[Federal Register Volume 61, Number 106 (Friday, May 31, 1996)]
[Rules and Regulations]
[Pages 27282-27288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13629]



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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 417

[OMC-004-F]
RIN 0938-AE64


Health Maintenance Organizations: Employer Contribution to HMOs

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

ACTION: Final rule.

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SUMMARY: This rule amends Sec. 417.157 of the HCFA regulations, which 
pertains to employer contributions to health maintenance organizations 
(HMOs) that are included among the alternatives in health benefits 
plans that an employer offers to its employees.
    These amendments are necessary to conform that section to changes 
made in section 1310(c) of the Public Health Service Act by section 
7(a)(2) of the HMO Amendments of 1988.
    The intent is to ensure that employees who choose the HMO 
alternative are not financially disadvantaged.

DATES: Effective Date: These regulations are effective on July 1, 1996.

FOR FURTHER INFORMATION, CONTACT: Marty Abeln, (410) 786-1032.

SUPPLEMENTARY INFORMATION:

I. Background

    Under section 1310 of the Public Health Service (PHS) Act, the 
following rules apply:
    <bullet> Certain public and private employers that offer health 
benefits plans to their employees must include the option of enrollment 
in qualified health maintenance organizations (HMOs) if such HMOs 
request inclusion and their requests meet specified conditions as to 
content and timing (this is known as the ``employer mandate'' 
provision);
    <bullet> The procedures for offering the HMO option must take into 
account the rules of collective bargaining; and
    <bullet> No employer is required to contribute more for health 
benefits than would be required by any prevailing collective bargaining 
agreement or any other legally enforceable contract between the 
employer and the employees for health benefits.
    These provisions are implemented by subpart E of part 417 of the 
HCFA rules. Section 417.157 of those rules provides that--
    <bullet> The employer or designee must include the HMO option in 
the offering on terms no less favorable, with respect

[[Page 27283]]

to the employer's monetary contribution or designee's cost than the 
terms on which the other alternatives are included; and
    <bullet> An employer's contribution must be equal, in dollar 
amount, to the largest contribution made by that employer, on behalf of 
a particular employee, to a non-HMO alternative included in the plan 
offering.

II. Statutory Amendment

    Under amendments made to section 1310 of the Public Health Service 
Act by section 7 of Public Law 100-517--
    <bullet> If an employer offers a health benefits plan to its 
employees and includes an HMO as required by the mandate provisions 
discussed above, any employer contribution under the plan must ``not 
financially discriminate'' against an employee who enrolls in the HMO;
    <bullet> The employer's contribution does not discriminate if the 
``method of determining the contribution on behalf of all employees is 
reasonable and is designed to assure employees a fair choice among 
health benefits plans''.
    <bullet> The ``employer mandate'' provision expires on October 24, 
1995, and employers that voluntarily include HMOs after that date must 
meet the nondiscrimination standard for their contributions.
    The legislative history of this provision makes clear that, while 
the Congress agreed that our current ``dollar for dollar'' test was 
consistent with previous law, the Congress now intends to give 
employers greater flexibility.
    The committee reports accompanying Public Law 100-517 provided 
examples of some methods of contribution that would meet the 
legislative requirement. (See, for example, the report of the Senate 
Committee on Labor and Human Resource, Sen. Rep. No 304, 100th Cong., 
2nd Sess., 9-11 (1988).) We incorporated those examples in the proposed 
rule at Sec. 417.157(a)(4). We indicated that, if an employer followed 
one of those methods, we would not consider the contributions to be 
financially discriminatory.
    Method 1: The employer may contribute to the HMO the same amount it 
contributes to the non-HMO alternative. For example, an employer that 
contributes $80 per month on behalf of each employee who joins an 
indemnity plan and pays the same amount on behalf of each employee who 
joins the HMO would not be discriminating.
    Method 2: An employer's contributions may vary for different 
classes of enrollees established on the basis of attributes, such as 
age, sex, or family status, that are reasonable predictors of 
utilization, experience, costs, or risk. For each enrollee in a given 
class, the employer would contribute an equal dollar amount, regardless 
of the plan that an employee chooses. To illustrate, one such class 
might be single males under the age of 30. If the employer's cost for 
the class of single males under age 30 in an indemnity or self-
insurance plan is $60, and the employer's contribution for HMO 
enrollment for each employee in that particular class were $60, there 
would be no discrimination. The employer would follow this methodology 
for each of the other classes. By calculating the contribution for HMO 
enrollment for each class in this way, the employer would determine its 
total payment on behalf of all employees enrolling in the HMO.
    Method 3: If the employer's policy is that all employees contribute 
to their health benefits plan, an employer may require employees to 
make a reasonable minimum contribution to an HMO. We would consider an 
employee contribution that did not exceed 50 percent of the employee 
contribution to the principal non-HMO alternative to be reasonable in 
such a situation. To illustrate, assume that the HMO's premium is $80, 
the alternative plan's premium is $100, and the employer contributes 
$80 on behalf of each employee who participates in the alternative 
plan. In such a case, employees who join the HMO would have no out-of-
pocket costs while employees who remain with the alternative plan would 
contribute $20. If the employer had a policy requiring a minimum 
employee contribution for health benefits, we would consider it 
reasonable for the employer to require employees who enroll in the 
lower cost plan, in this example the HMO, to pay an amount not in 
excess of $10, which is 50 percent of the employee contribution to the 
non-HMO alternative.
    Method 4: An employer's contribution may be the same percentage of 
the premium of each alternative the employer offers. For example, if 
the employer pays 90 percent of the premium of each non-HMO alternative 
offered, we would find no discrimination if the employer pays 90 
percent of the HMO premium.
    Method 5: Employers and HMOs may negotiate contribution 
arrangements that are mutually acceptable. In negotiating those 
arrangements with a Federally qualified HMO, an employer may not insist 
on terms that would cause the HMO to violate any of the requirements 
for being a qualified HMO, as set forth in subparts B and C of part 417 
of the HCFA rules. Any negotiated arrangements must meet the basic 
criteria for nondiscrimination against employees who enroll in HMOs.
    Although the major thrust of the statutory amendment is to provide 
greater flexibility to the employer while ensuring fair choice for 
employees, two of the committee reports (discussed below in the 
response to comment #6) specify that HMOs are also protected from 
``discriminatory and unfair contribution practices''.

