[Congressional Record Volume 142, Number 115 (Wednesday, July 31, 1996)]
[House]
[Pages H9473-H9564]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 REPORT ON H.R. 3103, HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY 
                              ACT OF 1996

  Mr. HASTERT submitted the following conference report and statement 
on the bill (H.R. 3103) to amend the Internal Revenue Code of 1986 to 
improve portability and continuity of health insurance coverage in the 
group and individual markets, to combat waste, fraud, and abuse in 
health insurance and health care delivery, to promote the use of 
medical savings accounts, to improve access to long-term care services 
and coverage, to simplify the administration of health insurance, and 
for other purposes.

                  Conference Report (H. Rept. 104-736)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendment of the Senate to the bill (H.R. 
     3103), to amend the Internal Revenue Code of 1986 to improve 
     portability and continuity of health insurance coverage in 
     the group and individual markets, to combat waste, fraud, and 
     abuse in health insurance and health care delivery, to 
     promote the use of medical savings accounts, to improve 
     access to long-term care services and coverage, to simplify 
     the administration of health insurance, and for other 
     purposes, having met, after full and free conference, and 
     agreed to recommend and do recommend to their respective 
     Houses as follows:
       That the House recede from its disagreement to the 
     amendment of the Senate and agree to the same with an 
     amendment as follows:
       In lieu of the matter proposed to be inserted by the Senate 
     amendment, insert the following:

     SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

       (a) Short Title.--This Act may be cited as the ``Health 
     Insurance Portability and Accountability Act of 1996''.
       (b) Table of Contents.--The table of contents of this Act 
     is as follows:

Sec. 1. Short title; table of contents.

       TITLE I--HEALTH CARE ACCESS, PORTABILITY, AND RENEWABILITY

                     Subtitle A--Group Market Rules

       Part 1--Portability, Access, and Renewability Requirements

Sec. 101. Through the Employee Retirement Income Security Act of 1974.

   ``Part 7--Group Health Plan Portability, Access, and Renewability 
                              Requirements

``Sec. 701. Increased portability through limitation on preexisting 
              condition exclusions.
``Sec. 702. Prohibiting discrimination against individual participants 
              and beneficiaries based on health status.
``Sec. 703. Guaranteed renewability in multiemployer plans and multiple 
              employer welfare arrangements.
``Sec. 704. Preemption; State flexibility; construction.
``Sec. 705. Special rules relating to group health plans.
``Sec. 706. Definitions.
``Sec. 707. Regulations.
Sec. 102. Through the Public Health Service Act.

``TITLE XXVII--ASSURING PORTABILITY, AVAILABILITY, AND RENEWABILITY OF 
                       HEALTH INSURANCE COVERAGE

                     ``Part A--Group Market Reforms

    ``Subpart 1--Portability, Access, and Renewability Requirements

``Sec. 2701. Increased portability through limitation on preexisting 
              condition exclusions.
``Sec. 2702. Prohibiting discrimination against individual participants 
              and beneficiaries based on health status.

  ``Subpart 2--Provisions Applicable Only to Health Insurance Issuers

``Sec. 2711. Guaranteed availability of coverage for employers in the 
              group market.
``Sec. 2712. Guaranteed renewability of coverage for employers in the 
              group market.
``Sec. 2713. Disclosure of information.

        ``Subpart 3--Exclusion of Plans; Enforcement; Preemption

``Sec. 2721. Exclusion of certain plans.
``Sec. 2722. Enforcement.
``Sec. 2723. Preemption; State flexibility; construction.

            ``Part C--Definitions; Miscellaneous Provisions

``Sec. 2791. Definitions.
``Sec. 2792. Regulations.
Sec. 103. Reference to implementation through the Internal Revenue Code 
              of 1986.
Sec. 104. Assuring coordination.

                  Subtitle B--Individual Market Rules

Sec. 111. Amendment to Public Health Service Act.

                   ``Part B--Individual Market Rules

``Sec. 2741. Guaranteed availability of individual health insurance 
              coverage to certain individuals with prior group 
              coverage.
``Sec. 2742. Guaranteed renewability of individual health insurance 
              coverage.
``Sec. 2743. Certification of coverage.
``Sec. 2744. State flexibility in individual market reforms.
``Sec. 2745. Enforcement.
``Sec. 2746. Preemption.
``Sec. 2747. General exceptions.

            Subtitle C--General and Miscellaneous Provisions

Sec. 191. Health coverage availability studies.
Sec. 192. Report on medicare reimbursement of telemedicine.
Sec. 193. Allowing Federally-qualified HMOs to offer high deductible 
              plans.
Sec. 194. Volunteer services provided by health professionals at free 
              clinics.
Sec. 195. Findings; severability.

   TITLE II--PREVENTING HEALTH CARE FRAUD AND ABUSE; ADMINISTRATIVE 
                SIMPLIFICATION; MEDICAL LIABILITY REFORM

Sec. 200. References in title.

              Subtitle A--Fraud and Abuse Control Program

Sec. 201. Fraud and abuse control program.
Sec. 202. Medicare integrity program.
Sec. 203. Beneficiary incentive programs.
Sec. 204. Application of certain health anti-fraud and abuse sanctions 
              to fraud and abuse against Federal health care programs.
Sec. 205. Guidance regarding application of health care fraud and abuse 
              sanctions.

     Subtitle B--Revisions to Current Sanctions for Fraud and Abuse

Sec. 211. Mandatory exclusion from participation in medicare and State 
              health care programs.
Sec. 212. Establishment of minimum period of exclusion for certain 
              individuals and entities subject to permissive exclusion 
              from medicare and State health care programs.
Sec. 213. Permissive exclusion of individuals with ownership or control 
              interest in sanctioned entities.
Sec. 214. Sanctions against practitioners and persons for failure to 
              comply with statutory obligations.
Sec. 215. Intermediate sanctions for medicare health maintenance 
              organizations.
Sec. 216. Additional exception to anti-kickback penalties for risk-
              sharing arrangements.
Sec. 217. Criminal penalty for fraudulent disposition of assets in 
              order to obtain medicaid benefits.
Sec. 218. Effective date.

                      Subtitle C--Data Collection

Sec. 221. Establishment of the health care fraud and abuse data 
              collection program.

                  Subtitle D--Civil Monetary Penalties

Sec. 231. Social security act civil monetary penalties.
Sec. 232. Penalty for false certification for home health services.

                 Subtitle E--Revisions to Criminal Law

Sec. 241. Definitions relating to Federal health care offense.
Sec. 242. Health care fraud.
Sec. 243. Theft or embezzlement.
Sec. 244. False Statements.
Sec. 245. Obstruction of criminal investigations of health care 
              offenses.
Sec. 246. Laundering of monetary instruments.
Sec. 247. Injunctive relief relating to health care offenses.
Sec. 248. Authorized investigative demand procedures.
Sec. 249. Forfeitures for Federal health care offenses.
Sec. 250. Relation to ERISA authority.

               Subtitle F--Administrative Simplification

Sec. 261. Purpose.
Sec. 262. Administrative simplification.

                ``Part C--Administrative Simplification

``Sec. 1171. Definitions.
``Sec. 1172. General requirements for adoption of standards.
``Sec. 1173. Standards for information transactions and data elements.
``Sec. 1174. Timetables for adoption of standards.
``Sec. 1175. requirements.
``Sec. 1176. General penalty for failure to comply with requirements 
              and standards.
``Sec. 1177. Wrongful disclosure of individually identifiable health 
              information.

[[Page H9474]]

``Sec. 1178. Effect on State law.
``Sec. 1179. Processing payment transactions.
Sec. 263. Changes in membership and duties of National Committee on 
              Vital and Health Statistics.
Sec. 264. Recommendations with respect to privacy of certain health 
              information.

   Subtitle G--Duplication and Coordination of Medicare-Related Plans

Sec. 271. Duplication and coordination of medicare-related plans.

                      Subtitle H--Patent Extension

Sec. 281. Patent extension.

                TITLE III--TAX-RELATED HEALTH PROVISIONS

Sec. 300. Amendment of 1986 Code.

                  Subtitle A--Medical Savings Accounts

Sec. 301. Medical savings accounts.

 Subtitle B--Increase in Deduction for Health Insurance Costs of Self-
                          Employed Individuals

Sec. 311. Increase in deduction for health insurance costs of self-
              employed individuals.

           Subtitle C--Long-Term Care Services and Contracts

                       Part I--General Provisions

Sec. 321. Treatment of long-term care insurance.
Sec. 322. Qualified long-term care services treated as medical care.
Sec. 323. Reporting requirements.

                Part II--Consumer Protection Provisions

Sec. 325. Policy requirements.
Sec. 326. Requirements for issuers of qualified long-term care 
              insurance contracts.
Sec. 327. Effective dates.

          Subtitle D--Treatment of Accelerated Death Benefits

Sec. 331. Treatment of accelerated death benefits by recipient.
Sec. 332. Tax treatment of companies issuing qualified accelerated 
              death benefit riders.

                   Subtitle E--State Insurance Pools

Sec. 341. Exemption from income tax for State-sponsored organizations 
              providing health coverage for high-risk individuals.
Sec. 342. Exemption from income tax for State-sponsored workmen's 
              compensation reinsurance organizations.

            Subtitle F--Organizations Subject to Section 833

Sec. 351. Organizations subject to section 833.

            Subtitle G--IRA Distributions to the Unemployed

Sec. 361. Distributions from certain plans may be used without 
              additional tax to pay financially devastating medical 
              expenses.

Subtitle H--Organ and Tissue Donation Information Included With Income 
                          Tax Refund Payments

Sec. 371. Organ and tissue donation information included with income 
              tax refund payments.

TITLE IV--APPLICATION AND ENFORCEMENT OF GROUP HEALTH PLAN REQUIREMENTS

     Subtitle A--Application and Enforcement of Group Health Plan 
                              Requirements

Sec. 401. Group health plan portability, access, and renewability 
              requirements.
Sec. 402. Penalty on failure to meet certain group health plan 
              requirements.

Subtitle B--Clarification of Certain Continuation Coverage Requirements

Sec. 421. COBRA clarifications.

                        TITLE V--REVENUE OFFSETS

Sec. 500. Amendment of 1986 Code.

                Subtitle A--Company-Owned Life Insurance

Sec. 501. Denial of deduction for interest on loans with respect to 
              company-owned life insurance.

Subtitle B--Treatment of Individuals Who Lose United States Citizenship

Sec. 511. Revision of income, estate, and gift taxes on individuals who 
              lose United States citizenship.
Sec. 512. Information on individuals losing United States citizenship.
Sec. 513. Report on tax compliance by United States citizens and 
              residents living abroad.

Subtitle C--Repeal of Financial Institution Transition Rule to Interest 
                            Allocation Rules

Sec. 521. Repeal of financial institution transition rule to interest 
              allocation rules.
       TITLE I--HEALTH CARE ACCESS, PORTABILITY, AND RENEWABILITY
                     Subtitle A--Group Market Rules

       Part 1--Portability, Access, and Renewability Requirements

     SEC. 101. THROUGH THE EMPLOYEE RETIREMENT INCOME SECURITY ACT 
                   OF 1974.

       (a) In General.--Subtitle B of title I of the Employee 
     Retirement Income Security Act of 1974 is amended by adding 
     at the end the following new part:

   ``Part 7--Group Health Plan Portability, Access, and Renewability 
                              Requirements

     ``SEC. 701. INCREASED PORTABILITY THROUGH LIMITATION ON 
                   PREEXISTING CONDITION EXCLUSIONS.

       ``(a) Limitation on Preexisting Condition Exclusion Period; 
     Crediting for Periods of Previous Coverage.--Subject to 
     subsection (d), a group health plan, and a health insurance 
     issuer offering group health insurance coverage, may, with 
     respect to a participant or beneficiary, impose a preexisting 
     condition exclusion only if--
       ``(1) such exclusion relates to a condition (whether 
     physical or mental), regardless of the cause of the 
     condition, for which medical advice, diagnosis, care, or 
     treatment was recommended or received within the 6-month 
     period ending on the enrollment date;
       ``(2) such exclusion extends for a period of not more than 
     12 months (or 18 months in the case of a late enrollee) after 
     the enrollment date; and
       ``(3) the period of any such preexisting condition 
     exclusion is reduced by the aggregate of the periods of 
     creditable coverage (if any, as defined in subsection (c)(1)) 
     applicable to the participant or beneficiary as of the 
     enrollment date.
       ``(b) Definitions.--For purposes of this part--
       ``(1) Preexisting condition exclusion.--
       ``(A) In general.--The term `preexisting condition 
     exclusion' means, with respect to coverage, a limitation or 
     exclusion of benefits relating to a condition based on the 
     fact that the condition was present before the date of 
     enrollment for such coverage, whether or not any medical 
     advice, diagnosis, care, or treatment was recommended or 
     received before such date.
       ``(B) Treatment of genetic information.--Genetic 
     information shall not be treated as a condition described in 
     subsection (a)(1) in the absence of a diagnosis of the 
     condition related to such information.
       ``(2) Enrollment date.--The term `enrollment date' means, 
     with respect to an individual covered under a group health 
     plan or health insurance coverage, the date of enrollment of 
     the individual in the plan or coverage or, if earlier, the 
     first day of the waiting period for such enrollment.
       ``(3) Late enrollee.--The term `late enrollee' means, with 
     respect to coverage under a group health plan, a participant 
     or beneficiary who enrolls under the plan other than during--
       ``(A) the first period in which the individual is eligible 
     to enroll under the plan, or
       ``(B) a special enrollment period under subsection (f).
       ``(4) Waiting period.--The term `waiting period' means, 
     with respect to a group health plan and an individual who is 
     a potential participant or beneficiary in the plan, the 
     period that must pass with respect to the individual before 
     the individual is eligible to be covered for benefits under 
     the terms of the plan.
       ``(c) Rules Relating to Crediting Previous Coverage.--
       ``(1) Creditable coverage defined.--For purposes of this 
     part, the term `creditable coverage' means, with respect to 
     an individual, coverage of the individual under any of the 
     following:
       ``(A) A group health plan.
       ``(B) Health insurance coverage.
       ``(C) Part A or part B of title XVIII of the Social 
     Security Act.
       ``(D) Title XIX of the Social Security Act, other than 
     coverage consisting solely of benefits under section 1928.
       ``(E) Chapter 55 of title 10, United States Code.
       ``(F) A medical care program of the Indian Health Service 
     or of a tribal organization.
       ``(G) A State health benefits risk pool.
       ``(H) A health plan offered under chapter 89 of title 5, 
     United States Code.
       ``(I) A public health plan (as defined in regulations).
       ``(J) A health benefit plan under section 5(e) of the Peace 
     Corps Act (22 U.S.C. 2504(e)).
     Such term does not include coverage consisting solely of 
     coverage of excepted benefits (as defined in section 706(c)).
       ``(2) Not counting periods before significant breaks in 
     coverage.--
       ``(A) In general.--A period of creditable coverage shall 
     not be counted, with respect to enrollment of an individual 
     under a group health plan, if, after such period and before 
     the enrollment date, there was a 63-day period during all of 
     which the individual was not covered under any creditable 
     coverage.
       ``(B) Waiting period not treated as a break in coverage.--
     For purposes of subparagraph (A) and subsection (d)(4), any 
     period that an individual is in a waiting period for any 
     coverage under a group health plan (or for group health 
     insurance coverage) or is in an affiliation period (as 
     defined in subsection (g)(2)) shall not be taken into account 
     in determining the continuous period under subparagraph (A).
       ``(3) Method of crediting coverage.--
       ``(A) Standard method.--Except as otherwise provided under 
     subparagraph (B), for purposes of applying subsection (a)(3), 
     a group health plan, and a health insurance issuer offering 
     group health insurance coverage, shall count a period of 
     creditable coverage without regard to the specific benefits 
     covered during the period.
       ``(B) Election of alternative method.--A group health plan, 
     or a health insurance issuer offering group health insurance 
     coverage, may elect to apply subsection (a)(3) based on 
     coverage of benefits within each of several classes or 
     categories of benefits specified in regulations rather than 
     as provided under subparagraph (A). Such election shall be 
     made on a uniform basis for all participants and 
     beneficiaries. Under such election a group health plan or 
     issuer shall count a period of creditable coverage with 
     respect to any class or category of benefits if any level of 
     benefits is covered within such class or category.
       ``(C) Plan notice.--In the case of an election with respect 
     to a group health plan under subparagraph (B) (whether or not 
     health insurance coverage is provided in connection with such 
     plan), the plan shall--
       ``(i) prominently state in any disclosure statements 
     concerning the plan, and state to each enrollee at the time 
     of enrollment under the plan, that the plan has made such 
     election, and

[[Page H9475]]

       ``(ii) include in such statements a description of the 
     effect of this election.
       ``(4) Establishment of period.--Periods of creditable 
     coverage with respect to an individual shall be established 
     through presentation of certifications described in 
     subsection (e) or in such other manner as may be specified in 
     regulations.
       ``(d) Exceptions.--
       ``(1) Exclusion not applicable to certain newborns.--
     Subject to paragraph (4), a group health plan, and a health 
     insurance issuer offering group health insurance coverage, 
     may not impose any preexisting condition exclusion in the 
     case of an individual who, as of the last day of the 30-day 
     period beginning with the date of birth, is covered under 
     creditable coverage.
       ``(2) Exclusion not applicable to certain adopted 
     children.--Subject to paragraph (4), a group health plan, and 
     a health insurance issuer offering group health insurance 
     coverage, may not impose any preexisting condition exclusion 
     in the case of a child who is adopted or placed for adoption 
     before attaining 18 years of age and who, as of the last day 
     of the 30-day period beginning on the date of the adoption or 
     placement for adoption, is covered under creditable coverage. 
     The previous sentence shall not apply to coverage before the 
     date of such adoption or placement for adoption.
       ``(3) Exclusion not applicable to pregnancy.--A group 
     health plan, and health insurance issuer offering group 
     health insurance coverage, may not impose any preexisting 
     condition exclusion relating to pregnancy as a preexisting 
     condition.
       ``(4) Loss if break in coverage.--Paragraphs (1) and (2) 
     shall no longer apply to an individual after the end of the 
     first 63-day period during all of which the individual was 
     not covered under any creditable coverage.
       ``(e) Certifications and Disclosure of Coverage.--
       ``(1) Requirement for certification of period of creditable 
     coverage.--
       ``(A) In general.--A group health plan, and a health 
     insurance issuer offering group health insurance coverage, 
     shall provide the certification described in subparagraph 
     (B)--
       ``(i) at the time an individual ceases to be covered under 
     the plan or otherwise becomes covered under a COBRA 
     continuation provision,
       ``(ii) in the case of an individual becoming covered under 
     such a provision, at the time the individual ceases to be 
     covered under such provision, and
       ``(iii) on the request on behalf of an individual made not 
     later than 24 months after the date of cessation of the 
     coverage described in clause (i) or (ii), whichever is later.
     The certification under clause (i) may be provided, to the 
     extent practicable, at a time consistent with notices 
     required under any applicable COBRA continuation provision.
       ``(B) Certification.--The certification described in this 
     subparagraph is a written certification of--
       ``(i) the period of creditable coverage of the individual 
     under such plan and the coverage (if any) under such COBRA 
     continuation provision, and
       ``(ii) the waiting period (if any) (and affiliation period, 
     if applicable) imposed with respect to the individual for any 
     coverage under such plan.
       ``(C) Issuer compliance.--To the extent that medical care 
     under a group health plan consists of group health insurance 
     coverage, the plan is deemed to have satisfied the 
     certification requirement under this paragraph if the health 
     insurance issuer offering the coverage provides for such 
     certification in accordance with this paragraph.
       ``(2) Disclosure of information on previous benefits.--In 
     the case of an election described in subsection (c)(3)(B) by 
     a group health plan or health insurance issuer, if the plan 
     or issuer enrolls an individual for coverage under the plan 
     and the individual provides a certification of coverage of 
     the individual under paragraph (1)--
       ``(A) upon request of such plan or issuer, the entity which 
     issued the certification provided by the individual shall 
     promptly disclose to such requesting plan or issuer 
     information on coverage of classes and categories of health 
     benefits available under such entity's plan or coverage, and
       ``(B) such entity may charge the requesting plan or issuer 
     for the reasonable cost of disclosing such information.
       ``(3) Regulations.--The Secretary shall establish rules to 
     prevent an entity's failure to provide information under 
     paragraph (1) or (2) with respect to previous coverage of an 
     individual from adversely affecting any subsequent coverage 
     of the individual under another group health plan or health 
     insurance coverage.
       ``(f) Special Enrollment Periods.--
       ``(1) Individuals losing other coverage.--A group health 
     plan, and a health insurance issuer offering group health 
     insurance coverage in connection with a group health plan, 
     shall permit an employee who is eligible, but not enrolled, 
     for coverage under the terms of the plan (or a dependent of 
     such an employee if the dependent is eligible, but not 
     enrolled, for coverage under such terms) to enroll for 
     coverage under the terms of the plan if each of the following 
     conditions is met:
       ``(A) The employee or dependent was covered under a group 
     health plan or had health insurance coverage at the time 
     coverage was previously offered to the employee or dependent.
       ``(B) The employee stated in writing at such time that 
     coverage under a group health plan or health insurance 
     coverage was the reason for declining enrollment, but only if 
     the plan sponsor or issuer (if applicable) required such a 
     statement at such time and provided the employee with notice 
     of such requirement (and the consequences of such 
     requirement) at such time.
       ``(C) The employee's or dependent's coverage described in 
     subparagraph (A)--
       ``(i) was under a COBRA continuation provision and the 
     coverage under such provision was exhausted; or
       ``(ii) was not under such a provision and either the 
     coverage was terminated as a result of loss of eligibility 
     for the coverage (including as a result of legal separation, 
     divorce, death, termination of employment, or reduction in 
     the number of hours of employment) or employer contributions 
     towards such coverage were terminated.
       ``(D) Under the terms of the plan, the employee requests 
     such enrollment not later than 30 days after the date of 
     exhaustion of coverage described in subparagraph (C)(i) or 
     termination of coverage or employer contribution described in 
     subparagraph (C)(ii).
       ``(2) For dependent beneficiaries.--
       ``(A) In general.--If--
       ``(i) a group health plan makes coverage available with 
     respect to a dependent of an individual,
       ``(ii) the individual is a participant under the plan (or 
     has met any waiting period applicable to becoming a 
     participant under the plan and is eligible to be enrolled 
     under the plan but for a failure to enroll during a previous 
     enrollment period), and
       ``(iii) a person becomes such a dependent of the individual 
     through marriage, birth, or adoption or placement for 
     adoption,
     the group health plan shall provide for a dependent special 
     enrollment period described in subparagraph (B) during which 
     the person (or, if not otherwise enrolled, the individual) 
     may be enrolled under the plan as a dependent of the 
     individual, and in the case of the birth or adoption of a 
     child, the spouse of the individual may be enrolled as a 
     dependent of the individual if such spouse is otherwise 
     eligible for coverage.
       ``(B) Dependent special enrollment period.--A dependent 
     special enrollment period under this subparagraph shall be a 
     period of not less than 30 days and shall begin on the later 
     of--
       ``(i) the date dependent coverage is made available, or
       ``(ii) the date of the marriage, birth, or adoption or 
     placement for adoption (as the case may be) described in 
     subparagraph (A)(iii).
       ``(C) No waiting period.--If an individual seeks to enroll 
     a dependent during the first 30 days of such a dependent 
     special enrollment period, the coverage of the dependent 
     shall become effective--
       ``(i) in the case of marriage, not later than the first day 
     of the first month beginning after the date the completed 
     request for enrollment is received;
       ``(ii) in the case of a dependent's birth, as of the date 
     of such birth; or
       ``(iii) in the case of a dependent's adoption or placement 
     for adoption, the date of such adoption or placement for 
     adoption.
       ``(g) Use of Affiliation Period by HMOs as Alternative to 
     Preexisting Condition Exclusion.--
       ``(1) In general.--In the case of a group health plan that 
     offers medical care through health insurance coverage offered 
     by a health maintenance organization, the plan may provide 
     for an affiliation period with respect to coverage through 
     the organization only if--
       ``(A) no preexisting condition exclusion is imposed with 
     respect to coverage through the organization,
       ``(B) the period is applied uniformly without regard to any 
     health status-related factors, and
       ``(C) such period does not exceed 2 months (or 3 months in 
     the case of a late enrollee).
       ``(2) Affiliation period.--
       ``(A) Defined.--For purposes of this part, the term 
     `affiliation period' means a period which, under the terms of 
     the health insurance coverage offered by the health 
     maintenance organization, must expire before the health 
     insurance coverage becomes effective. The organization is not 
     required to provide health care services or benefits during 
     such period and no premium shall be charged to the 
     participant or beneficiary for any coverage during the 
     period.
       ``(B) Beginning.--Such period shall begin on the enrollment 
     date.
       ``(C) Runs concurrently with waiting periods.--An 
     affiliation period under a plan shall run concurrently with 
     any waiting period under the plan.
       ``(3) Alternative methods.--A health maintenance 
     organization described in paragraph (1) may use alternative 
     methods, from those described in such paragraph, to address 
     adverse selection as approved by the State insurance 
     commissioner or official or officials designated by the State 
     to enforce the requirements of part A of title XXVII of the 
     Public Health Service Act for the State involved with respect 
     to such issuer.

     ``SEC. 702. PROHIBITING DISCRIMINATION AGAINST INDIVIDUAL 
                   PARTICIPANTS AND BENEFICIARIES BASED ON HEALTH 
                   STATUS.

       ``(a) In Eligibility to Enroll.--
       ``(1) In general.--Subject to paragraph (2), a group health 
     plan, and a health insurance issuer offering group health 
     insurance coverage in connection with a group health plan, 
     may not establish rules for eligibility (including continued 
     eligibility) of any individual to enroll under the terms of 
     the plan based on any of the following health status-related 
     factors in relation to the individual or a dependent of the 
     individual:
       ``(A) Health status.
       ``(B) Medical condition (including both physical and mental 
     illnesses).
       ``(C) Claims experience.
       ``(D) Receipt of health care.
       ``(E) Medical history.
       ``(F) Genetic information.
       ``(G) Evidence of insurability (including conditions 
     arising out of acts of domestic violence).

[[Page H9476]]

       ``(H) Disability.
       ``(2) No application to benefits or exclusions.--To the 
     extent consistent with section 701, paragraph (1) shall not 
     be construed--
       ``(A) to require a group health plan, or group health 
     insurance coverage, to provide particular benefits other than 
     those provided under the terms of such plan or coverage, or
       ``(B) to prevent such a plan or coverage from establishing 
     limitations or restrictions on the amount, level, extent, or 
     nature of the benefits or coverage for similarly situated 
     individuals enrolled in the plan or coverage.
       ``(3) Construction.--For purposes of paragraph (1), rules 
     for eligibility to enroll under a plan include rules defining 
     any applicable waiting periods for such enrollment.
       ``(b) In Premium Contributions.--
       ``(1) In general.--A group health plan, and a health 
     insurance issuer offering health insurance coverage in 
     connection with a group health plan, may not require any 
     individual (as a condition of enrollment or continued 
     enrollment under the plan) to pay a premium or contribution 
     which is greater than such premium or contribution for a 
     similarly situated individual enrolled in the plan on the 
     basis of any health status-related factor in relation to the 
     individual or to an individual enrolled under the plan as a 
     dependent of the individual.
       ``(2) Construction.--Nothing in paragraph (1) shall be 
     construed--
       ``(A) to restrict the amount that an employer may be 
     charged for coverage under a group health plan; or
       ``(B) to prevent a group health plan, and a health 
     insurance issuer offering group health insurance coverage, 
     from establishing premium discounts or rebates or modifying 
     otherwise applicable copayments or deductibles in return for 
     adherence to programs of health promotion and disease 
     prevention.

     ``SEC. 703. GUARANTEED RENEWABILITY IN MULTIEMPLOYER PLANS 
                   AND MULTIPLE EMPLOYER WELFARE ARRANGEMENTS.

       ``A group health plan which is a multiemployer plan or 
     which is a multiple employer welfare arrangement may not deny 
     an employer whose employees are covered under such a plan 
     continued access to the same or different coverage under the 
     terms of such a plan, other than--
       ``(1) for nonpayment of contributions;
       ``(2) for fraud or other intentional misrepresentation of 
     material fact by the employer;
       ``(3) for noncompliance with material plan provisions;
       ``(4) because the plan is ceasing to offer any coverage in 
     a geographic area;
       ``(5) in the case of a plan that offers benefits through a 
     network plan, there is no longer any individual enrolled 
     through the employer who lives, resides, or works in the 
     service area of the network plan and the plan applies this 
     paragraph uniformly without regard to the claims experience 
     of employers or any health status-related factor in relation 
     to such individuals or their dependents; and
       ``(6) for failure to meet the terms of an applicable 
     collective bargaining agreement, to renew a collective 
     bargaining or other agreement requiring or authorizing 
     contributions to the plan, or to employ employees covered by 
     such an agreement.

     ``SEC. 704. PREEMPTION; STATE FLEXIBILITY; CONSTRUCTION.

       ``(a) Continued Applicability of State Law with Respect to 
     Health Insurance Issuers.--
       ``(1) In General.--Subject to paragraph (2) and except as 
     provided in subsection (b), this part shall not be construed 
     to supersede any provision of State law which establishes, 
     implements, or continues in effect any standard or 
     requirement solely relating to health insurance issuers in 
     connection with group health insurance coverage except to the 
     extent that such standard or requirement prevents the 
     application of a requirement of this part.
       ``(2) Continued preemption with respect to group health 
     plans.--Nothing in this part shall be construed to affect or 
     modify the provisions of section 514 with respect to group 
     health plans.
       ``(b) Special Rules in Case of Portability Requirements.--
       ``(1) In general.--Subject to paragraph (2), the provisions 
     of this part relating to health insurance coverage offered by 
     a health insurance issuer supersede any provision of State 
     law which establishes, implements, or continues in effect a 
     standard or requirement applicable to imposition of a 
     preexisting condition exclusion specifically governed by 
     section 701 which differs from the standards or requirements 
     specified in such section.
       ``(2) Exceptions.--Only in relation to health insurance 
     coverage offered by a health insurance issuer, the provisions 
     of this part do not supersede any provision of State law to 
     the extent that such provision--
       ``(i) substitutes for the reference to `6-month period' in 
     section 701(a)(1) a reference to any shorter period of time;
       ``(ii) substitutes for the reference to `12 months' and `18 
     months' in section 701(a)(2) a reference to any shorter 
     period of time;
       ``(iii) substitutes for the references to `63' days in 
     sections 701(c)(2)(A) and 701(d)(4)(A) a reference to any 
     greater number of days;
       ``(iv) substitutes for the reference to `30-day period' in 
     sections 701(b)(2) and 701(d)(1) a reference to any greater 
     period;
       ``(v) prohibits the imposition of any preexisting condition 
     exclusion in cases not described in section 701(d) or expands 
     the exceptions described in such section;
       ``(vi) requires special enrollment periods in addition to 
     those required under section 701(f); or
       ``(vii) reduces the maximum period permitted in an 
     affiliation period under section 701(g)(1)(B).
       ``(c) Rules of Construction.--Nothing in this part shall be 
     construed as requiring a group health plan or health 
     insurance coverage to provide specific benefits under the 
     terms of such plan or coverage.
       ``(d) Definitions.--For purposes of this section--
       ``(1) State law.--The term `State law' includes all laws, 
     decisions, rules, regulations, or other State action having 
     the effect of law, of any State. A law of the United States 
     applicable only to the District of Columbia shall be treated 
     as a State law rather than a law of the United States.
       ``(2) State.--The term `State' includes a State, the 
     Northern Mariana Islands, any political subdivisions of a 
     State or such Islands, or any agency or instrumentality of 
     either.

     ``SEC. 705. SPECIAL RULES RELATING TO GROUP HEALTH PLANS.

       ``(a) General Exception for Certain Small Group Health 
     Plans.--The requirements of this part shall not apply to any 
     group health plan (and group health insurance coverage 
     offered in connection with a group health plan) for any plan 
     year if, on the first day of such plan year, such plan has 
     less than 2 participants who are current employees.
       ``(b) Exception for Certain Benefits.--The requirements of 
     this part shall not apply to any group health plan (and group 
     health insurance coverage) in relation to its provision of 
     excepted benefits described in section 706(c)(1).
       ``(c) Exception for Certain Benefits If Certain Conditions 
     Met.--
       ``(1) Limited, excepted benefits.--The requirements of this 
     part shall not apply to any group health plan (and group 
     health insurance coverage offered in connection with a group 
     health plan) in relation to its provision of excepted 
     benefits described in section 706(c)(2) if the benefits--
       ``(A) are provided under a separate policy, certificate, or 
     contract of insurance; or
       ``(B) are otherwise not an integral part of the plan.
       ``(2) Noncoordinated, excepted benefits.--The requirements 
     of this part shall not apply to any group health plan (and 
     group health insurance coverage offered in connection with a 
     group health plan) in relation to its provision of excepted 
     benefits described in section 706(c)(3) if all of the 
     following conditions are met:
       ``(A) The benefits are provided under a separate policy, 
     certificate, or contract of insurance.
       ``(B) There is no coordination between the provision of 
     such benefits and any exclusion of benefits under any group 
     health plan maintained by the same plan sponsor.
       ``(C) Such benefits are paid with respect to an event 
     without regard to whether benefits are provided with respect 
     to such an event under any group health plan maintained by 
     the same plan sponsor.
       ``(3) Supplemental excepted benefits.--The requirements of 
     this part shall not apply to any group health plan (and group 
     health insurance coverage) in relation to its provision of 
     excepted benefits described in section 706(c)(4) if the 
     benefits are provided under a separate policy, certificate, 
     or contract of insurance.
       ``(d) Treatment of Partnerships.--For purposes of this 
     part--
       ``(1) Treatment as a group health plan.--Any plan, fund, or 
     program which would not be (but for this subsection) an 
     employee welfare benefit plan and which is established or 
     maintained by a partnership, to the extent that such plan, 
     fund, or program provides medical care (including items and 
     services paid for as medical care) to present or former 
     partners in the partnership or to their dependents (as 
     defined under the terms of the plan, fund, or program), 
     directly or through insurance, reimbursement, or otherwise, 
     shall be treated (subject to paragraph (2)) as an employee 
     welfare benefit plan which is a group health plan.
       ``(2) Employer.--In the case of a group health plan, the 
     term `employer' also includes the partnership in relation to 
     any partner.
       ``(3) Participants of group health plans.--In the case of a 
     group health plan, the term `participant' also includes--
       ``(A) in connection with a group health plan maintained by 
     a partnership, an individual who is a partner in relation to 
     the partnership, or
       ``(B) in connection with a group health plan maintained by 
     a self-employed individual (under which one or more employees 
     are participants), the self-employed individual,
     if such individual is, or may become, eligible to receive a 
     benefit under the plan or such individual's beneficiaries may 
     be eligible to receive any such benefit.

     ``SEC. 706. DEFINITIONS.

       ``(a) Group Health Plan.--For purposes of this part--
       ``(1) In general.--The term `group health plan' means an 
     employee welfare benefit plan to the extent that the plan 
     provides medical care (as defined in paragraph (2) and 
     including items and services paid for as medical care) to 
     employees or their dependents (as defined under the terms of 
     the plan) directly or through insurance, reimbursement, or 
     otherwise.
       ``(2) Medical care.--The term `medical care' means amounts 
     paid for--
       ``(A) the diagnosis, cure, mitigation, treatment, or 
     prevention of disease, or amounts paid for the purpose of 
     affecting any structure or function of the body,
       ``(B) amounts paid for transportation primarily for and 
     essential to medical care referred to in subparagraph (A), 
     and
       ``(C) amounts paid for insurance covering medical care 
     referred to in subparagraphs (A) and (B).
       ``(b) Definitions Relating to Health Insurance.--For 
     purposes of this part--
       ``(1) Health insurance coverage.--The term `health 
     insurance coverage' means benefits consisting of medical care 
     (provided directly, through insurance or reimbursement, or 
     otherwise and including items and services paid for

[[Page H9477]]

     as medical care) under any hospital or medical service policy 
     or certificate, hospital or medical service plan contract, or 
     health maintenance organization contract offered by a health 
     insurance issuer.
       ``(2) Health insurance issuer.--The term `health insurance 
     issuer' means an insurance company, insurance service, or 
     insurance organization (including a health maintenance 
     organization, as defined in paragraph (3)) which is licensed 
     to engage in the business of insurance in a State and which 
     is subject to State law which regulates insurance (within the 
     meaning of section 514(b)(2)). Such term does not include a 
     group health plan.
       ``(3) Health maintenance organization.--The term `health 
     maintenance organization' means--
       ``(A) a Federally qualified health maintenance organization 
     (as defined in section 1301(a) of the Public Health Service 
     Act (42 U.S.C. 300e(a))),
       ``(B) an organization recognized under State law as a 
     health maintenance organization, or
       ``(C) a similar organization regulated under State law for 
     solvency in the same manner and to the same extent as such a 
     health maintenance organization.
       ``(4) Group health insurance coverage.--The term `group 
     health insurance coverage' means, in connection with a group 
     health plan, health insurance coverage offered in connection 
     with such plan.
       ``(c) Excepted Benefits.--For purposes of this part, the 
     term `excepted benefits' means benefits under one or more (or 
     any combination thereof) of the following:
       ``(1) Benefits not subject to requirements.--
       ``(A) Coverage only for accident, or disability income 
     insurance, or any combination thereof.
       ``(B) Coverage issued as a supplement to liability 
     insurance.
       ``(C) Liability insurance, including general liability 
     insurance and automobile liability insurance.
       ``(D) Workers' compensation or similar insurance.
       ``(E) Automobile medical payment insurance.
       ``(F) Credit-only insurance.
       ``(G) Coverage for on-site medical clinics.
       ``(H) Other similar insurance coverage, specified in 
     regulations, under which benefits for medical care are 
     secondary or incidental to other insurance benefits.
       ``(2) Benefits not subject to requirements if offered 
     separately.--
       ``(A) Limited scope dental or vision benefits.
       ``(B) Benefits for long-term care, nursing home care, home 
     health care, community-based care, or any combination 
     thereof.
       ``(C) Such other similar, limited benefits as are specified 
     in regulations.
       ``(3) Benefits not subject to requirements if offered as 
     independent, noncoordinated benefits.--
       ``(A) Coverage only for a specified disease or illness.
       ``(B) Hospital indemnity or other fixed indemnity 
     insurance.
       ``(4) Benefits not subject to requirements if offered as 
     separate insurance policy.--Medicare supplemental health 
     insurance (as defined under section 1882(g)(1) of the Social 
     Security Act), coverage supplemental to the coverage provided 
     under chapter 55 of title 10, United States Code, and similar 
     supplemental coverage provided to coverage under a group 
     health plan.
       ``(d) Other Definitions.--For purposes of this part--
       ``(1) COBRA continuation provision.--The term `COBRA 
     continuation provision' means any of the following:
       ``(A) Part 6 of this subtitle.
       ``(B) Section 4980B of the Internal Revenue Code of 1986, 
     other than subsection (f)(1) of such section insofar as it 
     relates to pediatric vaccines.
       ``(C) Title XXII of the Public Health Service Act.
       ``(2) Health status-related factor.--The term `health 
     status-related factor' means any of the factors described in 
     section 702(a)(1).
       ``(3) Network plan.--The term `network plan' means health 
     insurance coverage offered by a health insurance issuer under 
     which the financing and delivery of medical care (including 
     items and services paid for as medical care) are provided, in 
     whole or in part, through a defined set of providers under 
     contract with the issuer.
       ``(4) Placed for adoption.--The term `placement', or being 
     `placed', for adoption, has the meaning given such term in 
     section 609(c)(3)(B).

     ``SEC. 707. REGULATIONS.

       ``The Secretary, consistent with section 104 of the Health 
     Care Portability and Accountability Act of 1996, may 
     promulgate such regulations as may be necessary or 
     appropriate to carry out the provisions of this part. The 
     Secretary may promulgate any interim final rules as the 
     Secretary determines are appropriate to carry out this 
     part.''.
       (b) Enforcement with Respect to Health Insurance Issuers.--
     Section 502(b) of such Act (29 U.S.C. 1132(b)) is amended by 
     adding at the end the following new paragraph:
       ``(3) The Secretary is not authorized to enforce under this 
     part any requirement of part 7 against a health insurance 
     issuer offering health insurance coverage in connection with 
     a group health plan (as defined in section 706(a)(1)). 
     Nothing in this paragraph shall affect the authority of the 
     Secretary to issue regulations to carry out such part.''.
        (c) Disclosure of Information to Participants and 
     Beneficiaries.--
       (1) In general.--Section 104(b)(1) of such Act (29 U.S.C. 
     1024(b)(1)) is amended in the matter following subparagraph 
     (B)--
       (A) by striking ``102(a)(1),'' and inserting ``102(a)(1) 
     (other than a material reduction in covered services or 
     benefits provided in the case of a group health plan (as 
     defined in section 706(a)(1))),''; and
       (B) by adding at the end the following new sentences: ``If 
     there is a modification or change described in section 
     102(a)(1) that is a material reduction in covered services or 
     benefits provided under a group health plan (as defined in 
     section 706(a)(1)), a summary description of such 
     modification or change shall be furnished to participants and 
     beneficiaries not later than 60 days after the date of the 
     adoption of the modification or change. In the alternative, 
     the plan sponsors may provide such description at regular 
     intervals of not more than 90 days. The Secretary shall issue 
     regulations within 180 days after the date of enactment of 
     the Health Insurance Portability and Accountability Act of 
     1996, providing alternative mechanisms to delivery by mail 
     through which group health plans (as so defined) may notify 
     participants and beneficiaries of material reductions in 
     covered services or benefits.''.
       (2) Plan description and summary.--Section 102(b) of such 
     Act (29 U.S.C. 1022(b)) is amended--
       (A) by inserting ``in the case of a group health plan (as 
     defined in section 706(a)(1)), whether a health insurance 
     issuer (as defined in section 706(b)(2)) is responsible for 
     the financing or administration (including payment of claims) 
     of the plan and (if so) the name and address of such 
     issuer;'' after ``type of administration of the plan;''; and
       (B) by inserting ``including the office at the Department 
     of Labor through which participants and beneficiaries may 
     seek assistance or information regarding their rights under 
     this Act and the Health Insurance Portability and 
     Accountability Act of 1996 with respect to health benefits 
     that are offered through a group health plan (as defined in 
     section 706(a)(1))'' after ``benefits under the plan''.
       (d) Treatment of Health Insurance Issuers Offering Health 
     Insurance Coverage to Noncovered Plans.--Section 4(b) of such 
     Act (29 U.S.C. 1003(b)) is amended by adding at the end 
     (after and below paragraph (5)) the following:
     ``The provisions of part 7 of subtitle B shall not apply to a 
     health insurance issuer (as defined in section 706(b)(2)) 
     solely by reason of health insurance coverage (as defined in 
     section 706(b)(1)) provided by such issuer in connection with 
     a group health plan (as defined in section 706(a)(1)) if the 
     provisions of this title do not apply to such group health 
     plan.''.
       (e) Reporting and Enforcement with Respect to Certain 
     Arrangements.--
       (1) In general.--Section 101 of such Act (29 U.S.C. 1021) 
     is amended--
       (A) by redesignating subsection (g) as subsection (h), and
       (B) by inserting after subsection (f) the following new 
     subsection:
       ``(g) Reporting by Certain Arrangements.--The Secretary 
     may, by regulation, require multiple employer welfare 
     arrangements providing benefits consisting of medical care 
     (within the meaning of section 706(a)(2)) which are not group 
     health plans to report, not more frequently than annually, in 
     such form and such manner as the Secretary may require for 
     the purpose of determining the extent to which the 
     requirements of part 7 are being carried out in connection 
     with such benefits.''.
       (2) Enforcement.--
       (A) In general.--Section 502 of such Act (29 U.S.C. 1132) 
     is amended--
       (i) in subsection (a)(6), by striking ``under subsection 
     (c)(2) or (i) or (l)'' and inserting ``under paragraph (2), 
     (4), or (5) of subsection (c) or under subsection (i) or 
     (l)''; and
       (ii) in the last 2 sentences of subsection (c), by striking 
     ``For purposes of this paragraph'' and all that follows 
     through ``The Secretary and'' and inserting the following:
       ``(5) The Secretary may assess a civil penalty against any 
     person of up to $1,000 a day from the date of the person's 
     failure or refusal to file the information required to be 
     filed by such person with the Secretary under regulations 
     prescribed pursuant to section 101(g).
       ``(6) The Secretary and''.
       (B) Technical and conforming amendment.--Section 502(c)(1) 
     of such Act (29 U.S.C. 1132(c)(1)) is amended by adding at 
     the end the following sentence: ``For purposes of this 
     paragraph, each violation described in subparagraph (A) with 
     respect to any single participant, and each violation 
     described in subparagraph (B) with respect to any single 
     participant or beneficiary, shall be treated as a separate 
     violation.''.
       (3) Coordination.--Section 506 of such Act (29 U.S.C. 1136) 
     is amended by adding at the end the following new subsection:
       ``(c) Coordination of Enforcement with States with Respect 
     to Certain Arrangements.--A State may enter into an agreement 
     with the Secretary for delegation to the State of some or all 
     of the Secretary's authority under sections 502 and 504 to 
     enforce the requirements under part 7 in connection with 
     multiple employer welfare arrangements, providing medical 
     care (within the meaning of section 706(a)(2)), which are not 
     group health plans.''.
       (f) Conforming Amendments.--
       (1) Section 514(b) of such Act (29 U.S.C. 1144(b)) is 
     amended by adding at the end the following new paragraph:
       ``(9) For additional provisions relating to group health 
     plans, see section 704.''.
       (2)(A) Part 6 of subtitle B of title I of such Act (29 
     U.S.C. 1161 et seq.) is amended by striking the heading and 
     inserting the following:

  ``Part 6--Continuation Coverage and Additional Standards for Group 
                            Health Plans''.

       (B) The table of contents in section 1 of such Act is 
     amended by striking the item relating to the heading for part 
     6 of subtitle B of title I and inserting the following:

[[Page H9478]]

  ``Part 6--Continuation Coverage and Additional Standards for Group 
                            Health Plans''.

       (3) The table of contents in section 1 of such Act (as 
     amended by the preceding provisions of this section) is 
     amended by inserting after the items relating to part 6 the 
     following new items:

   ``Part 7--Group Health Plan Portability, Access, and Renewability 
                              Requirements

``Sec. 701. Increased portability through limitation on preexisting 
              condition exclusions.
``Sec. 702. Prohibiting discrimination against individual participants 
              and beneficiaries based on health status.
``Sec. 703. Guaranteed renewability in multiemployer plans and multiple 
              employer welfare arrangements.
``Sec. 704. Preemption; State flexibility; construction.
``Sec. 705. Special rules relating to group health plans.
``Sec. 706. Definitions.
``Sec. 707. Regulations.''.

       (g) Effective Dates.--
       (1) In general.--Except as provided in this section, this 
     section (and the amendments made by this section) shall apply 
     with respect to group health plans for plan years beginning 
     after June 30, 1997.
       (2) Determination of creditable coverage.--
       (A) Period of coverage.--
       (i) In general.--Subject to clause (ii), no period before 
     July 1, 1996, shall be taken into account under part 7 of 
     subtitle B of title I of the Employee Retirement Income 
     Security Act of 1974 (as added by this section) in 
     determining creditable coverage.
       (ii) Special rule for certain periods.--The Secretary of 
     Labor, consistent with section 104, shall provide for a 
     process whereby individuals who need to establish creditable 
     coverage for periods before July 1, 1996, and who would have 
     such coverage credited but for clause (i) may be given credit 
     for creditable coverage for such periods through the 
     presentation of documents or other means.
       (B) Certifications, etc.--
       (i) In general.--Subject to clauses (ii) and (iii), 
     subsection (e) of section 701 of the Employee Retirement 
     Income Security Act of 1974 (as added by this section) shall 
     apply to events occurring after June 30, 1996.
       (ii) No certification required to be provided before june 
     1, 1997.--In no case is a certification required to be 
     provided under such subsection before June 1, 1997.
       (iii) Certification only on written request for events 
     occurring before october 1, 1996.--In the case of an event 
     occurring after June 30, 1996, and before October 1, 1996, a 
     certification is not required to be provided under such 
     subsection unless an individual (with respect to whom the 
     certification is otherwise required to be made) requests such 
     certification in writing.
       (C) Transitional rule.--In the case of an individual who 
     seeks to establish creditable coverage for any period for 
     which certification is not required because it relates to an 
     event occurring before June 30, 1996--
       (i) the individual may present other credible evidence of 
     such coverage in order to establish the period of creditable 
     coverage; and
       (ii) a group health plan and a health insurance issuer 
     shall not be subject to any penalty or enforcement action 
     with respect to the plan's or issuer's crediting (or not 
     crediting) such coverage if the plan or issuer has sought to 
     comply in good faith with the applicable requirements under 
     the amendments made by this section.
       (3) Special rule for collective bargaining agreements.--
     Except as provided in paragraph (2), in the case of a group 
     health plan maintained pursuant to 1 or more collective 
     bargaining agreements between employee representatives and 
     one or more employers ratified before the date of the 
     enactment of this Act, part 7 of subtitle B of title I of 
     Employee Retirement Income Security Act of 1974 (other than 
     section 701(e) thereof) shall not apply to plan years 
     beginning before the later of--
       (A) the date on which the last of the collective bargaining 
     agreements relating to the plan terminates (determined 
     without regard to any extension thereof agreed to after the 
     date of the enactment of this Act), or
       (B) July 1, 1997.
     For purposes of subparagraph (A), any plan amendment made 
     pursuant to a collective bargaining agreement relating to the 
     plan which amends the plan solely to conform to any 
     requirement of such part shall not be treated as a 
     termination of such collective bargaining agreement.
       (4) Timely regulations.--The Secretary of Labor, consistent 
     with section 104, shall first issue by not later than April 
     1, 1997, such regulations as may be necessary to carry out 
     the amendments made by this section.
       (5) Limitation on actions.--No enforcement action shall be 
     taken, pursuant to the amendments made by this section, 
     against a group health plan or health insurance issuer with 
     respect to a violation of a requirement imposed by such 
     amendments before January 1, 1998, or, if later, the date of 
     issuance of regulations referred to in paragraph (4), if the 
     plan or issuer has sought to comply in good faith with such 
     requirements.

     SEC. 102. THROUGH THE PUBLIC HEALTH SERVICE ACT.

       (a) In General.--The Public Health Service Act is amended 
     by adding at the end the following new title:
``TITLE XXVII--ASSURING PORTABILITY, AVAILABILITY, AND RENEWABILITY OF 
                       HEALTH INSURANCE COVERAGE

                     ``Part A--Group Market Reforms

    ``Subpart 1--Portability, Access, and Renewability Requirements

     ``SEC. 2701. INCREASED PORTABILITY THROUGH LIMITATION ON 
                   PREEXISTING CONDITION EXCLUSIONS.

