‘‘(C) chapter 17 of title 38, United States
Code, or
‘‘(D) the Indian Health Care Improvement
Act.
‘‘(3) SPECIAL RULE IN THE CASE OF CHILD OF
DIVORCED PARENTS, ETC.—Any child to whom sec-
tion 152(e) applies shall be treated as a dependent
of both parents.
‘‘(4) MARRIAGE RULES.—The determination of
whether an individual is married at any time during
the taxable year shall be made in accordance with
the provisions of section 6013(d) (relating to deter-
mination of status as husband and wife).
‘‘(c) APPLICABLE PERCENTAGE.—For purposes of
subsection (a), the applicable percentage for any taxable
year is determined by the number of whole months in such
year in which the taxpayer is a qualified individual.
‘‘(d) QUALIFIED HEALTH INSURANCE PREMIUMS.—
For purposes of this section, the term ‘qualified health in-
surance premiums’ means premiums for—
‘‘(1) a federally qualified health insurance plan,
and
‘‘(2) any other benefits or plans supplementary
to such a federally qualified health insurance plan.
‘‘(e) FEDERALLY QUALIFIED HEALTH INSURANCE
PLAN.—For purposes of this section, the term ‘federally
qualified health insurance plan’ means a health insurance
plan which is described in section 111 of the Consumer
Choice Health Security Act of 1994.
‘‘(f) MEDICAL CARE.—For purposes of this section:
‘‘(1) IN
GENERAL.—The term ‘medical care’
means amounts paid—
‘‘(A) for the diagnosis, cure, mitigation,
treatment, or prevention of disease, or for the
purpose of affecting any structure or function
of the body, and
‘‘(B) for transportation primarily for and
essential to medical care referred to in subpara-
graph (A).
‘‘(2) AMOUNTS
PAID
FOR
CERTAIN
LODGING
AWAY FROM HOME TREATED AS PAID FOR MEDICAL
CARE.—Amounts paid for lodging (not lavish or ex-
travagant under the circumstances) while away from
home primarily for and essential to medical care re-
ferred to in paragraph (1)(A) shall be treated as
amounts paid for medical care if—
‘‘(A) the medical care referred to in para-
graph (1)(A) is provided by a physician in a li-
censed hospital (or in a medical care facility
which is related to, or the equivalent of, a li-
censed hospital), and
‘‘(B) there is no significant element of per-
sonal pleasure, recreation, or vacation in the
travel away from home.
The amount taken into account under the preceding
sentence shall not exceed $50 for each night for each
individual.
‘‘(3) COSMETIC SURGERY.—
‘‘(A) IN
GENERAL.—The term ‘medical
care’ does not include cosmetic surgery or other
similar procedures, unless the surgery or proce-
dure is necessary to ameliorate a deformity
arising from, or directly related to, a congenital
abnormality, a personal injury resulting from
an accident or trauma, or disfiguring disease.
‘‘(B) COSMETIC SURGERY DEFINED.—For
purposes of this paragraph, the term ‘cosmetic
surgery’ means any procedure which is directed
at improving the patient’s appearance and does
not meaningfully promote the proper function
of the body or prevent or treat illness or dis-
ease.
‘‘(4) PHYSICIAN.—The term ‘physician’ has the
meaning given to such term by section 1861(r) of
the Social Security Act (42 U.S.C. 1395x(r)).
‘‘(g) SPECIAL RULES.—For purposes of this section:
‘‘(1) LIMITATION WITH RESPECT TO MEDICINE
AND DRUGS.—
‘‘(A) IN GENERAL.—An amount paid dur-
ing the taxable year for medicine or a drug
shall be taken into account under subsection (a)
only if such medicine or drug is a prescribed
drug or is insulin.
‘‘(B) PRESCRIBED DRUG.—The term ‘pre-
scribed drug’ means a drug or biological which
requires a prescription of a physician for its use
by an individual.
‘‘(2) SPECIAL RULE FOR DECEDENTS.—
‘‘(A) TREATMENT
OF
EXPENSES
PAID
AFTER DEATH.—Expenses for the medical care
of the taxpayer which are paid out of the tax-
payer’s estate during the 1-year period begin-
ning with the day after the date of the tax-
payer’s death shall be treated as paid by the
taxpayer at the time incurred.
‘‘(B) 
LIMITATION.—Subparagraph 
(A)
shall not apply if the amount paid is allowable
under section 2053 as a deduction in computing
the taxable estate of the decedent, but this sub-
paragraph shall not apply if (within the time
and in the manner and form prescribed by the
Secretary) there is filed—
‘‘(i) a statement that such amount
has not been allowed as a deduction under
section 2053, and
‘‘(ii) a waiver of the right to have
such amount allowed at any time as a de-
duction under section 2053.
‘‘(3) FORM OF INSURANCE CONTRACT.—In the
case of an insurance contract under which amounts
are payable for other than medical care—
‘‘(A) no amount shall be treated as paid
for insurance to which subsection (a) applies
unless the charge for such insurance is either
separately stated in the contract, or furnished
to the policyholder by the insurance company in
a separate statement,
‘‘(B) the amount taken into account as the
amount paid for such insurance shall not exceed
such charge, and
‘‘(C) no amount shall be treated as paid
for such insurance if the amount specified in
the contract (or furnished to the policyholder by
the insurance company in a separate statement)
as the charge for such insurance is unreason-
ably large in relation to the total charges under
the contract.