III. Proposed Rule

    On July 5, 1991, at 56 FR 30723, we published a proposed rule that 
would amend Sec. 417.157 to implement the statutory change discussed 
above, primarily by incorporating the examples.
    Also included were proposed minor amendments to those portions of 
Sec. 417.107 that pertained to quality assurance and to certification 
of institutional providers, and the removal of an outdated requirement. 
No comments were received on this part of the NPRM. While this final 
rule was under development, the document identified as OCC-015-FC 
(published on July 15, 1993 at 58 FR 38062) made the proposed changes. 
It removed obsolete paragraph (f), redesignated paragraph (h) as 
paragraph (a) of Sec. 417.106, and redesignated paragraph (i) as 
paragraph (h) of Sec. 417.124.

IV. Discussion of Comments on the Proposed Rule

    We received seven letters of comment; three from HMOs, two from 
industry associations, and one each from a law firm and a consultant. 
Their comments and our responses to them are discussed under several 
subject areas.

A. ``Contribution by Class'' Method

    This is the second of the five examples listed in the proposed 
rule. Under this method, employers may contribute different amounts for 
different classes of employees classes based on factors such as age, 
sex, and family status.
    1. Comment: One commenter noted that this appeared to allow 
differential employer contributions for male and female employees which 
would presumably result in different out-of-pocket costs for male and 
female employees. The commenter thought this would be illegal 
discrimination as it would violate title VII of the 1964 Civil Rights 
Act. In addition, the commenter questioned whether an age-based 
classification would violate HCFA regulations that require that 
employees

[[Page 27284]]

and spouses over age 65 be provided health coverage on the same terms 
as coverage for younger employees.
    1. Response: This comment has brought to our attention that 
``Method 2'', which was taken directly from the legislative history, is 
misleading. First, the example assumes that the employer would have 
differential costs by age and sex in its contributions towards 
indemnity plans, which would be reflected in its payment to HMOs. 
However, we understand that health insurers that contract with employer 
groups do not vary rates between men and women, or according to age, 
but rather develop composite rates similar to the HMO community rates, 
i.e.,distinguishing only between individuals and families. This, as a 
practical matter, makes the example in ``Method 2'' inaccurate. We are 
revising the regulation text accordingly.
    However, we note that gender-based distinctions under an employee 
benefit plan would likely violate title VII of the Civil Rights Act of 
1964, as interpreted by the Supreme Court. That statute is under the 
jurisdiction of the Equal Employment Opportunity Commission (EEOC), and 
beyond the scope of this regulation. Any questions as to whether a 
particular fact situation would or would not violate title VII should 
be directed to the EEOC.
    We also note that the HCFA regulations cited by the commenter do 
not impose a general prohibition against age-based distinctions, but 
apply only to distinctions based on attainment of age 65. This 
implements explicit statutory language.
    2. Comment: Two commenters were concerned that some employers may 
wish to use prior year data on attributes that may not be reasonable 
predictors of utilization, experience, costs, or risk. In order to 
prevent confusion on this issue, one commenter proposed adding the word 
``demographic'' to the example, to read:

    An employer's contributions may reflect the demographic 
composition of enrollees according to attributes such as age, sex 
and family status* * *

    2. Response: We do not believe that the Congress intended to limit 
to ``demographic factors'' the ``attributes'' employers may use in 
determining their contribution amount. The supporting committee reports 
suggest a broader concern: that employers be able to determine their 
contribution using a method that reflects the HMO's actual costs, so 
that the employers realize cost savings if their employees use fewer or 
less costly services. We believe that the critical language is the 
requirement that the attributes must be such as can reasonably be 
expected to predict utilization, experience, costs, and risks. Age, 
sex, and family status are given only as examples. In summary, if an 
employer can establish that a nondemographic attribute can reasonably 
be considered a predictor of those factors, it is acceptable. On the 
other hand, if an HMO can show that a particular health status factor 
cannot reasonably be considered to be a predictor, it is not 
acceptable. We do not believe it is necessary or appropriate for the 
regulations to elaborate further on the standard.
    3. Comment: One commenter had additional questions about the 
application of nondemographic factors. He expressed concern about the 
validity and potential for abuse of employers' revising their HMO 
contribution amount on the basis of studies of health costs incurred by 
persons who switched from the employer's self-insured plan to an HMO, 
or on national data showing that HMOs receive favorable selection.
    The commenter requested that HCFA provide more information about 
how prior use data may appropriately be used to predict future health 
care costs and thus be a legitimate factor in developing employer 
contributions by class. The commenter concluded by proposing that 
HCFA--
    a. Establish guidelines as to the circumstances under which 
employers may make contribution decisions using data on prior 
utilization of employees who switch to an HMO, and require 
justification for such use;
    b. Require employers to obtain prior HCFA approval for any method 
not allowed under the guidelines; and
    c. Specify the minimum number of employees for whom data must be 
obtained, for the data to be considered statistically valid.
    3. Response: As previously discussed, under the contribution by 
class method, any employee attribute used in an employer's contribution 
methodology must be one that can reasonably be expected to predict the 
health care utilization, experience, costs, or risk of those employees 
who are enrolling in the HMO. Health status attributes such as previous 
health care utilization and costs are generally accepted as predictors 
of future health care costs and are acceptable for employers to use in 
determining their contribution to an HMO.
    The legislation requires that the employer's method for calculating 
the contribution be ``reasonable'' and ensure employees a ``fair 
choice'' among the plans offered. We believe that in order to meet the 
standard of being reasonable and ensuring employees a fair choice, the 
method of determining the employer's contribution must reflect a 
reasonable estimate of the cost of providing health care services for 
the actual enrollees of a particular HMO.
    We also believe that the intent of the legislation is to provide 
employers with flexibility in determining their contribution 
methodology, as long as it meets the ``reasonable'' and ``fair choice'' 
standards. Therefore, we will not specify a minimum number of employees 
to be used in the calculations. Although we do not require prior 
approval, we do require the employer to make available to HCFA, upon 
request, information on how it calculates its contribution. If the HMO 
or the employees believe that the contribution does not meet the 
``reasonable'' and ``fair choice'' standards, they may request that 
HCFA review the methodology.
    4. Comment: Two commenters requested that HCFA provide guidance on 
possible exceptions to the principle that the ``contribution by class'' 
method should reflect the actual enrollment of each HMO.
    The first commenter noted that it is not unusual for an employer to 
offer one or more indemnity plans and several HMOs to achieve HMO 
coverage over a broad enough area or for other reasons. In such cases, 
the commenter noted, it would be desirable for the employer to 
establish a single HMO contribution rate, even though the different 
HMOs may in fact charge different rates. To avoid compelling the 
employer to find a separate contribution for each HMO, the final 
regulations should treat the HMO contribution as acceptable if it meets 
the required standard with respect to any of the HMOs or with respect 
to the average of the HMO charges.
    The second commenter was concerned that an employer might take the 
demographic data from all the HMOs it offered and come up with a single 
``composite'' contribution amount for all of them. This commenter 
believed that a single ``composite'' contribution should not be allowed 
because the employer had not developed it on the basis of the expected 
demographic characteristics of the mandating HMO. The commenter noted 
that if the employer combines the demographic data of the mandating HMO 
with the data of another HMO or other health benefits plans it offers 
its employees, the employer would not be making an equal dollar 
contribution for each employee in a particular class.
    4. Response: The basic rule is that the methodology must be 
reasonable and