       ``(a) Limitation on Preexisting Condition Exclusion Period; 
     Crediting for Periods of Previous Coverage.--Subject to 
     subsection (d), a group health plan, and a health insurance 
     issuer offering group health insurance coverage, may, with 
     respect to a participant or beneficiary, impose a preexisting 
     condition exclusion only if--
       ``(1) such exclusion relates to a condition (whether 
     physical or mental), regardless of the cause of the 
     condition, for which medical advice, diagnosis, care, or 
     treatment was recommended or received within the 6-month 
     period ending on the enrollment date;
       ``(2) such exclusion extends for a period of not more than 
     12 months (or 18 months in the case of a late enrollee) after 
     the enrollment date; and
       ``(3) the period of any such preexisting condition 
     exclusion is reduced by the aggregate of the periods of 
     creditable coverage (if any, as defined in subsection (c)(1)) 
     applicable to the participant or beneficiary as of the 
     enrollment date.
       ``(b) Definitions.--For purposes of this part--
       ``(1) Preexisting condition exclusion.--
       ``(A) In general.--The term `preexisting condition 
     exclusion' means, with respect to coverage, a limitation or 
     exclusion of benefits relating to a condition based on the 
     fact that the condition was present before the date of 
     enrollment for such coverage, whether or not any medical 
     advice, diagnosis, care, or treatment was recommended or 
     received before such date.
       ``(B) Treatment of genetic information.--Genetic 
     information shall not be treated as a condition described in 
     subsection (a)(1) in the absence of a diagnosis of the 
     condition related to such information.
       ``(2) Enrollment date.--The term `enrollment date' means, 
     with respect to an individual covered under a group health 
     plan or health insurance coverage, the date of enrollment of 
     the individual in the plan or coverage or, if earlier, the 
     first day of the waiting period for such enrollment.
       ``(3) Late enrollee.--The term `late enrollee' means, with 
     respect to coverage under a group health plan, a participant 
     or beneficiary who enrolls under the plan other than during--
       ``(A) the first period in which the individual is eligible 
     to enroll under the plan, or
       ``(B) a special enrollment period under subsection (f).
       ``(4) Waiting period.--The term `waiting period' means, 
     with respect to a group health plan and an individual who is 
     a potential participant or beneficiary in the plan, the 
     period that must pass with respect to the individual before 
     the individual is eligible to be covered for benefits under 
     the terms of the plan.
       ``(c) Rules Relating to Crediting Previous Coverage.--
       ``(1) Creditable coverage defined.--For purposes of this 
     title, the term `creditable coverage' means, with respect to 
     an individual, coverage of the individual under any of the 
     following:
       ``(A) A group health plan.
       ``(B) Health insurance coverage.
       ``(C) Part A or part B of title XVIII of the Social 
     Security Act.
       ``(D) Title XIX of the Social Security Act, other than 
     coverage consisting solely of benefits under section 1928.
       ``(E) Chapter 55 of title 10, United States Code.
       ``(F) A medical care program of the Indian Health Service 
     or of a tribal organization.
       ``(G) A State health benefits risk pool.
       ``(H) A health plan offered under chapter 89 of title 5, 
     United States Code.
       ``(I) A public health plan (as defined in regulations).
       ``(J) A health benefit plan under section 5(e) of the Peace 
     Corps Act (22 U.S.C. 2504(e)).
     Such term does not include coverage consisting solely of 
     coverage of excepted benefits (as defined in section 
     2791(c)).
       ``(2) Not counting periods before significant breaks in 
     coverage.--
       ``(A) In general.--A period of creditable coverage shall 
     not be counted, with respect to enrollment of an individual 
     under a group health plan, if, after such period and before 
     the enrollment date, there was a 63-day period during all of 
     which the individual was not covered under any creditable 
     coverage.
       ``(B) Waiting period not treated as a break in coverage.--
     For purposes of subparagraph (A) and subsection (d)(4), any 
     period that an individual is in a waiting period for any 
     coverage under a group health plan (or for group health 
     insurance coverage) or is in an affiliation period (as 
     defined in subsection (g)(2)) shall not be taken into account 
     in determining the continuous period under subparagraph (A).
       ``(3) Method of crediting coverage.--
       ``(A) Standard method.--Except as otherwise provided under 
     subparagraph (B), for purposes of applying subsection (a)(3), 
     a group health plan, and a health insurance issuer offering 
     group health insurance coverage, shall count a period of 
     creditable coverage without regard to the specific benefits 
     covered during the period.
       ``(B) Election of alternative method.--A group health plan, 
     or a health insurance issuer offering group health insurance, 
     may elect to apply subsection (a)(3) based on coverage of 
     benefits within each of several classes or categories of 
     benefits specified in regulations rather than as provided 
     under subparagraph (A). Such election shall be made on a 
     uniform basis for all participants and beneficiaries. Under 
     such election a group health plan or issuer shall count a 
     period of creditable coverage with respect to any class or 
     category of benefits if any level of benefits is covered 
     within such class or category.
       ``(C) Plan notice.--In the case of an election with respect 
     to a group health plan under subparagraph (B) (whether or not 
     health insurance

[[Page H9479]]

     coverage is provided in connection with such plan), the plan 
     shall--
       ``(i) prominently state in any disclosure statements 
     concerning the plan, and state to each enrollee at the time 
     of enrollment under the plan, that the plan has made such 
     election, and
       ``(ii) include in such statements a description of the 
     effect of this election.
       ``(D) Issuer notice.--In the case of an election under 
     subparagraph (B) with respect to health insurance coverage 
     offered by an issuer in the small or large group market, the 
     issuer--
       ``(i) shall prominently state in any disclosure statements 
     concerning the coverage, and to each employer at the time of 
     the offer or sale of the coverage, that the issuer has made 
     such election, and
       ``(ii) shall include in such statements a description of 
     the effect of such election.
       ``(4) Establishment of period.--Periods of creditable 
     coverage with respect to an individual shall be established 
     through presentation of certifications described in 
     subsection (e) or in such other manner as may be specified in 
     regulations.
       ``(d) Exceptions.--
       ``(1) Exclusion not applicable to certain newborns.--
     Subject to paragraph (4), a group health plan, and a health 
     insurance issuer offering group health insurance coverage, 
     may not impose any preexisting condition exclusion in the 
     case of an individual who, as of the last day of the 30-day 
     period beginning with the date of birth, is covered under 
     creditable coverage.
       ``(2) Exclusion not applicable to certain adopted 
     children.--Subject to paragraph (4), a group health plan, and 
     a health insurance issuer offering group health insurance 
     coverage, may not impose any preexisting condition exclusion 
     in the case of a child who is adopted or placed for adoption 
     before attaining 18 years of age and who, as of the last day 
     of the 30-day period beginning on the date of the adoption or 
     placement for adoption, is covered under creditable coverage. 
     The previous sentence shall not apply to coverage before the 
     date of such adoption or placement for adoption.
       ``(3) Exclusion not applicable to pregnancy.--A group 
     health plan, and health insurance issuer offering group 
     health insurance coverage, may not impose any preexisting 
     condition exclusion relating to pregnancy as a preexisting 
     condition.
       ``(4) Loss if break in coverage.--Paragraphs (1) and (2) 
     shall no longer apply to an individual after the end of the 
     first 63-day period during all of which the individual was 
     not covered under any creditable coverage.
       ``(e) Certifications and Disclosure of Coverage.--
       ``(1) Requirement for certification of period of creditable 
     coverage.--
       ``(A) In general.--A group health plan, and a health 
     insurance issuer offering group health insurance coverage, 
     shall provide the certification described in subparagraph 
     (B)--
       ``(i) at the time an individual ceases to be covered under 
     the plan or otherwise becomes covered under a COBRA 
     continuation provision,
       ``(ii) in the case of an individual becoming covered under 
     such a provision, at the time the individual ceases to be 
     covered under such provision, and
       ``(iii) on the request on behalf of an individual made not 
     later than 24 months after the date of cessation of the 
     coverage described in clause (i) or (ii), whichever is later.

     The certification under clause (i) may be provided, to the 
     extent practicable, at a time consistent with notices 
     required under any applicable COBRA continuation provision.
       ``(B) Certification.--The certification described in this 
     subparagraph is a written certification of--
       ``(i) the period of creditable coverage of the individual 
     under such plan and the coverage (if any) under such COBRA 
     continuation provision, and
       ``(ii) the waiting period (if any) (and affiliation period, 
     if applicable) imposed with respect to the individual for any 
     coverage under such plan.
       ``(C) Issuer compliance.--To the extent that medical care 
     under a group health plan consists of group health insurance 
     coverage, the plan is deemed to have satisfied the 
     certification requirement under this paragraph if the health 
     insurance issuer offering the coverage provides for such 
     certification in accordance with this paragraph.
       ``(2) Disclosure of information on previous benefits.--In 
     the case of an election described in subsection (c)(3)(B) by 
     a group health plan or health insurance issuer, if the plan 
     or issuer enrolls an individual for coverage under the plan 
     and the individual provides a certification of coverage of 
     the individual under paragraph (1)--
       ``(A) upon request of such plan or issuer, the entity which 
     issued the certification provided by the individual shall 
     promptly disclose to such requesting plan or issuer 
     information on coverage of classes and categories of health 
     benefits available under such entity's plan or coverage, and
       ``(B) such entity may charge the requesting plan or issuer 
     for the reasonable cost of disclosing such information.
       ``(3) Regulations.--The Secretary shall establish rules to 
     prevent an entity's failure to provide information under 
     paragraph (1) or (2) with respect to previous coverage of an 
     individual from adversely affecting any subsequent coverage 
     of the individual under another group health plan or health 
     insurance coverage.
       ``(f) Special Enrollment Periods.--
       ``(1) Individuals losing other coverage.--A group health 
     plan, and a health insurance issuer offering group health 
     insurance coverage in connection with a group health plan, 
     shall permit an employee who is eligible, but not enrolled, 
     for coverage under the terms of the plan (or a dependent of 
     such an employee if the dependent is eligible, but not 
     enrolled, for coverage under such terms) to enroll for 
     coverage under the terms of the plan if each of the following 
     conditions is met:
       ``(A) The employee or dependent was covered under a group 
     health plan or had health insurance coverage at the time 
     coverage was previously offered to the employee or dependent.
       ``(B) The employee stated in writing at such time that 
     coverage under a group health plan or health insurance 
     coverage was the reason for declining enrollment, but only if 
     the plan sponsor or issuer (if applicable) required such a 
     statement at such time and provided the employee with notice 
     of such requirement (and the consequences of such 
     requirement) at such time.
       ``(C) The employee's or dependent's coverage described in 
     subparagraph (A)--
       ``(i) was under a COBRA continuation provision and the 
     coverage under such provision was exhausted; or
       ``(ii) was not under such a provision and either the 
     coverage was terminated as a result of loss of eligibility 
     for the coverage (including as a result of legal separation, 
     divorce, death, termination of employment, or reduction in 
     the number of hours of employment) or employer contributions 
     towards such coverage were terminated.
       ``(D) Under the terms of the plan, the employee requests 
     such enrollment not later than 30 days after the date of 
     exhaustion of coverage described in subparagraph (C)(i) or 
     termination of coverage or employer contribution described in 
     subparagraph (C)(ii).
       ``(2) For dependent beneficiaries.--
       ``(A) In general.--If--
       ``(i) a group health plan makes coverage available with 
     respect to a dependent of an individual,
       ``(ii) the individual is a participant under the plan (or 
     has met any waiting period applicable to becoming a 
     participant under the plan and is eligible to be enrolled 
     under the plan but for a failure to enroll during a previous 
     enrollment period), and
       ``(iii) a person becomes such a dependent of the individual 
     through marriage, birth, or adoption or placement for 
     adoption,

     the group health plan shall provide for a dependent special 
     enrollment period described in subparagraph (B) during which 
     the person (or, if not otherwise enrolled, the individual) 
     may be enrolled under the plan as a dependent of the 
     individual, and in the case of the birth or adoption of a 
     child, the spouse of the individual may be enrolled as a 
     dependent of the individual if such spouse is otherwise 
     eligible for coverage.
       ``(B) Dependent special enrollment period.--A dependent 
     special enrollment period under this subparagraph shall be a 
     period of not less than 30 days and shall begin on the later 
     of--
       ``(i) the date dependent coverage is made available, or
       ``(ii) the date of the marriage, birth, or adoption or 
     placement for adoption (as the case may be) described in 
     subparagraph (A)(iii).
       ``(C) No waiting period.--If an individual seeks to enroll 
     a dependent during the first 30 days of such a dependent 
     special enrollment period, the coverage of the dependent 
     shall become effective--
       ``(i) in the case of marriage, not later than the first day 
     of the first month beginning after the date the completed 
     request for enrollment is received;
       ``(ii) in the case of a dependent's birth, as of the date 
     of such birth; or
       ``(iii) in the case of a dependent's adoption or placement 
     for adoption, the date of such adoption or placement for 
     adoption.
       ``(g) Use of Affiliation Period by HMOs as Alternative to 
     Preexisting Condition Exclusion.--
       ``(1) In general.--A health maintenance organization which 
     offers health insurance coverage in connection with a group 
     health plan and which does not impose any preexisting 
     condition exclusion allowed under subsection (a) with respect 
     to any particular coverage option may impose an affiliation 
     period for such coverage option, but only if--
       ``(A) such period is applied uniformly without regard to 
     any health status-related factors; and
       ``(B) such period does not exceed 2 months (or 3 months in 
     the case of a late enrollee).
       ``(2) Affiliation period.--
       ``(A) Defined.--For purposes of this title, the term 
     `affiliation period' means a period which, under the terms of 
     the health insurance coverage offered by the health 
     maintenance organization, must expire before the health 
     insurance coverage becomes effective. The organization is not 
     required to provide health care services or benefits during 
     such period and no premium shall be charged to the 
     participant or beneficiary for any coverage during the 
     period.
       ``(B) Beginning.--Such period shall begin on the enrollment 
     date.
       ``(C) Runs concurrently with waiting periods.--An 
     affiliation period under a plan shall run concurrently with 
     any waiting period under the plan.
       ``(3) Alternative methods.--A health maintenance 
     organization described in paragraph (1) may use alternative 
     methods, from those described in such paragraph, to address 
     adverse selection as approved by the State insurance 
     commissioner or official or officials designated by the State 
     to enforce the requirements of this part for the State 
     involved with respect to such issuer.

     ``SEC. 2702. PROHIBITING DISCRIMINATION AGAINST INDIVIDUAL 
                   PARTICIPANTS AND BENEFICIARIES BASED ON HEALTH 
                   STATUS.

       ``(a) In Eligibility to Enroll.--
       ``(1) In general.--Subject to paragraph (2), a group health 
     plan, and a health insurance issuer offering group health 
     insurance coverage

[[Page H9480]]

     in connection with a group health plan, may not establish 
     rules for eligibility (including continued eligibility) of 
     any individual to enroll under the terms of the plan based on 
     any of the following health status-related factors in 
     relation to the individual or a dependent of the individual:
       ``(A) Health status.
       ``(B) Medical condition (including both physical and mental 
     illnesses).
       ``(C) Claims experience.
       ``(D) Receipt of health care.
       ``(E) Medical history.
       ``(F) Genetic information.
       ``(G) Evidence of insurability (including conditions 
     arising out of acts of domestic violence).
       ``(H) Disability.
       ``(2) No application to benefits or exclusions.--To the 
     extent consistent with section 701, paragraph (1) shall not 
     be construed--
       ``(A) to require a group health plan, or group health 
     insurance coverage, to provide particular benefits other than 
     those provided under the terms of such plan or coverage, or
       ``(B) to prevent such a plan or coverage from establishing 
     limitations or restrictions on the amount, level, extent, or 
     nature of the benefits or coverage for similarly situated 
     individuals enrolled in the plan or coverage.
       ``(3) Construction.--For purposes of paragraph (1), rules 
     for eligibility to enroll under a plan include rules defining 
     any applicable waiting periods for such enrollment.
       ``(b) In Premium Contributions.--
       ``(1) In general.--A group health plan, and a health 
     insurance issuer offering health insurance coverage in 
     connection with a group health plan, may not require any 
     individual (as a condition of enrollment or continued 
     enrollment under the plan) to pay a premium or contribution 
     which is greater than such premium or contribution for a 
     similarly situated individual enrolled in the plan on the 
     basis of any health status-related factor in relation to the 
     individual or to an individual enrolled under the plan as a 
     dependent of the individual.
       ``(2) Construction.--Nothing in paragraph (1) shall be 
     construed--
       ``(A) to restrict the amount that an employer may be 
     charged for coverage under a group health plan; or
       ``(B) to prevent a group health plan, and a health 
     insurance issuer offering group health insurance coverage, 
     from establishing premium discounts or rebates or modifying 
     otherwise applicable copayments or deductibles in return for 
     adherence to programs of health promotion and disease 
     prevention.

  ``Subpart 2--Provisions Applicable Only to Health Insurance Issuers

     ``SEC. 2711. GUARANTEED AVAILABILITY OF COVERAGE FOR 
                   EMPLOYERS IN THE GROUP MARKET.

       ``(a) Issuance of Coverage in the Small Group Market.--
       ``(1) In general.--Subject to subsections (c) through (f), 
     each health insurance issuer that offers health insurance 
     coverage in the small group market in a State--
       ``(A) must accept every small employer (as defined in 
     section 2791(e)(4)) in the State that applies for such 
     coverage; and
       ``(B) must accept for enrollment under such coverage every 
     eligible individual (as defined in paragraph (2)) who applies 
     for enrollment during the period in which the individual 
     first becomes eligible to enroll under the terms of the group 
     health plan and may not place any restriction which is 
     inconsistent with section 2702 on an eligible individual 
     being a participant or beneficiary.
       ``(2) Eligible individual defined.--For purposes of this 
     section, the term `eligible individual' means, with respect 
     to a health insurance issuer that offers health insurance 
     coverage to a small employer in connection with a group 
     health plan in the small group market, such an individual in 
     relation to the employer as shall be determined--
       ``(A) in accordance with the terms of such plan,
       ``(B) as provided by the issuer under rules of the issuer 
     which are uniformly applicable in a State to small employers 
     in the small group market, and
       ``(C) in accordance with all applicable State laws 
     governing such issuer and such market.
       ``(b) Assuring Access in the Large Group Market.--
       ``(1) Reports to hhs.--The Secretary shall request that the 
     chief executive officer of each State submit to the 
     Secretary, by not later December 31, 2000, and every 3 years 
     thereafter a report on--
       ``(A) the access of large employers to health insurance 
     coverage in the State, and
       ``(B) the circumstances for lack of access (if any) of 
     large employers (or one or more classes of such employers) in 
     the State to such coverage.
       ``(2) Triennial reports to congress.--The Secretary, based 
     on the reports submitted under paragraph (1) and such other 
     information as the Secretary may use, shall prepare and 
     submit to Congress, every 3 years, a report describing the 
     extent to which large employers (and classes of such 
     employers) that seek health insurance coverage in the 
     different States are able to obtain access to such coverage. 
     Such report shall include such recommendations as the 
     Secretary determines to be appropriate.
       ``(3) GAO report on large employer access to health 
     insurance coverage.--The Comptroller General shall provide 
     for a study of the extent to which classes of large employers 
     in the different States are able to obtain access to health 
     insurance coverage and the circumstances for lack of access 
     (if any) to such coverage. The Comptroller General shall 
     submit to Congress a report on such study not later than 18 
     months after the date of the enactment of this title.
       ``(c) Special Rules for Network Plans.--
       ``(1) In general.--In the case of a health insurance issuer 
     that offers health insurance coverage in the small group 
     market through a network plan, the issuer may--
       ``(A) limit the employers that may apply for such coverage 
     to those with eligible individuals who live, work, or reside 
     in the service area for such network plan; and
       ``(B) within the service area of such plan, deny such 
     coverage to such employers if the issuer has demonstrated, if 
     required, to the applicable State authority that--
       ``(i) it will not have the capacity to deliver services 
     adequately to enrollees of any additional groups because of 
     its obligations to existing group contract holders and 
     enrollees, and
       ``(ii) it is applying this paragraph uniformly to all 
     employers without regard to the claims experience of those 
     employers and their employees (and their dependents) or any 
     health status-related factor relating to such employees and 
     dependents.
       ``(2) 180-day suspension upon denial of coverage.--An 
     issuer, upon denying health insurance coverage in any service 
     area in accordance with paragraph (1)(B), may not offer 
     coverage in the small group market within such service area 
     for a period of 180 days after the date such coverage is 
     denied.
       ``(d) Application of Financial Capacity Limits.--
       ``(1) In general.--A health insurance issuer may deny 
     health insurance coverage in the small group market if the 
     issuer has demonstrated, if required, to the applicable State 
     authority that--
       ``(A) it does not have the financial reserves necessary to 
     underwrite additional coverage; and
       ``(B) it is applying this paragraph uniformly to all 
     employers in the small group market in the State consistent 
     with applicable State law and without regard to the claims 
     experience of those employers and their employees (and their 
     dependents) or any health status-related factor relating to 
     such employees and dependents.
       ``(2) 180-day suspension upon denial of coverage.--A health 
     insurance issuer upon denying health insurance coverage in 
     connection with group health plans in accordance with 
     paragraph (1) in a State may not offer coverage in connection 
     with group health plans in the small group market in the 
     State for a period of 180 days after the date such coverage 
     is denied or until the issuer has demonstrated to the 
     applicable State authority, if required under applicable 
     State law, that the issuer has sufficient financial reserves 
     to underwrite additional coverage, whichever is later. An 
     applicable State authority may provide for the application of 
     this subsection on a service-area-specific basis.
       ``(e) Exception to Requirement for Failure To Meet Certain 
     Minimum Participation or Contribution Rules.--
       ``(1) In general.--Subsection (a) shall not be construed to 
     preclude a health insurance issuer from establishing employer 
     contribution rules or group participation rules for the 
     offering of health insurance coverage in connection with a 
     group health plan in the small group market, as allowed under 
     applicable State law.
       ``(2) Rules defined.--For purposes of paragraph (1)--
       ``(A) the term `employer contribution rule' means a 
     requirement relating to the minimum level or amount of 
     employer contribution toward the premium for enrollment of 
     participants and beneficiaries; and
       ``(B) the term `group participation rule' means a 
     requirement relating to the minimum number of participants or 
     beneficiaries that must be enrolled in relation to a 
     specified percentage or number of eligible individuals or 
     employees of an employer.
       ``(f) Exception for Coverage Offered Only to Bona Fide 
     Association Members.--Subsection (a) shall not apply to 
     health insurance coverage offered by a health insurance 
     issuer if such coverage is made available in the small group 
     market only through one or more bona fide associations (as 
     defined in section 2791(d)(3)).

     ``SEC. 2712. GUARANTEED RENEWABILITY OF COVERAGE FOR 
                   EMPLOYERS IN THE GROUP MARKET.

       ``(a) In General.--Except as provided in this section, if a 
     health insurance issuer offers health insurance coverage in 
     the small or large group market in connection with a group 
     health plan, the issuer must renew or continue in force such 
     coverage at the option of the plan sponsor of the plan.
       ``(b) General Exceptions.--A health insurance issuer may 
     nonrenew or discontinue health insurance coverage offered in 
     connection with a group health plan in the small or large 
     group market based only on one or more of the following:
       ``(1) Nonpayment of premiums.--The plan sponsor has failed 
     to pay premiums or contributions in accordance with the terms 
     of the health insurance coverage or the issuer has not 
     received timely premium payments.
       ``(2) Fraud.--The plan sponsor has performed an act or 
     practice that constitutes fraud or made an intentional 
     misrepresentation of material fact under the terms of the 
     coverage.
       ``(3) Violation of participation or contribution rules.--
     The plan sponsor has failed to comply with a material plan 
     provision relating to employer contribution or group 
     participation rules, as permitted under section 2711(e) in 
     the case of the small group market or pursuant to applicable 
     State law in the case of the large group market.
       ``(4) Termination of coverage.--The issuer is ceasing to 
     offer coverage in such market in accordance with subsection 
     (c) and applicable State law.
       ``(5) Movement outside service area.--In the case of a 
     health insurance issuer that offers

[[Page H9481]]

     health insurance coverage in the market through a network 
     plan, there is no longer any enrollee in connection with such 
     plan who lives, resides, or works in the service area of the 
     issuer (or in the area for which the issuer is authorized to 
     do business) and, in the case of the small group market, the 
     issuer would deny enrollment with respect to such plan under 
     section 2711(c)(1)(A).
       ``(6) Association membership ceases.--In the case of health 
     insurance coverage that is made available in the small or 
     large group market (as the case may be) only through one or 
     more bona fide associations, the membership of an employer in 
     the association (on the basis of which the coverage is 
     provided) ceases but only if such coverage is terminated 
     under this paragraph uniformly without regard to any health 
     status-related factor relating to any covered individual.
       ``(c) Requirements for Uniform Termination of Coverage.--
       ``(1) Particular type of coverage not offered.--In any case 
     in which an issuer decides to discontinue offering a 
     particular type of group health insurance coverage offered in 
     the small or large group market, coverage of such type may be 
     discontinued by the issuer in accordance with applicable 
     State law in such market only if--
       ``(A) the issuer provides notice to each plan sponsor 
     provided coverage of this type in such market (and 
     participants and beneficiaries covered under such coverage) 
     of such discontinuation at least 90 days prior to the date of 
     the discontinuation of such coverage;
       ``(B) the issuer offers to each plan sponsor provided 
     coverage of this type in such market, the option to purchase 
     all (or, in the case of the large group market, any) other 
     health insurance coverage currently being offered by the 
     issuer to a group health plan in such market; and
       ``(C) in exercising the option to discontinue coverage of 
     this type and in offering the option of coverage under 
     subparagraph (B), the issuer acts uniformly without regard to 
     the claims experience of those sponsors or any health status-
     related factor relating to any participants or beneficiaries 
     covered or new participants or beneficiaries who may become 
     eligible for such coverage.
       ``(2) Discontinuance of all coverage.--
       ``(A) In general.--In any case in which a health insurance 
     issuer elects to discontinue offering all health insurance 
     coverage in the small group market or the large group market, 
     or both markets, in a State, health insurance coverage may be 
     discontinued by the issuer only in accordance with applicable 
     State law and if--
       ``(i) the issuer provides notice to the applicable State 
     authority and to each plan sponsor (and participants and 
     beneficiaries covered under such coverage) of such 
     discontinuation at least 180 days prior to the date of the 
     discontinuation of such coverage; and
       ``(ii) all health insurance issued or delivered for 
     issuance in the State in such market (or markets) are 
     discontinued and coverage under such health insurance 
     coverage in such market (or markets) is not renewed.
       ``(B) Prohibition on market reentry.--In the case of a 
     discontinuation under subparagraph (A) in a market, the 
     issuer may not provide for the issuance of any health 
     insurance coverage in the market and State involved during 
     the 5-year period beginning on the date of the 
     discontinuation of the last health insurance coverage not so 
     renewed.
       ``(d) Exception for Uniform Modification of Coverage.--At 
     the time of coverage renewal, a health insurance issuer may 
     modify the health insurance coverage for a product offered to 
     a group health plan--
       ``(1) in the large group market; or
       ``(2) in the small group market if, for coverage that is 
     available in such market other than only through one or more 
     bona fide associations, such modification is consistent with 
     State law and effective on a uniform basis among group health 
     plans with that product.
       ``(e) Application to Coverage Offered Only Through 
     Associations.--In applying this section in the case of health 
     insurance coverage that is made available by a health 
     insurance issuer in the small or large group market to 
     employers only through one or more associations, a reference 
     to `plan sponsor' is deemed, with respect to coverage 
     provided to an employer member of the association, to include 
     a reference to such employer.

     ``SEC. 2713. DISCLOSURE OF INFORMATION.

       ``(a) Disclosure of Information by Health Plan Issuers.--In 
     connection with the offering of any health insurance coverage 
     to a small employer, a health insurance issuer--
       ``(1) shall make a reasonable disclosure to such employer, 
     as part of its solicitation and sales materials, of the 
     availability of information described in subsection (b), and
       ``(2) upon request of such a small employer, provide such 
     information.
       ``(b) Information Described.--
       ``(1) In general.--Subject to paragraph (3), with respect 
     to a health insurance issuer offering health insurance 
     coverage to a small employer, information described in this 
     subsection is information concerning--
       ``(A) the provisions of such coverage concerning issuer's 
     right to change premium rates and the factors that may affect 
     changes in premium rates;
       ``(B) the provisions of such coverage relating to 
     renewability of coverage;
       ``(C) the provisions of such coverage relating to any 
     preexisting condition exclusion; and
       ``(D) the benefits and premiums available under all health 
     insurance coverage for which the employer is qualified.
       ``(2) Form of information.--Information under this 
     subsection shall be provided to small employers in a manner 
     determined to be understandable by the average small 
     employer, and shall be sufficient to reasonably inform small 
     employers of their rights and obligations under the health 
     insurance coverage.
       ``(3) Exception.--An issuer is not required under this 
     section to disclose any information that is proprietary and 
     trade secret information under applicable law.

        ``Subpart 3--Exclusion of Plans; Enforcement; Preemption

     ``SEC. 2721. EXCLUSION OF CERTAIN PLANS.

       ``(a) Exception for Certain Small Group Health Plans.--The 
     requirements of subparts 1 and 2 shall not apply to any group 
     health plan (and health insurance coverage offered in 
     connection with a group health plan) for any plan year if, on 
     the first day of such plan year, such plan has less than 2 
     participants who are current employees.
       ``(b) Limitation on Application of Provisions Relating to 
     Group Health Plans.--
       ``(1) In general.--The requirements of subparts 1 and 2 
     shall apply with respect to group health plans only--
       ``(A) subject to paragraph (2), in the case of a plan that 
     is a nonfederal governmental plan, and
       ``(B) with respect to health insurance coverage offered in 
     connection with a group health plan (including such a plan 
     that is a church plan or a governmental plan).
       ``(2) Treatment of nonfederal governmental plans.--
       ``(A) Election to be excluded.--If the plan sponsor of a 
     nonfederal governmental plan which is a group health plan to 
     which the provisions of subparts 1 and 2 otherwise apply 
     makes an election under this subparagraph (in such form and 
     manner as the Secretary may by regulations prescribe), then 
     the requirements of such subparts insofar as they apply 
     directly to group health plans (and not merely to group 
     health insurance coverage) shall not apply to such 
     governmental plans for such period except as provided in this 
     paragraph.
       ``(B) Period of election.--An election under subparagraph 
     (A) shall apply--
       ``(i) for a single specified plan year, or
       ``(ii) in the case of a plan provided pursuant to a 
     collective bargaining agreement, for the term of such 
     agreement.

     An election under clause (i) may be extended through 
     subsequent elections under this paragraph.
       ``(C) Notice to enrollees.--Under such an election, the 
     plan shall provide for--
       ``(i) notice to enrollees (on an annual basis and at the 
     time of enrollment under the plan) of the fact and 
     consequences of such election, and
       ``(ii) certification and disclosure of creditable coverage 
     under the plan with respect to enrollees in accordance with 
     section 2701(e).
       ``(c) Exception for Certain Benefits.--The requirements of 
     subparts 1 and 2 shall not apply to any group health plan (or 
     group health insurance coverage) in relation to its provision 
     of excepted benefits described in section 2791(c)(1).
       ``(d) Exception for Certain Benefits If Certain Conditions 
     Met.--
       ``(1) Limited, excepted benefits.--The requirements of 
     subparts 1 and 2 shall not apply to any group health plan 
     (and group health insurance coverage offered in connection 
     with a group health plan) in relation to its provision of 
     excepted benefits described in section 2791(c)(2) if the 
     benefits--
       ``(A) are provided under a separate policy, certificate, or 
     contract of insurance; or
       ``(B) are otherwise not an integral part of the plan.
       ``(2) Noncoordinated, excepted benefits.--The requirements 
     of subparts 1 and 2 shall not apply to any group health plan 
     (and group health insurance coverage offered in connection 
     with a group health plan) in relation to its provision of 
     excepted benefits described in section 2791(c)(3) if all of 
     the following conditions are met:
       ``(A) The benefits are provided under a separate policy, 
     certificate, or contract of insurance.
       ``(B) There is no coordination between the provision of 
     such benefits and any exclusion of benefits under any group 
     health plan maintained by the same plan sponsor.
       ``(C) Such benefits are paid with respect to an event 
     without regard to whether benefits are provided with respect 
     to such an event under any group health plan maintained by 
     the same plan sponsor.
       ``(3) Supplemental excepted benefits.--The requirements of 
     this part shall not apply to any group health plan (and group 
     health insurance coverage) in relation to its provision of 
     excepted benefits described in section 27971(c)(4) if the 
     benefits are provided under a separate policy, certificate, 
     or contract of insurance.
       ``(e) Treatment of Partnerships.--For purposes of this 
     part--
       ``(1) Treatment as a group health plan.--Any plan, fund, or 
     program which would not be (but for this subsection) an 
     employee welfare benefit plan and which is established or 
     maintained by a partnership, to the extent that such plan, 
     fund, or program provides medical care (including items and 
     services paid for as medical care) to present or former 
     partners in the partnership or to their dependents (as 
     defined under the terms of the plan, fund, or program), 
     directly or through insurance, reimbursement, or otherwise, 
     shall be treated (subject to paragraph (2)) as an employee 
     welfare benefit plan which is a group health plan.
       ``(2) Employer.--In the case of a group health plan, the 
     term `employer' also includes the partnership in relation to 
     any partner.
       ``(3) Participants of group health plans.--In the case of a 
     group health plan, the term `participant' also includes--
       ``(A) in connection with a group health plan maintained by 
     a partnership, an individual who is a partner in relation to 
     the partnership, or
       ``(B) in connection with a group health plan maintained by 
     a self-employed individual

[[Page H9482]]

     (under which one or more employees are participants), the 
     self-employed individual,

     if such individual is, or may become, eligible to receive a 
     benefit under the plan or such individual's beneficiaries may 
     be eligible to receive any such benefit.

     ``SEC. 2722. ENFORCEMENT.

       ``(a) State Enforcement.--
       ``(1) State authority.--Subject to section 2723, each State 
     may require that health insurance issuers that issue, sell, 
     renew, or offer health insurance coverage in the State in the 
     small or large group markets meet the requirements of this 
     part with respect to such issuers.
       ``(2) Failure to implement provisions.--In the case of a 
     determination by the Secretary that a State has failed to 
     substantially enforce a provision (or provisions) in this 
     part with respect to health insurance issuers in the State, 
     the Secretary shall enforce such provision (or provisions) 
     under subsection (b) insofar as they relate to the issuance, 
     sale, renewal, and offering of health insurance coverage in 
     connection with group health plans in such State.
       ``(b) Secretarial Enforcement Authority.--
       ``(1) Limitation.--The provisions of this subsection shall 
     apply to enforcement of a provision (or provisions) of this 
     part only--
       ``(A) as provided under subsection (a)(2); and
       ``(B) with respect to group health plans that are 
     nonfederal governmental plans.
       ``(2) Imposition of penalties.--In the cases described in 
     paragraph (1)--
       ``(A) In general.--Subject to the succeeding provisions of 
     this subsection, any nonfederal governmental plan that is a 
     group health plan and any health insurance issuer that fails 
     to meet a provision of this part applicable to such plan or 
     issuer is subject to a civil money penalty under this 
     subsection.
       ``(B) Liability for penalty.--In the case of a failure by--
       ``(i) a health insurance issuer, the issuer is liable for 
     such penalty, or
       ``(ii) a group health plan that is a nonfederal 
     governmental plan which is--

       ``(I) sponsored by 2 or more employers, the plan is liable 
     for such penalty, or
       ``(II) not so sponsored, the employer is liable for such 
     penalty.

       ``(C) Amount of penalty.--
       ``(i) In general.--The maximum amount of penalty imposed 
     under this paragraph is $100 for each day for each individual 
     with respect to which such a failure occurs.
       ``(ii) Considerations in imposition.--In determining the 
     amount of any penalty to be assessed under this paragraph, 
     the Secretary shall take into account the previous record of 
     compliance of the entity being assessed with the applicable 
     provisions of this part and the gravity of the violation.
       ``(iii) Limitations.--

       ``(I) Penalty not to apply where failure not discovered 
     exercising reasonable diligence.--No civil money penalty 
     shall be imposed under this paragraph on any failure during 
     any period for which it is established to the satisfaction of 
     the Secretary that none of the entities against whom the 
     penalty would be imposed knew, or exercising reasonable 
     diligence would have known, that such failure existed.
       ``(II) Penalty not to apply to failures corrected within 30 
     days.--No civil money penalty shall be imposed under this 
     paragraph on any failure if such failure was due to 
     reasonable cause and not to willful neglect, and such failure 
     is corrected during the 30-day period beginning on the first 
     day any of the entities against whom the penalty would be 
     imposed knew, or exercising reasonable diligence would have 
     known, that such failure existed.

       ``(D) Administrative review.--
       ``(i) Opportunity for hearing.--The entity assessed shall 
     be afforded an opportunity for hearing by the Secretary upon 
     request made within 30 days after the date of the issuance of 
     a notice of assessment. In such hearing the decision shall be 
     made on the record pursuant to section 554 of title 5, United 
     States Code. If no hearing is requested, the assessment shall 
     constitute a final and unappealable order.
       ``(ii) Hearing procedure.--If a hearing is requested, the 
     initial agency decision shall be made by an administrative 
     law judge, and such decision shall become the final order 
     unless the Secretary modifies or vacates the decision. Notice 
     of intent to modify or vacate the decision of the 
     administrative law judge shall be issued to the parties 
     within 30 days after the date of the decision of the judge. A 
     final order which takes effect under this paragraph shall be 
     subject to review only as provided under subparagraph (E).
       ``(E) Judicial review.--
       ``(i) Filing of action for review.--Any entity against whom 
     an order imposing a civil money penalty has been entered 
     after an agency hearing under this paragraph may obtain 
     review by the United States district court for any district 
     in which such entity is located or the United States District 
     Court for the District of Columbia by filing a notice of 
     appeal in such court within 30 days from the date of such 
     order, and simultaneously sending a copy of such notice by 
     registered mail to the Secretary.
       ``(ii) Certification of administrative record.--The 
     Secretary shall promptly certify and file in such court the 
     record upon which the penalty was imposed.
       ``(iii) Standard for review.--The findings of the Secretary 
     shall be set aside only if found to be unsupported by 
     substantial evidence as provided by section 706(2)(E) of 
     title 5, United States Code.
       ``(iv) Appeal.--Any final decision, order, or judgment of 
     the district court concerning such review shall be subject to 
     appeal as provided in chapter 83 of title 28 of such Code.
       ``(F) Failure to pay assessment; maintenance of action.--
       ``(i) Failure to pay assessment.--If any entity fails to 
     pay an assessment after it has become a final and 
     unappealable order, or after the court has entered final 
     judgment in favor of the Secretary, the Secretary shall refer 
     the matter to the Attorney General who shall recover the 
     amount assessed by action in the appropriate United States 
     district court.
       ``(ii) Nonreviewability.--In such action the validity and 
     appropriateness of the final order imposing the penalty shall 
     not be subject to review.
       ``(G) Payment of penalties.--Except as otherwise provided, 
     penalties collected under this paragraph shall be paid to the 
     Secretary (or other officer) imposing the penalty and shall 
     be available without appropriation and until expended for the 
     purpose of enforcing the provisions with respect to which the 
     penalty was imposed.

     ``SEC. 2723. PREEMPTION; STATE FLEXIBILITY; CONSTRUCTION.

       ``(a) Continued Applicability of State Law with Respect to 
     Health Insurance Issuers.--
       ``(1) In General.--Subject to paragraph (2) and except as 
     provided in subsection (b), this part and part C insofar as 
     it relates to this part shall not be construed to supersede 
     any provision of State law which establishes, implements, or 
     continues in effect any standard or requirement solely 
     relating to health insurance issuers in connection with group 
     health insurance coverage except to the extent that such 
     standard or requirement prevents the application of a 
     requirement of this part.
       ``(2) Continued preemption with respect to group health 
     plans.--Nothing in this part shall be construed to affect or 
     modify the provisions of section 514 of the Employee 
     Retirement Income Security Act of 1974 with respect to group 
     health plans.
       ``(b) Special Rules in Case of Portability Requirements.--
       ``(1) In general.--Subject to paragraph (2), the provisions 
     of this part relating to health insurance coverage offered by 
     a health insurance issuer supersede any provision of State 
     law which establishes, implements, or continues in effect a 
     standard or requirement applicable to imposition of a 
     preexisting condition exclusion specifically governed by 
     section 701 which differs from the standards or requirements 
     specified in such section.
       ``(2) Exceptions.--Only in relation to health insurance 
     coverage offered by a health insurance issuer, the provisions 
     of this part do not supersede any provision of State law to 
     the extent that such provision--
       ``(i) substitutes for the reference to `6-month period' in 
     section 2701(a)(1) a reference to any shorter period of time;
       ``(ii) substitutes for the reference to `12 months' and `18 
     months' in section 2701(a)(2) a reference to any shorter 
     period of time;
       ``(iii) substitutes for the references to `63' days in 
     sections 2701(c)(2)(A) and 2701(d)(4)(A) a reference to any 
     greater number of days;
       ``(iv) substitutes for the reference to `30-day period' in 
     sections 2701(b)(2) and 2701(d)(1) a reference to any greater 
     period;
       ``(v) prohibits the imposition of any preexisting condition 
     exclusion in cases not described in section 2701(d) or 
     expands the exceptions described in such section;
       ``(vi) requires special enrollment periods in addition to 
     those required under section 2701(f); or
       ``(vii) reduces the maximum period permitted in an 
     affiliation period under section 2701(g)(1)(B).
       ``(c) Rules of Construction.--Nothing in this part shall be 
     construed as requiring a group health plan or health 
     insurance coverage to provide specific benefits under the 
     terms of such plan or coverage.
       ``(d) Definitions.--For purposes of this section--
       ``(1) State law.--The term `State law' includes all laws, 
     decisions, rules, regulations, or other State action having 
     the effect of law, of any State. A law of the United States 
     applicable only to the District of Columbia shall be treated 
     as a State law rather than a law of the United States.
       ``(2) State.--The term `State' includes a State (including 
     the Northern Mariana Islands), any political subdivisions of 
     a State or such Islands, or any agency or instrumentality of 
     either.

            ``Part C--Definitions; Miscellaneous Provisions

     ``SEC. 2791. DEFINITIONS.

       ``(a) Group Health Plan.--
       ``(1) Definition.--The term `group health plan' means an 
     employee welfare benefit plan (as defined in section 3(1) of 
     the Employee Retirement Income Security Act of 1974) to the 
     extent that the plan provides medical care (as defined in 
     paragraph (2)) and including items and services paid for as 
     medical care) to employees or their dependents (as defined 
     under the terms of the plan) directly or through insurance, 
     reimbursement, or otherwise.
       ``(2) Medical care.--The term `medical care' means amounts 
     paid for--
       ``(A) the diagnosis, cure, mitigation, treatment, or 
     prevention of disease, or amounts paid for the purpose of 
     affecting any structure or function of the body,
       ``(B) amounts paid for transportation primarily for and 
     essential to medical care referred to in subparagraph (A), 
     and
       ``(C) amounts paid for insurance covering medical care 
     referred to in subparagraphs (A) and (B).
       ``(3) Treatment of certain plans as group health plan for 
     notice provision.--A program under which creditable coverage 
     described in subparagraph (C), (D), (E), or (F) of section 
     2701(c)(1) is provided shall be treated as a group health 
     plan for purposes of applying section 2701(e).

[[Page H9483]]

       ``(b) Definitions Relating to Health Insurance.--
       ``(1) Health insurance coverage.--The term `health 
     insurance coverage' means benefits consisting of medical care 
     (provided directly, through insurance or reimbursement, or 
     otherwise and including items and services paid for as 
     medical care) under any hospital or medical service policy or 
     certificate, hospital or medical service plan contract, or 
     health maintenance organization contract offered by a health 
     insurance issuer.
       ``(2) Health insurance issuer.--The term `health insurance 
     issuer' means an insurance company, insurance service, or 
     insurance organization (including a health maintenance 
     organization, as defined in paragraph (3)) which is licensed 
     to engage in the business of insurance in a State and which 
     is subject to State law which regulates insurance (within the 
     meaning of section 514(b)(2) of the Employee Retirement 
     Income Security Act of 1974). Such term does not include a 
     group health plan.
       ``(3) Health maintenance organization.--The term `health 
     maintenance organization' means--
       ``(A) a Federally qualified health maintenance organization 
     (as defined in section 1301(a)),
       ``(B) an organization recognized under State law as a 
     health maintenance organization, or
       ``(C) a similar organization regulated under State law for 
     solvency in the same manner and to the same extent as such a 
     health maintenance organization.
       ``(4) Group health insurance coverage.--The term `group 
     health insurance coverage' means, in connection with a group 
     health plan, health insurance coverage offered in connection 
     with such plan.
       ``(5) Individual health insurance coverage.--The term 
     `individual health insurance coverage' means health insurance 
     coverage offered to individuals in the individual market, but 
     does not include short-term limited duration insurance.
       ``(c) Excepted Benefits.--For purposes of this title, the 
     term `excepted benefits' means benefits under one or more (or 
     any combination thereof) of the following:
       ``(1) Benefits not subject to requirements.--
       ``(A) Coverage only for accident, or disability income 
     insurance, or any combination thereof.
       ``(B) Coverage issued as a supplement to liability 
     insurance.
       ``(C) Liability insurance, including general liability 
     insurance and automobile liability insurance.
       ``(D) Workers' compensation or similar insurance.
       ``(E) Automobile medical payment insurance.
       ``(F) Credit-only insurance.
       ``(G) Coverage for on-site medical clinics.
       ``(H) Other similar insurance coverage, specified in 
     regulations, under which benefits for medical care are 
     secondary or incidental to other insurance benefits.
       ``(2) Benefits not subject to requirements if offered 
     separately.--
       ``(A) Limited scope dental or vision benefits.
       ``(B) Benefits for long-term care, nursing home care, home 
     health care, community-based care, or any combination 
     thereof.
       ``(C) Such other similar, limited benefits as are specified 
     in regulations.
       ``(3) Benefits not subject to requirements if offered as 
     independent, noncoordinated benefits.--
       ``(A) Coverage only for a specified disease or illness.
       ``(B) Hospital indemnity or other fixed indemnity 
     insurance.
       ``(4) Benefits not subject to requirements if offered as 
     separate insurance policy.--Medicare supplemental health 
     insurance (as defined under section 1882(g)(1) of the Social 
     Security Act), coverage supplemental to the coverage provided 
     under chapter 55 of title 10, United States Code, and similar 
     supplemental coverage provided to coverage under a group 
     health plan.
       ``(d) Other Definitions.--
       ``(1) Applicable state authority.--The term `applicable 
     State authority' means, with respect to a health insurance 
     issuer in a State, the State insurance commissioner or 
     official or officials designated by the State to enforce the 
     requirements of this title for the State involved with 
     respect to such issuer.
       ``(2) Beneficiary.--The term `beneficiary' has the meaning 
     given such term under section 3(8) of the Employee Retirement 
     Income Security Act of 1974.
       ``(3) Bona fide association.--The term `bona fide 
     association' means, with respect to health insurance coverage 
     offered in a State, an association which--
       ``(A) has been actively in existence for at least 5 years;
       ``(B) has been formed and maintained in good faith for 
     purposes other than obtaining insurance;
       ``(C) does not condition membership in the association on 
     any health status-related factor relating to an individual 
     (including an employee of an employer or a dependent of an 
     employee);
       ``(D) makes health insurance coverage offered through the 
     association available to all members regardless of any health 
     status-related factor relating to such members (or 
     individuals eligible for coverage through a member);
       ``(E) does not make health insurance coverage offered 
     through the association available other than in connection 
     with a member of the association; and
       ``(F) meets such additional requirements as may be imposed 
     under State law.
       ``(4) COBRA continuation provision.--The term `COBRA 
     continuation provision' means any of the following:
       ``(A) Section 4980B of the Internal Revenue Code of 1986, 
     other than subsection (f)(1) of such section insofar as it 
     relates to pediatric vaccines.
       ``(B) Part 6 of subtitle B of title I of the Employee 
     Retirement Income Security Act of 1974, other than section 
     609 of such Act.
       ``(C) Title XXII of this Act.
       ``(5) Employee.--The term `employee' has the meaning given 
     such term under section 3(6) of the Employee Retirement 
     Income Security Act of 1974.
       ``(6) Employer.--The term `employer' has the meaning given 
     such term under section 3(5) of the Employee Retirement 
     Income Security Act of 1974, except that such term shall 
     include only employers of two or more employees.
       ``(7) Church plan.--The term `church plan' has the meaning 
     given such term under section 3(33) of the Employee 
     Retirement Income Security Act of 1974.
       ``(8) Governmental plan.--(A) The term `governmental plan' 
     has the meaning given such term under section 3(32) of the 
     Employee Retirement Income Security Act of 1974 and any 
     Federal governmental plan.
       ``(B) Federal governmental plan.--The term `Federal 
     governmental plan' means a governmental plan established or 
     maintained for its employees by the Government of the United 
     States or by any agency or instrumentality of such 
     Government.
       ``(C) Nonfederal governmental plan.--The term `nonfederal 
     governmental plan' means a governmental plan that is not a 
     Federal governmental plan.
       ``(9) Health status-related factor.--The term `health 
     status-related factor' means any of the factors described in 
     section 2702(a)(1).
       ``(10) Network plan.--The term `network plan' means health 
     insurance coverage of a health insurance issuer under which 
     the financing and delivery of medical care (including items 
     and services paid for as medical care) are provided, in whole 
     or in part, through a defined set of providers under contract 
     with the issuer.
       ``(11) Participant.--The term `participant' has the meaning 
     given such term under section 3(7) of the Employee Retirement 
     Income Security Act of 1974.
       ``(12) Placed for adoption defined.--The term `placement', 
     or being `placed', for adoption, in connection with any 
     placement for adoption of a child with any person, means the 
     assumption and retention by such person of a legal obligation 
     for total or partial support of such child in anticipation of 
     adoption of such child. The child's placement with such 
     person terminates upon the termination of such legal 
     obligation.
       ``(13) Plan sponsor.--The term `plan sponsor' has the 
     meaning given such term under section 3(16)(B) of the 
     Employee Retirement Income Security Act of 1974.
       ``(14) State.--The term `State' means each of the several 
     States, the District of Columbia, Puerto Rico, the Virgin 
     Islands, Guam, American Samoa, and the Northern Mariana 
     Islands.
       ``(e) Definitions Relating to Markets and Small 
     Employers.--For purposes of this title:
       ``(1) Individual market.--
       ``(A) In general.--The term `individual market' means the 
     market for health insurance coverage offered to individuals 
     other than in connection with a group health plan.
       ``(B) Treatment of very small groups.--
       ``(i) In general.--Subject to clause (ii), such terms 
     includes coverage offered in connection with a group health 
     plan that has fewer than two participants as current 
     employees on the first day of the plan year.
       ``(ii) State exception.--Clause (i) shall not apply in the 
     case of a State that elects to regulate the coverage 
     described in such clause as coverage in the small group 
     market.
       ``(2) Large employer.--The term `large employer' means, in 
     connection with a group health plan with respect to a 
     calendar year and a plan year, an employer who employed an 
     average of at least 51 employees on business days during the 
     preceding calendar year and who employs at least 2 employees 
     on the first day of the plan year.
       ``(3) Large group market.--The term `large group market' 
     means the health insurance market under which individuals 
     obtain health insurance coverage (directly or through any 
     arrangement) on behalf of themselves (and their dependents) 
     through a group health plan maintained by a large employer.
       ``(4) Small employer.--The term `small employer' means, in 
     connection with a group health plan with respect to a 
     calendar year and a plan year, an employer who employed an 
     average of at least 2 but not more than 50 employees on 
     business days during the preceding calendar year and who 
     employs at least 2 employees on the first day of the plan 
     year.
       ``(5) Small group market.--The term `small group market' 
     means the health insurance market under which individuals 
     obtain health insurance coverage (directly or through any 
     arrangement) on behalf of themselves (and their dependents) 
     through a group health plan maintained by a small employer.
       ``(6) Application of certain rules in determination of 
     employer size.--For purposes of this subsection--
       ``(A) Application of aggregation rule for employers.--all 
     persons treated as a single employer under subsection (b), 
     (c), (m), or (o) of section 414 of the Internal Revenue Code 
     of 1986 shall be treated as 1 employer.
       ``(B) Employers not in existence in preceding year.--In the 
     case of an employer which was not in existence throughout the 
     preceding calendar year, the determination of whether such 
     employer is a small or large employer shall be based on the 
     average number of employees that it is reasonably expected 
     such employer will employ on business days in the current 
     calendar year.
       ``(C) Predecessors.--Any reference in this subsection to an 
     employer shall include a reference to any predecessor of such 
     employer.

[[Page H9484]]

     ``SEC. 2792. REGULATIONS.

