage of an individual under any of the following:
    (i) A group health plan as defined in Sec. 144.103.
    (ii) Health insurance coverage as defined in Sec. 144.103 (whether 
or not the entity offering the coverage is subject to the requirements 
of this part and 45 CFR part 148, and without regard to whether the 
coverage is offered in the group market, the individual market, or 
otherwise).
    (iii) Part A or part B of title XVIII of the Social Security Act 
(Medicare).
    (iv) Title XIX of the Social Security Act (Medicaid), other than 
coverage consisting solely of benefits under section 1928 of the Social 
Security Act (the program for distribution of pediatric vaccines).
    (v) Title 10 U.S.C. Chapter 55 (medical and dental care for members 
and certain former members of the uniformed services, and for their 
dependents; for purposes of title 10 U.S.C. chapter 55, ``uniformed 
services'' means the armed forces and the Commissioned Corps of the 
National Oceanic and Atmospheric Administration and of the Public 
Health Service).
    (vi) A medical care program of the Indian Health Service or of a 
tribal organization.
    (vii) A State health benefits risk pool. For purposes of this 
section, a State health benefits risk pool means--
    (A) An organization qualifying under section 501(c)(26) of the 
Code;
    (B) A qualified high risk pool described in section 2744(c)(2) of 
the PHS Act; or
    (C) Any other arrangement sponsored by a State, the membership 
composition of which is specified by the State and which is established 
and maintained primarily to provide health insurance coverage for 
individuals who are residents of such State and who, by reason of the 
existence or history of a medical condition--
    (1) Are unable to acquire medical care coverage for such condition 
through insurance or from an HMO; or
    (2) Are able to acquire such coverage only at a rate which is 
substantially in

[[Page 16961]]

excess of the rate for such coverage through the membership 
organization.
    (viii) A health plan offered under title 5 U.S.C. chapter 89 (the 
Federal Employees Health Benefits Program).
    (ix) A public health plan. For purposes of this section, a public 
health plan means any plan established or maintained by a State, 
county, or other political subdivision of a State that provides health 
insurance coverage to individuals who are enrolled in the plan.
    (x) A health benefit plan under section 5(e) of the Peace Corps Act 
(22 U.S.C. 2504(e)).
    (2) Excluded coverage. Creditable coverage does not include 
coverage consisting solely of coverage of excepted benefits (described 
in Sec. 146.145).
    (3) Methods of counting creditable coverage. For purposes of 
reducing any preexisting condition exclusion period, as provided under 
Sec. 146.111(a)(1)(iii), a group health plan, and a health insurance 
issuer offering group health insurance coverage, determines the amount 
of an individual's creditable coverage by using the standard method 
described in paragraph (b), except that the plan, or issuer, may use 
the alternative method under paragraph (c) with respect to any or all 
of the categories of benefits described under paragraph (c)(3).
    (b) Standard method--(1) Specific benefits not considered. Under 
the standard method, a group health plan, and a health insurance issuer 
offering group health insurance coverage, determines the amount of 
creditable coverage without regard to the specific benefits included in 
the coverage.
    (2) Counting creditable coverage--(i) Based on days. For purposes 
of reducing the preexisting condition exclusion period, a group health 
plan, and a health insurance issuer offering group health insurance 
coverage, determines the amount of creditable coverage by counting all 
the days that the individual has under one or more types of creditable 
coverage. Accordingly, if on a particular day, an individual has 
creditable coverage from more than one source, all the creditable 
coverage on that day is counted as one day. Further, any days in a 
waiting period for a plan or policy are not creditable coverage under 
the plan or policy.
    (ii) Days not counted before significant break in coverage. Days of 
creditable coverage that occur before a significant break in coverage 
are not required to be counted.
    (iii) Definition of significant break in coverage. A significant 
break in coverage means a period of 63 consecutive days during all of 
which the individual does not have any creditable coverage, except that 
neither a waiting period nor an affiliation period is taken into 
account in determining a significant break in coverage. (See section 
731(b)(2)(iii) of ERISA and section 2723(b)(2)(iii) of the PHS Act, 
which exclude from preemption State insurance laws that require a break 
of more than 63 days before an individual has a significant break in 
coverage for purposes of State law.)
    (iv) Examples. The following examples illustrate how creditable 
coverage is counted in reducing preexisting condition exclusion 
periods:

    Example 1: (i) Individual A work for Employer P and has 
creditable coverage under Employer P's plan for 18 months before A's 
employment terminates. A is hired by Employer O, and enrolls in 
Employer O's group health plan, 64 days after the last date of 
coverage under Employer P's plan. Employer O's plan has a 12-month 
preexisting condition exclusion period.
    (ii) In this Example, because A had a break in coverage of 63 
days, Employer O's plan may disregard A's prior coverage and A may 
be subject to a 12-month preexisting condition exclusion period.
    Example 2: (i) Same facts as Example 1, except that A is hired 
by Employer O, and enrolls in Employer O's plan, on the 63rd day 
after the last date of coverage under Employer P's plan.
    (ii) In this Example, A has a break in coverage of 62 days. 
Because A's break in coverage is not a significant break in 
coverage, Employer O's plan must count A's prior creditable coverage 
for purposes of reducing the plan's preexisting condition exclusion 
period as it applies to A.
    Example 3: (i) Same facts as Example 1, except that Employer O's 
plan provides benefits through an insurance policy that, as required 
by applicable State insurance laws, defines a significant break in 
coverage as 90 days.
    (ii) In this Example, the issuer that provides group health 
insurance to Employer O's plan must count A's period of creditable 
coverage prior to the 63-day break.
    Example 4: (i) Same facts as Example 3, except that Employer O's 
plan is a self-insured plan, and thus is not subject to State 
insurance laws.
    (ii) In this Example, the plan is not governed by the longer 
break rules under State insurance law and A's previous coverage may 
be disregarded.
    Example 5: (i) Individual B begins employment with Employer R 45 
days after terminating coverage under a prior group health plan. 
Employer R's group health plan has a 30-day waiting period before 
coverage begins. B enrolls in Employer R's plan when first eligible.
    (ii) In this Example, B does not have a significant break in 
coverage for purposes of determining whether B's prior coverage must 
be counted by Employer R's plan. B has only a 44-day break in 
coverage because the 30-day waiting period is not taken into account 
in determining a significant break in coverage.
    Example 6: (i) Individual C works for Employer S and has 
creditable coverage under Employer S's plan for 200 days before C's 
employment is terminated and coverage ceases. C is then unemployed 
for 51 days before being hired by Employer T. Employer T's plan has 
a 3-month waiting period. C works for Employer T for 2 months and 
then terminates employment. Eleven days after terminating employment 
with Employer T, C begins working for Employer U. Employer U's plan 
has no waiting period, but has a 6-month preexisting condition 
exclusion period.
    (ii) In this Example, C does not have a significant break in 
coverage because, after disregarding the waiting period under 
Employer T's plan, C had only a 62-day break in coverage (51 days 
plus 11 days). Accordingly, C has 200 days of creditable coverage 
and Employer U's plan may not apply its 6-month preexisting 
condition exclusion period with respect to C.
    Example 7: (i) Individual D terminates employment with Employer 
V on January 13, 1998 after being covered for 24 months under 
Employer V's group health plan. On March 17, the 63rd day without 
coverage, D applies for a health insurance policy in the individual 
market. D's application is accepted and the coverage is made 
effective May 1.
    (ii) In this Example, because D applied for the policy before 
the end of the 63rd day, and coverage under the policy ultimately 
became effective, the period between the date of application and the 
first day of coverage is a waiting period, and no significant break 
in coverage occurred even though the actual period without coverage 
was 107 days.
    Example 8: (i) Same facts as Example 7, except that D's 
application for a policy in the individual market is denied.
    (ii) In this Example, because D did not obtain coverage 
following application, D incurred a significant break in coverage on 
the 64th day.

    (v) Other permissible counting methods--(A) General rule. 
Notwithstanding any other provisions of this paragraph (b)(2), for 
purposes of reducing a preexisting condition exclusion period (but not 
for purposes of issuing a certificate under Sec. 146.115), a group 
health plan, and a health insurance issuer offering group health 
insurance coverage, may determine the amount of creditable coverage in 
any other manner that is at least as favorable to the individual as the 
method set forth in this paragraph (b)(2), subject to the requirements 
of other applicable law.
    (B) Example. The following example illustrates the requirements of 
this paragraph (b)(2)(v):

    Example: (1) Individual F has coverage under group health plan Y 
from January 3, 1997 through March 25, 1997. F then becomes covered 
by group health plan Z. F's enrollment date in Plan Z is May 1, 
1997. Plan Z has a 12-month preexisting condition exclusion period.
    (ii) In this Example, Plan Z may determine, in accordance with 
the rules prescribed in

[[Page 16962]]

paragraph (b)(2) (i), (ii), and (iii), that F has 82 days of 
creditable coverage (29 days in January, 28 days in February, and 25 
days in March). Thus, the preexisting condition exclusion period 
will no longer apply to F on February 8, 1998 (82 days before the 
12-month anniversary of F's enrollment (May 1)). For administrative 
convenience, however, Plan Z may consider that the preexisting 
condition exclusion period will no longer apply to F on the first 
day of the month (February 1).

    (c) Alternative method--(1) Specific benefits considered. Under the 
alternative method, a group health plan, or a health insurance issuer 
offering group health insurance coverage, determines the amount of 
creditable coverage based on coverage within any category of benefits 
described in paragraph (c)(3) and not based on coverage for any other 
benefits. The plan or issuer may use the alternative method for any or 
all of the categories. The plan may apply a different preexisting 
condition exclusion period with respect to each category (and may apply 
a different preexisting condition exclusion period for benefits that 
are not within any category). The creditable coverage determined for a 
category of benefits applies only for purposes of reducing the 
preexisting condition exclusion period with respect to that category. 
An individual's creditable coverage for benefits that are not within 
any category for which the alternative method is being used is 
determined under the standard method of paragraph (b).
    (2) Uniform application. A plan or issuer using the alternative 
method is required to apply it uniformly to all participants and 
beneficiaries under the plan or policy. The use of the alternative 
method is set forth in the plan.
    (3) Categories of benefits. The alternative method for counting 
creditable coverage may be used for coverage for any of the following 
categories of benefits:
    (i) Mental health.
    (ii) Substance abuse treatment.
    (iii) Prescription drugs.
    (iv) Dental care.
    (v) Vision care.
    (4) Plan notice. If the alternative method is used, the plan is 
required to--
    (i) State prominently that the plan is using the alternative method 
of counting creditable coverage in disclosure statements concerning the 
plan, and state this to each enrollee at the time of enrollment under 
the plan; and
    (ii) Include in these statements a description of the effect of 
using the alternative method, including an identification of the 
categories used.
    (5) Issuer notice. With respect to health insurance coverage 
offered by an issuer in the small or large group market, if the 
insurance coverage uses the alternative method, the issuer states 
prominently in any disclosure statement concerning the coverage, and to 
each employer at the time of the offer or sale of the coverage, that 
the issuer is using the alternative method, and include in such 
statements a description of the effect of using the alternative method. 
This applies separately to each type of coverage offered by the health 
insurance issuer.
    (6) Disclosure of information on previous benefits. See 
Sec. 146.115(b) for special rules concerning disclosure of coverage to 
a plan, or issuer, using the alternative method of counting creditable 
coverage under this paragraph (c).
    (7) Counting creditable coverage--(i) General. Under the 
alternative method, the group health plan or issuer counts creditable 
coverage within a category if any level of benefits is provided within 
the category. Coverage under a reimbursement account or arrangement, 
such as a flexible spending arrangement, (as defined in section 
106(c)(2) of the Internal Revenue Code), does not constitute coverage 
within any category.
    (ii) Special rules. In counting an individual's creditable coverage 
under the alternative method, the group health plan, or issuer, first 
determines the amount of the individual's creditable coverage that may 
be counted under paragraph (b), up to a total of 365 days of the most 
recent creditable coverage (546 days for a late enrollee). The period 
over which this creditable coverage is determined is referred to as the 
``determination period.'' Then, for the category specified under the 
alternative method, the plan or issuer counts within the category all 
days of coverage that occurred during the determination period (whether 
or not a significant break in coverage for that category occurs), and 
reduces the individual's preexisting condition exclusion period for 
that category by that number of days. The plan or issuer may determine 
the amount of creditable coverage in any other reasonable manner, 
uniformly applied, that is at least as favorable to the individual.
    (iii) Example. The following example illustrates the requirements 
of this paragraph (c)(7):

    Example: (i) Individual D enrolls in Employer V's plan on 
January 1, 2001. Coverage under the plan includes prescription drug 
benefits. On April 1, 2001, the plan ceases providing prescription 
drug benefits. D's employment with Employer V ends on January 1, 
2002, after D was covered under Employer V's group health plan for 
365 days. D enrolls in Employer Y's plan on February 1, 2001 (D's 
enrollment date). Employer Y's plan uses the alternative method of 
counting creditable coverage and imposes a 12-month preexisting 
condition exclusion on prescription drug benefits.
    (ii) In this Example, Employer Y's plan may impose a 275-day 
preexisting condition exclusion with respect to D for prescription 
drug benefits because D had the equivalent of 90-days of creditable 
coverage relating to prescription drug benefits within D's 
determination period.