[[Page 27285]]

must offer employees a fair choice among health benefit plans. As noted 
above, we take the position that it must reflect the actual attributes 
of each HMO's enrollment. It seems unlikely, for example, that an 
employer with employees in widely dispersed geographic areas, or in 
rural as well as urban areas could establish a ``composite'' 
contribution that would meet the standard. However, if an employer can 
show that in its particular situation, a composite amount would meet 
the standard, it could be acceptable. For example, all of the HMOs 
might be shown to serve the same general geographic area and attract 
the same type of enrollee. Absent such a showing, it would not be 
sufficient to meet the standard for a single HMO without considering 
the others.
    We note that the second commenter objected to a composite 
contribution amount on the grounds that the employer would not be 
making an equal dollar contribution for all members of a particular 
class. Although the ``contribution by class'' method requires equal 
dollar amounts within each class, there could be other similar 
approaches that do not use equal dollar amounts but still meet the 
standard of reasonableness and fair choice.

B. Minimum Employee Contribution Method

    5. Comment: One commenter suggested that example (iii), which 
states that the employer may require employees to contribute to the HMO 
an amount that does not exceed 50 percent of the employee contribution 
to the principal non-HMO alternative, include two additional 
limitations:
    a. The minimum contribution requirement can be invoked only if an 
employee would otherwise have to pay little or nothing for the HMO 
plan.
    b. The employee contribution may not exceed $20 per month.
    5. Response: We agree with the commenter that the ``minimum 
employee contribution'' approach can be used only if the HMO coverage 
would otherwise be available at nominal or no cost. This is 
specifically stated in the legislative history and was implicit in the 
proposed rule. We are making it explicit in the final rule. However, we 
will not establish a $20 maximum because the Congress, in stating that 
it would be reasonable to set the limit for the required contribution 
at 50 percent of the contribution to the non-HMO alternative, 
established that amount as the maximum.

C. Miscellaneous Aspects

    6. Comment: One commenter was concerned that the intent of the 
Congress that contribution arrangements not discriminate against the 
HMO is not evident in the regulation. The committee report language is 
essential to an understanding of the legislative intent. There should 
be a statement in the final regulation or preamble to the effect that 
it is not the intent of the law to allow practices that would be unfair 
or discriminatory to the HMO, and that such practices will not be 
permitted.
    The commenter also suggested that the purpose of the HMO provisions 
and the examples set forth in the committee reports could provide a 
basis for HCFA to establish strict criteria for evaluating any method 
that results in the employer's paying less on behalf of an employee who 
enrolls in an HMO than on behalf of an employee who enrolls in a non-
HMO alternative. The commenter urged that exceptions be narrowly 
construed and allowed only for compelling reasons. Otherwise, the 
underlying purpose for enactment of section 1310 of the PHS Act would 
be circumvented. The commenter recommended that we adopt the following 
factors as the basis for determining whether an employer contribution 
is reasonable and offers a fair choice:
    <bullet> The method proposed by the employer must be consistent 
with the purposes of encouraging the effective and efficient delivery 
of health care services and reducing health care costs.
    <bullet> Financial discrimination against employees who enroll in 
an HMO must be minimal and only to the extent necessary to accomplish 
the purposes.
    Another commenter asked if a contribution method in which the 
employer contributed the difference between the employee contribution 
and the health plans' premiums resulting in employees having an equal 
expense whether they choose an HMO or a more expensive indemnity plan, 
would be prohibited by these proposed rules. The commenter stated that 
such a practice clearly discriminates in favor of the more expensive 
plan (typically a non-HMO plan) and thus unfairly discriminates against 
employees and the HMO.
    6. Response: With respect to the first comment, section 1310(c) of 
the PHS Act does not mention discrimination against the HMO. The 
employer contribution is acceptable if it ``is reasonable and is 
designed to assure employees a fair choice among health benefits 
plans''. The legislative history cited by the commenter states that the 
new standard ``enhances employers' flexibility in determining their 
contributions to HMOs while protecting employees and HMOs from 
discriminatory and unfair contribution practices.'' (Sen. Rep. No. 100-
304, H.R. Rep. No. 100-417) However, the fact that the statute does not 
contain the reference to the HMO indicates that this statement 
supports, at most, a balance of the interests of the three parties, 
with primary weight given to the employer and employee interests.
    With respect to the suggestion that the HMO contribution cannot be 
less than the non-HMO contribution, unless it is shown to ``encourage 
effective and efficient delivery of health care'', we note that the 
legislative history clearly states that a dollar-for-dollar match is no 
longer required. Moreover, two of the examples provided in the 
legislative history assume that there will be an unequal contribution, 
and that it will be to the HMO's disadvantage. First, an employer can 
require employees to pay for their HMO coverage even if the methodology 
would otherwise result in no cost to the employees.
    Similarly, the employer is permitted to contribute equal 
percentages of the cost for the HMO and non-HMO options. Under this 
method, an employer can contribute far more, in terms of dollars, for 
the non-HMO option than for the HMO option. For example, if the HMO 
costs $100 per month, and the indemnity plan costs $300, and the 
employer pays 90 percent of the cost, it will pay $90 for an employee 
who chooses an HMO, and $270 for an employee who chooses the indemnity 
plan. (For the employee, the difference between the two options is only 
$20.)
    Therefore, we see no justification for imposing a stricter standard 
simply because the employer pays less for the HMO than the non-HMO 
option. In addition, the commenter's proposed ``efficiency and cost 
effectiveness'' standard is neither required by the statutory amendment 
nor, arguably, supported by its legislative history. The latter states 
only that section 1310 was designed to give employees an opportunity to 
choose an HMO alternative. It does not mention efficiency and cost 
effectiveness.
    Finally, with respect to determinations that result in equal 
employee contributions for all alternatives, we believe that this 
approach is clearly one way to provide a ``fair choice'' to employees. 
Under this approach, employees can choose the health plan that best 
serves their needs. The commenter's primary concern seems to be that 
this approach is unfair