       ``The Secretary, consistent with section 104 of the Health 
     Care Portability and Accountability Act of 1996, may 
     promulgate such regulations as may be necessary or 
     appropriate to carry out the provisions of this title. The 
     Secretary may promulgate any interim final rules as the 
     Secretary determines are appropriate to carry out this 
     title.''.
       (b) Application of Rules by Certain Health Maintenance 
     Organizations.--Section 1301 of such Act (42 U.S.C. 300e) is 
     amended by adding at the end the following new subsection:
       ``(d) An organization that offers health benefits coverage 
     shall not be considered as failing to meet the requirements 
     of this section notwithstanding that it provides, with 
     respect to coverage offered in connection with a group health 
     plan in the small or large group market (as defined in 
     section 2791(e)), an affiliation period consistent with the 
     provisions of section 2701(g).''.
       (c) Effective Date.--
       (1) In general.--Except as provided in this subsection, 
     part A of title XXVII of the Public Health Service Act (as 
     added by subsection (a)) shall apply with respect to group 
     health plans, and health insurance coverage offered in 
     connection with group health plans, for plan years beginning 
     after June 30, 1997.
       (2) Determination of creditable coverage.--
       (A) Period of coverage.--
       (i) In general.--Subject to clause (ii), no period before 
     July 1, 1996, shall be taken into account under part A of 
     title XXVII of the Public Health Service Act (as added by 
     this section) in determining creditable coverage.
       (ii) Special rule for certain periods.--The Secretary of 
     Health and Human Services, consistent with section 104, shall 
     provide for a process whereby individuals who need to 
     establish creditable coverage for periods before July 1, 
     1996, and who would have such coverage credited but for 
     clause (i) may be given credit for creditable coverage for 
     such periods through the presentation of documents or other 
     means.
       (B) Certifications, etc.--
       (i) In general.--Subject to clauses (ii) and (iii), 
     subsection (e) of section 2701 of the Public Health Service 
     Act (as added by this section) shall apply to events 
     occurring after June 30, 1996.
       (ii) No certification required to be provided before june 
     1, 1997.--In no case is a certification required to be 
     provided under such subsection before June 1, 1997.
       (iii) Certification only on written request for events 
     occurring before october 1, 1996.--In the case of an event 
     occurring after June 30, 1996, and before October 1, 1996, a 
     certification is not required to be provided under such 
     subsection unless an individual (with respect to whom the 
     certification is otherwise required to be made) requests such 
     certification in writing.
       (C) Transitional rule.--In the case of an individual who 
     seeks to establish creditable coverage for any period for 
     which certification is not required because it relates to an 
     event occurring before June 30, 1996--
       (i) the individual may present other credible evidence of 
     such coverage in order to establish the period of creditable 
     coverage; and
       (ii) a group health plan and a health insurance issuer 
     shall not be subject to any penalty or enforcement action 
     with respect to the plan's or issuer's crediting (or not 
     crediting) such coverage if the plan or issuer has sought to 
     comply in good faith with the applicable requirements under 
     the amendments made by this section.
       (3) Special rule for collective bargaining agreements.--
     Except as provided in paragraph (2)(B), in the case of a 
     group health plan maintained pursuant to 1 or more collective 
     bargaining agreements between employee representatives and 
     one or more employers ratified before the date of the 
     enactment of this Act, part A of title XXVII of the Public 
     Health Service Act (other than section 2701(e) thereof) shall 
     not apply to plan years beginning before the later of--
       (A) the date on which the last of the collective bargaining 
     agreements relating to the plan terminates (determined 
     without regard to any extension thereof agreed to after the 
     date of the enactment of this Act), or
       (B) July 1, 1997.

     For purposes of subparagraph (A), any plan amendment made 
     pursuant to a collective bargaining agreement relating to the 
     plan which amends the plan solely to conform to any 
     requirement of such part shall not be treated as a 
     termination of such collective bargaining agreement.
       (4) Timely regulations.--The Secretary of Health and Human 
     Services, consistent with section 104, shall first issue by 
     not later than April 1, 1997, such regulations as may be 
     necessary to carry out the amendments made by this section 
     and section 111.
       (5) Limitation on actions.--No enforcement action shall be 
     taken, pursuant to the amendments made by this section, 
     against a group health plan or health insurance issuer with 
     respect to a violation of a requirement imposed by such 
     amendments before January 1, 1998, or, if later, the date of 
     issuance of regulations referred to in paragraph (4), if the 
     plan or issuer has sought to comply in good faith with such 
     requirements.
       (d) Miscellaneous Correction.--Section 2208(1) of the 
     Public Health Service Act (42 U.S.C. 300bb-8(1)) is amended 
     by striking ``section 162(i)(2)'' and inserting ``5000(b)''.

     SEC. 103. REFERENCE TO IMPLEMENTATION THROUGH THE INTERNAL 
                   REVENUE CODE OF 1986.

       For provisions amending the Internal Revenue Code of 1986 
     to provide for application and enforcement of rules for group 
     health plans similar to those provided under the amendments 
     made by section 101(a), see section 401.

     SEC. 104. ASSURING COORDINATION.

       The Secretary of the Treasury, the Secretary of Health and 
     Human Services, and the Secretary of Labor shall ensure, 
     through the execution of an interagency memorandum of 
     understanding among such Secretaries, that--
       (1) regulations, rulings, and interpretations issued by 
     such Secretaries relating to the same matter over which two 
     or more such Secretaries have responsibility under this 
     subtitle (and the amendments made by this subtitle and 
     section 401) are administered so as to have the same effect 
     at all times; and
       (2) coordination of policies relating to enforcing the same 
     requirements through such Secretaries in order to have a 
     coordinated enforcement strategy that avoids duplication of 
     enforcement efforts and assigns priorities in enforcement.
                  Subtitle B--Individual Market Rules

     SEC. 111. AMENDMENT TO PUBLIC HEALTH SERVICE ACT.

       (a) In General.--Title XXVII of the Public Health Service 
     Act, as added by section 102(a) of this Act, is amended by 
     inserting after part A the following new part:

                   ``Part B--Individual Market Rules

     ``SEC. 2741. GUARANTEED AVAILABILITY OF INDIVIDUAL HEALTH 
                   INSURANCE COVERAGE TO CERTAIN INDIVIDUALS WITH 
                   PRIOR GROUP COVERAGE.

       ``(a) Guaranteed Availability.--
       ``(1) In general.--Subject to the succeeding subsections of 
     this section and section 2744, each health insurance issuer 
     that offers health insurance coverage (as defined in section 
     2791(b)(1)) in the individual market in a State may not, with 
     respect to an eligible individual (as defined in subsection 
     (b)) desiring to enroll in individual health insurance 
     coverage--
       ``(A) decline to offer such coverage to, or deny enrollment 
     of, such individual; or
       ``(B) impose any preexisting condition exclusion (as 
     defined in section 2701(b)(1)(A)) with respect to such 
     coverage.
       ``(2) Substitution by state of acceptable alternative 
     mechanism.--The requirement of paragraph (1) shall not apply 
     to health insurance coverage offered in the individual market 
     in a State in which the State is implementing an acceptable 
     alternative mechanism under section 2744.
       ``(b) Eligible Individual Defined.--In this part, the term 
     `eligible individual' means an individual--
       ``(1)(A) for whom, as of the date on which the individual 
     seeks coverage under this section, the aggregate of the 
     periods of creditable coverage (as defined in section 
     2701(c)) is 18 or more months and (B) whose most recent prior 
     creditable coverage was under a group health plan, 
     governmental plan, or church plan (or health insurance 
     coverage offered in connection with any such plan);
       ``(2) who is not eligible for coverage under (A) a group 
     health plan, (B) part A or part B of title XVIII of the 
     Social Security Act, or (C) a State plan under title XIX of 
     such Act (or any successor program), and does not have other 
     health insurance coverage;
       ``(3) with respect to whom the most recent coverage within 
     the coverage period described in paragraph (1)(A) was not 
     terminated based on a factor described in paragraph (1) or 
     (2) of section 2712(b) (relating to nonpayment of premiums or 
     fraud);
       ``(4) if the individual had been offered the option of 
     continuation coverage under a COBRA continuation provision or 
     under a similar State program, who elected such coverage; and
       ``(5) who, if the individual elected such continuation 
     coverage, has exhausted such continuation coverage under such 
     provision or program.
       ``(c) Alternative Coverage Permitted Where No State 
     Mechanism.--
       ``(1) In general.--In the case of health insurance coverage 
     offered in the individual market in a State in which the 
     State is not implementing an acceptable alternative mechanism 
     under section 2744, the health insurance issuer may elect to 
     limit the coverage offered under subsection (a) so long as it 
     offers at least two different policy forms of health 
     insurance coverage both of which--
       ``(A) are designed for, made generally available to, and 
     actively marketed to, and enroll both eligible and other 
     individuals by the issuer; and
       ``(B) meet the requirement of paragraph (2) or (3), as 
     elected by the issuer.

     For purposes of this subsection, policy forms which have 
     different cost-sharing arrangements or different riders shall 
     be considered to be different policy forms.
       ``(2) Choice of most popular policy forms.--The requirement 
     of this paragraph is met, for health insurance coverage 
     policy forms offered by an issuer in the individual market, 
     if the issuer offers the policy forms for individual health 
     insurance coverage with the largest, and next to largest, 
     premium volume of all such policy forms offered by the issuer 
     in the State or applicable marketing or service area (as may 
     be prescribed in regulation) by the issuer in the individual 
     market in the period involved.
       ``(3) Choice of 2 policy forms with representative 
     coverage.--
       ``(A) In general.--The requirement of this paragraph is 
     met, for health insurance coverage policy forms offered by an 
     issuer in the individual market, if the issuer offers a 
     lower-level coverage policy form (as defined in subparagraph 
     (B)) and a higher-level coverage policy form (as defined in 
     subparagraph (C)) each of which includes benefits 
     substantially similar to other individual health insurance 
     coverage offered by the issuer in that State and each of 
     which is covered under a method described in section

[[Page H9485]]

     2744(c)(3)(A) (relating to risk adjustment, risk spreading, 
     or financial subsidization).
       ``(B) Lower-level of coverage described.--A policy form is 
     described in this subparagraph if the actuarial value of the 
     benefits under the coverage is at least 85 percent but not 
     greater than 100 percent of a weighted average (described in 
     subparagraph (D)).
       ``(C) Higher-level of coverage described.--A policy form is 
     described in this subparagraph if--
       ``(i) the actuarial value of the benefits under the 
     coverage is at least 15 percent greater than the actuarial 
     value of the coverage described in subparagraph (B) offered 
     by the issuer in the area involved; and
       ``(ii) the actuarial value of the benefits under the 
     coverage is at least 100 percent but not greater than 120 
     percent of a weighted average (described in subparagraph 
     (D)).
       ``(D) Weighted average.--For purposes of this paragraph, 
     the weighted average described in this subparagraph is the 
     average actuarial value of the benefits provided by all the 
     health insurance coverage issued (as elected by the issuer) 
     either by that issuer or by all issuers in the State in the 
     individual market during the previous year (not including 
     coverage issued under this section), weighted by enrollment 
     for the different coverage.
       ``(4) Election.--The issuer elections under this subsection 
     shall apply uniformly to all eligible individuals in the 
     State for that issuer. Such an election shall be effective 
     for policies offered during a period of not shorter than 2 
     years.
       ``(5) Assumptions.--For purposes of paragraph (3), the 
     actuarial value of benefits provided under individual health 
     insurance coverage shall be calculated based on a 
     standardized population and a set of standardized utilization 
     and cost factors.
       ``(d) Special Rules for Network Plans.--
       ``(1) In general.--In the case of a health insurance issuer 
     that offers health insurance coverage in the individual 
     market through a network plan, the issuer may--
       ``(A) limit the individuals who may be enrolled under such 
     coverage to those who live, reside, or work within the 
     service area for such network plan; and
       ``(B) within the service area of such plan, deny such 
     coverage to such individuals if the issuer has demonstrated, 
     if required, to the applicable State authority that--
       ``(i) it will not have the capacity to deliver services 
     adequately to additional individual enrollees because of its 
     obligations to existing group contract holders and enrollees 
     and individual enrollees, and
       ``(ii) it is applying this paragraph uniformly to 
     individuals without regard to any health status-related 
     factor of such individuals and without regard to whether the 
     individuals are eligible individuals.
       ``(2) 180-day suspension upon denial of coverage.--An 
     issuer, upon denying health insurance coverage in any service 
     area in accordance with paragraph (1)(B), may not offer 
     coverage in the individual market within such service area 
     for a period of 180 days after such coverage is denied.
       ``(e) Application of Financial Capacity Limits.--
       ``(1) In general.--A health insurance issuer may deny 
     health insurance coverage in the individual market to an 
     eligible individual if the issuer has demonstrated, if 
     required, to the applicable State authority that--
       ``(A) it does not have the financial reserves necessary to 
     underwrite additional coverage; and
       ``(B) it is applying this paragraph uniformly to all 
     individuals in the individual market in the State consistent 
     with applicable State law and without regard to any health 
     status-related factor of such individuals and without regard 
     to whether the individuals are eligible individuals.
       ``(2) 180-day suspension upon denial of coverage.--An 
     issuer upon denying individual health insurance coverage in 
     any service area in accordance with paragraph (1) may not 
     offer such coverage in the individual market within such 
     service area for a period of 180 days after the date such 
     coverage is denied or until the issuer has demonstrated, if 
     required under applicable State law, to the applicable State 
     authority that the issuer has sufficient financial reserves 
     to underwrite additional coverage, whichever is later. A 
     State may provide for the application of this paragraph on a 
     service-area-specific basis.
       ``(e) Market Requirements.--
       ``(1) In general.--The provisions of subsection (a) shall 
     not be construed to require that a health insurance issuer 
     offering health insurance coverage only in connection with 
     group health plans or through one or more bona fide 
     associations, or both, offer such health insurance coverage 
     in the individual market.
       ``(2) Conversion policies.--A health insurance issuer 
     offering health insurance coverage in connection with group 
     health plans under this title shall not be deemed to be a 
     health insurance issuer offering individual health insurance 
     coverage solely because such issuer offers a conversion 
     policy.
       ``(f) Construction.--Nothing in this section shall be 
     construed--
       ``(1) to restrict the amount of the premium rates that an 
     issuer may charge an individual for health insurance coverage 
     provided in the individual market under applicable State law; 
     or
       ``(2) to prevent a health insurance issuer offering health 
     insurance coverage in the individual market from establishing 
     premium discounts or rebates or modifying otherwise 
     applicable copayments or deductibles in return for adherence 
     to programs of health promotion and disease prevention.

     ``SEC. 2742. GUARANTEED RENEWABILITY OF INDIVIDUAL HEALTH 
                   INSURANCE COVERAGE.

       ``(a) In General.--Except as provided in this section, a 
     health insurance issuer that provides individual health 
     insurance coverage to an individual shall renew or continue 
     in force such coverage at the option of the individual.
       ``(b) General Exceptions.--A health insurance issuer may 
     nonrenew or discontinue health insurance coverage of an 
     individual in the individual market based only on one or more 
     of the following:
       ``(1) Nonpayment of premiums.--The individual has failed to 
     pay premiums or contributions in accordance with the terms of 
     the health insurance coverage or the issuer has not received 
     timely premium payments.
       ``(2) Fraud.--The individual has performed an act or 
     practice that constitutes fraud or made an intentional 
     misrepresentation of material fact under the terms of the 
     coverage.
       ``(3) Termination of plan.--The issuer is ceasing to offer 
     coverage in the individual market in accordance with 
     subsection (c) and applicable State law.
       ``(4) Movement outside service area.--In the case of a 
     health insurance issuer that offers health insurance coverage 
     in the market through a network plan, the individual no 
     longer resides, lives, or works in the service area (or in an 
     area for which the issuer is authorized to do business) but 
     only if such coverage is terminated under this paragraph 
     uniformly without regard to any health status-related factor 
     of covered individuals.
       ``(5) Association membership ceases.--In the case of health 
     insurance coverage that is made available in the individual 
     market only through one or more bona fide associations, the 
     membership of the individual in the association (on the basis 
     of which the coverage is provided) ceases but only if such 
     coverage is terminated under this paragraph uniformly without 
     regard to any health status-related factor of covered 
     individuals.
       ``(c) Requirements for Uniform Termination of Coverage.--
       ``(1) Particular type of coverage not offered.--In any case 
     in which an issuer decides to discontinue offering a 
     particular type of health insurance coverage offered in the 
     individual market, coverage of such type may be discontinued 
     by the issuer only if--
       ``(A) the issuer provides notice to each covered individual 
     provided coverage of this type in such market of such 
     discontinuation at least 90 days prior to the date of the 
     discontinuation of such coverage;
       ``(B) the issuer offers to each individual in the 
     individual market provided coverage of this type, the option 
     to purchase any other individual health insurance coverage 
     currently being offered by the issuer for individuals in such 
     market; and
       ``(C) in exercising the option to discontinue coverage of 
     this type and in offering the option of coverage under 
     subparagraph (B), the issuer acts uniformly without regard to 
     any health status-related factor of enrolled individuals or 
     individuals who may become eligible for such coverage.
       ``(2) Discontinuance of all coverage.--
       ``(A) In general.--Subject to subparagraph (C), in any case 
     in which a health insurance issuer elects to discontinue 
     offering all health insurance coverage in the individual 
     market in a State, health insurance coverage may be 
     discontinued by the issuer only if--
       ``(i) the issuer provides notice to the applicable State 
     authority and to each individual of such discontinuation at 
     least 180 days prior to the date of the expiration of such 
     coverage, and
       ``(ii) all health insurance issued or delivered for 
     issuance in the State in such market are discontinued and 
     coverage under such health insurance coverage in such market 
     is not renewed.
       ``(B) Prohibition on market reentry.--In the case of a 
     discontinuation under subparagraph (A) in the individual 
     market, the issuer may not provide for the issuance of any 
     health insurance coverage in the market and State involved 
     during the 5-year period beginning on the date of the 
     discontinuation of the last health insurance coverage not so 
     renewed.
       ``(d) Exception for Uniform Modification of Coverage.--At 
     the time of coverage renewal, a health insurance issuer may 
     modify the health insurance coverage for a policy form 
     offered to individuals in the individual market so long as 
     such modification is consistent with State law and effective 
     on a uniform basis among all individuals with that policy 
     form.
       ``(e) Application to Coverage Offered Only Through 
     Associations.--In applying this section in the case of health 
     insurance coverage that is made available by a health 
     insurance issuer in the individual market to individuals only 
     through one or more associations, a reference to an 
     `individual' is deemed to include a reference to such an 
     association (of which the individual is a member).

     ``SEC. 2743. CERTIFICATION OF COVERAGE.

       ``The provisions of section 2701(e) shall apply to health 
     insurance coverage offered by a health insurance issuer in 
     the individual market in the same manner as it applies to 
     health insurance coverage offered by a health insurance 
     issuer in connection with a group health plan in the small or 
     large group market.

     ``SEC. 2744. STATE FLEXIBILITY IN INDIVIDUAL MARKET REFORMS.

       ``(a) Waiver of Requirements Where Implementation of 
     Acceptable Alternative Mechanism.--
       ``(1) In general.--The requirements of section 2741 shall 
     not apply with respect to health insurance coverage offered 
     in the individual market in the State so long as a State is 
     found to be implementing, in accordance with this section and 
     consistent with section 2746(b), an alternative mechanism (in 
     this section referred to as an `acceptable alternative 
     mechanism')--
       ``(A) under which all eligible individuals are provided a 
     choice of health insurance coverage;

[[Page H9486]]

       ``(B) under which such coverage does not impose any 
     preexisting condition exclusion with respect to such 
     coverage;
       ``(C) under which such choice of coverage includes at least 
     one policy form of coverage that is comparable to 
     comprehensive health insurance coverage offered in the 
     individual market in such State or that is comparable to a 
     standard option of coverage available under the group or 
     individual health insurance laws of such State; and
       ``(D) in a State which is implementing--
       ``(i) a model act described in subsection (c)(1),
       ``(ii) a qualified high risk pool described in subsection 
     (c)(2), or
       ``(iii) a mechanism described in subsection (c)(3).
       ``(2) Permissible Forms of mechanisms.--A private or public 
     individual health insurance mechanism (such as a health 
     insurance coverage pool or programs, mandatory group 
     conversion policies, guaranteed issue of one or more plans of 
     individual health insurance coverage, or open enrollment by 
     one or more health insurance issuers), or combination of such 
     mechanisms, that is designed to provide access to health 
     benefits for individuals in the individual market in the 
     State in accordance with this section may constitute an 
     acceptable alternative mechanism.
       ``(b) Application of Acceptable Alternative Mechanisms.--
       ``(1) Presumption.--
       ``(A) In general.--Subject to the succeeding provisions of 
     this subsection, a State is presumed to be implementing an 
     acceptable alternative mechanism in accordance with this 
     section as of July 1, 1997, if, by not later than April 1, 
     1997, the chief executive officer of a State--
       ``(i) notifies the Secretary that the State has enacted or 
     intends to enact (by not later than January 1, 1998, or July 
     1, 1998, in the case of a State described in subparagraph 
     (B)(ii)) any necessary legislation to provide for the 
     implementation of a mechanism reasonably designed to be an 
     acceptable alternative mechanism as of January 1, 1998, (or, 
     in the case of a State described in subparagraph (B)(ii), 
     July 1, 1998); and
       ``(ii) provides the Secretary with such information as the 
     Secretary may require to review the mechanism and its 
     implementation (or proposed implementation) under this 
     subsection.
       ``(B) Delay permitted for certain states.--
       ``(i) Effect of delay.--In the case of a State described in 
     clause (ii) that provides notice under subparagraph (A)(i), 
     for the presumption to continue on and after July 1, 1998, 
     the chief executive officer of the State by April 1, 1998--

       ``(I) must notify the Secretary that the State has enacted 
     any necessary legislation to provide for the implementation 
     of a mechanism reasonably designed to be an acceptable 
     alternative mechanism as of July 1, 1998; and
       ``(II) must provide the Secretary with such information as 
     the Secretary may require to review the mechanism and its 
     implementation (or proposed implementation) under this 
     subsection.

       ``(ii) States described.--A State described in this clause 
     is a State that has a legislature that does not meet within 
     the 12-month period beginning on the date of enactment of 
     this Act.
       ``(C) Continued application.--In order for a mechanism to 
     continue to be presumed to be an acceptable alternative 
     mechanism, the State shall provide the Secretary every 3 
     years with information described in subparagraph (A)(ii) or 
     (B)(i)(II) (as the case may be).
       ``(2) Notice.--If the Secretary finds, after review of 
     information provided under paragraph (1) and in consultation 
     with the chief executive officer of the State and the 
     insurance commissioner or chief insurance regulatory official 
     of the State, that such a mechanism is not an acceptable 
     alternative mechanism or is not (or no longer) being 
     implemented, the Secretary--
       ``(A) shall notify the State of--
       ``(i) such preliminary determination, and
       ``(ii) the consequences under paragraph (3) of a failure to 
     implement such a mechanism; and
       ``(B) shall permit the State a reasonable opportunity in 
     which to modify the mechanism (or to adopt another mechanism) 
     in a manner so that may be an acceptable alternative 
     mechanism or to provide for implementation of such a 
     mechanism.
       ``(3) Final determination.--If, after providing notice and 
     opportunity under paragraph (2), the Secretary finds that the 
     mechanism is not an acceptable alternative mechanism or the 
     State is not implementing such a mechanism, the Secretary 
     shall notify the State that the State is no longer considered 
     to be implementing an acceptable alternative mechanism and 
     that the requirements of section 2741 shall apply to health 
     insurance coverage offered in the individual market in the 
     State, effective as of a date specified in the notice.
       ``(4) Limitation on secretarial authority.--The Secretary 
     shall not make a determination under paragraph (2) or (3) on 
     any basis other than the basis that a mechanism is not an 
     acceptable alternative mechanism or is not being implemented.
       ``(5) Future adoption of mechanisms.--If a State, after 
     January 1, 1997, submits the notice and information described 
     in paragraph (1), unless the Secretary makes a finding 
     described in paragraph (3) within the 90-day period beginning 
     on the date of submission of the notice and information, the 
     mechanism shall be considered to be an acceptable alternative 
     mechanism for purposes of this section, effective 90 days 
     after the end of such period, subject to the second sentence 
     of paragraph (1).
       ``(c) Provision Related to Risk.--
       ``(1) Adoption of naic models.--The model act referred to 
     in subsection (a)(1)(D)(i) is the Small Employer and 
     Individual Health Insurance Availability Model Act (adopted 
     by the National Association of Insurance Commissioners on 
     June 3, 1996) insofar as it applies to individual health 
     insurance coverage or the Individual Health Insurance 
     Portability Model Act (also adopted by such Association on 
     such date).
       ``(2) Qualified high risk pool.--For purposes of subsection 
     (a)(1)(D)(ii), a `qualified high risk pool' described in this 
     paragraph is a high risk pool that--
       ``(A) provides to all eligible individuals health insurance 
     coverage (or comparable coverage) that does not impose any 
     preexisting condition exclusion with respect to such coverage 
     for all eligible individuals, and
       ``(B) provides for premium rates and covered benefits for 
     such coverage consistent with standards included in the NAIC 
     Model Health Plan for Uninsurable Individuals Act (as in 
     effect as of the date of the enactment of this title).
       ``(3) Other mechanisms.--For purposes of subsection 
     (a)(1)(D)(iii), a mechanism described in this paragraph--
       ``(A) provides for risk adjustment, risk spreading, or a 
     risk spreading mechanism (among issuers or policies of an 
     issuer) or otherwise provides for some financial 
     subsidization for eligible individuals, including through 
     assistance to participating issuers; or
       ``(B) is a mechanism under which each eligible individual 
     is provided a choice of all individual health insurance 
     coverage otherwise available.

     ``SEC. 2745. ENFORCEMENT.

       ``(a) State Enforcement.--
       ``(1) State authority.--Subject to section 2746, each State 
     may require that health insurance issuers that issue, sell, 
     renew, or offer health insurance coverage in the State in the 
     individual market meet the requirements established under 
     this part with respect to such issuers.
       ``(2) Failure to implement requirements.--In the case of a 
     State that fails to substantially enforce the requirements 
     set forth in this part with respect to health insurance 
     issuers in the State, the Secretary shall enforce the 
     requirements of this part under subsection (b) insofar as 
     they relate to the issuance, sale, renewal, and offering of 
     health insurance coverage in the individual market in such 
     State.
       ``(b) Secretarial Enforcement Authority.--The Secretary 
     shall have the same authority in relation to enforcement of 
     the provisions of this part with respect to issuers of health 
     insurance coverage in the individual market in a State as the 
     Secretary has under section 2722(b)(2) in relation to the 
     enforcement of the provisions of part A with respect to 
     issuers of health insurance coverage in the small group 
     market in the State.

     ``SEC. 2746. PREEMPTION.

       ``(a) In General.--Subject to subsection (b), nothing in 
     this part (or part C insofar as it applies to this part) 
     shall be construed to prevent a State from establishing, 
     implementing, or continuing in effect standards and 
     requirements unless such standards and requirements prevent 
     the application of a requirement of this part.
       ``(b) Rules of Construction.--Nothing in this part (or part 
     C insofar as it applies to this part) shall be construed to 
     affect or modify the provisions of section 514 of the 
     Employee Retirement Income Security Act of 1974 (29 U.S.C. 
     1144).

     ``SEC. 2747. GENERAL EXCEPTIONS.

       ``(a) Exception for Certain Benefits.--The requirements of 
     this part shall not apply to any health insurance coverage in 
     relation to its provision of excepted benefits described in 
     section 2791(c)(1).
       ``(b) Exception for Certain Benefits If Certain Conditions 
     Met.--The requirements of this part shall not apply to any 
     health insurance coverage in relation to its provision of 
     excepted benefits described in paragraph (2), (3), or (4) of 
     section 2791(c) if the benefits are provided under a separate 
     policy, certificate, or contract of insurance.''.
       (b) Effective Date.--
       (1) In general.--Except as provided in this subsection, 
     part B of title XXVII of the Public Health Service Act (as 
     inserted by subsection (a)) shall apply with respect to 
     health insurance coverage offered, sold, issued, renewed, in 
     effect, or operated in the individual market after June 30, 
     1997, regardless of when a period of creditable coverage 
     occurs.
       (2) Application of certification rules.--The provisions of 
     section 102(d)(2) of this Act shall apply to section 2743 of 
     the Public Health Service Act in the same manner as it 
     applies to section 2701(e) of such Act.
            Subtitle C--General and Miscellaneous Provisions

     SEC. 191. HEALTH COVERAGE AVAILABILITY STUDIES.

       (a) Studies.--
       (1) Study on effectiveness of reforms.--The Secretary of 
     Health and Human Services shall provide for a study on the 
     effectiveness of the provisions of this title and the various 
     State laws, in ensuring the availability of reasonably priced 
     health coverage to employers purchasing group coverage and 
     individuals purchasing coverage on a non-group basis.
       (2) Study on access and choice.--The Secretary also shall 
     provide for a study on--
       (A) the extent to which patients have direct access to, and 
     choice of, health care providers, including specialty 
     providers, within a network plan, as well as the opportunity 
     to utilize providers outside of the network plan, under the 
     various types of coverage offered under the provisions of 
     this title; and
       (B) the cost and cost-effectiveness to health insurance 
     issuers of providing access to out-of-network providers, and 
     the potential impact of providing such access on the cost and 
     quality of health insurance coverage offered under provisions 
     of this title.
       (3) Consultation.--The studies under this subsection shall 
     be conducted in consultation with the Secretary of Labor, 
     representatives of

[[Page H9487]]

     State officials, consumers, and other representatives of 
     individuals and entities that have expertise in health 
     insurance and employee benefits.
       (b) Reports.--Not later than January 1, 2000, the Secretary 
     shall submit to the appropriate committees of Congress a 
     report on each of the studies under subsection (a).

     SEC. 192. REPORT ON MEDICARE REIMBURSEMENT OF TELEMEDICINE.

       The Health Care Financing Administration shall complete its 
     ongoing study of medicare reimbursement of all telemedicine 
     services and submit a report to Congress on medicare 
     reimbursement of telemedicine services by not later than 
     March 1, 1997. The report shall--
       (1) utilize data compiled from the current demonstration 
     projects already under review and gather data from other 
     ongoing telemedicine networks;
       (2) include an analysis of the cost of services provided 
     via telemedicine; and
       (3) include a proposal for medicare reimbursement of such 
     services.

     SEC. 193. ALLOWING FEDERALLY-QUALIFIED HMOS TO OFFER HIGH 
                   DEDUCTIBLE PLANS.

       Section 1301(b) of the Public Health Service Act (42 U.S.C. 
     300e(b)) is amended by adding at the end the following new 
     paragraph:
       ``(6) A health maintenance organization that otherwise 
     meets the requirements of this title may offer a high-
     deductible health plan (as defined in section 220(c)(2) of 
     the Internal Revenue Code of 1986).''.

     SEC. 194. VOLUNTEER SERVICES PROVIDED BY HEALTH PROFESSIONALS 
                   AT FREE CLINICS.

       Section 224 of the Public Health Service Act (42 U.S.C. 
     233) is amended by adding at the end the following 
     subsection:
       ``(o)(1) For purposes of this section, a free clinic health 
     professional shall in providing a qualifying health service 
     to an individual be deemed to be an employee of the Public 
     Health Service for a calendar year that begins during a 
     fiscal year for which a transfer was made under paragraph 
     (6)(D). The preceding sentence is subject to the provisions 
     of this subsection.
       ``(2) In providing a health service to an individual, a 
     health care practitioner shall for purposes of this 
     subsection be considered to be a free clinic health 
     professional if the following conditions are met:
       ``(A) The service is provided to the individual at a free 
     clinic, or through offsite programs or events carried out by 
     the free clinic.
       ``(B) The free clinic is sponsoring the health care 
     practitioner pursuant to paragraph (5)(C).
       ``(C) The service is a qualifying health service (as 
     defined in paragraph (4)).
       ``(D) Neither the health care practitioner nor the free 
     clinic receives any compensation for the service from the 
     individual or from any third-party payor (including 
     reimbursement under any insurance policy or health plan, or 
     under any Federal or State health benefits program). With 
     respect to compliance with such condition:
       ``(i) The health care practitioner may receive repayment 
     from the free clinic for reasonable expenses incurred by the 
     health care practitioner in the provision of the service to 
     the individual.
       ``(ii) The free clinic may accept voluntary donations for 
     the provision of the service by the health care practitioner 
     to the individual.
       ``(E) Before the service is provided, the health care 
     practitioner or the free clinic provides written notice to 
     the individual of the extent to which the legal liability of 
     the health care practitioner is limited pursuant to this 
     subsection (or in the case of an emergency, the written 
     notice is provided to the individual as soon after the 
     emergency as is practicable). If the individual is a minor or 
     is otherwise legally incompetent, the condition under this 
     subparagraph is that the written notice be provided to a 
     legal guardian or other person with legal responsibility for 
     the care of the individual.
       ``(F) At the time the service is provided, the health care 
     practitioner is licensed or certified in accordance with 
     applicable law regarding the provision of the service.
       ``(3)(A) For purposes of this subsection, the term `free 
     clinic' means a health care facility operated by a nonprofit 
     private entity meeting the following requirements:
       ``(i) The entity does not, in providing health services 
     through the facility, accept reimbursement from any third-
     party payor (including reimbursement under any insurance 
     policy or health plan, or under any Federal or State health 
     benefits program).
       ``(ii) The entity, in providing health services through the 
     facility, either does not impose charges on the individuals 
     to whom the services are provided, or imposes a charge 
     according to the ability of the individual involved to pay 
     the charge.
       ``(iii) The entity is licensed or certified in accordance 
     with applicable law regarding the provision of health 
     services.
       ``(B) With respect to compliance with the conditions under 
     subparagraph (A), the entity involved may accept voluntary 
     donations for the provision of services.
       ``(4) For purposes of this subsection, the term `qualifying 
     health service' means any medical assistance required or 
     authorized to be provided in the program under title XIX of 
     the Social Security Act, without regard to whether the 
     medical assistance is included in the plan submitted under 
     such program by the State in which the health care 
     practitioner involved provides the medical assistance. 
     References in the preceding sentence to such program shall as 
     applicable be considered to be references to any successor to 
     such program.
       ``(5) Subsection (g) (other than paragraphs (3) through 
     (5)) and subsections (h), (i), and (l) apply to a health care 
     practitioner for purposes of this subsection to the same 
     extent and in the same manner as such subsections apply to an 
     officer, governing board member, employee, or contractor of 
     an entity described in subsection (g)(4), subject to 
     paragraph (6) and subject to the following:
       ``(A) The first sentence of paragraph (1) applies in lieu 
     of the first sentence of subsection (g)(1)(A).
       ``(B) This subsection may not be construed as deeming any 
     free clinic to be an employee of the Public Health Service 
     for purposes of this section.
       ``(C) With respect to a free clinic, a health care 
     practitioner is not a free clinic health professional unless 
     the free clinic sponsors the health care practitioner. For 
     purposes of this subsection, the free clinic shall be 
     considered to be sponsoring the health care practitioner if--
       ``(i) with respect to the health care practitioner, the 
     free clinic submits to the Secretary an application meeting 
     the requirements of subsection (g)(1)(D); and
       ``(ii) the Secretary, pursuant to subsection (g)(1)(E), 
     determines that the health care practitioner is deemed to be 
     an employee of the Public Health Service.
       ``(D) In the case of a health care practitioner who is 
     determined by the Secretary pursuant to subsection (g)(1)(E) 
     to be a free clinic health professional, this subsection 
     applies to the health care practitioner (with respect to the 
     free clinic sponsoring the health care practitioner pursuant 
     to subparagraph C)) for any cause of action arising from an 
     act or omission of the health care practitioner occurring on 
     or after the date on which the Secretary makes such 
     determination.
       ``(E) Subsection (g)(1)(F) applies to a health care 
     practitioner for purposes of this subsection only to the 
     extent that, in providing health services to an individual, 
     each of the conditions specified in paragraph (2) is met.
       ``(6)(A) For purposes of making payments for judgments 
     against the United States (together with related fees and 
     expenses of witnesses) pursuant to this section arising from 
     the acts or omissions of free clinic health professionals, 
     there is authorized to be appropriated $10,000,000 for each 
     fiscal year.
       ``(B) The Secretary shall establish a fund for purposes of 
     this subsection. Each fiscal year amounts appropriated under 
     subparagraph (A) shall be deposited in such fund.
       ``(C) Not later than May 1 of each fiscal year, the 
     Attorney General, in consultation with the Secretary, shall 
     submit to the Congress a report providing an estimate of the 
     amount of claims (together with related fees and expenses of 
     witnesses) that, by reason of the acts or omissions of free 
     clinic health professionals, will be paid pursuant to this 
     section during the calendar year that begins in the following 
     fiscal year. Subsection (k)(1)(B) applies to the estimate 
     under the preceding sentence regarding free clinic health 
     professionals to the same extent and in the same manner as 
     such subsection applies to the estimate under such subsection 
     regarding officers, governing board members, employees, and 
     contractors of entities described in subsection (g)(4).
       ``(D) Not later than December 31 of each fiscal year, the 
     Secretary shall transfer from the fund under subparagraph (B) 
     to the appropriate accounts in the Treasury an amount equal 
     to the estimate made under subparagraph (C) for the calendar 
     year beginning in such fiscal year, subject to the extent of 
     amounts in the fund.
       ``(7)(A) This subsection takes effect on the date of the 
     enactment of the first appropriations Act that makes an 
     appropriation under paragraph (6)(A), except as provided in 
     subparagraph (B)(i).
       ``(B)(i) Effective on the date of the enactment of the 
     Health Insurance Portability and Accountability Act of 1996--
       ``(I) the Secretary may issue regulations for carrying out 
     this subsection, and the Secretary may accept and consider 
     applications submitted pursuant to paragraph (5)(C); and
       ``(II) reports under paragraph (6)(C) may be submitted to 
     the Congress.
       ``(ii) For the first fiscal year for which an appropriation 
     is made under subparagraph (A) of paragraph (6), if an 
     estimate under subparagraph (C) of such paragraph has not 
     been made for the calendar year beginning in such fiscal 
     year, the transfer under subparagraph (D) of such paragraph 
     shall be made notwithstanding the lack of the estimate, and 
     the transfer shall be made in an amount equal to the amount 
     of such appropriation.''.

     SEC. 195. FINDINGS; SEVERABILITY.

       (a) Findings Relating to Exercise of Commerce Clause 
     Authority.--Congress finds the following in relation to the 
     provisions of this title:
       (1) Provisions in group health plans and health insurance 
     coverage that impose certain preexisting condition exclusions 
     impact the ability of employees to seek employment in 
     interstate commerce, thereby impeding such commerce.
       (2) Health insurance coverage is commercial in nature and 
     is in and affects interstate commerce.
       (3) It is a necessary and proper exercise of Congressional 
     authority to impose requirements under this title on group 
     health plans and health insurance coverage (including 
     coverage offered to individuals previously covered under 
     group health plans) in order to promote commerce among the 
     States.
       (4) Congress, however, intends to defer to States, to the 
     maximum extent practicable, in carrying out such requirements 
     with respect to insurers and health maintenance organizations 
     that are subject to State regulation, consistent with the 
     provisions of the Employee Retirement Income Security Act of 
     1974.
       (b) Severability.--If any provision of this title or the 
     application of such provision to any person or circumstance 
     is held to be unconstitutional, the remainder of this title 
     and the application of the provisions of such to any person 
     or circumstance shall not be affected thereby.

[[Page H9488]]

   TITLE II--PREVENTING HEALTH CARE FRAUD AND ABUSE; ADMINISTRATIVE 
                             SIMPLIFICATION

     SEC. 200. REFERENCES IN TITLE.

       Except as otherwise specifically provided, whenever in this 
     title an amendment is expressed in terms of an amendment to 
     or repeal of a section or other provision, the reference 
     shall be considered to be made to that section or other 
     provision of the Social Security Act.
              Subtitle A--Fraud and Abuse Control Program

     SEC. 201. FRAUD AND ABUSE CONTROL PROGRAM.

       (a) Establishment of Program.--Title XI (42 U.S.C. 1301 et 
     seq.) is amended by inserting after section 1128B the 
     following new section:


                   ``fraud and abuse control program

       ``Sec. 1128C. (a) Establishment of Program.--
       ``(1) In general.--Not later than January 1, 1997, the 
     Secretary, acting through the Office of the Inspector General 
     of the Department of Health and Human Services, and the 
     Attorney General shall establish a program--
       ``(A) to coordinate Federal, State, and local law 
     enforcement programs to control fraud and abuse with respect 
     to health plans,
       ``(B) to conduct investigations, audits, evaluations, and 
     inspections relating to the delivery of and payment for 
     health care in the United States,
       ``(C) to facilitate the enforcement of the provisions of 
     sections 1128, 1128A, and 1128B and other statutes applicable 
     to health care fraud and abuse,
       ``(D) to provide for the modification and establishment of 
     safe harbors and to issue advisory opinions and special fraud 
     alerts pursuant to section 1128D, and
       ``(E) to provide for the reporting and disclosure of 
     certain final adverse actions against health care providers, 
     suppliers, or practitioners pursuant to the data collection 
     system established under section 1128E.
       ``(2) Coordination with health plans.--In carrying out the 
     program established under paragraph (1), the Secretary and 
     the Attorney General shall consult with, and arrange for the 
     sharing of data with representatives of health plans.
       ``(3) Guidelines.--
       ``(A) In general.--The Secretary and the Attorney General 
     shall issue guidelines to carry out the program under 
     paragraph (1). The provisions of sections 553, 556, and 557 
     of title 5, United States Code, shall not apply in the 
     issuance of such guidelines.
       ``(B) Information guidelines.--
       ``(i) In general.--Such guidelines shall include guidelines 
     relating to the furnishing of information by health plans, 
     providers, and others to enable the Secretary and the 
     Attorney General to carry out the program (including 
     coordination with health plans under paragraph (2)).
       ``(ii) Confidentiality.--Such guidelines shall include 
     procedures to assure that such information is provided and 
     utilized in a manner that appropriately protects the 
     confidentiality of the information and the privacy of 
     individuals receiving health care services and items.
       ``(iii) Qualified immunity for providing information.--The 
     provisions of section 1157(a) (relating to limitation on 
     liability) shall apply to a person providing information to 
     the Secretary or the Attorney General in conjunction with 
     their performance of duties under this section.
       ``(4) Ensuring access to documentation.--The Inspector 
     General of the Department of Health and Human Services is 
     authorized to exercise such authority described in paragraphs 
     (3) through (9) of section 6 of the Inspector General Act of 
     1978 (5 U.S.C. App.) as necessary with respect to the 
     activities under the fraud and abuse control program 
     established under this subsection.
       ``(5) Authority of inspector general.--Nothing in this Act 
     shall be construed to diminish the authority of any Inspector 
     General, including such authority as provided in the 
     Inspector General Act of 1978 (5 U.S.C. App.).
       ``(b) Additional Use of Funds by Inspector General.--
       ``(1) Reimbursements for investigations.--The Inspector 
     General of the Department of Health and Human Services is 
     authorized to receive and retain for current use 
     reimbursement for the costs of conducting investigations and 
     audits and for monitoring compliance plans when such costs 
     are ordered by a court, voluntarily agreed to by the payor, 
     or otherwise.
       ``(2) Crediting.--Funds received by the Inspector General 
     under paragraph (1) as reimbursement for costs of conducting 
     investigations shall be deposited to the credit of the 
     appropriation from which initially paid, or to appropriations 
     for similar purposes currently available at the time of 
     deposit, and shall remain available for obligation for 1 year 
     from the date of the deposit of such funds.
       ``(c) Health Plan Defined.--For purposes of this section, 
     the term `health plan' means a plan or program that provides 
     health benefits, whether directly, through insurance, or 
     otherwise, and includes--
       ``(1) a policy of health insurance;
       ``(2) a contract of a service benefit organization; and
       ``(3) a membership agreement with a health maintenance 
     organization or other prepaid health plan.''.
       (b) Establishment of Health Care Fraud and Abuse Control 
     Account in Federal Hospital Insurance Trust Fund.--Section 
     1817 (42 U.S.C. 1395i) is amended by adding at the end the 
     following new subsection:
       ``(k) Health Care Fraud and Abuse Control Account.--
       ``(1) Establishment.--There is hereby established in the 
     Trust Fund an expenditure account to be known as the `Health 
     Care Fraud and Abuse Control Account' (in this subsection 
     referred to as the `Account').
       ``(2) Appropriated amounts to trust fund.--
       ``(A) In general.--There are hereby appropriated to the 
     Trust Fund--
       ``(i) such gifts and bequests as may be made as provided in 
     subparagraph (B);
       ``(ii) such amounts as may be deposited in the Trust Fund 
     as provided in sections 242(b) and 249(c) of the Health 
     Insurance Portability and Accountability Act of 1996, and 
     title XI; and
       ``(iii) such amounts as are transferred to the Trust Fund 
     under subparagraph (C).
       ``(B) Authorization to accept gifts.--The Trust Fund is 
     authorized to accept on behalf of the United States money 
     gifts and bequests made unconditionally to the Trust Fund, 
     for the benefit of the Account or any activity financed 
     through the Account.
       ``(C) Transfer of amounts.--The Managing Trustee shall 
     transfer to the Trust Fund, under rules similar to the rules 
     in section 9601 of the Internal Revenue Code of 1986, an 
     amount equal to the sum of the following:
       ``(i) Criminal fines recovered in cases involving a Federal 
     health care offense (as defined in section 982(a)(6)(B) of 
     title 18, United States Code).
       ``(ii) Civil monetary penalties and assessments imposed in 
     health care cases, including amounts recovered under titles 
     XI, XVIII, and XIX, and chapter 38 of title 31, United States 
     Code (except as otherwise provided by law).
       ``(iii) Amounts resulting from the forfeiture of property 
     by reason of a Federal health care offense.
       ``(iv) Penalties and damages obtained and otherwise 
     creditable to miscellaneous receipts of the general fund of 
     the Treasury obtained under sections 3729 through 3733 of 
     title 31, United States Code (known as the False Claims Act), 
     in cases involving claims related to the provision of health 
     care items and services (other than funds awarded to a 
     relator, for restitution or otherwise authorized by law).
       ``(D) Application.--Nothing in subparagraph (C)(iii) shall 
     be construed to limit the availability of recoveries and 
     forfeitures obtained under title I of the Employee Retirement 
     Income Security Act of 1974 for the purpose of providing 
     equitable or remedial relief for employee welfare benefit 
     plans, and for participants and beneficiaries under such 
     plans, as authorized under such title.
       ``(3) Appropriated amounts to account for fraud and abuse 
     control program, etc.--
       ``(A) Departments of health and human services and 
     justice.--
       ``(i) In general.--There are hereby appropriated to the 
     Account from the Trust Fund such sums as the Secretary and 
     the Attorney General certify are necessary to carry out the 
     purposes described in subparagraph (C), to be available 
     without further appropriation, in an amount not to exceed--

       ``(I) for fiscal year 1997, $104,000,000,
       ``(II) for each of the fiscal years 1998 through 2003, the 
     limit for the preceding fiscal year, increased by 15 percent; 
     and
       ``(III) for each fiscal year after fiscal year 2003, the 
     limit for fiscal year 2003.

       ``(ii) Medicare and medicaid activities.--For each fiscal 
     year, of the amount appropriated in clause (i), the following 
     amounts shall be available only for the purposes of the 
     activities of the Office of the Inspector General of the 
     Department of Health and Human Services with respect to the 
     medicare and medicaid programs--

       ``(I) for fiscal year 1997, not less than $60,000,000 and 
     not more than $70,000,000;
       ``(II) for fiscal year 1998, not less than $80,000,000 and 
     not more than $90,000,000;
       ``(III) for fiscal year 1999, not less than $90,000,000 and 
     not more than $100,000,000;
       ``(IV) for fiscal year 2000, not less than $110,000,000 and 
     not more than $120,000,000;
       ``(V) for fiscal year 2001, not less than $120,000,000 and 
     not more than $130,000,000;
       ``(VI) for fiscal year 2002, not less than $140,000,000 and 
     not more than $150,000,000; and
       ``(VII) for each fiscal year after fiscal year 2002, not 
     less than $150,000,000 and not more than $160,000,000.

       ``(B) Federal bureau of investigation.--There are hereby 
     appropriated from the general fund of the United States 
     Treasury and hereby appropriated to the Account for transfer 
     to the Federal Bureau of Investigation to carry out the 
     purposes described in subparagraph (C), to be available 
     without further appropriation--
       ``(i) for fiscal year 1997, $47,000,000;
       ``(ii) for fiscal year 1998, $56,000,000;
       ``(iii) for fiscal year 1999, $66,000,000;
       ``(iv) for fiscal year 2000, $76,000,000;
       ``(v) for fiscal year 2001, $88,000,000;
       ``(vi) for fiscal year 2002, $101,000,000; and
       ``(vii) for each fiscal year after fiscal year 2002, 
     $114,000,000.
       ``(C) Use of funds.--The purposes described in this 
     subparagraph are to cover the costs (including equipment, 
     salaries and benefits, and travel and training) of the 
     administration and operation of the health care fraud and 
     abuse control program established under section 1128C(a), 
     including the costs of--
       ``(i) prosecuting health care matters (through criminal, 
     civil, and administrative proceedings);
       ``(ii) investigations;
       ``(iii) financial and performance audits of health care 
     programs and operations;
       ``(iv) inspections and other evaluations; and
       ``(v) provider and consumer education regarding compliance 
     with the provisions of title XI.
       ``(4) Appropriated amounts to account for medicare 
     integrity program.--
       ``(A) In general.--There are hereby appropriated to the 
     Account from the Trust Fund for each fiscal year such amounts 
     as are necessary to carry out the Medicare Integrity Program 
     under section 1893, subject to subparagraph (B) and to be 
     available without further appropriation.

[[Page H9489]]

       ``(B) Amounts specified.--The amount appropriated under 
     subparagraph (A) for a fiscal year is as follows:
       ``(i) For fiscal year 1997, such amount shall be not less 
     than $430,000,000 and not more than $440,000,000.
       ``(ii) For fiscal year 1998, such amount shall be not less 
     than $490,000,000 and not more than $500,000,000.
       ``(iii) For fiscal year 1999, such amount shall be not less 
     than $550,000,000 and not more than $560,000,000.
       ``(iv) For fiscal year 2000, such amount shall be not less 
     than $620,000,000 and not more than $630,000,000.
       ``(v) For fiscal year 2001, such amount shall be not less 
     than $670,000,000 and not more than $680,000,000.
       ``(vi) For fiscal year 2002, such amount shall be not less 
     than $690,000,000 and not more than $700,000,000.
       ``(vii) For each fiscal year after fiscal year 2002, such 
     amount shall be not less than $710,000,000 and not more than 
     $720,000,000.
       ``(5) Annual report.--Not later than January 1, the 
     Secretary and the Attorney General shall submit jointly a 
     report to Congress which identifies--
       ``(A) the amounts appropriated to the Trust Fund for the 
     previous fiscal year under paragraph (2)(A) and the source of 
     such amounts; and
       ``(B) the amounts appropriated from the Trust Fund for such 
     year under paragraph (3) and the justification for the 
     expenditure of such amounts.
       ``(6) GAO report.--Not later than January 1 of 2000, 2002, 
     and 2004, the Comptroller General of the United States shall 
     submit a report to Congress which--
       ``(A) identifies--
       ``(i) the amounts appropriated to the Trust Fund for the 
     previous two fiscal years under paragraph (2)(A) and the 
     source of such amounts; and
       ``(ii) the amounts appropriated from the Trust Fund for 
     such fiscal years under paragraph (3) and the justification 
     for the expenditure of such amounts;
       ``(B) identifies any expenditures from the Trust Fund with 
     respect to activities not involving the medicare program 
     under title XVIII;
       ``(C) identifies any savings to the Trust Fund, and any 
     other savings, resulting from expenditures from the Trust 
     Fund; and
       ``(D) analyzes such other aspects of the operation of the 
     Trust Fund as the Comptroller General of the United States 
     considers appropriate.''.

     SEC. 202. MEDICARE INTEGRITY PROGRAM.