‘‘(4) EXCLUSION OF AMOUNTS ALLOWED FOR
CARE OF CERTAIN DEPENDENTS.—Any expense al-
lowed as a credit under section 21 shall not be treat-
ed as an expense paid for medical care.
‘‘(5) COORDINATION WITH ADVANCE PAYMENT
AND MINIMUM TAX.—Rules similar to the rules of
subsections (g) and (h) of section 32 shall apply to
any credit to which this section applies.
‘‘(6) SUBSIDIZED EXPENSES.—No expense shall
be taken into account under subsection (a), if—
‘‘(A) such expense is paid, reimbursed, or
subsidized (whether by being disregarded for
purposes of another program or otherwise) by
the Federal Government, a State or local gov-
ernment, or any agency or instrumentality
thereof, and
‘‘(B) the payment, reimbursement, or sub-
sidy of such expense is not includable in the
gross income of the recipient.
‘‘(7) COORDINATION
WITH
MEDICAL
SAVINGS
ACCOUNTS.—The amount otherwise taken into ac-
count under subsection (a) shall be reduced by the
amount (if any) of the distributions from any medi-
cal savings account of the taxpayer during the tax-
able year which is not includible in gross income by
reason of being used for qualified medical expenses
(as defined in section 25A(c)(2)).
‘‘(h) INDEXING OF PERCENTAGES.—For each year
after 1997, the Secretary, in consultation with the Sec-
retary of Health and Human Services, shall adjust the ref-
erences to 10 percent and 20 percent in subsection (a)
by the ratio of—
‘‘(1) the percentage increase in medical care in-
flation between 1996 and the year before the year
involved, to
‘‘(2) the national average percentage increase in
adjusted gross income of individuals between such
years.
‘‘(i) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the pur-
poses of this section.’’.
(b) ADVANCE PAYMENT OF CREDIT.—Chapter 25 of
the Internal Revenue Code of 1986 (relating to general
provisions relating to employment taxes) is amended by
inserting after section 3507 the following new section:
‘‘SEC. 3507A. ADVANCE PAYMENT OF HEALTH EXPENSES
CREDIT.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this section, every employer making payment of wages
with respect to whom a health care expenses eligibility cer-
tificate is in effect shall, at the time of paying such wages,
make an additional payment equal to such employee’s
health care expenses advance amount.
‘‘(b) HEALTH CARE EXPENSES ELIGIBILITY CER-
TIFICATE.—For purposes of this title, a health care ex-
penses eligibility certificate is a statement furnished by an
employee to the employer which—
‘‘(1) certifies that the employee will be eligible
to receive the credit provided by section 34A for the
taxable year,
‘‘(2) certifies that the employee does not have
a health care expenses eligibility certificate in effect
for the calendar year with respect to the payment of
wages by another employer,
‘‘(3) states whether or not the employee’s
spouse has a health care expenses eligibility certifi-
cate in effect, and
‘‘(4) estimates the amount of premiums for a
federally qualified health insurance plan and unreim-
bursed expenses for medical care (as defined in sec-
tion 34A) for the calendar year.
For purposes of this section, a certificate shall be treated
as being in effect with respect to a spouse if such a certifi-
cate will be in effect on the first status determination date
following the date on which the employee furnishes the
statement in question.
‘‘(c) 
HEALTH
CARE
EXPENSES
ADVANCE
AMOUNT.—
‘‘(1) IN GENERAL.—For purposes of this title,
the term ‘health expenses advance amount’ means,
with respect to any payroll period, the amount deter-
mined—
‘‘(A) on the basis of the employee’s wages
from the employer for such period,
‘‘(B) on the basis of the employee’s esti-
mated premiums for a federally qualified health
insurance plan and unreimbursed expenses for
medical care included in the health care ex-
penses eligibility certificate, and
‘‘(C) in accordance with tables provided by
the Secretary.
‘‘(2) ADVANCE AMOUNT TABLES.—The tables
referred to in paragraph (1)(C) shall be similar in
form to the tables prescribed under section 3402
and, to the maximum extent feasible, shall be coordi-
nated with such tables and the tables prescribed
under section 3507(c).
‘‘(d) OTHER RULES.—For purposes of this section,
rules similar to the rules of subsections (d) and (e) of sec-
tion 3507 shall apply.
‘‘(e) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the pur-
poses of this section.’’.
(c) CLERICAL AMENDMENTS.—
(1) The table of sections for subpart A of part
IV of subchapter A of chapter 1 of the Internal Rev-
enue Code of 1986 is amended by inserting after the
item relating to section 34 the following new item:
‘‘Sec. 34A. Health care expenses.’’.
(2) The table of sections for chapter 25 of such
Code is amended by adding after the item relating
to section 3507 the following new item:
‘‘Sec. 3507A. Advance payment of health care expenses credit.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 102. MEDICAL SAVINGS ACCOUNTS.
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 of the Internal Revenue Code of
1986 (relating to nonrefundable personal credits) is
amended by inserting after section 25 the following new
section:
‘‘SEC. 25A. MEDICAL SAVINGS ACCOUNTS.
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in-
dividual, there shall be allowed as a credit against the tax
imposed by this subtitle for the taxable year an amount
equal to 25 percent of the amount paid in cash during
such year by or on behalf of such individual to a medical
savings account.