Sec. 146.115  Certification and disclosure of previous coverage.

    (a) Certificate of creditable coverage--(1) Entities required to 
provide certificate--(i) General. A group health plan, and each health 
insurance issuer offering group health insurance coverage under a group 
health plan, is required to certificates of creditable coverage in 
accordance with this paragraph (a).
    (ii) Duplicate certificates not required. An entity required to 
provide a certificate under this paragraph (a)(1) for an individual is 
deemed to have satisfied the certification requirements for that 
individual if another party provides the certificate, but only to the 
extent that information relating to the individual's creditable 
coverage and waiting or affiliation period is provided by the other 
party. For example, in the case of a group health plan funded through 
an insurance policy, the issuer is deemed to have satisfied the 
certification requirement with respect to a participant or beneficiary 
if the plan actually provides a certificate that includes the 
information required under paragraph (a)(3) with respect to the 
participant or beneficiary.
    (iii) Special rule for group health plan. To the extent coverage 
under a plan consists of group health insurance coverage, the plan is 
deemed to have satisfied the certification requirements under this 
paragraph (a)(1) if any issuer offering the coverage is required to 
provide the certificates pursuant to an agreement between the plan and 
the issuer. For example, if there is an agreement between an issuer and 
the plan sponsor under which the issuer agrees to provide certificates 
for individuals covered under the plan, and the issuer fails to provide 
a certificate to an individual when the plan would have been required 
to provide one under this paragraph (a), then the issuer, but not the 
plan, violates the certification requirements of this paragraph (a).
    (iv) Special rules for issuers--(A) Responsibility of issuer for 
coverage period--(1) General rule. An issuer is

[[Page 16963]]

not required to provide information regarding coverage provided to an 
individual by another party.
    (2) Example. The following example illustrates the requirements of 
this paragraph (a)(1)(iv)(A):

    Example. (i) A plan offers coverage with an HMO option from one 
issuer and an indemnity option from a different issuer. The HMO has 
not entered into an agreement with the plan to provide certificates 
as permitted under paragraph (a)(1)(iii) of this section.
    (ii) In this Example, if an employee switches from the indemnity 
option to the HMO option and later ceases to be covered under the 
plan, any certificate provided by the HMO is not required to provide 
information regarding the employee's coverage under the indemnity 
option.

    (B) Cessation of issuer coverage prior to cessation of coverage 
under a plan--(1) General rule. If an individual's coverage under an 
issuer's policy ceases before the individual's coverage under the plan 
ceases, the issuer is required to provide sufficient information to the 
plan (or to another party designated by the plan) to enable a 
certificate to be provided by the plan (or other party), after 
cessation of the individual's coverage under the plan, that reflects 
the period of coverage under the policy. The provision of that 
information to the plan will satisfy the issuer's obligation to provide 
an automatic certificate for that period of creditable coverage for the 
individual under paragraphs (a)(2)(ii) and (a)(3) of this section. In 
addition, an issuer providing that information is required to cooperate 
with the plan in responding to any request made under paragraph (b)(2) 
of this section (relating to the alternative method of counting 
creditable coverage). If the individual's coverage under the plan 
ceases at the time the individual's coverage under the issuer's policy 
ceases, the issuer must provide an automatic certificate under 
paragraph (a)(2)(ii) of this section. An issuer may presume that an 
individual whose coverage ceases at a time other than the effective 
date for changing enrollment options has ceased to be covered under the 
plan.
    (2) Example. The following example illustrates the requirements of 
this paragraph (a)(1)(iv)(B):
    Example: (i) A group health plan provides coverage under an HMO 
option and an indemnity option with a different issuer, and only 
allows employees to switch on each January 1. Neither the HMO nor 
the indemnity issuer has entered into an agreement with the plan to 
provide automatic certificates as permitted under paragraph 
(a)(2)(ii) of this section.
    (ii) In this Example, if an employee switches from the indemnity 
option to the HMO option on January 1, the issuer must provide the 
plan (or a person designated by the plan) with appropriate 
information with respect to the individual's coverage with the 
indemnity issuer. However, if the individual's coverage with the 
indemnity issuer ceases at a date other than January 1, the issuer 
is instead required to provide the individual with an automatic 
certificate.

    (2) Individuals for whom a certificate must be provided; timing of 
issuance--(i) Individuals. A certificate must be provided, without 
charge, for participants or dependents who are or were covered under a 
group health plan upon the occurrence of any of the events described in 
paragraph (a)(2)(ii) and (a)(2)(iii) of this section.
    (ii) Issuance of automatic certificates. The certificates described 
in this paragraph (a)(2)(ii) of this section are referred to as 
``automatic certificates.''
    (A) Qualified beneficiaries upon a qualifying event. In the case of 
an individual who is a qualified beneficiary (as defined in section 
607(3) of ERISA, section 4980B(g)(1) of the Code, or section 2208 of 
the PHS Act) entitled to elect COBRA continuation coverage, an 
automatic certificate is required to be provided at the time the 
individual would lose coverage under the plan in the absence of COBRA 
continuation coverage or alternative coverage elected instead of COBRA 
continuation coverage. A plan or issuer satisfies this requirement if 
it provides the automatic certificate no later than the time a notice 
is required to be furnished for a qualifying event under section 606 of 
the Act, section 4980B(f)(6) of the Code and section 2206 of the PHS 
Act (relating to notices required under COBRA).
    (B) Other individuals when coverage ceases. In the case of an 
individual who is not a qualified beneficiary entitled to elect COBRA 
continuation coverage, an automatic certificate is required to be 
provided at the time the individual ceases to be covered under the 
plan. A plan or issuer satisfies this requirement if it provides the 
automatic certificate within a reasonable time period thereafter. In 
the case of an individual who is entitled to elect to continue coverage 
under a State program similar to COBRA and who receives the automatic 
certificate not later than the time a notice is required to be 
furnished under the State program, the certificate is deemed to be 
provided within a reasonable time period after the cessation of 
coverage under the plan.
    (C) Qualified beneficiaries when COBRA ceases. In the case of an 
individual who is a qualified beneficiary and has elected COBRA 
continuation coverage (or whose coverage has continued after the 
individual became entitled to elect COBRA continuation coverage), an 
automatic certificate is to be provided at the time the individual's 
coverage under the plan ceases. A plan, or issuer, satisfies this 
requirement if it provides the automatic certificate within a 
reasonable time after coverage ceases (or after the expiration of any 
grace period for nonpayment of premiums). An automatic certificate is 
required to be provided to such an individual regardless of whether the 
individual has previously received an automatic certificate under 
paragraph (a)(2)(ii)(A) of this section.
    (iii) Any individual upon request. Requests for certificates are 
permitted to be made by, or on behalf of, an individual within 24 
months after coverage ceases. Thus, for example, a plan in which an 
individual enrolls may, if authorized by the individual, request a 
certificate of the individual's creditable coverage on behalf of the 
individual from a plan in which the individual was formerly enrolled. 
After the request is received, a plan or issuer is required to provide 
the certificate by the earliest date that the plan or issuer, acting in 
a reasonable or prompt fashion can provide the certificate. A 
certificate is to be provided under this paragraph (a)(2)(iii) even if 
the individual has previously received a certificate under this 
paragraph (a)(2)(iii) or an automatic certificate under paragraph 
(a)(2)(ii) of this section.
    (iv) Examples. The following examples illustrate the requirements 
of this paragraph (a)(2).

    Example 1: (i) Individual A terminates employment with Employer 
O. A is a qualified beneficiary entitled to elect COBRA continuation 
coverage under Employer O's group health plan. A notice of the 
rights provided under COBRA is typically furnished to qualified 
beneficiaries under the plan within 10 days after a covered employee 
terminates employment.
    (ii) In this Example, the automatic certificate may be provided 
at the same time that A is provided the COBRA notice.
    Example 2: (i) Same facts as Example 1, except that the 
automatic certificate for A is not completed by the time the COBRA 
notice is furnished to A.
    (ii) In this Example, the automatic certificate may be provided 
within the period permitted by law for the delivery of notices under 
COBRA.
    Example 3: (i) Employer R maintains an insured group health 
plan. R has never had 20 employees and thus R's plan is not subject 
to the COBRA continuation coverage provisions. However, R is in a 
State that has a State program similar to COBRA. B terminates 
employment with R and loses coverage under R's plan.
    (ii) In this Example, the automatic certificate may be provided 
not later than the time a notice is required to be furnished under 
the State program.

[[Page 16964]]

    Example 4: (i) Individual C terminates employment with Employer 
S and receives both a notice of C's rights under COBRA and an 
automatic certificate. C elects COBRA continuation coverage under 
Employer S's group health plan. After four months of COBRA 
continuation coverage and the expiration of a 30-day grace period, 
S's group health plan determines that C's COBRA continuation 
coverage has ceased due to failure to make a timely payment for 
continuation coverage.
    (ii) In this Example, the plan must provide an updated automatic 
certificate to C within a reasonable time after the end of the grace 
period.
    Example 5: (i) Individual D is currently covered under the group 
health plan of Employer T. D requests a certificate, as permitted 
under paragraph (a)(2)(iii). Under the procedure for Employer T's 
plan, certificates are mailed (by first class mail) 7 business days 
following receipt of the request. This date reflects the earliest 
date that the plan, acting in a reasonable and prompt fashion, can 
provide certificates.
    (ii) In this Example, the plan's procedure satisfies paragraph 
(a)(2)(iii) of this section.