       (a) Establishment of Medicare Integrity Program.--Title 
     XVIII is amended by adding at the end the following new 
     section:


                      ``medicare integrity program

       ``Sec. 1893. (a) Establishment of Program.--There is hereby 
     established the Medicare Integrity Program (in this section 
     referred to as the `Program') under which the Secretary shall 
     promote the integrity of the medicare program by entering 
     into contracts in accordance with this section with eligible 
     entities to carry out the activities described in subsection 
     (b).
       ``(b) Activities Described.--The activities described in 
     this subsection are as follows:
       ``(1) Review of activities of providers of services or 
     other individuals and entities furnishing items and services 
     for which payment may be made under this title (including 
     skilled nursing facilities and home health agencies), 
     including medical and utilization review and fraud review 
     (employing similar standards, processes, and technologies 
     used by private health plans, including equipment and 
     software technologies which surpass the capability of the 
     equipment and technologies used in the review of claims under 
     this title as of the date of the enactment of this section).
       ``(2) Audit of cost reports.
       ``(3) Determinations as to whether payment should not be, 
     or should not have been, made under this title by reason of 
     section 1862(b), and recovery of payments that should not 
     have been made.
       ``(4) Education of providers of services, beneficiaries, 
     and other persons with respect to payment integrity and 
     benefit quality assurance issues.
       ``(5) Developing (and periodically updating) a list of 
     items of durable medical equipment in accordance with section 
     1834(a)(15) which are subject to prior authorization under 
     such section.
       ``(c) Eligibility of Entities.--An entity is eligible to 
     enter into a contract under the Program to carry out any of 
     the activities described in subsection (b) if--
       ``(1) the entity has demonstrated capability to carry out 
     such activities;
       ``(2) in carrying out such activities, the entity agrees to 
     cooperate with the Inspector General of the Department of 
     Health and Human Services, the Attorney General, and other 
     law enforcement agencies, as appropriate, in the 
     investigation and deterrence of fraud and abuse in relation 
     to this title and in other cases arising out of such 
     activities;
       ``(3) the entity complies with such conflict of interest 
     standards as are generally applicable to Federal acquisition 
     and procurement; and
       ``(4) the entity meets such other requirements as the 
     Secretary may impose.

     In the case of the activity described in subsection (b)(5), 
     an entity shall be deemed to be eligible to enter into a 
     contract under the Program to carry out the activity if the 
     entity is a carrier with a contract in effect under section 
     1842.
       ``(d) Process for Entering Into Contracts.--The Secretary 
     shall enter into contracts under the Program in accordance 
     with such procedures as the Secretary shall by regulation 
     establish, except that such procedures shall include the 
     following:
       ``(1) Procedures for identifying, evaluating, and resolving 
     organizational conflicts of interest that are generally 
     applicable to Federal acquisition and procurement.
       ``(2) Competitive procedures to be used--
       ``(A) when entering into new contracts under this section;
       ``(B) when entering into contracts that may result in the 
     elimination of responsibilities of an individual fiscal 
     intermediary or carrier under section 202(b) of the Health 
     Insurance Portability and Accountability Act of 1996; and
       ``(C) at any other time considered appropriate by the 
     Secretary,

     except that the Secretary may continue to contract with 
     entities that are carrying out the activities described in 
     this section pursuant to agreements under section 1816 or 
     contracts under section 1842 in effect on the date of the 
     enactment of this section.
       ``(3) Procedures under which a contract under this section 
     may be renewed without regard to any provision of law 
     requiring competition if the contractor has met or exceeded 
     the performance requirements established in the current 
     contract.

     The Secretary may enter into such contracts without regard to 
     final rules having been promulgated.
       ``(e) Limitation on Contractor Liability.--The Secretary 
     shall by regulation provide for the limitation of a 
     contractor's liability for actions taken to carry out a 
     contract under the Program, and such regulation shall, to the 
     extent the Secretary finds appropriate, employ the same or 
     comparable standards and other substantive and procedural 
     provisions as are contained in section 1157.''.
       (b) Elimination of FI and Carrier Responsibility for 
     Carrying Out Activities Subject to Program.--
       (1) Responsibilities of fiscal intermediaries under part 
     a.--Section 1816 (42 U.S.C. 1395h) is amended by adding at 
     the end the following new subsection:
       ``(l) No agency or organization may carry out (or receive 
     payment for carrying out) any activity pursuant to an 
     agreement under this section to the extent that the activity 
     is carried out pursuant to a contract under the Medicare 
     Integrity Program under section 1893.''.
       (2) Responsibilities of carriers under part b.--Section 
     1842(c) (42 U.S.C. 1395u(c)) is amended by adding at the end 
     the following new paragraph:
       ``(6) No carrier may carry out (or receive payment for 
     carrying out) any activity pursuant to a contract under this 
     subsection to the extent that the activity is carried out 
     pursuant to a contract under the Medicare Integrity Program 
     under section 1893. The previous sentence shall not apply 
     with respect to the activity described in section 1893(b)(5) 
     (relating to prior authorization of certain items of durable 
     medical equipment under section 1834(a)(15)).''.

     SEC. 203. BENEFICIARY INCENTIVE PROGRAMS.

       (a) Clarification of Requirement to Provide Explanation of 
     Medicare Benefits.--The Secretary of Health and Human 
     Services (in this section referred to as the ``Secretary'') 
     shall provide an explanation of benefits under the medicare 
     program under title XVIII of the Social Security Act with 
     respect to each item or service for which payment may be made 
     under the program which is furnished to an individual, 
     without regard to whether or not a deductible or coinsurance 
     may be imposed against the individual with respect to the 
     item or service.
       (b) Program To Collect Information on Fraud and Abuse.--
       (1) Establishment of program.--Not later than 3 months 
     after the date of the enactment of this Act, the Secretary 
     shall establish a program under which the Secretary shall 
     encourage individuals to report to the Secretary information 
     on individuals and entities who are engaging in or who have 
     engaged in acts or omissions which constitute grounds for the 
     imposition of a sanction under section 1128, 1128A, or 1128B 
     of the Social Security Act, or who have otherwise engaged in 
     fraud and abuse against the medicare program under title 
     XVIII of such act for which there is a sanction provided 
     under law. The program shall discourage provision of, and not 
     consider, information which is frivolous or otherwise not 
     relevant or material to the imposition of such a sanction.
       (2) Payment of portion of amounts collected.--If an 
     individual reports information to the Secretary under the 
     program established under paragraph (1) which serves as the 
     basis for the collection by the Secretary or the Attorney 
     General of any amount of at least $100 (other than any amount 
     paid as a penalty under section 1128B of the Social Security 
     Act), the Secretary may pay a portion of the amount collected 
     to the individual (under procedures similar to those 
     applicable under section 7623 of the Internal Revenue Code of 
     1986 to payments to individuals providing information on 
     violations of such Code).
       (c) Program To Collect Information on Program Efficiency.--
       (1) Establishment of program.--Not later than 3 months 
     after the date of the enactment of this Act, the Secretary 
     shall establish a program under which the Secretary shall 
     encourage individuals to submit to the Secretary suggestions 
     on methods to improve the efficiency of the medicare program.
       (2) Payment of portion of program savings.--If an 
     individual submits a suggestion to the Secretary under the 
     program established under paragraph (1) which is adopted by 
     the Secretary and which results in savings to the program, 
     the Secretary may make a payment to the individual of such 
     amount as the Secretary considers appropriate.

[[Page H9490]]

     SEC. 204. APPLICATION OF CERTAIN HEALTH ANTI-FRAUD AND ABUSE 
                   SANCTIONS TO FRAUD AND ABUSE AGAINST FEDERAL 
                   HEALTH CARE PROGRAMS.

       (a) In General.--Section 1128B (42 U.S.C. 1320a-7b) is 
     amended as follows:
       (1) In the heading, by striking ``medicare or state health 
     care programs'' and inserting ``federal health care 
     programs''.
       (2) In subsection (a)(1), by striking ``a program under 
     title XVIII or a State health care program (as defined in 
     section 1128(h))'' and inserting ``a Federal health care 
     program (as defined in subsection (f))''.
       (3) In subsection (a)(5), by striking ``a program under 
     title XVIII or a State health care program'' and inserting 
     ``a Federal health care program''.
       (4) In the second sentence of subsection (a)--
       (A) by striking ``a State plan approved under title XIX'' 
     and inserting ``a Federal health care program'', and
       (B) by striking ``the State may at its option 
     (notwithstanding any other provision of that title or of such 
     plan)'' and inserting ``the administrator of such program may 
     at its option (notwithstanding any other provision of such 
     program)''.
       (5) In subsection (b), by striking ``title XVIII or a State 
     health care program'' each place it appears and inserting ``a 
     Federal health care program''.
       (6) In subsection (c), by inserting ``(as defined in 
     section 1128(h))'' after ``a State health care program''.
       (7) By adding at the end the following new subsection:
       ``(f) For purposes of this section, the term `Federal 
     health care program' means--
       ``(1) any plan or program that provides health benefits, 
     whether directly, through insurance, or otherwise, which is 
     funded directly, in whole or in part, by the United States 
     Government (other than the health insurance program under 
     chapter 89 of title 5, United States Code); or
       ``(2) any State health care program, as defined in section 
     1128(h).''.
       (b) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 1997.

     SEC. 205. GUIDANCE REGARDING APPLICATION OF HEALTH CARE FRAUD 
                   AND ABUSE SANCTIONS.

       Title XI (42 U.S.C. 1301 et seq.), as amended by section 
     201, is amended by inserting after section 1128C the 
     following new section:


    ``guidance regarding application of health care fraud and abuse 
                               sanctions

       ``Sec. 1128D. (a) Solicitation and Publication of 
     Modifications to Existing Safe Harbors and New Safe 
     Harbors.--
       ``(1) In general.--
       ``(A) Solicitation of proposals for safe harbors.--Not 
     later than January 1, 1997, and not less than annually 
     thereafter, the Secretary shall publish a notice in the 
     Federal Register soliciting proposals, which will be accepted 
     during a 60-day period, for--
       ``(i) modifications to existing safe harbors issued 
     pursuant to section 14(a) of the Medicare and Medicaid 
     Patient and Program Protection Act of 1987 (42 U.S.C. 1320a-
     7b note);
       ``(ii) additional safe harbors specifying payment practices 
     that shall not be treated as a criminal offense under section 
     1128B(b) and shall not serve as the basis for an exclusion 
     under section 1128(b)(7);
       ``(iii) advisory opinions to be issued pursuant to 
     subsection (b); and
       ``(iv) special fraud alerts to be issued pursuant to 
     subsection (c).
       ``(B) Publication of proposed modifications and proposed 
     additional safe harbors.--After considering the proposals 
     described in clauses (i) and (ii) of subparagraph (A), the 
     Secretary, in consultation with the Attorney General, shall 
     publish in the Federal Register proposed modifications to 
     existing safe harbors and proposed additional safe harbors, 
     if appropriate, with a 60-day comment period. After 
     considering any public comments received during this period, 
     the Secretary shall issue final rules modifying the existing 
     safe harbors and establishing new safe harbors, as 
     appropriate.
       ``(C) Report.--The Inspector General of the Department of 
     Health and Human Services (in this section referred to as the 
     `Inspector General') shall, in an annual report to Congress 
     or as part of the year-end semiannual report required by 
     section 5 of the Inspector General Act of 1978 (5 U.S.C. 
     App.), describe the proposals received under clauses (i) and 
     (ii) of subparagraph (A) and explain which proposals were 
     included in the publication described in subparagraph (B), 
     which proposals were not included in that publication, and 
     the reasons for the rejection of the proposals that were not 
     included.
       ``(2) Criteria for modifying and establishing safe 
     harbors.--In modifying and establishing safe harbors under 
     paragraph (1)(B), the Secretary may consider the extent to 
     which providing a safe harbor for the specified payment 
     practice may result in any of the following:
       ``(A) An increase or decrease in access to health care 
     services.
       ``(B) An increase or decrease in the quality of health care 
     services.
       ``(C) An increase or decrease in patient freedom of choice 
     among health care providers.
       ``(D) An increase or decrease in competition among health 
     care providers.
       ``(E) An increase or decrease in the ability of health care 
     facilities to provide services in medically underserved areas 
     or to medically underserved populations.
       ``(F) An increase or decrease in the cost to Federal health 
     care programs (as defined in section 1128B(f)).
       ``(G) An increase or decrease in the potential 
     overutilization of health care services.
       ``(H) The existence or nonexistence of any potential 
     financial benefit to a health care professional or provider 
     which may vary based on their decisions of--
       ``(i) whether to order a health care item or service; or
       ``(ii) whether to arrange for a referral of health care 
     items or services to a particular practitioner or provider.
       ``(I) Any other factors the Secretary deems appropriate in 
     the interest of preventing fraud and abuse in Federal health 
     care programs (as so defined).
       ``(b) Advisory Opinions.--
       ``(1) Issuance of advisory opinions.--The Secretary, in 
     consultation with the Attorney General, shall issue written 
     advisory opinions as provided in this subsection.
       ``(2) Matters subject to advisory opinions.--The Secretary 
     shall issue advisory opinions as to the following matters:
       ``(A) What constitutes prohibited remuneration within the 
     meaning of section 1128B(b).
       ``(B) Whether an arrangement or proposed arrangement 
     satisfies the criteria set forth in section 1128B(b)(3) for 
     activities which do not result in prohibited remuneration.
       ``(C) Whether an arrangement or proposed arrangement 
     satisfies the criteria which the Secretary has established, 
     or shall establish by regulation for activities which do not 
     result in prohibited remuneration.
       ``(D) What constitutes an inducement to reduce or limit 
     services to individuals entitled to benefits under title 
     XVIII or title XIX within the meaning of section 1128B(b).
       ``(E) Whether any activity or proposed activity constitutes 
     grounds for the imposition of a sanction under section 1128, 
     1128A, or 1128B.
       ``(3) Matters not subject to advisory opinions.--Such 
     advisory opinions shall not address the following matters:
       ``(A) Whether the fair market value shall be, or was paid 
     or received for any goods, services or property.
       ``(B) Whether an individual is a bona fide employee within 
     the requirements of section 3121(d)(2) of the Internal 
     Revenue Code of 1986.
       ``(4) Effect of advisory opinions.--
       ``(A) Binding as to secretary and parties involved.--Each 
     advisory opinion issued by the Secretary shall be binding as 
     to the Secretary and the party or parties requesting the 
     opinion.
       ``(B) Failure to seek opinion.--The failure of a party to 
     seek an advisory opinion may not be introduced into evidence 
     to prove that the party intended to violate the provisions of 
     sections 1128, 1128A, or 1128B.
       ``(5) Regulations.--
       ``(A) In general.--Not later than 180 days after the date 
     of the enactment of this section, the Secretary shall issue 
     regulations to carry out this section. Such regulations shall 
     provide for--
       ``(i) the procedure to be followed by a party applying for 
     an advisory opinion;
       ``(ii) the procedure to be followed by the Secretary in 
     responding to a request for an advisory opinion;
       ``(iii) the interval in which the Secretary shall respond;
       ``(iv) the reasonable fee to be charged to the party 
     requesting an advisory opinion; and
       ``(v) the manner in which advisory opinions will be made 
     available to the public.
       ``(B) Specific contents.--Under the regulations promulgated 
     pursuant to subparagraph (A)--
       ``(i) the Secretary shall be required to issue to a party 
     requesting an advisory opinion by not later than 60 days 
     after the request is received; and
       ``(ii) the fee charged to the party requesting an advisory 
     opinion shall be equal to the costs incurred by the Secretary 
     in responding to the request.
       ``(6) Application of subsection.--This subsection shall 
     apply to requests for advisory opinions made on or after the 
     date which is 6 months after the date of enactment of this 
     section and before the date which is 4 years after such date 
     of enactment.
       ``(c) Special Fraud Alerts.--
       ``(1) In general.--
       ``(A) Request for special fraud alerts.--Any person may 
     present, at any time, a request to the Inspector General for 
     a notice which informs the public of practices which the 
     Inspector General considers to be suspect or of particular 
     concern under the medicare program under title XVIII or a 
     State health care program, as defined in section 1128(h) (in 
     this subsection referred to as a `special fraud alert').
       ``(B) Issuance and publication of special fraud alerts.--
     Upon receipt of a request described in subparagraph (A), the 
     Inspector General shall investigate the subject matter of the 
     request to determine whether a special fraud alert should be 
     issued. If appropriate, the Inspector General shall issue a 
     special fraud alert in response to the request. All special 
     fraud alerts issued pursuant to this subparagraph shall be 
     published in the Federal Register.
       ``(2) Criteria for special fraud alerts.--In determining 
     whether to issue a special fraud alert upon a request 
     described in paragraph (1), the Inspector General may 
     consider--
       ``(A) whether and to what extent the practices that would 
     be identified in the special fraud alert may result in any of 
     the consequences described in subsection (a)(2); and
       ``(B) the volume and frequency of the conduct that would be 
     identified in the special fraud alert.''.
     Subtitle B--Revisions to Current Sanctions for Fraud and Abuse

     SEC. 211. MANDATORY EXCLUSION FROM PARTICIPATION IN MEDICARE 
                   AND STATE HEALTH CARE PROGRAMS.

       (a) Individual Convicted of Felony Relating to Health Care 
     Fraud.--
       (1) In general.--Section 1128(a) (42 U.S.C. 1320a-7(a)) is 
     amended by adding at the end the following new paragraph:
       ``(3) Felony conviction relating to health care fraud.--Any 
     individual or entity that has

[[Page H9491]]

     been convicted for an offense which occurred after the date 
     of the enactment of the Health Insurance Portability and 
     Accountability Act of 1996, under Federal or State law, in 
     connection with the delivery of a health care item or service 
     or with respect to any act or omission in a health care 
     program (other than those specifically described in paragraph 
     (1)) operated by or financed in whole or in part by any 
     Federal, State, or local government agency, of a criminal 
     offense consisting of a felony relating to fraud, theft, 
     embezzlement, breach of fiduciary responsibility, or other 
     financial misconduct.''.
       (2) Conforming amendment.--Paragraph (1) of section 1128(b) 
     (42 U.S.C. 1320a-7(b)) is amended to read as follows:
       ``(1) Conviction relating to fraud.--Any individual or 
     entity that has been convicted for an offense which occurred 
     after the date of the enactment of the Health Insurance 
     Portability and Accountability Act of 1996, under Federal or 
     State law--
       ``(A) of a criminal offense consisting of a misdemeanor 
     relating to fraud, theft, embezzlement, breach of fiduciary 
     responsibility, or other financial misconduct--
       ``(i) in connection with the delivery of a health care item 
     or service, or
       ``(ii) with respect to any act or omission in a health care 
     program (other than those specifically described in 
     subsection (a)(1)) operated by or financed in whole or in 
     part by any Federal, State, or local government agency; or
       ``(B) of a criminal offense relating to fraud, theft, 
     embezzlement, breach of fiduciary responsibility, or other 
     financial misconduct with respect to any act or omission in a 
     program (other than a health care program) operated by or 
     financed in whole or in part by any Federal, State, or local 
     government agency.''.
       (b) Individual Convicted of Felony Relating to Controlled 
     Substance.--
       (1) In general.--Section 1128(a) (42 U.S.C. 1320a-7(a)), as 
     amended by subsection (a), is amended by adding at the end 
     the following new paragraph:
       ``(4) Felony conviction relating to controlled substance.--
     Any individual or entity that has been convicted for an 
     offense which occurred after the date of the enactment of the 
     Health Insurance Portability and Accountability Act of 1996, 
     under Federal or State law, of a criminal offense consisting 
     of a felony relating to the unlawful manufacture, 
     distribution, prescription, or dispensing of a controlled 
     substance.''.
       (2) Conforming amendment.--Section 1128(b)(3) (42 U.S.C. 
     1320a-7(b)(3)) is amended--
       (A) in the heading, by striking ``Conviction'' and 
     inserting ``Misdemeanor conviction''; and
       (B) by striking ``criminal offense'' and inserting 
     ``criminal offense consisting of a misdemeanor''.

     SEC. 212. ESTABLISHMENT OF MINIMUM PERIOD OF EXCLUSION FOR 
                   CERTAIN INDIVIDUALS AND ENTITIES SUBJECT TO 
                   PERMISSIVE EXCLUSION FROM MEDICARE AND STATE 
                   HEALTH CARE PROGRAMS.

       Section 1128(c)(3) (42 U.S.C. 1320a-7(c)(3)) is amended by 
     adding at the end the following new subparagraphs:
       ``(D) In the case of an exclusion of an individual or 
     entity under paragraph (1), (2), or (3) of subsection (b), 
     the period of the exclusion shall be 3 years, unless the 
     Secretary determines in accordance with published regulations 
     that a shorter period is appropriate because of mitigating 
     circumstances or that a longer period is appropriate because 
     of aggravating circumstances.
       ``(E) In the case of an exclusion of an individual or 
     entity under subsection (b)(4) or (b)(5), the period of the 
     exclusion shall not be less than the period during which the 
     individual's or entity's license to provide health care is 
     revoked, suspended, or surrendered, or the individual or the 
     entity is excluded or suspended from a Federal or State 
     health care program.
       ``(F) In the case of an exclusion of an individual or 
     entity under subsection (b)(6)(B), the period of the 
     exclusion shall be not less than 1 year.''.

     SEC. 213. PERMISSIVE EXCLUSION OF INDIVIDUALS WITH OWNERSHIP 
                   OR CONTROL INTEREST IN SANCTIONED ENTITIES.

       Section 1128(b) (42 U.S.C. 1320a-7(b)) is amended by adding 
     at the end the following new paragraph:
       ``(15) Individuals controlling a sanctioned entity.--(A) 
     Any individual--
       ``(i) who has a direct or indirect ownership or control 
     interest in a sanctioned entity and who knows or should know 
     (as defined in section 1128A(i)(6)) of the action 
     constituting the basis for the conviction or exclusion 
     described in subparagraph (B); or
       ``(ii) who is an officer or managing employee (as defined 
     in section 1126(b)) of such an entity.
       ``(B) For purposes of subparagraph (A), the term 
     `sanctioned entity' means an entity--
       ``(i) that has been convicted of any offense described in 
     subsection (a) or in paragraph (1), (2), or (3) of this 
     subsection; or
       ``(ii) that has been excluded from participation under a 
     program under title XVIII or under a State health care 
     program.''.

     SEC. 214. SANCTIONS AGAINST PRACTITIONERS AND PERSONS FOR 
                   FAILURE TO COMPLY WITH STATUTORY OBLIGATIONS.

       (a) Minimum Period of Exclusion for Practitioners and 
     Persons Failing To Meet Statutory Obligations.--
       (1) In general.--The second sentence of section 1156(b)(1) 
     (42 U.S.C. 1320c-5(b)(1)) is amended by striking ``may 
     prescribe)'' and inserting ``may prescribe, except that such 
     period may not be less than 1 year)''.
       (2) Conforming amendment.--Section 1156(b)(2) (42 U.S.C. 
     1320c-5(b)(2)) is amended by striking ``shall remain'' and 
     inserting ``shall (subject to the minimum period specified in 
     the second sentence of paragraph (1)) remain''.
       (b) Repeal of ``Unwilling or Unable'' Condition for 
     Imposition of Sanction.--Section 1156(b)(1) (42 U.S.C. 1320c-
     5(b)(1)) is amended--
       (1) in the second sentence, by striking ``and determines'' 
     and all that follows through ``such obligations,''; and
       (2) by striking the third sentence.

     SEC. 215. INTERMEDIATE SANCTIONS FOR MEDICARE HEALTH 
                   MAINTENANCE ORGANIZATIONS.

       (a) Application of Intermediate Sanctions for any Program 
     Violations.--
       (1) In general.--Section 1876(i)(1) (42 U.S.C. 
     1395mm(i)(1)) is amended by striking ``the Secretary may 
     terminate'' and all that follows and inserting ``in 
     accordance with procedures established under paragraph (9), 
     the Secretary may at any time terminate any such contract or 
     may impose the intermediate sanctions described in paragraph 
     (6)(B) or (6)(C) (whichever is applicable) on the eligible 
     organization if the Secretary determines that the 
     organization--
       ``(A) has failed substantially to carry out the contract;
       ``(B) is carrying out the contract in a manner 
     substantially inconsistent with the efficient and effective 
     administration of this section; or
       ``(C) no longer substantially meets the applicable 
     conditions of subsections (b), (c), (e), and (f).''.
       (2) Other intermediate sanctions for miscellaneous program 
     violations.--Section 1876(i)(6) (42 U.S.C. 1395mm(i)(6)) is 
     amended by adding at the end the following new subparagraph:
       ``(C) In the case of an eligible organization for which the 
     Secretary makes a determination under paragraph (1), the 
     basis of which is not described in subparagraph (A), the 
     Secretary may apply the following intermediate sanctions:
       ``(i) Civil money penalties of not more than $25,000 for 
     each determination under paragraph (1) if the deficiency that 
     is the basis of the determination has directly adversely 
     affected (or has the substantial likelihood of adversely 
     affecting) an individual covered under the organization's 
     contract.
       ``(ii) Civil money penalties of not more than $10,000 for 
     each week beginning after the initiation of procedures by the 
     Secretary under paragraph (9) during which the deficiency 
     that is the basis of a determination under paragraph (1) 
     exists.
       ``(iii) Suspension of enrollment of individuals under this 
     section after the date the Secretary notifies the 
     organization of a determination under paragraph (1) and until 
     the Secretary is satisfied that the deficiency that is the 
     basis for the determination has been corrected and is not 
     likely to recur.''.
       (3) Procedures for imposing sanctions.--Section 1876(i) (42 
     U.S.C. 1395mm(i)) is amended by adding at the end the 
     following new paragraph:
       ``(9) The Secretary may terminate a contract with an 
     eligible organization under this section or may impose the 
     intermediate sanctions described in paragraph (6) on the 
     organization in accordance with formal investigation and 
     compliance procedures established by the Secretary under 
     which--
       ``(A) the Secretary first provides the organization with 
     the reasonable opportunity to develop and implement a 
     corrective action plan to correct the deficiencies that were 
     the basis of the Secretary's determination under paragraph 
     (1) and the organization fails to develop or implement such a 
     plan;
       ``(B) in deciding whether to impose sanctions, the 
     Secretary considers aggravating factors such as whether an 
     organization has a history of deficiencies or has not taken 
     action to correct deficiencies the Secretary has brought to 
     the organization's attention;
       ``(C) there are no unreasonable or unnecessary delays 
     between the finding of a deficiency and the imposition of 
     sanctions; and
       ``(D) the Secretary provides the organization with 
     reasonable notice and opportunity for hearing (including the 
     right to appeal an initial decision) before imposing any 
     sanction or terminating the contract.''.
       (4) Conforming amendments.--Section 1876(i)(6)(B) (42 
     U.S.C. 1395mm(i)(6)(B)) is amended by striking the second 
     sentence.
       (b) Agreements With Peer Review Organizations.--Section 
     1876(i)(7)(A) (42 U.S.C. 1395mm(i)(7)(A)) is amended by 
     striking ``an agreement'' and inserting ``a written 
     agreement''.
       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to contract years beginning on or 
     after January 1, 1997.

     SEC. 216. ADDITIONAL EXCEPTION TO ANTI-KICKBACK PENALTIES FOR 
                   RISK-SHARING ARRANGEMENTS.

       (a) In General.--Section 1128B(b)(3) (42 U.S.C. 1320a-
     7b(b)(3)) is amended--
       (1) by striking ``and'' at the end of subparagraph (D);
       (2) by striking the period at the end of subparagraph (E) 
     and inserting ``; and''; and
       (3) by adding at the end the following new subparagraph:
       ``(F) any remuneration between an organization and an 
     individual or entity providing items or services, or a 
     combination thereof, pursuant to a written agreement between 
     the organization and the individual or entity if the 
     organization is an eligible organization under section 1876 
     or if the written agreement, through a risk-sharing 
     arrangement, places the individual or entity at substantial 
     financial risk for the cost or utilization of the items or 
     services, or a combination thereof, which the individual or 
     entity is obligated to provide.''.
       (b) Negotiated Rulemaking For Risk-Sharing Exception.--
       (1) Establishment.--

[[Page H9492]]

       (A) In general.--The Secretary of Health and Human Services 
     (in this subsection referred to as the ``Secretary'') shall 
     establish, on an expedited basis and using a negotiated 
     rulemaking process under subchapter 3 of chapter 5 of title 
     5, United States Code, standards relating to the exception 
     for risk-sharing arrangements to the anti-kickback penalties 
     described in section 1128B(b)(3)(F) of the Social Security 
     Act, as added by subsection (a).
       (B) Factors to consider.--In establishing standards 
     relating to the exception for risk-sharing arrangements to 
     the anti-kickback penalties under subparagraph (A), the 
     Secretary--
       (i) shall consult with the Attorney General and 
     representatives of the hospital, physician, other health 
     practitioner, and health plan communities, and other 
     interested parties; and
       (ii) shall take into account--

       (I) the level of risk appropriate to the size and type of 
     arrangement;
       (II) the frequency of assessment and distribution of 
     incentives;
       (III) the level of capital contribution; and
       (IV) the extent to which the risk-sharing arrangement 
     provides incentives to control the cost and quality of health 
     care services.

       (2) Publication of notice.--In carrying out the rulemaking 
     process under this subsection, the Secretary shall publish 
     the notice provided for under section 564(a) of title 5, 
     United States Code, by not later than 45 days after the date 
     of the enactment of this Act.
       (3) Target date for publication of rule.--As part of the 
     notice under paragraph (2), and for purposes of this 
     subsection, the `target date for publication' (referred to in 
     section 564(a)(5) of such title) shall be January 1, 1997.
       (4) Abbreviated period for submission of comments.--In 
     applying section 564(c) of such title under this subsection, 
     `15 days' shall be substituted for `30 days'.
       (5) Appointment of negotiated rulemaking committee and 
     facilitator.--The Secretary shall provide for--
       (A) the appointment of a negotiated rulemaking committee 
     under section 565(a) of such title by not later than 30 days 
     after the end of the comment period provided for under 
     section 564(c) of such title (as shortened under paragraph 
     (4)), and
       (B) the nomination of a facilitator under section 566(c) of 
     such title by not later than 10 days after the date of 
     appointment of the committee.
       (6) Preliminary committee report.--The negotiated 
     rulemaking committee appointed under paragraph (5) shall 
     report to the Secretary, by not later than October 1, 1996, 
     regarding the committee's progress on achieving a consensus 
     with regard to the rulemaking proceeding and whether such 
     consensus is likely to occur before one month before the 
     target date for publication of the rule. If the committee 
     reports that the committee has failed to make significant 
     progress towards such consensus or is unlikely to reach such 
     consensus by the target date, the Secretary may terminate 
     such process and provide for the publication of a rule under 
     this subsection through such other methods as the Secretary 
     may provide.
       (7) Final committee report.--If the committee is not 
     terminated under paragraph (6), the rulemaking committee 
     shall submit a report containing a proposed rule by not later 
     than one month before the target publication date.
       (8) Interim, final effect.--The Secretary shall publish a 
     rule under this subsection in the Federal Register by not 
     later than the target publication date. Such rule shall be 
     effective and final immediately on an interim basis, but is 
     subject to change and revision after public notice and 
     opportunity for a period (of not less than 60 days) for 
     public comment. In connection with such rule, the Secretary 
     shall specify the process for the timely review and approval 
     of applications of entities to be certified as provider-
     sponsored organizations pursuant to such rules and consistent 
     with this subsection.
       (9) Publication of rule after public comment.--The 
     Secretary shall provide for consideration of such comments 
     and republication of such rule by not later than 1 year after 
     the target publication date.
       (c) Effective Date.--The amendments made by subsection (a) 
     shall apply to written agreements entered into on or after 
     January 1, 1997, without regard to whether regulations have 
     been issued to implement such amendments.

     SEC. 217. CRIMINAL PENALTY FOR FRAUDULENT DISPOSITION OF 
                   ASSETS IN ORDER TO OBTAIN MEDICAID BENEFITS.

       Section 1128B(a) (42 U.S.C. 1320a-7b(a)) is amended--
       (1) by striking ``or'' at the end of paragraph (4);
       (2) by adding ``or'' at the end of paragraph (5); and
       (3) by inserting after paragraph (5) the following new 
     paragraph:
       ``(6) knowingly and willfully disposes of assets (including 
     by any transfer in trust) in order for an individual to 
     become eligible for medical assistance under a State plan 
     under title XIX, if disposing of the assets results in the 
     imposition of a period of ineligibility for such assistance 
     under section 1917(c),''.

     SEC. 218. EFFECTIVE DATE.

       Except as otherwise provided, the amendments made by this 
     subtitle shall take effect January 1, 1997.
                      Subtitle C--Data Collection

     SEC. 221. ESTABLISHMENT OF THE HEALTH CARE FRAUD AND ABUSE 
                   DATA COLLECTION PROGRAM.

       (a) In General.--Title XI (42 U.S.C. 1301 et seq.), as 
     amended by sections 201 and 205, is amended by inserting 
     after section 1128D the following new section:


         ``health care fraud and abuse data collection program

       ``Sec. 1128E. (a) General Purpose.--Not later than January 
     1, 1997, the Secretary shall establish a national health care 
     fraud and abuse data collection program for the reporting of 
     final adverse actions (not including settlements in which no 
     findings of liability have been made) against health care 
     providers, suppliers, or practitioners as required by 
     subsection (b), with access as set forth in subsection (c), 
     and shall maintain a database of the information collected 
     under this section.
       ``(b) Reporting of Information.--
       ``(1) In general.--Each Government agency and health plan 
     shall report any final adverse action (not including 
     settlements in which no findings of liability have been made) 
     taken against a health care provider, supplier, or 
     practitioner.
       ``(2) Information to be reported.--The information to be 
     reported under paragraph (1) includes:
       ``(A) The name and TIN (as defined in section 7701(a)(41) 
     of the Internal Revenue Code of 1986) of any health care 
     provider, supplier, or practitioner who is the subject of a 
     final adverse action.
       ``(B) The name (if known) of any health care entity with 
     which a health care provider, supplier, or practitioner, who 
     is the subject of a final adverse action, is affiliated or 
     associated.
       ``(C) The nature of the final adverse action and whether 
     such action is on appeal.
       ``(D) A description of the acts or omissions and injuries 
     upon which the final adverse action was based, and such other 
     information as the Secretary determines by regulation is 
     required for appropriate interpretation of information 
     reported under this section.
       ``(3) Confidentiality.--In determining what information is 
     required, the Secretary shall include procedures to assure 
     that the privacy of individuals receiving health care 
     services is appropriately protected.
       ``(4) Timing and form of reporting.--The information 
     required to be reported under this subsection shall be 
     reported regularly (but not less often than monthly) and in 
     such form and manner as the Secretary prescribes. Such 
     information shall first be required to be reported on a date 
     specified by the Secretary.
       ``(5) To whom reported.--The information required to be 
     reported under this subsection shall be reported to the 
     Secretary.
       ``(c) Disclosure and Correction of Information.--
       ``(1) Disclosure.--With respect to the information about 
     final adverse actions (not including settlements in which no 
     findings of liability have been made) reported to the 
     Secretary under this section with respect to a health care 
     provider, supplier, or practitioner, the Secretary shall, by 
     regulation, provide for--
       ``(A) disclosure of the information, upon request, to the 
     health care provider, supplier, or licensed practitioner, and
       ``(B) procedures in the case of disputed accuracy of the 
     information.
       ``(2) Corrections.--Each Government agency and health plan 
     shall report corrections of information already reported 
     about any final adverse action taken against a health care 
     provider, supplier, or practitioner, in such form and manner 
     that the Secretary prescribes by regulation.
       ``(d) Access to Reported Information.--
       ``(1) Availability.--The information in the database 
     maintained under this section shall be available to Federal 
     and State government agencies and health plans pursuant to 
     procedures that the Secretary shall provide by regulation.
       ``(2) Fees for disclosure.--The Secretary may establish or 
     approve reasonable fees for the disclosure of information in 
     such database (other than with respect to requests by Federal 
     agencies). The amount of such a fee shall be sufficient to 
     recover the full costs of operating the database. Such fees 
     shall be available to the Secretary or, in the Secretary's 
     discretion to the agency designated under this section to 
     cover such costs.
       ``(e) Protection From Liability for Reporting.--No person 
     or entity, including the agency designated by the Secretary 
     in subsection (b)(5) shall be held liable in any civil action 
     with respect to any report made as required by this section, 
     without knowledge of the falsity of the information contained 
     in the report.
       ``(f) Coordination With National Practitioner Data Bank.--
     The Secretary shall implement this section in such a manner 
     as to avoid duplication with the reporting requirements 
     established for the National Practitioner Data Bank under the 
     Health Care Quality Improvement Act of 1986 (42 U.S.C. 11101 
     et seq.).
       ``(g) Definitions and Special Rules.--For purposes of this 
     section:
       ``(1) Final adverse action.--
       ``(A) In general.--The term `final adverse action' 
     includes:
       ``(i) Civil judgments against a health care provider, 
     supplier, or practitioner in Federal or State court related 
     to the delivery of a health care item or service.
       ``(ii) Federal or State criminal convictions related to the 
     delivery of a health care item or service.
       ``(iii) Actions by Federal or State agencies responsible 
     for the licensing and certification of health care providers, 
     suppliers, and licensed health care practitioners, 
     including--

       ``(I) formal or official actions, such as revocation or 
     suspension of a license (and the length of any such 
     suspension), reprimand, censure or probation,
       ``(II) any other loss of license or the right to apply for, 
     or renew, a license of the provider, supplier, or 
     practitioner, whether by operation of law, voluntary 
     surrender, non-renewability, or otherwise, or
       ``(III) any other negative action or finding by such 
     Federal or State agency that is publicly available 
     information.

       ``(iv) Exclusion from participation in Federal or State 
     health care programs (as defined in sections 1128B(f) and 
     1128(h), respectively).

[[Page H9493]]

       ``(v) Any other adjudicated actions or decisions that the 
     Secretary shall establish by regulation.
       ``(B) Exception.--The term does not include any action with 
     respect to a malpractice claim.
       ``(2) Practitioner.--The terms `licensed health care 
     practitioner', `licensed practitioner', and `practitioner' 
     mean, with respect to a State, an individual who is licensed 
     or otherwise authorized by the State to provide health care 
     services (or any individual who, without authority holds 
     himself or herself out to be so licensed or authorized).
       ``(3) Government agency.--The term `Government agency' 
     shall include:
       ``(A) The Department of Justice.
       ``(B) The Department of Health and Human Services.
       ``(C) Any other Federal agency that either administers or 
     provides payment for the delivery of health care services, 
     including, but not limited to the Department of Defense and 
     the Veterans' Administration.
       ``(D) State law enforcement agencies.
       ``(E) State medicaid fraud control units.
       ``(F) Federal or State agencies responsible for the 
     licensing and certification of health care providers and 
     licensed health care practitioners.
       ``(4) Health plan.--The term `health plan' has the meaning 
     given such term by section 1128C(c).
       ``(5) Determination of conviction.--For purposes of 
     paragraph (1), the existence of a conviction shall be 
     determined under paragraph (4) of section 1128(i).''.
       (b) Improved Prevention in Issuance of Medicare Provider 
     Numbers.--Section 1842(r) (42 U.S.C. 1395u(r)) is amended by 
     adding at the end the following new sentence: ``Under such 
     system, the Secretary may impose appropriate fees on such 
     physicians to cover the costs of investigation and 
     recertification activities with respect to the issuance of 
     the identifiers.''.
                  Subtitle D--Civil Monetary Penalties

     SEC. 231. SOCIAL SECURITY ACT CIVIL MONETARY PENALTIES.

       (a) General Civil Monetary Penalties.--Section 1128A (42 
     U.S.C. 1320a-7a) is amended as follows:
       (1) In the third sentence of subsection (a), by striking 
     ``programs under title XVIII'' and inserting ``Federal health 
     care programs (as defined in section 1128B(f)(1))''.
       (2) In subsection (f)--
       (A) by redesignating paragraph (3) as paragraph (4); and
       (B) by inserting after paragraph (2) the following new 
     paragraph:
       ``(3) With respect to amounts recovered arising out of a 
     claim under a Federal health care program (as defined in 
     section 1128B(f)), the portion of such amounts as is 
     determined to have been paid by the program shall be repaid 
     to the program, and the portion of such amounts attributable 
     to the amounts recovered under this section by reason of the 
     amendments made by the Health Insurance Portability and 
     Accountability Act of 1996 (as estimated by the Secretary) 
     shall be deposited into the Federal Hospital Insurance Trust 
     Fund pursuant to section 1817(k)(2)(C).''.
       (3) In subsection (i)--
       (A) in paragraph (2), by striking ``title V, XVIII, XIX, or 
     XX of this Act'' and inserting ``a Federal health care 
     program (as defined in section 1128B(f))'',
       (B) in paragraph (4), by striking ``a health insurance or 
     medical services program under title XVIII or XIX of this 
     Act'' and inserting ``a Federal health care program (as so 
     defined)'', and
       (C) in paragraph (5), by striking ``title V, XVIII, XIX, or 
     XX'' and inserting ``a Federal health care program (as so 
     defined)''.
       (4) By adding at the end the following new subsection:
       ``(m)(1) For purposes of this section, with respect to a 
     Federal health care program not contained in this Act, 
     references to the Secretary in this section shall be deemed 
     to be references to the Secretary or Administrator of the 
     department or agency with jurisdiction over such program and 
     references to the Inspector General of the Department of 
     Health and Human Services in this section shall be deemed to 
     be references to the Inspector General of the applicable 
     department or agency.
       ``(2)(A) The Secretary and Administrator of the departments 
     and agencies referred to in paragraph (1) may include in any 
     action pursuant to this section, claims within the 
     jurisdiction of other Federal departments or agencies as long 
     as the following conditions are satisfied:
       ``(i) The case involves primarily claims submitted to the 
     Federal health care programs of the department or agency 
     initiating the action.
       ``(ii) The Secretary or Administrator of the department or 
     agency initiating the action gives notice and an opportunity 
     to participate in the investigation to the Inspector General 
     of the department or agency with primary jurisdiction over 
     the Federal health care programs to which the claims were 
     submitted.
       ``(B) If the conditions specified in subparagraph (A) are 
     fulfilled, the Inspector General of the department or agency 
     initiating the action is authorized to exercise all powers 
     granted under the Inspector General Act of 1978 (5 U.S.C. 
     App.) with respect to the claims submitted to the other 
     departments or agencies to the same manner and extent as 
     provided in that Act with respect to claims submitted to such 
     departments or agencies.''.
       (b) Excluded Individual Retaining Ownership or Control 
     Interest in Participating Entity.--Section 1128A(a) (42 
     U.S.C. 1320a-7a(a)) is amended--
       (1) by striking ``or'' at the end of paragraph (1)(D);
       (2) by striking ``, or'' at the end of paragraph (2) and 
     inserting a semicolon;
       (3) by striking the semicolon at the end of paragraph (3) 
     and inserting ``; or''; and
       (4) by inserting after paragraph (3) the following new 
     paragraph:
       ``(4) in the case of a person who is not an organization, 
     agency, or other entity, is excluded from participating in a 
     program under title XVIII or a State health care program in 
     accordance with this subsection or under section 1128 and 
     who, at the time of a violation of this subsection--
       ``(A) retains a direct or indirect ownership or control 
     interest in an entity that is participating in a program 
     under title XVIII or a State health care program, and who 
     knows or should know of the action constituting the basis for 
     the exclusion; or
       ``(B) is an officer or managing employee (as defined in 
     section 1126(b)) of such an entity;''.
       (c) Modifications of Amounts of Penalties and 
     Assessments.--Section 1128A(a) (42 U.S.C. 1320a-7a(a)), as 
     amended by subsection (b), is amended in the matter following 
     paragraph (4)--
       (1) by striking ``$2,000'' and inserting ``$10,000'';
       (2) by inserting ``; in cases under paragraph (4), $10,000 
     for each day the prohibited relationship occurs'' after 
     ``false or misleading information was given''; and
       (3) by striking ``twice the amount'' and inserting ``3 
     times the amount''.
       (d) Clarification of Level of Knowledge Required for 
     Imposition of Civil Monetary Penalties.--
       (1) In general.--Section 1128A(a) (42 U.S.C. 1320a-7a(a)) 
     is amended--
       (A) in paragraphs (1) and (2), by inserting ``knowingly'' 
     before ``presents'' each place it appears; and
       (B) in paragraph (3), by striking ``gives'' and inserting 
     ``knowingly gives or causes to be given''.
       (2) Definition of standard.--Section 1128A(i) (42 U.S.C. 
     1320a-7a(i)), as amended by subsection (h)(2), is amended by 
     adding at the end the following new paragraph:
       ``(7) The term `should know' means that a person, with 
     respect to information--
       ``(A) acts in deliberate ignorance of the truth or falsity 
     of the information; or
       ``(B) acts in reckless disregard of the truth or falsity of 
     the information,

     and no proof of specific intent to defraud is required.''.
       (e) Claim for Item or Service Based on Incorrect Coding or 
     Medically Unnecessary Services.--Section 1128A(a)(1) (42 
     U.S.C. 1320a-7a(a)(1)), as amended by subsection (b), is 
     amended--
       (1) in subparagraph (A) by striking ``claimed,'' and 
     inserting ``claimed, including any person who engages in a 
     pattern or practice of presenting or causing to be presented 
     a claim for an item or service that is based on a code that 
     the person knows or should know will result in a greater 
     payment to the person than the code the person knows or 
     should know is applicable to the item or service actually 
     provided,'';
       (2) in subparagraph (C), by striking ``or'' at the end;
       (3) in subparagraph (D), by striking the semicolon and 
     inserting ``, or''; and
       (4) by inserting after subparagraph (D) the following new 
     subparagraph:
       ``(E) is for a pattern of medical or other items or 
     services that a person knows or should know are not medically 
     necessary;''.
       (f) Sanctions Against Practitioners and Persons for Failure 
     To Comply With Statutory Obligations.--Section 1156(b)(3) (42 
     U.S.C. 1320c-5(b)(3)) is amended by striking ``the actual or 
     estimated cost'' and inserting ``up to $10,000 for each 
     instance''.
       (g) Procedural Provisions.--Section 1876(i)(6) (42 U.S.C. 
     1395mm(i)(6)), as amended by section 215(a)(2), is amended by 
     adding at the end the following new subparagraph:
       ``(D) The provisions of section 1128A (other than 
     subsections (a) and (b)) shall apply to a civil money penalty 
     under subparagraph (B)(i) or (C)(i) in the same manner as 
     such provisions apply to a civil money penalty or proceeding 
     under section 1128A(a).''.
       (h) Prohibition Against Offering Inducements to Individuals 
     Enrolled Under Programs or Plans.--
       (1) Offer of remuneration.--Section 1128A(a) (42 U.S.C. 
     1320a-7a(a)), as amended by subsection (b), is amended--
       (A) by striking ``or'' at the end of paragraph (3);
       (B) by striking the semicolon at the end of paragraph (4) 
     and inserting ``; or''; and
       (D) by inserting after paragraph (4) the following new 
     paragraph:
       ``(5) offers to or transfers remuneration to any individual 
     eligible for benefits under title XVIII of this Act, or under 
     a State health care program (as defined in section 1128(h)) 
     that such person knows or should know is likely to influence 
     such individual to order or receive from a particular 
     provider, practitioner, or supplier any item or service for 
     which payment may be made, in whole or in part, under title 
     XVIII, or a State health care program (as so defined);''.
       (2) Remuneration defined.--Section 1128A(i) (42 U.S.C. 
     1320a-7a(i)) is amended by adding at the end the following 
     new paragraph:
       ``(6) The term `remuneration' includes the waiver of 
     coinsurance and deductible amounts (or any part thereof), and 
     transfers of items or services for free or for other than 
     fair market value. The term `remuneration' does not include--
       ``(A) the waiver of coinsurance and deductible amounts by a 
     person, if--
       ``(i) the waiver is not offered as part of any 
     advertisement or solicitation;
       ``(ii) the person does not routinely waive coinsurance or 
     deductible amounts; and
       ``(iii) the person--

[[Page H9494]]

       ``(I) waives the coinsurance and deductible amounts after 
     determining in good faith that the individual is in financial 
     need;
       ``(II) fails to collect coinsurance or deductible amounts 
     after making reasonable collection efforts; or
       ``(III) provides for any permissible waiver as specified in 
     section 1128B(b)(3) or in regulations issued by the 
     Secretary;

       ``(B) differentials in coinsurance and deductible amounts 
     as part of a benefit plan design as long as the differentials 
     have been disclosed in writing to all beneficiaries, third 
     party payers, and providers, to whom claims are presented and 
     as long as the differentials meet the standards as defined in 
     regulations promulgated by the Secretary not later than 180 
     days after the date of the enactment of the Health Insurance 
     Portability and Accountability Act of 1996; or
       ``(C) incentives given to individuals to promote the 
     delivery of preventive care as determined by the Secretary in 
     regulations so promulgated.''.
       (i) Effective Date.--The amendments made by this section 
     shall apply to acts or omissions occurring on or after 
     January 1, 1997.

     SEC. 232. PENALTY FOR FALSE CERTIFICATION FOR HOME HEALTH 
                   SERVICES.

       (a) In General.--Section 1128A(b) (42 U.S.C. 1320a-7a(b)) 
     is amended by adding at the end the following new paragraph:
       ``(3)(A) Any physician who executes a document described in 
     subparagraph (B) with respect to an individual knowing that 
     all of the requirements referred to in such subparagraph are 
     not met with respect to the individual shall be subject to a 
     civil monetary penalty of not more than the greater of--
       ``(i) $5,000, or
       ``(ii) three times the amount of the payments under title 
     XVIII for home health services which are made pursuant to 
     such certification.
       ``(B) A document described in this subparagraph is any 
     document that certifies, for purposes of title XVIII, that an 
     individual meets the requirements of section 1814(a)(2)(C) or 
     1835(a)(2)(A) in the case of home health services furnished 
     to the individual.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to certifications made on or after the date of 
     the enactment of this Act.
                 Subtitle E--Revisions to Criminal Law

     SEC. 241. DEFINITIONS RELATING TO FEDERAL HEALTH CARE 
                   OFFENSE.

       (a) In General.--Chapter 1 of title 18, United States Code, 
     is amended by adding at the end the following:

     ``Sec. 24. Definitions relating to Federal health care 
       offense

       ``(a) As used in this title, the term `Federal health care 
     offense' means a violation of, or a criminal conspiracy to 
     violate--
       ``(1) section 669, 1035, 1347, or 1518 of this title;
       ``(2) section 287, 371, 664, 666, 1001, 1027, 1341, 1343, 
     or 1954 of this title, if the violation or conspiracy relates 
     to a health care benefit program.
       ``(b) As used in this title, the term `health care benefit 
     program' means any public or private plan or contract, 
     affecting commerce, under which any medical benefit, item, or 
     service is provided to any individual, and includes any 
     individual or entity who is providing a medical benefit, 
     item, or service for which payment may be made under the plan 
     or contract.''.
       (b) Clerical Amendment.--The table of sections at the 
     beginning of chapter 2 of title 18, United States Code, is 
     amended by inserting after the item relating to section 23 
     the following new item:
``24. Definitions relating to Federal health care offense.''.

     SEC. 242. HEALTH CARE FRAUD.

       (a) Offense.--
       (1) In general.--Chapter 63 of title 18, United States 
     Code, is amended by adding at the end the following:

     ``Sec. 1347. Health care fraud

       ``Whoever knowingly and willfully executes, or attempts to 
     execute, a scheme or artifice--
       ``(1) to defraud any health care benefit program; or
       ``(2) to obtain, by means of false or fraudulent pretenses, 
     representations, or promises, any of the money or property 
     owned by, or under the custody or control of, any health care 
     benefit program,

     in connection with the delivery of or payment for health care 
     benefits, items, or services, shall be fined under this title 
     or imprisoned not more than 10 years, or both. If the 
     violation results in serious bodily injury (as defined in 
     section 1365 of this title), such person shall be fined under 
     this title or imprisoned not more than 20 years, or both; and 
     if the violation results in death, such person shall be fined 
     under this title, or imprisoned for any term of years or for 
     life, or both.''.
       (2) Clerical amendment.--The table of sections at the 
     beginning of chapter 63 of title 18, United States Code, is 
     amended by adding at the end the following:
``1347. Health care fraud.''.
       (b) Criminal Fines Deposited in Federal Hospital Insurance 
     Trust Fund.--The Secretary of the Treasury shall deposit into 
     the Federal Hospital Insurance Trust Fund pursuant to section 
     1817(k)(2)(C) of the Social Security Act (42 U.S.C. 1395i) an 
     amount equal to the criminal fines imposed under section 1347 
     of title 18, United States Code (relating to health care 
     fraud).

     SEC. 243. THEFT OR EMBEZZLEMENT.

       (a) In General.--Chapter 31 of title 18, United States 
     Code, is amended by adding at the end the following:

     ``Sec. 669. Theft or embezzlement in connection with health 
       care

       ``(a) Whoever knowingly and willfully embezzles, steals, or 
     otherwise without authority converts to the use of any person 
     other than the rightful owner, or intentionally misapplies 
     any of the moneys, funds, securities, premiums, credits, 
     property, or other assets of a health care benefit program, 
     shall be fined under this title or imprisoned not more than 
     10 years, or both; but if the value of such property does not 
     exceed the sum of $100 the defendant shall be fined under 
     this title or imprisoned not more than one year, or both.
       ``(b) As used in this section, the term `health care 
     benefit program' has the meaning given such term in section 
     1347(b) of this title.''.
       (b) Clerical Amendment.--The table of sections at the 
     beginning of chapter 31 of title 18, United States Code, is 
     amended by adding at the end the following:
``669. Theft or embezzlement in connection with health care.''.

