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.

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 www.dol.gov/ebsa, the Department of Labor's website. 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' website (www.cms.hhs.gov/hipaal), 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 websites.

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 I, 1997 (published in the Federal Register on April 8, 1997, 62 FR 16894) (April 1997 interim rules) (T.D 8716, 1997-1 C.B. 225). 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 (REG-130370-04) elsewhere in this issue of the Bulletin 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 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

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 coverage3 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.

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 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 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 30 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 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

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 54.9807-4, 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 provides5 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.

The second modification is to the definition of public health plan. This 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 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 Bulletin 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.

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.

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 Bulletin. 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.

IMAGE ILLUSTRATION 1

CERTIFICATE OF GROUP HEALTH PLAN COVERAGE

Statement of HIPAA Portability Rights

IMPORTANT - KEEP THIS CERTIFICATE. This certificate is evidence of your coverage under this plan. Under a federal law known as HIPAA, you may need evidence of your coverage to reduce a preexisting condition exclusion period under another plan, to help you get special enrollment in another plan, or to get certain types of individual health coverage even if you have health problems.

Preexisting condition exclusions. Some group health plans restrict coverage for medical conditions present before an individual's enrollment. These restrictions are known as "preexisting condition exclusions." A preexisting condition exclusion can apply only to conditions for which medical advice, diagnosis, care, or treatment was recommended or received within the 6 months before your "enrollment date." Your enrollment date is your first day of coverage under the plan, or, if there is a waiting period, the first day of your waiting period (typically, your first day of work). In addition, a preexisting condition exclusion cannot last for more than 12 months after your enrollment date (18 months if you are a late enrollee). Finally, a preexisting condition exclusion cannot apply to pregnancy and cannot apply to a child who is enrolled in health coverage within 30 days after birth, adoption, or placement for adoption.

If a plan imposes a preexisting condition exclusion, the length of the exclusion must be reduced by the amount of your prior creditable coverage. Most health coverage is creditable coverage, including group health plan coverage, COBRA continuation coverage, coverage under an individual health policy, Medicare, Medicaid, State Children's Health Insurance Program (SCHIP), and coverage through high-risk pools and the Peace Corps. Not all forms of creditable coverage are required to provide certificates like this one. If you do not receive a certificate for past coverage, talk to your new plan administrator.

You can add up any creditable coverage you have, including the coverage shown on this certificate. However, if at any time you went for 63 days or more without any coverage (called a break in coverage) a plan may not have to count the coverage you had before the break.

* Therefore, once your coverage ends, you should try to obtain alternative coverage as soon as possible to avoid a 63-day break. You may use this certificate as evidence of your creditable coverage to reduce the length of any preexisting condition exclusion if you enroll in another plan.

Right to get special enrollment in another plan. Under HIPAA, if you lose your group health plan coverage, you may be able to get into another group health plan for which you are eligible (such as a spouse's plan), even if the plan generally does not accept late enrollees, if you request enrollment within 30 days. (Additional special enrollment rights are triggered by marriage, birth, adoption, and placement for adoption.)

* Therefore, once your coverage ends, if you are eligible for coverage in another plan (such as a spouse's plan), you should request special enrollment as soon as possible.

Prohibition against discrimination based on a health factor. Under HIPAA, a group health plan may not keep you (or your dependents) out of the plan based on anything related to your health. Also, a group health plan may not charge you (or your dependents) more for coverage, based on health, than the amount charged a similarly situated individual.

Right to individual health coverage. Under HIPAA, if you are an "eligible individual," you have a right to buy certain individual health policies (or in some states, to buy coverage through a high-risk pool) without a preexisting condition exclusion. To be an eligible individual, you must meet the following requirements:

* You have had coverage for at least 18 months without a break in coverage of 63 days or more;

* Your most recent coverage was under a group health plan (which can be shown by this certificate);

* Your group coverage was not terminated because of fraud or nonpayment of premiums;

* You are not eligible for COBRA continuation coverage or you have exhausted your COBRA benefits (or continuation coverage under a similar state provision); and

* You are not eligible for another group health plan, Medicare, or Medicaid, and do not have any other health insurance coverage.

The right to buy individual coverage is the same whether you are laid off, fired, or quit your job.

* Therefore, if you are interested in obtaining individual coverage and you meet the other criteria to be an eligible individual, you should apply for this coverage as soon as possible to avoid losing your eligible individual status due to a 63-day break.

State flexibility. This certificate describes minimum HIPAA protections under federal law. States may require insurers and HMOs to provide additional protections to individuals in that state.

For more information. If you have questions about your HIPAA rights, you may contact your state insurance department or the U.S. Department of Labor, Employee Benefits security Administration (EBSA) toll-free at 1-866-444-3272 (for free HIPAA publications ask for publications concerning changes in health care laws). You may also contact the CMS publication hotline at 1-800-633-4227 (ask for "Protecting Your Health Insurance Coverage"). These publications and other useful information are also available on the Internet at: http://www.dol.gov/ebsa, the DOL's interactive web pages - Health Elaws, or http://www.cms.hhs.gov/hipaal.

IMAGE ILLUSTRATION 2

CERTIFICATE OF MEDICAID COVERAGE

Statement of HIPAA Portability Rights

IMPORTANT - KEEP THIS CERTIFICATE. This certificate is evidence of your coverage under this state Medicaid program. Under a federal law known as HIPAA, you may need evidence of your coverage to reduce a preexisting condition exclusion period under a group health plan, to help you get special enrollment in a group health plan, or to get certain types of individual health coverage even if you have health problems.

* Therefore, once your coverage in a group health plan ends, if you are eligible for coverage in another plan (such as a spouse's plan), you should request special enrollment as soon as possible.

* You have had coverage for at least 18 months without a break in coverage of 63 days or more;

* Your most recent coverage was under a group health plan;

* Your group coverage was not terminated because of fraud or nonpayment of premiums;

* You are not eligible for COBRA continuation coverage or you have exhausted your COBRA benefits (or continuation coverage under a similar state provision); and

* You are not eligible for another group health plan, Medicare, or Medicaid, and do not have any other health insurance coverage.

The right to buy individual coverage is the same whether you are laid off, fired, or quit your job.

State flexibility. This certificate describes minimum HIPAA protections under federal law. States may require insurers and HMOs to provide additional protections to individuals in that state.

For more information. If you have questions about your HIPAA rights, you may contact your state insurance department or the U.S. Department of Labor, Employee Benefits security Administration (EBSA) toll-free at 1 -866-444-327'2 (for free HIPAA publications ask for publications concerning changes in health care laws). You may also contact the CMS publication hotline at 1-800-633-4227 (ask for "Protecting Your Health Insurance Coverage"). These publications and other useful information are also available on the Internet at: http://www.dol.gov/ebsa or http://www.cms.hhs.gov/hipaal.

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 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 Bulletin, 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

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 Bulletin, more detailed procedures are described for how plans and issuers would have to enroll individuals requesting special enrollment.

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 Bulletin.

8. Special rules; Excepted Plans and Excepted Benefits - 26 CFR 54.9831-1, 29 CFR 2590.732, 45 CFR 146.145

This section of the final regulations contains special rules that apply for 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 Bulletin.

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.

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 benefits9 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 consid-, ered 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.

Limited scope vision and dental benefits

These regulations define limited scope dental benefits as benefits 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 I06(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 No. 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 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)(l) 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.

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 Bulletin.

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 HIPA A'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 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 Grafting 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 HIPA A'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 finai iegulations 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.

Generally all of the major administrative