    (3) Form and content of certificate--(i) Written certificate--(A) 
General. Except as provided in paragraph (a)(3)(i)(B) of this section, 
the certificate must be provided in writing (including any form 
approved by HCFA as a writing).
    (B) Other permissible forms. No written certificate is required to 
be provided under this paragraph (a) with respect to a particular event 
described in paragraphs (a)(2)(ii) and (a)(2)(iii) of this section if 
all the following conditions are met:
    (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) through means 
other than a written certificate (for example, by telephone).
    (4) The receiving plan or issuer receives the information from the 
sending plan or issuer in such form within the time periods required 
under paragraph (a)(2) of this section.
    (ii) Required information. The certificate must include all of the 
following:
    (A) The date the certificate is issued.
    (B) The name of the group health plan that provided the coverage 
described in the certificate.
    (C) The name of the participant or dependent with respect to whom 
the certificate applies, and any other information necessary for the 
plan providing the coverage specified in the certificate to identify 
the individual, such as the individual's identification number under 
the plan and the name of the participant if the certificate is for (or 
includes) a dependent.
    (D) The name, address, and telephone number of the plan 
administrator or issuer required to provide the certificate.
    (E) The telephone number to call for further information regarding 
the certificate (if different from paragraph (a)(3)(ii)(D)).
    (F) Either--
    (1) A statement that an 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, or
    (2) The date any waiting period (and affiliation period, if 
applicable) began and the date creditable coverage began.
    (G) 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 certificate. If an automatic 
certificate is provided under paragraph (a)(2)(ii) 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 (a)(2)(iii) 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 such period of continuous 
coverage.
    (iv) Combining information for families. A certificate may provide 
information with respect to both a participant and the participant's 
dependents if the information is identical for each individual or, if 
the information is not identical, certificates may be provided on one 
form if the form provides all the required information for each 
individual and separately states the information that is not identical.
    (v) Model certificate. The requirements of paragraph (a)(3)(ii) of 
this section are satisfied if the plan or issuer provides a certificate 
in accordance with a model certificate authorized by HCFA.
    (vi) Excepted benefits; categories of benefits. No certificate is 
required to be furnished with respect to excepted benefits described in 
Sec. 146.145. In addition, the information in the certificate regarding 
coverage is not required to specify categories of benefits described in 
Sec. 146.113(c) (relating to the alternative method of counting 
creditable coverage). However, 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 (b) of this 
section.
    (4) Procedures--(i) Method of delivery. The certificate is required 
to be provided to each individual described in paragraph (a)(2) 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 participant and the 
participant's spouse at the participant's last known address, then the 
requirements of this paragraph (a)(4) are satisfied with respect to all 
individuals residing at that address. If a dependent's last known 
address is different than the participant's last known address, a 
separate certificate is required to be provided to the dependent at the 
dependent's last known address. If separate certificates are being 
provided by mail to individuals who reside at the same address, 
separate mailings of each certificate are not required.
    (ii) Procedure for requesting certificates. A plan or issuer must 
establish a procedure for individuals to request and receive 
certificates under paragraph (a)(2)(iii) of this section.
    (iii) Designated recipients. If an automatic certificate is 
required to be provided under paragraph (a)(2)(ii) of this section, and 
the individual entitled to receive the certificate designates another 
individual or entity to receive the certificate, the plan or issuer 
responsible for providing the certificate is permitted to provide the 
certificate to the designated party. If a certificate is required to be 
provided upon request under paragraph (a)(2)(iii) of this section and 
the individual entitled to receive the certificate designates another 
individual or entity to receive the certificate, the plan or issuer 
responsible for providing the certificate is required to provide the 
certificate to the designated party.
    (5) Special rules concerning dependent coverage--(i) Reasonable 
efforts--(A) General rule. A plan or issuer is required to use 
reasonable efforts to determine any information needed for a 
certificate relating to the dependent coverage. In any case in which an 
automatic certificate is required to be furnished with respect to a 
dependent under paragraph (a)(2)(ii) of this section, no individual 
certificate is required to be furnished until the plan or issuer knows 
(or making reasonable efforts should know) of the

[[Page 16965]]

dependent's cessation of coverage under the plan.
    (B) Example. The following example illustrates the requirements of 
this paragraph (a)(5)(i):

    Example: (i) A group health plan covers employees and their 
dependents. The plan annually requests all employees to provide 
updated information regarding dependents, including the specific 
date on which an employee has a new dependent or on which a person 
ceases to be a dependent of the employee.
    (ii) In this Example, the plan has satisfied the standard in 
this paragraph (a)(5)(i) that it make reasonable efforts to 
determine the cessation of dependents' coverage and the related 
dependent coverage information.

    (ii) Special rules for demonstrating coverage. If a certificate 
furnished by a plan or 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 (c)(4) of 
this section for demonstrating dependent status. In addition, 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. See Sec. 146.111(b), under which such a child would not 
be subject to a preexisting condition exclusion.
    (iii) Transition rule for dependent coverage through June 30, 
1998--(A) General. A group health plan or health insurance 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 (a)(3)(ii)(C) of 
this section by providing the name of the participant covered by the 
group health plan or health insurance issuer and specifying that the 
type of coverage described in the certificate is for dependent coverage 
(for example, family coverage or employee-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 (a)(2)(iii) of this section, a plan or issuer must make 
reasonable efforts to obtain and provide the names of any dependent 
covered by the certificate where such information is requested to be 
provided. It does not include the name of any dependent of an 
individual covered by the certificate, the individual may, if 
necessary, use the procedures described in paragraph (c) of this 
section for submitting documentation to establish that the creditable 
coverage in the certificate applies to the dependent.
    (C) Demonstrating a dependent's creditable coverage. See paragraph 
(c)(4) of this section for special rules to demonstrate dependent 
status.
    (D) Duration. This paragraph (a)(5)(iii) is only effective for 
certifications provided with respect to events occurring through June 
30, 1998.
    (6) Special certification rules--(i) Issuers. Issuers of group and 
individual health insurance are required to provide certificates of any 
creditable coverage they provide in the group or individual health 
insurance market, even if the coverage is provided in connection with 
an entity or program that is not itself required to provide a 
certificate because it is not subject to the group market provisions of 
this part, part 7 of subtitle B of title I of ERISA, or chapter 100 of 
subtitle K of the Internal Revenue Code. This would include coverage 
provided in connection with any of the following:
    (A) Creditable coverage described in sections 2701 (c)(1)(G) 
through (c)(1)(J) of the PHS Act (coverage under a State health 
benefits risk pool, the Federal Employees Health Benefits Program, a 
public health plan, and a health benefit plan under section 5(e) of the 
Peace Corps Act),
    (B) Coverage subject to section 2721(b)(1)(B) of the PHS Act 
(requiring certificates by issuers offering health insurance coverage 
in connection with any group health plan, including a church plan or a 
governmental plan (including the Federal Employees Health Benefits 
Program (FEHBP)).
    (C) Coverage subject to section 2743 of the PHS Act applicable to 
health insurance issuers in the individual market. (However, this 
section does not require a certificate to be provided with respect to 
short-term limited duration insurance, which is excluded from the 
definition of ``individual health insurance coverage'' in 45 CFR 
144.103 that is not provided in connection with a group health plan, as 
described in paragraph (a)(6)(i)(B) of this section.)
    (ii) Other entities. For special rules requiring that certain other 
entities, not subject to this part, provide certificates consistent 
with the rules in this section, see section 2791(a)(3) of the PHS Act 
applicable to entities described in sections 2701(c)(1)(C), (D), (E), 
and (F) of the PHS Act (relating to Medicare, Medicaid, CHAMPUS, and 
Indian Health Service), section 2721(b)(1)(A) of the PHS Act applicable 
to non-Federal governmental plans generally, section 2721(b)(2)(C)(ii) 
of the PHS Act applicable to non-Federal governmental plans that elect 
to be excluded from the requirements of subparts 1 and 3 of part A of 
title XXVII of the PHS Act, and section 9805(a) of the Internal Revenue 
Code applicable to group health plans, which includes church plans (as 
defined in section 414(e) of the Internal Revenue Code).
    (b) Disclosure of coverage to a plan, or issuer, using the 
alternative method of counting creditable coverage--(1) General. If an 
individual enrolls in a group health plan with respect to which the 
plan, or issuer, uses the alternative method of counting creditable 
coverage described in section 2701(c)(3)(B) of the PHS Act and 
Sec. 146.113(c), the individual provides a certificate of coverage 
under paragraph (a) of this section, and the plan or issuer in which 
the individual enrolls so requests, the entity that issued the 
certificate (the ``prior entity'') is required to disclose promptly to 
a requesting plan or issuer (the ``requesting entity'') the information 
set forth in paragraph (b)(2) of this section.
    (2) Information to be disclosed. The prior entity is required to 
identify to the requesting entity the categories of benefits with 
respect to which the requesting entity is using the alternative method 
of counting creditable coverage, and the requesting entity may identify 
specific information that the requesting entity reasonably needs in 
order to determine the individual's creditable coverage with respect to 
any such category. The prior entity is required to disclose promptly to 
the requesting entity the creditable coverage information so requested.
    (3) Charge for providing information. The prior entity furnishing 
the information under paragraph (b) of this section may charge the 
requesting entity for the reasonable cost of disclosing such 
information.
    (c) Ability of an individual to demonstrate creditable coverage and 
waiting period information--(1) General. The rules in this paragraph 
(c) implement section 2701(c)(4) of the PHS Act, which permits 
individuals to establish creditable coverage through means other than 
certificates, and section 2701(e)(3) of the PHS Act, which requires the 
Secretary to establish rules designed to prevent an individual's 
subsequent coverage under a group health plan or health insurance 
coverage from being adversely affected by an entity's failure to 
provide a certificate with respect to that individual. 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 such a demonstration when--

[[Page 16966]]

    (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 under paragraph 
(a) of this section;
    (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; or
    (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. 
A plan or issuer is required to 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 
an individual has creditable coverage and is entitled to offset all or 
a portion of any preexisting condition exclusion period. A plan or 
issuer shall treat the individual as having furnished a certificate 
under paragraph (a) of this section if the individual attests to the 
period of creditable coverage, the individual also presents relevant 
corroborating evidence of some creditable coverage during the period, 
and the individual cooperates with the plan's or issuer's efforts to 
verify the individual's coverage. For this purpose, cooperation 
includes providing (upon the plan's or issuer's request) a written 
authorization for the plan or 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 a plan or issuer may refuse to credit coverage where the 
individual fails to cooperate with the plan's or issuer's efforts to 
verify coverage, the plan or 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 also be established through means 
other than documentation, such as by a telephone call from the plan or 
provider to a third party verifying creditable coverage.
    (iv) Example. The following example illustrates the requirements of 
this paragraph (c)(2):

    Example: (i) Employer X's group health plan imposes a 
preexisting condition exclusion of 12 months on new enrollees under 
the plan and uses the standard method of determining creditable 
coverage. F fails to receive a certificate of prior coverage from 
the self-insured group health plan maintained by F's prior employer, 
Employer W, and requests a certificate. However, F (and Employer X's 
plan, on F's behalf) is unable to obtain a certificate from Employer 
W's plan. F attests that, to the best of F's knowledge, F had at 
least 12 months of continuous coverage under Employer W's plan, and 
that the coverage ended no earlier than F's termination of 
employment from Employer W. In addition, F presents evidence of 
coverage, such as an explanation of benefits for a claim that was 
made during the relevant period.
    (ii) In this Example, based solely on these facts, F has 
demonstrated creditable coverage for the 12 months of coverage under 
Employer W's plan in the same manner as if F had presented a written 
certificate of creditable coverage.