     SEC. 244. FALSE STATEMENTS.

       (a) In General.--Chapter 47 of title 18, United States 
     Code, is amended by adding at the end the following:

     ``Sec. 1035. False statements relating to health care matters

       ``(a) Whoever, in any matter involving a health care 
     benefit program, knowingly and willfully--
       ``(1) falsifies, conceals, or covers up by any trick, 
     scheme, or device a material fact; or
       ``(2) makes any materially false, fictitious, or fraudulent 
     statements or representations, or makes or uses any 
     materially false writing or document knowing the same to 
     contain any materially false, fictitious, or fraudulent 
     statement or entry,

     in connection with the delivery of or payment for health care 
     benefits, items, or services, shall be fined under this title 
     or imprisoned not more than 5 years, or both.
       ``(b) As used in this section, the term `health care 
     benefit program' has the meaning given such term in section 
     1347(b) of this title.''.
       (b) Clerical Amendment.--The table of sections at the 
     beginning of chapter 47 of title 18, United States Code, is 
     amended by adding at the end the following new item:
``1035. False statements relating to health care matters.''.

     SEC. 245. OBSTRUCTION OF CRIMINAL INVESTIGATIONS OF HEALTH 
                   CARE OFFENSES.

       (a) In General.--Chapter 73 of title 18, United States 
     Code, is amended by adding at the end the following:

     ``Sec. 1518. Obstruction of criminal investigations of health 
       care offenses

       ``(a) Whoever willfully prevents, obstructs, misleads, 
     delays or attempts to prevent, obstruct, mislead, or delay 
     the communication of information or records relating to a 
     violation of a Federal health care offense to a criminal 
     investigator shall be fined under this title or imprisoned 
     not more than 5 years, or both.
       ``(b) As used in this section the term `criminal 
     investigator' means any individual duly authorized by a 
     department, agency, or armed force of the United States to 
     conduct or engage in investigations for prosecutions for 
     violations of health care offenses.''.
       (b) Clerical Amendment.--The table of sections at the 
     beginning of chapter 73 of title 18, United States Code, is 
     amended by adding at the end the following new item:
``1518. Obstruction of criminal investigations of health care 
              offenses.''.

     SEC. 246. LAUNDERING OF MONETARY INSTRUMENTS.

       Section 1956(c)(7) of title 18, United States Code, is 
     amended by adding at the end the following:
       ``(F) Any act or activity constituting an offense involving 
     a Federal health care offense.''.

     SEC. 247. INJUNCTIVE RELIEF RELATING TO HEALTH CARE OFFENSES.

       (a) In General.--Section 1345(a)(1) of title 18, United 
     States Code, is amended--
       (1) by striking ``or'' at the end of subparagraph (A);
       (2) by inserting ``or'' at the end of subparagraph (B); and
       (3) by adding at the end the following:
       ``(C) committing or about to commit a Federal health care 
     offense.''.
       (b) Freezing of Assets.--Section 1345(a)(2) of title 18, 
     United States Code, is amended by inserting ``or a Federal 
     health care offense'' after ``title)''.

     SEC. 248. AUTHORIZED INVESTIGATIVE DEMAND PROCEDURES.

       (a) In General.--Chapter 223 of title 18, United States 
     Code, is amended by adding after section 3485 the following:

     ``Sec. 3486. Authorized investigative demand procedures

       ``(a) Authorization.--(1) In any investigation relating to 
     any act or activity involving a Federal health care offense, 
     the Attorney General or the Attorney General's designee may 
     issue in writing and cause to be served a subpoena--
       ``(A) requiring the production of any records (including 
     any books, papers, documents, electronic media, or other 
     objects or tangible things), which may be relevant to an 
     authorized law enforcement inquiry, that a person or legal 
     entity may possess or have care, custody, or control; or
       ``(B) requiring a custodian of records to give testimony 
     concerning the production and authentication of such records.
       ``(2) A subpoena under this subsection shall describe the 
     objects required to be produced and prescribe a return date 
     within a reasonable period of time within which the objects 
     can be assembled and made available.
       ``(3) The production of records shall not be required under 
     this section at any place more than 500 miles distant from 
     the place where the

[[Page H9495]]

     subpoena for the production of such records is served.
       ``(4) Witnesses summoned under this section shall be paid 
     the same fees and mileage that are paid witnesses in the 
     courts of the United States.
       ``(b) Service.--A subpoena issued under this section may be 
     served by any person who is at least 18 years of age and is 
     designated in the subpoena to serve it. Service upon a 
     natural person may be made by personal delivery of the 
     subpoena to him. Service may be made upon a domestic or 
     foreign corporation or upon a partnership or other 
     unincorporated association which is subject to suit under a 
     common name, by delivering the subpoena to an officer, to a 
     managing or general agent, or to any other agent authorized 
     by appointment or by law to receive service of process. The 
     affidavit of the person serving the subpoena entered on a 
     true copy thereof by the person serving it shall be proof of 
     service.
       ``(c) Enforcement.--In the case of contumacy by or refusal 
     to obey a subpoena issued to any person, the Attorney General 
     may invoke the aid of any court of the United States within 
     the jurisdiction of which the investigation is carried on or 
     of which the subpoenaed person is an inhabitant, or in which 
     he carries on business or may be found, to compel compliance 
     with the subpoena. The court may issue an order requiring the 
     subpoenaed person to appear before the Attorney General to 
     produce records, if so ordered, or to give testimony 
     concerning the production and authentication of such records. 
     Any failure to obey the order of the court may be punished by 
     the court as a contempt thereof. All process in any such case 
     may be served in any judicial district in which such person 
     may be found.
       ``(d) Immunity From Civil Liability.--Notwithstanding any 
     Federal, State, or local law, any person, including officers, 
     agents, and employees, receiving a summons under this 
     section, who complies in good faith with the summons and thus 
     produces the materials sought, shall not be liable in any 
     court of any State or the United States to any customer or 
     other person for such production or for nondisclosure of that 
     production to the customer.
       ``(e) Limitation on Use.--(1) Health information about an 
     individual that is disclosed under this section may not be 
     used in, or disclosed to any person for use in, any 
     administrative, civil, or criminal action or investigation 
     directed against the individual who is the subject of the 
     information unless the action or investigation arises out of 
     and is directly related to receipt of health care or payment 
     for health care or action involving a fraudulent claim 
     related to health; or if authorized by an appropriate order 
     of a court of competent jurisdiction, granted after 
     application showing good cause therefor.
       ``(2) In assessing good cause, the court shall weigh the 
     public interest and the need for disclosure against the 
     injury to the patient, to the physician-patient relationship, 
     and to the treatment services.
       ``(3) Upon the granting of such order, the court, in 
     determining the extent to which any disclosure of all or any 
     part of any record is necessary, shall impose appropriate 
     safeguards against unauthorized disclosure.''.
       (b) Clerical Amendment.--The table of sections at the 
     beginning of chapter 223 of title 18, United States Code, is 
     amended by inserting after the item relating to section 3485 
     the following new item:
``3486. Authorized investigative demand procedures.''.
       (c) Conforming Amendment.--Section 1510(b)(3)(B) of title 
     18, United States Code, is amended by inserting ``or a 
     Department of Justice subpoena (issued under section 3486 of 
     title 18),'' after ``subpoena''.

     SEC. 249. FORFEITURES FOR FEDERAL HEALTH CARE OFFENSES.

       (a) In General.--Section 982(a) of title 18, United States 
     Code, is amended by adding after paragraph (5) the following 
     new paragraph:
       ``(6) The court, in imposing sentence on a person convicted 
     of a Federal health care offense, shall order the person to 
     forfeit property, real or personal, that constitutes or is 
     derived, directly or indirectly, from gross proceeds 
     traceable to the commission of the offense.''.
       (b) Conforming Amendment.--Section 982(b)(1)(A) of title 
     18, United States Code, is amended by inserting ``or (a)(6)'' 
     after ``(a)(1)''.
       (c) Property Forfeited Deposited in Federal Hospital 
     Insurance Trust Fund.--
       (1) In general.--After the payment of the costs of asset 
     forfeiture has been made and after all restoration payments 
     (if any) have been made, and notwithstanding any other 
     provision of law, the Secretary of the Treasury shall deposit 
     into the Federal Hospital Insurance Trust Fund pursuant to 
     section 1817(k)(2)(C) of the Social Security Act, as added by 
     section 301(b), an amount equal to the net amount realized 
     from the forfeiture of property by reason of a Federal health 
     care offense pursuant to section 982(a)(6) of title 18, 
     United States Code.
       (2) Costs of asset forfeiture.--For purposes of paragraph 
     (1), the term ``payment of the costs of asset forfeiture'' 
     means--
       (A) the payment, at the discretion of the Attorney General, 
     of any expenses necessary to seize, detain, inventory, 
     safeguard, maintain, advertise, sell, or dispose of property 
     under seizure, detention, or forfeited, or of any other 
     necessary expenses incident to the seizure, detention, 
     forfeiture, or disposal of such property, including payment 
     for--
       (i) contract services;
       (ii) the employment of outside contractors to operate and 
     manage properties or provide other specialized services 
     necessary to dispose of such properties in an effort to 
     maximize the return from such properties; and
       (iii) reimbursement of any Federal, State, or local agency 
     for any expenditures made to perform the functions described 
     in this subparagraph;
       (B) at the discretion of the Attorney General, the payment 
     of awards for information or assistance leading to a civil or 
     criminal forfeiture involving any Federal agency 
     participating in the Health Care Fraud and Abuse Control 
     Account;
       (C) the compromise and payment of valid liens and mortgages 
     against property that has been forfeited, subject to the 
     discretion of the Attorney General to determine the validity 
     of any such lien or mortgage and the amount of payment to be 
     made, and the employment of attorneys and other personnel 
     skilled in State real estate law as necessary;
       (D) payment authorized in connection with remission or 
     mitigation procedures relating to property forfeited; and
       (E) the payment of State and local property taxes on 
     forfeited real property that accrued between the date of the 
     violation giving rise to the forfeiture and the date of the 
     forfeiture order.
       (3) Restoration payment.--Notwithstanding any other 
     provision of law, if the Federal health care offense referred 
     to in paragraph (1) resulted in a loss to an employee welfare 
     benefit plan within the meaning of section 3(1) of the 
     Employee Retirement Income Security Act of 1974, the 
     Secretary of the Treasury shall transfer to such employee 
     welfare benefit plan, from the amount realized from the 
     forfeiture of property referred to in paragraph (1), an 
     amount equal to such loss. For purposes of paragraph (1), the 
     term `restoration payment' means the amount transferred to an 
     employee welfare benefit plan pursuant to this paragraph.''.

     SEC. 250. RELATION TO ERISA AUTHORITY.

       Nothing in this subtitle shall be construed as affecting 
     the authority of the Secretary of Labor under section 506(b) 
     of the Employee Retirement Income Security Act of 1974, 
     including the Secretary's authority with respect to 
     violations of title 18, United States Code (as amended by 
     this subtitle).
               Subtitle F--Administrative Simplification

     SEC. 261. PURPOSE.

       It is the purpose of this subtitle to improve the medicare 
     program under title XVIII of the Social Security Act, the 
     medicaid program under title XIX of such Act, and the 
     efficiency and effectiveness of the health care system, by 
     encouraging the development of a health information system 
     through the establishment of standards and requirements for 
     the electronic transmission of certain health information.

     SEC. 262. ADMINISTRATIVE SIMPLIFICATION.

       (a) In General.--Title XI (42 U.S.C. 1301 et seq.) is 
     amended by adding at the end the following:

                ``Part C--Administrative Simplification


                             ``definitions

       ``Sec. 1171. For purposes of this part:
       ``(1) Code set.--The term `code set' means any set of codes 
     used for encoding data elements, such as tables of terms, 
     medical concepts, medical diagnostic codes, or medical 
     procedure codes.
       ``(2) Health care clearinghouse.--The term `health care 
     clearinghouse' means a public or private entity that 
     processes or facilitates the processing of nonstandard data 
     elements of health information into standard data elements.
       ``(3) Health care provider.--The term `health care 
     provider' includes a provider of services (as defined in 
     section 1861(u)), a provider of medical or other health 
     services (as defined in section 1861(s)), and any other 
     person furnishing health care services or supplies.
       ``(4) Health information.--The term `health information' 
     means any information, whether oral or recorded in any form 
     or medium, that--
       ``(A) is created or received by a health care provider, 
     health plan, public health authority, employer, life insurer, 
     school or university, or health care clearinghouse; and
       ``(B) relates to the past, present, or future physical or 
     mental health or condition of an individual, the provision of 
     health care to an individual, or the past, present, or future 
     payment for the provision of health care to an individual.
       ``(5) Health plan.--The term `health plan' means an 
     individual or group plan that provides, or pays the cost of, 
     medical care (as such term is defined in section 2791 of the 
     Public Health Service Act). Such term includes the following, 
     and any combination thereof:
       ``(A) A group health plan (as defined in section 2791(a) of 
     the Public Health Service Act), but only if the plan--
       ``(i) has 50 or more participants (as defined in section 
     3(7) of the Employee Retirement Income Security Act of 1974); 
     or
       ``(ii) is administered by an entity other than the employer 
     who established and maintains the plan.
       ``(B) A health insurance issuer (as defined in section 
     2791(b) of the Public Health Service Act).
       ``(C) A health maintenance organization (as defined in 
     section 2791(b) of the Public Health Service Act).
       ``(D) Part A or part B of the medicare program under title 
     XVIII.
       ``(E) The medicaid program under title XIX.
       ``(F) A medicare supplemental policy (as defined in section 
     1882(g)(1)).
       ``(G) A long-term care policy, including a nursing home 
     fixed indemnity policy (unless the Secretary determines that 
     such a policy does not provide sufficiently comprehensive 
     coverage of a benefit so that the policy should be treated as 
     a health plan).
       ``(H) An employee welfare benefit plan or any other 
     arrangement which is established or maintained for the 
     purpose of offering or providing health benefits to the 
     employees of 2 or more employers.
       ``(I) The health care program for active military personnel 
     under title 10, United States Code.

[[Page H9496]]

       ``(J) The veterans health care program under chapter 17 of 
     title 38, United States Code.
       ``(K) The Civilian Health and Medical Program of the 
     Uniformed Services (CHAMPUS), as defined in section 1072(4) 
     of title 10, United States Code.
       ``(L) The Indian health service program under the Indian 
     Health Care Improvement Act (25 U.S.C. 1601 et seq.).
       ``(M) The Federal Employees Health Benefit Plan under 
     chapter 89 of title 5, United States Code.
       ``(6) Individually identifiable health information.--The 
     term `individually identifiable health information' means any 
     information, including demographic information collected from 
     an individual, that--
       ``(A) is created or received by a health care provider, 
     health plan, employer, or health care clearinghouse; and
       ``(B) relates to the past, present, or future physical or 
     mental health or condition of an individual, the provision of 
     health care to an individual, or the past, present, or future 
     payment for the provision of health care to an individual, 
     and--
       ``(i) identifies the individual; or
       ``(ii) with respect to which there is a reasonable basis to 
     believe that the information can be used to identify the 
     individual.
       ``(7) Standard.--The term `standard', when used with 
     reference to a data element of health information or a 
     transaction referred to in section 1173(a)(1), means any such 
     data element or transaction that meets each of the standards 
     and implementation specifications adopted or established by 
     the Secretary with respect to the data element or transaction 
     under sections 1172 through 1174.
       ``(8) Standard setting organization.--The term `standard 
     setting organization' means a standard setting organization 
     accredited by the American National Standards Institute, 
     including the National Council for Prescription Drug 
     Programs, that develops standards for information 
     transactions, data elements, or any other standard that is 
     necessary to, or will facilitate, the implementation of this 
     part.


            ``general requirements for adoption of standards

       ``Sec. 1172. (a) Applicability.--Any standard adopted under 
     this part shall apply, in whole or in part, to the following 
     persons:
       ``(1) A health plan.
       ``(2) A health care clearinghouse.
       ``(3) A health care provider who transmits any health 
     information in electronic form in connection with a 
     transaction referred to in section 1173(a)(1).
       ``(b) Reduction of Costs.--Any standard adopted under this 
     part shall be consistent with the objective of reducing the 
     administrative costs of providing and paying for health care.
       ``(c) Role of Standard Setting Organizations.--
       ``(1) In general.--Except as provided in paragraph (2), any 
     standard adopted under this part shall be a standard that has 
     been developed, adopted, or modified by a standard setting 
     organization.
       ``(2) Special rules.--
       ``(A) Different standards.--The Secretary may adopt a 
     standard that is different from any standard developed, 
     adopted, or modified by a standard setting organization, if--
       ``(i) the different standard will substantially reduce 
     administrative costs to health care providers and health 
     plans compared to the alternatives; and
       ``(ii) the standard is promulgated in accordance with the 
     rulemaking procedures of subchapter III of chapter 5 of title 
     5, United States Code.
       ``(B) No standard by standard setting organization.--If no 
     standard setting organization has developed, adopted, or 
     modified any standard relating to a standard that the 
     Secretary is authorized or required to adopt under this 
     part--
       ``(i) paragraph (1) shall not apply; and
       ``(ii) subsection (f) shall apply.
       ``(3) Consultation requirement.--
       ``(A) In general.--A standard may not be adopted under this 
     part unless--
       ``(i) in the case of a standard that has been developed, 
     adopted, or modified by a standard setting organization, the 
     organization consulted with each of the organizations 
     described in subparagraph (B) in the course of such 
     development, adoption, or modification; and
       ``(ii) in the case of any other standard, the Secretary, in 
     complying with the requirements of subsection (f), consulted 
     with each of the organizations described in subparagraph (B) 
     before adopting the standard.
       ``(B) Organizations described.--The organizations referred 
     to in subparagraph (A) are the following:
       ``(i) The National Uniform Billing Committee.
       ``(ii) The National Uniform Claim Committee.
       ``(iii) The Workgroup for Electronic Data Interchange.
       ``(iv) The American Dental Association.
       ``(d) Implementation Specifications.--The Secretary shall 
     establish specifications for implementing each of the 
     standards adopted under this part.
       ``(e) Protection of Trade Secrets.--Except as otherwise 
     required by law, a standard adopted under this part shall not 
     require disclosure of trade secrets or confidential 
     commercial information by a person required to comply with 
     this part.
       ``(f) Assistance to the Secretary.--In complying with the 
     requirements of this part, the Secretary shall rely on the 
     recommendations of the National Committee on Vital and Health 
     Statistics established under section 306(k) of the Public 
     Health Service Act (42 U.S.C. 242k(k)), and shall consult 
     with appropriate Federal and State agencies and private 
     organizations. The Secretary shall publish in the Federal 
     Register any recommendation of the National Committee on 
     Vital and Health Statistics regarding the adoption of a 
     standard under this part.
       ``(g) Application to Modifications of Standards.--This 
     section shall apply to a modification to a standard 
     (including an addition to a standard) adopted under section 
     1174(b) in the same manner as it applies to an initial 
     standard adopted under section 1174(a).


       ``standards for information transactions and data elements

       ``Sec. 1173. (a) Standards to Enable Electronic Exchange.--
       ``(1) In general.--The Secretary shall adopt standards for 
     transactions, and data elements for such transactions, to 
     enable health information to be exchanged electronically, 
     that are appropriate for--
       ``(A) the financial and administrative transactions 
     described in paragraph (2); and
       ``(B) other financial and administrative transactions 
     determined appropriate by the Secretary, consistent with the 
     goals of improving the operation of the health care system 
     and reducing administrative costs.
       ``(2) Transactions.--The transactions referred to in 
     paragraph (1)(A) are transactions with respect to the 
     following:
       ``(A) Health claims or equivalent encounter information.
       ``(B) Health claims attachments.
       ``(C) Enrollment and disenrollment in a health plan.
       ``(D) Eligibility for a health plan.
       ``(E) Health care payment and remittance advice.
       ``(F) Health plan premium payments.
       ``(G) First report of injury.
       ``(H) Health claim status.
       ``(I) Referral certification and authorization.
       ``(3) Accommodation of specific providers.--The standards 
     adopted by the Secretary under paragraph (1) shall 
     accommodate the needs of different types of health care 
     providers.
       ``(b) Unique Health Identifiers.--
       ``(1) In general.--The Secretary shall adopt standards 
     providing for a standard unique health identifier for each 
     individual, employer, health plan, and health care provider 
     for use in the health care system. In carrying out the 
     preceding sentence for each health plan and health care 
     provider, the Secretary shall take into account multiple uses 
     for identifiers and multiple locations and specialty 
     classifications for health care providers.
       ``(2) Use of identifiers.--The standards adopted under 
     paragraphs (1) shall specify the purposes for which a unique 
     health identifier may be used.
       ``(c) Code Sets.--
       ``(1) In general.--The Secretary shall adopt standards 
     that--
       ``(A) select code sets for appropriate data elements for 
     the transactions referred to in subsection (a)(1) from among 
     the code sets that have been developed by private and public 
     entities; or
       ``(B) establish code sets for such data elements if no code 
     sets for the data elements have been developed.
       ``(2) Distribution.--The Secretary shall establish 
     efficient and low-cost procedures for distribution (including 
     electronic distribution) of code sets and modifications made 
     to such code sets under section 1174(b).
       ``(d) Security Standards for Health Information.--
       ``(1) Security standards.--The Secretary shall adopt 
     security standards that--
       ``(A) take into account--
       ``(i) the technical capabilities of record systems used to 
     maintain health information;
       ``(ii) the costs of security measures;
       ``(iii) the need for training persons who have access to 
     health information;
       ``(iv) the value of audit trails in computerized record 
     systems; and
       ``(v) the needs and capabilities of small health care 
     providers and rural health care providers (as such providers 
     are defined by the Secretary); and
       ``(B) ensure that a health care clearinghouse, if it is 
     part of a larger organization, has policies and security 
     procedures which isolate the activities of the health care 
     clearinghouse with respect to processing information in a 
     manner that prevents unauthorized access to such information 
     by such larger organization.
       ``(2) Safeguards.--Each person described in section 1172(a) 
     who maintains or transmits health information shall maintain 
     reasonable and appropriate administrative, technical, and 
     physical safeguards--
       ``(A) to ensure the integrity and confidentiality of the 
     information;
       ``(B) to protect against any reasonably anticipated--
       ``(i) threats or hazards to the security or integrity of 
     the information; and
       ``(ii) unauthorized uses or disclosures of the information; 
     and
       ``(C) otherwise to ensure compliance with this part by the 
     officers and employees of such person.
       ``(e) Electronic Signature.--
       ``(1) Standards.--The Secretary, in coordination with the 
     Secretary of Commerce, shall adopt standards specifying 
     procedures for the electronic transmission and authentication 
     of signatures with respect to the transactions referred to in 
     subsection (a)(1).
       ``(2) Effect of compliance.--Compliance with the standards 
     adopted under paragraph (1) shall be deemed to satisfy 
     Federal and State statutory requirements for written 
     signatures with respect to the transactions referred to in 
     subsection (a)(1).
       ``(f) Transfer of Information Among Health Plans.--The 
     Secretary shall adopt standards for transferring among health 
     plans

[[Page H9497]]

     appropriate standard data elements needed for the 
     coordination of benefits, the sequential processing of 
     claims, and other data elements for individuals who have more 
     than one health plan.


                 ``timetables for adoption of standards

       ``Sec. 1174. (a) Initial Standards.--The Secretary shall 
     carry out section 1173 not later than 18 months after the 
     date of the enactment of the Health Insurance Portability and 
     Accountability Act of 1996, except that standards relating to 
     claims attachments shall be adopted not later than 30 months 
     after such date.
       ``(b) Additions and Modifications to Standards.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     Secretary shall review the standards adopted under section 
     1173, and shall adopt modifications to the standards 
     (including additions to the standards), as determined 
     appropriate, but not more frequently than once every 12 
     months. Any addition or modification to a standard shall be 
     completed in a manner which minimizes the disruption and cost 
     of compliance.
       ``(2) Special rules.--
       ``(A) First 12-month period.--Except with respect to 
     additions and modifications to code sets under subparagraph 
     (B), the Secretary may not adopt any modification to a 
     standard adopted under this part during the 12-month period 
     beginning on the date the standard is initially adopted, 
     unless the Secretary determines that the modification is 
     necessary in order to permit compliance with the standard.
       ``(B) Additions and modifications to code sets.--
       ``(i) In general.--The Secretary shall ensure that 
     procedures exist for the routine maintenance, testing, 
     enhancement, and expansion of code sets.
       ``(ii) Additional rules.--If a code set is modified under 
     this subsection, the modified code set shall include 
     instructions on how data elements of health information that 
     were encoded prior to the modification may be converted or 
     translated so as to preserve the informational value of the 
     data elements that existed before the modification. Any 
     modification to a code set under this subsection shall be 
     implemented in a manner that minimizes the disruption and 
     cost of complying with such modification.


                             ``requirements

       ``Sec. 1175. (a) Conduct of Transactions by Plans.--
       ``(1) In general.--If a person desires to conduct a 
     transaction referred to in section 1173(a)(1) with a health 
     plan as a standard transaction--
       ``(A) the health plan may not refuse to conduct such 
     transaction as a standard transaction;
       ``(B) the insurance plan may not delay such transaction, or 
     otherwise adversely affect, or attempt to adversely affect, 
     the person or the transaction on the ground that the 
     transaction is a standard transaction; and
       ``(C) the information transmitted and received in 
     connection with the transaction shall be in the form of 
     standard data elements of health information.
       ``(2) Satisfaction of requirements.--A health plan may 
     satisfy the requirements under paragraph (1) by--
       ``(A) directly transmitting and receiving standard data 
     elements of health information; or
       ``(B) submitting nonstandard data elements to a health care 
     clearinghouse for processing into standard data elements and 
     transmission by the health care clearinghouse, and receiving 
     standard data elements through the health care clearinghouse.
       ``(3) Timetable for compliance.--Paragraph (1) shall not be 
     construed to require a health plan to comply with any 
     standard, implementation specification, or modification to a 
     standard or specification adopted or established by the 
     Secretary under sections 1172 through 1174 at any time prior 
     to the date on which the plan is required to comply with the 
     standard or specification under subsection (b).
       ``(b) Compliance With Standards.--
       ``(1) Initial compliance.--
       ``(A) In general.--Not later than 24 months after the date 
     on which an initial standard or implementation specification 
     is adopted or established under sections 1172 and 1173, each 
     person to whom the standard or implementation specification 
     applies shall comply with the standard or specification.
       ``(B) Special rule for small health plans.--In the case of 
     a small health plan, paragraph (1) shall be applied by 
     substituting `36 months' for `24 months'. For purposes of 
     this subsection, the Secretary shall determine the plans that 
     qualify as small health plans.
       ``(2) Compliance With modified standards.--If the Secretary 
     adopts a modification to a standard or implementation 
     specification under this part, each person to whom the 
     standard or implementation specification applies shall comply 
     with the modified standard or implementation specification at 
     such time as the Secretary determines appropriate, taking 
     into account the time needed to comply due to the nature and 
     extent of the modification. The time determined appropriate 
     under the preceding sentence may not be earlier than the last 
     day of the 180-day period beginning on the date such 
     modification is adopted. The Secretary may extend the time 
     for compliance for small health plans, if the Secretary 
     determines that such extension is appropriate.
       ``(3) Construction.--Nothing in this subsection shall be 
     construed to prohibit any person from complying with a 
     standard or specification by--
       ``(A) submitting nonstandard data elements to a health care 
     clearinghouse for processing into standard data elements and 
     transmission by the health care clearinghouse; or
       ``(B) receiving standard data elements through a health 
     care clearinghouse.


``general penalty for failure to comply with requirements and standards

       ``Sec. 1176. (a) General Penalty.--
       ``(1) In general.--Except as provided in subsection (b), 
     the Secretary shall impose on any person who violates a 
     provision of this part a penalty of not more than $100 for 
     each such violation, except that the total amount imposed on 
     the person for all violations of an identical requirement or 
     prohibition during a calendar year may not exceed $25,000.
       ``(2) Procedures.--The provisions of section 1128A (other 
     than subsections (a) and (b) and the second sentence of 
     subsection (f)) shall apply to the imposition of a civil 
     money penalty under this subsection in the same manner as 
     such provisions apply to the imposition of a penalty under 
     such section 1128A.
       ``(b) Limitations.--
       ``(1) Offenses otherwise punishable.--A penalty may not be 
     imposed under subsection (a) with respect to an act if the 
     act constitutes an offense punishable under section 1177.
       ``(2) Noncompliance not discovered.--A penalty may not be 
     imposed under subsection (a) with respect to a provision of 
     this part if it is established to the satisfaction of the 
     Secretary that the person liable for the penalty did not 
     know, and by exercising reasonable diligence would not have 
     known, that such person violated the provision.
       ``(3) Failures due to reasonable cause.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     a penalty may not be imposed under subsection (a) if--
       ``(i) the failure to comply was due to reasonable cause and 
     not to willful neglect; and
       ``(ii) the failure to comply is corrected during the 30-day 
     period beginning on the first date the person liable for the 
     penalty knew, or by exercising reasonable diligence would 
     have known, that the failure to comply occurred.
       ``(B) Extension of period.--
       ``(i) No penalty.--The period referred to in subparagraph 
     (A)(ii) may be extended as determined appropriate by the 
     Secretary based on the nature and extent of the failure to 
     comply.
       ``(ii) Assistance.--If the Secretary determines that a 
     person failed to comply because the person was unable to 
     comply, the Secretary may provide technical assistance to the 
     person during the period described in subparagraph (A)(ii). 
     Such assistance shall be provided in any manner determined 
     appropriate by the Secretary.
       ``(4) Reduction.--In the case of a failure to comply which 
     is due to reasonable cause and not to willful neglect, any 
     penalty under subsection (a) that is not entirely waived 
     under paragraph (3) may be waived to the extent that the 
     payment of such penalty would be excessive relative to the 
     compliance failure involved.


 ``wrongful disclosure of individually identifiable health information

       ``Sec. 1177. (a) Offense.--A person who knowingly and in 
     violation of this part--
       ``(1) uses or causes to be used a unique health identifier;
       ``(2) obtains individually identifiable health information 
     relating to an individual; or
       ``(3) discloses individually identifiable health 
     information to another person,
     shall be punished as provided in subsection (b).
       ``(b) Penalties.--A person described in subsection (a) 
     shall--
       ``(1) be fined not more than $50,000, imprisoned not more 
     than 1 year, or both;
       ``(2) if the offense is committed under false pretenses, be 
     fined not more than $100,000, imprisoned not more than 5 
     years, or both; and
       ``(3) if the offense is committed with intent to sell, 
     transfer, or use individually identifiable health information 
     for commercial advantage, personal gain, or malicious harm, 
     fined not more than $250,000, imprisoned not more than 10 
     years, or both.


                         ``effect on state law

       ``Sec. 1178. (a) General Effect.--
       ``(1) General rule.--Except as provided in paragraph (2), a 
     provision or requirement under this part, or a standard or 
     implementation specification adopted or established under 
     sections 1172 through 1174, shall supersede any contrary 
     provision of State law, including a provision of State law 
     that requires medical or health plan records (including 
     billing information) to be maintained or transmitted in 
     written rather than electronic form.
       ``(2) Exceptions.--A provision or requirement under this 
     part, or a standard or implementation specification adopted 
     or established under sections 1172 through 1174, shall not 
     supersede a contrary provision of State law, if the provision 
     of State law--
       ``(A) is a provision the Secretary determines--
       ``(i) is necessary--

       ``(I) to prevent fraud and abuse;
       ``(II) to ensure appropriate State regulation of insurance 
     and health plans;
       ``(III) for State reporting on health care delivery or 
     costs; or
       ``(IV) for other purposes; or

       ``(ii) addresses controlled substances; or
       ``(B) subject to section 264(c)(2) of the Health Insurance 
     Portability and Accountability Act of 1996, relates to the 
     privacy of individually identifiable health information.
       ``(b) Public Health.--Nothing in this part shall be 
     construed to invalidate or limit the authority, power, or 
     procedures established under any law providing for the 
     reporting of disease or injury, child abuse, birth, or death, 
     public health surveillance, or public health investigation or 
     intervention.
       ``(c) State Regulatory Reporting.--Nothing in this part 
     shall limit the ability of a State to require a health plan 
     to report, or to provide access to, information for 
     management audits,

[[Page H9498]]

     financial audits, program monitoring and evaluation, facility 
     licensure or certification, or individual licensure or 
     certification.


      ``processing payment transactions by financial institutions

       ``Sec. 1179. To the extent that an entity is engaged in 
     activities of a financial institution (as defined in section 
     1101 of the Right to Financial Privacy Act of 1978), or is 
     engaged in authorizing, processing, clearing, settling, 
     billing, transferring, reconciling, or collecting payments, 
     for a financial institution, this part, and any standard 
     adopted under this part, shall not apply to the entity with 
     respect to such activities, including the following:
       ``(1) The use or disclosure of information by the entity 
     for authorizing, processing, clearing, settling, billing, 
     transferring, reconciling or collecting, a payment for, or 
     related to, health plan premiums or health care, where such 
     payment is made by any means, including a credit, debit, or 
     other payment card, an account, check, or electronic funds 
     transfer.
       ``(2) The request for, or the use or disclosure of, 
     information by the entity with respect to a payment described 
     in paragraph (1)--
       ``(A) for transferring receivables;
       ``(B) for auditing;
       ``(C) in connection with--
       ``(i) a customer dispute; or
       ``(ii) an inquiry from, or to, a customer;
       ``(D) in a communication to a customer of the entity 
     regarding the customer's transactions, payment card, account, 
     check, or electronic funds transfer;
       ``(E) for reporting to consumer reporting agencies; or
       ``(F) for complying with--
       ``(i) a civil or criminal subpoena; or
       ``(ii) a Federal or State law regulating the entity.''.
       (b) Conforming Amendments.--
       (1) Requirement for medicare providers.--Section 1866(a)(1) 
     (42 U.S.C. 1395cc(a)(1)) is amended--
       (A) by striking ``and'' at the end of subparagraph (P);
       (B) by striking the period at the end of subparagraph (Q) 
     and inserting ``; and''; and
       (C) by inserting immediately after subparagraph (Q) the 
     following new subparagraph:
       ``(R) to contract only with a health care clearinghouse (as 
     defined in section 1171) that meets each standard and 
     implementation specification adopted or established under 
     part C of title XI on or after the date on which the health 
     care clearinghouse is required to comply with the standard or 
     specification.''.
       (2) Title heading.--Title XI (42 U.S.C. 1301 et seq.) is 
     amended by striking the title heading and inserting the 
     following:

    ``TITLE XI--GENERAL PROVISIONS, PEER REVIEW, AND ADMINISTRATIVE 
                           SIMPLIFICATION''.

     SEC. 263. CHANGES IN MEMBERSHIP AND DUTIES OF NATIONAL 
                   COMMITTEE ON VITAL AND HEALTH STATISTICS.

       Section 306(k) of the Public Health Service Act (42 U.S.C. 
     242k(k)) is amended--
       (1) in paragraph (1), by striking ``16'' and inserting 
     ``18'';
       (2) by amending paragraph (2) to read as follows:
       ``(2) The members of the Committee shall be appointed from 
     among persons who have distinguished themselves in the fields 
     of health statistics, electronic interchange of health care 
     information, privacy and security of electronic information, 
     population-based public health, purchasing or financing 
     health care services, integrated computerized health 
     information systems, health services research, consumer 
     interests in health information, health data standards, 
     epidemiology, and the provision of health services. Members 
     of the Committee shall be appointed for terms of 4 years.'';
       (3) by redesignating paragraphs (3) through (5) as 
     paragraphs (4) through (6), respectively, and inserting after 
     paragraph (2) the following:
       ``(3) Of the members of the Committee--
       ``(A) 1 shall be appointed, not later than 60 days after 
     the date of the enactment of the Health Insurance Portability 
     and Accountability Act of 1996, by the Speaker of the House 
     of Representatives after consultation with the minority 
     leader of the House of Representatives;
       ``(B) 1 shall be appointed, not later than 60 days after 
     the date of the enactment of the Health Insurance Portability 
     and Accountability Act of 1996, by the President pro tempore 
     of the Senate after consultation with the minority leader of 
     the Senate; and
       ``(C) 16 shall be appointed by the Secretary.'';
       (4) by amending paragraph (5) (as so redesignated) to read 
     as follows:
       ``(5) The Committee--
       ``(A) shall assist and advise the Secretary--
       ``(i) to delineate statistical problems bearing on health 
     and health services which are of national or international 
     interest;
       ``(ii) to stimulate studies of such problems by other 
     organizations and agencies whenever possible or to make 
     investigations of such problems through subcommittees;
       ``(iii) to determine, approve, and revise the terms, 
     definitions, classifications, and guidelines for assessing 
     health status and health services, their distribution and 
     costs, for use (I) within the Department of Health and Human 
     Services, (II) by all programs administered or funded by the 
     Secretary, including the Federal-State-local cooperative 
     health statistics system referred to in subsection (e), and 
     (III) to the extent possible as determined by the head of the 
     agency involved, by the Department of Veterans Affairs, the 
     Department of Defense, and other Federal agencies concerned 
     with health and health services;
       ``(iv) with respect to the design of and approval of health 
     statistical and health information systems concerned with the 
     collection, processing, and tabulation of health statistics 
     within the Department of Health and Human Services, with 
     respect to the Cooperative Health Statistics System 
     established under subsection (e), and with respect to the 
     standardized means for the collection of health information 
     and statistics to be established by the Secretary under 
     subsection (j)(1);
       ``(v) to review and comment on findings and proposals 
     developed by other organizations and agencies and to make 
     recommendations for their adoption or implementation by 
     local, State, national, or international agencies;
       ``(vi) to cooperate with national committees of other 
     countries and with the World Health Organization and other 
     national agencies in the studies of problems of mutual 
     interest;
       ``(vii) to issue an annual report on the state of the 
     Nation's health, its health services, their costs and 
     distributions, and to make proposals for improvement of the 
     Nation's health statistics and health information systems; 
     and
       ``(viii) in complying with the requirements imposed on the 
     Secretary under part C of title XI of the Social Security 
     Act;
       ``(B) shall study the issues related to the adoption of 
     uniform data standards for patient medical record information 
     and the electronic exchange of such information;
       ``(C) shall report to the Secretary not later than 4 years 
     after the date of the enactment of the Health Insurance 
     Portability and Accountability Act of 1996 recommendations 
     and legislative proposals for such standards and electronic 
     exchange; and
       ``(D) shall be responsible generally for advising the 
     Secretary and the Congress on the status of the 
     implementation of part C of title XI of the Social Security 
     Act.''; and
       (5) by adding at the end the following:
       ``(7) Not later than 1 year after the date of the enactment 
     of the Health Insurance Portability and Accountability Act of 
     1996, and annually thereafter, the Committee shall submit to 
     the Congress, and make public, a report regarding the 
     implementation of part C of title XI of the Social Security 
     Act. Such report shall address the following subjects, to the 
     extent that the Committee determines appropriate:
       ``(A) The extent to which persons required to comply with 
     part C of title XI of the Social Security Act are cooperating 
     in implementing the standards adopted under such part.
       ``(B) The extent to which such entities are meeting the 
     security standards adopted under such part and the types of 
     penalties assessed for noncompliance with such standards.
       ``(C) Whether the Federal and State Governments are 
     receiving information of sufficient quality to meet their 
     responsibilities under such part.
       ``(D) Any problems that exist with respect to 
     implementation of such part.
       ``(E) The extent to which timetables under such part are 
     being met.''.

     SEC. 264. RECOMMENDATIONS WITH RESPECT TO PRIVACY OF CERTAIN 
                   HEALTH INFORMATION.

       (a) In General.--Not later than the date that is 12 months 
     after the date of the enactment of this Act, the Secretary of 
     Health and Human Services shall submit to the Committee on 
     Labor and Human Resources and the Committee on Finance of the 
     Senate and the Committee on Commerce and the Committee on 
     Ways and Means of the House of Representatives detailed 
     recommendations on standards with respect to the privacy of 
     individually identifiable health information.
       (b) Subjects for Recommendations.--The recommendations 
     under subsection (a) shall address at least the following:
       (1) The rights that an individual who is a subject of 
     individually identifiable health information should have.
       (2) The procedures that should be established for the 
     exercise of such rights.
       (3) The uses and disclosures of such information that 
     should be authorized or required.
       (c) Regulations.--
       (1) In general.--If legislation governing standards with 
     respect to the privacy of individually identifiable health 
     information transmitted in connection with the transactions 
     described in section 1173(a) of the Social Security Act (as 
     added by section 262) is not enacted by the date that is 36 
     months after the date of the enactment of this Act, the 
     Secretary of Health and Human Services shall promulgate final 
     regulations containing such standards not later than the date 
     that is 42 months after the date of the enactment of this 
     Act. Such regulations shall address at least the subjects 
     described in subsection (b).
       (2) Preemption.--A regulation promulgated under paragraph 
     (1) shall not supercede a contrary provision of State law, if 
     the provision of State law imposes requirements, standards, 
     or implementation specifications that are more stringent than 
     the requirements, standards, or implementation specifications 
     imposed under the regulation.
       (d) Consultation.--In carrying out this section, the 
     Secretary of Health and Human Services shall consult with--
       (1) the National Committee on Vital and Health Statistics 
     established under section 306(k) of the Public Health Service 
     Act (42 U.S.C. 242k(k)); and
       (2) the Attorney General.
   Subtitle G--Duplication and Coordination of Medicare-Related Plans

     SEC. 271. DUPLICATION AND COORDINATION OF MEDICARE-RELATED 
                   PLANS.

       (a) Treatment of Certain Health Insurance Policies as 
     Nonduplicative.--Section 1882(d)(3)(A) (42 U.S.C. 
     1395ss(d)(3)(A)) is amended--
       (1) in clause (iii), by striking ``clause (i)'' and 
     inserting ``clause (i)(II)''; and
       (2) by adding at the end the following:
       ``(iv) For purposes of this subparagraph, a health 
     insurance policy (other than a medicare

[[Page H9499]]

     supplemental policy) providing for benefits which are payable 
     to or on behalf of an individual without regard to other 
     health benefit coverage of such individual is not considered 
     to `duplicate' any health benefits under this title, under 
     title XIX, or under a health insurance policy, and subclauses 
     (I) and (III) of clause (i) do not apply to such a policy.
       ``(v) For purposes of this subparagraph, a health insurance 
     policy (or a rider to an insurance contract which is not a 
     health insurance policy) is not considered to `duplicate' 
     health benefits under this title or under another health 
     insurance policy if it--
       ``(I) provides health care benefits only for long-term 
     care, nursing home care, home health care, or community-based 
     care, or any combination thereof,
       ``(II) coordinates against or excludes items and services 
     available or paid for under this title or under another 
     health insurance policy, and
       ``(III) for policies sold or issued on or after the end of 
     the 90-day period beginning on the date of enactment of the 
     Health Insurance Portability and Accountability Act of 1996) 
     discloses such coordination or exclusion in the policy's 
     outline of coverage.
     For purposes of this clause, the terms `coordinates' and 
     `coordination' mean, with respect to a policy in relation to 
     health benefits under this title or under another health 
     insurance policy, that the policy under its terms is 
     secondary to, or excludes from payment, items and services to 
     the extent available or paid for under this title or under 
     another health insurance policy.
       ``(vi)(I) An individual entitled to benefits under part A 
     or enrolled under part B of this title who is applying for a 
     health insurance policy (other than a policy described in 
     subclause (III)) shall be furnished a disclosure statement 
     described in clause (vii) for the type of policy being 
     applied for. Such statement shall be furnished as a part of 
     (or together with) the application for such policy.
       ``(II) Whoever issues or sells a health insurance policy 
     (other than a policy described in subclause (III)) to an 
     individual described in subclause (I) and fails to furnish 
     the appropriate disclosure statement as required under such 
     subclause shall be fined under title 18, United States Code, 
     or imprisoned not more than 5 years, or both, and, in 
     addition to or in lieu of such a criminal penalty, is subject 
     to a civil money penalty of not to exceed $25,000 (or $15,000 
     in the case of a person other than the issuer of the policy) 
     for each such violation.
       ``(III) A policy described in this subclause (to which 
     subclauses (I) and (II) do not apply) is a medicare 
     supplemental policy or a health insurance policy identified 
     under 60 Federal Register 30880 (June 12, 1995) as a policy 
     not required to have a disclosure statement.
       ``(IV) Any reference in this section to the revised NAIC 
     model regulation (referred to in subsection (m)(1)(A)) is 
     deemed a reference to such regulation as revised by section 
     171(m)(2) of the Social Security Act Amendments of 1994 
     (Public Law 103-432) and as modified by substituting, for the 
     disclosure required under section 16D(2), disclosure under 
     subclause (I) of an appropriate disclosure statement under 
     clause (vii).
       ``(vii) The disclosure statement described in this clause 
     for a type of policy is the statement specified under 
     subparagraph (D) of this paragraph (as in effect before the 
     date of the enactment of the Health Insurance Portability and 
     Accountability Act of 1996) for that type of policy, as 
     revised as follows:
       ``(I) In each statement, amend the second line to read as 
     follows:

              `THIS IS NOT MEDICARE SUPPLEMENT INSURANCE'.

       ``(II) In each statement, strike the third line and insert 
     the following: `Some health care services paid for by 
     Medicare may also trigger the payment of benefits under this 
     policy.'.
       ``(III) In each statement not described in subclause (V), 
     strike the boldface matter that begins `This insurance' and 
     all that follows up to the next paragraph that begins 
     `Medicare'.
       ``(IV) In each statement not described in subclause (V), 
     insert before the boxed matter (that states `Before You Buy 
     This Insurance') the following: `This policy must pay 
     benefits without regard to other health benefit coverage to 
     which you may be entitled under Medicare or other 
     insurance.'.
       ``(V) In a statement relating to policies providing both 
     nursing home and non-institutional coverage, to policies 
     providing nursing home benefits only, or policies providing 
     home care benefits only, amend the sentence that begins 
     `Federal law' to read as follows: `Federal law requires us to 
     inform you that in certain situations this insurance may pay 
     for some care also covered by Medicare.'.
       ``(viii)(I) Subject to subclause (II), nothing in this 
     subparagraph shall restrict or preclude a State's ability to 
     regulate health insurance policies, including any health 
     insurance policy that is described in clause (iv), (v), or 
     (vi)(III).
       ``(II) A State may not declare or specify, in statute, 
     regulation, or otherwise, that a health insurance policy 
     (other than a medicare supplemental policy) or rider to an 
     insurance contract which is not a health insurance policy, 
     that is described in clause (iv), (v), or (vi)(III) and that 
     is sold, issued, or renewed to an individual entitled to 
     benefits under part A or enrolled under part B `duplicates' 
     health benefits under this title or under a medicare 
     supplemental policy.''.
       (b) Conforming Amendments.--Section 1882(d)(3) (42 U.S.C. 
     1395ss(d)(3)) is amended--
       (1) in subparagraph (C)--
       (A) by striking ``with respect to (i)'' and inserting 
     ``with respect to'', and
       (B) by striking ``, (ii) the sale'' and all that follows up 
     to the period at the end; and
       (2) by striking subparagraph (D).
       (c) Transitional Provision.--
       (1) No penalties.--Subject to paragraph (3), no criminal or 
     civil money penalty may be imposed under section 
     1882(d)(3)(A) of the Social Security Act for any act or 
     omission that occurred during the transition period (as 
     defined in paragraph (4)) and that relates to any health 
     insurance policy that is described in clause (iv) or (v) of 
     such section (as amended by subsection (a)).
       (2) Limitation on legal action.--Subject to paragraph (3), 
     no legal action shall be brought or continued in any Federal 
     or State court insofar as such action--
       (A) includes a cause of action which arose, or which is 
     based on or evidenced by any act or omission which occurred, 
     during the transition period; and
       (B) relates to the application of section 1882(d)(3)(A) of 
     the Social Security Act to any act or omission with respect 
     to the sale, issuance, or renewal of any health insurance 
     policy that is described in clause (iv) or (v) of such 
     section (as amended by subsection (a)).
       (3) Disclosure condition.--In the case of a policy 
     described in clause (iv) of section 1882(d)(3)(A) of the 
     Social Security Act that is sold or issued on or after the 
     effective date of statements under section 171(d)(3)(C) of 
     the Social Security Act Amendments of 1994 and before the end 
     of the 30-day period beginning on the date of the enactment 
     of this Act, paragraphs (1) and (2) shall only apply if 
     disclosure was made in accordance with section 
     1882(d)(3)(C)(ii) of the Social Security Act (as in effect 
     before the date of the enactment of this Act).
       (4) Transition period.--In this subsection, the term 
     ``transition period'' means the period beginning on November 
     5, 1991, and ending on the date of the enactment of this Act.
       (d) Effective Date.--(1) Except as provided in this 
     subsection, the amendment made by subsection (a) shall be 
     effective as if included in the enactment of section 4354 of 
     the Omnibus Budget Reconciliation Act of 1990.
       (2)(A) Clause (vi) of section 1882(d)(3)(A) of the Social 
     Security Act, as added by subsection (a), shall only apply to 
     individuals applying for--
       (i) a health insurance policy described in section 
     1882(d)(3)(A)(iv) of such Act (as added by subsection (a)), 
     after the date of the enactment of this Act, or
       (ii) another health insurance policy after the end of the 
     30-day period beginning on the date of the enactment of this 
     Act.
       (B) A seller or issuer of a health insurance policy may 
     substitute, for the disclosure statement described in clause 
     (vii) of such section, the statement specified under section 
     1882(d)(3)(D) of the Social Security Act (as in effect before 
     the date of the enactment of this Act), without the revision 
     specified in such clause.
                      Subtitle H--Patent Extension

     SEC. 281. PATENT EXTENSION.

       (a) In General.--Any owner on the date of the enactment of 
     this Act of the right to market a non-steroidal anti-
     inflammatory drug that--
       (1) contains a patented active agent,
       (2) has been reviewed by the Federal Food and Drug 
     Administration for a period of more than 96 months as a new 
     drug application, and
       (3) was approved as safe and effective by the Federal Food 
     and Drug Administration on January 31, 1991,
     shall be entitled, for the 2-year period beginning on 
     February 28, 1997, to exclude others from making, using, 
     offering for sale, selling, or importing into the United 
     States such active agent, in accordance with section 
     154(a)(1) of title 35, United States Code.
       (b) Infringement.--Section 271 of title 35, United States 
     Code, shall apply to the infringement of the entitlement 
     provided under subsection (a) to the same extent as such 
     section applies to infringement of a patent.
       (c) Notification.--Not later than 30 days after the date of 
     the enactment of this Act, any owner granted an entitlement 
     under subsection (a) shall notify the Commissioner of Patents 
     and Trademarks and the Secretary for Health and Human 
     Services of such entitlement. Not later than 7 days after the 
     receipt of such notice, the Commissioner and the Secretary 
     shall publish an appropriate notice of the receipt of such 
     notice.
       (d) Offset.--An owner described in subsection (a) shall pay 
     the amount of $10,000,000 to the Secretary of Health and 
     Human Services in each of the fiscal years 1997 and 1998 as a 
     condition for being eligible to qualify for the entitlement 
     under subsection (a). As a further condition for eligibility, 
     such owner shall enter into a legally binding agreement with 
     the Secretary of Health and Human Services which shall 
     provide a means for ensuring that the entitlement under 
     subsection (a) shall not create any net costs to the States 
     under the medicaid program under title XIX of the Social 
     Security Act.
                TITLE III--TAX-RELATED HEALTH PROVISIONS

     SEC. 300. AMENDMENT OF 1986 CODE.

       Except as otherwise expressly provided, whenever in this 
     title an amendment or repeal is expressed in terms of an 
     amendment to, or repeal of, a section or other provision, the 
     reference shall be considered to be made to a section or 
     other provision of the Internal Revenue Code of 1986.
                  Subtitle A--Medical Savings Accounts

     SEC. 301. MEDICAL SAVINGS ACCOUNTS.

       (a) In General.--Part VII of subchapter B of chapter 1 
     (relating to additional itemized deductions for individuals) 
     is amended by redesignating section 220 as section 221 and by 
     inserting after section 219 the following new section:

     ``SEC. 220. MEDICAL SAVINGS ACCOUNTS.