‘‘(b) LIMITATIONS.—For purposes of this section:
‘‘(1) ONLY 1 ACCOUNT PER FAMILY.—No credit
shall be allowed under subsection (a) for amounts
paid to any medical savings account for the benefit
of an individual, such individual’s spouse, or any de-
pendent (as defined in section 152) of such individ-
ual if such individual, spouse, or dependent is a ben-
eficiary of any other medical savings account.
‘‘(2) DOLLAR
LIMITATION.—The aggregate
amount of contributions which may be taken into ac-
count under subsection (a) with respect to any indi-
vidual for any taxable year shall not exceed the sum
of—
‘‘(A) $3,000, plus
‘‘(B) $500 for each individual who is a de-
pendent (as so defined) of the individual for
whose benefit the account is established.
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section:
‘‘(1) MEDICAL SAVINGS ACCOUNT.—
‘‘(A) IN
GENERAL.—The term ‘medical
savings account’ means a trust created or orga-
nized in the United States exclusively for the
purpose of paying the qualified medical ex-
penses of the individual for whose benefit the
trust is established, but only if the written gov-
erning instrument creating the trust meets the
following requirements:
‘‘(i) Except in the case of a rollover
contribution described in subsection (d)(4),
no contribution will be accepted unless it is
in cash and contributions will not be ac-
cepted for any taxable year in excess of the
amount 
determined 
under 
subsection
(b)(1).
‘‘(ii) The trustee is a bank (as defined
in section 408(n)) or another person who
demonstrates to the satisfaction of the Sec-
retary that the manner in which such per-
son will administer the trust will be con-
sistent with the requirements of this sec-
tion.
‘‘(iii) No part of the trust assets will
be invested in life insurance contracts.
‘‘(iv) The assets of the trust will not
be commingled with other property except
in a common trust fund or common invest-
ment fund.
‘‘(v) The interest of an individual in
the balance in such individual’s account is
nonforfeitable.
‘‘(vi) Under regulations prescribed by
the Secretary, rules similar to the rules of
section 401(a)(9) shall apply to the dis-
tribution of the entire interest of bene-
ficiaries of such trust.
‘‘(B) TREATMENT
OF
COMPARABLE
AC-
COUNTS HELD BY INSURANCE COMPANIES.—An
account held by an insurance company in the
United States shall be treated as a medical sav-
ings account (and such company shall be treat-
ed as a bank) if—
and is made not later than the time prescribed by
law for filing the return for such taxable year (not
including extensions thereof).
‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, any amount paid or distrib-
uted out of a medical savings account shall be in-
cluded in the gross income of the individual for
whose benefit such account was established unless
such amount is used exclusively to pay the qualified
medical expenses of such individual.
‘‘(2) EXCESS CONTRIBUTIONS RETURNED BE-
FORE DUE DATE OF RETURN.—Paragraph (1) shall
not apply to the distribution of any contribution paid
during a taxable year to a medical savings account
to the extent that such contribution exceeds the
amount allowable under subsection (b) if—
‘‘(A) such distribution is received on or be-
fore the day prescribed by law (including exten-
sions of time) for filing such individual’s return
for such taxable year,
‘‘(B) no credit is allowed under subsection
(a) with respect to such excess contribution,
and
‘‘(C) such distribution is accompanied by
the amount of net income attributable to such
excess contribution.
Any net income described in subparagraph (C) shall
be included in the gross income of the individual for
the taxable year in which it is received.
‘‘(3) PENALTY FOR DISTRIBUTIONS NOT USED
FOR MEDICAL EXPENSES.—The tax imposed by this
chapter for any taxable year in which there is a pay-
ment or distribution from a medical savings account
which is not used to pay the medical expenses of the
individual for whose benefit the account was estab-
lished, shall be increased by 10 percent of the
amount of such payment or distribution which is in-
cludible in gross income under paragraph (1).
‘‘(4) ROLLOVERS.—Paragraph (1) shall not
apply to any amount paid or distributed out of a
medical savings account to the individual for whose
benefit the account is maintained, if the entire
amount received (including money and any other
property) is paid into another medical savings ac-
count for the benefit of such individual not later
than the 60th day after the day on which the indi-
vidual received the payment or distribution.
‘‘(e) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) EXEMPTION FROM TAX.—Any medical sav-
ings account is exempt from taxation under this sub-
title unless such account has ceased to be a medical
savings account by reason of paragraph (2) or (3).
Notwithstanding the preceding sentence, any such
account shall be subject to the taxes imposed by sec-
tion 511 (relating to imposition of tax on unrelated
business income of charitable, etc. organizations).
‘‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE
INDIVIDUAL
ENGAGES
IN
PROHIBITED
TRANS-
ACTION.—
‘‘(A) IN GENERAL.—If, during any taxable
year of the individual for whose benefit the
medical savings account was established, such
individual engages in any transaction prohibited
by section 4975 with respect to the account, the
account ceases to be a medical savings account
as of the first day of that taxable year.
‘‘(B) ACCOUNT TREATED AS DISTRIBUTING
ALL ITS ASSETS.—In any case in which any ac-
count ceases to be a medical savings account by
reason of subparagraph (A) on the first day of
any taxable year, paragraph (1) of subsection
(d) applies as if there were a distribution on
such first day in an amount equal to the fair
market value (on such first day) of all assets in
the account (on such first day) and no portion
of such distribution were used to pay qualified
medical expenses.
‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU-
RITY.—If, during any taxable year, the individual for
whose benefit a medical savings account was estab-
lished uses the account or any portion thereof as se-
curity for a loan, the portion so used is treated as
distributed to that individual and not used to pay
qualified medical expenses.
‘‘(f) CUSTODIAL ACCOUNTS.—For purposes of this
section, a custodial account shall be treated as a trust if—
‘‘(1) the assets of such account are held by a
bank (as defined in section 408(n)) or another per-
son who demonstrates to the satisfaction of the Sec-
retary that the manner in which he will administer
the account will be consistent with the requirements
of this section, and
‘‘(2) the custodial account would, except for the
fact that it is not a trust, constitute a medical sav-
ings account described in subsection (c).
For purposes of this title, in the case of a custodial ac-
count treated as a trust by reason of the preceding sen-
tence, the custodian of such account shall be treated as
the trustee thereof.
‘‘(g) INFLATION ADJUSTMENT.—
‘‘(1) IN GENERAL.—In the case of any taxable
year beginning in a calendar year after 1998, each
applicable dollar amount shall be increased by an
amount equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment for the
calendar year in which the taxable year begins.
‘‘(2) COST-OF-LIVING ADJUSTMENT.—For pur-
poses of paragraph (1), the cost-of-living adjustment
for any calendar year is the percentage (if any) by
which—
‘‘(A) the deemed average total wages (as
defined in section 209(k) of the Social Security
Act) for the preceding calendar year, exceeds
‘‘(B) the deemed average total wages (as
so defined) for calendar year 1996.
‘‘(3) APPLICABLE DOLLAR AMOUNT.—For pur-
poses of paragraph (1), the term ‘applicable dollar
amount’ means the $3,000 and $500 amounts in
subsection (b)(2).
‘‘(4) ROUNDING.—If any amount as adjusted
under paragraph (1) is not a multiple of $10, such
amount shall be rounded to the nearest multiple of
$10 (or, if such amount is a multiple of $5 and not
of $10, such amount shall be rounded to the next
highest multiple of $10).
‘‘(h) REPORTS.—The trustee of a medical savings ac-
count shall make such reports regarding such account to
the Secretary and to the individual for whose benefit the
account is maintained with respect to contributions, dis-
tributions, and such other matters as the Secretary may
require under regulations. The reports required by this
subsection shall be filed at such time and in such manner
and furnished to such individuals at such time and in such
manner as may be required by those regulations.’’.
(b) TAX ON EXCESS CONTRIBUTIONS.—Section 4973
of the Internal Revenue Code of 1986 (relating to tax on
excess contributions to individual retirement accounts, cer-
tain section 403(b) contracts, and certain individual re-
tirement annuities) is amended—
(1) by inserting ‘‘MEDICAL
SAVINGS
AC-
COUNTS,’’ after ‘‘ACCOUNTS,’’ in the heading of
such section,
(2) by redesignating paragraph (2) of sub-
section (a) as paragraph (3) and by inserting after
paragraph (1) the following:
‘‘(2) a medical savings account (within the
meaning of section 25A(c)(1)),’’,
(3) by striking ‘‘or’’ at the end of paragraph
(1) of subsection (a), and
(4) by adding at the end thereof the following
new subsection:
‘‘(d) EXCESS CONTRIBUTIONS TO MEDICAL SAVINGS
ACCOUNTS.—For purposes of this section, in the case of
a medical savings account (within the meaning of section
25A(c)(1)), the term ‘excess contributions’ means the
amount by which the amount contributed for the taxable
year to the account exceeds the amount allowable under
section 25A(b)(2) for such taxable year. For purposes of
this subsection, any contribution which is distributed out
of the medical savings account and a distribution to which
section 25A(d)(2) applies shall be treated as an amount
not contributed.’’.
(c) TAX ON PROHIBITED TRANSACTIONS.—Section
4975 of the Internal Revenue Code of 1986 (relating to
prohibited transactions) is amended—
(1) by adding at the end of subsection (c) the
following new paragraph:
‘‘(4) SPECIAL RULE FOR MEDICAL SAVINGS AC-
COUNTS.—An individual for whose benefit a medical
savings account (within the meaning of section
25A(c)(1)) is established shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if, with re-
spect to such transaction, the account ceases to be
a medical savings account by reason of the applica-
tion of section 25A(e)(2)(A) to such account.’’, and
(2) by inserting ‘‘or a medical savings account
described in section 25A(c)(1)’’ in subsection (e)(1)
after ‘‘described in section 408(a)’’.
(d) FAILURE TO PROVIDE REPORTS ON MEDICAL
SAVINGS ACCOUNTS.—Section 6693 of the Internal Reve-
nue Code of 1986 (relating to failure to provide reports
on individual retirement account or annuities) is amend-
ed—
(1) by inserting ‘‘OR ON MEDICAL SAVINGS
ACCOUNTS’’ after ‘‘ANNUITIES’’ in the heading of
such section, and
(2) by adding at the end of subsection (a) the
following: ‘‘The person required by section 25A(h) to
file a report regarding a medical savings account at
the time and in the manner required by such section
shall pay a penalty of $50 for each failure unless it
is shown that such failure is due to reasonable
cause.’’.