[[Page 27286]]

to employees if they cannot ``share in the savings'' of choosing an 
HMO. We note, first, that ``fairness'' is a subjective standard. As 
long as an approach can reasonably be viewed as fair, it satisfies the 
standard. That judgment is not invalidated simply because there may be 
a basis for characterizing it as unfair.
    We note further that the legislative history makes clear that the 
amendment was, to a large extent, prompted by a concern that the HMOs 
were engaging in ``shadow pricing''. Under shadow pricing, the HMOs 
would charge the same premium as more expensive non-HMO alternatives 
instead of passing the savings along to either the employer or the 
employee. Therefore, the argument that equal employee contributions are 
unfair because employees cannot ``share in the savings'' (from choosing 
a lower cost HMO) is not compelling.
    7. Comment: One commenter noted that Sec. 417.157(a)(2) lists five 
contribution methods as acceptable, but there are no examples of 
unacceptable methods. Several commenters asked for more guidance to 
assist them in determining what would be acceptable.
    Another commenter strongly suggested that the proposed rules be 
amended to provide examples of types of arrangements that would be 
considered to be discriminatory, and therefore prohibited, by these 
regulations.
    7. Response: The employer contribution requirements provide 
employers enhanced flexibility in determining their contributions to 
HMOs and other health benefits plans they offer. The limits on that 
flexibility are established by the statutory language which requires 
that the method of determining the contribution be reasonable and not 
discriminate financially against employees who choose to join an HMO. 
In part, this new flexibility is recognition that HMOs need less 
regulatory protection because in recent years they have become more 
accepted by both employers and employees and are generally better able 
to compete with other health benefits plans.
    As previously stated, if the HMO or the employees believe that the 
employer's contribution does not meet the ``reasonable'' and ``fair 
choice'' standards, they may request that HCFA review the methodology. 
Generally, HCFA will not undertake a review if the employer has 
followed one of the examples given in the regulation.
    If the employer uses a methodology other than one of those 
examples, HCFA generally will not review unless the methodology results 
in significantly higher costs for employees who select the HMO 
alternative. If it undertakes review, HCFA will consider whether the 
employer's methodology is based on factors that are reasonable and are 
applied fairly. For example, if the HMO has a more comprehensive 
benefits package than the principle indemnity plan, that could be a 
reasonable factor justifying a higher cost for employees who enroll in 
the HMO.
    We will not attempt to define all possible reasonable explanations 
that would justify a larger contribution from HMO enrollees. We note 
however, that the rationale must apply to the actual employees of the 
particular HMOs.
    8. Comment: One of the commenters, while agreeing that employers 
can now make unequal contributions, stated that the right to make 
unequal contributions should require substantial justification, be 
narrowly construed, and allowed only for compelling reasons.
    8. Response: We believe such stringent requirements are not in 
keeping with the flexibility the Congress intended employers to have. 
As noted below under Changes in the Regulations, the final rule 
requires the employer to make available to HCFA, upon request, a 
description of the methodology it used to determine its contributions, 
and related data on the eligible employee population. HCFA may request 
the data on its own initiative or because an HMO or employee requests 
HCFA to review the methodology.
    A contribution methodology that results in different contributions 
to different plans in order to ensure that employees have the same out-
of-pocket costs, no matter which plan they choose, is consistent with 
the standards and would, therefore, be acceptable.
    9. Comment: One commenter suggested that any method that does not 
fall into one of the first four examples provided in the regulation 
should be required to fall into the fifth example--the method must be 
mutually acceptable to both the employer and the HMO.
    9. Response: The five examples of acceptable contribution methods 
listed under Sec. 417.157(a)(2) are not meant to be exclusive. We note 
that the intent of the legislation is to allow employers increased 
flexibility in determining their contribution payment amounts. 
Accordingly, we will not restrict feasible contribution methodologies 
beyond the requirements already described.
    10. Comment: One commenter noted that the last of the five examples 
under Sec. 417.157(a)(2) allows for employers and HMOs to negotiate 
contribution arrangements that are mutually acceptable. The commenter 
goes on to ask if such mutually-agreed-upon arrangements must also meet 
the statutory standards of the proposed employer contribution 
regulation.
    10. Response: Contribution levels that are mutually agreed upon by 
the employer and the HMO must also meet the standards established by 
this regulation.