       ``(a) Deduction Allowed.--In the case of an individual who 
     is an eligible individual for any month during the taxable 
     year, there shall be

[[Page H9500]]

     allowed as a deduction for the taxable year an amount equal 
     to the aggregate amount paid in cash during such taxable year 
     by such individual to a medical savings account of such 
     individual.
       ``(b) Limitations.--
       ``(1) In general.--The amount allowable as a deduction 
     under subsection (a) to an individual for the taxable year 
     shall not exceed the sum of the monthly limitations for 
     months during such taxable year that the individual is an 
     eligible individual.
       ``(2) Monthly limitation.--The monthly limitation for any 
     month is the amount equal to \1/12\ of--
       ``(A) in the case of an individual who has self-only 
     coverage under the high deductible health plan as of the 
     first day of such month, 65 percent of the annual deductible 
     under such coverage, and
       ``(B) in the case of an individual who has family coverage 
     under the high deductible health plan as of the first day of 
     such month, 75 percent of the annual deductible under such 
     coverage.
       ``(3) Special rule for married individuals.--In the case of 
     individuals who are married to each other, if either spouse 
     has family coverage--
       ``(A) both spouses shall be treated as having only such 
     family coverage (and if such spouses each have family 
     coverage under different plans, as having the family coverage 
     with the lowest annual deductible), and
       ``(B) the limitation under paragraph (1) (after the 
     application of subparagraph (A) of this paragraph) shall be 
     divided equally between them unless they agree on a different 
     division.
       ``(4) Deduction not to exceed compensation.--
       ``(A) Employees.--The deduction allowed under subsection 
     (a) for contributions as an eligible individual described in 
     subclause (I) of subsection (c)(1)(A)(iii) shall not exceed 
     such individual's wages, salaries, tips, and other employee 
     compensation which are attributable to such individual's 
     employment by the employer referred to in such subclause.
       ``(B) Self-employed individuals.--The deduction allowed 
     under subsection (a) for contributions as an eligible 
     individual described in subclause (II) of subsection 
     (c)(1)(A)(iii) shall not exceed such individual's earned 
     income (as defined in section 401(c)(1)) derived by the 
     taxpayer from the trade or business with respect to which the 
     high deductible health plan is established.
       ``(C) Community property laws not to apply.--The 
     limitations under this paragraph shall be determined without 
     regard to community property laws.
       ``(5) Coordination with exclusion for employer 
     contributions.--No deduction shall be allowed under this 
     section for any amount paid for any taxable year to a medical 
     savings account of an individual if--
       ``(A) any amount is contributed to any medical savings 
     account of such individual for such year which is excludable 
     from gross income under section 106(b), or
       ``(B) if such individual's spouse is covered under the high 
     deductible health plan covering such individual, any amount 
     is contributed for such year to any medical savings account 
     of such spouse which is so excludable.
       ``(6) Denial of deduction to dependents.--No deduction 
     shall be allowed under this section to any individual with 
     respect to whom a deduction under section 151 is allowable to 
     another taxpayer for a taxable year beginning in the calendar 
     year in which such individual's taxable year begins.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Eligible individual.--
       ``(A) In general.--The term `eligible individual' means, 
     with respect to any month, any individual if--
       ``(i) such individual is covered under a high deductible 
     health plan as of the 1st day of such month,
       ``(ii) such individual is not, while covered under a high 
     deductible health plan, covered under any health plan--

       ``(I) which is not a high deductible health plan, and
       ``(II) which provides coverage for any benefit which is 
     covered under the high deductible health plan, and

       ``(iii)(I) the high deductible health plan covering such 
     individual is established and maintained by the employer of 
     such individual or of the spouse of such individual and such 
     employer is a small employer, or
       ``(II) such individual is an employee (within the meaning 
     of section 401(c)(1)) or the spouse of such an employee and 
     the high deductible health plan covering such individual is 
     not established or maintained by any employer of such 
     individual or spouse.
       ``(B) Certain coverage disregarded.--Subparagraph (A)(ii) 
     shall be applied without regard to--
       ``(i) coverage for any benefit provided by permitted 
     insurance, and
       ``(ii) coverage (whether through insurance or otherwise) 
     for accidents, disability, dental care, vision care, or long-
     term care.
       ``(C) Continued eligibility of employee and spouse 
     establishing medical savings accounts.--If, while an employer 
     is a small employer--
       ``(i) any amount is contributed to a medical savings 
     account of an individual who is an employee of such employer 
     or the spouse of such an employee, and
       ``(ii) such amount is excludable from gross income under 
     section 106(b) or allowable as a deduction under this 
     section,
     such individual shall not cease to meet the requirement of 
     subparagraph (A)(iii)(I) by reason of such employer ceasing 
     to be a small employer so long as such employee continues to 
     be an employee of such employer.
       ``(D) Limitations on eligibility.--
  ``For limitations on number of taxpayers who are eligible to have 
medical savings accounts, see subsection (i).
       ``(2) High deductible health plan.--
       ``(A) In general.--The term `high deductible health plan' 
     means a health plan--
       ``(i) in the case of self-only coverage, which has an 
     annual deductible which is not less than $1,500 and not more 
     than $2,250,
       ``(ii) in the case of family coverage, which has an annual 
     deductible which is not less than $3,000 and not more than 
     $4,500, and
       ``(iii) the annual out-of-pocket expenses required to be 
     paid under the plan (other than for premiums) for covered 
     benefits does not exceed--

       ``(I) $3,000 for self-only coverage, and
       ``(II) $5,500 for family coverage.

       ``(B) Special rules.--
       ``(i) Exclusion of certain plans.--Such term does not 
     include a health plan if substantially all of its coverage is 
     coverage described in paragraph (1)(B).
       ``(ii) Safe harbor for absence of preventive care 
     deductible.--A plan shall not fail to be treated as a high 
     deductible health plan by reason of failing to have a 
     deductible for preventive care if the absence of a deductible 
     for such care is required by State law.
       ``(3) Permitted insurance.--The term `permitted insurance' 
     means--
       ``(A) Medicare supplemental insurance,
       ``(B) insurance if substantially all of the coverage 
     provided under such insurance relates to--
       ``(i) liabilities incurred under workers' compensation 
     laws,
       ``(ii) tort liabilities,
       ``(iii) liabilities relating to ownership or use of 
     property, or
       ``(iv) such other similar liabilities as the Secretary may 
     specify by regulations,
       ``(C) insurance for a specified disease or illness, and
       ``(D) insurance paying a fixed amount per day (or other 
     period) of hospitalization.
       ``(4) Small employer.--
       ``(A) In general.--The term `small employer' means, with 
     respect to any calendar year, any employer if such employer 
     employed an average of 50 or fewer employees on business days 
     during either of the 2 preceding calendar years. For purposes 
     of the preceding sentence, a preceding calendar year may be 
     taken into account only if the employer was in existence 
     throughout such year.
       ``(B) Employers not in existence in preceding year.--In the 
     case of an employer which was not in existence throughout the 
     1st preceding calendar year, the determination under 
     subparagraph (A) shall be based on the average number of 
     employees that it is reasonably expected such employer will 
     employ on business days in the current calendar year.
       ``(C) Certain growing employers retain treatment as small 
     employer.--The term `small employer' includes, with respect 
     to any calendar year, any employer if--
       ``(i) such employer met the requirement of subparagraph (A) 
     (determined without regard to subparagraph (B)) for any 
     preceding calendar year after 1996,
       ``(ii) any amount was contributed to the medical savings 
     account of any employee of such employer with respect to 
     coverage of such employee under a high deductible health plan 
     of such employer during such preceding calendar year and such 
     amount was excludable from gross income under section 106(b) 
     or allowable as a deduction under this section, and
       ``(iii) such employer employed an average of 200 or fewer 
     employees on business days during each preceding calendar 
     year after 1996.
       ``(D) Special rules.--
       ``(i) Controlled groups.--For purposes of this paragraph, 
     all persons treated as a single employer under subsection 
     (b), (c), (m), or (o) of section 414 shall be treated as 1 
     employer.
       ``(ii) Predecessors.--Any reference in this paragraph to an 
     employer shall include a reference to any predecessor of such 
     employer.
       ``(5) Family coverage.--The term `family coverage' means 
     any coverage other than self-only coverage.
       ``(d) Medical Savings Account.--For purposes of this 
     section--
       ``(1) Medical savings account.--The term `medical savings 
     account' means a trust created or organized in the United 
     States exclusively for the purpose of paying the qualified 
     medical expenses of the account holder, but only if the 
     written governing instrument creating the trust meets the 
     following requirements:
       ``(A) Except in the case of a rollover contribution 
     described in subsection (f)(5), no contribution will be 
     accepted--
       ``(i) unless it is in cash, or
       ``(ii) to the extent such contribution, when added to 
     previous contributions to the trust for the calendar year, 
     exceeds 75 percent of the highest annual limit deductible 
     permitted under subsection (c)(2)(A)(ii) for such calendar 
     year.
       ``(B) The trustee is a bank (as defined in section 408(n)), 
     an insurance company (as defined in section 816), or another 
     person who demonstrates to the satisfaction of the Secretary 
     that the manner in which such person will administer the 
     trust will be consistent with the requirements of this 
     section.
       ``(C) No part of the trust assets will be invested in life 
     insurance contracts.
       ``(D) The assets of the trust will not be commingled with 
     other property except in a common trust fund or common 
     investment fund.
       ``(E) The interest of an individual in the balance in his 
     account is nonforfeitable.
       ``(2) Qualified medical expenses.--
       ``(A) In general.--The term `qualified medical expenses' 
     means, with respect to an account holder, amounts paid by 
     such holder for medical

[[Page H9501]]

     care (as defined in section 213(d)) for such individual, the 
     spouse of such individual, and any dependent (as defined in 
     section 152) of such individual, but only to the extent such 
     amounts are not compensated for by insurance or otherwise.
       ``(B) Health insurance may not be purchased from account.--
       ``(i) In general.--Subparagraph (A) shall not apply to any 
     payment for insurance.
       ``(ii) Exceptions.--Clause (i) shall not apply to any 
     expense for coverage under--

       ``(I) a health plan during any period of continuation 
     coverage required under any Federal law,
       ``(II) a qualified long-term care insurance contract (as 
     defined in section 7702B(b)), or
       ``(III) a health plan during a period in which the 
     individual is receiving unemployment compensation under any 
     Federal or State law.

       ``(C) Medical expenses of individuals who are not eligible 
     individuals.--Subparagraph (A) shall apply to an amount paid 
     by an account holder for medical care of an individual who is 
     not an eligible individual for the month in which the expense 
     for such care is incurred only if no amount is contributed 
     (other than a rollover contribution) to any medical savings 
     account of such account holder for the taxable year which 
     includes such month. This subparagraph shall not apply to any 
     expense for coverage described in subclause (I) or (III) of 
     subparagraph (B)(ii).
       ``(3) Account holder.--The term `account holder' means the 
     individual on whose behalf the medical savings account was 
     established.
       ``(4) Certain rules to apply.--Rules similar to the 
     following rules shall apply for purposes of this section:
       ``(A) Section 219(d)(2) (relating to no deduction for 
     rollovers).
       ``(B) Section 219(f)(3) (relating to time when 
     contributions deemed made).
       ``(C) Except as provided in section 106(b), section 
     219(f)(5) (relating to employer payments).
       ``(D) Section 408(g) (relating to community property laws).
       ``(E) Section 408(h) (relating to custodial accounts).
       ``(e) Tax Treatment of Accounts.--
       ``(1) In general.--A medical savings account is exempt from 
     taxation under this subtitle unless such account has ceased 
     to be a medical savings account. Notwithstanding the 
     preceding sentence, any such account is subject to the taxes 
     imposed by section 511 (relating to imposition of tax on 
     unrelated business income of charitable, etc. organizations).
       ``(2) Account terminations.--Rules similar to the rules of 
     paragraphs (2) and (4) of section 408(e) shall apply to 
     medical savings accounts, and any amount treated as 
     distributed under such rules shall be treated as not used to 
     pay qualified medical expenses.
       ``(f) Tax Treatment of Distributions.--
       ``(1) Amounts used for qualified medical expenses.--Any 
     amount paid or distributed out of a medical savings account 
     which is used exclusively to pay qualified medical expenses 
     of any account holder shall not be includible in gross 
     income.
       ``(2) Inclusion of amounts not used for qualified medical 
     expenses.--Any amount paid or distributed out of a medical 
     savings account which is not used exclusively to pay the 
     qualified medical expenses of the account holder shall be 
     included in the gross income of such holder.
       ``(3) Excess contributions returned before due date of 
     return.--
       ``(A) In general.--If any excess contribution is 
     contributed for a taxable year to any medical savings account 
     of an individual, paragraph (2) shall not apply to 
     distributions from the medical savings accounts of such 
     individual (to the extent such distributions do not exceed 
     the aggregate excess contributions to all such accounts of 
     such individual for such year) if--
       ``(i) such distribution is received by the individual on or 
     before the last day prescribed by law (including extensions 
     of time) for filing such individual's return for such taxable 
     year, and
       ``(ii) such distribution is accompanied by the amount of 
     net income attributable to such excess contribution.
     Any net income described in clause (ii) shall be included in 
     the gross income of the individual for the taxable year in 
     which it is received.
       ``(B) Excess contribution.--For purposes of subparagraph 
     (A), the term `excess contribution' means any contribution 
     (other than a rollover contribution) which is neither 
     excludable from gross income under section 106(b) nor 
     deductible under this section.
       ``(4) Additional tax on distributions not used for 
     qualified medical expenses.--
       ``(A) In general.--The tax imposed by this chapter on the 
     account holder for any taxable year in which there is a 
     payment or distribution from a medical savings account of 
     such holder which is includible in gross income under 
     paragraph (2) shall be increased by 15 percent of the amount 
     which is so includible.
       ``(B) Exception for disability or death.--Subparagraph (A) 
     shall not apply if the payment or distribution is made after 
     the account holder becomes disabled within the meaning of 
     section 72(m)(7) or dies.
       ``(C) Exception for distributions after medicare 
     eligibility.--Subparagraph (A) shall not apply to any payment 
     or distribution after the date on which the account holder 
     attains the age specified in section 1811 of the Social 
     Security Act.
       ``(5) Rollover contribution.--An amount is described in 
     this paragraph as a rollover contribution if it meets the 
     requirements of subparagraphs (A) and (B).
       ``(A) In general.--Paragraph (2) shall not apply to any 
     amount paid or distributed from a medical savings account to 
     the account holder to the extent the amount received is paid 
     into a medical savings account for the benefit of such holder 
     not later than the 60th day after the day on which the holder 
     receives the payment or distribution.
       ``(B) Limitation.--This paragraph shall not apply to any 
     amount described in subparagraph (A) received by an 
     individual from a medical savings account if, at any time 
     during the 1-year period ending on the day of such receipt, 
     such individual received any other amount described in 
     subparagraph (A) from a medical savings account which was not 
     includible in the individual's gross income because of the 
     application of this paragraph.
       ``(6) Coordination with medical expense deduction.--For 
     purposes of determining the amount of the deduction under 
     section 213, any payment or distribution out of a medical 
     savings account for qualified medical expenses shall not be 
     treated as an expense paid for medical care.
       ``(7) Transfer of account incident to divorce.--The 
     transfer of an individual's interest in a medical savings 
     account to an individual's spouse or former spouse under a 
     divorce or separation instrument described in subparagraph 
     (A) of section 71(b)(2) shall not be considered a taxable 
     transfer made by such individual notwithstanding any other 
     provision of this subtitle, and such interest shall, after 
     such transfer, be treated as a medical savings account with 
     respect to which such spouse is the account holder.
       ``(8) Treatment after death of account holder.--
       ``(A) Treatment if designated beneficiary is spouse.--If 
     the account holder's surviving spouse acquires such holder's 
     interest in a medical savings account by reason of being the 
     designated beneficiary of such account at the death of the 
     account holder, such medical savings account shall be treated 
     as if the spouse were the account holder.
       ``(B) Other cases.--
       ``(i) In general.--If, by reason of the death of the 
     account holder, any person acquires the account holder's 
     interest in a medical savings account in a case to which 
     subparagraph (A) does not apply--

       ``(I) such account shall cease to be a medical savings 
     account as of the date of death, and
       ``(II) an amount equal to the fair market value of the 
     assets in such account on such date shall be includible if 
     such person is not the estate of such holder, in such 
     person's gross income for the taxable year which includes 
     such date, or if such person is the estate of such holder, in 
     such holder's gross income for the last taxable year of such 
     holder.

       ``(ii) Special rules.--

       ``(I) Reduction of inclusion for pre-death expenses.--The 
     amount includible in gross income under clause (i) by any 
     person (other than the estate) shall be reduced by the amount 
     of qualified medical expenses which were incurred by the 
     decedent before the date of the decedent's death and paid by 
     such person within 1 year after such date.
       ``(II) Deduction for estate taxes.--An appropriate 
     deduction shall be allowed under section 691(c) to any person 
     (other than the decedent or the decedent's spouse) with 
     respect to amounts included in gross income under clause (i) 
     by such person.

       ``(g) Cost-of-Living Adjustment.--In the case of any 
     taxable year beginning in a calendar year after 1998, each 
     dollar amount in subsection (c)(2) shall be increased by an 
     amount equal to--
       ``(1) such dollar amount, multiplied by
       ``(2) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which such taxable 
     year begins by substituting `calendar year 1997' for 
     `calendar year 1992' in subparagraph (B) thereof.
     If any increase under the preceding sentence is not a 
     multiple of $50, such increase shall be rounded to the 
     nearest multiple of $50.
       ``(h) Reports.--The Secretary may require the trustee of a 
     medical savings account to make such reports regarding such 
     account to the Secretary and to the account holder with 
     respect to contributions, distributions, and such other 
     matters as the Secretary determines appropriate. The reports 
     required by this subsection shall be filed at such time and 
     in such manner and furnished to such individuals at such time 
     and in such manner as may be required by the Secretary.
       ``(i) Limitation on Number of Taxpayers Having Medical 
     Savings Accounts.--
       ``(1) In general.--Except as provided in paragraph (5), no 
     individual shall be treated as an eligible individual for any 
     taxable year beginning after the cut-off year unless--
       ``(A) such individual was an active MSA participant for any 
     taxable year ending on or before the close of the cut-off 
     year, or
       ``(B) such individual first became an active MSA 
     participant for a taxable year ending after the cut-off year 
     by reason of coverage under a high deductible health plan of 
     an MSA-participating employer.
       ``(2) Cut-off year.--For purposes of paragraph (1), the 
     term `cut-off year' means the earlier of--
       ``(A) calendar year 2000, or
       ``(B) the first calendar year before 2000 for which the 
     Secretary determines under subsection (j) that the numerical 
     limitation for such year has been exceeded.
       ``(3) Active msa participant.--For purposes of this 
     subsection--
       ``(A) In general.--The term `active MSA participant' means, 
     with respect to any taxable year, any individual who is the 
     account holder of any medical savings account into which any 
     contribution was made which was excludable from gross income 
     under section 106(b), or allowable as a deduction under this 
     section, for such taxable year.
       ``(B) Special rule for cut-off years before 2000.--In the 
     case of a cut-off year before 2000--

[[Page H9502]]

       ``(i) an individual shall not be treated as an eligible 
     individual for any month of such year or an active MSA 
     participant under paragraph (1)(A) unless such individual is, 
     on or before the cut-off date, covered under a high 
     deductible health plan, and
       ``(ii) an employer shall not be treated as an MSA-
     participating employer unless the employer, on or before the 
     cut-off date, offered coverage under a high deductible health 
     plan to any employee.
       ``(C) Cut-off date.--For purposes of subparagraph (B)--
       ``(i) In general.--Except as otherwise provided in this 
     subparagraph, the cut-off date is October 1 of the cut-off 
     year.
       ``(ii) Employees with enrollment periods after october 1.--
     In the case of an individual described in subclause (I) of 
     subsection (c)(1)(A)(iii), if the regularly scheduled 
     enrollment period for health plans of the individual's 
     employer occurs during the last 3 months of the cut-off year, 
     the cut-off date is December 31 of the cut-off year.
       ``(iii) Self-employed individuals.--In the case of an 
     individual described in subclause (II) of subsection 
     (c)(1)(A)(iii), the cut-off date is November 1 of the cut-off 
     year.
       ``(iv) Special rules for 1997.--If 1997 is a cut-off year 
     by reason of subsection (j)(1)(A)--

       ``(I) each of the cut-off dates under clauses (i) and (iii) 
     shall be 1 month earlier than the date determined without 
     regard to this clause, and
       ``(II) clause (ii) shall be applied by substituting `4 
     months' for `3 months'.

       ``(4) MSA-participating employer.--For purposes of this 
     subsection, the term `MSA-participating employer' means any 
     small employer if--
       ``(A) such employer made any contribution to the medical 
     savings account of any employee during the cut-off year or 
     any preceding calendar year which was excludable from gross 
     income under section 106(b), or
       ``(B) at least 20 percent of the employees of such employer 
     who are eligible individuals for any month of the cut-off 
     year by reason of coverage under a high deductible health 
     plan of such employer each made a contribution of at least 
     $100 to their medical savings accounts for any taxable year 
     ending with or within the cut-off year which was allowable as 
     a deduction under this section.
       ``(5) Additional eligibility after cut-off year.--If the 
     Secretary determines under subsection (j)(2)(A) that the 
     numerical limit for the calendar year following a cut-off 
     year described in paragraph (2)(B) has not been exceeded--
       ``(A) this subsection shall not apply to any otherwise 
     eligible individual who is covered under a high deductible 
     health plan during the first 6 months of the second calendar 
     year following the cut-off year (and such individual shall be 
     treated as an active MSA participant for purposes of this 
     subsection if a contribution is made to any medical savings 
     account with respect to such coverage), and
       ``(B) any employer who offers coverage under a high 
     deductible health plan to any employee during such 6-month 
     period shall be treated as an MSA-participating employer for 
     purposes of this subsection if the requirements of paragraph 
     (4) are met with respect to such coverage.
     For purposes of this paragraph, subsection (j)(2)(A) shall be 
     applied for 1998 by substituting `750,000' for `600,000'.
       ``(j) Determination of Whether Numerical Limits Are 
     Exceeded.--
       ``(1) Determination of whether limit exceeded for 1997.--
     The numerical limitation for 1997 is exceeded if, based on 
     the reports required under paragraph (4), the number of 
     medical savings accounts established as of--
       ``(A) April 30, 1997, exceeds 375,000, or
       ``(B) June 30, 1997, exceeds 525,000.
       ``(2) Determination of whether limit exceeded for 1998 or 
     1999.--
       ``(A) In general.--The numerical limitation for 1998 or 
     1999 is exceeded if the sum of--
       ``(i) the number of MSA returns filed on or before April 15 
     of such calendar year for taxable years ending with or within 
     the preceding calendar year, plus
       ``(ii) the Secretary's estimate (determined on the basis of 
     the returns described in clause (i)) of the number of MSA 
     returns for such taxable years which will be filed after such 
     date,
     exceeds 600,000 (750,000 in the case of 1999). For purposes 
     of the preceding sentence, the term `MSA return' means any 
     return on which any exclusion is claimed under section 106(b) 
     or any deduction is claimed under this section.
       ``(B) Alternative computation of limitation.--The numerical 
     limitation for 1998 or 1999 is also exceeded if the sum of--
       ``(i) 90 percent of the sum determined under subparagraph 
     (A) for such calendar year, plus
       ``(ii) the product of 2.5 and the number of medical savings 
     accounts established during the portion of such year 
     preceding July 1 (based on the reports required under 
     paragraph (4)) for taxable years beginning in such year,
     exceeds 750,000.
       ``(3) Previously uninsured individuals not included in 
     determination.--
       ``(A) In general.--The determination of whether any 
     calendar year is a cut-off year shall be made by not counting 
     the medical savings account of any previously uninsured 
     individual.
       ``(B) Previously uninsured individual.--For purposes of 
     this subsection, the term `previously uninsured individual' 
     means, with respect to any medical savings account, any 
     individual who had no health plan coverage (other than 
     coverage referred to in subsection (c)(1)(B)) at any time 
     during the 6-month period before the date such individual's 
     coverage under the high deductible health plan commences.
       ``(4) Reporting by msa trustees.--
       ``(A) In general.--Not later than August 1 of 1997, 1998, 
     and 1999, each person who is the trustee of a medical savings 
     account established before July 1 of such calendar year shall 
     make a report to the Secretary (in such form and manner as 
     the Secretary shall specify) which specifies--
       ``(i) the number of medical savings accounts established 
     before such July 1 (for taxable years beginning in such 
     calendar year) of which such person is the trustee,
       ``(ii) the name and TIN of the account holder of each such 
     account, and
       ``(iii) the number of such accounts which are accounts of 
     previously uninsured individuals.
       ``(B) Additional report for 1997.--Not later than June 1, 
     1997, each person who is the trustee of a medical savings 
     account established before May 1, 1997, shall make an 
     additional report described in subparagraph (A) but only with 
     respect to accounts established before May 1, 1997.
       ``(C) Penalty for failure to file report.--The penalty 
     provided in section 6693(a) shall apply to any report 
     required by this paragraph, except that--
       ``(i) such section shall be applied by substituting `$25' 
     for `$50', and
       ``(ii) the maximum penalty imposed on any trustee shall not 
     exceed $5,000.
       ``(D) Aggregation of accounts.--To the extent practical, in 
     determining the number of medical savings accounts on the 
     basis of the reports under this paragraph, all medical 
     savings accounts of an individual shall be treated as 1 
     account and all accounts of individuals who are married to 
     each other shall be treated as 1 account.
       ``(5) Date of making determinations.--Any determination 
     under this subsection that a calendar year is a cut-off year 
     shall be made by the Secretary and shall be published not 
     later than October 1 of such year.
       (b) Deduction Allowed Whether or Not Individual Itemizes 
     Other Deductions.--Subsection (a) of section 62 is amended by 
     inserting after paragraph (15) the following new paragraph:
       ``(16) Medical savings accounts.--The deduction allowed by 
     section 220.''
       (c) Exclusions for Employer Contributions to Medical 
     Savings Accounts.--
       (1) Exclusion from income tax.--The text of section 106 
     (relating to contributions by employer to accident and health 
     plans) is amended to read as follows:
       ``(a) General Rule.--Except as otherwise provided in this 
     section, gross income of an employee does not include 
     employer-provided coverage under an accident or health plan.
       ``(b) Contributions to Medical Savings Accounts.--
       ``(1) In general.--In the case of an employee who is an 
     eligible individual, amounts contributed by such employee's 
     employer to any medical savings account of such employee 
     shall be treated as employer-provided coverage for medical 
     expenses under an accident or health plan to the extent such 
     amounts do not exceed the limitation under section 220(b)(1) 
     (determined without regard to this subsection) which is 
     applicable to such employee for such taxable year.
       ``(2) No constructive receipt.--No amount shall be included 
     in the gross income of any employee solely because the 
     employee may choose between the contributions referred to in 
     paragraph (1) and employer contributions to another health 
     plan of the employer.
       ``(3) Special rule for deduction of employer 
     contributions.--Any employer contribution to a medical 
     savings account, if otherwise allowable as a deduction under 
     this chapter, shall be allowed only for the taxable year in 
     which paid.
       ``(4) Employer msa contributions required to be shown on 
     return.--Every individual required to file a return under 
     section 6012 for the taxable year shall include on such 
     return the aggregate amount contributed by employers to the 
     medical savings accounts of such individual or such 
     individual's spouse for such taxable year.
       ``(5) MSA contributions not part of cobra coverage.--
     Paragraph (1) shall not apply for purposes of section 4980B.
       ``(6) Definitions.--For purposes of this subsection, the 
     terms `eligible individual' and `medical savings account' 
     have the respective meanings given to such terms by section 
     220.
       ``(7) Cross reference.--
  ``For penalty on failure by employer to make comparable contributions 
to the medical savings accounts of comparable employees, see section 
4980E.''.
       (2) Exclusion from employment taxes.--
       (A) Railroad retirement tax.--Subsection (e) of section 
     3231 is amended by adding at the end the following new 
     paragraph:
       ``(10) Medical savings account contributions.--The term 
     `compensation' shall not include any payment made to or for 
     the benefit of an employee if at the time of such payment it 
     is reasonable to believe that the employee will be able to 
     exclude such payment from income under section 106(b).''
       (B) Unemployment tax.--Subsection (b) of section 3306 is 
     amended by striking ``or'' at the end of paragraph (15), by 
     striking the period at the end of paragraph (16) and 
     inserting ``; or'', and by inserting after paragraph (16) the 
     following new paragraph:
       ``(17) any payment made to or for the benefit of an 
     employee if at the time of such payment it is reasonable to 
     believe that the employee will be able to exclude such 
     payment from income under section 106(b).''
       (C) Withholding tax.--Subsection (a) of section 3401 is 
     amended by striking ``or'' at the end of paragraph (19), by 
     striking the period at the end of paragraph (20) and 
     inserting ``; or'', and by inserting after paragraph (20) the 
     following new paragraph:
       ``(21) any payment made to or for the benefit of an 
     employee if at the time of such payment it is reasonable to 
     believe that the employee will be able to exclude such 
     payment from income under section 106(b).''

[[Page H9503]]

       (3) Employer contributions required to be shown on w-2.--
     Subsection (a) of section 6051 is amended by striking ``and'' 
     at the end of paragraph (9), by striking the period at the 
     end of paragraph (10) and inserting ``, and'', and by 
     inserting after paragraph (10) the following new paragraph:
       ``(11) the amount contributed to any medical savings 
     account (as defined in section 220(d)) of such employee or 
     such employee's spouse.''
       (4) Penalty for failure of employer to make comparable msa 
     contributions.--
       (A) In general.--Chapter 43 is amended by adding after 
     section 4980D the following new section:

     ``SEC. 4980E. FAILURE OF EMPLOYER TO MAKE COMPARABLE MEDICAL 
                   SAVINGS ACCOUNT CONTRIBUTIONS.

       ``(a) General Rule.--In the case of an employer who makes a 
     contribution to the medical savings account of any employee 
     with respect to coverage under a high deductible health plan 
     of the employer during a calendar year, there is hereby 
     imposed a tax on the failure of such employer to meet the 
     requirements of subsection (d) for such calendar year.
       ``(b) Amount of Tax.--The amount of the tax imposed by 
     subsection (a) on any failure for any calendar year is the 
     amount equal to 35 percent of the aggregate amount 
     contributed by the employer to medical savings accounts of 
     employees for taxable years of such employees ending with or 
     within such calendar year.
       ``(c) Waiver by Secretary.--In the case of a failure which 
     is due to reasonable cause and not to willful neglect, the 
     Secretary may waive part or all of the tax imposed by 
     subsection (a) to the extent that the payment of such tax 
     would be excessive relative to the failure involved.
       ``(d) Employer Required To Make Comparable MSA 
     Contributions for All Participating Employees.--
       ``(1) In general.--An employer meets the requirements of 
     this subsection for any calendar year if the employer makes 
     available comparable contributions to the medical savings 
     accounts of all comparable participating employees for each 
     coverage period during such calendar year.
       ``(2) Comparable contributions.--
       ``(A) In general.--For purposes of paragraph (1), the term 
     `comparable contributions' means contributions--
       ``(i) which are the same amount, or
       ``(ii) which are the same percentage of the annual 
     deductible limit under the high deductible health plan 
     covering the employees.
       ``(B) Part-year employees.--In the case of an employee who 
     is employed by the employer for only a portion of the 
     calendar year, a contribution to the medical savings account 
     of such employee shall be treated as comparable if it is an 
     amount which bears the same ratio to the comparable amount 
     (determined without regard to this subparagraph) as such 
     portion bears to the entire calendar year.
       ``(3) Comparable participating employees.--For purposes of 
     paragraph (1), the term `comparable participating employees' 
     means all employees--
       ``(A) who are eligible individuals covered under any high 
     deductible health plan of the employer, and

       ``(B) who have the same category of coverage.
     For purposes of subparagraph (B), the categories of coverage 
     are self-only and family coverage.
       ``(4) Part-time employees.--
       ``(A) In general.--Paragraph (3) shall be applied 
     separately with respect to part-time employees and other 
     employees.
       ``(B) Part-time employee.--For purposes of subparagraph 
     (A), the term `part-time employee' means any employee who is 
     customarily employed for fewer than 30 hours per week.
       ``(e) Controlled Groups.--For purposes of this section, all 
     persons treated as a single employer under subsection (b), 
     (c), (m), or (o) of section 414 shall be treated as 1 
     employer.
       ``(f) Definitions.--Terms used in this section which are 
     also used in section 220 have the respective meanings given 
     such terms in section 220.''
       (B) Clerical amendment.--The table of sections for chapter 
     43 is amended by adding after the item relating to section 
     4980D the following new item:

``Sec. 4980E. Failure of employer to make comparable medical savings 
              account contributions.''

       (d) Medical Savings Account Contributions Not Available 
     Under Cafeteria Plans.--Subsection (f) of section 125 of such 
     Code is amended by inserting ``106(b),'' before ``117''.
       (e) Tax on Excess Contributions.--Section 4973 (relating to 
     tax on excess contributions to individual retirement 
     accounts, certain section 403(b) contracts, and certain 
     individual retirement annuities) is amended--
       (1) by inserting ``medical savings accounts,'' after 
     ``accounts,'' in the heading of such section,
       (2) by striking ``or'' at the end of paragraph (1) of 
     subsection (a),
       (3) by redesignating paragraph (2) of subsection (a) as 
     paragraph (3) and by inserting after paragraph (1) the 
     following:
       ``(2) a medical savings account (within the meaning of 
     section 220(d)), or'', and
       (4) by adding at the end the following new subsection:
       ``(d) Excess Contributions to Medical Savings Accounts.--
     For purposes of this section, in the case of medical savings 
     accounts (within the meaning of section 220(d)), the term 
     `excess contributions' means the sum of--
       ``(1) the aggregate amount contributed for the taxable year 
     to the accounts (other than rollover contributions described 
     in section 220(f)(5)) which is neither excludable from gross 
     income under section 106(b) nor allowable as a deduction 
     under section 220 for such year, and
       ``(2) the amount determined under this subsection for the 
     preceding taxable year, reduced by the sum of--
       ``(A) the distributions out of the accounts which were 
     included in gross income under section 220(f)(2), and
       ``(B) the excess (if any) of--
       ``(i) the maximum amount allowable as a deduction under 
     section 220(b)(1) (determined without regard to section 
     106(b)) for the taxable year, over
       ``(ii) the amount contributed to the accounts for the 
     taxable year.

     For purposes of this subsection, any contribution which is 
     distributed out of the medical savings account in a 
     distribution to which section 220(f)(3) applies shall be 
     treated as an amount not contributed.''
       (f) Tax on Prohibited Transactions.--
       (1) Section 4975 (relating to tax on prohibited 
     transactions) is amended by adding at the end of subsection 
     (c) the following new paragraph:
       ``(4) Special rule for medical savings accounts.--An 
     individual for whose benefit a medical savings account 
     (within the meaning of section 220(d)) is established shall 
     be exempt from the tax imposed by this section with respect 
     to any transaction concerning such account (which would 
     otherwise be taxable under this section) if, with respect to 
     such transaction, the account ceases to be a medical savings 
     account by reason of the application of section 220(e)(2) to 
     such account.''
       (2) Paragraph (1) of section 4975(e) is amended to read as 
     follows:
       ``(1) Plan.--For purposes of this section, the term `plan' 
     means--
       ``(A) a trust described in section 401(a) which forms a 
     part of a plan, or a plan described in section 403(a), which 
     trust or plan is exempt from tax under section 501(a),
       ``(B) an individual retirement account described in section 
     408(a),
       ``(C) an individual retirement annuity described in section 
     408(b),
       ``(D) a medical savings account described in section 
     220(d), or
       ``(E) a trust, plan, account, or annuity which, at any 
     time, has been determined by the Secretary to be described in 
     any preceding subparagraph of this paragraph.''
       (g) Failure To Provide Reports on Medical Savings 
     Accounts.--
       (1) Subsection (a) of section 6693 (relating to failure to 
     provide reports on individual retirement accounts or 
     annuities) is amended to read as follows:
       ``(a) Reports.--
       ``(1) In general.--If a person required to file a report 
     under a provision referred to in paragraph (2) fails to file 
     such report at the time and in the manner required by such 
     provision, such person shall pay a penalty of $50 for each 
     failure unless it is shown that such failure is due to 
     reasonable cause.
       ``(2) Provisions.--The provisions referred to in this 
     paragraph are--
       ``(A) subsections (i) and (l) of section 408 (relating to 
     individual retirement plans), and
       ``(B) section 220(h) (relating to medical savings 
     accounts).''
       (h) Exception From Capitalization of Policy Acquisition 
     Expenses.--Subparagraph (B) of section 848(e)(1) (defining 
     specified insurance contract) is amended by striking ``and'' 
     at the end of clause (ii), by striking the period at the end 
     of clause (iii) and inserting ``, and'', and by adding at the 
     end the following new clause:
       ``(iv) any contract which is a medical savings account (as 
     defined in section 220(d)).''.
       (i) Clerical Amendment.--The table of sections for part VII 
     of subchapter B of chapter 1 is amended by striking the last 
     item and inserting the following:

``Sec. 220. Medical savings accounts.
``Sec. 221. Cross reference.''.

       (j) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.
       (k) Monitoring of Participation in Medical Savings 
     Accounts.--The Secretary of the Treasury or his delegate 
     shall--
       (1) during 1997, 1998, 1999, and 2000, regularly evaluate 
     the number of individuals who are maintaining medical savings 
     accounts and the reduction in revenues to the United States 
     by reason of such accounts, and
       (2) provide such reports of such evaluations to Congress as 
     such Secretary determines appropriate.
       (l) Study of Effects of Medical Savings Accounts on Small 
     Group Market.--The Comptroller General of the United States 
     shall enter into a contract with an organization with 
     expertise in health economics, health insurance markets, and 
     actuarial science to conduct a comprehensive study regarding 
     the effects of medical savings accounts in the small group 
     market on--
       (1) selection, including adverse selection,
       (2) health costs, including any impact on premiums of 
     individuals with comprehensive coverage,
       (3) use of preventive care,
       (4) consumer choice,
       (5) the scope of coverage of high deductible plans 
     purchased in conjunction with such accounts, and
       (6) other relevant items.

     A report on the results of the study conducted under this 
     subsection shall be submitted to the Congress no later than 
     January 1, 1999.
 Subtitle B--Increase in Deduction for Health Insurance Costs of Self-
                          Employed Individuals

     SEC. 311. INCREASE IN DEDUCTION FOR HEALTH INSURANCE COSTS OF 
                   SELF-EMPLOYED INDIVIDUALS.

       (a) In General.--Paragraph (1) of section 162(l) is amended 
     to read as follows:
       ``(1) Allowance of deduction.--
       ``(A) In general.--In the case of an individual who is an 
     employee within the meaning of

[[Page H9504]]

     section 401(c)(1), there shall be allowed as a deduction 
     under this section an amount equal to the applicable 
     percentage of the amount paid during the taxable year for 
     insurance which constitutes medical care for the taxpayer, 
     his spouse, and dependents.
       ``(B) Applicable percentage.--For purposes of subparagraph 
     (A), the applicable percentage shall be determined under the 
     following table:

  ``For taxable years                                                  
  beginning in                                        The applicable in
  calendar year--                                       percentage is--
        1997................................................40 percent 
        1998 through 2002...................................45 percent 
        2003................................................50 percent 
        2004................................................60 percent 
        2005................................................70 percent 
        2006 or thereafter...............................80 percent.''.

       (b) Exclusion for Amounts Received Under Certain Self-
     Insured Plans.--Paragraph (3) of section 104(a) is amended by 
     inserting ``(or through an arrangement having the effect of 
     accident or health insurance)'' after ``health insurance''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.
           Subtitle C--Long-Term Care Services and Contracts

                       PART I--GENERAL PROVISIONS

     SEC. 321. TREATMENT OF LONG-TERM CARE INSURANCE.

       (a) General Rule.--Chapter 79 (relating to definitions) is 
     amended by inserting after section 7702A the following new 
     section:

     ``SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE 
                   INSURANCE.

       ``(a) In General.--For purposes of this title--
       ``(1) a qualified long-term care insurance contract shall 
     be treated as an accident and health insurance contract,
       ``(2) amounts (other than policyholder dividends, as 
     defined in section 808, or premium refunds) received under a 
     qualified long-term care insurance contract shall be treated 
     as amounts received for personal injuries and sickness and 
     shall be treated as reimbursement for expenses actually 
     incurred for medical care (as defined in section 213(d)),
       ``(3) any plan of an employer providing coverage under a 
     qualified long-term care insurance contract shall be treated 
     as an accident and health plan with respect to such coverage,
       ``(4) except as provided in subsection (e)(3), amounts paid 
     for a qualified long-term care insurance contract providing 
     the benefits described in subsection (b)(2)(A) shall be 
     treated as payments made for insurance for purposes of 
     section 213(d)(1)(D), and
       ``(5) a qualified long-term care insurance contract shall 
     be treated as a guaranteed renewable contract subject to the 
     rules of section 816(e).
       ``(b) Qualified Long-Term Care Insurance Contract.--For 
     purposes of this title--
       ``(1) In general.--The term `qualified long-term care 
     insurance contract' means any insurance contract if--
       ``(A) the only insurance protection provided under such 
     contract is coverage of qualified long-term care services,
       ``(B) such contract does not pay or reimburse expenses 
     incurred for services or items to the extent that such 
     expenses are reimbursable under title XVIII of the Social 
     Security Act or would be so reimbursable but for the 
     application of a deductible or coinsurance amount,
       ``(C) such contract is guaranteed renewable,
       ``(D) such contract does not provide for a cash surrender 
     value or other money that can be--
       ``(i) paid, assigned, or pledged as collateral for a loan, 
     or
       ``(ii) borrowed,

     other than as provided in subparagraph (E) or paragraph 
     (2)(C),
       ``(E) all refunds of premiums, and all policyholder 
     dividends or similar amounts, under such contract are to be 
     applied as a reduction in future premiums or to increase 
     future benefits, and
       ``(F) such contract meets the requirements of subsection 
     (g).
       ``(2) Special rules.--
       ``(A) Per diem, etc. payments permitted.--A contract shall 
     not fail to be described in subparagraph (A) or (B) of 
     paragraph (1) by reason of payments being made on a per diem 
     or other periodic basis without regard to the expenses 
     incurred during the period to which the payments relate.
       ``(B) Special rules relating to medicare.--
       ``(i) Paragraph (1)(B) shall not apply to expenses which 
     are reimbursable under title XVIII of the Social Security Act 
     only as a secondary payor.
       ``(ii) No provision of law shall be construed or applied so 
     as to prohibit the offering of a qualified long-term care 
     insurance contract on the basis that the contract coordinates 
     its benefits with those provided under such title.
       ``(C) Refunds of premiums.--Paragraph (1)(E) shall not 
     apply to any refund on the death of the insured, or on a 
     complete surrender or cancellation of the contract, which 
     cannot exceed the aggregate premiums paid under the contract. 
     Any refund on a complete surrender or cancellation of the 
     contract shall be includible in gross income to the extent 
     that any deduction or exclusion was allowable with respect to 
     the premiums.
       ``(c) Qualified Long-Term Care Services.--For purposes of 
     this section--
       ``(1) In general.--The term `qualified long-term care 
     services' means necessary diagnostic, preventive, 
     therapeutic, curing, treating, mitigating, and rehabilitative 
     services, and maintenance or personal care services, which--
       ``(A) are required by a chronically ill individual, and
       ``(B) are provided pursuant to a plan of care prescribed by 
     a licensed health care practitioner.
       ``(2) Chronically ill individual.--
       ``(A) In general.--The term `chronically ill individual' 
     means any individual who has been certified by a licensed 
     health care practitioner as--
       ``(i) being unable to perform (without substantial 
     assistance from another individual) at least 2 activities of 
     daily living for a period of at least 90 days due to a loss 
     of functional capacity,
       ``(ii) having a level of disability similar (as determined 
     under regulations prescribed by the Secretary in consultation 
     with the Secretary of Health and Human Services) to the level 
     of disability described in clause (i), or
       ``(iii) requiring substantial supervision to protect such 
     individual from threats to health and safety due to severe 
     cognitive impairment.

     Such term shall not include any individual otherwise meeting 
     the requirements of the preceding sentence unless within the 
     preceding 12-month period a licensed health care practitioner 
     has certified that such individual meets such requirements.
       ``(B) Activities of daily living.--For purposes of 
     subparagraph (A), each of the following is an activity of 
     daily living:
       ``(i) Eating.
       ``(ii) Toileting.
       ``(iii) Transferring.
       ``(iv) Bathing.
       ``(v) Dressing.
       ``(vi) Continence.

     A contract shall not be treated as a qualified long-term care 
     insurance contract unless the determination of whether an 
     individual is a chronically ill individual takes into account 
     at least 5 of such activities.
       ``(3) Maintenance or personal care services.--The term 
     `maintenance or personal care services' means any care the 
     primary purpose of which is the provision of needed 
     assistance with any of the disabilities as a result of which 
     the individual is a chronically ill individual (including the 
     protection from threats to health and safety due to severe 
     cognitive impairment).
       ``(4) Licensed health care practitioner.--The term 
     `licensed health care practitioner' means any physician (as 
     defined in section 1861(r)(1) of the Social Security Act) and 
     any registered professional nurse, licensed social worker, or 
     other individual who meets such requirements as may be 
     prescribed by the Secretary.
       ``(d) Aggregate Payments in Excess of Limits.--
       ``(1) In general.--If the aggregate of--
       ``(A) the periodic payments received for any period under 
     all qualified long-term care insurance contracts which are 
     treated as made for qualified long-term care services for an 
     insured, and
       ``(B) the periodic payments received for such period which 
     are treated under section 101(g) as paid by reason of the 
     death of such insured,

     exceeds the per diem limitation for such period, such excess 
     shall be includible in gross income without regard to section 
     72. A payment shall not be taken into account under 
     subparagraph (B) if the insured is a terminally ill 
     individual (as defined in section 101(g)) at the time the 
     payment is received.
       ``(2) Per diem limitation.--For purposes of paragraph (1), 
     the per diem limitation for any period is an amount equal to 
     the excess (if any) of--
       ``(A) the greater of--
       ``(i) the dollar amount in effect for such period under 
     paragraph (4), or
       ``(ii) the costs incurred for qualified long-term care 
     services provided for the insured for such period, over
       ``(B) the aggregate payments received as reimbursements 
     (through insurance or otherwise) for qualified long-term care 
     services provided for the insured during such period.
       ``(3) Aggregation rules.--For purposes of this subsection--
       ``(A) all persons receiving periodic payments described in 
     paragraph (1) with respect to the same insured shall be 
     treated as 1 person, and
       ``(B) the per diem limitation determined under paragraph 
     (2) shall be allocated first to the insured and any remaining 
     limitation shall be allocated among the other such persons in 
     such manner as the Secretary shall prescribe.
       ``(4) Dollar amount.--The dollar amount in effect under 
     this subsection shall be $175 per day (or the equivalent 
     amount in the case of payments on another periodic basis).
       ``(5) Inflation adjustment.--In the case of a calendar year 
     after 1997, the dollar amount contained in paragraph (4) 
     shall be increased at the same time and in the same manner as 
     amounts are increased pursuant to section 213(d)(10).
       ``(6) Periodic payments.--For purposes of this subsection, 
     the term `periodic payment' means any payment (whether on a 
     periodic basis or otherwise) made without regard to the 
     extent of the costs incurred by the payee for qualified long-
     term care services.
       ``(e) Treatment of Coverage Provided as Part of a Life 
     Insurance Contract.--Except as otherwise provided in 
     regulations prescribed by the Secretary, in the case of any 
     long-term care insurance coverage (whether or not qualified) 
     provided by a rider on or as part of a life insurance 
     contract--
       ``(1) In general.--This section shall apply as if the 
     portion of the contract providing such coverage is a separate 
     contract.
       ``(2) Application of 7702.--Section 7702(c)(2) (relating to 
     the guideline premium limitation) shall be applied by 
     increasing the guideline premium limitation with respect to a 
     life insurance contract, as of any date--
       ``(A) by the sum of any charges (but not premium payments) 
     against the life insurance contract's cash surrender value 
     (within the meaning of section 7702(f)(2)(A)) for such 
     coverage made to that date under the contract, less

[[Page H9505]]

       ``(B) any such charges the imposition of which reduces the 
     premiums paid for the contract (within the meaning of section 
     7702(f)(1)).
       ``(3) Application of section 213.--No deduction shall be 
     allowed under section 213(a) for charges against the life 
     insurance contract's cash surrender value described in 
     paragraph (2), unless such charges are includible in income 
     as a result of the application of section 72(e)(10) and the 
     rider is a qualified long-term care insurance contract under 
     subsection (b).
       ``(4) Portion defined.--For purposes of this subsection, 
     the term `portion' means only the terms and benefits under a 
     life insurance contract that are in addition to the terms and 
     benefits under the contract without regard to long-term care 
     insurance coverage.
       ``(f) Treatment of Certain State-Maintained Plans.--
       ``(1) In general.--If--
       (A) an individual receives coverage for qualified long-term 
     care services under a State long-term care plan, and
       ``(B) the terms of such plan would satisfy the requirements 
     of subsection (b) were such plan an insurance contract,

     such plan shall be treated as a qualified long-term care 
     insurance contract for purposes of this title.
       ``(2) State long-term care plan.--For purposes of paragraph 
     (1), the term `State long-term care plan' means any plan--
       ``(A) which is established and maintained by a State or an 
     instrumentality of a State,
       ``(B) which provides coverage only for qualified long-term 
     care services, and
       ``(C) under which such coverage is provided only to--
       ``(i) employees and former employees of a State (or any 
     political subdivision or instrumentality of a State),
       ``(ii) the spouses of such employees, and
       ``(iii) individuals bearing a relationship to such 
     employees or spouses which is described in any of paragraphs 
     (1) through (8) of section 152(a).''
       (b) Reserve Method.--Clause (iii) of section 807(d)(3)(A) 
     is amended by inserting ``(other than a qualified long-term 
     care insurance contract, as defined in section 7702B(b))'' 
     after ``insurance contract''.
       (c) Long-Term Care Insurance Not Permitted Under Cafeteria 
     Plans or Flexible Spending Arrangements.--
       (1) Cafeteria plans.--Section 125(f) is amended by adding 
     at the end the following new sentence: ``Such term shall not 
     include any product which is advertised, marketed, or offered 
     as long-term care insurance.''
       (2) Flexible spending arrangements.--Section 106 (relating 
     to contributions by employer to accident and health plans), 
     as amended by section 301(c), is amended by adding at the end 
     the following new subsection:
       ``(c) Inclusion of Long-Term Care Benefits Provided Through 
     Flexible Spending Arrangements.--
       ``(1) In general.--Effective on and after January 1, 1997, 
     gross income of an employee shall include employer-provided 
     coverage for qualified long-term care services (as defined in 
     section 7702B(c)) to the extent that such coverage is 
     provided through a flexible spending or similar arrangement.
       ``(2) Flexible spending arrangement.--For purposes of this 
     subsection, a flexible spending arrangement is a benefit 
     program which provides employees with coverage under which--
       ``(A) specified incurred expenses may be reimbursed 
     (subject to reimbursement maximums and other reasonable 
     conditions), and
       ``(B) the maximum amount of reimbursement which is 
     reasonably available to a participant for such coverage is 
     less than 500 percent of the value of such coverage.

     In the case of an insured plan, the maximum amount reasonably 
     available shall be determined on the basis of the underlying 
     coverage.''
       (d) Continuation Coverage Rules Not To Apply.--
       (1) Paragraph (2) of section 4980B(g) is amended by adding 
     at the end the following new sentence: ``Such term shall not 
     include any plan substantially all of the coverage under 
     which is for qualified long-term care services (as defined in 
     section 7702B(c)).''
       (2) Paragraph (1) of section 607 of the Employee Retirement 
     Income Security Act of 1974 is amended by adding at the end 
     the following new sentence: ``Such term shall not include any 
     plan substantially all of the coverage under which is for 
     qualified long-term care services (as defined in section 
     7702B(c) of such Code).''
       (3) Paragraph (1) of section 2208 of the Public Health 
     Service Act is amended by adding at the end the following new 
     sentence: ``Such term shall not include any plan 
     substantially all of the coverage under which is for 
     qualified long-term care services (as defined in section 
     7702B(c) of such Code).''
       (e) Clerical Amendment.--The table of sections for chapter 
     79 is amended by inserting after the item relating to section 
     7702A the following new item:

``Sec. 7702B. Treatment of qualified long-term care insurance.''.

