Final Regulations for Health Coverage Portability; Final Rule and Request for Information on Benefit-Specific Waiting Periods Under HIPAA Titles I & IV; Final Rule
[12/30/2004]
Volume 69, Number 250, Page 78719-78799
[[Page 78719]]
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Part III
Department of the Treasury
Internal Revenue Service
26 CFR Parts 54 and 602
Department of Labor
Employee Benefits Security Administration
29 CFR Part 2590
Department of Health and Human Services
Centers for Medicare & Medicaid Services
45 CFR Parts 144 and 146
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Final Regulations for Health Coverage Portability; Final Rule
Notice of Proposed Rulemaking for Health Coverage Portability and
Request for Information on Benefit-Specific Waiting Periods Under HIPAA
Titles I & IV; Proposed Rules
[[Page 78720]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 54 and 602
[TD 9166]
RIN 1545-AX84
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2590
RIN 1210-AA54
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
45 CFR Parts 144 and 146
RIN 0938-AL43
Final Regulations for Health Coverage Portability for Group
Health Plans and Group Health Insurance Issuers Under HIPAA Titles I &
IV
AGENCIES: Internal Revenue Service, Department of the Treasury;
Employee Benefits Security Administration, Department of Labor; Centers
for Medicare & Medicaid Services, Department of Health and Human
Services.
ACTION: Final regulation.
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SUMMARY: This document contains final regulations governing portability
requirements for group health plans and issuers of health insurance
coverage offered in connection with a group health plan. The rules
contained in this document implement changes made to the Internal
Revenue Code, the Employee Retirement Income Security Act, and the
Public Health Service Act enacted as part of the Health Insurance
Portability and Accountability Act of 1996.
DATES: Effective date. These final regulations are effective February
28, 2005.
Applicability date. These final regulations apply for plan years
beginning on or after July 1, 2005.
FOR FURTHER INFORMATION CONTACT: Dave Mlawsky, Centers for Medicare &
Medicaid Services (CMS), Department of Health and Human Services, at 1-
877-267-2323 ext. 61565; Amy Turner, Employee Benefits Security
Administration, Department of Labor, at (202) 693-8335; or Russ
Weinheimer, Internal Revenue Service, Department of the Treasury, at
(202) 622-6080.
SUPPLEMENTARY INFORMATION:
Customer Service Information
To assist consumers and the regulated community, the Departments
have issued questions and answers concerning HIPAA. Individuals
interested in obtaining copies of Department of Labor publications
concerning changes in health care law may call a toll free number, 1-
866-444-EBSA (3272), or access the publications on-line at http://www.dol.gov/ebsa
, the Department of Labor's Web site. These regulations as well as
other information on the new health care laws are also available on the
Department of Labor's interactive web pages, Health Elaws. In addition,
CMS's publication entitled ``Protecting Your Health Insurance
Coverage'' is available by calling 1-800-633-4227 or on the Department
of Health and Human Services' Web site (http://www.cms.hhs.gov/hipaa1), which
includes the interactive webpages, HIPAA Online. Copies of the HIPAA
regulations, as well as notices and press releases related to HIPAA and
other health care laws, are also available at the above-referenced Web
sites.
A. Background
The Health Insurance Portability and Accountability Act of 1996
(HIPAA), Public Law 104-191, was enacted on August 21, 1996. HIPAA
amended the Internal Revenue Code of 1986 (Code), the Employee
Retirement Income Security Act of 1974 (ERISA), and the Public Health
Service Act (PHS Act) to provide for, among other things, improved
portability and continuity of health coverage. Interim final
regulations implementing the HIPAA provisions were first made available
to the public on April 1, 1997 (published in the Federal Register on
April 8, 1997, 62 FR 16894) (April 1997 interim rules). On December 29,
1997, the Departments published in the Federal Register (62 FR 67688) a
clarification of the April 1997 interim rules as they relate to
excepted benefits. On October 25, 1999, the Departments published a
notice in the Federal Register (64 FR 57520) soliciting additional
comments on the portability requirements based on the experience of
plans and issuers operating under the April 1997 interim rules.
After consideration of all the comments received on the portability
provisions, the Departments are publishing these final regulations.
These final regulations do not significantly modify the framework
established in the April 1997 interim rules. Instead, these final
regulations implement changes to improve the portability of health
coverage while seeking to minimize burdens on group health plans and
group health insurance issuers. These final regulations become
applicable to plans and issuers on the first day of the plan year
beginning on or after July 1, 2005. Each plan or issuer must continue
to comply with the April 1997 interim rules until these final
regulations become applicable to that plan or issuer. In addition, the
Departments are publishing proposed regulations elsewhere in this issue
of the Federal Register to address additional and discrete issues.
B. Overview of the Final Regulations
1. Definitions--26 CFR 54.9801-2, 29 CFR 2590-701-2, 45 CFR 144.103
This section of the final regulations provides most of the
definitions used in the regulations implementing HIPAA. In addition to
some minor restructuring of the April 1997 interim rules (i.e., some
definitions have been moved into other sections of the regulations),
some additional terms have been added. Among the new terms is the
definition of the term dependent. Dependent is defined as any
individual who is or may become eligible for coverage under the terms
of a group health plan because of a relationship to a participant. This
is intended to clarify that for purposes of HIPAA the terms of the
group health plan determine which individuals are eligible for coverage
as a dependent under the plan. Thus, for example, the plan terms
control the age (if any) at which and conditions under which a child of
a participant ceases to be eligible for coverage as a dependent.
Moreover, whether an individual is eligible for special enrollment as a
dependent is determined in part based on the plan's definition of
dependent.
2. Limitations on Preexisting Condition Exclusions--26 CFR 54.9801-3,
29 CFR 2590.701-3, 45 CFR 146.111
This section of the final regulations addresses HIPAA's limitations
on a plan's or issuer's ability to impose a preexisting condition
exclusion. Comments addressing this topic generally approved of the
approach taken in the Departments' April 1997 interim rules.
Accordingly, these final regulations do not modify significantly the
April 1997 interim rules but instead add several clarifications to the
general framework already established. Also, some comments reflect a
misunderstanding of the notice requirements for plans and issuers that
impose a preexisting condition exclusion. Thus, these final regulations
are restructured to clarify these notice
[[Page 78721]]
obligations. In addition, an example in the regulations contains
language that plans and issuers can use to satisfy the notice
requirements.
Definition of a Preexisting Condition Exclusion
In these final regulations, a preexisting condition exclusion
continues to be defined broadly. A preexisting condition exclusion is
any limitation or exclusion of benefits relating to a condition based
on the fact that the condition was present before the effective date of
coverage, whether or not any medical advice, diagnosis, care, or
treatment was recommended or received before that day. This definition
has been moved to this section on limitations on preexisting condition
exclusions to emphasize the difference between the broadness of the
definition and the narrowness of permissible preexisting condition
exclusions. The definition has also been modified slightly from the
previous definition and clarifications of its application have been
added.
If a plan exclusion satisfies the definition of a preexisting
condition exclusion, it is subject to the rules of this section for
preexisting condition exclusions. Under the April 1997 interim rules,
whether an exclusion is a preexisting condition exclusion is determined
by whether the plan provision restricts benefits for a condition
because it was present before the ``first day of coverage.'' These
final regulations have replaced the term first day of coverage with
effective date of coverage under a group health plan or health
insurance coverage. In the case of a plan that changes health insurance
issuers, ``first day of coverage'' can be read to mean only the first
day of coverage under the plan and not the first day of coverage under
the new issuer's policy or contract (because ``first day of coverage''
is thus defined for purposes of determining the enrollment date). This
reading would mean that an exclusion of benefits based on the fact that
a condition existed before the effective date of coverage in the health
insurance of the succeeding issuer would not be a preexisting condition
(because it would not apply based on the fact that a condition existed
before the first day of coverage under the plan). The phrase
``effective date of coverage under a group health plan or health
insurance coverage'' under the final regulations thus applies to
coverage either under a plan or health insurance coverage. Therefore, a
provision used by a succeeding issuer to deny benefits for a condition
because it arose before the effective date of coverage under the new
policy would also fit the definition of a preexisting condition
exclusion.
Since the April 1997 interim rules were published, several
situations have repeatedly arisen in which a plan exclusion is not
designated as a preexisting condition exclusion but nevertheless
satisfies the definition of a preexisting condition exclusion. Examples
have been added to illustrate some of these common plan provisions.
These situations include a plan provision that provides coverage for
accidental injury only if the injury occurred while covered under the
plan, a plan provision that counts against a lifetime limit benefits
received under prior health coverage, and a plan provision that denies
benefits for pregnancy until 12 months after an individual generally
becomes eligible for benefits under the plan.\1\ The regulations also
include a series of examples relating to exclusions for congenital
conditions. These examples illustrate that a plan that generally
provides benefits for a condition cannot exclude benefits for the
condition in instances where it arises congenitally without complying
with these limitations on preexisting condition exclusions. However,
these limitations would not apply if a plan excludes benefits for all
instances of a condition, even if all instances are likely to be
congenital. Plans and policies that contain these types of preexisting
condition exclusions that are not designated as such should be modified
to comply with HIPAA's requirements for preexisting condition
exclusions, or the exclusions should be deleted. In addition, because a
preexisting condition exclusion discriminates against individuals based
on one or more health factors, unless a preexisting condition exclusion
complies with HIPAA's limitations on preexisting condition exclusions,
the plan provision will also violate the HIPAA nondiscrimination
provisions.\2\
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\1\ Several comments (including those of several State insurance
commissioner's offices) have asked the Departments to clarify that a
preexisting condition exclusion would also include any waiting
period or other temporary benefit exclusion (other than a waiting
period on all benefits). The Departments are publishing separately
in this issue of the Federal Register a Request for Information,
which invites further comments on this issue of benefit-specific
waiting periods.
\2\ See 26 CFR 54.9802-1T(b)(3), 29 CFR 2590.702(b)(3), and 45
CFR 146.121(b)(3), published on January 8, 2001 at 66 FR 1378.
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General Rules Governing Preexisting Condition Exclusions
In addition to modifying the definition of a preexisting condition
exclusion, these final regulations set forth HIPAA's limitations on
preexisting condition exclusions, as follows:
Six-Month Look-Back Rule
The final regulations retain the 6-month look-back rule set forth
in the April 1997 interim rules. In addition, these regulations clarify
that a plan or issuer can use a period shorter than 6 months for
purposes of applying the 6-month look-back rule. Examples in these
final regulations also clarify that if a doctor's recommendation for
treatment occurs before the 6-month look-back period, an individual can
be subject to a preexisting condition exclusion only if the individual
receives the recommended treatment within the 6-month look-back period.
Maximum Length of Preexisting Condition Exclusion
The final regulations retain the rule set forth in the April 1997
interim rules that a preexisting condition exclusion is not permitted
to extend for more than 12 months (18 months in the case of a late
enrollee) after the enrollment date.
Reducing a Preexisting Condition Exclusion Period by Creditable
Coverage
The final regulations retain the rule set forth in the April 1997
interim rules. Accordingly, under these final regulations, the period
of any preexisting condition exclusion that would otherwise apply to an
individual under a group health plan is reduced by the number of days
of creditable coverage \3\ the individual has as of the enrollment date
(not including any days before a significant break in coverage). Some
comments asked how this rule applies to individuals who currently have
coverage under another plan (that is, the coverage has not yet ended).