    (3) Demonstrating categories of creditable coverage. Procedures 
similar to those described in this paragraph (c) apply in order to 
determine an individual's creditable coverage with respect to any 
category under paragraph (b) of this section (relating to determining 
creditable coverage under the alternative method).
    (4) 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 group 
health plan or issuer is required to treat the individual as having 
furnished a certificate showing the dependent status if the individual 
attests to such dependency and the period of such status and the 
individual cooperates with the plan's or issuer's efforts to verify the 
dependent status.
    (d) Determination and notification of creditable coverage--(1) 
Reasonable time period. In the event that a group health plan or health 
insurance issuer offering group health insurance coverage receives 
information in this section under paragraph (a) (certifications), 
paragraph (b) (disclosure of information relating to the alternative 
method), or paragraph (c) (other evidence of creditable coverage), the 
entity is required, within a reasonable time period following receipt 
of the information, to make a determination regarding the individual's 
period of creditable coverage and notify the individual of the 
determination in accordance with paragraph (d)(2) of this section. 
Whether a determination and notification regarding an individual's 
creditable coverage is made within a reasonable time period is 
determined based on the relevant facts and circumstances. Relevant 
facts and circumstances include whether a plan's application of a 
preexisting condition exclusion would prevent an individual from having 
access to urgent medical services.
    (2) Notification to individual of period of preexisting condition 
exclusion. A plan or issuer seeking to impose a preexisting condition 
exclusion is required to disclose to the individual, in writing, its 
determination of any preexisting condition exclusion period that 
applies to the individual, and the basis for such determination, 
including the source and substance of any information on which the plan 
or issuer relied. In addition, the plan or issuer is required to 
provide the individual with a written explanation of any appeal 
procedures established by the plan or issuer, and with a reasonable 
opportunity to submit additional evidence of creditable coverage. 
However, nothing in this paragraph (d) or paragraph (c) of this section 
prevents a plan or issuer from modifying an initial determination of 
creditable coverage if it determines that the individual did not have 
the claimed creditable coverage, provided that--
    (i) A notice of the reconsideration is provided to the individual; 
and
    (ii) Until the final determination is made, the plan or issuer, for 
purposes of approving access to medical services (such as a pre-surgery 
authorization), acts in a manner consistent with the initial 
determination.
    (3) Examples. The following examples illustrate this paragraph (d):

    Example: (i) Individual F terminates employment with Employer W 
and, a month later, is hired by Employer X. Example 1: Individual G 
is hired by Employer Y. Employer Y's group health plan imposes a 
preexisting condition exclusion for 12 months with respect to new 
enrollees and uses the standard method of determining credible 
coverage. Employer Y's plan determines that G is subject to a 4-
month preexisting condition exclusion, based on a certificate of 
creditable coverage that is provided by G to Employer Y's plan 
indicating 8 months of coverage under G's prior group health plan.

[[Page 16967]]

    (ii) In this Example, Employer Y's plan must notify G within a 
reasonable period of time following receipt of the certificate that 
G is subject to a 4-month preexisting condition exclusion beginning 
on G's enrollment date in Y's plan.
    Example 2: (i) Same facts as in Example 1, except that Employer 
Y's plan determines that G has 14 months of creditable coverage 
based on G's certificate indicating 14 months of creditable coverage 
under G's prior plan.
    (ii) In this Example, Employer Y's plan is not required to 
notify G that G will not be subject to a preexisting condition 
exclusion.
    Example 3: (i) Individual H is hired by Employer Z. Employer Z's 
group health plan imposes a preexisting condition exclusion for 12 
months with respect to new enrollees and uses the standard method of 
determining creditable coverage. H develops an urgent health 
condition before receiving a certificate of prior coverage. H 
attests to the period of prior coverage, presents corroborating 
documentation of the coverage period, and authorizes the plan to 
request a certificate on H's behalf.
    (ii) In this Example, Employer Z's plan must review the evidence 
presented by H. In addition, the plan must make a determination and 
notify H regarding any preexisting condition exclusion period that 
applies to H (and the basis of such determination) within a 
reasonable time period following receipt of the evidence that is 
consistent with the urgency of H's health condition (this 
determination may be modified as permitted under paragraph (d)(2)).


Sec. 146.117  Special enrollment periods.

    (a) Special enrollment for certain individuals who lose coverage--
(1) General. A group health plan, and a health insurance issuer 
offering group health insurance coverage in connection with a group 
health plan, is required to permit employees and dependents described 
in this section in paragraph (a)(2), (a)(3), or (a)(4) to enroll for 
coverage under the terms of the plan if the conditions in paragraph 
(a)(5) are satisfied and the enrollment is requested within the period 
described in paragraph (a)(6). The enrollment is effective at the time 
described in paragraph (a)(7). The special enrollment rights under this 
paragraph (a) apply without regard to the dates on which an individual 
would otherwise be able to enroll under the plan.
    (2) Special enrollment of an employee only. An employee is 
described in this paragraph (a)(2) if the employee is eligible, but not 
enrolled, for coverage under the terms of the plan and, when enrollment 
was previously offered to the employee under the plan and was declined 
by the employee, the employee was covered under another group health 
plan or had other health insurance coverage.
    (3) Special enrollment of dependents only. A dependent is described 
in this paragraph (a)(3) if the dependent is a dependent of an employee 
participating in the plan, the dependent is eligible, but not enrolled, 
for coverage under the terms of the plan, and, when enrollment was 
previously offered under the plan and was declined, the dependent was 
covered under another group health plan or had other health insurance 
coverage.
    (4) Special enrollment of both employee and dependent. An employee 
and any dependent of the employee are described in this paragraph 
(a)(4) if they are eligible, but not enrolled, for coverage under the 
terms of the plan and, when enrollment was previously offered to the 
employee or dependent under the plan and was declined, the employee or 
dependent was covered under another group health plan or had other 
health insurance coverage.
    (5) Conditions for special enrollment. An employee or dependent is 
eligible to enroll during a special enrollment period if each of the 
following applicable conditions is met:
    (i) When the employee declined enrollment for the employee or the 
dependent, the employee stated in writing that coverage under another 
group health plan or other health insurance coverage was the reason for 
declining enrollment. This paragraph (a)(5)(i) applies only if--
    (A) The plan required such a statement when the employee declined 
enrollment; and
    (B) The employee is provided with notice of the requirement to 
provide the statement in paragraph (a)(5)(i) (and the consequences of 
the employee's failure to provide the statement) at the time the 
employee declined enrollment.
    (ii) (A) When the employee declined enrollment for the employee or 
dependent under the plan, the employee or dependent had COBRA 
continuation coverage under another plan and COBRA continuation 
coverage under that other plan has since been exhausted; or
    (B) If the other coverage that applied to the employee or dependent 
when enrollment was declined was not under a COBRA continuation 
provision, either the other coverage has been terminated as a result of 
loss of eligibility for the coverage or employer contributions towards 
the other coverage have been terminated. For this purpose, loss of 
eligibility for coverage includes a loss of coverage as a result of 
legal separation, divorce, death, termination of employment, reduction 
in the number of hours of employment, and any loss of eligibility after 
a period that is measured by reference to any of the foregoing. Thus, 
for example, if an employee's coverage ceases following a termination 
of employment and the employee is eligible for but fails to elect COBRA 
continuation coverage, this is treated as a loss of eligibility under 
this paragraph (a)(5)(ii)(B). However, loss of eligibility does not 
include a loss due to failure of the individual or the participant to 
pay premiums on a timely basis or termination of coverage for cause 
(such as making a fraudulent claim or an intentional misrepresentation 
of a material fact in connection with the plan). In addition, for 
purposes of this paragraph (a)(5)(ii)(B), employer contributions 
include contributions by any current or former employer (of the 
individual or another person) that was contributing to coverage for the 
individual.
    (6) Length of special enrollment period. The employee is required 
to request enrollment (for the employee or the employee's dependent, as 
described in this section in paragraph (a)(2), paragraph (a)(3), or 
paragraph (a)(4)) not later than 30 days after the exhaustion of the 
other coverage described in paragraph (a)(5)(ii)(A) or termination of 
the other coverage as a result of the loss of eligibility for the other 
coverage for items described in paragraph (a)(5)(ii)(B) or following 
the termination of employer contributions toward that other coverage. 
The plan may impose the same requirements that apply to employees who 
are otherwise eligible under the plan to immediately request enrollment 
for coverage (for example, that the request be made in writing).
    (7) Effective date of enrollment. Enrollment is effective not later 
than the first day of the first calendar month beginning after the date 
the completed request for enrollment is received.
    (b) Special enrollment with respect to certain dependent 
beneficiaries--(1) General. A group health plan that makes coverage 
available with respect to dependents of a participant is required to 
provide a special enrollment period to permit individuals described in 
this section in paragraph (b)(2), (b)(3), (b)(4), (b)(5), or (b)(6) to 
be enrolled for coverage under the terms of the plan if the enrollment 
is requested within the time period described in paragraph (b)(7). The 
enrollment is effective at the time described in paragraph (b)(8). The 
special enrollment rights under this paragraph (b) apply without regard 
to the dates on which an individual would otherwise be able to enroll 
under the plan.
    (2) Special enrollment of an employee who is eligible but not 
enrolled. An individual is described in this paragraph (b)(2) if the 
individual is an employee who is eligible, but not

[[Page 16968]]

enrolled, in the plan, the individual would be a participant but for a 
prior election by the individual not to enroll in the plan during a 
previous enrollment period, and a person becomes a dependent of the 
individual through marriage, birth, or adoption or placement for 
adoption.
    (3) Special enrollment of a spouse of a participant. An individual 
is described in this paragraph (b)(3) if either--
    (i) The individual becomes the spouse of a participant; or
    (ii) The individual is a spouse of the participant and a child 
becomes a dependent of the participant through birth, adoption, or 
placement for adoption.
    (4) Special enrollment of an employee who is eligible but not 
enrolled and the spouse of such employee. An employee who is eligible, 
but not enrolled, in the plan, and an individual who is a dependent of 
such employee, are described in this paragraph (b)(4) if the employee 
would be a participant but for a prior election by the employee not to 
enroll in the plan during a previous enrollment period, and either--
    (i) The employee and the individual become married; or
    (ii) The employee and individual are married and a child becomes a 
dependent of the employee through birth, adoption or placement for 
adoption.
    (5) Special enrollment of a dependent of a participant. An 
individual is described in this paragraph (b)(5) if the individual is a 
dependent of a participant and the individual becomes a dependent of 
such participant through marriage, birth, or adoption or placement for 
adoption.
    (6) Special enrollment of an employee who is eligible but not 
enrolled and a new dependent. An employee who is eligible, but not 
enrolled, in the plan, and an individual who is a dependent of the 
employee, are described in this paragraph (b)(6) if the employee would 
be a participant but for a prior election by the employee not to enroll 
in the plan during a previous enrollment period, and the dependent 
becomes a dependent of the employee through marriage, birth, or 
adoption or placement for adoption.
    (7) Length of special enrollment period. The special enrollment 
period under paragraph (b)(1) of this section is a period of not less 
than 30 days and begins on the date of the marriage, birth, or adoption 
or placement for adoption (except that such period does not begin 
earlier than the date the plan makes dependent coverage generally 
available).
    (8) Effective date of enrollment. Enrollment is effective--
    (i) In the case of marriage, not later than the first day of the 
first calendar month beginning after the date the completed request for 
enrollment is received by the plan;
    (ii) In the case of a dependent's birth, the date of such birth; 
and
    (iii) In the case of a dependent's adoption or placement for 
adoption, the date of such adoption or placement for adoption.
    (9) Example. The following example illustrates the requirements of 
this paragraph (b):

    Example. (i) Employee A is hired on September 3, 1998 by 
Employer X, which has a group health plan in which A can elect to 
enroll either for employee-only coverage, for employee-plus-spouse 
coverage, or for family coverage, effective on the first day of any 
calendar quarter thereafter. A is married and has no children. A 
does not elect to join Employer X's plan (for employee-only 
coverage, employee-plus-spouse coverage, or family coverage) on 
October 1, 1998 or January 1, 1999. On February 15, 1999, a child is 
placed for adoption with A and A's spouse.
    (ii) In this Example, the conditions for special enrollment of 
an employee with a new dependent under paragraph (b)(2) are 
satisfied, the conditions for special enrollment of an employee and 
a spouse with a new dependent under paragraph (b)(4) are satisfied, 
and the conditions for special enrollment of an employee and a new 
dependent under paragraph (b)(6) are satisfied. Accordingly, 
Employer X's plan will satisfy this paragraph (b) if and only if it 
allows A to elect, by filing the required forms by March 16, 1999, 
to enroll in Employer X's plan either with employee-only coverage, 
with employee-plus-spouse coverage, or with family coverage, 
effective as of February 15, 1999.