V. Changes in the Regulations

A. Changes Required by the Expiration of the ``Employer Mandate'' 
Provisions Effective October 24, 1995

    In Sec. 417.151, we have revised paragraphs (a) and (e) to make 
clear that, effective October 24, 1995, inclusion of the HMO 
alternative in an employer's health benefits plan became optional.
    We have removed Secs. 417.152 and 417.154 because they would no 
longer be applicable.
    In Sec. 417.153, we have revised paragraph (a) to make paragraphs 
(b) and (c) applicable when an employing entity voluntarily includes 
one or more HMOs in its health plan offerings.
    We have revised Sec. 417.159 to make clear that inclusion of HMOs 
is at the employing entity's option.

B. Changes to Implement Statutory Amendments That Were Effective Upon 
Enactment.

    In Sec. 417.157, we have--
    <bullet> Revised paragraphs (a)(1) and (a)(2) to eliminate the 
``equal contribution'' requirement and to incorporate the criteria 
specified in the statute;
    <bullet> Revised paragraph (a)(3) to remove the requirement for 
increased contribution to the HMO and to give examples of contributions 
that would be considered nondiscriminatory;
    <bullet> Added a paragraph (a)(4) ``Adjustment of employer 
contribution'' to make clear that what appeared in the proposed rule as 
a third ``method'' is rather a general rule applicable, under specified 
circumstances, to a contribution determined by any acceptable method. 
Adjustment is permitted only when HMO enrollees would, otherwise, have 
to pay little or nothing at all because the HMO premium is lower than 
the premiums of other plans offered. The payment by the enrollee could 
not exceed 50 percent of the payment for the principal non-HMO 
alternative, that is, the alternative that covers the largest number of 
the employer's employees.
    <bullet> Removed paragraphs (f) and (g) as inconsistent with the 
revised policy; and
    <bullet> In response to certain comments, revised the content of 
paragraph (h) and redesignated it under new paragraphs (f) and (g).

[[Page 27287]]

VI. Regulatory Impact Statement

    Consistent with the Regulatory Flexibility Act (RFA) and section 
1102(b) of the Social Security Act, we prepare a regulatory flexibility 
analysis for each rule, unless the Secretary certifies that the 
particular rule will not have a significant economic impact on a 
substantial number of small entities, or a significant impact on the 
operations of a substantial number of small rural hospitals.
    The RFA defines ``small entity'' as a small business, a nonprofit 
enterprise, or a governmental jurisdiction (such as a county, city, or 
township) with a population of less than 50,000. We also consider all 
HMOs to be small entities. For purposes of section 1102(b) of the Act, 
we define ``small rural hospital'' as a hospital that has fewer than 50 
beds and is located anywhere but in a metropolitan statistical area.
    For reasons noted below, we believe that any economic impact of the 
statutory provisions on which this rule is based will be small and 
transitory.
    Effective as of October 24, 1995, inclusion of HMOs in employer 
health plan offerings became voluntary.
    Employers that do include HMOs are no longer held to the previous 
``dollar for dollar'' rule. An employer could, for example, base its 
contribution to an HMO on a reasonable estimate of what it will cost to 
provide care for its employees, and thus share in the savings resulting 
from efficient delivery of health care by the HMO.
    However, the employer's contribution must meet new standards, that 
is, it must be an amount that is ``reasonable'' and that ensures 
employees a ``fair choice'' among health plan alternatives offered. 
This balanced approach means that, while employers benefit from greater 
flexibility, employees--and the HMOs they are free to join, are 
protected against discrimination.
    We have not prepared a regulatory flexibility analysis because we 
have determined, and the Secretary certifies, that these rules will not 
have a significant economic impact on a substantial number of small 
entities or a significant impact on the operation of a substantial 
number of small rural hospitals.
    In accordance with Executive Order 12866, this rule was reviewed by 
the Office of Management and Budget.