(e) CLERICAL AMENDMENTS.—
(1) The table of sections for subpart A of part
IV of subchapter A of chapter 1 of the Internal Rev-
enue Code of 1986 is amended by inserting after the
item relating to section 25 the following:
‘‘Sec. 25A. Medical savings accounts.’’.
(2) The table of sections for chapter 43 of such
Code is amended by striking the item relating to sec-
tion 4973 and inserting the following:
‘‘Sec. 4973. Tax on excess contributions to individual retirement
accounts, medical savings accounts, certain 403(b)
contracts, and certain individual retirement annu-
ities.’’.
(3) The table of sections for subchapter B of
chapter 68 of such Code is amended by inserting ‘‘or
on medical savings accounts’’ after ‘‘annuities’’ in
the item relating to section 6693.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 103. OTHER TAX PROVISIONS.
(a) TERMINATION OF MEDICAL EXPENSE DEDUC-
TION.—Section 213 of the Internal Revenue Code of 1986
(relating to medical, dental, etc., expenses) is amended by
adding at the end thereof the following new subsection:
‘‘(g) TERMINATION.—No amount paid after Decem-
ber 31, 1997, shall be treated as an expense paid for medi-
cal care.’’.
(b) TERMINATION OF DEDUCTION FOR HEALTH IN-
SURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS.—
(1) IN GENERAL.—Section 162(l) of the Inter-
nal Revenue Code of 1986 (relating to special rules
for health insurance costs of self-employed individ-
uals) is amended by striking paragraph (6).
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to taxable years begin-
ning after December 31, 1997.
(c) TERMINATION OF EXCLUSION FOR EMPLOYER-
PROVIDED HEALTH INSURANCE.—Section 106 of the In-
ternal Revenue Code of 1986 (relating to contributions by
employer to accident and health plans) is amended by add-
ing at the end the following new sentence: ‘‘The preceding
sentence shall not apply to any amount paid after Decem-
ber 31, 1997.’’.
Subtitle B—Insurance Provisions
PART I—FEDERALLY QUALIFIED HEALTH
INSURANCE PLAN
SEC. 111. FEDERALLY QUALIFIED HEALTH INSURANCE
PLAN.
(a) IN GENERAL.—A federally qualified health insur-
ance plan is a health insurance plan offered, issued, or
renewed on or after January 1, 1998, which is certified
by the applicable regulatory authority as meeting, at a
minimum, the requirements of sections 112, 113, 114, and
115, and the regulatory program described in section 117.
(b) GENERAL DEFINITIONS.—As used in this Act:
(1) HEALTH
INSURANCE
PLAN.—The term
‘‘health insurance plan’’ means any hospital or medi-
cal service policy or certificate, hospital or medical
service plan contract, or health maintenance organi-
zation group contract and, in States which have dis-
tinct licensure requirements, a multiple employer
welfare arrangement, but does not include any of the
following offered by an insurer:
(A) Accident only, dental only, disability
only, or long-term care only insurance.
(B) Coverage issued as a supplement to li-
ability insurance.
(C) Workers’ compensation or similar in-
surance.
(D) Automobile medical-payment insur-
ance.
(2) APPLICABLE
REGULATORY
AUTHORITY.—
The term ‘applicable regulatory authority’ means—
(A) in the case of a State with a program
described in section 117, the State commis-
sioner or superintendent of insurance or other
State authority responsible for regulation of
health insurance; or
(B) if the State has not established such a
program or such program has been decertified
under section 117(b), the Secretary.
(3) SECRETARY.—The term ‘‘Secretary’’ means
the Secretary of Health and Human Services.
(4) STATE.—The term ‘‘State’’ means each of
the several States of the United States, the District
of Columbia, the Commonwealth of Puerto Rico, the
United States Virgin Islands, Guam, America
Samoa, and the Commonwealth of the Northern
Mariana Islands.
SEC. 112. FAMILY SECURITY BENEFITS PACKAGE.
(a) REQUIREMENTS.—
Nothing in this subsection may be construed to require
the inclusion of abortion services.
(c) LIMITATION ON COST SHARING.—
(1) IN GENERAL.—A health insurance plan may
not require 
the 
payment 
of 
any 
deductible,
copayment, or coinsurance for an item or service for
which coverage is required under this section after
an individual or a family covered under the plan has
incurred out-of-pocket expenses under the plan that
are equal to the out-of-pocket limit for a plan year.
(2) LIMIT ON OUT-OF-POCKET EXPENSES.—As
used in this paragraph:
(A) 
OUT-OF-POCKET
EXPENSES
DE-
FINED.—The term ‘‘out-of-pocket expenses’’
means, with respect to an individual or a family
in a plan year, amounts payable under the plan
as deductibles, coinsurance, and copayments
with respect to items and services provided
under the plan and furnished in the plan year
on behalf of the individual or the family covered
under the plan.
(B) OUT-OF-POCKET LIMIT DEFINED.—
(i) IN GENERAL.—The term ‘‘out-of-
pocket limit’’ means—
(I) the amount specified under
clause (ii), or
(II) 10 percent of the adjusted
gross income of the family involved,
whichever is greater.
(ii) MINIMUM AMOUNT.—The amount
specified in this clause for a plan year be-
ginning in—
(I) a calendar year prior to 1998,
is $5,000; or
(II) for a subsequent calendar
year, is the amount specified in this
clause for the previous calendar year
increased by the percentage increase
in the consumer price index for all
urban consumers (United States city
average, as published by the Bureau
of Labor Statistics) for the 12-month
period ending on September 30 of the
preceding calendar year.