An example clarifies that a plan or issuer must count all days of
creditable coverage prior to an individual's enrollment date, even if
that coverage is still in effect.
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\3\ For purposes of these regulations, the phrase ``days of
creditable coverage'' has the same meaning as the phrase ``aggregate
of the periods of creditable coverage'' as such phrase is used in
the statute.
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Other Standards
The final regulations retain the statement that other legal
standards may apply to group health coverage preexisting condition
exclusions. In this connection, the Department of Labor's Veterans'
Employment and Training Service (VETS) has commented that the Uniformed
Services Employment and Reemployment Rights Act (USERRA) provides
reemployment rights for persons who leave civilian employment to
perform service in the uniformed
[[Page 78722]]
services and prohibits employer discrimination against any person on
the basis of the person's military service, obligations, intent to join
or certain other protected activities. In general, USERRA reemployment
rights apply to persons who leave civilian employment to serve a single
enlistment period in the active military or to employees who are
members of the National Guard or Reserve and are required to perform
intermittent military service or training. USERRA provides rights
regarding both continuation of group health plan coverage by an
employee who is absent to perform service in the uniformed services and
reinstatement of group health plan coverage upon reemployment if the
coverage was interrupted by the service. In response to this comment,
the final regulations include a statement that USERRA can affect the
application of a preexisting condition exclusion to certain individuals
who are reinstated in a group health plan following active military
service. For more information, a VETS directory and additional USERRA
information is available at http://www.dol.gov/vets.
Enrollment Definitions
Both the 6-month look-back period and the maximum length of
preexisting condition exclusion are measured with respect to an
individual's enrollment date. The final regulations generally retain
the enrollment definitions that were set forth in the April 1997
interim rules (including definitions of enrollment date, waiting
period, and late enrollee). Under HIPAA, the April 1997 interim rules,
and these final regulations, the enrollment date is the first day of
coverage under the plan or, if there is a waiting period, the first day
of the waiting period. These final regulations clarify that if an
individual receiving benefits under a group health plan changes benefit
package options, or if the plan changes group health insurance issuers,
the individual's enrollment date remains the same.
The Departments received several comments reflecting confusion
about the relationship between the preexisting condition exclusion
rules and the definitions of enrollment date and waiting period.
Accordingly, guidance concerning waiting periods previously located in
the definitions section has been moved to this section of the
regulations and expanded. In addition, the definition of waiting period
has been modified with respect to individuals seeking individual market
coverage. Specifically, these final rules clarify that if an individual
seeks coverage in the individual market, a waiting period begins on the
date the individual submits a substantially complete application for
coverage and ends on either the date coverage begins (if the
application results in coverage), or the date on which the application
is denied by the issuer or the date on which the offer of coverage
lapses (if the application does not result in coverage). Under the
statute, the April 1997 interim rules, and these final regulations, the
effect of considering this period a waiting period is that the period
is not counted when determining the length of any break in coverage.
This rule modifies the rule contained in the April 1997 interim rules
(which provided a waiting period only if the individual actually
obtained coverage). The modification addresses situations where some
individuals have been denied individual market policies or individuals
declined coverage because, for example, the policies had an exorbitant
premium.
Additional examples illustrate the interaction between a waiting
period and the 6-month look-back period, the application of the 6-month
look-back and maximum preexisting condition exclusion period rules to
plans with more than one benefit package option at open season, and the
interaction between these rules and other eligibility criteria under
the plan.
Individuals and Conditions That Cannot Be Subject to a Preexisting
Condition Exclusion
Under HIPAA, the April 1997 interim rules, and these final rules, a
preexisting condition exclusion cannot be applied to pregnancy. Nor can
a preexisting condition exclusion be applied to a newborn, adopted
child, or child placed for adoption if the child is covered under a
group health plan (or other creditable coverage) within 30 days after
birth, adoption, or placement for adoption.
One comment noted that the rule for newborns in the April 1997
interim rules is expressed inconsistently. Some of those expressions
are inconsistent with the rule for adopted children. Specifically, the
rule for adopted children and one expression of the rule for newborns
refers to eligibility being conditioned on being covered under any
creditable coverage as of the last day of the 30-day period after
birth, adoption, or placement for adoption. However, in other
expressions of the rule for newborns, a reference is made to being
covered under creditable coverage within 30 days after birth. These
final regulations use one term consistently, referring to coverage
within 30 days after birth, adoption, or placement for adoption. This
accords with the conference report. H.R. Conf. Rep. No. 736, 104th
Cong. 2d Session 184-185 (1996). Consequently, if, for example, a child
is covered within 30 days of birth, the child cannot be subject to a
preexisting condition exclusion even if the child is no longer covered
under the plan on the 30th day after birth (unless the child has a
significant break in coverage).
Several comments noted that State laws applicable to health
insurance issuers sometimes require that a mother's health coverage
must provide benefits for health care expenses incurred for the child
for a specified period following birth and cannot be recouped even if
the child never enrolls in the plan under which the mother is covered.
A new example clarifies that, in this situation, the child has
creditable coverage within 30 days after birth and, therefore, no
preexisting condition exclusion may be imposed on the child unless the
child has a subsequent significant break in coverage.
Finally, HIPAA, the April 1997 interim rules, and these final
regulations provide that a group health plan, and a health insurance
issuer offering group health insurance coverage, may not impose a
preexisting condition exclusion relating to a condition based solely on
genetic information. Comments expressed concern that the definition of
genetic information in the April 1997 interim rules was too broad and
would prevent the application of a preexisting condition exclusion to
conditions that would be otherwise permitted independent of any genetic
information. Although these regulations have not changed the definition
of genetic information, the regulations clarify that if an individual
is diagnosed with a condition, even if the condition relates to genetic
information, the plan may impose a preexisting condition exclusion with
respect to the condition, subject to the other limitations of this
section. This rule was located in the definition of medical condition
in the April 1997 interim rules. Some comments indicated this rule was
difficult to locate. Thus, it has been moved to this section, and an
example illustrating the rule has been added.
First Notice of Preexisting Condition Exclusion--General Notice
Under these final regulations, as with the April 1997 interim
rules, a group health plan imposing a preexisting condition exclusion,
and a health insurance issuer offering group health insurance coverage
under a plan imposing a preexisting condition
[[Page 78723]]
exclusion, must provide a written general notice of preexisting
condition exclusion before it can impose a preexisting condition
exclusion.
After publication of the April 1997 interim rules, the Departments
received questions about the operation of this requirement. The April
1997 interim rules provided that a plan or issuer could not impose a
preexisting condition exclusion with respect to a participant or
dependent before providing the general notice to the participant.
Several comments asked whether plans and issuers could delay providing
the general notice until a large claim was filed and then pend the
claim until the general notice was sent. Other comments expressed
concern that if plans do not notify individuals upon enrollment about
the benefit exclusions that apply to their coverage, individuals will
not be able to make informed decisions about their health care choices.
The Departments had contemplated under the April 1997 interim rules
that individuals should be provided the information required in the
general notice before they incurred claims that could be denied under a
preexisting condition exclusion. These final regulations clarify the
procedural requirements for the general notice of preexisting condition
exclusion. Specifically, under the final regulations, the general
notice of preexisting condition exclusion must be provided as part of
any written application materials distributed by the plan or issuer for
enrollment. If the plan or issuer does not distribute such materials,
the notice must be provided by the earliest date following a request
for enrollment that the plan or issuer, acting in a reasonable and
prompt fashion, can provide the notice. Moreover, regarding the content
of this general notice, the final regulations clarify precisely what is
required when disclosing the existence and terms of the plan's
preexisting condition exclusion. In addition, these final regulations
require the notice to include the person to contact (including an
address or telephone number) for obtaining additional information or
assistance regarding the preexisting condition exclusion. An example in
these final regulations sets forth sample language that plans and
issuers can use when developing the general notice for their coverages.
Issuers that sell different policies to different plans should also
be aware that when describing the existence and terms of the maximum
preexisting condition exclusion period, the issuer must describe to
individuals the actual maximum exclusion period under their policy.
Therefore, if an issuer sells two policies, one with a 6-month and one
with a 12-month maximum preexisting condition exclusion, the issuer
could not send one notice to individuals under both policies indicating
that the maximum preexisting condition exclusion is 12 months. Instead,
the issuer is required to send one notice to participants under the
policy with the 6-month preexisting condition exclusion (indicating
that the maximum exclusion period is 6 months) and a different notice
to participants under the policy with the 12-month preexisting
condition exclusion (indicating that the maximum exclusion period is 12
months).
Determination of Creditable Coverage
These final regulations require a plan or issuer that imposes a
preexisting condition exclusion to make a determination of creditable
coverage within a reasonable time after receiving information regarding
prior health coverage. This rule was included in the section of the
April 1997 interim rules addressing certification and disclosure of
previous coverage, and it has been moved to this section on preexisting
condition exclusions unchanged. These final regulations clarify that a
plan or issuer may not impose any limit on the amount of time that an
individual has to present a certificate or other evidence of creditable
coverage.\4\
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\4\ Of course, after a claim has been denied under a preexisting
condition exclusion, other laws, such as section 503 of ERISA, may
set forth timing rules for an individual to appeal a denied claim.
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Second Notice of Preexisting Condition Exclusion--Individual Notice
These final regulations retain the requirement to provide an
individual a written notice of the length of preexisting condition
exclusion that remains after offsetting for prior creditable coverage.
These final regulations clarify that this individual notice is not
required to identify any medical conditions specific to the individual
that could be subject to the exclusion. Also, a plan or issuer is not
required to provide this notice if the plan or issuer does not impose
any preexisting condition exclusion on the individual or if the plan's
preexisting condition exclusion is completely offset by the
individual's prior creditable coverage. These final regulations add a
new example that illustrates how the notice works and includes sample
language that may be helpful to plans and issuers in developing this
type of notice with respect to their coverage.
Reconsideration
Consistent with the April 1997 interim rules, these final
regulations do not prevent a plan or issuer from modifying an initial
determination of creditable coverage if it determines that the
individual did not have the claimed creditable coverage and if certain
procedural requirements are met. The final regulations have been
slightly reorganized and modified to make clearer that a plan or issuer
is permitted to modify its initial determination if a notice of the new
determination (that meets the requirements of the second, individual
notice of preexisting condition exclusion, described above) is provided
and, until the notice of the new determination is provided, the plan or
issuer acts in a manner consistent with the initial determination for
purposes of approving access to medical services (such as pre-surgery
authorization).
3. Rules Relating to Creditable Coverage--26 CFR 54.9801-4, 29 CFR
2590.701-4, 45 CFR 146.113
This section of the final regulations describes the varieties of
health coverage that constitute creditable coverage and sets forth
rules for how to count creditable coverage for purposes of the rule
requiring plans and issuers to offset the maximum length of a
preexisting condition exclusion by prior creditable coverage.