       (f) Effective Dates.--
       (1) General effective date.--
       (A) In general.--Except as provided in subparagraph (B), 
     the amendments made by this section shall apply to contracts 
     issued after December 31, 1996.
       (B) Reserve method.--The amendment made by subsection (b) 
     shall apply to contracts issued after December 31, 1997.
       (2) Continuation of existing policies.--In the case of any 
     contract issued before January 1, 1997, which met the long-
     term care insurance requirements of the State in which the 
     contract was sitused at the time the contract was issued--
       (A) such contract shall be treated for purposes of the 
     Internal Revenue Code of 1986 as a qualified long-term care 
     insurance contract (as defined in section 7702B(b) of such 
     Code), and
       (B) services provided under, or reimbursed by, such 
     contract shall be treated for such purposes as qualified 
     long-term care services (as defined in section 7702B(c) of 
     such Code).

     In the case of an individual who is covered on December 31, 
     1996, under a State long-term care plan (as defined in 
     section 7702B(f)(2) of such Code), the terms of such plan on 
     such date shall be treated for purposes of the preceding 
     sentence as a contract issued on such date which met the 
     long-term care insurance requirements of such State.
       (3) Exchanges of existing policies.--If, after the date of 
     enactment of this Act and before January 1, 1998, a contract 
     providing for long-term care insurance coverage is exchanged 
     solely for a qualified long-term care insurance contract (as 
     defined in section 7702B(b) of such Code), no gain or loss 
     shall be recognized on the exchange. If, in addition to a 
     qualified long-term care insurance contract, money or other 
     property is received in the exchange, then any gain shall be 
     recognized to the extent of the sum of the money and the fair 
     market value of the other property received. For purposes of 
     this paragraph, the cancellation of a contract providing for 
     long-term care insurance coverage and reinvestment of the 
     cancellation proceeds in a qualified long-term care insurance 
     contract within 60 days thereafter shall be treated as an 
     exchange.
       (4) Issuance of certain riders permitted.--For purposes of 
     applying sections 101(f), 7702, and 7702A of the Internal 
     Revenue Code of 1986 to any contract--
       (A) the issuance of a rider which is treated as a qualified 
     long-term care insurance contract under section 7702B, and
       (B) the addition of any provision required to conform any 
     other long-term care rider to be so treated,

     shall not be treated as a modification or material change of 
     such contract.
       (5) Application of per diem limitation to existing 
     contracts.--The amount of per diem payments made under a 
     contract issued on or before July 31, 1996, with respect to 
     an insured which are excludable from gross income by reason 
     of section 7702B of the Internal Revenue Code of 1986 (as 
     added by this section) shall not be reduced under subsection 
     (d)(2)(B) thereof by reason of reimbursements received under 
     a contract issued on or before such date. The preceding 
     sentence shall cease to apply as of the date (after July 31, 
     1996) such contract is exchanged or there is any contract 
     modification which results in an increase in the amount of 
     such per diem payments or the amount of such reimbursements.
       (g) Long-Term Care Study Request.--The Chairman of the 
     Committee on Ways and Means of the House of Representatives 
     and the Chairman of the Committee on Finance of the Senate 
     shall jointly request the National Association of Insurance 
     Commissioners, in consultation with representatives of the 
     insurance industry and consumer organizations, to formulate, 
     develop, and conduct a study to determine the marketing and 
     other effects of per diem limits on certain types of long-
     term care policies. If the National Association of Insurance 
     Commissioners agrees to the study request, the National 
     Association of Insurance Commissioners shall report the 
     results of its study to such committees not later than 2 
     years after accepting the request.

     SEC. 322. QUALIFIED LONG-TERM CARE SERVICES TREATED AS 
                   MEDICAL CARE.

       (a) General Rule.--Paragraph (1) of section 213(d) 
     (defining medical care) is amended by striking ``or'' at the 
     end of subparagraph (B), by redesignating subparagraph (C) as 
     subparagraph (D), and by inserting after subparagraph (B) the 
     following new subparagraph:
       ``(C) for qualified long-term care services (as defined in 
     section 7702B(c)), or''.
       (b) Technical Amendments.--
       (1) Subparagraph (D) of section 213(d)(1) (as redesignated 
     by subsection (a)) is amended by inserting before the period 
     ``or for any qualified long-term care insurance contract (as 
     defined in section 7702B(b))''.
       (2)(A) Paragraph (1) of section 213(d) is amended by adding 
     at the end the following new flush sentence:
     ``In the case of a qualified long-term care insurance 
     contract (as defined in section 7702B(b)), only eligible 
     long-term care premiums (as defined in paragraph (10)) shall 
     be taken into account under subparagraph (D).''
       (B) Paragraph (2) of section 162(l) is amended by adding at 
     the end the following new subparagraph:
       ``(C) Long-term care premiums.--In the case of a qualified 
     long-term care insurance contract (as defined in section 
     7702B(b)), only eligible long-term care premiums (as defined 
     in section 213(d)(10)) shall be taken into account under 
     paragraph (1).''
       (C) Subsection (d) of section 213 is amended by adding at 
     the end the following new paragraphs:
       ``(10) Eligible long-term care premiums.--
       ``(A) In general.--For purposes of this section, the term 
     `eligible long-term care premiums' means the amount paid 
     during a taxable year for any qualified long-term care 
     insurance contract (as defined in section 7702B(b)) covering 
     an individual, to the extent such amount does not exceed the 
     limitation determined under the following table:
``In the case of an individual with an attained age before the close of 
  the taxable year of:                               The limitation is:
        40 or less..............................................$200   
        More than 40 but not more than 50........................375   
        More than 50 but not more than 60........................750   

[[Page H9506]]

        More than 60 but not more than 70......................2,000   
        More than 70...........................................2,500.  

       ``(B) Indexing.--
       ``(i) In general.--In the case of any taxable year 
     beginning in a calendar year after 1997, each dollar amount 
     contained in subparagraph (A) shall be increased by the 
     medical care cost adjustment of such amount for such calendar 
     year. If any increase determined under the preceding sentence 
     is not a multiple of $10, such increase shall be rounded to 
     the nearest multiple of $10.
       ``(ii) Medical care cost adjustment.--For purposes of 
     clause (i), the medical care cost adjustment for any calendar 
     year is the percentage (if any) by which--

       ``(I) the medical care component of the Consumer Price 
     Index (as defined in section 1(f)(5)) for August of the 
     preceding calendar year, exceeds
       ``(II) such component for August of 1996.

     The Secretary shall, in consultation with the Secretary of 
     Health and Human Services, prescribe an adjustment which the 
     Secretary determines is more appropriate for purposes of this 
     paragraph than the adjustment described in the preceding 
     sentence, and the adjustment so prescribed shall apply in 
     lieu of the adjustment described in the preceding sentence.
       ``(11) Certain payments to relatives treated as not paid 
     for medical care.--An amount paid for a qualified long-term 
     care service (as defined in section 7702B(c)) provided to an 
     individual shall be treated as not paid for medical care if 
     such service is provided--
       ``(A) by the spouse of the individual or by a relative 
     (directly or through a partnership, corporation, or other 
     entity) unless the service is provided by a licensed 
     professional with respect to such service, or
       ``(B) by a corporation or partnership which is related 
     (within the meaning of section 267(b) or 707(b)) to the 
     individual.

     For purposes of this paragraph, the term `relative' means an 
     individual bearing a relationship to the individual which is 
     described in any of paragraphs (1) through (8) of section 
     152(a). This paragraph shall not apply for purposes of 
     section 105(b) with respect to reimbursements through 
     insurance.'' .
       (3) Paragraph (6) of section 213(d) is amended--
       (A) by striking ``subparagraphs (A) and (B)'' and inserting 
     ``subparagraphs (A), (B), and (C)'', and
       (B) by striking ``paragraph (1)(C)'' in subparagraph (A) 
     and inserting ``paragraph (1)(D)''.
       (4) Paragraph (7) of section 213(d) is amended by striking 
     ``subparagraphs (A) and (B)'' and inserting ``subparagraphs 
     (A), (B), and (C)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 323. REPORTING REQUIREMENTS.

       (a) In General.--Subpart B of part III of subchapter A of 
     chapter 61 is amended by adding at the end the following new 
     section:

     ``SEC. 6050Q. CERTAIN LONG-TERM CARE BENEFITS.

       ``(a) Requirement of Reporting.--Any person who pays long-
     term care benefits shall make a return, according to the 
     forms or regulations prescribed by the Secretary, setting 
     forth--
       ``(1) the aggregate amount of such benefits paid by such 
     person to any individual during any calendar year,
       ``(2) whether or not such benefits are paid in whole or in 
     part on a per diem or other periodic basis without regard to 
     the expenses incurred during the period to which the payments 
     relate,
       ``(3) the name, address, and TIN of such individual, and
       ``(4) the name, address, and TIN of the chronically ill or 
     terminally ill individual on account of whose condition such 
     benefits are paid.
       ``(b) Statements To Be Furnished to Persons With Respect to 
     Whom Information Is Required.--Every person required to make 
     a return under subsection (a) shall furnish to each 
     individual whose name is required to be set forth in such 
     return a written statement showing--
       ``(1) the name of the person making the payments, and
       ``(2) the aggregate amount of long-term care benefits paid 
     to the individual which are required to be shown on such 
     return.

     The written statement required under the preceding sentence 
     shall be furnished to the individual on or before January 31 
     of the year following the calendar year for which the return 
     under subsection (a) was required to be made.
       ``(c) Long-Term Care Benefits.--For purposes of this 
     section, the term `long-term care benefit' means--
       ``(1) any payment under a product which is advertised, 
     marketed, or offered as long-term care insurance, and
       ``(2) any payment which is excludable from gross income by 
     reason of section 101(g).''.
       (b) Penalties.--
       (1) Subparagraph (B) of section 6724(d)(1) is amended by 
     redesignating clauses (ix) through (xiv) as clauses (x) 
     through (xv), respectively, and by inserting after clause 
     (viii) the following new clause:
       ``(ix) section 6050Q (relating to certain long-term care 
     benefits),''.
       (2) Paragraph (2) of section 6724(d) is amended by 
     redesignating subparagraphs (Q) through (T) as subparagraphs 
     (R) through (U), respectively, and by inserting after 
     subparagraph (P) the following new subparagraph:
       ``(Q) section 6050Q(b) (relating to certain long-term care 
     benefits),''.
       (c) Clerical Amendment.--The table of sections for subpart 
     B of part III of subchapter A of chapter 61 is amended by 
     adding at the end the following new item:

``Sec. 6050Q. Certain long-term care benefits.''.

       (d) Effective Date.--The amendments made by this section 
     shall apply to benefits paid after December 31, 1996.

                PART II--CONSUMER PROTECTION PROVISIONS

     SEC. 325. POLICY REQUIREMENTS.

       Section 7702B (as added by section 321) is amended by 
     adding at the end the following new subsection:
       ``(g) Consumer Protection Provisions.--
       ``(1) In general.--The requirements of this subsection are 
     met with respect to any contract if the contract meets--
       ``(A) the requirements of the model regulation and model 
     Act described in paragraph (2),
       ``(B) the disclosure requirement of paragraph (3), and
       ``(C) the requirements relating to nonforfeitability under 
     paragraph (4).
       ``(2) Requirements of model regulation and act.--
       ``(A) In general.--The requirements of this paragraph are 
     met with respect to any contract if such contract meets--
       ``(i) Model regulation.--The following requirements of the 
     model regulation:

       ``(I) Section 7A (relating to guaranteed renewal or 
     noncancellability), and the requirements of section 6B of the 
     model Act relating to such section 7A.
       ``(II) Section 7B (relating to prohibitions on limitations 
     and exclusions).
       ``(III) Section 7C (relating to extension of benefits).
       ``(IV) Section 7D (relating to continuation or conversion 
     of coverage).
       ``(V) Section 7E (relating to discontinuance and 
     replacement of policies).
       ``(VI) Section 8 (relating to unintentional lapse).
       ``(VII) Section 9 (relating to disclosure), other than 
     section 9F thereof.
       ``(VIII) Section 10 (relating to prohibitions against post-
     claims underwriting).
       ``(IX) Section 11 (relating to minimum standards).
       ``(X) Section 12 (relating to requirement to offer 
     inflation protection), except that any requirement for a 
     signature on a rejection of inflation protection shall permit 
     the signature to be on an application or on a separate form.
       ``(XI) Section 23 (relating to prohibition against 
     preexisting conditions and probationary periods in 
     replacement policies or certificates).

       ``(ii) Model act.--The following requirements of the model 
     Act:

       ``(I) Section 6C (relating to preexisting conditions).
       ``(II) Section 6D (relating to prior hospitalization).

       ``(B) Definitions.--For purposes of this paragraph--
       ``(i) Model provisions.--The terms `model regulation' and 
     `model Act' mean the long-term care insurance model 
     regulation, and the long-term care insurance model Act, 
     respectively, promulgated by the National Association of 
     Insurance Commissioners (as adopted as of January 1993).
       ``(ii) Coordination.--Any provision of the model regulation 
     or model Act listed under clause (i) or (ii) of subparagraph 
     (A) shall be treated as including any other provision of such 
     regulation or Act necessary to implement the provision.
       ``(iii) Determination.--For purposes of this section and 
     section 4980C, the determination of whether any requirement 
     of a model regulation or the model Act has been met shall be 
     made by the Secretary.
       ``(3) Disclosure requirement.--The requirement of this 
     paragraph is met with respect to any contract if such 
     contract meets the requirements of section 4980C(d).
       ``(4) Nonforfeiture requirements.--
       ``(A) In general.--The requirements of this paragraph are 
     met with respect to any level premium contract, if the issuer 
     of such contract offers to the policyholder, including any 
     group policyholder, a nonforfeiture provision meeting the 
     requirements of subparagraph (B).
       ``(B) Requirements of provision.--The nonforfeiture 
     provision required under subparagraph (A) shall meet the 
     following requirements:
       ``(i) The nonforfeiture provision shall be appropriately 
     captioned.
       ``(ii) The nonforfeiture provision shall provide for a 
     benefit available in the event of a default in the payment of 
     any premiums and the amount of the benefit may be adjusted 
     subsequent to being initially granted only as necessary to 
     reflect changes in claims, persistency, and interest as 
     reflected in changes in rates for premium paying contracts 
     approved by the Secretary for the same contract form.
       ``(iii) The nonforfeiture provision shall provide at least 
     one of the following:

       ``(I) Reduced paid-up insurance.
       ``(II) Extended term insurance.
       ``(III) Shortened benefit period.
       ``(IV) Other similar offerings approved by the Secretary.

       ``(5) Cross reference.--
  ``For coordination of the requirements of this subsection with State 
requirements, see section 4980C(f).''

     SEC. 326. REQUIREMENTS FOR ISSUERS OF QUALIFIED LONG-TERM 
                   CARE INSURANCE CONTRACTS.

       (a) In General.--Chapter 43 is amended by adding at the end 
     the following new section:

     ``SEC. 4980C. REQUIREMENTS FOR ISSUERS OF QUALIFIED LONG-TERM 
                   CARE INSURANCE CONTRACTS.

       ``(a) General Rule.--There is hereby imposed on any person 
     failing to meet the requirements

[[Page H9507]]

     of subsection (c) or (d) a tax in the amount determined under 
     subsection (b).
       ``(b) Amount.--
       ``(1) In general.--The amount of the tax imposed by 
     subsection (a) shall be $100 per insured for each day any 
     requirement of subsection (c) or (d) is not met with respect 
     to each qualified long-term care insurance contract.
       ``(2) Waiver.--In the case of a failure which is due to 
     reasonable cause and not to willful neglect, the Secretary 
     may waive part or all of the tax imposed by subsection (a) to 
     the extent that payment of the tax would be excessive 
     relative to the failure involved.
       ``(c) Responsibilities.--The requirements of this 
     subsection are as follows:
       ``(1) Requirements of model provisions.--
       ``(A) Model regulation.--The following requirements of the 
     model regulation must be met:
       ``(i) Section 13 (relating to application forms and 
     replacement coverage).
       ``(ii) Section 14 (relating to reporting requirements), 
     except that the issuer shall also report at least annually 
     the number of claims denied during the reporting period for 
     each class of business (expressed as a percentage of claims 
     denied), other than claims denied for failure to meet the 
     waiting period or because of any applicable preexisting 
     condition.
       ``(iii) Section 20 (relating to filing requirements for 
     marketing).
       ``(iv) Section 21 (relating to standards for marketing), 
     including inaccurate completion of medical histories, other 
     than sections 21C(1) and 21C(6) thereof, except that--

       ``(I) in addition to such requirements, no person shall, in 
     selling or offering to sell a qualified long-term care 
     insurance contract, misrepresent a material fact; and
       ``(II) no such requirements shall include a requirement to 
     inquire or identify whether a prospective applicant or 
     enrollee for long-term care insurance has accident and 
     sickness insurance.

       ``(v) Section 22 (relating to appropriateness of 
     recommended purchase).
       ``(vi) Section 24 (relating to standard format outline of 
     coverage).
       ``(vii) Section 25 (relating to requirement to deliver 
     shopper's guide).
       ``(B) Model act.--The following requirements of the model 
     Act must be met:
       ``(i) Section 6F (relating to right to return), except that 
     such section shall also apply to denials of applications and 
     any refund shall be made within 30 days of the return or 
     denial.
       ``(ii) Section 6G (relating to outline of coverage).
       ``(iii) Section 6H (relating to requirements for 
     certificates under group plans).
       ``(iv) Section 6I (relating to policy summary).
       ``(v) Section 6J (relating to monthly reports on 
     accelerated death benefits).
       ``(vi) Section 7 (relating to incontestability period).
       ``(C) Definitions.--For purposes of this paragraph, the 
     terms `model regulation' and `model Act' have the meanings 
     given such terms by section 7702B(g)(2)(B).
       ``(2) Delivery of policy.--If an application for a 
     qualified long-term care insurance contract (or for a 
     certificate under such a contract for a group) is approved, 
     the issuer shall deliver to the applicant (or policyholder or 
     certificateholder) the contract (or certificate) of insurance 
     not later than 30 days after the date of the approval.
       ``(3) Information on denials of claims.--If a claim under a 
     qualified long-term care insurance contract is denied, the 
     issuer shall, within 60 days of the date of a written request 
     by the policyholder or certificateholder (or 
     representative)--
       ``(A) provide a written explanation of the reasons for the 
     denial, and
       ``(B) make available all information directly relating to 
     such denial.
       ``(d) Disclosure.--The requirements of this subsection are 
     met if the issuer of a long-term care insurance policy 
     discloses in such policy and in the outline of coverage 
     required under subsection (c)(1)(B)(ii) that the policy is 
     intended to be a qualified long-term care insurance contract 
     under section 7702B(b).
       ``(e) Qualified Long-Term Care Insurance Contract 
     Defined.--For purposes of this section, the term `qualified 
     long-term care insurance contract' has the meaning given such 
     term by section 7702B.
       ``(f) Coordination With State Requirements.--If a State 
     imposes any requirement which is more stringent than the 
     analogous requirement imposed by this section or section 
     7702B(g), the requirement imposed by this section or section 
     7702B(g) shall be treated as met if the more stringent State 
     requirement is met.''.
       (b) Conforming Amendment.--The table of sections for 
     chapter 43 is amended by adding at the end the following new 
     item:

``Sec. 4980C. Requirements for issuers of qualified long-term care 
              insurance contracts.''

     SEC. 327. EFFECTIVE DATES.

       (a) In General.--The provisions of, and amendments made by, 
     this part shall apply to contracts issued after December 31, 
     1996. The provisions of section 321(f) (relating to 
     transition rule) shall apply to such contracts.
       (b) Issuers.--The amendments made by section 326 shall 
     apply to actions taken after December 31, 1996.
          Subtitle D--Treatment of Accelerated Death Benefits

     SEC. 331. TREATMENT OF ACCELERATED DEATH BENEFITS BY 
                   RECIPIENT.

       (a) In General.--Section 101 (relating to certain death 
     benefits) is amended by adding at the end the following new 
     subsection:
       ``(g) Treatment of Certain Accelerated Death Benefits.--
       ``(1) In general.--For purposes of this section, the 
     following amounts shall be treated as an amount paid by 
     reason of the death of an insured:
       ``(A) Any amount received under a life insurance contract 
     on the life of an insured who is a terminally ill individual.
       ``(B) Any amount received under a life insurance contract 
     on the life of an insured who is a chronically ill 
     individual.
       ``(2) Treatment of viatical settlements.--
       ``(A) In general.--If any portion of the death benefit 
     under a life insurance contract on the life of an insured 
     described in paragraph (1) is sold or assigned to a viatical 
     settlement provider, the amount paid for the sale or 
     assignment of such portion shall be treated as an amount paid 
     under the life insurance contract by reason of the death of 
     such insured.
       ``(B) Viatical settlement provider.--
       ``(i) In general.--The term `viatical settlement provider' 
     means any person regularly engaged in the trade or business 
     of purchasing, or taking assignments of, life insurance 
     contracts on the lives of insureds described in paragraph (1) 
     if--

       ``(I) such person is licensed for such purposes (with 
     respect to insureds described in the same subparagraph of 
     paragraph (1) as the insured) in the State in which the 
     insured resides, or
       ``(II) in the case of an insured who resides in a State not 
     requiring the licensing of such persons for such purposes 
     with respect to such insured, such person meets the 
     requirements of clause (ii) or (iii), whichever applies to 
     such insured.

       ``(ii) Terminally ill insureds.--A person meets the 
     requirements of this clause with respect to an insured who is 
     a terminally ill individual if such person--

       ``(I) meets the requirements of sections 8 and 9 of the 
     Viatical Settlements Model Act of the National Association of 
     Insurance Commissioners, and
       ``(II) meets the requirements of the Model Regulations of 
     the National Association of Insurance Commissioners (relating 
     to standards for evaluation of reasonable payments) in 
     determining amounts paid by such person in connection with 
     such purchases or assignments.

       ``(iii) Chronically ill insureds.--A person meets the 
     requirements of this clause with respect to an insured who is 
     a chronically ill individual if such person--

       ``(I) meets requirements similar to the requirements 
     referred to in clause (ii)(I), and
       ``(II) meets the standards (if any) of the National 
     Association of Insurance Commissioners for evaluating the 
     reasonableness of amounts paid by such person in connection 
     with such purchases or assignments with respect to 
     chronically ill individuals.

       ``(3) Special rules for chronically ill insureds.--In the 
     case of an insured who is a chronically ill individual--
       ``(A) In general.--Paragraphs (1) and (2) shall not apply 
     to any payment received for any period unless--
       ``(i) such payment is for costs incurred by the payee (not 
     compensated for by insurance or otherwise) for qualified 
     long-term care services provided for the insured for such 
     period, and
       ``(ii) the terms of the contract giving rise to such 
     payment satisfy--

       ``(I) the requirements of section 7702B(b)(1)(B), and
       ``(II) the requirements (if any) applicable under 
     subparagraph (B).

     For purposes of the preceding sentence, the rule of section 
     7702B(b)(2)(B) shall apply.
       ``(B) Other requirements.--The requirements applicable 
     under this subparagraph are--
       ``(i) those requirements of section 7702B(g) and section 
     4980C which the Secretary specifies as applying to such a 
     purchase, assignment, or other arrangement,
       ``(ii) standards adopted by the National Association of 
     Insurance Commissioners which specifically apply to 
     chronically ill individuals (and, if such standards are 
     adopted, the analogous requirements specified under clause 
     (i) shall cease to apply), and
       ``(iii) standards adopted by the State in which the 
     policyholder resides (and if such standards are adopted, the 
     analogous requirements specified under clause (i) and 
     (subject to section 4980C(f)) standards under clause (ii), 
     shall cease to apply).
       ``(C) Per diem payments.--A payment shall not fail to be 
     described in subparagraph (A) by reason of being made on a 
     per diem or other periodic basis without regard to the 
     expenses incurred during the period to which the payment 
     relates.
       ``(D) Limitation on exclusion for periodic payments.--
  ``For limitation on amount of periodic payments which are treated as 
described in paragraph (1), see section 7702B(d).''
       ``(4) Definitions.--For purposes of this subsection--
       ``(A) Terminally ill individual.--The term `terminally ill 
     individual' means an individual who has been certified by a 
     physician as having an illness or physical condition which 
     can reasonably be expected to result in death in 24 months or 
     less after the date of the certification.
       ``(B) Chronically ill individual.--The term `chronically 
     ill individual' has the meaning given such term by section 
     7702B(c)(2); except that such term shall not include a 
     terminally ill individual.
       ``(C) Qualified long-term care services.--The term 
     `qualified long-term care services' has the meaning given 
     such term by section 7702B(c).
       ``(D) Physician.--The term `physician' has the meaning 
     given to such term by section 1861(r)(1) of the Social 
     Security Act (42 U.S.C. 1395x(r)(1)).
       ``(5) Exception for business-related policies.--This 
     subsection shall not apply in the case of any amount paid to 
     any taxpayer other

[[Page H9508]]

     than the insured if such taxpayer has an insurable interest 
     with respect to the life of the insured by reason of the 
     insured being a director, officer, or employee of the 
     taxpayer or by reason of the insured being financially 
     interested in any trade or business carried on by the 
     taxpayer.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to amounts received after December 31, 1996.

     SEC. 332. TAX TREATMENT OF COMPANIES ISSUING QUALIFIED 
                   ACCELERATED DEATH BENEFIT RIDERS.

       (a) Qualified Accelerated Death Benefit Riders Treated as 
     Life Insurance.--Section 818 (relating to other definitions 
     and special rules) is amended by adding at the end the 
     following new subsection:
       ``(g) Qualified Accelerated Death Benefit Riders Treated as 
     Life Insurance.--For purposes of this part--
       ``(1) In general.--Any reference to a life insurance 
     contract shall be treated as including a reference to a 
     qualified accelerated death benefit rider on such contract.
       ``(2) Qualified accelerated death benefit riders.--For 
     purposes of this subsection, the term `qualified accelerated 
     death benefit rider' means any rider on a life insurance 
     contract if the only payments under the rider are payments 
     meeting the requirements of section 101(g).
       ``(3) Exception for long-term care riders.--Paragraph (1) 
     shall not apply to any rider which is treated as a long-term 
     care insurance contract under section 7702B.''.
       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     take effect on January 1, 1997.
       (2) Issuance of rider not treated as material change.--For 
     purposes of applying sections 101(f), 7702, and 7702A of the 
     Internal Revenue Code of 1986 to any contract--
       (A) the issuance of a qualified accelerated death benefit 
     rider (as defined in section 818(g) of such Code (as added by 
     this Act)), and
       (B) the addition of any provision required to conform an 
     accelerated death benefit rider to the requirements of such 
     section 818(g),

     shall not be treated as a modification or material change of 
     such contract.
                   Subtitle E--State Insurance Pools

     SEC. 341. EXEMPTION FROM INCOME TAX FOR STATE-SPONSORED 
                   ORGANIZATIONS PROVIDING HEALTH COVERAGE FOR 
                   HIGH-RISK INDIVIDUALS.

       (a) In General.--Subsection (c) of section 501 (relating to 
     list of exempt organizations) is amended by adding at the end 
     the following new paragraph:
       ``(26) Any membership organization if--
       ``(A) such organization is established by a State 
     exclusively to provide coverage for medical care (as defined 
     in section 213(d)) on a not-for-profit basis to individuals 
     described in subparagraph (B) through--
       ``(i) insurance issued by the organization, or
       ``(ii) a health maintenance organization under an 
     arrangement with the organization,
       ``(B) the only individuals receiving such coverage through 
     the organization are individuals--
       ``(i) who are residents of such State, and
       ``(ii) who, by reason of the existence or history of a 
     medical condition--

       ``(I) are unable to acquire medical care coverage for such 
     condition through insurance or from a health maintenance 
     organization, or
       ``(II) are able to acquire such coverage only at a rate 
     which is substantially in excess of the rate for such 
     coverage through the membership organization,

       ``(C) the composition of the membership in such 
     organization is specified by such State, and
       ``(D) no part of the net earnings of the organization 
     inures to the benefit of any private shareholder or 
     individual.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 342. EXEMPTION FROM INCOME TAX FOR STATE-SPONSORED 
                   WORKMEN'S COMPENSATION REINSURANCE 
                   ORGANIZATIONS.

       (a) In General.--Subsection (c) of section 501 (relating to 
     list of exempt organizations), as amended by section 341, is 
     amended by adding at the end the following new paragraph:
       ``(27) Any membership organization if--
       ``(A) such organization is established before June 1, 1996, 
     by a State exclusively to reimburse its members for losses 
     arising under workmen's compensation acts,
       ``(B) such State requires that the membership of such 
     organization consist of--
       ``(i) all persons who issue insurance covering workmen's 
     compensation losses in such State, and
       ``(ii) all persons and governmental entities who self-
     insure against such losses, and
       ``(C) such organization operates as a non-profit 
     organization by--
       ``(i) returning surplus income to its members or workmen's 
     compensation policyholders on a periodic basis, and
       ``(ii) reducing initial premiums in anticipation of 
     investment income.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.
            Subtitle F--Organizations Subject to Section 833

     SEC. 351. ORGANIZATIONS SUBJECT TO SECTION 833.

       (a) In General.--Section 833(c) (relating to organization 
     to which section applies) is amended by adding at the end the 
     following new paragraph:
       ``(4) Treatment as existing blue cross or blue shield 
     organization.--
       ``(A) In general.--Paragraph (2) shall be applied to an 
     organization described in subparagraph (B) as if it were a 
     Blue Cross or Blue Shield organization.
       ``(B) Applicable organization.--An organization is 
     described in this subparagraph if it--
       ``(i) is organized under, and governed by, State laws which 
     are specifically and exclusively applicable to not-for-profit 
     health insurance or health service type organizations, and
       ``(ii) is not a Blue Cross or Blue Shield organization or 
     health maintenance organization.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years ending after December 31, 1996.
            Subtitle G--IRA Distributions to the Unemployed

     SEC. 361. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE USED 
                   WITHOUT ADDITIONAL TAX TO PAY FINANCIALLY 
                   DEVASTATING MEDICAL EXPENSES.

       (a) In General.--Section 72(t)(3)(A) is amended by striking 
     ``(B),''.
       (b) Distributions for Payment of Health Insurance Premiums 
     of Certain Unemployed Individuals.--Paragraph (2) of section 
     72(t) is amended by adding at the end the following new 
     subparagraph:
       ``(D) Distributions to unemployed individuals for health 
     insurance premiums.--
       ``(i) In general.--Distributions from an individual 
     retirement plan to an individual after separation from 
     employment--

       ``(I) if such individual has received unemployment 
     compensation for 12 consecutive weeks under any Federal or 
     State unemployment compensation law by reason of such 
     separation,
       ``(II) if such distributions are made during any taxable 
     year during which such unemployment compensation is paid or 
     the succeeding taxable year, and
       ``(III) to the extent such distributions do not exceed the 
     amount paid during the taxable year for insurance described 
     in section 213(d)(1)(D) with respect to the individual and 
     the individual's spouse and dependents (as defined in section 
     152).

       ``(ii) Distributions after reemployment.--Clause (i) shall 
     not apply to any distribution made after the individual has 
     been employed for at least 60 days after the separation from 
     employment to which clause (i) applies.
       ``(iii) Self-employed individuals.--To the extent provided 
     in regulations, a self-employed individual shall be treated 
     as meeting the requirements of clause (i)(I) if, under 
     Federal or State law, the individual would have received 
     unemployment compensation but for the fact the individual was 
     self-employed.''.
       (c) Conforming Amendment.--Subparagraph (B) of section 
     72(t)(2) is amended by striking ``or (C)'' and inserting ``, 
     (C), or (D)''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to distributions after December 31, 1996.
Subtitle H--Organ and Tissue Donation Information Included With Income 
                          Tax Refund Payments

     SEC. 371. ORGAN AND TISSUE DONATION INFORMATION INCLUDED WITH 
                   INCOME TAX REFUND PAYMENTS.

       (a) In General.--The Secretary of the Treasury shall, to 
     the extent practicable, include with the mailing of any 
     payment of a refund of individual income tax made during the 
     period beginning on February 1, 1997, and ending on June 30, 
     1997, a copy of the document described in subsection (b).
       (b) Text of Document.--The Secretary of the Treasury shall, 
     after consultation with the Secretary of Health and Human 
     Services and organizations promoting organ and tissue 
     (including eye) donation, prepare a document suitable for 
     inclusion with individual income tax refund payments which--
       (1) encourages organ and tissue donation;
       (2) includes a detachable organ and tissue donor card; and
       (3) urges recipients to--
       (A) sign the organ and tissue donor card;
       (B) discuss organ and tissue donation with family members 
     and tell family members about the recipient's desire to be an 
     organ and tissue donor if the occasion arises; and
       (C) encourage family members to request or authorize organ 
     and tissue donation if the occasion arises.
TITLE IV--APPLICATION AND ENFORCEMENT OF GROUP HEALTH PLAN REQUIREMENTS
     Subtitle A--Application and Enforcement of Group Health Plan 
                              Requirements

     SEC. 401. GROUP HEALTH PLAN PORTABILITY, ACCESS, AND 
                   RENEWABILITY REQUIREMENTS.

       (a) In General.--The Internal Revenue Code of 1986 is 
     amended by adding at the end the following new subtitle:
 ``Subtitle K--Group Health Plan Portability, Access, and Renewability 
                              Requirements
``Chapter 100. Group health plan portability, access, and renewability 
              requirements.

``CHAPTER 100--GROUP HEALTH PLAN PORTABILITY, ACCESS, AND RENEWABILITY 
                              REQUIREMENTS

``Sec. 9801. Increased portability through limitation on preexisting 
              condition exclusions.
``Sec. 9802. Prohibiting discrimination against individual participants 
              and beneficiaries based on health status.
``Sec. 9803. Guaranteed renewability in multiemployer plans and certain 
              multiple employer welfare arrangements.
``Sec. 9804. General exceptions.
``Sec. 9805. Definitions.
``Sec. 9806. Regulations.

[[Page H9509]]

     ``SEC. 9801. INCREASED PORTABILITY THROUGH LIMITATION ON 
                   PREEXISTING CONDITION EXCLUSIONS.

       ``(a) Limitation on Preexisting Condition Exclusion Period; 
     Crediting for Periods of Previous Coverage.--Subject to 
     subsection (d), a group health plan may, with respect to a 
     participant or beneficiary, impose a preexisting condition 
     exclusion only if--
       ``(1) such exclusion relates to a condition (whether 
     physical or mental), regardless of the cause of the 
     condition, for which medical advice, diagnosis, care, or 
     treatment was recommended or received within the 6-month 
     period ending on the enrollment date;
       ``(2) such exclusion extends for a period of not more than 
     12 months (or 18 months in the case of a late enrollee) after 
     the enrollment date; and
       ``(3) the period of any such preexisting condition 
     exclusion is reduced by the length of the aggregate of the 
     periods of creditable coverage (if any) applicable to the 
     participant or beneficiary as of the enrollment date.
       ``(b) Definitions.--For purposes of this section--
       ``(1) Preexisting condition exclusion.--
       ``(A) In general.--The term `preexisting condition 
     exclusion' means, with respect to coverage, a limitation or 
     exclusion of benefits relating to a condition based on the 
     fact that the condition was present before the date of 
     enrollment for such coverage, whether or not any medical 
     advice, diagnosis, care, or treatment was recommended or 
     received before such date.
       ``(B) Treatment of genetic information.--For purposes of 
     this section, genetic information shall not be treated as a 
     condition described in subsection (a)(1) in the absence of a 
     diagnosis of the condition related to such information.
       ``(2) Enrollment date.--The term `enrollment date' means, 
     with respect to an individual covered under a group health 
     plan, the date of enrollment of the individual in the plan 
     or, if earlier, the first day of the waiting period for such 
     enrollment.
       ``(3) Late enrollee.--The term `late enrollee' means, with 
     respect to coverage under a group health plan, a participant 
     or beneficiary who enrolls under the plan other than during--
       ``(A) the first period in which the individual is eligible 
     to enroll under the plan, or
       ``(B) a special enrollment period under subsection (f).
       ``(4) Waiting period.--The term `waiting period' means, 
     with respect to a group health plan and an individual who is 
     a potential participant or beneficiary in the plan, the 
     period that must pass with respect to the individual before 
     the individual is eligible to be covered for benefits under 
     the terms of the plan.
       ``(c) Rules Relating to Crediting Previous Coverage.--
       ``(1) Creditable coverage defined.--For purposes of this 
     part, the term `creditable coverage' means, with respect to 
     an individual, coverage of the individual under any of the 
     following:
       ``(A) A group health plan.
       ``(B) Health insurance coverage.
       ``(C) Part A or part B of title XVIII of the Social 
     Security Act.
       ``(D) Title XIX of the Social Security Act, other than 
     coverage consisting solely of benefits under section 1928.
       ``(E) Chapter 55 of title 10, United States Code.
       ``(F) A medical care program of the Indian Health Service 
     or of a tribal organization.
       ``(G) A State health benefits risk pool.
       ``(H) A health plan offered under chapter 89 of title 5, 
     United States Code.
       ``(I) A public health plan (as defined in regulations).
       ``(J) A health benefit plan under section 5(e) of the Peace 
     Corps Act (22 U.S.C. 2504(e).
     Such term does not include coverage consisting solely of 
     coverage of excepted benefits (as defined in section 
     9805(c)).
       ``(2) Not counting periods before significant breaks in 
     coverage.--
       ``(A) In general.--A period of creditable coverage shall 
     not be counted, with respect to enrollment of an individual 
     under a group health plan, if, after such period and before 
     the enrollment date, there was a 63-day period during all of 
     which the individual was not covered under any creditable 
     coverage.
       ``(B) Waiting period not treated as a break in coverage.--
     For purposes of subparagraph (A) and subsection (d)(4), any 
     period that an individual is in a waiting period for any 
     coverage under a group health plan or is in an affiliation 
     period shall not be taken into account in determining the 
     continuous period under subparagraph (A).
       ``(C) Affiliation period.--
       ``(i) In general.--For purposes of this section, the term 
     `affiliation period' means a period which, under the terms of 
     the health insurance coverage offered by the health 
     maintenance organization, must expire before the health 
     insurance coverage becomes effective. During such an 
     affiliation period, the organization is not required to 
     provide health care services or benefits and no premium shall 
     be charged to the participant or beneficiary.
       ``(ii) Beginning.--Such period shall begin on the 
     enrollment date.
       ``(iii) Runs concurrently with waiting periods.--Any such 
     affiliation period shall run concurrently with any waiting 
     period under the plan.
       ``(3) Method of crediting coverage.--
       ``(A) Standard method.--Except as otherwise provided under 
     subparagraph (B), for purposes of applying subsection (a)(3), 
     a group health plan shall count a period of creditable 
     coverage without regard to the specific benefits for which 
     coverage is offered during the period.
       ``(B) Election of alternative method.--A group health plan 
     may elect to apply subsection (a)(3) based on coverage of any 
     benefits within each of several classes or categories of 
     benefits specified in regulations rather than as provided 
     under subparagraph (A). Such election shall be made on a 
     uniform basis for all participants and beneficiaries. Under 
     such election a group health plan shall count a period of 
     creditable coverage with respect to any class or category of 
     benefits if any level of benefits is covered within such 
     class or category.
       ``(C) Plan notice.--In the case of an election with respect 
     to a group health plan under subparagraph (B), the plan 
     shall--
       ``(i) prominently state in any disclosure statements 
     concerning the plan, and state to each enrollee at the time 
     of enrollment under the plan, that the plan has made such 
     election, and
       ``(ii) include in such statements a description of the 
     effect of this election.
       ``(4) Establishment of period.--Periods of creditable 
     coverage with respect to an individual shall be established 
     through presentation of certifications described in 
     subsection (e) or in such other manner as may be specified in 
     regulations.
       ``(d) Exceptions.--
       ``(1) Exclusion not applicable to certain newborns.--
     Subject to paragraph (4), a group health plan may not impose 
     any preexisting condition exclusion in the case of an 
     individual who, as of the last day of the 30-day period 
     beginning with the date of birth, is covered under creditable 
     coverage.
       ``(2) Exclusion not applicable to certain adopted 
     children.--Subject to paragraph (4), a group health plan may 
     not impose any preexisting condition exclusion in the case of 
     a child who is adopted or placed for adoption before 
     attaining 18 years of age and who, as of the last day of the 
     30-day period beginning on the date of the adoption or 
     placement for adoption, is covered under creditable coverage. 
     The previous sentence shall not apply to coverage before the 
     date of such adoption or placement for adoption.
       ``(3) Exclusion not applicable to pregnancy.--For purposes 
     of this section, a group health plan may not impose any 
     preexisting condition exclusion relating to pregnancy as a 
     preexisting condition.
       ``(4) Loss if break in coverage.--Paragraphs (1) and (2) 
     shall no longer apply to an individual after the end of the 
     first 63-day period during all of which the individual was 
     not covered under any creditable coverage.
       ``(e) Certifications and Disclosure of Coverage.--
       ``(1) Requirement for certification of period of creditable 
     coverage.--
       ``(A) In general.--A group health plan shall provide the 
     certification described in subparagraph (B)--
       ``(i) at the time an individual ceases to be covered under 
     the plan or otherwise becomes covered under a COBRA 
     continuation provision,
       ``(ii) in the case of an individual becoming covered under 
     such a provision, at the time the individual ceases to be 
     covered under such provision, and
       ``(iii) on the request on behalf of an individual made not 
     later than 24 months after the date of cessation of the 
     coverage described in clause (i) or (ii), whichever is later.
     The certification under clause (i) may be provided, to the 
     extent practicable, at a time consistent with notices 
     required under any applicable COBRA continuation provision.
       ``(B) Certification.--The certification described in this 
     subparagraph is a written certification of--
       ``(i) the period of creditable coverage of the individual 
     under such plan and the coverage under such COBRA 
     continuation provision, and
       ``(ii) the waiting period (if any) (and affiliation period, 
     if applicable) imposed with respect to the individual for any 
     coverage under such plan.
       ``(C) Issuer compliance.--To the extent that medical care 
     under a group health plan consists of health insurance 
     coverage offered in connection with the plan, the plan is 
     deemed to have satisfied the certification requirement under 
     this paragraph if the issuer provides for such certification 
     in accordance with this paragraph.
       ``(2) Disclosure of information on previous benefits.--
       ``(A) In general.--In the case of an election described in 
     subsection (c)(3)(B) by a group health plan, if the plan 
     enrolls an individual for coverage under the plan and the 
     individual provides a certification of coverage of the 
     individual under paragraph (1)--
       ``(i) upon request of such plan, the entity which issued 
     the certification provided by the individual shall promptly 
     disclose to such requesting plan information on coverage of 
     classes and categories of health benefits available under 
     such entity's plan, and
       ``(ii) such entity may charge the requesting plan or issuer 
     for the reasonable cost of disclosing such information.
       ``(3) Regulations.--The Secretary shall establish rules to 
     prevent an entity's failure to provide information under 
     paragraph (1) or (2) with respect to previous coverage of an 
     individual from adversely affecting any subsequent coverage 
     of the individual under another group health plan or health 
     insurance coverage.
       ``(f) Special Enrollment Periods.--
       ``(1) Individuals losing other coverage.--A group health 
     plan shall permit an employee who is eligible, but not 
     enrolled, for coverage under the terms of the plan (or a 
     dependent of such an employee if the dependent is eligible, 
     but not enrolled, for coverage under such terms) to enroll 
     for coverage under the terms of the plan if each of the 
     following conditions is met:
       ``(A) The employee or dependent was covered under a group 
     health plan or had health insurance coverage at the time 
     coverage was previously offered to the employee or 
     individual.
       ``(B) The employee stated in writing at such time that 
     coverage under a group health plan or health insurance 
     coverage was the reason for declining enrollment, but only if 
     the plan sponsor (or the health insurance issuer offering

[[Page H9510]]

     health insurance coverage in connection with the plan) 
     required such a statement at such time and provided the 
     employee with notice of such requirement (and the 
     consequences of such requirement) at such time.
       ``(C) The employee's or dependent's coverage described in 
     subparagraph (A)--
       ``(i) was under a COBRA continuation provision and the 
     coverage under such provision was exhausted; or
       ``(ii) was not under such a provision and either the 
     coverage was terminated as a result of loss of eligibility 
     for the coverage (including as a result of legal separation, 
     divorce, death, termination of employment, or reduction in 
     the number of hours of employment) or employer contributions 
     towards such coverage were terminated.
       ``(D) Under the terms of the plan, the employee requests 
     such enrollment not later than 30 days after the date of 
     exhaustion of coverage described in subparagraph (C)(i) or 
     termination of coverage or employer contribution described in 
     subparagraph (C)(ii).
       ``(2) For dependent beneficiaries.--
       ``(A) In general.--If--
       ``(i) a group health plan makes coverage available with 
     respect to a dependent of an individual,
       ``(ii) the individual is a participant under the plan (or 
     has met any waiting period applicable to becoming a 
     participant under the plan and is eligible to be enrolled 
     under the plan but for a failure to enroll during a previous 
     enrollment period), and
       ``(iii) a person becomes such a dependent of the individual 
     through marriage, birth, or adoption or placement for 
     adoption,
     the group health plan shall provide for a dependent special 
     enrollment period described in subparagraph (B) during which 
     the person (or, if not otherwise enrolled, the individual) 
     may be enrolled under the plan as a dependent of the 
     individual, and in the case of the birth or adoption of a 
     child, the spouse of the individual may be enrolled as a 
     dependent of the individual if such spouse is otherwise 
     eligible for coverage.
       ``(B) Dependent special enrollment period.--The dependent 
     special enrollment period under this subparagraph shall be a 
     period of not less than 30 days and shall begin on the later 
     of--
       ``(i) the date dependent coverage is made available, or
       ``(ii) the date of the marriage, birth, or adoption or 
     placement for adoption (as the case may be) described in 
     subparagraph (A)(iii).
       ``(C) No waiting period.--If an individual seeks coverage 
     of a dependent during the first 30 days of such a dependent 
     special enrollment period, the coverage of the dependent 
     shall become effective--
       ``(i) in the case of marriage, not later than the first day 
     of the first month beginning after the date the completed 
     request for enrollment is received;
       ``(ii) in the case of a dependent's birth, as of the date 
     of such birth; or
       ``(iii) in the case of a dependent's adoption or placement 
     for adoption, the date of such adoption or placement for 
     adoption.

     ``SEC. 9802. PROHIBITING DISCRIMINATION AGAINST INDIVIDUAL 
                   PARTICIPANTS AND BENEFICIARIES BASED ON HEALTH 
                   STATUS.

       ``(a) In Eligibility to Enroll.--
       ``(1) In general.--Subject to paragraph (2), a group health 
     plan may not establish rules for eligibility (including 
     continued eligibility) of any individual to enroll under the 
     terms of the plan based on any of the following factors in 
     relation to the individual or a dependent of the individual:
       ``(A) Health status.
       ``(B) Medical condition (including both physical and mental 
     illnesses).
       ``(C) Claims experience.
       ``(D) Receipt of health care.
       ``(E) Medical history.
       ``(F) Genetic information.
       ``(G) Evidence of insurability (including conditions 
     arising out of acts of domestic violence).
       ``(H) Disability.
       ``(2) No application to benefits or exclusions.--To the 
     extent consistent with section 9801, paragraph (1) shall not 
     be construed--
       ``(A) to require a group health plan to provide particular 
     benefits (or benefits with respect to a specific procedure, 
     treatment, or service) other than those provided under the 
     terms of such plan; or
       ``(B) to prevent such a plan from establishing limitations 
     or restrictions on the amount, level, extent, or nature of 
     the benefits or coverage for similarly situated individuals 
     enrolled in the plan or coverage.
       ``(3) Construction.--For purposes of paragraph (1), rules 
     for eligibility to enroll under a plan include rules defining 
     any applicable waiting periods for such enrollment.
       ``(b) In Premium Contributions.--
       ``(1) In general.--A group health plan may not require any 
     individual (as a condition of enrollment or continued 
     enrollment under the plan) to pay a premium or contribution 
     which is greater than such premium or contribution for a 
     similarly situated individual enrolled in the plan on the 
     basis of any factor described in subsection (a)(1) in 
     relation to the individual or to an individual enrolled under 
     the plan as a dependent of the individual.
       ``(2) Construction.--Nothing in paragraph (1) shall be 
     construed--
       ``(A) to restrict the amount that an employer may be 
     charged for coverage under a group health plan; or
       ``(B) to prevent a group health plan from establishing 
     premium discounts or rebates or modifying otherwise 
     applicable copayments or deductibles in return for adherence 
     to programs of health promotion and disease prevention.

     ``SEC. 9803. GUARANTEED RENEWABILITY IN MULTIEMPLOYER PLANS 
                   AND CERTAIN MULTIPLE EMPLOYER WELFARE 
                   ARRANGEMENTS.

       ``(a) In General.--A group health plan which is a 
     multiemployer plan (as defined in section 414(f)) or which is 
     a multiple employer welfare arrangement may not deny an 
     employer continued access to the same or different coverage 
     under such plan, other than--
       ``(1) for nonpayment of contributions;
       ``(2) for fraud or other intentional misrepresentation of 
     material fact by the employer;
       ``(3) for noncompliance with material plan provisions;
       ``(4) because the plan is ceasing to offer any coverage in 
     a geographic area;
       ``(5) in the case of a plan that offers benefits through a 
     network plan, because there is no longer any individual 
     enrolled through the employer who lives, resides, or works in 
     the service area of the network plan and the plan applies 
     this paragraph uniformly without regard to the claims 
     experience of employers or a factor described in section 
     9802(a)(1) in relation to such individuals or their 
     dependents; or
       ``(6) for failure to meet the terms of an applicable 
     collective bargaining agreement, to renew a collective 
     bargaining or other agreement requiring or authorizing 
     contributions to the plan, or to employ employees covered by 
     such an agreement.
       ``(b) Multiple Employer Welfare Arrangement.--For purposes 
     of subsection (a), the term `multiple employer welfare 
     arrangement' has the meaning given such term by section 3(40) 
     of the Employee Retirement Income Security Act of 1974, as in 
     effect on the date of the enactment of this section.

     ``SEC. 9804. GENERAL EXCEPTIONS.

       ``(a) Exception for Certain Plans.--The requirements of 
     this chapter shall not apply to--
       ``(1) any governmental plan, and
       ``(2) any group health plan for any plan year if, on the 
     first day of such plan year, such plan has less than 2 
     participants who are current employees.
       ``(b) Exception for Certain Benefits.--The requirements of 
     this chapter shall not apply to any group health plan in 
     relation to its provision of excepted benefits described in 
     section 9805(c)(1).
       ``(c) Exception for Certain Benefits If Certain Conditions 
     Met.--
       ``(1) Limited, excepted benefits.--The requirements of this 
     chapter shall not apply to any group health plan in relation 
     to its provision of excepted benefits described in section 
     9805(c)(2) if the benefits--
       ``(A) are provided under a separate policy, certificate, or 
     contract of insurance; or
       ``(B) are otherwise not an integral part of the plan.
       ``(2) Noncoordinated, excepted benefits.--The requirements 
     of this chapter shall not apply to any group health plan in 
     relation to its provision of excepted benefits described in 
     section 9805(c)(3) if all of the following conditions are 
     met:
       ``(A) The benefits are provided under a separate policy, 
     certificate, or contract of insurance.
       ``(B) There is no coordination between the provision of 
     such benefits and any exclusion of benefits under any group 
     health plan maintained by the same plan sponsor.
       ``(C) Such benefits are paid with respect to an event 
     without regard to whether benefits are provided with respect 
     to such an event under any group health plan maintained by 
     the same plan sponsor.
       ``(3) Supplemental excepted benefits.--The requirements of 
     this chapter shall not apply to any group health plan in 
     relation to its provision of excepted benefits described in 
     section 9805(c)(4) if the benefits are provided under a 
     separate policy, certificate, or contract of insurance.

     ``SEC. 9805. DEFINITIONS.