If the amount computed under subclause
(II) is not a multiple of $10, it shall be
rounded to the next highest multiple of
$10.
SEC. 113. RATING PRACTICES.
(a) IN GENERAL.—The requirements of this section
are met, if, except as provided in subsection (b), the health
insurance plan provides for—
(1) a variation in premium rates only on the
basis of age, sex, and geography, and
(2) a charge of the same premium rates to new
applicants and existing policyholders with the same
age, sex, and geographic characteristics.
(b) INCENTIVE DISCOUNTS.—A plan may discount
an individual’s premium rate as an incentive for partici-
pating in a program, approved by the applicable regulatory
authority to be offered in conjunction with the coverage,
which has as its objective, 1 or more of the following:
(1) To promote healthy behavior.
(2) To prevent or delay the onset of illness.
(3) To provide for screening or early detection
of illness.
SEC. 114. GUARANTEED ISSUE.
(a) IN GENERAL.—Except as provided in paragraph
(2), in the case of applications made on and after January
1, 1999, the following rules apply:
(1) IN
GENERAL.—The requirements of this
section are met, if, except as provided in paragraph
(2), the health insurance plan—
(A) provides guaranteed issue at standard
rates to all applicants, and
(B) does not exclude from coverage, or
limit coverage for, any preexisting medical con-
dition of any applicant who, on the date the ap-
plication is made, has been continuously insured
for a period of at least 1 year prior to the date
of the application under 1 or more of the fol-
lowing health insurance plans or programs:
(i) Another federally qualified health
insurance plan.
(ii) An employer-sponsored group
health insurance plan in effect before the
date of the enactment of this Act.
(iii) An individual health insurance
plan in effect before such date.
(iv) A program described in—
(I) title XVIII or XIX of the So-
cial Security Act,
(II) chapter 55 of title 10,
United States Code,
(III) chapter 17 of title 38,
United States Code,
(IV) chapter 89 of title 5, United
States Code, or
(V) the Indian Health Care Im-
provement Act.
(2) BREAK IN COVERAGE.—In the case of an
applicant who has not been continuously insured for
a period of 1 year prior to the date the application
is made, the health insurance plan may exclude from
coverage, or limit coverage for, any preexisting medi-
cal condition for a period no greater than the lesser
of—
(A) the number of months immediately
prior to the date of the application during
which the individual was not insured since the
illness or condition in question was first diag-
nosed, or
(B) 1 year.
(b) TRANSITION RULE.—In the case of applications
made in 1998, the requirements of this section are met,
if the health insurance plan—
(1) provides guaranteed issue at standard rates
to all applicants, and
(2) does not exclude from coverage, or limit
coverage for, any preexisting medical condition of
any applicant.
SEC. 115. GUARANTEED RENEWABILITY.
The requirements of this section are met, if the
health insurance plan provides the policyholder with a con-
tractual right to renew the coverage which stipulates that
the insurer cannot cancel or refuse to renew the coverage
except for cases of—
(1) nonpayment of premiums by the policy-
holder, or
(2) fraud or misrepresentation by the policy-
holder.
PART II—CERTIFICATION OF FEDERALLY
QUALIFIED HEALTH INSURANCE PLANS
SEC. 117. ESTABLISHMENT OF REGULATORY PROGRAM
FOR CERTIFICATION OF PLANS.
(a) IN GENERAL.—Each State shall establish no later
than January 1, 1998, a regulatory program which meets
the standards referred to in section 118.
(b) PERIODIC SECRETARIAL REVIEW OF STATE REG-
ULATORY PROGRAM.—The Secretary periodically shall re-
view each State regulatory program to determine if such
program continues to meet and enforce the standards re-
ferred to in section 118. If the Secretary initially deter-
mines that a State regulatory program no longer meets
and enforces such standards, the Secretary shall provide
the State an opportunity to adopt a plan of correction that
would bring such program into compliance with such
standards. If the Secretary makes a final determination
that the State regulatory program fails to meet and en-
force such standards after such an opportunity, the Sec-
retary shall decertify such program and assume respon-
sibility with respect to health insurance plans in the State.
SEC. 118. STANDARDS FOR REGULATORY PROGRAMS.
(a) IN GENERAL.—The Secretary, in consultation
with the National Association of Insurance Commissioners
(hereafter in this section referred to as ‘‘NAIC’’) shall de-
velop by not later than 1 year after the date of the enact-
ment of this Act, in the form of model Acts and model
regulations, State regulatory program standards which in-
clude—
(1) procedures for certifying that the require-
ments of part I of this subtitle have been met by a
health insurance plan applying for certification as a
federally qualified health insurance plan,
(2) the requirements described in subsections
(b), (c), and (d),
(3) requirements with respect to solvency stand-
ards and guaranty funds for carriers of federally
qualified health insurance plans, and
(4) reporting requirements under which carriers
report to the Internal Revenue Service regarding the
acquisition and termination by individuals of cov-
erage under federally qualified health insurance
plans.