Creditable Coverage
The rules in the final regulations describing the varieties of
health coverage that constitute creditable coverage generally follow
the April 1997 interim rules, with two modifications. The April 1997
interim rules contain ten categories of creditable coverage. After
publication of the April 1997 interim rules, Congress created the State
Children's Health Insurance Program (S-CHIP), which allows states to
provide health coverage to eligible children through Medicaid expansion
or private market mechanisms. This coverage meets the definition of
creditable coverage as either Medicaid coverage, group health plan
coverage, or health insurance coverage. In addition, Congress
specifically provides \5\ that S-CHIP coverage is creditable coverage
under HIPAA. Therefore, these final regulations have added coverage
under S-CHIP as an eleventh category of creditable coverage.
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\5\ Section 2109 of the Social Security Act, enacted by section
4901 of the Balanced Budget Act of 1997, Pub. L. 105-33, 111 Stat.
567.
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The second modification is to the definition of public health plan.
This
[[Page 78724]]
definition has been changed in two ways. The first change relates to
the type of health coverage provided by a public health plan. The
statute does not define the term. The April 1997 interim rules limit
the definition of public health plans to certain plans provided through
health insurance coverage. Some comments suggested it was unnecessary
to restrict the definition to insured coverage and argued that the term
public health plan should be expanded. These final regulations delete
the word ``insurance'' from that requirement so that any health
coverage provided by a governmental entity, regardless of whether it
has the risk-shifting or risk-distributing effects of insurance, is a
public health plan.
The second change to the definition of public health plan relates
to the type of governmental entity that can establish or maintain a
public health plan. Under the April 1997 interim rules, only health
coverage provided under a plan established or maintained by a State, a
county, or another political subdivision of a State can be a public
health plan. This definition does not include a plan established or
maintained by a foreign government or the U.S. government. The preamble
to the April 1997 interim rules specifically solicited comments on
whether public health systems of foreign countries should be considered
public health plans.
Many comments addressed this issue, arguing both for and against
including public health systems of foreign governments in the
definition of public health plan. The comments in favor of inclusion
argued that generally the health coverage provided through public
health systems in foreign countries is more comprehensive than that
received in this country. Some comments argued that the exclusion of
foreign public health systems from the definition of public health plan
arbitrarily penalizes individuals who maintain continuous health
coverage through a foreign public health system. The comments against
inclusion focused on the difficulty for a plan or issuer to verify
whether someone had the coverage they claimed under a foreign public
health system.
Under these final regulations, the definition of a public health
plan includes health coverage provided under a plan established or
maintained by a foreign country or a political subdivision. While this
result can inconvenience plans and issuers, verifying this type of
coverage may be no more inconvenient than verifying certain other types
of coverage, such as group health coverage provided through foreign
employers. In addition, this result is much less inequitable than
denying an individual coverage for a preexisting condition in a case in
which the individual can provide reliable evidence of having coverage
under the public health system of a foreign government. Under the rules
for establishing creditable coverage in the absence of a certificate of
creditable coverage, an individual is required to present at a minimum
some corroborating evidence of the claimed creditable coverage and is
required to cooperate with a plan's or issuer's efforts to verify
coverage. Thus, in the case of an individual claiming coverage under
the public health system of a foreign country, a plan or issuer could
require some evidence of residency in the foreign country (or evidence
that some other eligibility standard had been met) and the individual
would have to cooperate with the plan's or issuer's efforts to verify
that the individual had coverage under that country's health system.
Under the revised definition in these final regulations, health
coverage provided under a plan established or maintained by the U.S.
Government is also a public health plan.
Counting Creditable Coverage
The rules in the final regulations for how to count creditable
coverage are adopted with stylistic and conforming changes from the
April 1997 interim rules. In addition, a technical modification was
added, as required by a statutory change made by the Trade Act of 2002
(``the Trade Act'', Public Law 107-210, enacted on August 6, 2002).
Under the Trade Act, workers whose employment is adversely affected by
international trade may become entitled to receive trade adjustment
assistance (TAA) and a 65% health coverage tax credit (HCTC). The Trade
Act also amended COBRA continuation coverage provisions in ERISA, the
Public Health Service Act, and the Internal Revenue Code, to provide a
second opportunity to elect COBRA for individuals who are eventually
determined to qualify for TAA, but who did not elect COBRA after their
original loss of health coverage. Because this could result in a
``significant break in coverage'' for purposes of HIPAA, the Trade Act
specifies that the period beginning with the loss of coverage, and
ending on the first day of the second election period, for individuals
who elect COBRA during this second election period, should be
disregarded for purposes of the HIPAA pre-existing condition
provisions. Accordingly, as required by the Trade Act, under these
final rules the days between the date an individual lost group health
plan coverage and the first day of the second COBRA election period are
not taken into account in determining whether a significant break in
coverage has occurred. For more information on TAA, contact the
Department of Labor's Employment and Training Administration at 877-
US2-JOBS or at http://www.doleta.gov/tradeact. For more information on the
HCTC, contact the IRS toll-free at 866-628-4282.
The existing examples relating to the tolling of the period for
determining a significant break in coverage in the case of individuals
seeking coverage in the individual market have also been modified to
conform to the change in the definition of waiting period, which under
these final regulations includes the period beginning when an
individual submits a substantially complete application for coverage in
the individual market and ends when the application is denied or when
the offer of coverage lapses. In addition, here, as throughout these
final regulations, references in the April 1997 interim rules to ``plan
or policy'' have been revised so that the reference includes health
insurance coverage not offered through a policy of insurance, such as
health insurance coverage offered through a contract of a health
maintenance organization.
Published elsewhere in this issue of the Federal Register is a
proposed rule that provides that the period that determines whether a
significant break in coverage has occurred (generally 63 days) is
tolled in cases in which a certificate of creditable coverage is not
provided on or before the day coverage ceases. In those cases, the
significant-break-in-coverage period would be tolled until a
certificate is provided or, if earlier, until 44 days after the
coverage ceases.
These final regulations retain the methods in the April 1997
interim rules for counting creditable coverage, that is, the standard
method and the alternative method. Comments requested that the
alternative method be expanded so that a plan or issuer could elect to
have it apply to categories in addition to the five categories
prescribed in the April 1997 interim rules (mental health; substance
abuse treatment; prescription drugs; dental care; and vision care). The
types of categories described in the comments were significant
differences in deductibles, cost-sharing, or out-of-pocket maximums
between plans. One comment suggested that any comparison between plans
on the basis of difference in deductibles or cost sharing was
unworkable.
[[Page 78725]]
It is the view of the Departments that a comparison between plans,
and allowing one plan not to count creditable coverage (in whole or in
part) under another plan, based solely on differences in deductibles or
in some other cost-sharing mechanism or in all cost-sharing mechanisms,
is an insufficient basis for determining the comparative value of
benefits under the plans. A plan with a low deductible or low co-
payments might also have an annual or per-incident limit on benefits so
low as to make the plan with the higher deductible or higher cost
sharing actually more valuable. Similarly, a plan with a higher
deductible or coinsurance might also have a higher table of usual,
customary, and reasonable costs, might be much more liberal in covering
treatments considered experimental, and might provide a much broader
base of benefits than the plan with the lower deductible or
coinsurance. Because of the numerous ways that plans or issuers can
limit the amount of benefits available under the plan, it is very
complicated to compare the value of one plan or coverage with another.
Singling out one or several of these features is insufficient for
making a true comparison of the value of the benefits.
4. Evidence of Creditable Coverage--26 CFR 54.9801-5, 29 CFR 2590.701-
5, 45 CFR 146.115
This section of the final regulations sets forth guidance regarding
the certification requirements and other requirements for disclosure of
information relating to prior creditable coverage. The provision of a
certificate and certain other disclosures of information provided for
in the statute, the April 1997 interim rules, and these final
regulations are intended to enable an individual to establish prior
creditable coverage for purposes of reducing or eliminating any
preexisting condition exclusion imposed on the individual by any
subsequent group health plan coverage. The Departments received
generally favorable comments on the April 1997 interim rules from
interested parties who submitted comments with regard to the
certification requirements. For example, several comments praised the
Departments' promulgation of a model certificate in the April 1997
interim rules as a vehicle that helped reduce compliance burdens
associated with the statutory requirements under HIPAA.
Form of Certificate
These final regulations retain the requirement that the certificate
must generally be provided in writing. The April 1997 interim rules
clarified that for this purpose a writing included any form approved by
the Secretaries as a writing. These final regulations modify that
standard to include any other medium approved by the Secretary. As with
the April 1997 interim rules, these final regulations provide that
where an individual requests that the certificate be sent to another
plan or issuer instead of the individual, and the other plan or issuer
agrees, the certification information may be provided by other means,
such as by telephone.
Information in Certificate
The information required to be provided in a certificate under
these final regulations is the same as required under the April 1997
interim rules with one addition. In response to recommendations made by
the U.S. General Accounting Office (GAO) \6\ and several comments, the
Departments have modified the April 1997 interim rules to require that
an educational statement be provided as part of a certificate of
creditable coverage in order to inform consumers of their HIPAA rights.
Some comments stated that such educational language was not necessary,
but indicated that if the Departments adopted such an approach they
should provide language for compliance purposes. In response to the GAO
recommendation, the Departments have amended the requirements for the
certificate of creditable coverage in the final regulations to include
the provision of an educational statement regarding certain HIPAA
protections. Model educational language is provided in the model
certificate (set forth below). This eliminates the burden on plans and
issuers of developing language to satisfy this requirement.
---------------------------------------------------------------------------
\6\ In the report entitled ``PRIVATE HEALTH INSURANCE: Progress
and Challenges in Implementing 1996 Federal Standards'' (GAO/HEHS-
99-100, May 12, 1999) the GAO recommended that the Departments
revise the model certificate of creditable health plan coverage to
more explicitly inform consumers of their new rights under HIPAA. At
a minimum, the GAO recommended that the certificate of creditable
coverage should inform consumers about appropriate contacts for
additional information about HIPAA and highlight key provisions and
restrictions, including (1) the limits on preexisting condition
exclusion periods and the guaranteed renewability of all health
coverage; (2) the reduction or elimination of preexisting condition
exclusion periods for employees changing jobs; (3) the prohibition
against excluding an individual from an employer health plan on the
basis of health status; and (4) the guarantee of access to insurance
products for certain individuals losing group health coverage and
the restrictions placed on that guarantee.
---------------------------------------------------------------------------
Model Certificate
The first model certificate below has been authorized by the
Secretary of each of the Departments. The model educational statement
is set forth under the heading ``Statement of HIPAA Portability
Rights.'' Use of the model certificate by group health plans and group
health insurance issuers will satisfy the requirements of paragraph
(a)(3)(ii) of the regulations. The second model certificate below has
been authorized by the Secretary of Health and Human Services. State
Medicaid programs may use this version. Once these final regulations
are applicable, use of the previously-published model certificate
(published in the preamble to the April 1997 interim rules) will no
longer satisfy paragraph (a)(3)(ii) of the regulations.
In addition to these model certificates, the Departments are
publishing a different model certificate for group health plans and
group health insurance issuers in the preamble to the proposed rules
published elsewhere in this issue of the Federal Register. That model
certificate includes in its educational statement an additional
paragraph regarding coordination with rules under the Family and
Medical Leave Act (FMLA). The Secretaries of the Departments authorize
plans and issuers to use either model certificate in fulfillment of
their obligations under paragraph (a)(3)(ii) of this section in the
final regulations. State Medicaid programs may use either the model
certificate below that is designated for Medicaid programs, or the
model certificate in the proposed rules that is so designated and
includes an additional paragraph on FMLA.