VII. Collection of Information Requirements

    This rule contains new information collections that are subject to 
review by the Office of Management (OMB) under the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3501 through 3511). The title and description of 
the information collection and the description of respondents are shown 
below with an estimate of the annual reporting and recordkeeping 
burden.
    Sec. 417.157(f): Retention and availability of data, is revised to 
specify that each employing entity or designee must retain the plan 
data for three years and make it available to HCFA upon request. The 
data must be that used to compute the level of contribution for each of 
the plans offered to employees, a description of the methodology for 
computing the level of contribution, and any related data about the 
employees who are eligible to enroll in a plan.
    Sec. 417.157(g): HCFA review of data, is revised to make clear that 
HCFA may request and review the data specified in paragraph (f) of this 
section on its own initiative or in response to requests from HMOs or 
employees. The purpose of HCFA's review is to determine whether the 
methodology and the level of contribution comply with the requirements 
of this subpart. HMOs and employees that request HCFA to review the 
plan data must set forth reasonable grounds for making the request.
    The respondents affected by section 417.157, paragraphs (f) and (g) 
are public and private employers and employees.
    The burden under paragraphs (f) and (g) of section 417.157 is 
estimated at 8 to 10 hours per employer for compiling the data, usually 
once a year, and making it available to HCFA when requested.
    The agency has submitted a copy of this rule to OMB for its review 
of these information collections. When OMB approves these provisions, 
we will publish a notice in the Federal Register to that effect.
    We invite comments regarding this burden estimate or any other 
aspect of these collections of information, including any of the 
following:
    <bullet> Whether the information collection is necessary and useful 
for carrying out the proper functions of the agency;
    <bullet> the accuracy of the estimated burden;
    <bullet> ways to enhance the quality, clarity, and usefulness of 
the information to be collected; and,
    <bullet> recommendations for using automated collection techniques 
or other forms of information technology to minimize the information 
collection burden.
    Please send any comments to HCFA, OFHR, MPAS, C2-26-17, 7500 
Security Boulevard, Baltimore, Maryland 21244-1850.

List of Subjects in 42 CFR Part 417

    Administrative practice and procedure, Grant programs-health, 
Health care, Health facilities, Health insurance, Health maintenance 
organizations (HMO), Loan programs-health, Medicare, Reporting and 
recordkeeping requirements.
    42 CFR Part 417 is amended as set forth below:
    1. The authority citation for part 417 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh); secs. 1301, 1306, and 1310 of the Public 
Health Services Act (42 U.S.C. 300e, 300e-5, and 300e-9); and 31 
U.S.C. 9701.

    2. Sec. 417.151 is amended to revise paragraphs (a) and (e) to read 
as follows:


Sec. 417.151  Applicability.

    (a) Basic rule. Effective October 24, 1995 <SUP>1, this subpart 
applies to any employing entity that offers a health benefits plan to 
its employees, meets the conditions specified in paragraphs (b) through 
(e) of this section, and elects to include one or more qualified HMOs 
in the health plan alternatives it offers its employees.
---------------------------------------------------------------------------

    \1\  Before October 24, 1995, an employing entity that met the 
conditions specified in Sec. 417.151 was required to include one or 
more qualified HMOs, if it received from at least one qualified HMO 
a written request for inclusion and that request met the timing, 
content, and procedural requirements specified in Sec. 417.152.
---------------------------------------------------------------------------

* * * * *
    (e) Employees in HMO's service area. At least 25 of the employing 
entity's employees reside within the HMO's service area.


Sec. 417.152   [Removed]

    3. Section 417.152 is removed.
    4. Section 417.153 is amended to revise the heading and paragraph 
(a) to read as follows:


Sec. 417.153   Offer of HMO alternative.

    (a) Basic rule. An employing entity that is subject to this subpart 
and that elects to include one or more qualified HMOs must offer the 
HMO alternative in accordance with this section.
* * * * *


Sec. 417.154   [Removed]

    5. Section 417.154 is removed.
    6. Section 417.157 is revised to read as follows:


Sec. 417.157   Contributions for the HMO alternative.