(b) PASSBACK OF CLAIMS AND PREMIUMS.—The re-
quirements of this subsection are met, if, in the case of
an applicant who has been continuously insured, as de-
scribed in section 114(b)(1)(B), and is at the time of the
application receiving treatment for a preexisting medical
condition—
(1) the federally qualified health insurance plan
is allowed to pass back to the applicant’s previous
plan any claims relating to such condition, together
with a portion of the premium, and
(2) such previous plan is required to pay such
claims and premium incurred during the lesser of—
(A) the duration of the course of the treat-
ment or spell of illness, or
(B) 2 years from the date at which cov-
erage commenced under the federally qualified
health insurance plan.
(c) MARKETING PRACTICES.—The requirements of
this subsection are met, if the carrier offering the federally
qualified health insurance plan retains the right to select
agents with whom such plan contracts and to determine
the amount and form of compensation to such agents, ex-
cept that—
(1) if the carrier chooses to contract with an
agent, the carrier may not terminate or refuse to
renew the agency contract for any reason related to
the age, sex, health status, claims experience, occu-
pation, or geographic location of the insureds placed
by the agent with such plan, and
(2) the carrier may not, directly or indirectly,
enter into any contract, agreement, or arrangement
with an agent that provides for, or results in, any
consideration provided to such agent for the issu-
ance or renewal of such a plan to vary on account
of the age, sex, health status, claims experience, oc-
cupation, or geographic location of the insureds
placed by the agent with such plan.
(d) RISK ADJUSTMENT
OR REINSURANCE PRO-
GRAMS.—The requirements of this subsection are met, if
the carrier offering the federally qualified health insurance
plan participates in a State-administered risk adjustment
program (or, at the option of the State, a reinsurance pro-
gram) designed to compensate for the potential occurrence
of grossly disproportionate distributions of above-standard
or below-standard insured risks among federally qualified
health insurance plans.
(e) NONBINDING STANDARDS.—The Secretary, in
consultation with NAIC, shall also develop within the 1-
year period described in subsection (a), nonbinding stand-
ards for premium rating practices and guaranteed renew-
ability of coverage which, if the insurer so elects, is more
generous (additional benefits or lower cost sharing or
both) than the requirements under part I of this subtitle
for federally qualified health insurance plans.
Subtitle C—Employer Provisions
SEC. 121. GENERAL PROVISIONS RELATING TO EMPLOY-
ERS.
(a) PREMIUMS WITHHELD.—Each employer shall—
(1) withhold from each employee’s wages the
amount of the employee’s health insurance premium
and remit, directly or indirectly, such premium to
the insurance plan of the employee’s choice accord-
ing to an agreed upon schedule, and
(2) within the first 30 days of any calendar
year or the date of the hire of an employee, notify
each employee of the employee’s right to claim an
advance refundable tax credit for such premium
under section 34A of the Internal Revenue Code of
1986.
(b) EFFECTIVE DATE.—The requirements under
subsection (a) shall apply with respect to calendar year
1998 and thereafter.
SEC. 122. CONVERSION OF NON-SELF-INSURED PLANS.
In the case of an employer-sponsored health insur-
ance plan in force on the date of the enactment of this
Act, and which is not a self-insured plan, the insurer from
whom the plan was purchased (or, in the event such in-
surer refuses, any new subsidiary, corporation, insurer,
union, cooperative, or association willing to become the
new sponsor of the plan) shall—
(1) notify, not later than October 1, 1997, all
of the primary insured beneficiaries of the employer-
sponsored plan of their rights to convert their insur-
ance coverage to a federally qualified health insur-
ance plan (as defined in section 111) offered by the
insurer with benefits identical to, or actuarially
equivalent to, those of the employer-sponsored plan
and the rates of that coverage, and provide such
beneficiaries 60 additional days to decline or accept
the new coverage, and
(2) offer such coverage beginning January 1,
1998, at premium rates which vary only by age, sex,
and geography, except that the combined total of the
new rates charged separately to the various bene-
ficiaries may not exceed the total group rate paid by
the employer or employees or both under the em-
ployer-sponsored plan on the last day it is, or was,
in force.
SEC. 123. PROVISIONS RELATING TO EXISTING SELF-IN-
SURED PLANS.
(a) IN GENERAL.—In the case of an employer-spon-
sored health insurance plan in force on the date of the
enactment of this Act, and which is a self-insured plan,
the employer sponsoring the plan may, at anytime follow-
ing such date sell, transfer, or assign the plan to any exist-
ing or new, subsidiary, corporation, insurer, union, cooper-
ative or association, willing to become the new sponsor of
the plan, except that—
(1) such sale, transfer, or assignment may not
take effect unless first approved by a two-thirds ma-
jority vote of all the primary-insured beneficiaries of
the plan, and
(2) the terms or conditions and benefits or cov-
erage of the plan, and the eligibility criteria for par-
ticipation in the plan, may not be altered before
such date.
(b) PROVISIONS GOVERNING PLAN.—As of the date
of the enactment of this Act, the sponsor of the plan de-
scribed in subsection (a) becomes subject to all laws gov-
erning the operation of a corporation selling health insur-
ance in the applicable State or States and to the provisions
of section 122.
SEC. 
124. 
CONTINUATION 
OF 
EMPLOYER-PROVIDED
HEALTH COVERAGE REQUIRED UNTIL EF-
FECTIVE DATE OF NEW COVERAGE UNDER
THIS ACT.