    (c) Notice of enrollment rights. On or before the time an employee 
is offered the opportunity to enroll in a group health plan, the plan 
is required to provide the employee with a description of the plan's 
special enrollment rules under this section. For this purpose, the plan 
may use the following model description of the special enrollment rules 
under this section:

    If you are declining enrollment for yourself or your dependents 
(including your spouse) because of other health insurance coverage, 
you may in the future be able to enroll yourself or your dependents 
in this plan, provided that you request enrollment within 30 days 
after your other coverage ends. In addition, if you have a new 
dependent as a result of marriage, birth, adoption or placement for 
adoption, you may be able to enroll yourself and your dependents, 
provided that you request enrollment within 30 days after the 
marriage, birth, adoption, or placement for adoption.

    (d) Special enrollment date definition. (1) General rule. A special 
enrollment date for an individual means any date in paragraph (a)(7) or 
paragraph (b)(8) of this section on which the individual has a right to 
have enrollment in a group health plan become effective under this 
section.
    (2) Examples. The following examples illustrate the requirements of 
this paragraph (d):

    Example 1: (i) Employer Y maintains a group health plan that 
allows employees to enroll in the plan either (a) effective on the 
first day of employment by an election filed within three days 
thereafter, (b) effective on any subsequent January 1 by an election 
made during the preceding months of November or December, or (c) 
effective as of any special enrollment date described in this 
section. Employee B is hired by Employer Y on March 15, 1998 and 
does not elect to enroll in Employer Y's plan until January 31, 1999 
when B loses coverage under another plan. B elects to enroll in 
Employer Y's plan effective on February 1, 1999 by filing the 
completed request form by January 31, 1999, in accordance with the 
special rule set forth in paragraph (a).
    (ii) In this Example, B has enrolled on a special enrollment 
date because the enrollment is effective at a date described in 
paragraph (a)(7).
    Example 2: (i) Same facts as Example 1, except that B's loss of 
coverage under the other plan occurs on December 31, 1998 and B 
elects to enroll in Employer Y's plan effective on January 1, 1999 
by filing the completed request form by December 31, 1998, in 
accordance with the special rule set forth in paragraph (a).
    (ii) In this Example, B has enrolled on a special enrollment 
date because the enrollment is effective at a date described in 
paragraph (a)(7) (even though this date is also a regular enrollment 
date under the plan).


Sec. 146.119  HMO affiliation period as alternative to preexisting 
condition exclusion.

    (a) General. A group health plan offering health insurance coverage 
through an HMO, or an HMO that offers health insurance coverage in 
connection with a group health plan, may impose an affiliation period 
only if each of the requirements in paragraph (b) of this section is 
satisfied.
    (b) Requirements for affiliation period. (1) No preexisting 
condition exclusion is imposed with respect to any coverage offered by 
the HMO in connection with the particular group health plan.
    (2) No premium is charged to a participant or beneficiary for the 
affiliation period.
    (3) The affiliation period for the HMO coverage is applied 
uniformly without regard to any health status-related factors.

[[Page 16969]]

    (4) The affiliation period does not exceed 2 months (or 3 months in 
the case of a late enrollee).
    (5) The affiliation period begins on the enrollment date.
    (6) The affiliation period for enrollment in the HMO under a plan 
runs concurrently with any waiting period.
    (c) Alternatives to affiliation period. An HMO may use alternative 
methods in lieu of an affiliation period to address adverse selection, 
as approved by the State insurance commissioner or other official 
designated to regulate HMOs. Nothing in this section requires a State 
to receive proposals for or approve alternatives to affiliation 
periods.


Sec. 146.121  Prohibiting discrimination against participants and 
beneficiaries based on a health status-related factor.

    (a) In eligibility to enroll--(1) General. Subject to paragraph 
(a)(2) of this section, a group health plan, and a health insurance 
issuer offering group health insurance coverage in connection with a 
group health plan, may not establish rules for eligibility (including 
continued eligibility) of any individual to enroll under the terms of 
the plan based on any of the following health status-related factors in 
relation to the individual or a dependent of the individual:
    (i) Health status.
    (ii) Medical condition (including both physical and mental 
illnesses), as defined in Sec. 146.102.
    (iii) Claims experience.
    (iv) Receipt of health care.
    (v) Medical history.
    (vi) Genetic information, as defined in Sec. 146.102.
    (vii) Evidence of insurability (including conditions arising out of 
acts of domestic violence).
    (viii) Disability.
    (2) No application to benefits or exclusions. To the extent 
consistent with section 2701 of the Act and Sec. 146.111, paragraph 
(a)(1) of this section shall not be construed--
    (i) To require a group health plan, or a health insurance issuer 
offering group health insurance coverage, to provide particular 
benefits other than those provided under the terms of such plan or 
coverage; or
    (ii) To prevent such a plan or issuer from establishing limitations 
or restrictions on the amount, level, extent, or nature of the benefits 
or coverage for similarly situated individuals enrolled in the plan or 
coverage.
    (3) Construction. For purposes of paragraph (a)(1) of this section, 
rules for eligibility to enroll include rules defining any applicable 
waiting (or affiliation) periods for such enrollment and rules relating 
to late and special enrollment.
    4. Example. The following example illustrates the requirements of 
this paragraph (a):

    Example. (i) An employer sponsors a group health plan that is 
available to all employees who enroll within the first 30 days of 
their employment. However, individuals who do not enroll in the 
first 30 days cannot enroll later unless they pass a physical 
examination.
    (ii) In this Example, the plan discriminates on the basis of one 
or more health status-related factors.

    (b) In premiums or contributions--(1) General. A group health plan, 
and a health insurance issuer offering health insurance coverage in 
connection with a group health plan, may not require an individual (as 
a condition of enrollment or continued enrollment under the plan) to 
pay a premium or contribution that is greater than the premium or 
contribution for a similarly situated individual enrolled in the plan 
based on any health status-related factor, in relation to the 
individual or a dependent of the individual.
    (2) Construction. Nothing in paragraph (b)(1) of this section can 
be construed--
    (i) To restrict the amount that an employer may be charged by an 
issuer for coverage under a group health plan; or
    (ii) To prevent a group health plan, and a health insurance issuer 
offering group health insurance coverage, from establishing premium 
discounts or rebates or modifying otherwise applicable copayments or 
deductibles in return for adherence to a bona fide wellness program. 
For purposes of this section, a bona fide wellness program is a program 
of health promotion and disease prevention.
    (3) Example. The following example illustrates the requirements of 
this paragraph (b):

    Example. (i) Plan X offers a premium discount to participants 
who adhere to a cholesterol-reduction wellness program. Enrollees 
are expected to keep a diary of their food intake over 6 weeks. They 
periodically submit the diary to the plan physician who responds 
with suggested diet modifications. Enrollees are to modify their 
diets in accordance with the physician's recommendations. At the end 
of the 6 weeks, enrollees are given a cholesterol test and those who 
achieve a count under 200 receive a premium discount.
    (ii) In this Example, because enrollees who otherwise comply 
with the program may be unable to achieve a cholesterol count under 
200 due to a health status-related factor, this is not a bona fide 
wellness program and such discounts would discriminate impermissibly 
based on one or more health status-related factors. However, if, 
instead, individuals covered by the plan were entitled to receive 
the discount for complying with the diary and dietary requirements 
and were not required to pass a cholesterol test, the program would 
be a bona fide wellness program.


Sec. 146.125  Effective dates.

    (a) General effective dates--(1) Non-collectively-bargained plans. 
Except as otherwise provided in this section, part A of title XXVII of 
the PHS Act and this part applies with respect to group health plans, 
including health insurance issuers offering health insurance coverage 
in connection with group health plans, for plan years beginning after 
June 30, 1997.
    (2) Collectively bargained plans. Except as otherwise provided in 
this section (other than paragraph (a)(1)), in the case of a group 
health plan maintained under one or more collective bargaining 
agreements between employee representatives and one or more employers 
ratified before August 21, 1996, part A of title XXVII of the PHS Act 
and this part does not apply to plan years beginning before the later 
of July 1, 1997, or the date on which the last of the collective 
bargaining agreements relating to the plan terminates (determined 
without regard to any extension thereof agreed to after August 21, 
1996). For these purposes, any plan amendment made under a collective 
bargaining agreement relating to the plan, that amends the plan solely 
to conform to any requirement of such part, is not treated as a 
termination of the collective bargaining agreement.
    (3) Preexisting condition exclusion periods for current employees. 
(i) General rule. Any preexisting condition exclusion period permitted 
under Sec. 146.111 is measured from the individual's enrollment date in 
the plan. This exclusion period, as limited under Sec. 146.111, may be 
completed before the effective date of the Health Insurance Portability 
and Accountability Act of 1996 (HIPAA) for his or her plan. Therefore, 
on the date the individual's plan becomes subject to part A of title 
XXVII of the PHS Act, no preexisting condition exclusion may be imposed 
with respect to an individual beyond the limitation in Sec. 146.111. 
For an individual who has not completed the permitted exclusion period 
under HIPAA, upon the effective date for his or her plan, the 
individual may use credible coverage that the person had as of the 
enrollment date to reduce the remaining preexisting condition exclusion 
period applicable to the individual.

[[Page 16970]]

    (ii) Examples. The following examples illustrate the requirements 
of this paragraph (a)(3):

    Example 1: (i) Individual A has been working for Employer X and 
has been covered under Employer X's plan since March 1, 1997. Under 
Employer X's plan, as in effect before January 1, 1998, there is no 
coverage for any preexisting condition. Employer X's plan year 
begins on January 1, 1998. A's enrollment date in the plan is March 
1, 1997, and A has no credible coverage before this date.
    (ii) In this Example, Employer X may continue to impose the 
preexisting conditions exclusion under the plan through February 28, 
1998 (the end of the 12-month period using anniversary dates).
    Example 2: (i) Same facts as in Example 1, except that A's 
enrollment date was August 1, 1996, instead of March 1, 1997.
    (ii) In this Example, on January 1, 1998, Employer X's plan may 
no longer exclude treatment for any preexisting condition that A may 
have, however, because Employer X's plan is not subject to HIPAA 
until January 1, 1998, A is not entitled to claim reimbursement for 
expenses under the plan for treatments for any preexisting condition 
received before January 1, 1998.