    (a) General principles--(1) Nondiscrimination. The employer 
contribution to an HMO must be in an amount that does not discriminate 
financially against an employee who

[[Page 27288]]

enrolls in an HMO. A contribution does not discriminate financially if 
the method of determining the contribution is reasonable and is 
designed to ensure that employees have a fair choice among health 
benefits plan alternatives.
    (2) Effect of agreements or contracts. The employing entity or 
designee is not required to pay more for health benefits as a result of 
offering the HMO alternative than it would otherwise be required to pay 
under a collective bargaining agreement or contract that provides for 
health benefits and is in effect at the time the HMO alternative is 
included.
    (3) Examples of acceptable employer contributions. The following 
are methods that are considered nondiscriminatory:
    (i) The employer contribution to the HMO is the same, per employee, 
as the contribution to non-HMO alternatives.
    (ii) The employer contribution reflects the composition of the 
HMO's enrollment in terms of enrollee attributes that can reasonably be 
used to predict utilization, experience, costs, or risk. For each 
enrollee in a given class established on the basis of those attributes, 
the employer contributes an equal amount, regardless of the health 
benefits plan chosen by the employee.
    (iii) The employer contribution is a fixed percentage of the 
premium for each of the alternatives offered.
    (iv) The employer contribution is determined under a mutually 
acceptable arrangement negotiated by the HMO and the employer. In 
negotiating the arrangement, the employer may not insist on terms that 
would cause the HMO to violate any of the requirements of this part.
    (4) Adjustment of employer contribution. An employer contribution 
determined by an acceptable method may in some cases be adjusted if it 
would result in a nominal payment or no payment at all by HMO enrollees 
(because the HMO premium is lower than the premiums for the other 
alternatives offered). If, for example the employer has a policy of 
requiring all employees to contribute to their health benefits plan, 
the employer may require HMO enrollees who would otherwise pay little 
or nothing at all, to make a payment that does not exceed 50 percent of 
the employee contribution to the principal non-HMO alternative. The 
principal non-HMO alternative is the one that covers the largest number 
of enrollees from the particular employer.
    (b) Administrative expenses. (1) In determining the amount of its 
contribution to the HMO, the employing entity or designee may not 
consider administrative expenses incurred in connection with offering 
any alternative in the health benefits plan.
    (2) However, if the employing entity or designee has special 
requirements for other than standard solicitation brochures and 
enrollment literature, it must, in the case of the HMO alternative, 
determine and distribute any administrative costs attributable to those 
requirements in a manner consistent with its method of determining and 
distributing those costs for the non-HMO alternatives.
    (c) Exclusion for contribution for certain benefits. In determining 
the amount of the employing entity's contribution or the designee's 
cost for the HMO alternative, the employing entity or designee may 
exclude those portions of the contribution allocable to benefits (such 
as life insurance or insurance for supplemental health benefits)--
    (1) For which eligible employees and their eligible dependents are 
covered notwithstanding selection of the HMO alternative; and
    (2) That are not offered on a prepayment basis by the HMO to the 
employing entity's employees.
    (d) Contributions determined by agreements or contracts or by law. 
If the specific amount of the employing entity's contribution for 
health benefits is fixed by an agreement or contract, or by law, that 
amount constitutes the employing entity's obligation for contribution 
toward the HMO premiums.
    (e) Allocation of portion of a contribution determined by an 
agreement. In some cases, the employing entity's contribution for 
health benefits is determined by an agreement that also provides for 
benefits other than health benefits. In that case, the employing entity 
must determine, or instruct its designee to determine, what portion of 
its contribution is applicable to health benefits.
    (f) Retention and availability of data. Each employing entity or 
designee must retain the following data for three years and make it 
available to HCFA upon request:
    (1) The data used to compute the level of contribution for each of 
the plans offered to employees.
    (2) Related data about the employees who are eligible to enroll in 
a plan.
    (3) A description of the methodology for computation.
    (g) HCFA review of data. (1) HCFA may request and review the data 
specified in paragraph (f) of this section on its own initiative or in 
response to requests from HMOs or employees.
    (2) The purpose of HCFA's review is to determine whether the 
methodology and the level of contribution comply with the requirements 
of this subpart.
    (3) HMOs and employees that request HCFA to review must set forth 
reasonable grounds for making the request.
    7. In Sec. 417.155(d)(2) introductory text, ``which'' is removed 
and ``that'' is added in its place.
    8. In Sec. 417.159, ``The obligation'' is revised to read ``The 
decision'', and ``HMO option'' is revised to read ``HMO alternative''.
    9. In the heading of Sec. 417.164, ``qualifiers'' is removed and 
``qualification'' is added in its place.
    10. In Sec. 417.166(a)(1), ``change'' is removed and ``changed'' is 
added in its place.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: August 14, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.

    Dated: December 5, 1995.
Donna E. Shalala,
Secretary.
[FR Doc. 96-13629 Filed 5-30-96; 8:45 am]
BILLING CODE 4120-01-P