BILLING CODE 4830-01-P
[[Page 78726]]
[GRAPHIC] [TIFF OMITTED] TR30DE04.007
[[Page 78727]]
[GRAPHIC] [TIFF OMITTED] TR30DE04.008
[[Page 78728]]
[GRAPHIC] [TIFF OMITTED] TR30DE04.009
[[Page 78729]]
[GRAPHIC] [TIFF OMITTED] TR30DE04.010
BILLING CODE 4830-01-C
[[Page 78730]]
Procedure for Requesting Certificates
The April 1997 interim rules require plans and health insurance
issuers to establish a procedure for individuals to request and receive
certificates of creditable coverage. The Departments have received
requests to clarify whether such procedures need to be in writing.
These final regulations clarify that the procedures need to be in
writing, helping to ensure that individuals are aware of their right to
request a certificate and how to make the request.
In addition, the Departments have become aware that some plans and
issuers believe they are not required to provide a certificate to
individuals who request one while their coverage is still in effect.
This requirement exists under the April 1997 interim rules. However,
due to these questions being raised, the final regulations more
explicitly state this requirement.
Dependent Coverage Information
Under HIPAA, plans and health insurance issuers are required to
issue certificates of creditable coverage (automatically, and upon
request) to dependents who are or were covered under a group health
plan. In response to comments, and in order to allow entities
responsible for issuing certificates adequate time to modify their data
collection systems, the Departments established a transitional rule in
the April 1997 interim rules for providing dependent coverage
information. Under this transitional rule, a group health plan or
health insurance issuer that, after having made reasonable efforts,
could not provide a certificate of creditable coverage for a dependent
could satisfy the requirements for providing a certificate to the
dependent by providing the name of the participant covered by the group
health plan or health insurance issuer and specifying that the type of
coverage described in the certificate was for dependent coverage (for
example, family coverage or employee-plus-spouse coverage). This
transitional rule was effective through June 30, 1998.
Under these final regulations, the transitional rule is no longer
in effect and dependents are entitled to receive individualized
certificates of creditable coverage under the same circumstances as
other individuals. As with the April 1997 interim rules, these final
regulations permit a single certificate of creditable coverage to be
provided with respect to both a participant and the participant's
dependents if the information is identical for each individual. In
addition, these final regulations retain the provisions of the April
1997 interim rules permitting the combining of information for
families. As a result, in situations where coverage information is not
identical for a participant and the participant's dependents, these
final regulations allow certificates for all individuals to be provided
on one form if the form provides all the required information for each
individual and separately states the information that is not identical.
Special Rules for Certain Entities
Section 2791(a)(3) of the PHS Act provides that certain entities
not otherwise subject to HIPAA's requirements are to comply with the
statutory certification of coverage requirements that apply to group
health plans, with respect to providing certificates of creditable
coverage for Medicare, Medicaid, TRICARE, and medical care programs
provided through the Indian Health Service or a tribal organization.
These rules further establish that such entities are required to comply
with the general statutory requirement to provide certificates.
However, the Departments recognize that these programs operate in a
different manner than do private employment-based group health plans,
nonfederal governmental group health plans, and health insurance
issuers. In addition, the populations served by these programs are
unique. Therefore, it may be appropriate to allow these programs to
implement the certification process in a manner that addresses these
unique characteristics and better serves the individuals covered by
these programs, including requiring different information elements (for
example, see the above model certificate of creditable coverage for use
by State Medicaid programs). HHS will coordinate with the appropriate
entities responsible for issuing these certificates and will issue
separate guidance to these entities on how they must comply with the
certification requirements.
5. Special Enrollment Periods--26 CFR 54.9801-6, 29 CFR 2590.701-6, 45
CFR 146.117
Under HIPAA, the April 1997 interim rules, and these final
regulations, a group health plan and a health insurance issuer offering
group health insurance coverage are required to provide for special
enrollment periods during which certain individuals are allowed to
enroll (without having to wait until a late enrollment opportunity and
regardless of whether the plan offers late enrollment). A special
enrollment right can arise if a person with other health coverage loses
eligibility for that coverage or employer contributions toward the
other coverage cease, or if a person becomes a dependent through
marriage, birth, adoption, or placement for adoption.
In order to qualify for special enrollment, an individual must be
otherwise eligible for coverage under the plan. Being otherwise
eligible for coverage means having met the plan's substantive
eligibility requirements (such as satisfying any waiting period, being
in an eligible job classification, or working full time), regardless of
whether the individual previously satisfied the plan's procedural
requirements for becoming enrolled (such as completing written
application materials or providing them to the plan within a specified
time frame) during any enrollment opportunity prior to special
enrollment.
The special enrollment rules have been reorganized and clarified.
As discussed below, the special enrollment rules have also been
modified in response to comments.
Loss of Eligibility for Other Coverage
A special enrollment right resulting from loss of eligibility for
other coverage is available to employees and their dependents who meet
certain requirements. As under the April 1997 interim rules, the
employee or dependent must otherwise be eligible for coverage under the
terms of the plan. When coverage was previously declined, the employee
or dependent must have been covered under another group health plan or
must have had other health insurance coverage. The plan can require
that, when coverage in the plan was previously declined, the employee
must have declared in writing that the reason was other coverage, in
which case the plan must at that time have provided notice of this
requirement and the consequences of the employee's failure to provide
the statement.
These regulations include an example that clarifies that the
initial opportunity for enrollment (generally provided when employment
begins) is not the only time when an individual with other health
coverage may decline coverage for purposes of satisfying the
prerequisites to special enrollment upon loss of other coverage. (Other
examples discussed below also illustrate this principle.) An individual
who initially did not enroll for coverage without having other health
coverage might later be eligible for special enrollment. This could
occur if, after subsequently enrolling in other coverage, the
individual had an opportunity for late
[[Page 78731]]
enrollment or special enrollment under the plan, but again chose not to
enroll.
These final regulations, like the April 1997 interim rules, contain
a list of situations when an individual loses eligibility for other
coverage. While the list is not exhaustive, it has nonetheless been
expanded in these final regulations to address situations that have
prompted frequent questions. Thus, these regulations clarify that a
loss of eligibility for coverage occurs, in the case of individual
coverage provided through an HMO, when an individual no longer resides,
lives, or works in the service area of the HMO (whether or not within
the choice of the individual) and the HMO does not provide coverage for
that reason. In the case of group coverage provided through an HMO, the
same rule applies, provided that there is no other coverage under the
plan available to the individual. For purposes of this rule, the HMO
service area is typically defined by State law. In addition, the
regulations clarify that a loss of eligibility for coverage occurs due
to the cessation of dependent status. For example, a child who ``ages
out'' of dependent coverage--who attains an age in excess of the
maximum age for coverage of a dependent child--incurs a loss of
eligibility for coverage for purposes of special enrollment.
The regulations also clarify that a loss of eligibility for
coverage occurs when a plan no longer offers any benefits to a class of
similarly situated individuals. Thus, if a plan terminated health
coverage for all part-time workers, the part-time workers incur a loss
of eligibility for coverage, even if the plan continues to provide
coverage to other employees. An example in the final regulations also
illustrates how the loss of eligibility rule applies to a plan that
terminates a benefit package option. Similarly, if an issuer providing
one of the options ceases to operate in the group market, thus
terminating one of the options offered by the plan, the individuals
formerly in the terminated option would incur a loss of eligibility for
coverage for purposes of special enrollment, unless the plan otherwise
provided a current right to enroll in alternative health coverage. In
addition, the final regulations clarify that an employee who is already
enrolled in a benefit package may enroll in another benefit package
under the plan if a dependent of that employee has a special enrollment
right in the plan because the dependent lost eligibility for other
coverage.
These regulations clarify that a loss of eligibility for coverage
is still considered to exist even if there are subsequent coverage
opportunities. As under the April 1997 interim rules, an individual
does not have to elect COBRA continuation coverage or exercise similar
continuation rights in order to preserve the right to special
enrollment. Moreover, a special enrollment right exists even if an
individual who lost coverage elects COBRA continuation coverage. In
that case, if an individual declines special enrollment, and instead
elects and exhausts COBRA continuation coverage, the individual has a
second special enrollment right upon exhausting the COBRA continuation
coverage.
In addition, as under the statute and the April 1997 interim rules,
even if there is no loss of eligibility for coverage, a special
enrollment right can result when employer contributions towards other
coverage terminate. This is the case even if an individual continues
the other coverage by paying the amount previously paid by the
employer.
Lifetime Benefit Limits
Comments asked how the special enrollment rules apply when an
individual reaches a lifetime limit on all benefits under a plan. The
regulations clarify that where an individual has a claim denied due to
the operation of a lifetime limit on all benefits, there is a loss of
eligibility for coverage for special enrollment purposes. In this
regard, an individual has a special enrollment right when a claim that
would exceed a lifetime limit on all benefits is incurred, and the
right continues at least until 30 days after the earliest date that a
claim is denied due to the operation of the lifetime limit.
Accordingly, because individuals who are keeping track of claims in
relation to a lifetime limit can request enrollment immediately (after
the claim is incurred, but before it is denied by the plan), the period
for requesting special enrollment can be longer than 30 days.
(Timeframes for providing certificates of creditable coverage and
determining when COBRA is exhausted for individuals who have reached a
lifetime limit on all benefits are set forth elsewhere in these final
regulations, under the certificate and the definition provisions,
respectively.)
Tolling of the Special Enrollment Period
Proposed rules, published elsewhere in this issue of the Federal
Register, would toll the beginning of the 30-day period for requesting
special enrollment until a certificate of creditable coverage is
provided to the person losing coverage, up to a maximum of 44 days of
tolling. This tolling rule would be in the paragraph reserved for
special enrollment procedures in these final regulations.
Dependent Special Enrollment
Comments asked for clarification of the interaction of coverage for
children under a State Children's Health Insurance Program (S-CHIP) and
special enrollment. In particular, it was asked whether a child would
have a right to special enrollment in a group health plan if the child
becomes eligible for benefits under S-CHIP and the child is otherwise
eligible for dependent coverage under the plan. This situation would
arise if a State creates a children's health program that provides
payments to a parent to cover the increased cost of enrolling a
dependent child in the parent's employer's group health. However,
without a special enrollment right, the parent might not be able to
take advantage of the program until the next late enrollment
opportunity, if the plan allows late enrollment at all. The statutory
language of HIPAA, however, only provides special enrollment if there
is loss of eligibility for other coverage, loss of employer
contributions, or addition of a new dependent to the employee's family.
Becoming eligible under a health program such as S-CHIP does not fall
under any of these categories.\7\
---------------------------------------------------------------------------
\7\ Nonetheless, in addition to the dependent special enrollment
rights under HIPAA, for plans subject to ERISA, section 609 of ERISA
imposes additional requirements on group health plans to provide
benefits to certain children, including in cases where a qualified
medical child support order applies, as well as in cases of
adoption. HIPAA does not prevent States from imposing similar
requirements on nonfederal governmental plans.