    (b) Effective date for certification requirement--(1) General. 
Subject to the transitional rule in Sec. 146.115(a)(5)(iii), the 
certification rules of Sec. 146.115 apply to events occurring on or 
after July 1, 1996.
    (2) Period covered by certificate. A certificate is not required to 
reflect coverage before July 1, 1996.
    (3) No certificate before June 1, 1997. Notwithstanding any other 
provision of this part, in no case is a certificate required to be 
provided before June 1, 1997.
    (c) Limitation on actions. No enforcement action is taken, under, 
against a group health plan or health insurance issuer with respect to 
a violation of a requirement imposed by part A of title XXVII of the 
PHS Act before January 1, 1998, if the plan or issuer has sought to 
comply in good faith with such requirements. Compliance with this part 
is deemed to be good faith compliance with the requirements of part A 
of title XXVII of the PHS Act.
    (d) Transition rules for counting creditable coverage. An 
individual who seeks to establish creditable coverage for periods 
before July 1, 1996 is entitled to establish such coverage through the 
presentation of documents or other means in accordance with the 
provisions of Sec. 146.115(c). For coverage relating to an event 
occurring before July 1, 1996, a group health plan and a health 
insurance issuer is not subject to any penalty or enforcement action 
with respect to the plan's or issuer's counting (or not counting) such 
coverage if the plan or issuer has sought to comply in good faith with 
the applicable requirements under Sec. 146.115(c).
    (e) Transition rules for certification of creditable coverage--(1) 
Certificates only upon request. For events occurring on or after July 
1, 1996 but before October 1, 1996, a certificate is required to be 
provided only upon a written request by or on behalf of the individual 
to whom the certificate applies.
    (2) Certificates before June 1, 1997. For events occurring on or 
after October 1, 1996 and before June 1, 1997, a certificate must be 
furnished no later than June 1, 1997, or any later date permitted under 
Sec. 146.115(a)(2) (ii) and (iii).
    (3) Optional notice--(i) General. This paragraph (e)(3) applies 
with respect to events described in Sec. 146.115(a)(5)(ii), that occur 
on or after October 1, 1996 but before June 1, 1997. A group health 
plan or health insurance issuer offering group health coverage is 
deemed to satisfy Secs. 146.115 (a)(2) and (a)(3) if a notice is 
provided in accordance with the provisions of paragraphs (e)(3)(i) 
through (e)(3)(iv) of this section.
    (ii) Time of notice. The notice must be provided no later than June 
1, 1997.
    (iii) Form and content of notice. A notice provided under this 
paragraph (e)(3) must be in writing and must include information 
substantially similar to the information included in a model notice 
authorized by HCFA. Copies of the model notice are available at the 
following website--www.hcfa.gov (or call (410) 786-1565).
    (iv) Providing certificate after request. If an individual requests 
a certificate following receipt of the notice, the certificate must be 
provided at the time of the request as set forth in 
Sec. 146.115(a)(5)(iii).
    (v) Other certification rules apply. The rules set forth in 
Sec. 146.115(a)(4)(i) (method of delivery) and (a)(1) (entities 
required to provide a certificate) apply with respect to the provision 
of the notice.

Subpart C--[Reserved]

Subpart D--Preemption and Special Rules


Sec. 146.143  Preemption; State flexibility; construction.

    (a) Continued applicability of State law with respect to health 
insurance issuers. Subject to paragraph (b) of this section and except 
as provided in paragraph (c) of this section, part A of title XXVII of 
the PHS Act is not to be construed to supersede any provision of State 
law which establishes, implements, or continues in effect any standard 
or requirement solely relating to health insurance issuers in 
connection with group health insurance coverage except to the extent 
that such standard or requirement prevents the application of a 
requirement of part A of title XXVII of the PHS Act.
    (b) Continued preemption with respect to group health plans. 
Nothing in part A of title XXVII of the PHS Act affects or modifies the 
provisions of section 514 of ERISA with respect to group health plans.
    (c) Special rules--(1) General. Subject to paragraph (c)(2) of this 
section, the provisions of part A of title XXVII of the PHS Act 
relating to health insurance coverage offered by a health insurance 
issuer supersede any provision of State law which establishes, 
implements, or continues in effect a standard or requirement applicable 
to imposition of a preexisting condition exclusion specifically 
governed by section 2701 of the PHS Act, which differs from the 
standards or requirements specified in such section.
    (2) Exceptions. Only in relation to health insurance coverage 
offered by a health insurance issuer, the provisions of this part do 
not supersede any provision of State law to the extent that such 
provision--
    (i) Shortens the period of time from the ``6-month period'' 
described in section 2701(a)(1) of the PHS Act and 
Sec. 146.111(a)(1)(i) (for purposes of identifying a preexisting 
condition);
    (ii) Shortens the period of time from the ``12 months'' and ``18 
months'' described in section 2701(a)(2) of the PHS Act and 
Sec. 146.111(a)(1)(ii) (for purposes of applying a preexisting 
condition exclusion period);
    (iii) Provides for a greater number of days than the ``63-day 
period'' described in sections 2701 (c)(2)(A) and (d)(4)(A) of the PHS 
Act and Secs. 146.111(a)(1)(iii) and 146.113 (for purposes of applying 
the break in coverage rules);
    (iv) Provides for a greater number of days than the ``30-day 
period'' described in sections 2701 (b)(2) and (d)(1) of the PHS Act 
and Sec. 146.111(b) (for purposes of the enrollment period and 
preexisting condition exclusion periods for certain newborns and 
children that are adopted or placed for adoption);
    (v) Prohibits the imposition of any preexisting condition exclusion 
in cases not described in section 2701(d) of the PHS Act or expands the 
exceptions described in that section;
    (vi) Requires special enrollment periods in addition to those 
required under section 2701(f) of the PHS Act; or
    (vii) Reduces the maximum period permitted in an affiliation period 
under section 701(g)(1)(B).

[[Page 16971]]

    (d) Definitions--(1) State law. For purposes of this section the 
term ``State law'' includes all laws, decisions, rules, regulations, or 
other State action having the effect of law, of any State. A law of the 
United States applicable only to the District of Columbia is treated as 
a State law rather than a law of the United States.
    (2) State. For purposes of this section the term ``State'' includes 
a State, the Northern Mariana Islands, any political subdivisions of a 
State or such Islands, or any agency or instrumentality of either.


Sec. 146.145  Special rules relating to group health plans.

    (a) General exception for certain small group health plans. The 
requirements of this part do not apply to any group health plan (and 
group health insurance coverage offered in connection with a group 
health plan) for any plan year if, on the first day of the plan year, 
the plan has fewer than 2 participants who are current employees.
    (b) Excepted benefits--(1) General. The requirements of subpart B 
of this part do not apply to any group health plan (or any group health 
insurance coverage offered in connection with a group health plan) in 
relation to its provision of the benefits described in paragraph 
(b)(2), (3), (4), or (5) of this section (or any combination of these 
benefits).
    (2) Benefits excepted in all circumstances. The following benefits 
are excepted in all circumstances:
    (i) Coverage only for accident (including accidental death and 
dismemberment).
    (ii) Disability income insurance.
    (iii) Liability insurance, including general liability insurance 
and automobile liability insurance.
    (iv) Coverage issued as a supplement to liability insurance.
    (v) Workers' compensation or similar insurance.
    (vi) Automobile medical payment insurance.
    (vii) Credit-only insurance (for example, mortgage insurance).
    (viii) Coverage for on-site medical clinics.
    (3) Limited excepted benefits--(1) General. Limited-scope dental 
benefits, limited-scope vision benefits, or long-term care benefits are 
excepted if they are provided under a separate policy, certificate, or 
contract of insurance, or are otherwise not an integral part of the 
plan, as defined in paragraph (b)(3)(ii) of this section.
    (ii) Integral. For purposes of paragraph (b)(3)(i) of this section, 
benefits are deemed to be an integral part of a plan unless a 
participant has the right to elect not to receive coverage for the 
benefits and, if the participant elects to receive coverage for the 
benefits, the participant pays an additional premium or contribution 
for that coverage.
    (iii) Limited scope. Limited scope dental or vision benefits are 
dental or vision benefits that are sold under a separate policy or 
rider and that are limited in scope to a narrow range or type of 
benefits that are generally excluded from hospital/medical/surgical 
benefits packages.
    (iv) Long-term care. Long-term care benefits are benefits that are 
either--
    (A) Subject to State long-term care insurance laws;
    (B) For qualified long-term care insurance services, as defined in 
section 7702B(c)(1) of the Internal Revenue Code, or provided under a 
qualified long-term care insurance contract, as defined in section 
7702B(b) of the Internal Revenue Code; or
    (C) based on cognitive impairment or a loss of functional capacity 
that is expected to be chronic.
    (4) Noncoordinated benefits--(i) Excepted benefits that are not 
coordinated. Coverage for only a specified disease or illness (for 
example, cancer-only policies) or hospital indemnity or other fixed 
dollar indemnity insurance (for example, $100/day) is expected only if 
it meets each of the conditions specified in paragraph (b)(4)(ii) of 
this section.
    (ii) Conditions. Benefits are described in paragraph (b)(4)(i) of 
this section only if--
    (A) The benefits are provided under a separate policy, certificate, 
or contract of insurance;
    (B) 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; and
    (C) 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.
    (5) Supplemental benefits. The following benefits are excepted only 
if they are provided under a separate policy, certificate, or contract 
of insurance:
    (i) Medicare supplemental health insurance (as defined under 
section 1882(g)(1) of the Social Security Act; also known as Medigap or 
MedSupp insurance),
    (ii) Coverage supplemental to the coverage provided under Chapter 
55, Title 10 of the United States Code (also known as CHAMPUS 
supplemental programs), and
    (iii) Similar supplemental coverage provided to coverage under a 
group health plan.

Subpart E--Provisions Applicable to Only Health Insurance Issuers


Sec. 146.150  Guaranteed availability of coverage for employers in the 
small group market.

    (a) Issuance of coverage in the small group market. Subject to 
paragraphs (c) through (f) of this section, each health insurance 
issuer that offers health insurance coverage in the small group market 
in a State must--
    (1) Offer, to any small employer in the State, all products that 
are approved for sale in the small group market and that the issuer is 
actively marketing, and must accept any employer that applies for any 
of those products; and
    (2) Accept for enrollment under the coverage every eligible 
individual (as defined in paragraph (b) of this section) who applies 
for enrollment during the period in which the individual first becomes 
eligible to enroll under the terms of the group health plan, or during 
a special enrollment period, and may not impose any restriction on an 
eligible individual, which is inconsistent with the nondiscrimination 
provisions of Sec. 146.121 on an eligible individual being a 
participant or beneficiary.
    (b) Eligible individual defined. For purposes of this section, the 
term ``eligible individual'' means an individual who is eligible--
    (1) To enroll in group health insurance coverage offered to a group 
health plan maintained by a small employer, in accordance with the 
terms of the group health plan;
    (2) For coverage under the rules of the health insurance issuer 
which are uniformly applicable in the State to small employers in the 
small group market, and
    (3) For coverage in accordance with all applicable State laws 
governing the issuer and the small group market.
    (c) Special rules for network plans. (1) In the case of a health 
insurance issuer that offers health insurance coverage in the small 
group market through a network plan, the issuer may--
    (i) Limit the employers that may apply for the coverage to those 
with eligible individuals who live, work, or reside in the service area 
for the network plan; and
    (ii) Within the service area of the plan, deny coverage to 
employers if the issuer has demonstrated to the applicable State 
authority (if required by the State authority) that--

[[Page 16972]]

