‘‘(3) MEMBERSHIP.—The Board of Directors 
shall—
‘‘(A) be composed of representatives of the 
members of the coalition, in equal number, in-
cluding small employers and employee rep-
resentatives of such employers, but 
‘‘(B) not include other interested parties, 
such as health care service providers, health in-
surers, or insurance agents or brokers which 
may have a conflict of interest with the pur-
poses of the coalition. 
‘‘(c) MEMBERSHIP OF COALITION.—
‘‘(1) IN
GENERAL.—A purchasing coalition 
shall accept all small employers residing within the 
area served by the coalition as members if such em-
ployers request such membership. 
‘‘(2) OTHER MEMBERS.—The coalition, at the 
discretion of its Board of Directors, may be open to 
individuals and large employers. 
‘‘(3) VOTING.—Members of a purchasing coali-
tion shall have voting rights consistent with the rules 
established by the State. 
‘‘(d) DUTIES OF PURCHASING COALITIONS.—Each 
purchasing coalition shall—
‘‘(1) enter into agreements with small employ-
ers (and, at the discretion of its Board, with individ-
uals and other employers) to provide health insur-
ance benefits to employees and retirees of such em-
ployers, 
‘‘(2) where it is feasible and advisable, enter 
into agreements with 3 or more unaffiliated, quali-
fied licensed health plans, to offer benefits to mem-
bers, 
‘‘(3) offer to members at least 1 open enroll-
ment period of at least 30 days per calendar year, 
‘‘(4)(A) serve a geographical area which, under 
the State certification procedures referred to in sub-
section (a)(2), is significant, and 
‘‘(B) market to all eligible members in that 
area, and 
‘‘(5) carry out other functions provided for 
under this section. 
‘‘(e) LIMITATION ON ACTIVITIES.—A purchasing coa-
lition shall not—
‘‘(1) perform any activity (including certifi-
cation or enforcement) relating to compliance or li-
censing of health plans, 
‘‘(2) assume insurance or financial risk in rela-
tion to any health plan, or
‘‘(3) perform other activities identified by the 
State as being inconsistent with the performance of 
its duties under this section. 
‘‘(f) ADDITIONAL REQUIREMENTS FOR PURCHASING 
COALITIONS.—As provided by the Secretary in regula-
tions, a purchasing coalition shall be subject to require-
ments similar to the requirements of a group health plan 
under this chapter. 
‘‘(g) RELATION TO OTHER LAWS.—
‘‘(1) 
PREEMPTION
OF
STATE
FICTITIOUS 
GROUP LAWS.—Requirements (commonly referred to 
as fictitious group laws) relating to grouping and 
similar requirements for health insurance coverage 
are preempted to the extent such requirements im-
pede the establishment and operation of qualified 
health benefit purchasing coalitions. 
‘‘(2) ALLOWING
SAVINGS
TO
BE
PASSED 
THROUGH.—Any State law that prohibits health in-
surance issuers from reducing premiums on health 
insurance coverage sold through a qualified health 
benefit purchasing coalition to reflect administrative 
savings is preempted. This paragraph shall not be 
construed to preempt State laws that impose restric-
tions on premiums based on health status, claims
history, industry, age, gender, or other underwriting 
factors. 
‘‘(3) NO WAIVER OF HIPAA REQUIREMENTS.—
Nothing in this section shall be construed to change 
the obligation of health insurance issuers to comply 
with the requirements of title XXVII of the Public 
Health Service Act with respect to health insurance 
coverage offered to small employers in the small 
group market through a qualified health benefit pur-
chasing coalition. 
‘‘(h) DEFINITION OF SMALL EMPLOYER.—For pur-
poses of this section—
‘‘(1) IN GENERAL.—The term ‘small employer’ 
means, with respect to any calendar year, any em-
ployer if such employer employed an average of at 
least 2 and not more than 50 qualified employees on 
business days during either of the 2 preceding cal-
endar years. For purposes of the preceding sentence, 
a preceding calendar year may be taken into account 
only if the employer was in existence throughout 
such year. 
‘‘(2) EMPLOYERS NOT IN EXISTENCE IN PRE-
CEDING YEAR.—In the case of an employer which 
was not in existence throughout the 1st preceding 
calendar year, the determination under paragraph
(1) shall be based on the average number of quali-
fied employees that it is reasonably expected such 
employer will employ on business days in the current 
calendar year.’’. 
(2) CONFORMING AMENDMENT.—The table of 
subchapters for chapter 100 of such Code is amend-
ed by adding at the end the following item:
‘‘SUBCHAPTER D. QUALIFIED HEALTH BENEFIT PURCHASING COALITION’’.
(c) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 4. STATE GRANT PROGRAM FOR MARKET INNOVA-
TION. 
(a) IN GENERAL.—The Secretary of Health and 
Human Services (in this section referred to as the ‘‘Sec-
retary’’) shall establish a program (in this section referred 
to as the ‘‘program’’) to award demonstration grants 
under this section to States to allow States to demonstrate 
the effectiveness of innovative ways to increase access to 
health insurance through market reforms and other inno-
vative means. Such innovative means may include (and are 
not limited to) any of the following: 
(1) Alternative group purchasing or pooling ar-
rangements, such as a purchasing cooperatives for 
small businesses, reinsurance pools, or high risk 
pools.