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Under these final regulations, as under the April 1997 interim
rules, the special enrollment of dependents is subject to the plan's
general eligibility requirements. For example, a plan may require an
employee to remain enrolled, or to special enroll, in order to special
enroll the employee's dependent. However, a plan's general eligibility
requirements cannot prevent the application of a special enrollment
right. For example, a plan may not deny special enrollment to an
otherwise eligible dependent merely because the individual became a
dependent of the participant after the participant's first day of
coverage under the plan.
Modification of Special Enrollment Procedures
Under proposed rules, published elsewhere in this issue of the
Federal Register, more detailed procedures are described for how plans
and issuers would have to enroll individuals requesting special
enrollment.
[[Page 78732]]
When Coverage Begins Under Special Enrollment
Where the special enrollment right results from marriage or a loss
of eligibility, coverage generally begins no later than the first day
of the first calendar month after the date the plan or issuer receives
the request for special enrollment. Where the special enrollment right
results from a birth, coverage must begin on the date of birth. In the
case of adoption or placement for adoption, coverage must begin no
later than the date of such adoption or placement for adoption.
Clarification of Special Enrollment During a Late Enrollment
Opportunity
The April 1997 interim rules provided a definition of the term
special enrollment date. The purpose of the definition and accompanying
examples was to illustrate that if an individual who qualified for
special enrollment enrolled during a coinciding late enrollment
opportunity, the individual could not be treated as a late enrollee.
The final regulations eliminate the term special enrollment date and
clarify this issue by providing that if an individual requests
enrollment while the individual is entitled to special enrollment, the
individual is a special enrollee, even if the request coincides with a
late enrollment opportunity under the plan. Thus, the individual cannot
be treated as a late enrollee.
Notice of Special Enrollment
The preamble to the April 1997 interim rules stated that a plan
must provide a description of the special enrollment rights to anyone
who declines coverage. However, the text of the April 1997 interim
rules required the notice to be provided to all eligible employees.
Even employees who enroll may need to avail themselves of their special
enrollment rights in the future, either for a spouse or other
dependent, or if they lose the present coverage. Thus, these
regulations reiterate the requirement in the April 1997 interim rules
that a plan must provide all employees (those who enroll as well as
those who decline enrollment) with a notice of special enrollment at or
before the time the employee is initially offered the opportunity to
enroll in the plan. The regulation also provides model language that
plans can use to satisfy this requirement.
Treatment of Special Enrollees
HIPAA provides that a late enrollee does not include an individual
who enrolls when first eligible or who enrolls during a special
enrollment period. These regulations further clarify that individuals
who enroll during a special enrollment period must generally be treated
the same as individuals who enroll when first eligible. That is,
relative to similarly situated individuals who enroll when first
eligible, special enrollees must be offered all the same benefit
packages, cannot be required to pay more for coverage, and cannot be
subject to a longer preexisting condition exclusion.
6. HMO Affiliation Period as an Alternative to a Preexisting Condition
Exclusion--29 CFR 2590.701-7, 45 CFR 146.119
Under HIPAA, the April 1997 interim rules, and these final
regulations, a group health plan that offers health insurance coverage
through an HMO, or an HMO that offers health insurance coverage in
connection with a group health plan, may impose an affiliation period
under certain conditions. An affiliation period is a period of time
that must expire before health insurance coverage provided by an HMO
becomes effective and during which time the HMO is not required to
provide benefits. Under these final regulations an affiliation period
can be imposed if each of the following requirements is satisfied:
(1) No preexisting condition exclusion is imposed with respect to
any coverage offered by the HMO in connection with the particular group
health plan.
(2) No premium is charged to a participant or beneficiary for the
affiliation period.
(3) The affiliation period for the HMO coverage is imposed
consistent with the requirements of the HIPAA nondiscrimination
provisions.
(4) The affiliation period does not exceed 2 months (or 3 months
for a late enrollee).
(5) The affiliation period begins on the enrollment date (or, in
the case of a late enrollee, the affiliation period begins on the day
that would be the first day of coverage, but for the affiliation
period).
(6) The affiliation period for enrollment in the HMO under a plan
runs concurrently with any waiting period.
The requirements related to HMO affiliation periods contained in
these final regulations clarify that a group health plan offering
health insurance through an HMO or an HMO that offers health insurance
coverage in connection with a group health plan may impose different
affiliation periods, so long as the affiliation period complies with
the requirements of the HIPAA nondiscrimination provisions. To
illustrate this clarification, these final regulations contain an
example where a group health plan that provides benefits through an HMO
imposes an affiliation period with respect to salaried employees but
does not impose an affiliation period with respect to hourly employees.
This example illustrates that it is permissible to impose an
affiliation period on salaried employees but not hourly employees, so
long as treating these two groups differently complies with the
requirements of the HIPAA nondiscrimination provisions.
The April 1997 interim rules and these final regulations specify
that the affiliation period begins on the enrollment date (which is the
first day of coverage under the plan, or if there is a waiting period
for coverage under the plan, the first day of the waiting period), not
when coverage under a particular benefit package option begins.
Accordingly, an example in these final regulations illustrates that if
a group health plan offers multiple benefit package options
simultaneously, the HMO cannot impose an affiliation period on a plan
participant who later switches to the HMO benefit package option,
assuming the period of time that has elapsed since the enrollment date
(during which the participant was covered under the first benefit
package option) exceeds the duration of the HMO affiliation period.
Moreover, these regulations clarify that, in the case of a late
enrollee, the affiliation period begins on the day that would be the
first day of coverage, but for the affiliation period.
The April 1997 interim rules and these final regulations allow an
HMO to use alternative methods in lieu of an affiliation period to
address adverse selection, as approved by the State insurance
commissioner or other official designated to regulate HMOs. Because an
affiliation period may be imposed only if no preexisting condition
exclusion is imposed, an alternative to an affiliation period may not
encompass an arrangement that is in the nature of a preexisting
condition exclusion.
7. Interaction With the Family and Medical Leave Act--26 CFR 54.9801-7,
29 CFR 701-8, 45 CFR 146.120
This section has been reserved. For proposed rules on the
interaction with the Family and Medical Leave Act, see the Departments'
notice of proposed rulemaking, published elsewhere in this issue of the
Federal Register.
8. Special Rules; Excepted Plans and Excepted Benefits--26 CFR 54.9831-
1, 29 2590.732, 45 CFR 146.145
This section of the final regulations contains special rules that
apply for
[[Page 78733]]
Chapter 100 of the Code, Part 7 of Subtitle B of Title I of ERISA (Part
7 of ERISA), and Title XXVII of the PHS Act. For ease in applying these
rules, the definition of group health plan has been moved from the
definitions section to this section (and the reference to employees in
that definition has been modified to clarify that the term includes
both current and former employees). New rules have been added for
defining limited scope dental and vision benefits and for determining
the extent to which benefits provided under a health flexible spending
arrangement are excepted benefits. Special rules for partnerships have
also been clarified.
Determination of the Number of Plans
A paragraph has been reserved in the final regulation for
determining the number of plans an employer or employee organization
maintains. For proposed rules on this topic, see the Departments'
notice of proposed rulemaking, published elsewhere in this issue of the
Federal Register.
Coverage Provided by an Employer Through Two or More Individual
Policies
If an employer provides coverage to its employees through two or
more individual policies, the coverage may be considered coverage
offered in connection with a group health plan and, therefore, subject
to the group market provisions under HIPAA. A determination of whether
there is a group health plan depends on the particular facts and
circumstances surrounding the extent of the employer's involvement. For
example, one significant factor in establishing whether there is a
group health plan is the extent to which the employer makes
contributions to health insurance premiums. The fact that health
insurance coverage is provided through a contract regulated under State
law as individual health insurance coverage does not necessarily
prevent the coverage from being treated for HIPAA purposes as coverage
sold in the group market. Similarly, the policy that provides the
coverage does not have to be considered a ``group'' policy under State
law in order for the group market requirements to apply. Further, the
mere fact that an employer forwards employee payroll deductions to a
health insurance issuer will not, alone, cause the coverage to become
group health plan coverage. However, the employer need not be a party
to the insurance policy, or arrange or pay for it directly, in order
for its coverage to be considered group health plan coverage. For
example, if an employer's actions appear to endorse one or more
policies offered by a health insurance issuer (or issuers), the
coverage might be considered group health plan coverage.
General Exception for Certain Small Group Health Plans
Under HIPAA, the April 1997 interim rules, and these final
regulations, the group market requirements do not apply to a group
health plan or to group health insurance coverage offered in connection
with a group health plan for any plan year if, on the first day of the
plan year, the plan has fewer than two participants who are current
employees. As noted in the preamble to the April 1997 interim rules, a
State may apply some or all of the group market provisions in the PHS
Act to health insurance issuers in connection with group health plans
with fewer than two participants who are current employees on the first
day of the plan year. In this case, to the extent the State applies its
group market provisions to such insurance, the insurance would not be
subject to the individual market requirements.
In the event a group health plan has two or more participants who
are current employees on the first day of the plan year but the number
of participants who are current employees drops below two during the
plan year, under these final regulations the group market requirements
continue to apply to the group health plan for the duration of the plan
year.
To the extent a health insurance issuer offers group health
insurance that is subject to HIPAA's group health insurance
requirements, HIPAA generally prohibits the issuer from terminating or
failing to offer to renew the insurance (see 45 CFR 146.152). With
respect to very small employers, whether group health insurance is
subject to the requirements of 45 CFR 146.152 is generally determined
by whether the group health plan has two or more participants who are
current employees on the first day of the plan year. If so, the issuer
generally must provide such coverage throughout the plan year, and is
prohibited from terminating coverage in the midst of that plan year
merely because the number of current-employee participants drops below
two.\8\ However, an issuer is permitted to terminate an employer's
coverage in the midst of a plan year if the employer fails to satisfy
any valid plan participation requirements in the midst of that plan
year (see 45 CFR 146.152(a)(3)), including instances where such failure
causes the number of current-employee participants to drop below two.
---------------------------------------------------------------------------
\8\ See CMS Program Memorandum No. 99-03, Group Size Issues
Under Title XXVII of the Public Health Service Act, September 1999.
---------------------------------------------------------------------------
Excepted Benefits
Under HIPAA, the April 1997 interim rules, and these final
regulations, certain benefits are excepted from HIPAA in all
circumstances, including coverage only for accident (including
accidental death and dismemberment); disability income coverage;
liability insurance, including general liability insurance and
automotive liability insurance; coverage issued as a supplement to
liability insurance; workers' compensation or similar coverage;
automobile medical payment insurance; credit-only insurance (for
example, mortgage insurance); and coverage for on-site medical clinics.
Limited Excepted Benefits
Under HIPAA, the April 1997 interim rules, and these final
regulations, limited scope dental benefits, limited scope vision
benefits, and long-term care benefits\9\ are excepted if they are
provided under a separate policy, certificate, or contract of
insurance, or are otherwise not an integral part of a plan that is
subject to these regulations. Benefits are not an integral part of such
a plan if participants have the right not to elect coverage for the
benefits, and if participants who elect such coverage must pay an
additional premium or contribution for it. These regulations clarify
that whether limited scope dental benefits, limited scope vision
benefits, or long-term care benefits are provided through a plan that
is subject to these regulations, or through a separate plan, is
irrelevant to determining whether such benefits are an integral part of
a plan that is subject to these regulations. Thus, if participants can
decline coverage for the limited-scope benefits, and those electing
such coverage must pay an additional premium or contribution, the
limited scope benefits could be considered not to be an integral part
of a plan that is subject to these regulations, even if such benefits
are not provided through that plan.