    (A) It will not have the capacity to deliver services adequately to 
enrollees of any additional groups because of its obligations to 
existing group contract holders and enrollees; and
    (B) It is applying this paragraph (c)(1) uniformly to all employers 
without regard to the claims experience of those employers and their 
employees (and their dependents) or any health status-related factor 
relating to those employees and dependents.
    (2) An issuer that denies health insurance coverage to an employer 
in any service area in accordance with paragraph (c)(1)(ii) of this 
section, may not offer coverage in the small group market within the 
service area to any employer for a period of 180 days after the date 
the coverage is denied. This paragraph (c)(2) does not limit the 
issuer's ability to renew coverage already in force or relieve the 
issuer of the responsibility to renew that coverage.
    (3) Coverage offered within a service area after the 180-day period 
specified in paragraph (c)(2) of this section is subject to the 
requirements of this section.
    (d) Application of financial capacity limits. (1) A health 
insurance issuer may deny health insurance coverage in the small group 
market if the issuer has demonstrated to the applicable State authority 
(if required by the State authority) that it--
    (i) Does not have the financial reserves necessary to underwrite 
additional coverage; and
    (ii) Is applying this paragraph (d)(1) uniformly to all employers 
in the small group market in the State consistent with applicable State 
law and without regard to the claims experience of those employers and 
their employees (and their dependents) or any health status-related 
factor relating to those employees and dependents.
    (2) An issuer that denies group health insurance coverage to any 
small employer in a State in accordance with paragraph (d)(1) of this 
section may not offer coverage in connection with group health plans in 
the small group market in the State for a period of 180 days after the 
later of the date--
    (i) 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 under write additional coverage.
    (3) Paragraph (d)(2) of this section does not limit the issuer's 
ability to renew coverage already in force or relieve the issuer of the 
responsibility to renew that coverage.
    (4) Coverage offered after the 180-day period specified in 
paragraph (d)(2) of this section, is subject to the requirements of 
this section.
    (5) An applicable State authority may provide for the application 
of this paragraph (d) of this section on a service-area-specific basis.
    (e) Exception to requirement for failure to meet certain minimum 
participation or contribution rules.
    (1) Paragraph (a) of this section does not preclude a health 
insurance issuer from establishing employer contribution rules or group 
participation rules for the offering of health insurance coverage in 
connection with a group health plan in the small group market, as 
allowed under applicable State law.
    (2) For purposes of paragraph (e)(1) of this section--
    (i) The term ``employer contribution rule'' means a requirement 
relating to the minimum level or amount of employer contribution toward 
the premium for enrollment of participants and beneficiaries; and
    (ii) The term ``group participation rule'' means a requirement 
relating to the minimum number of participants or beneficiaries that 
must be enrolled in relation to a specified percentage or number of 
eligible individuals or employees of an employer.
    (f) Exception for coverage offered only to bona fide association 
members. Paragraph (a) of this section does not apply to health 
insurance coverage offered by a health insurance issuer if that 
coverage is made available in the small group market only through one 
or more bona fide associations (as defined in 45 CFR 144.103).


Sec. 146.152  Guaranteed renewability of coverage for employers in the 
group market.

    (a) General rule. Subject to paragraphs (b) through (d) of this 
section, a health insurance issuer offering health insurance coverage 
in the small or large group market is required to renew or continue in 
force the coverage at the option of the plan sponsor.
    (b) Exceptions. An issuer may nonrenew or discontinue group health 
insurance coverage offered in the small or large group market based 
only on one or more of the following:
    (1) Nonpayment of premiums. The plan sponsor as failed to pay 
premiums or contributions in accordance with the terms of the health 
insurance coverage, including any timeliness requirements.
    (2) Fraud. The plan sponsor has performed an act or practice that 
constitutes fraud or made an intentional misrepresentation of material 
fact in connection with the coverage.
    (3) Violation of participation or contribution rules. The plan 
sponsor has failed to comply with a material plan provision relating to 
any employer contribution or group participation rules permitted under 
Sec. 146.150(e) in the case of the small group market or under 
applicable State law in the case of the large group market.
    (4) Termination of plan. The issuer is ceasing to offer coverage in 
the market in accordance with paragraphs (c) and (d) of this section 
and applicable State law.
    (5) Enrollees' movement outside service area. For network plans, 
there is no longer any enrollee under the group health plan who lives, 
resides, or works in the service area of the issuer (or in the area for 
which the issuer is authorized to do business); and in the case of the 
small group market, the issuer applies the same criteria it would apply 
in denying enrollment in the plan under Sec. 146.150(c).
    (6) Association membership ceases. For coverage made available in 
the small or large group market only through one or more bona fide 
associations, if the employer's membership in the association ceases, 
but only if the coverage is terminated uniformly without regard to any 
health status-related factor relating to any covered individual.
    (c) Discontinuing a particular product. In any case in which an 
issuer decides to discontinue offering a particular product offered in 
the small or large group market, that product may be discontinued by 
the issuer in accordance with applicable State law in the particular 
market only if--
    (1) The issuer provides notice in writing to each plan sponsor 
provided that particular product in that market (and to all 
participants and beneficiaries covered under such coverage) of the 
discontinuation at least 90 days before the date the coverage will be 
discontinued;
    (2) The issuer offers to each plan sponsor provided that particular 
product the option, on a guaranteed issue basis, to purchase all (or, 
in the case of the large group market, any) other health insurance 
coverage currently being offered by the issuer to a group health plan 
in that market; and
    (3) In exercising the option to discontinue that product and in 
offering the option of coverage under paragraph (c)(2) of this section, 
the issuer acts uniformly without regard to the claims experience of 
those sponsors or any health status-related factor relating to any 
participants or beneficiaries covered or new participants or 
beneficiaries who may become eligible for such coverage.

[[Page 16973]]

    (d) Discontinuing all coverage. An issuer may elect to discontinue 
offering all health insurance coverage in the small or large group 
market or both markets in a State in accordance with applicable State 
law only if--
    (1) The issuer provides notice in writing to the applicable State 
authority and to each plan sponsor (and all participants and 
beneficiaries covered under the coverage) of the discontinuation at 
least 180 days prior to the date the coverage will be discontinued; and
    (2) All health insurance policies issued or delivered for issuance 
in the State in the market (or markets) are discontinued and not 
renewed.
    (e) Prohibition on market reentry. An issuer who elects to 
discontinue offering all health insurance coverage in a market (or 
markets) in a State as described in paragraph (d) of this section may 
not issue coverage in the market (or markets) and State involved during 
the 5-year period beginning on the date of discontinuation of the last 
coverage not renewed.
    (f) Exception for uniform modification of coverage. Only at the 
time of coverage renewal may issuers modify the health insurance 
coverage for a product offered to a group health plan in the--
    (1) Large group market; and
    (2) Small group market if, for coverage available in this market 
(other than only through one or more bona fide associations), the 
modification is consistent with State law and is effective uniformly 
among group health plans with that product.
    (g) 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 small or large group market to employers 
only through one or more associations, the reference to ``plan 
sponsor'' is deemed, with respect to coverage provided to an employer 
member of the association, to include a reference to such employer.


Sec. 146.160  Disclosure of information.

    (a) General rule. In connection with the offering of any health 
insurance coverage to a small employer, a health insurance issuer is 
required to--
    (1) Make a reasonable disclosure to the employer, as part of its 
solicitation and sales materials, of the availability of information 
described in paragraph (b) of this section; and
    (2) Upon request of the employer, provide that information to the 
employer.
    (b) Information described. Subject to paragraph (d) of this 
section, information that must be provided under paragraph (a)(2) of 
this section is information concerning the following:
    (1) Provisions of coverage relating to the following:
    (i) The issuer's right to change premium rates and the factors that 
may affect changes in premium rates.
    (ii) Renewability of coverage.
    (iii) Any preexisting condition exclusion, including use of the 
alternative method of counting creditable coverage.
    (iv) Any affiliation periods applied by HMOs.
    (v) The geographic areas served by HMOs.
    (2) The benefits and premiums available under all health insurance 
coverage for which the employer is qualified, under applicable State 
law. See Sec. 146.150(b) through (f) for allowable limitations on 
product availability.
    (c) Form of information. The information must be described in 
language that is understandable by the average small employer, with a 
level of detail that is sufficient to reasonably inform small employers 
of their rights and obligations under the health insurance coverage. 
This requirement is satisfied if the issuer provides each of the 
following with respect to each product offered:
    (1) An outline of coverage. For purposes of this section, outline 
of coverage means a description of benefits in summary form.
    (2) The rate or rating schedule that applies to the product (with 
and without the preexisting condition exclusion or affiliation period).
    (3) The minimum employer contribution and group participation rules 
that apply to any particular type of coverage.
    (4) In the case of a network plan, a map or listing of counties 
served.
    (5) Any other information required by the State.
    (d) Exception. An issuer is not required to disclose any 
information that is proprietary and trade secret information under 
applicable law.

Subpart F--Exclusion of Plans and Enforcement


Sec. 146.180  Treatment on non-Federal governmental plans.

    The plan sponsor of a non-Federal governmental plan may elect to be 
exempted from any or all of the requirements identified in paragraph 
(a) of this section with respect to any portion of its plan that is not 
provided through health insurance coverage, if the election complies 
with the requirements of paragraphs (b) and (c) of this section. The 
election remains in effect for the period described in paragraph (d) of 
this section.
    (a) Exemption from requirements. The election described in this 
paragraph (a) exempts a non-Federal governmental plan from the 
following requirements:
    (1) Limitations on preexisting condition exclusion periods 
(Sec. 146.111).
    (2) Special enrollment periods for individuals (and dependents) 
losing other coverage (Sec. 146.117).
    (3) Prohibitions against discriminating against individual 
participants and beneficiaries based on health status (Sec. 146.121).
    (4) Standards relating to benefits for mothers and newborns 
(section 2704 of the PHS Act).
    (5) Parity in the application of certain limits to mental health 
benefits (section 2705 of the PHS Act).
    (b) Form and manner of election. (1) The election must be in 
writing.
    (2) The election document must include as an attachment a copy of 
the notice described in paragraphs (f) and (g) of this section.
    (3) The election document must state the name of the plan and the 
name and address of the plan administrator.
    (4) The election document must either state that the plan does not 
include health insurance coverage, or identify which portion of the 
plan is not funded through insurance.
    (5) The election must be made in conformity with all the plan 
sponsor's rules, including any public hearing, if required, and the 
election document must certify that the person signing the election 
document, including if applicable a third party plan administrator, is 
legally authorized to do so by the plan sponsor.
    (6) The election document must be signed by the person described in 
paragraph (b)(5) of this section.
    (c) Timing of election. (1) For plans not subject to collective 
bargaining agreements, the election must be received by HCFA by the day 
preceding the beginning date of the plan year.
    (2) For plans provided under a collective bargaining agreement, the 
election must be received by HCFA no later than 30 days after--
    (i) The date of the agreement between the governmental entity and 
union officials; or
    (ii) If applicable, ratification of the agreement.
    (3) HCFA may extend the deadlines specified under paragraphs (c)(1) 
and (c)(2) of this section for good cause.
    (4) If the plan sponsor fails to file a timely election in 
accordance with paragraphs (c)(1) through (c)(3) of this section, the 
plan is subject to the

[[Page 16974]]

requirements described in paragraph (a) for the entire plan year, or, 
in the case of a plan provided under a collective bargaining agreement, 
for the term of the agreement.
    (d) Period of election. An election under paragraph (a) of this 
section applies--
    (1) For a single specified plan year; or
    (2) In the case of a plan provided under a collective bargaining 
agreement, for the term of the agreement. (For purposes of this 
section, if a collective bargaining agreement expires during the 
bargaining process for a new agreement, and the parties agree that the 
prior bargaining agreement continues in effect until the new agreement 
takes effect, the ``term of the agreement'' is deemed to continue until 
the new agreement takes effect.)
    (e) Subsequent elections. An election under this section may be 
extended through subsequent elections.
    (f) Notice to participants. (1) A plan that makes the election 
described in this section notifies the participant of the election, and 
explains the consequences of the election. This notice must be 
provided--
    (i) to each participant at the time of enrollment under the plan; 
and
    (ii) To all participants on an annual basis.
    (2) The notice shall be in writing, and must include the 
information specified in paragraph (g) of this section.
    (3) The notice shall be provided to each participant individually.
    (4) Subject to paragraph (g) of this section, the requirements of 
paragraphs (f)(1) through (f)(3) of this section are considered to have 
been met if the notice is prominently printed in the summary plan 
document, or equivalent document, and each participant receives a copy 
of that document at the time of enrollment and annually thereafter.
    (g) Notice content. The notice must contain at least the following 
information:
    (1) A statement that, in general, Federal law imposes upon group 
health plans the requirements described in paragraph (a) of this 
section (which must be individually described in the notice).
    (2) A statement that Federal law gives the plan sponsor of a non-
Federal governmental plan the right to exempt the plan in whole or in 
part from the requirements described in paragraph (a) of this section, 
and that the plan sponsor has elected to do so.
    (3) A statement identifying which parts of the plan are subject to 
the election, and each of the requirements of paragraph (a) of this 
section from which the plan sponsor has elected to be exempted.
    (4) If the plan chooses to provide any of the protections of 
paragraph (a) of this section voluntarily, or is required to under 
State law, a statement identifying which protections apply.
    (h) Certification and disclosure of creditable coverage. 
Notwithstanding an election under this section, a non-Federal 
governmental plan must provide for certification and disclosure of 
creditable coverage under the plan with respect to participants and 
their dependents in accordance with Sec. 146.115.
    (i) Effect of failure to comply with election requirements. (1) 
Subject to paragraph (i)(2) of this section, a plan's failure to comply 
with the requirements of paragraphs (f) through (h) of this section 
invalidates an election made under this section.
    (2) Upon a finding by HCFA that a non-Federal governmental plan has 
failed to comply with the requirements of paragraphs (f) through (h), 
and has failed to correct the noncompliance within 30 days (as provided 
in Sec. 146.184(d) (7)(iii)(B)), HCFA notifies the plan that its 
election has been invalidated and that it is subject to the 
requirements of this part.
    (3) A non-Federal governmental plan described in paragraph (i)(2) 
of this section that fails to comply with the requirements of this part 
is subject to Federal enforcement by HCFA under Sec. 146.184, including 
appropriate civil money penalties.