(a) 
IN
GENERAL.—Clause 
(i) 
of 
section
4980B(f)(2)(B) of the Internal Revenue Code of 1986 (re-
lating to period of coverage) is amended by inserting after
subclause (V) the following new subclause:
‘‘(VI) QUALIFYING
EVENT
IN-
VOLVING END OF PLAN.—In the case
of an event described in paragraph
(3)(G), December 31, 1997.’’.
(b) QUALIFYING
EVENT
INVOLVING
END
OF
PLAN.—Paragraph (3) of section 4980B(f) of the Internal
Revenue Code of 1986 (defining qualifying event) is
amended by inserting after subparagraph (F) the follow-
ing new subparagraph:
‘‘(G) The termination by the employer of
the group health plan after the date of the en-
actment of the Consumer Choice Health Secu-
rity Act of 1994.’’.
(c) CONFORMING AMENDMENT.—Clause (ii) of sec-
tion 4980B(f)(2)(B) of the Internal Revenue Code of 1986
is amended by striking ‘‘The date’’ and inserting ‘‘Except
in the case of a qualifying event described in paragraph
(3)(G), the date’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to qualifying events occurring after
the date of the enactment of this Act.
SEC. 125. REQUIREMENTS WITH RESPECT TO CASHING OUT
EMPLOYER-SPONSORED PLANS.
(a) NON-FEDERAL EMPLOYERS.—
(1) IN GENERAL.—Each employer contributing
in whole or in part to an employer-sponsored health
insurance plan on December 1, 1997, shall, within
30 days after such date—
(A) notify each employee participating in
the plan of the amount spent by the employer
on the employee’s health insurance, as deter-
mined under paragraph (2),
(B) add such amount to the cash wages of
the employee commencing with pay periods be-
ginning on and after January 1, 1998, and
(C) hold each employee harmless for the
employer’s share of any payroll taxes due under
chapter 31 of the Internal Revenue Code of
1986 on such amount.
(2) AMOUNT OF INCLUSION.—The amount de-
scribed in paragraph (1)(A) shall equal the actuarial
value of the employer’s contribution for group health
issuance coverage apportioned to the plan’s bene-
ficiaries according to the new premiums for individ-
ual and family coverage determined by the insurer.
(3) PRIOR TERMINATION.—Any beneficiary of
an employer-sponsored health insurance plan who
voluntarily terminates coverage under such a plan
before December 1, 1997, forfeits the right to re-
ceive the value of the beneficiary’s coverage in cash.
(b) COMMISSION ON CASHING OUT FEHBP BENE-
FITS.—
(1) ESTABLISHMENT.—
(A) IN GENERAL.—There is established an
independent board to be known as the ‘‘Bene-
fits Cash Out Commission’’ (in this subtitle, re-
ferred to as the ‘‘Commission’’).
(B) DUTIES.—The Commission shall study
and propose a procedure under which individ-
uals may cash out health benefits under chapter
89 of title 5, United States Code, and pay
scales and retirement benefits would be ad-
justed accordingly. The Commission shall report
to Congress regarding such study and proposal
not later than 1 year after the date of the en-
actment of this Act.
(C) MEMBERSHIP.—
(i) IN
GENERAL.—The Commission
shall be composed of 13 members ap-
pointed by the President by and with the
advice and consent of the Senate.
(ii) CONSULTATION.—In selecting in-
dividuals for nominations for appointments
for the Commission, the President should
consult with—
(I) the Speaker of the House of
Representatives concerning the ap-
pointment of 3 members;
(II) the Majority Leader of the
Senate concerning the appointment of
3 members;
(III) the Minority Leader of the
House of Representatives concerning
the appointment of 3 members; and
(IV) the Minority Leader of the
Senate concerning the appointment of
3 members.
(iii) CHAIR.—The President shall des-
ignate 1 individual described in clause (ii)
who shall serve as Chair of the Commis-
sion.
(iv) COMPOSITION OF COMMISSION.—
The membership of the Commission shall
include individuals with national recogni-
tion for expertise in the valuation of health
insurance benefits and of Federal civilian
pay and retirement benefits.
(D) ADMINISTRATIVE PROVISIONS.—
(i) MEETINGS.—Each meeting of the
Commission shall be open to the public.
(ii) PAY AND TRAVEL EXPENSES.—
(I) IN GENERAL.—Each member,
other than the Chair, shall be paid at
a rate equal to the daily equivalent of
the minimum annual rate of basic pay
payable for level IV of the Executive
Schedule under section 5315 of title
5, United States Code, for each day
(including travel time) during which
the member is engaged in the actual
performance of duties vested in the
Commission.
(II) CHAIR.—The Chair shall be
paid for each day referred to in
subclause (I) at a rate equal to the
daily equivalent of the minimum an-
nual rate of basic pay payable for
level III of the Executive Schedule
under section 5314 of title 5, United
States Code.
(III) TRAVEL EXPENSES.—Mem-
bers shall receive travel expenses, in-
cluding per diem in lieu of subsist-
ence, in accordance with sections
5702 and 5703 of title 5, United
States Code.
(iii) STAFF.—
(I) IN
GENERAL.—Subject to
subclauses (II) and (III), the Chair,
with the approval of the Commission,
may appoint and fix the pay of addi-
tional personnel.
(II) PAY.—The Chair may make
such appointments without regard to
the provisions of title 5, United States
Code, governing appointments in the
competitive service, and any personnel
so appointed may be paid without re-
gard to the provisions of chapter 51
and subchapter III of chapter 53 of
such title, relating to classification