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\9\ Long term care benefits are defined as benefits that are
either subject to State long-term care insurance laws; that meet the
qualifications of section 7702B(c)(1) or 7702B0(b) of the Internal
Revenue Code; or are based on cognitive impairment or loss of
functional capacity that is expected to be chronic.
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Limited Scope Vision and Dental Benefits
These regulations define limited scope dental benefits as benefits
[[Page 78734]]
substantially all of which are for treatment of the mouth (including
any organ or structure within the mouth). These regulations also define
limited scope vision benefits as benefits substantially all of which
are for treatment of the eye. Thus, if benefits meet the definition of
limited scope dental benefits or limited scope vision benefits, they
will be excepted benefits if they satisfy the requirements set forth in
these regulations.
These definitions were added in response to questions raised in
comments about the prior guidance. The April 1997 interim rules did not
define these terms. The preamble to the April 1997 interim rules
suggested that the term limited scope dental benefits typically does
not include medical services, such as those procedures associated with
oral cancer or with a mouth injury that results in broken, displaced,
or lost teeth. Similarly, the preamble to the April 1997 interim rules
suggested that the term limited scope vision benefits does not include
benefits for such ophthalmological services as treatment of an eye
disease (such as glaucoma or a bacterial eye infection) or an eye
injury. Comments indicated that typically most independent dental and
vision coverages include benefits for these types of medical services.
Accordingly, these regulations include definitions of limited scope
dental benefits and limited scope vision benefits that reflect this
market reality.
Health FSAs
Some comments asked about the extent to which health flexible
spending arrangements (FSAs) are subject to these regulations. A health
FSA generally is a benefit program that provides employees with
coverage under which specified, incurred expenses may be reimbursed
(subject to reimbursement maximums and any other reasonable conditions)
and under which the maximum amount of reimbursement that is reasonably
available to a participant for a period of coverage is not
substantially in excess of the total premium (including both employee-
paid and employer-paid portions of the premium) for the participant's
coverage. Coverage and reimbursements provided to an individual under a
group health plan that is a health FSA and that conforms to the
generally applicable rules for accident or health plans qualify for the
same tax-favored treatment that generally is extended to coverage and
reimbursements under employer-provided accident or health plans. Health
FSA reimbursements typically provide coverage for medical care expenses
not otherwise covered by the employer's primary group health plan. A
health FSA is permitted to operate under a cafeteria plan described in
section 125 of the Code. Pursuant to the rules of section 125, an
employee can elect to reduce the employee's salary in order to pay for
health FSA coverage without the employee having to include that portion
of the salary in gross income. Commonly, the maximum benefit payable
under a health FSA for any year is equal to the amount of the
employee's salary reduction election for the year, plus any additional
employer contribution for the year.
The April 1997 interim rules did not address the extent to which
health FSAs qualify as excepted benefits. On December 29, 1997, a
clarification to the April 1997 interim rules was published that
specified the circumstances under which a health FSA qualifies as
excepted benefits. (62 FR 67688) That clarification stated that
benefits under a health FSA are treated as excepted benefits if the FSA
meets certain requirements. Specifically, FSA benefits are treated as
excepted benefits if the maximum benefit payable for the employee under
the FSA for the year does not exceed two times the employee's salary
reduction election under the FSA for the year (or, if greater, the
amount of the employee's salary reduction election under the FSA for
the year, plus $500). In addition, the employee must have other
coverage available under a group health plan of the employer for the
year, and that other coverage cannot be limited to benefits that are
excepted benefits.
Based on section 9832(c)(2)(C) of the Code, section 733(c)(2)(C) of
ERISA, and section 2791(c)(2)(C) of the PHS Act, these regulations
adopt the December 29, 1997 guidance with some additional
clarifications. Specifically, these regulations clarify that to be
considered excepted benefits, a health FSA must meet the definition of
a health FSA in section 106(c)(2) of the Code. Also, these regulations
clarify that other group health plan coverage not limited to excepted
benefits must be made available for the year to the class of
participants by reason of their employment. Similarly, the maximum
amount payable to any participant in the class for the year is the
amount to consider when determining whether the maximum amount payable
under the FSA for the year complies with the limit specified in the
previous paragraph. Additionally, these regulations clarify that an
employer credit under a health FSA that an employee can elect to
receive as taxable income is considered an employee salary reduction
election. However, if the employee cannot receive the employer credit
as taxable income (that is, the credit is lost unless the employee uses
the amount for nontaxable benefits under a cafeteria plan), then the
amount is not considered an employee salary reduction election.
Application to HSAs and HDHPs
Section 1201 of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, Public Law 108-173, added section 223 to the
Internal Revenue Code to permit individuals to establish Health Savings
Accounts (HSAs). HSAs are established to receive tax-favored
contributions and amounts in an HSA may be used to pay or reimburse
qualified medical expenses. Questions have arisen concerning the
application of HIPAA to HSAs.
In order to establish and contribute to an HSA, an individual must
be covered by a High Deductible Health Plan (HDHP). An HDHP is a health
plan that satisfies certain requirements with respect to deductibles
and out-of-pocket expenses. An HDHP may be a group health plan
sponsored by an employer or individual health insurance coverage
purchased in the individual market. There is no provision in the HIPAA
rules that excludes an HDHP, by virtue of qualifying as an HDHP, from
the respective HIPAA requirements for group health plans or individual
health insurance coverage. Generally, employer-sponsored HDHPs are
employee welfare benefit plans. See Department of Labor Field
Assistance Bulletin 2004-01 (FAB 2004-01), issued on April 7, 2004.
Because an employer-sponsored HDHP provides medical care, it is
generally subject to the portability requirements of HIPAA and the
applicable regulations.
FAB 2004-01 concluded that HSAs, in contrast to HDHPs, generally
will not constitute employee welfare benefit plans. See Department of
Labor Field Assistance Bulletin 2004-01 (FAB 2004-01), issued on April
7, 2004. Because HSAs are generally not employee welfare benefit plans,
the HIPAA portability requirements under ERISA or the PHS Act generally
will not apply.
Moreover, the HIPAA portability requirements generally are not
relevant for purposes of HSAs. Due to the rules imposed by the Internal
Revenue Code with respect to HSAs, employers or HSA trustees do not
have discretion with respect to the coverage provided by an HSA, both
with respect to what expenses qualify for reimbursement as well as
which individuals' expenses are eligible. For example, expenses
reimbursable by an HSA cannot
[[Page 78735]]
generally be restricted by the employer or HSA trustee. Under the
statute and administrative guidance, any expense incurred after an HSA
is established is eligible for reimbursement, without restriction by an
employer contributing to the HSA or trustee of the HSA. Thus, as a
practical matter, whether or not an expense relates to a preexisting
condition cannot determine the reimbursement. As such HSAs by design
cannot impose a preexisting condition exclusion. Similarly, due to
comparability rules requiring uniform contributions to HSAs by
employers, employers and trustees generally cannot use differing
amounts of contributions to impose a preexisting condition exclusion.
The eligibility for tax-free reimbursement from an HSA is also
determined by statute; namely, the qualified medical expenses of the
HSA owner and the HSA owner's dependents incurred after the HSA is
established may be reimbursed on a tax-free basis by the HSA. Special
enrollment rules for dependent children or spouses are not relevant
because once an HSA is established they are eligible for tax-free
reimbursements immediately. With respect to special enrollment upon
loss of coverage, the rules for employer contributions generally
require that all employees who are eligible for HSA contributions and
participating in the employer's HDHP receive comparable HSA
contributions. Thus, the combination of the comparability rules and the
application of the special enrollment rules to the HDHP will generally
ensure compliance with respect to employer HSA contributions because
once an employee is enrolled in an employer-provided HDHP due to the
special enrollment rules, the employer must make comparable
contributions to the employee's HSA.
Indemnity Insurance
Under HIPAA, the April 1997 interim rules, and these final
regulations, hospital indemnity and other fixed-dollar indemnity
insurance are excepted benefits if the benefits are provided under a
separate policy, certificate, or contract of insurance; if there is no
coordination of benefits between the provision of the benefits and an
exclusion of benefits under any group health plan maintained by the
same plan sponsor; and if the benefits are paid with respect to an
event regardless of whether benefits are provided with respect to the
event under any group health plan maintained by the same plan sponsor.
These regulations clarify that, for hospital indemnity or other fixed-
dollar indemnity insurance to qualify as excepted benefits, such
insurance must pay a fixed dollar amount per day (or other period),
regardless of the amount of expenses incurred. An example clarifies
that if a policy provides benefits only for hospital stays at a fixed
percentage of hospital expenses up to a maximum amount per day, the
benefits are not excepted benefits. This is the result even if, in
practice, the policy pays the maximum for every day of hospitalization.
Supplemental Insurance
Under HIPAA, the April 1997 interim rules, and these final
regulations, Medicare supplemental health insurance (as defined under
section 1882(g)(1) of the Social Security Act); coverage supplemental
to TRICARE; and similar coverage that is supplemental to a group health
plan are excepted benefits if they are provided under a separate
policy, certificate, or contract of insurance. These regulations
clarify that, for coverage supplemental to a group health plan to
qualify as excepted benefits, the coverage must be specifically
designed to fill gaps in primary coverage, such as coinsurance or
deductibles. Coverage that becomes secondary or supplemental only under
a coordination-of-benefits provision in the insurance contract or plan
documents does not qualify as excepted supplemental benefits.
Treatment of Partnerships
Any plan, fund, or program that is established or maintained by a
partnership and that provides medical care to present or former
partners or their dependents, and that otherwise would not be an
employee welfare benefit plan, is considered an employee welfare
benefit plan that is a group health plan under Part 7 of ERISA and
Title XXVII of the PHS Act.\10\ As such, the partnership is considered
the employer with respect to any partner. Participants in the plan
include individuals who are partners of the partnership. Additionally,
with respect to group health plans maintained by self-employed
individuals (under which one or more employees are participants), the
self-employed individual is considered a participant if this individual
is or may become eligible to receive a benefit under the plan or if the
individual's beneficiaries may be so eligible. These regulations
clarify that, for purposes of Part 7 of ERISA and Title XXVII of PHS
Act, a partner must be a bona fide partner in order to be considered an
employee, and the partnership is considered the employer of a partner
only if the partner is a bona fide partner. These final regulations
also clarify that whether an individual is a bona fide partner is
determined based on all the relevant facts and circumstances, including
whether the individual performs services on behalf of the partnership.
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\10\ Such a plan, fund, or program is also considered a group
health plan under section 5000(b)(1) and Chapter 100 of the Code.
---------------------------------------------------------------------------
Counting the Average Number of Employees
A paragraph has been reserved in the final rules for determining
the average number of employees employed by an employer for a year. For
proposed rules on this topic, see the Departments' notice of proposed
rulemaking, published elsewhere in this issue of the Federal Register.
C. Economic Impact and Paperwork Burden
Summary--Department of Labor and Department of Health and Human
Services
HIPAA's group market portability provisions, which include
limitations on the scope and application of preexisting condition
exclusions, and special enrollment rights, provide a minimum standard
of protection designed to increase access to health coverage. The
Departments crafted these final regulations to secure these
protections, consistent with the intent of Congress, and to do so in a
manner that is economically efficient.