Sec. 146.184  Enforcement.

    (a) Enforcement with respect to group health plans--(1) Scope. In 
general, the requirements of the Health Insurance Portability and 
Accountability Act that apply to group health plans are contained in 
part 7 of subtitle B of title I of ERISA, and in subtitle K of the 
Internal Revenue Code. They are enforced by the Secretary of Labor 
under part 5 of subtitle B of title I of ERISA, and the Secretary of 
the Treasury under 26 U.S.C. 4980D. However, the provisions that apply 
to group health plans that are non-Federal governmental plans are 
contained in title XXVII of the PHS Act, and enforced by HCFA. The 
provisions of title XXVII that apply to health insurance issuers that 
offer coverage in connection with any group health plan are enforced in 
the first instance by the States. If HCFA determines under paragraph 
(b) of this section that a State is not substantially enforcing the 
provisions, HCFA enforces them under paragraph (d) of this section.
    (2) Non-Federal governmental plans. Requirements of this part that 
apply to group health plans that are non-Federal governmental plans 
(sponsored by a State or local governmental entity) are enforced by 
HCFA, as provided in paragraph (d) of this section.
    (b) Enforcement with respect to health insurance issuers--(1) 
General rule--enforcement by State. Except as provided in paragraph 
(b)(2) 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 small or large group markets 
in the State.
    (2) Enforcement by HCFA. HCFA enforces the provisions of this part 
with respect to health insurance issuers, using the procedures 
described in paragraph (d) of this section, only in the following 
circumstances:
    (i) State election. If the State chooses not to enforce the Federal 
requirements.
    (ii) State failure to enforce. If HCFA makes a determination under 
paragraph (c) of this section that a State has failed to substantially 
enforce one or more provisions of this part.
    (c) Determination by Administrator. if HCFA receives information, 
through a complaint or any other means, that raises a question whether 
a State is substantially enforcing one or more provisions of this part, 
HCFA follows the procedures set forth in this section.
    (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 whether there has been a failure to substantially 
enforce, HCFA provides notice as specified 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) The official responsible for regulating HMOs, if different 
than paragraph (c)(2)(ii) of this section, but only if the alleged 
failure involves HMOs.
    (3) Form and content of notice. The notice described in paragraph 
(c)(2) is in writing, and does the following:
    (i) Identifies the provision or provisions of the statute and 
regulations that have allegedly been violated;
    (ii) Describes the facts of the specific violations.

[[Page 16975]]

    (iii) Explains that the consequence of a failure to substantially 
enforce any provisions(s) is that HCFA enforces the provision(s) in 
accordance with paragraph (d) of this section.
    (iv) Advises the State that it has 45 days to respond to the 
notice, unless the time is extended as described in paragraph (c)(3) 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) Good cause. The time for responding can be extended for good 
cause. 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, 
and any extension, the State has not established to HCFA's satisfaction 
that it is substantially enforcing the provision or provisions 
described in the notice, 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 provisions, 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 under paragraph (c)(5) of this section, HCFA 
finds that the failure to enforce has not been corrected, HCFA sends 
the State a written notice of that final determination. The notice--
    (i) Identifies the provisions with respect to which HCFA is taking 
over enforcement;
    (ii) States the effective date of HCFA's enforcement;
    (iii) Informs the State of the mechanism for establishing in the 
future that it has corrected the failure, and has begun enforcement. 
This mechanism will include transition procedures for ending HCFA's 
enforcement.
    (d) Civil money penalties--(1) General rule. If any health 
insurance issuer that is subject to HCFA's enforcement authority under 
paragraph (b)(2) of this section, or any non-Federal governmental plan 
(or employer that sponsors a non-Federal governmental plan) that is 
subject to HCFA's enforcement authority under paragraph (a)(2) of this 
section, fails to comply with any applicable requirement of this part, 
if may be subject to a civil money penalty as described in this 
paragraph (d).
    (2) 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 
any failure described in paragraph (d)(1) of this section, may file a 
complaint with HCFA. Based on the complaint, HCFA identifies which 
entities are potentially responsible for the violation, in accordance 
with paragraph (d)(3) of this section.
    (3) Determination of responsible entity. If a failure to comply is 
established under this section, the responsible entity, as determined 
under this paragraph, is liable for the penalty. If the violation is 
due to a failure by--
    (i) A health insurance issuer, the issuer is the responsible 
entity;
    (ii) A group health plan that is a non-Federal governmental plan 
sponsored by a single employer, the employer is the responsible entity;
    (iii) A group health plan that is a non-Federal governmental plan 
sponsored by two or more employers, the plan is the responsible entity.
    (4) Notice to responsible entities. HCFA provides notice to the 
appropriate entity or entities identified under paragraph (d)(3) of 
this section that a complaint or other information has been received 
alleging a violation of this part. The notice--
    (i) Describes the substance of any complaint or other allegation;
    (ii) Provides 30 days for the responsible entity or entities to 
respond with additional information. This can include--
    (A) Information refuting that there has been a violation;
    (B) Evidence that the entity did not know, and exercising due 
diligence could not have known, of the violation;
    (C) Evidence of a previous record of compliance.
    (5) Notice to other regulators. HCFA notifies the State if the 
alleged violation involves a health insurance issuer under its 
jurisdiction.
    (6) Notice of assessment. If, based on the information provided in 
the complaint, as well as any information submitted by the entity or 
any other parties, HCFA proposes to assess a civil money penalty, HCFA 
sends written notice of assessment to the responsible entity or 
entities by certified mail, return receipt requested. The notice 
contains the following information:
    (i) A reference to the provision that was violated.
    (ii) The name or names of the individuals with respect to whom a 
violation occurred, with relevant identification numbers.
    (iii) The facts that support the finding of a violation, and the 
initial date of the violation.
    (iv) The amount of the proposed penalty as of the date of the 
notice.
    (v) The basis for calculating the penalty, including consideration 
of prior compliance.
    (vi) Instructions for responding to the notice, including--
    (A) A specific statement of the respondent's right to a hearing; 
and
    (B) A statement that failure to request a hearing within 30 days 
permits the imposition of the proposed penalty, without right of 
appeal.
    (7) Amount of penalty--(i) Maximum daily penalty. The penalty 
cannot exceed $100 for each day, for each responsible entity, for each 
individual with respect to whom such a failure occurs.
    (ii) Standard for calculating daily penalty. In calculating the 
amount of the penalty HCFA takes into account the responsible entity's 
previous record of compliance and the gravity of the violation.
    (iii) Limitations on penalties. No civil money penalty is imposed:
    (A) With respect to a period during which a failure existed, but 
none of the responsible entities knew, or exercising reasonable 
diligence would have known, that the failure existed.
    (B) With respect to the period occurring immediately after the 
period described in paragraph (d)(7)(iii)(A) of this section, if the 
failure--
    (1) Was due to reasonable cause and was not due to willful neglect; 
and
    (2) Was corrected within 30 days of the first day that any of the 
entities against whom the penalty would be imposed knew, or exercising 
reasonable diligence would have known, that the failure existed.
    (C) The burden is on the responsible entity or entities to 
establish to the satisfaction of HCFA that none of the entities knew, 
or exercising reasonable diligence could have known that the failure 
existed.
    (8) Hearings--(i) Right to a hearing. Any entity 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 the 
notice of assessment is issued.
    (ii) Failure to request a hearing. If no hearing is requested under 
this paragraph, the notice of assessment constitutes a final order that 
is not subject to appeal.
    (iii) Parties to the hearing. Parties to the hearing include any 
responsible entities, as well as the party who filed the complaint. An 
informational notice

[[Page 16976]]

is also sent to the State, or to the Secretaries of Labor and the 
Treasury, as appropriate.
    (iv) Initial agency decision. The initial agency decision is made 
by an administrative law judge. The decision is made on the record 
according to section 554 of title 5, United States Code. The decision 
becomes a final, appealable order after 30 days, unless it is modified 
in accordance with paragraph (d)(8)(v) of this section.
    (v) 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 of the 
administrative law judge.
    (9) Judicial review--(i) Filing of action for review. Any entity 
against whom a final order imposing a civil money penalty is entered in 
accordance with paragraph (d)(8) of this section 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--
    (A) Filing a notice of appeal in that court within 30 days from the 
date of a final order; and
    (B) Simultaneously sending a copy of the notice of appeal by 
registered mail to HCFA.
    (ii) Certification of administrative record. HCFA will promptly 
certify and file with the court the record upon which the penalty was 
imposed.
    (iii) 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.
    (iv) Appeal. Any final decision, order or judgement of the district 
court concerning the Administrator's review is subject to appeal as 
provided in Chapter 83 of Title 28, United States Code.
    (10) Failure to pay assessment, maintenance of action--(i) Failure 
to pay assessment. If any entity fails to pay an assessment after it 
becomes a final order under paragraphs (d)(7)(i)(A) or (d)(7)(iii) of 
this section, or after the court has entered final judgment in favor of 
HCFA, HCFA refers the matter to the Attorney General, who brings an 
action in the appropriate United States district court to recover the 
amount assessed.
    (ii) Final order not subject to review. In an action brought under 
paragraph (d)(10)(i) of this section, the validity and appropriateness 
of the final order described in paragraphs (d)(7)(i)(A) or (d)(7)(iii) 
of this section is not subject to review.
    (11) Use of penalty funds. (i) Any funds collected under this 
section will be paid to HCFA or other office imposing the penalty.
    (ii) The funds will be available without appropriation and until 
expended.
    (iii) The funds may only be used for the purpose of enforcing the 
provisions with respect to which the penalty was imposed.

PARTS 147--199 [RESERVED]

    Authority: Secs. 2701 through 2723, 2791, and 2792 of the PHS 
Act, 42 U.S.C. 300gg-41 through 300gg-63, 300gg-91, and 300gg-92.

    Dated: March 25, 1997.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.

    Dated: March 25, 1997.
Donna E. Shalala,
Secretary.
[FR Doc. 97-8275 Filed 4-1-97; 12:42 pm]
BILLING CODE 4120-01-M; 4830-01-M; 4510-29-M