The primary economic effects of HIPAA's portability provisions
ensue directly from the statute. These regulations, by clarifying and
securing HIPAA's statutory protections, will delineate and possibly
expand HIPAA's effects at the margin.
Effects of the Statute
HIPAA's statutory group market portability provisions extend
coverage to certain individuals and preexisting conditions not
otherwise covered. This extension of coverage entails both benefits and
costs. Individuals enjoying expanded coverage will realize benefits. In
some instances these individuals will gain coverage for services they
otherwise would have purchased out-of-pocket. In other instances the
extension of coverage will induce individuals to consume more (or
different) health care services, which in some cases may improve health
outcomes. The dollar value of the extended coverage is estimated to be
$515 million annually. Potential additional benefits from improved
health outcomes are difficult
[[Page 78736]]
to quantify (and the Departments have not attempted to do so), but may
be large in aggregate, and will be large for at least some individuals
whose health outcomes may be substantially improved. Another indirect
benefit of HIPAA's portability provisions is a reduction in so-called
``job lock''--a phenomenon in which individuals keep jobs they would
prefer to leave to avoid losing coverage for preexisting conditions. If
workers move into more productive jobs, the overall economy will
benefit.
It should be noted that the benefits of HIPAA's portability
provisions in any given year will be concentrated in a relatively small
population that gains coverage under HIPAA for needed care that would
otherwise not be covered. The number that might so benefit has been
estimated at 100,000 individuals.
The direct costs of HIPAA's portability provisions generally
include the cost of extending coverage to additional services, as well
as certain attendant administrative costs. The cost of extended
coverage is estimated at $515 million annually. The major
administrative costs include the cost of providing certificates of
creditable coverage, and possibly the cost of carrying out special
enrollments and offsets of preexisting condition exclusion periods. The
Departments did not attempt to fully estimate the administrative costs
of the HIPAA statute but in crafting this regulation did attempt to
constrain these costs.
The Departments believe that the cost of HIPAA is borne by covered
workers. Cost can be shifted to workers through increases in employee
premium shares or reductions (or smaller increases) in pay or other
components of compensation, or by increases in deductibles or other
cost sharing or other reductions in the richness of health benefits.
Whereas the benefits of HIPAA are concentrated in a relatively small
population, the costs are distributed broadly across plans and
enrollees.
The Departments have considered whether the costs imposed by
HIPAA's statutory portability provisions have had any major indirect
negative effects, and concluded that such effects are possible but
probably small.
Any mandate to increase the richness or availability of health
insurance adds to the cost of insurance. It is possible that some small
number of employers and employees already at the brink of affordability
would drop coverage in response to the implementation of HIPAA. The
Departments also note that the estimated $515 million cost associated
with extensions of coverage under HIPAA amounts to a small fraction of
one percent of total expenditures by private group health plans. This
suggests that the cost of HIPAA is a small, possibly negligible, factor
in most employers' decisions to offer health coverage and workers'
decisions to enroll. The Departments believe that the benefits of
HIPAA's statutory group market portability provisions justify their
cost. The Departments' full assessment of the costs and benefits of
HIPAA's statutory provisions and their basis for that assessment is
detailed later in the preamble.
Effects of the Final Regulations
By clarifying and securing HIPAA's statutory portability
protections, these regulations will help ensure that HIPAA rights are
fully realized. The result is likely to be a small increase at the
margin in the direct and indirect economic effects of HIPAA's statutory
portability provisions. The Departments believe that the regulation's
benefits will justify its costs.
Additional economic benefits derive from the regulations'
clarifications of HIPAA's portability requirements. By clarifying
employees' rights and plan sponsors' obligations under HIPAA's
portability provisions, the regulations will reduce uncertainty over
health benefits, thereby fostering labor market efficiency and the
establishment and continuation of group health plans by employers.
Many provisions of the final regulations closely resemble
provisions included in the interim final regulations that the final
regulations supplant. This regulatory action, however, adds or amends
both certain provisions directed at the scope of HIPAA's portability
protections and certain provisions establishing administrative
requirements intended to safeguard those protections.
Scope of Protections
These final regulations are intended to secure and implement
HIPAA's group market portability provisions under certain special
circumstances. The final regulations therefore contain a number of
provisions intended to clearly delimit the scope of HIPAA's portability
protections. Most of these provisions closely resemble and will have
the same effect as provisions of the interim final regulations. Others,
however, clarify or expand at the margin the range of situations to
which HIPAA's portability protections apply or in which a loss of
eligibility may trigger special enrollment rights. These include the
requirement that health coverage under foreign government programs be
treated as creditable coverage for purposes of limiting the application
of preexisting condition exclusions; the extension of special
enrollment rights to individuals who lose eligibility for coverage in
connection with the application of lifetime benefit limits, movement
out of an HMO's service area, or the termination of a health coverage
option previously offered under a group health plan; and the
establishment of a special enrollment right for a participant to change
among available coverage options under a group health plan when adding
one or more dependents in connection with marriage, adoption, or
placement for adoption. Each of these provisions is expected to result
in a small increase in the economic effects of HIPAA's statutory
portability protections. The Departments have no basis to quantify
these small increases. The potential size of affected sub populations
is explored later in the preamble.
Administrative Requirements
In order to secure and implement HIPAA's group market special
enrollment and portability provisions, both the HIPAA statute and these
final regulations establish certain administrative requirements.
As noted above, the HIPAA statute generally requires plans and
issuers to provide certifications of prior coverage to individuals
leaving coverage. These regulations additionally require plans and
issuers to notify individuals of their special enrollments rights, any
preexisting condition exclusion provisions, and the applicability of
such exclusions where individuals provide evidence of prior coverage
that is of insufficient duration to fully offset exclusion periods.
Plans will incur cost to comply with these administrative requirements.
The Departments estimate the administrative cost to prepare and
distribute certifications and notices to be $97 million per year.
Nearly all of this, or $96 million, is attributable to the preparation
and distribution of certifications as required under HIPAA's statutory
provisions. These final regulations include numerous special provisions
that serve to reduce plans' cost of providing certifications. A more
strict interpretation of the statute would require plans to send an
individual certificate to each affected enrollee. Such strict
interpretation would result in plans sending 80.1 million certificates
annually at cost of $157.6 million, which is $61.6 million more than
the burden imposed by the final regulations.
[[Page 78737]]
Generally all of the major administrative requirements included in
the final regulations were also included in the interim final
regulations. The final regulations make minor additions to two
requirements, however. They require plans to include educational
statements in certificates of creditable coverage and to maintain in
writing their procedures for requesting certificates. The cost of these
additional requirements is expected to be small, and was not estimated
separately from the overall cost of providing certificates.
Other changes included in these final regulations are likely to
slightly reduce plans' cost to provide certain HIPAA-required notices.
Included with the final regulation is new sample language for general
and specific notices of preexisting condition exclusions, which may
serve to reduce some plans' costs of providing these notices, and
revised sample language for special enrollment rights notices. The
final regulations also clarify the narrow scope of the requirement to
notify certain affected participants of the specific application of
preexisting condition exclusions. The Departments did not estimate the
impact of these provisions separately from the overall cost of
providing general and specific notices of preexisting condition
exclusions and notices of special enrollment rights.
The Departments' full assessment of the costs and benefits of this
regulation and their basis for that assessment is detailed later in
this preamble.
Executive Order 12866--Department of Labor and Department of Health and
Human Services
Under Executive Order 12866 (58 FR 551735, Oct. 4, 1993), the
Departments must determine whether a regulatory action is
``significant'' and therefore subject to the requirements of the
Executive Order and subject to review by the Office of Management and
Budget (OMB). Under section 3(f), the order defines a ``significant
regulatory action'' as an action that is likely to result in a rule:
(1) Having an annual effect on the economy of $100 million or more, or
adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.
Pursuant to the terms of the Executive Order, this action is
``economically significant'' and subject to OMB review under Section
3(f) of the Executive Order. Consistent with the Executive Order, the
Departments have assessed the costs and benefits of this action. The
Departments' assessment, and the analysis underlying that assessment,
is detailed below. The Departments performed a comprehensive, unified
analysis to estimate the costs and benefits attributable to the
regulations for purposes of compliance with Executive Order 12866, the
Regulatory Flexibility Act, and the Paperwork Reduction Act.
Statement of Need for Action
These final regulations are needed to clarify and interpret the
HIPAA portability provisions (increased portability through limitation
on preexisting condition exclusions) under Section 701 of the Employee
Retirement Income Security Act of 1974 (ERISA), Section 2701 of the
Public Health Service Act, and Section 9801 of the Internal Revenue
Code of 1986. The provisions are needed to improve the availability and
portability of health coverage by limiting preexisting condition
exclusions and their use, and requiring that group health plans and
group health insurance issuers allow individuals to enroll under
certain circumstances (special enrollment). Additional guidance was
required to clarify certain definitions, such as the definition of
creditable coverage; to clarify the method of determining the proper
length of a preexisting condition exclusion period for an individual;
to describe the circumstances under which an individual must be allowed
a special enrollment opportunity; and to describe notices that group
health plans and group health insurance issuers must provide to
individuals.
Economic Effects
The Departments believe that this regulation's benefits will
justify its costs. This belief is grounded in the assessment of costs
and benefit that is summarized earlier in the preamble and detailed
below.
Regulatory Flexibility Act--Department of Labor and Department of
Health and Human Services
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) that are likely to
have a significant economic impact on a substantial number of small
entities. Unless an agency certifies that a rule will not have a
significant economic impact on a substantial number of small entities,
section 604 of the RFA requires the agency to present a final
regulatory flexibility analysis at the time of the publication of the
notice of final rulemaking describing the impact of the rule on small
entities. Small entities include small businesses, organizations, and
governmental jurisdictions.
Because these final rules are being issued without prior notices of
proposed rulemaking, the RFA does not apply, and the Departments are
not required to either certify that the rule will not have a
significant impact on a substantial number of small entities or conduct
a regulatory flexibility analysis. The Departments nonetheless crafted
these regulations in careful consideration of their effects on small
entities.
For purposes of this discussion, the Departments consider a small
entity to be an employee benefit plan with fewer than 100 participants.
The basis for this definition is found in section 104(a)(2) of ERISA,
which permits the Secretary of Labor to prescribe simplified annual
reports for pension plans which cover fewer than 100 participants.
Under section 104(a)(3), the Secretary may also provide for simplified
annual reporting and disclosure if the statutory requirements of part 1
of Title I of ERISA would otherwise be inappropriate for welfare
benefit plans. Pursuant to the authority of section 104(a)(3), the
Department of Labor has previously issued at 29 CFR 2520.104-20,
2520.104-21, 2520.104-41, 2520.104-46 and 2520.104b-10, certain
simplified reporting provisions and limited exemptions from reporting
and disclosure requirements for small plans, including unfunded or
insured welfare plans covering fewer than 100 participants and which
satisfy certain other requirements.
Further, while some small plans are maintained by large employers,
most are maintained by small employers. Both small and large plans may
enlist small third party service providers to perform administrative
functions, but it is generally understood that third party service
providers transfer their costs to their plan clients in the form of
fees. Thus, the Departments believe that assessing the impact of this
rule on small plans is an appropriate substitute for evaluating the
effect on small entities. The definition of small entity
[[Page 78738]]
considered appropriate for this purpose differs, however, from a
definition of small business based on size standards promulgated by the
Small Business Administration (SBA) (13 CFR 121.201) pursuant to the
Small Business Act (5 U.S.C. 631 et seq.). The Department of Labor
solicited comments on the use of this standard for evaluating the
effects of the interim final on small entities. No comments were
received with respect to the standard.
The Departments believe that the benefits of this regulation will
justify its costs. This belief is grounded in the assessment of costs
and benefit that is summarized earlier in the preamble and detailed
below in the ``Basis for Assessment of Economic Impact'' section. The
direct financial value of coverage extensions pursuant to HIPAA's
portability provisions are estimated to be approximately $180 million
for small plans, or a small fraction of one percent of total small plan
expenditures.\11\
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\11\ Computer runs using Medical Expenditure Survey Household
Component (MEPS-HC) and the Robert Wood Johnson Employer Healthy
Benefits Survey determined that the share of covered private-sector
job leavers at small firms average 35 percent of all covered private
sector job leavers. From this, we inferred that the financial burden
borne by small plans is approximately 35 percent of the total
expenditures by private-sector group health plans.
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In order to secure and implement HIPAA's portability provisions,
the HIPAA statute and interim final regulations established certain
administrative requirements, including requirements to provide
certifications of creditable coverage and notices of special enrollment
rights and preexisting condition exclusions. The Departments estimate
the cost for small plans to prepare and distribute certifications and
notices to be $13 million per year.\12\ These costs will initially be
borne by issuers who supply small group insurance products and by
third-party administrators who provide services to small insured plans.
These two types of entities will spread the costs across a much larger
pool of small plans who will in turn transfer cost broadly to plan
enrollees.
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\12\ As noted above, the total cost for certificates and notices
is estimated to be $97 million. We estimate that 13 percent of
individuals receiving certificates and notices receive them from
small group health plans, and on that basis estimates that 13% of
the total cost falls on such plans. As noted below, we estimate that
out of a total of 54 million individuals who leave coverage under
group health plans, individual health insurance policies or public
programs, 20 million, or 44 percent, are leaving private-sector
group plans. Assuming that the proportion of these that are leaving
small plans is equal to the proportion of covered, private-sector
job leavers who leave small firms (estimated to be 35 percent, as
noted above), 13 percent of those leaving any type of coverage are
leaving coverage under small group plans.
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Special Analyses--Department of the Treasury
Notwithstanding the determinations of the Departments of Labor and
of Health and Human Services, for purposes of the Department of the
Treasury it has been determined that this Treasury decision is not a
significant regulatory action. Pursuant to sections 603(a) and 605(b)
of the Regulatory Flexibility Act, it is hereby certified that the
collections of information referenced in this Treasury decision (see
Sec. Sec. 54.9801-3, 54.9801-4, 54.9801-5, and 54.9801-6) will not
have a significant economic impact on a substantial number of small
entities. Although a substantial number of small entities will be
subject to the collection of information requirements in these
regulations, the requirements will not have a significant economic
impact on these entities. The average time required to complete a
certification required under these regulations is estimated to be 4 to
5 minutes for all employers. This average is based on the assumption
that most employers will automate the certification process. The
paperwork requirements other than certifications that are contained in
the regulations are estimated to impose less than 2% of the burden
imposed by the certifications. Many small employers that maintain group
health plans have their plans administered by an insurance company or
third party administrators (TPAs). Most insurers and TPAs are expected
to automate the certification process and therefore their average time
to produce a certificate should be similar to the 4 to 5 minute average
estimated for all employers. However, even for small employers that do
not automate the certification process, the collection of information
requirements in the regulation will not have a significant impact. Even
if it is conservatively assumed that their average time to produce a
certificate is 3 times as long as the highest estimate for all
employers (i.e., 15 minutes per certificate) and that all of their
employees are covered by their group health plan and that half of the
employees receive a certificate each year, the average burden per
employee is less than 8 minutes per year. This can be rounded up to 8
minutes to more than account for the additional burden imposed by the
other paperwork requirements of the final regulations. Thus, for
example, for an employer with 10 employees, the annual burden would be
not more than 1 hour and 20 minutes per year. At an estimated cost of
$18 per hour, this would result in a cost of not more than $24 per year
for the employer, which is not a significant economic impact. Because
the collection of information requirements of this Treasury decision
will not have a significant economic impact on a substantial number of
small entities, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f) of the Code, the notice of proposed rulemaking
preceding these regulations was submitted to the Small Business
Administration for comment on its impact on small business.
Paperwork Reduction Act
Department of Labor
These final regulations include three separate collections of
information as that term is defined in the Paperwork Reduction Act of
1995 (PRA 95), 44 U.S.C. 3502(3): the Notice of Enrollment Rights,
Notice of Preexisting Condition Exclusion, and Certificate of
Creditable Coverage. Each of these disclosures is currently approved by
the Office of Management and Budget (OMB) through October 31, 2006 in
accordance with PRA 95 under control numbers 1210-0101, 1210-0102, and
1210-0103.
Department of the Treasury
These final regulations include a collection of information as that
term is defined in PRA 95: the Notice of Enrollment Rights, Notice of
Preexisting Condition Exclusion, and Certificate of Creditable
Coverage. Each of these disclosures is currently approved by OMB under
control number 1545-1537.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Department of Health and Human Services
These final regulations include three separate collections of
information as that term is defined in PRA 95: the Notice of Enrollment
Rights, Notice of Preexisting Condition Exclusion, and Certificate of
Creditable Coverage. Each of these disclosures is currently approved by
OMB through June 30, 2006 in accordance with PRA 95 under control
number 0938-0702.
[[Page 78739]]
Small Business Regulatory Enforcement Fairness Act
This final rule is subject to the provisions of the Small Business
Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and
is being transmitted to Congress and the Comptroller General for
review. The final rule, is a ``major rule,'' as that term is defined in
5 U.S.C. 804, because it may result in (1) an annual effect on the
economy of $100 million or more; (2) a major increase in costs or
prices for consumers, individual industries, or federal, State or local
government agencies, or geographic regions; or (3) significant adverse
effects on competition, employment, investment, productivity,
innovation, or on the ability of United States-based enterprises to
compete with foreign-based enterprises in domestic or export markets.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits before issuing any
rule that may result in an expenditure in any 1 year by State, local,
or tribal governments, in the aggregate, or by the private sector, of
$100 million. These final regulations have no such mandated
consequential effect on State, local, or tribal governments, or on the
private sector.
Federalism Statement Under Executive Order 13132--Department of Labor
and Department of Health and Human Services
Executive Order 13132 outlines fundamental principles of
federalism. It requires adherence to specific criteria by federal
agencies in formulating and implementing policies that have
``substantial direct effects'' on the States, the relationship between
the national government and States, or on the distribution of power and
responsibilities among the various levels of government. Federal
agencies promulgating regulations that have these federalism
implications must consult with State and local officials, and describe
the extent of their consultation and the nature of the concerns of
State and local officials in the preamble to the regulation.
In the Departments' view, these final regulations have federalism
implications because they may have substantial direct effects on the
States, the relationship between the national government and States, or
on the distribution of power and responsibilities among the various
levels of government. However, in the Departments' view, the federalism
implications of these final regulations are substantially mitigated
because, with respect to health insurance issuers, the vast majority of
States have enacted laws which meet or exceed the federal HIPAA
portability standards.
In general, through section 514, ERISA supersedes State laws to the
extent that they relate to any covered employee benefit plan, and
preserves State laws that regulate insurance, banking or securities.
While ERISA prohibits States from regulating a plan as an insurance or
investment company or bank, HIPAA added a new section to ERISA (as well
as to the PHS Act) narrowly preempting State requirements for issuers
of group health insurance coverage. Specifically, with respect to seven
provisions of the HIPAA portability rules, States may impose stricter
obligations on health insurance issuers.\13\ Moreover, with respect to
other requirements for health insurance issuers, States may continue to
apply State law requirements except to the extent that such
requirements prevent the application of HIPAA's portability, access,
and renewability provisions.
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\13\ States may shorten the six-month look-back period prior to
the enrollment date; shorten the 12-month and 18-month maximum
preexisting condition exclusion periods; increase the 63-day
significant break in coverage period; increase the 30-day period for
newborns, adopted children, and children placed for adoption to
enroll in the plan with no preexisting condition exclusion; further
limit the circumstances in which a preexisting condition exclusion
may be applied (beyond the federal exceptions for certain newborns,
adopted children, children placed for adoption, pregnancy, and
genetic information in the absence of a diagnosis; require
additional special enrollment periods; and reduced the HMO
affiliation period to less than 2 months (3 months for late
enrollees).
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In enacting these new preemption provisions, Congress intended to
preempt State insurance requirements only to the extent that they
prevent the application of the basic protections set forth in HIPAA.
HIPAA's conference report States that the conferees intended the
narrowest preemption of State laws with regard to health insurance
issuers. H.R. Conf. Rep. No. 736, 104th Cong. 2d Session 205 (1996).
State insurance laws that are more stringent than the federal
requirements are unlikely to ``prevent the application of'' the HIPAA
portability provisions, and be preempted. Accordingly, States have
significant latitude to impose requirements on health insurance
insurers that are more restrictive than the federal law.
Guidance conveying this interpretation of HIPAA's preemption
provisions was published in the Federal Register on April 8, 1997. 62
FR 16904. These final regulations clarify and implement the statute's
minimum standards and do not significantly reduce the discretion given
the States by the statute. Moreover, the Departments understand that
the vast majority of States have requirements that meet or exceed the
minimum requirements of the HIPAA portability provisions.
HIPAA provides that the States may enforce the provisions of HIPAA
as they pertain to issuers, but that the Secretary of Health and Human
Services must enforce any provisions that a State fails to
substantially enforce. Currently, HHS enforces the HIPAA portability
provisions in only one State in accordance with that State's specific
request to do so. When exercising its responsibility to enforce the
provisions of HIPAA, HHS works cooperatively with the State for the
purpose of addressing the State's concerns and avoiding conflicts with
the exercise of State authority. HHS has developed procedures to
implement its enforcement responsibilities, and to afford the States
the maximum opportunity to enforce HIPAA's requirements in the first
instance. HHS's procedures address the handling of reports that States
may not be substantially enforcing HIPAA's requirements, and the
mechanism for allocating responsibility between the States and HHS. In
compliance with Executive Order 13132's requirement that agencies
examine closely any policies that may have federalism implications or
limit the policymaking discretion of the States, DOL and HHS have
engaged in numerous efforts to consult and work cooperatively with
affected State and local officials.
For example, the Departments sought and received input from State
insurance regulators and the National Association of Insurance
Commissioners (NAIC). The NAIC is a non-profit corporation established
by the insurance commissioners of the 50 States, the District of
Columbia, and the four U.S. territories. In most States the Insurance
Commissioner is appointed by the Governor, in approximately 14 States,
the insurance commissioner is an elected official. Among other
activities, it provides a forum for the development of uniform policy
when uniformity is appropriate. Its members meet, discuss and offer
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