       ``(a) Group Health Plan.--For purposes of this chapter, the 
     term `group health plan' has the meaning given to such term 
     by section 5000(b)(1).
       ``(b) Definitions Relating to Health Insurance.--For 
     purposes of this chapter--
       ``(1) Health insurance coverage.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the term `health insurance coverage' means benefits 
     consisting of medical care (provided directly, through 
     insurance or reimbursement, or otherwise) under any hospital 
     or medical service policy or certificate, hospital or medical 
     service plan contract, or health maintenance organization 
     contract offered by a health insurance issuer.
       ``(B) No application to certain excepted benefits.--In 
     applying subparagraph (A), excepted benefits described in 
     subsection (c)(1) shall not be treated as benefits consisting 
     of medical care.
       ``(2) Health insurance issuer.--The term `health insurance 
     issuer' means an insurance company, insurance service, or 
     insurance organization (including a health maintenance 
     organization, as defined in paragraph (3)) which is licensed 
     to engage in the business of insurance in a State and which 
     is subject to State law which regulates insurance (within the 
     meaning of section 514(b)(2) of the Employee Retirement 
     Income Security Act of 1974, as in effect on the date of the 
     enactment of this section). Such term does not include a 
     group health plan.
       ``(3) Health maintenance organization.--The term `health 
     maintenance organization' means--
       ``(A) a Federally qualified health maintenance organization 
     (as defined in section 1301(a) of the Public Health Service 
     Act (42 U.S.C. 300e(a))),
       ``(B) an organization recognized under State law as a 
     health maintenance organization, or
       ``(C) a similar organization regulated under State law for 
     solvency in the same manner and

[[Page H9511]]

     to the same extent as such a health maintenance organization.
       ``(c) Excepted Benefits.--For purposes of this chapter, the 
     term `excepted benefits' means benefits under one or more (or 
     any combination thereof) of the following:
       ``(1) Benefits not subject to requirements.--
       ``(A) Coverage only for accident, or disability income 
     insurance, or any combination thereof.
       ``(B) Coverage issued as a supplement to liability 
     insurance.
       ``(C) Liability insurance, including general liability 
     insurance and automobile liability insurance.
       ``(D) Workers' compensation or similar insurance.
       ``(E) Automobile medical payment insurance.
       ``(F) Credit-only insurance.
       ``(G) Coverage for on-site medical clinics.
       ``(H) Other similar insurance coverage, specified in 
     regulations, under which benefits for medical care are 
     secondary or incidental to other insurance benefits.
       ``(2) Benefits not subject to requirements if offered 
     separately.--
       ``(A) Limited scope dental or vision benefits.
       ``(B) Benefits for long-term care, nursing home care, home 
     health care, community-based care, or any combination 
     thereof.
       ``(C) Such other similar, limited benefits as are specified 
     in regulations.
       ``(3) Benefits not subject to requirements if offered as 
     independent, noncoordinated benefits.--
       ``(A) Coverage only for a specified disease or illness.
       ``(B) Hospital indemnity or other fixed indemnity 
     insurance.
       ``(4) Benefits not subject to requirements if offered as 
     separate insurance policy.--Medicare supplemental health 
     insurance (as defined under section 1882(g)(1) of the Social 
     Security Act), coverage supplemental to the coverage provided 
     under chapter 55 of title 10, United States Code, and similar 
     supplemental coverage provided to coverage under a group 
     health plan.
       ``(d) Other Definitions.--For purposes of this chapter--
       ``(1) COBRA continuation provision.--The term `COBRA 
     continuation provision' means any of the following:
       ``(A) Section 4980B, other than subsection (f)(1) thereof 
     insofar as it relates to pediatric vaccines.
       ``(B) Part 6 of subtitle B of title I of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1161 et 
     seq.), other than section 609 of such Act.
       ``(C) Title XXII of the Public Health Service Act.
       ``(2) Governmental plan.--The term `governmental plan' has 
     the meaning given such term by section 414(d).
       ``(3) Medical care.--The term `medical care' has the 
     meaning given such term by section 213(d) determined without 
     regard to--
       ``(A) paragraph (1)(C) thereof, and
       ``(B) so much of paragraph (1)(D) thereof as relates to 
     qualified long-term care insurance.
       ``(4) Network plan.--The term `network plan' means health 
     insurance coverage of a health insurance issuer under which 
     the financing and delivery of medical care are provided, in 
     whole or in part, through a defined set of providers under 
     contract with the issuer.
       ``(5) Placed for adoption defined.--The term `placement', 
     or being `placed', for adoption, in connection with any 
     placement for adoption of a child with any person, means the 
     assumption and retention by such person of a legal obligation 
     for total or partial support of such child in anticipation of 
     adoption of such child. The child's placement with such 
     person terminates upon the termination of such legal 
     obligation.

     ``SEC. 9806. REGULATIONS.

       ``The Secretary, consistent with section 104 of the Health 
     Care Portability and Accountability Act of 1996, may 
     promulgate such regulations as may be necessary or 
     appropriate to carry out the provisions of this chapter. The 
     Secretary may promulgate any interim final rules as the 
     Secretary determines are appropriate to carry out this 
     chapter.''
       (b) Clerical Amendment.--The table of subtitles of such 
     Code is amended by adding at the end the following new item:
``Subtitle K. Group health plan portability, access, and renewability 
              requirements.''
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to plan years beginning after June 30, 1997.
       (2) Determination of creditable coverage.--
       (A) Period of coverage.--
       (i) In general.--Subject to clause (ii), no period before 
     July 1, 1996, shall be taken into account under chapter 100 
     of the Internal Revenue Code of 1986 (as added by this 
     section) in determining creditable coverage.
       (ii) Special rule for certain periods.--The Secretary of 
     the Treasury, consistent with section 104, shall provide for 
     a process whereby individuals who need to establish 
     creditable coverage for periods before July 1, 1996, and who 
     would have such coverage credited but for clause (i) may be 
     given credit for creditable coverage for such periods through 
     the presentation of documents or other means.
       (B) Certifications, etc.--
       (i) In general.--Subject to clauses (ii) and (iii), 
     subsection (e) of section 9801 of the Internal Revenue Code 
     of 1986 (as added by this section) shall apply to events 
     occurring after June 30, 1996.
       (ii) No certification required to be provided before june 
     1, 1997.--In no case is a certification required to be 
     provided under such subsection before June 1, 1997.
       (iii) Certification only on written request for events 
     occurring before october 1, 1996.--In the case of an event 
     occurring after June 30, 1996, and before October 1, 1996, a 
     certification is not required to be provided under such 
     subsection unless an individual (with respect to whom the 
     certification is otherwise required to be made) requests such 
     certification in writing.
       (C) Transitional rule.--In the case of an individual who 
     seeks to establish creditable coverage for any period for 
     which certification is not required because it relates to an 
     event occurring before June 30, 1996--
       (i) the individual may present other credible evidence of 
     such coverage in order to establish the period of creditable 
     coverage; and
       (ii) a group health plan and a health insurance issuer 
     shall not be subject to any penalty or enforcement action 
     with respect to the plan's or issuer's crediting (or not 
     crediting) such coverage if the plan or issuer has sought to 
     comply in good faith with the applicable requirements under 
     the amendments made by this section.
       (3) Special rule for collective bargaining agreements.--
     Except as provided in paragraph (2), in the case of a group 
     health plan maintained pursuant to 1 or more collective 
     bargaining agreements between employee representatives and 
     one or more employers ratified before the date of the 
     enactment of this Act, the amendments made by this section 
     shall not apply to plan years beginning before the later of--
       (A) the date on which the last of the collective bargaining 
     agreements relating to the plan terminates (determined 
     without regard to any extension thereof agreed to after the 
     date of the enactment of this Act), or
       (B) July 1, 1997.
     For purposes of subparagraph (A), any plan amendment made 
     pursuant to a collective bargaining agreement relating to the 
     plan which amends the plan solely to conform to any 
     requirement added by this section shall not be treated as a 
     termination of such collective bargaining agreement.
       (4) Timely regulations.--The Secretary of the Treasury, 
     consistent with section 104, shall first issue by not later 
     than April 1, 1997, such regulations as may be necessary to 
     carry out the amendments made by this section.
       (5) Limitation on actions.--No enforcement action shall be 
     taken, pursuant to the amendments made by this section, 
     against a group health plan or health insurance issuer with 
     respect to a violation of a requirement imposed by such 
     amendments before January 1, 1998, or, if later, the date of 
     issuance of regulations referred to in paragraph (4), if the 
     plan or issuer has sought to comply in good faith with such 
     requirements.

     SEC. 402. PENALTY ON FAILURE TO MEET CERTAIN GROUP HEALTH 
                   PLAN REQUIREMENTS.

       (a) In General.--Chapter 43 of the Internal Revenue Code of 
     1986 (relating to qualified pension, etc., plans) is amended 
     by adding after section 4980C the following new section:

     ``SEC. 4980D. FAILURE TO MEET CERTAIN GROUP HEALTH PLAN 
                   REQUIREMENTS.

       ``(a) General Rule.--There is hereby imposed a tax on any 
     failure of a group health plan to meet the requirements of 
     chapter 100 (relating to group health plan portability, 
     access, and renewability requirements).
       ``(b) Amount of Tax.--
       ``(1) In general.--The amount of the tax imposed by 
     subsection (a) on any failure shall be $100 for each day in 
     the noncompliance period with respect to each individual to 
     whom such failure relates.
       ``(2) Noncompliance period.--For purposes of this section, 
     the term `noncompliance period' means, with respect to any 
     failure, the period--
       ``(A) beginning on the date such failure first occurs, and
       ``(B) ending on the date such failure is corrected.
       ``(3) Minimum tax for noncompliance period where failure 
     discovered after notice of examination.--Notwithstanding 
     paragraphs (1) and (2) of subsection (c)--
       ``(A) In general.--In the case of 1 or more failures with 
     respect to an individual--
       ``(i) which are not corrected before the date a notice of 
     examination of income tax liability is sent to the employer, 
     and
       ``(ii) which occurred or continued during the period under 
     examination,
     the amount of tax imposed by subsection (a) by reason of such 
     failures with respect to such individual shall not be less 
     than the lesser of $2,500 or the amount of tax which would be 
     imposed by subsection (a) without regard to such paragraphs.
       ``(B) Higher minimum tax where violations are more than de 
     minimis.--To the extent violations for which any person is 
     liable under subsection (e) for any year are more than de 
     minimis, subparagraph (A) shall be applied by substituting 
     `$15,000' for `$2,500' with respect to such person.
       ``(C) Exception for church plans.--This paragraph shall not 
     apply to any failure under a church plan (as defined in 
     section 414(e)).
       ``(c) Limitations on Amount of Tax.--
       ``(1) Tax not to apply where failure not discovered 
     exercising reasonable diligence.--No tax shall be imposed by 
     subsection (a) on any failure during any period for which it 
     is established to the satisfaction of the Secretary that the 
     person otherwise liable for such tax did not know, and 
     exercising reasonable diligence would not have known, that 
     such failure existed.
       ``(2) Tax not to apply to failures corrected within certain 
     periods.--No tax shall be imposed by subsection (a) on any 
     failure if--
       ``(A) such failure was due to reasonable cause and not to 
     willful neglect, and
       ``(B)(i) in the case of a plan other than a church plan (as 
     defined in section 414(e)), such

[[Page H9512]]

     failure is corrected during the 30-day period beginning on 
     the 1st date the person otherwise liable for such tax knew, 
     or exercising reasonable diligence would have known, that 
     such failure existed, and
       ``(ii) in the case of a church plan (as so defined), such 
     failure is corrected before the close of the correction 
     period (determined under the rules of section 414(e)(4)(C)).
       ``(3) Overall limitation for unintentional failures.--In 
     the case of failures which are due to reasonable cause and 
     not to willful neglect--
       ``(A) Single employer plans.--
       ``(i) In general.--In the case of failures with respect to 
     plans other than specified multiple employer health plans, 
     the tax imposed by subsection (a) for failures during the 
     taxable year of the employer shall not exceed the amount 
     equal to the lesser of--

       ``(I) 10 percent of the aggregate amount paid or incurred 
     by the employer (or predecessor employer) during the 
     preceding taxable year for group health plans, or
       ``(II) $500,000.

       ``(ii) Taxable years in the case of certain controlled 
     groups.--For purposes of this subparagraph, if not all 
     persons who are treated as a single employer for purposes of 
     this section have the same taxable year, the taxable years 
     taken into account shall be determined under principles 
     similar to the principles of section 1561.
       ``(B) Specified multiple employer health plans.--
       ``(i) In general.--In the case of failures with respect to 
     a specified multiple employer health plan, the tax imposed by 
     subsection (a) for failures during the taxable year of the 
     trust forming part of such plan shall not exceed the amount 
     equal to the lesser of--

       ``(I) 10 percent of the amount paid or incurred by such 
     trust during such taxable year to provide medical care (as 
     defined in section 9805(d)(3)) directly or through insurance, 
     reimbursement, or otherwise, or
       ``(II) $500,000.

     For purposes of the preceding sentence, all plans of which 
     the same trust forms a part shall be treated as 1 plan.
       ``(ii) Special rule for employers required to pay tax.--If 
     an employer is assessed a tax imposed by subsection (a) by 
     reason of a failure with respect to a specified multiple 
     employer health plan, the limit shall be determined under 
     subparagraph (A) (and not under this subparagraph) and as if 
     such plan were not a specified multiple employer health plan.
       ``(4) Waiver by secretary.--In the case of a failure which 
     is due to reasonable cause and not to willful neglect, the 
     Secretary may waive part or all of the tax imposed by 
     subsection (a) to the extent that the payment of such tax 
     would be excessive relative to the failure involved.
       ``(d) Tax Not To Apply to Certain Insured Small Employer 
     Plans.--
       ``(1) In general.--In the case of a group health plan of a 
     small employer which provides health insurance coverage 
     solely through a contract with a health insurance issuer, no 
     tax shall be imposed by this section on the employer on any 
     failure which is solely because of the health insurance 
     coverage offered by such issuer.
       ``(2) Small employer.--
       ``(A) In general.--For purposes of paragraph (1), the term 
     `small employer' means, with respect to a calendar year and a 
     plan year, an employer who employed an average of at least 2 
     but not more than 50 employees on business days during the 
     preceding calendar year and who employs at least 2 employees 
     on the first day of the plan year. For purposes of the 
     preceding sentence, all persons treated as a single employer 
     under subsection (b), (c), (m), or (o) of section 414 shall 
     be treated as 1 employer.
       ``(B) Employers not in existence in preceding year.--In the 
     case of an employer which was not in existence throughout the 
     preceding calendar year, the determination of whether such 
     employer is a small employer shall be based on the average 
     number of employees that it is reasonably expected such 
     employer will employ on business days in the current calendar 
     year.
       ``(C) Predecessors.--Any reference in this paragraph to an 
     employer shall include a reference to any predecessor of such 
     employer.
       ``(3) Health insurance coverage; health insurance issuer.--
     For purposes of paragraph (1), the terms `health insurance 
     coverage' and `health insurance issuer' have the respective 
     meanings given such terms by section 9805.
       ``(e) Liability for Tax.--The following shall be liable for 
     the tax imposed by subsection (a) on a failure:
       ``(1) Except as otherwise provided in this subsection, the 
     employer.
       ``(2) In the case of a multiemployer plan, the plan.
       ``(3) In the case of a failure under section 9803 (relating 
     to guaranteed renewability) with respect to a plan described 
     in subsection (f)(2)(B), the plan.
       ``(f) Definitions.--For purposes of this section--
       ``(1) Group health plan.--The term `group health plan' has 
     the meaning given such term by section 9805(a).
       ``(2) Specified multiple employer health plan.--The term 
     `specified multiple employer health plan' means a group 
     health plan which is--
       ``(A) any multiemployer plan, or
       ``(B) any multiple employer welfare arrangement (as defined 
     in section 3(40) of the Employee Retirement Income Secrurity 
     Act of 1974, as in effect on the date of the enactment of 
     this section).
       ``(3) Correction.--A failure of a group health plan shall 
     be treated as corrected if--
       ``(A) such failure is retroactively undone to the extent 
     possible, and
       ``(B) the person to whom the failure relates is placed in a 
     financial position which is as good as such person would have 
     been in had such failure not occurred.''
       (b) Clerical Amendment.--The table of sections for chapter 
     43 of such Code is amended by adding after the item relating 
     to section 4980C the following new item:

``Sec. 4980D. Failure to meet certain group health plan requirements.''

       (c) Effective Date.--The amendments made by this section 
     shall apply to failures under chapter 100 of the Internal 
     Revenue Code of 1986 (as added by section 401 of this Act).
Subtitle B--Clarification of Certain Continuation Coverage Requirements

     SEC. 421. COBRA CLARIFICATIONS.

       (a) Public Health Service Act.--
       (1) Period of coverage.--Section 2202(2) of the Public 
     Health Service Act (42 U.S.C. 300bb-2(2)) is amended--
       (A) in subparagraph (A)--
       (i) by transferring the sentence immediately preceding 
     clause (iv) so as to appear immediately following such clause 
     (iv); and
       (ii) in the last sentence (as so transferred)--

       (I) by striking ``an individual'' and inserting ``a 
     qualified beneficiary'';
       (II) by striking ``at the time of a qualifying event 
     described in section 2203(2)'' and inserting ``at any time 
     during the first 60 days of continuation coverage under this 
     title'';
       (III) by striking ``with respect to such event,''; and
       (IV) by inserting ``(with respect to all qualified 
     beneficiaries)'' after ``29 months'';

       (B) in subparagraph (D)(i), by inserting before ``, or'' 
     the following: ``(other than such an exclusion or limitation 
     which does not apply to (or is satisfied by) such beneficiary 
     by reason of chapter 100 of the Internal Revenue Code of 
     1986, part 7 of subtitle B of title I of the Employee 
     Retirement Income Security Act of 1974, or title XXVII of 
     this Act)''; and
       (C) in subparagraph (E), by striking ``at the time of a 
     qualifying event described in section 2203(2)'' and inserting 
     ``at any time during the first 60 days of continuation 
     coverage under this title''.
       (2) Notices.--Section 2206(3) of the Public Health Service 
     Act (42 U.S.C. 300bb-6(3)) is amended by striking ``at the 
     time of a qualifying event described in section 2203(2)'' and 
     inserting ``at any time during the first 60 days of 
     continuation coverage under this title''.
       (3) Birth or adoption of a child.--Section 2208(3)(A) of 
     the Public Health Service Act (42 U.S.C. 300bb-8(3)(A)) is 
     amended by adding at the end thereof the following new flush 
     sentence:
     ``Such term shall also include a child who is born to or 
     placed for adoption with the covered employee during the 
     period of continuation coverage under this title.''.
       (b) Employee Retirement Income Security Act of 1974.--
       (1) Period of coverage.--Section 602(2) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1162(2)) is 
     amended--
       (A) in the last sentence of subparagraph (A)--
       (i) by striking ``an individual'' and inserting ``a 
     qualified beneficiary'';
       (ii) by striking ``at the time of a qualifying event 
     described in section 603(2)'' and inserting ``at any time 
     during the first 60 days of continuation coverage under this 
     part'';
       (iii) by striking ``with respect to such event''; and
       (iv) by inserting ``(with respect to all qualified 
     beneficiaries)'' after ``29 months'';
       (B) in subparagraph (D)(i), by inserting before ``, or'' 
     the following: ``(other than such an exclusion or limitation 
     which does not apply to (or is satisfied by) such beneficiary 
     by reason of chapter 100 of the Internal Revenue Code of 
     1986, part 7 of this subtitle, or title XXVII of the Public 
     Health Service Act)''; and
       (C) in subparagraph (E), by striking ``at the time of a 
     qualifying event described in section 603(2)'' and inserting 
     ``at any time during the first 60 days of continuation 
     coverage under this part''.
       (2) Notices.--Section 606(a)(3) of the Employee Retirement 
     Income Security Act of 1974 (29 U.S.C. 1166(a)(3)) is amended 
     by striking ``at the time of a qualifying event described in 
     section 603(2)'' and inserting ``at any time during the first 
     60 days of continuation coverage under this part''.
       (3) Birth or adoption of a child.--Section 607(3)(A) of the 
     Employee Retirement Income Security Act of 1974 (29 U.S.C. 
     1167(3)) is amended by adding at the end thereof the 
     following new flush sentence:
     ``Such term shall also include a child who is born to or 
     placed for adoption with the covered employee during the 
     period of continuation coverage under this part.''.
       (c) Internal Revenue Code of 1986.--
       (1) Period of coverage.--Section 4980B(f)(2)(B) of the 
     Internal Revenue Code of 1986 is amended--
       (A) in the last sentence of clause (i)--
       (i) by striking ``at the time of a qualifying event 
     described in paragraph (3)(B)'' and inserting ``at any time 
     during the first 60 days of continuation coverage under this 
     section'';
       (ii) by striking ``with respect to such event''; and
       (iii) by inserting ``(with respect to all qualified 
     beneficiaries)'' after ``29 months'';
       (B) in clause (iv)(I), by inserting before ``, or'' the 
     following: ``(other than such an exclusion or limitation 
     which does not apply to (or is satisfied by) such beneficiary 
     by reason of chapter 100 of this title, part 7 of subtitle B 
     of title I of the Employee Retirement Income Security Act of 
     1974, or title XXVII of the Public Health Service Act)''; and
       (C) in clause (v), by striking ``at the time of a 
     qualifying event described in paragraph (3)(B)'' and 
     inserting ``at any time during the first 60

[[Page H9513]]

     days of continuation coverage under this section''.
       (2) Notices.--Section 4980B(f)(6)(C) of the Internal 
     Revenue Code of 1986 is amended by striking ``at the time of 
     a qualifying event described in paragraph (3)(B)'' and 
     inserting ``at any time during the first 60 days of 
     continuation coverage under this section''.
       (3) Birth or adoption of a child.--Section 4980B(g)(1)(A) 
     of the Internal Revenue Code of 1986 is amended by adding at 
     the end thereof the following new flush sentence:
     ``Such term shall also include a child who is born to or 
     placed for adoption with the covered employee during the 
     period of continuation coverage under this section.''.
       (d) Effective Date.--The amendments made by this section 
     shall become effective on January 1, 1997, regardless of 
     whether the qualifying event occurred before, on, or after 
     such date.
       (e) Notification of Changes.--Not later than November 1, 
     1996, each group health plan (covered under title XXII of the 
     Public Health Service Act, part 6 of subtitle B of title I of 
     the Employee Retirement Income Security Act of 1974, and 
     section 4980B(f) of the Internal Revenue Code of 1986) shall 
     notify each qualified beneficiary who has elected 
     continuation coverage under such title, part or section of 
     the amendments made by this section.
                        TITLE V--REVENUE OFFSETS

     SEC. 500. AMENDMENT OF 1986 CODE.

       Except as otherwise expressly provided, whenever in this 
     title an amendment or repeal is expressed in terms of an 
     amendment to, or repeal of, a section or other provision, the 
     reference shall be considered to be made to a section or 
     other provision of the Internal Revenue Code of 1986.
                Subtitle A--Company-Owned Life Insurance

     SEC. 501. DENIAL OF DEDUCTION FOR INTEREST ON LOANS WITH 
                   RESPECT TO COMPANY-OWNED LIFE INSURANCE.

       (a) In General.--Paragraph (4) of section 264(a) is 
     amended--
       (1) by inserting ``, or any endowment or annuity contracts 
     owned by the taxpayer covering any individual,'' after ``the 
     life of any individual'', and
       (2) by striking all that follows ``carried on by the 
     taxpayer'' and inserting a period.
       (b) Exception for Contracts Relating to Key Persons; 
     Permissible Interest Rates.--Section 264 is amended--
       (1) by striking ``Any'' in subsection (a)(4) and inserting 
     ``Except as provided in subsection (d), any'', and
       (2) by adding at the end the following new subsection:
       ``(d) Special Rules For Application of Subsection (a)(4).--
       ``(1) Exception for key persons.--Subsection (a)(4) shall 
     not apply to any interest paid or accrued on any indebtedness 
     with respect to policies or contracts covering an individual 
     who is a key person to the extent that the aggregate amount 
     of such indebtedness with respect to policies and contracts 
     covering such individual does not exceed $50,000.
       ``(2) Interest rate cap on key persons and pre-1986 
     contracts.--
       ``(A) In general.--No deduction shall be allowed by reason 
     of paragraph (1) or the last sentence of subsection (a) with 
     respect to interest paid or accrued for any month beginning 
     after December 31, 1995, to the extent the amount of such 
     interest exceeds the amount which would have been determined 
     if the applicable rate of interest were used for such month.
       ``(B) Applicable rate of interest.--For purposes of 
     subparagraph (A)--
       ``(i) In general.--The applicable rate of interest for any 
     month is the rate of interest described as Moody's Corporate 
     Bond Yield Average-Monthly Average Corporates as published by 
     Moody's Investors Service, Inc., or any successor thereto, 
     for such month.
       ``(ii) Pre-1986 contracts.--In the case of indebtedness on 
     a contract purchased on or before June 20, 1986--

       ``(I) which is a contract providing a fixed rate of 
     interest, the applicable rate of interest for any month shall 
     be the Moody's rate described in clause (i) for the month in 
     which the contract was purchased, or
       ``(II) which is a contract providing a variable rate of 
     interest, the applicable rate of interest for any month in an 
     applicable period shall be such Moody's rate for the third 
     month preceding the first month in such period.

     For purposes of subclause (II), the taxpayer shall elect an 
     applicable period for such contract on its return of tax 
     imposed by this chapter for its first taxable year ending on 
     or after October 13, 1995. Such applicable period shall be 
     for any number of months (not greater than 12) specified in 
     the election and may not be changed by the taxpayer without 
     the consent of the Secretary.
       ``(3) Key person.--For purposes of paragraph (1), the term 
     `key person' means an officer or 20-percent owner, except 
     that the number of individuals who may be treated as key 
     persons with respect to any taxpayer shall not exceed the 
     greater of--
       ``(A) 5 individuals, or
       ``(B) the lesser of 5 percent of the total officers and 
     employees of the taxpayer or 20 individuals.
       ``(4) 20-percent owner.--For purposes of this subsection, 
     the term `20-percent owner' means--
       ``(A) if the taxpayer is a corporation, any person who owns 
     directly 20 percent or more of the outstanding stock of the 
     corporation or stock possessing 20 percent or more of the 
     total combined voting power of all stock of the corporation, 
     or
       ``(B) if the taxpayer is not a corporation, any person who 
     owns 20 percent or more of the capital or profits interest in 
     the employer.
       ``(5) Aggregation rules.--
       ``(A) In general.--For purposes of paragraph (4)(A) and 
     applying the $50,000 limitation in paragraph (1)--
       ``(i) all members of a controlled group shall be treated as 
     1 taxpayer, and
       ``(ii) such limitation shall be allocated among the members 
     of such group in such manner as the Secretary may prescribe.
       ``(B) Controlled group.--For purposes of this paragraph, 
     all persons treated as a single employer under subsection (a) 
     or (b) of section 52 or subsection (m) or (o) of section 414 
     shall be treated as members of a controlled group.''.
       (c) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to interest paid or accrued after October 13, 1995.
       (2) Transition rule for existing indebtedness.--
       (A) In general.--In the case of--
       (i) indebtedness incurred before January 1, 1996, or
       (ii) indebtedness incurred before January 1, 1997 with 
     respect to any contract or policy entered into in 1994 or 
     1995,

     the amendments made by this section shall not apply to 
     qualified interest paid or accrued on such indebtedness after 
     October 13, 1995, and before January 1, 1999.
       (B) Qualified interest.--For purposes of subparagraph (A), 
     the qualified interest with respect to any indebtedness for 
     any month is the amount of interest (otherwise deductible) 
     which would be paid or accrued for such month on such 
     indebtedness if--
       (i) in the case of any interest paid or accrued after 
     December 31, 1995, indebtedness with respect to no more than 
     20,000 insured individuals were taken into account, and
       (ii) the lesser of the following rates of interest were 
     used for such month:

       (I) The rate of interest specified under the terms of the 
     indebtedness as in effect on October 13, 1995 (and without 
     regard to modification of such terms after such date).
       (II) The applicable percentage of the rate of interest 
     described as Moody's Corporate Bond Yield Average-Monthly 
     Average Corporates as published by Moody's Investors Service, 
     Inc., or any successor thereto, for such month.

     For purposes of clause (i), all persons treated as a single 
     employer under subsection (a) or (b) of section 52 of the 
     Internal Revenue Code of 1986 or subsection (m) or (o) of 
     section 414 of such Code shall be treated as 1 person. 
     Subclause (II) of clause (ii) shall not apply to any month 
     before January 1, 1996.
       (C) Applicable percentage.--For purposes of subparagraph 
     (B), the applicable percentage is as follows:
                                                     The percentage is:
    1996...................................................100 percent 
    1997....................................................90 percent 
    1998....................................................80 percent.
       (3) Special rule for grandfathered contracts.--This section 
     shall not apply to any contract purchased on or before June 
     20, 1986, except that section 264(d)(2) of the Internal 
     Revenue Code of 1986 shall apply to interest paid or accrued 
     after October 13, 1995.
       (d) Spread of Income Inclusion on Surrender, Etc. of 
     Contracts.--
       (1) In general.--If any amount is received under any life 
     insurance policy or endowment or annuity contract described 
     in paragraph (4) of section 264(a) of the Internal Revenue 
     Code of 1986--
       (A) on the complete surrender, redemption, or maturity of 
     such policy or contract during calendar year 1996, 1997, or 
     1998, or
       (B) in full discharge during any such calendar year of the 
     obligation under the policy or contract which is in the 
     nature of a refund of the consideration paid for the policy 
     or contract,

     then (in lieu of any other inclusion in gross income) such 
     amount shall be includible in gross income ratably over the 
     4-taxable year period beginning with the taxable year such 
     amount would (but for this paragraph) be includible. The 
     preceding sentence shall only apply to the extent the amount 
     is includible in gross income for the taxable year in which 
     the event described in subparagraph (A) or (B) occurs.
       (2) Special rules for applying section 264.--A contract 
     shall not be treated as--
       (A) failing to meet the requirement of section 264(c)(1) of 
     the Internal Revenue Code of 1986, or
       (B) a single premium contract under section 264(b)(1) of 
     such Code,

     solely by reason of an occurrence described in subparagraph 
     (A) or (B) of paragraph (1) of this subsection or solely by 
     reason of no additional premiums being received under the 
     contract by reason of a lapse occurring after October 13, 
     1995.
       (3) Special rule for deferred acquisition costs.--In the 
     case of the occurrence of any event described in subparagraph 
     (A) or (B) of paragraph (1) of this subsection with respect 
     to any policy or contract--
       (A) section 848 of the Internal Revenue Code of 1986 shall 
     not apply to the unamortized balance (if any) of the 
     specified policy acquisition expenses attributable to such 
     policy or contract immediately before the insurance company's 
     taxable year in which such event occurs, and
       (B) there shall be allowed as a deduction to such company 
     for such taxable year under chapter 1 of such Code an amount 
     equal to such unamortized balance.
Subtitle B--Treatment of Individuals Who Lose United States Citizenship

     SEC. 511. REVISION OF INCOME, ESTATE, AND GIFT TAXES ON 
                   INDIVIDUALS WHO LOSE UNITED STATES CITIZENSHIP.

       (a) In General.--Subsection (a) of section 877 is amended 
     to read as follows:
       ``(a) Treatment of Expatriates.--
       ``(1) In general.--Every nonresident alien individual who, 
     within the 10-year period immediately preceding the close of 
     the taxable year,

[[Page H9514]]

     lost United States citizenship, unless such loss did not have 
     for 1 of its principal purposes the avoidance of taxes under 
     this subtitle or subtitle B, shall be taxable for such 
     taxable year in the manner provided in subsection (b) if the 
     tax imposed pursuant to such subsection exceeds the tax 
     which, without regard to this section, is imposed pursuant to 
     section 871.
       ``(2) Certain individuals treated as having tax avoidance 
     purpose.--For purposes of paragraph (1), an individual shall 
     be treated as having a principal purpose to avoid such taxes 
     if--
       ``(A) the average annual net income tax (as defined in 
     section 38(c)(1)) of such individual for the period of 5 
     taxable years ending before the date of the loss of United 
     States citizenship is greater than $100,000, or
       ``(B) the net worth of the individual as of such date is 
     $500,000 or more.

     In the case of the loss of United States citizenship in any 
     calendar year after 1996, such $100,000 and $500,000 amounts 
     shall be increased by an amount equal to such dollar amount 
     multiplied by the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year by substituting `1994' 
     for `1992' in subparagraph (B) thereof. Any increase under 
     the preceding sentence shall be rounded to the nearest 
     multiple of $1,000.''.
       (b) Exceptions.--
       (1) In general.--Section 877 is amended by striking 
     subsection (d), by redesignating subsection (c) as subsection 
     (d), and by inserting after subsection (b) the following new 
     subsection:
       ``(c) Tax Avoidance Not Presumed in Certain Cases.--
       ``(1) In general.--Subsection (a)(2) shall not apply to an 
     individual if--
       ``(A) such individual is described in a subparagraph of 
     paragraph (2) of this subsection, and
       ``(B) within the 1-year period beginning on the date of the 
     loss of United States citizenship, such individual submits a 
     ruling request for the Secretary's determination as to 
     whether such loss has for 1 of its principal purposes the 
     avoidance of taxes under this subtitle or subtitle B.
       ``(2) Individuals described.--
       ``(A) Dual citizenship, etc.--An individual is described in 
     this subparagraph if--
       ``(i) the individual became at birth a citizen of the 
     United States and a citizen of another country and continues 
     to be a citizen of such other country, or
       ``(ii) the individual becomes (not later than the close of 
     a reasonable period after loss of United States citizenship) 
     a citizen of the country in which--

       ``(I) such individual was born,

       ``(II) if such individual is married, such individual's 
     spouse was born, or
       ``(III) either of such individual's parents were born.

       ``(B) Long-term foreign residents.--An individual is 
     described in this subparagraph if, for each year in the 10-
     year period ending on the date of loss of United States 
     citizenship, the individual was present in the United States 
     for 30 days or less. The rule of section 7701(b)(3)(D)(ii) 
     shall apply for purposes of this subparagraph.
       ``(C) Renunciation upon reaching age of majority.--An 
     individual is described in this subparagraph if the 
     individual's loss of United States citizenship occurs before 
     such individual attains age 18\1/2\.
       ``(D) Individuals specified in regulations.--An individual 
     is described in this subparagraph if the individual is 
     described in a category of individuals prescribed by 
     regulation by the Secretary.''
       (2) Technical amendment.--Paragraph (1) of section 877(b) 
     of such Code is amended by striking ``subsection (c)'' and 
     inserting ``subsection (d)''.
       (c) Treatment of Property Disposed of in Nonrecognition 
     Transactions; Treatment of Distributions From Certain 
     Controlled Foreign Corporations.--Subsection (d) of section 
     877, as redesignated by subsection (b), is amended to read as 
     follows:
       ``(d) Special Rules for Source, Etc.--For purposes of 
     subsection (b)--
       ``(1) Source rules.--The following items of gross income 
     shall be treated as income from sources within the United 
     States:
       ``(A) Sale of property.--Gains on the sale or exchange of 
     property (other than stock or debt obligations) located in 
     the United States.
       ``(B) Stock or debt obligations.--Gains on the sale or 
     exchange of stock issued by a domestic corporation or debt 
     obligations of United States persons or of the United States, 
     a State or political subdivision thereof, or the District of 
     Columbia.
       ``(C) Income or gain derived from controlled foreign 
     corporation.--Any income or gain derived from stock in a 
     foreign corporation but only--
       ``(i) if the individual losing United States citizenship 
     owned (within the meaning of section 958(a)), or is 
     considered as owning (by applying the ownership rules of 
     section 958(b)), at any time during the 2-year period ending 
     on the date of the loss of United States citizenship, more 
     than 50 percent of--

       ``(I) the total combined voting power of all classes of 
     stock entitled to vote of such corporation, or
       ``(II) the total value of the stock of such corporation, 
     and

       ``(ii) to the extent such income or gain does not exceed 
     the earnings and profits attributable to such stock which 
     were earned or accumulated before the loss of citizenship and 
     during periods that the ownership requirements of clause (i) 
     are met.
       ``(2) Gain recognition on certain exchanges.--
       ``(A) In general.--In the case of any exchange of property 
     to which this paragraph applies, notwithstanding any other 
     provision of this title, such property shall be treated as 
     sold for its fair market value on the date of such exchange, 
     and any gain shall be recognized for the taxable year which 
     includes such date.
       ``(B) Exchanges to which paragraph applies.--This paragraph 
     shall apply to any exchange during the 10-year period 
     described in subsection (a) if--
       ``(i) gain would not (but for this paragraph) be recognized 
     on such exchange in whole or in part for purposes of this 
     subtitle,
       ``(ii) income derived from such property was from sources 
     within the United States (or, if no income was so derived, 
     would have been from such sources), and
       ``(iii) income derived from the property acquired in the 
     exchange would be from sources outside the United States.
       ``(C) Exception.--Subparagraph (A) shall not apply if the 
     individual enters into an agreement with the Secretary which 
     specifies that any income or gain derived from the property 
     acquired in the exchange (or any other property which has a 
     basis determined in whole or part by reference to such 
     property) during such 10-year period shall be treated as from 
     sources within the United States. If the property transferred 
     in the exchange is disposed of by the person acquiring such 
     property, such agreement shall terminate and any gain which 
     was not recognized by reason of such agreement shall be 
     recognized as of the date of such disposition.
       ``(D) Secretary may extend period.--To the extent provided 
     in regulations prescribed by the Secretary, subparagraph (B) 
     shall be applied by substituting the 15-year period beginning 
     5 years before the loss of United States citizenship for the 
     10-year period referred to therein.
       ``(E) Secretary may require recognition of gain in certain 
     cases.--To the extent provided in regulations prescribed by 
     the Secretary--
       ``(i) the removal of appreciated tangible personal property 
     from the United States, and
       ``(ii) any other occurrence which (without recognition of 
     gain) results in a change in the source of the income or gain 
     from property from sources within the United States to 
     sources outside the United States,

     shall be treated as an exchange to which this paragraph 
     applies.
       ``(3) Substantial diminishing of risks of ownership.--For 
     purposes of determining whether this section applies to any 
     gain on the sale or exchange of any property, the running of 
     the 10-year period described in subsection (a) shall be 
     suspended for any period during which the individual's risk 
     of loss with respect to the property is substantially 
     diminished by--
       ``(A) the holding of a put with respect to such property 
     (or similar property),
       ``(B) the holding by another person of a right to acquire 
     the property, or
       ``(C) a short sale or any other transaction.
       ``(4) Treatment of property contributed to controlled 
     foreign corporations.--
       ``(A) In general.--If--
       ``(i) an individual losing United States citizenship 
     contributes property to any corporation which, at the time of 
     the contribution, is described in subparagraph (B), and
       ``(ii) income derived from such property was from sources 
     within the United States (or, if no income was so derived, 
     would have been from such sources),

     during the 10-year period referred to in subsection (a), any 
     income or gain on such property (or any other property which 
     has a basis determined in whole or part by reference to such 
     property) received or accrued by the corporation shall be 
     treated as received or accrued directly by such individual 
     and not by such corporation. The preceding sentence shall not 
     apply to the extent the property has been treated under 
     subparagraph (C) as having been sold by such corporation.
       ``(B) Corporation described.--A corporation is described in 
     this subparagraph with respect to an individual if, were such 
     individual a United States citizen--
       ``(i) such corporation would be a controlled foreign 
     corporation (as defined in 957), and
       ``(ii) such individual would be a United States shareholder 
     (as defined in section 951(b)) with respect to such 
     corporation.
       ``(C) Disposition of stock in corporation.--If stock in the 
     corporation referred to in subparagraph (A) (or any other 
     stock which has a basis determined in whole or part by 
     reference to such stock) is disposed of during the 10-year 
     period referred to in subsection (a) and while the property 
     referred to in subparagraph (A) is held by such corporation, 
     a pro rata share of such property (determined on the basis of 
     the value of such stock) shall be treated as sold by the 
     corporation immediately before such disposition.
       ``(D) Anti-abuse rules.--The Secretary shall prescribe such 
     regulations as may be necessary to prevent the avoidance of 
     the purposes of this paragraph, including where--
       ``(i) the property is sold to the corporation, and
       ``(ii) the property taken into account under subparagraph 
     (A) is sold by the corporation.
       ``(E) Information reporting.--The Secretary shall require 
     such information reporting as is necessary to carry out the 
     purposes of this paragraph.''
       (d) Credit for Foreign Taxes Imposed on United States 
     Source Income.--
       (1) Subsection (b) of section 877 is amended by adding at 
     the end the following new sentence: ``The tax imposed solely 
     by reason of this section shall be reduced (but not below 
     zero) by the amount of any income, war profits, and excess 
     profits taxes (within the meaning of section 903) paid to any 
     foreign country or possession of the United States on any 
     income of the taxpayer on which tax is imposed solely by 
     reason of this section.''

[[Page H9515]]

       (2) Subsection (a) of section 877, as amended by subsection 
     (a), is amended by inserting ``(after any reduction in such 
     tax under the last sentence of such subsection)'' after 
     ``such subsection''.
       (e) Comparable Estate and Gift Tax Treatment.--
       (1) Estate tax.--
       (A) In general.--Subsection (a) of section 2107 is amended 
     to read as follows:
       ``(a) Treatment of Expatriates.--
       ``(1) Rate of tax.--A tax computed in accordance with the 
     table contained in section 2001 is hereby imposed on the 
     transfer of the taxable estate, determined as provided in 
     section 2106, of every decedent nonresident not a citizen 
     of the United States if, within the 10-year period ending 
     with the date of death, such decedent lost United States 
     citizenship, unless such loss did not have for 1 of its 
     principal purposes the avoidance of taxes under this 
     subtitle or subtitle A.
       ``(2) Certain individuals treated as having tax avoidance 
     purpose.--
       ``(A) In general.--For purposes of paragraph (1), an 
     individual shall be treated as having a principal purpose to 
     avoid such taxes if such individual is so treated under 
     section 877(a)(2).
       ``(B) Exception.--Subparagraph (A) shall not apply to a 
     decedent meeting the requirements of section 877(c)(1).''.
       (B) Credit for foreign death taxes.--Subsection (c) of 
     section 2107 is amended by redesignating paragraph (2) as 
     paragraph (3) and by inserting after paragraph (1) the 
     following new paragraph:
       ``(2) Credit for foreign death taxes.--
       ``(A) In general.--The tax imposed by subsection (a) shall 
     be credited with the amount of any estate, inheritance, 
     legacy, or succession taxes actually paid to any foreign 
     country in respect of any property which is included in the 
     gross estate solely by reason of subsection (b).
       ``(B) Limitation on credit.--The credit allowed by 
     subparagraph (A) for such taxes paid to a foreign country 
     shall not exceed the lesser of--
       ``(i) the amount which bears the same ratio to the amount 
     of such taxes actually paid to such foreign country in 
     respect of property included in the gross estate as the value 
     of the property included in the gross estate solely by reason 
     of subsection (b) bears to the value of all property 
     subjected to such taxes by such foreign country, or
       ``(ii) such property's proportionate share of the excess 
     of--

       ``(I) the tax imposed by subsection (a), over
       ``(II) the tax which would be imposed by section 2101 but 
     for this section.

       ``(C) Proportionate share.--For purposes of subparagraph 
     (B), a property's proportionate share is the percentage of 
     the value of the property which is included in the gross 
     estate solely by reason of subsection (b) bears to the total 
     value of the gross estate.''.
       (C) Expansion of inclusion in gross estate of stock of 
     foreign corporations.--Paragraph (2) of section 2107(b) is 
     amended by striking ``more than 50 percent of'' and all that 
     follows and inserting ``more than 50 percent of--
       ``(A) the total combined voting power of all classes of 
     stock entitled to vote of such corporation, or
       ``(B) the total value of the stock of such corporation,''.
       (2) Gift tax.--
       (A) In general.--Paragraph (3) of section 2501(a) is 
     amended to read as follows:
       ``(3) Exception.--
       ``(A) Certain individuals.--Paragraph (2) shall not apply 
     in the case of a donor who, within the 10-year period ending 
     with the date of transfer, lost United States citizenship, 
     unless such loss did not have for 1 of its principal purposes 
     the avoidance of taxes under this subtitle or subtitle A.
       ``(B) Certain individuals treated as having tax avoidance 
     purpose.--For purposes of subparagraph (A), an individual 
     shall be treated as having a principal purpose to avoid such 
     taxes if such individual is so treated under section 
     877(a)(2).
       ``(C) Exception for certain individuals.--Subparagraph (B) 
     shall not apply to a decedent meeting the requirements of 
     section 877(c)(1).
       ``(D) Credit for foreign gift taxes.--The tax imposed by 
     this section solely by reason of this paragraph shall be 
     credited with the amount of any gift tax actually paid to any 
     foreign country in respect of any gift which is taxable under 
     this section solely by reason of this paragraph.''.
       (f) Comparable Treatment of Lawful Permanent Residents Who 
     Cease To Be Taxed as Residents.--
       (1) In general.--Section 877 is amended by redesignating 
     subsection (e) as subsection (f) and by inserting after 
     subsection (d) the following new subsection:
       ``(e) Comparable Treatment of Lawful Permanent Residents 
     Who Cease To Be Taxed as Residents.--
       ``(1) In general.--Any long-term resident of the United 
     States who--
       ``(A) ceases to be a lawful permanent resident of the 
     United States (within the meaning of section 7701(b)(6)), or
       ``(B) commences to be treated as a resident of a foreign 
     country under the provisions of a tax treaty between the 
     United States and the foreign country and who does not waive 
     the benefits of such treaty applicable to residents of the 
     foreign country,

     shall be treated for purposes of this section and sections 
     2107, 2501, and 6039F in the same manner as if such resident 
     were a citizen of the United States who lost United States 
     citizenship on the date of such cessation or commencement.
       ``(2) Long-term resident.--For purposes of this subsection, 
     the term `long-term resident' means any individual (other 
     than a citizen of the United States) who is a lawful 
     permanent resident of the United States in at least 8 taxable 
     years during the period of 15 taxable years ending with the 
     taxable year during which the event described in subparagraph 
     (A) or (B) of paragraph (1) occurs. For purposes of the 
     preceding sentence, an individual shall not be treated as a 
     lawful permanent resident for any taxable year if such 
     individual is treated as a resident of a foreign country for 
     the taxable year under the provisions of a tax treaty between 
     the United States and the foreign country and does not waive 
     the benefits of such treaty applicable to residents of the 
     foreign country.
       ``(3) Special rules.--
       ``(A) Exceptions not to apply.--Subsection (c) shall not 
     apply to an individual who is treated as provided in 
     paragraph (1).
       ``(B) Step-up in basis.--Solely for purposes of determining 
     any tax imposed by reason of this subsection, property which 
     was held by the long-term resident on the date the individual 
     first became a resident of the United States shall be treated 
     as having a basis on such date of not less than the fair 
     market value of such property on such date. The preceding 
     sentence shall not apply if the individual elects not to have 
     such sentence apply. Such an election, once made, shall be 
     irrevocable.
       ``(4) Authority to exempt individuals.--This subsection 
     shall not apply to an individual who is described in a 
     category of individuals prescribed by regulation by the 
     Secretary.
       ``(5) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out this 
     subsection, including regulations providing for the 
     application of this subsection in cases where an alien 
     individual becomes a resident of the United States during the 
     10-year period after being treated as provided in paragraph 
     (1).''.
       (2) Conforming amendments.--
       (A) Section 2107 is amended by striking subsection (d), by 
     redesignating subsection (e) as subsection (d), and by 
     inserting after subsection (d) (as so redesignated) the 
     following new subsection:
       ``(e) Cross Reference.--
  ``For comparable treatment of long-term lawful permanent residents 
who ceased to be taxed as residents, see section 877(e).''.
       (B) Paragraph (3) of section 2501(a) (as amended by 
     subsection (e)) is amended by adding at the end the following 
     new subparagraph:
       ``(E) Cross reference.--
  ``For comparable treatment of long-term lawful permanent residents 
who ceased to be taxed as residents, see section 877(e).''.
       (g) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to--
       (A) individuals losing United States citizenship (within 
     the meaning of section 877 of the Internal Revenue Code of 
     1986) on or after February 6, 1995, and
       (B) long-term residents of the United States with respect 
     to whom an event described in subparagraph (A) or (B) of 
     section 877(e)(1) of such Code occurs on or after February 6, 
     1995.
       (2) Ruling requests.--In no event shall the 1-year period 
     referred to in section 877(c)(1)(B) of such Code, as amended 
     by this section, expire before the date which is 90 days 
     after the date of the enactment of this Act.
       (3) Special rule.--
       (A) In general.--In the case of an individual who performed 
     an act of expatriation specified in paragraph (1), (2), (3), 
     or (4) of section 349(a) of the Immigration and Nationality 
     Act (8 U.S.C. 1481(a)(1)-(4)) before February 6, 1995, but 
     who did not, on or before such date, furnish to the United 
     States Department of State a signed statement of voluntary 
     relinquishment of United States nationality confirming the 
     performance of such act, the amendments made by this section 
     and section 512 shall apply to such individual except that 
     the 10-year period described in section 877(a) of such Code 
     shall not expire before the end of the 10-year period 
     beginning on the date such statement is so furnished.
       (B) Exception.--Subparagraph (A) shall not apply if the 
     individual establishes to the satisfaction of the Secretary 
     of the Treasury that such loss of United States citizenship 
     occurred before February 6, 1994.

     SEC. 512. INFORMATION ON INDIVIDUALS LOSING UNITED STATES 
                   CITIZENSHIP.

       (a) In General.--Subpart A of part III of subchapter A of 
     chapter 61 is amended by inserting after section 6039E the 
     following new section:

     ``SEC. 6039F. INFORMATION ON INDIVIDUALS LOSING UNITED STATES 
                   CITIZENSHIP.

       ``(a) In General.--Notwithstanding any other provision of 
     law, any individual who loses United States citizenship 
     (within the meaning of section 877(a)) shall provide a 
     statement which includes the information described in 
     subsection (b). Such statement shall be--
       ``(1) provided not later than the earliest date of any act 
     referred to in subsection (c), and
       ``(2) provided to the person or court referred to in 
     subsection (c) with respect to such act.
       ``(b) Information To Be Provided.--Information required 
     under subsection (a) shall include--
       ``(1) the taxpayer's TIN,
       ``(2) the mailing address of such individual's principal 
     foreign residence,
       ``(3) the foreign country in which such individual is 
     residing,
       ``(4) the foreign country of which such individual is a 
     citizen,
       ``(5) in the case of an individual having a net worth of at 
     least the dollar amount applicable under section 
     877(a)(2)(B), information detailing the assets and 
     liabilities of such individual, and
       ``(6) such other information as the Secretary may 
     prescribe.
       ``(c) Acts Described.--For purposes of this section, the 
     acts referred to in this subsection are--

[[Page H9516]]

       ``(1) the individual's renunciation of his United States 
     nationality before a diplomatic or consular officer of the 
     United States pursuant to paragraph (5) of section 349(a) of 
     the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
       ``(2) the individual's furnishing to the United States 
     Department of State a signed statement of voluntary 
     relinquishment of United States nationality confirming the 
     performance of an act of expatriation specified in paragraph 
     (1), (2), (3), or (4) of section 349(a) of the Immigration 
     and Nationality Act (8 U.S.C. 1481(a)(1)-(4)),
       ``(3) the issuance by the United States Department of State 
     of a certificate of loss of nationality to the individual, or
       ``(4) the cancellation by a court of the United States of a 
     naturalized citizen's certificate of naturalization.
       ``(d) Penalty.--Any individual failing to provide a 
     statement required under subsection (a) shall be subject to a 
     penalty for each year (of the 10-year period beginning on the 
     date of loss of United States citizenship) during any portion 
     of which such failure continues in an amount equal to the 
     greater of--
       ``(1) 5 percent of the tax required to be paid under 
     section 877 for the taxable year ending during such year, or
       ``(2) $1,000,

     unless it is shown that such failure is due to reasonable 
     cause and not to willful neglect.
       ``(e) Information To Be Provided to Secretary.--
     Notwithstanding any other provision of law--
       ``(1) any Federal agency or court which collects (or is 
     required to collect) the statement under subsection (a) shall 
     provide to the Secretary--
       ``(A) a copy of any such statement, and
       ``(B) the name (and any other identifying information) of 
     any individual refusing to comply with the provisions of 
     subsection (a),
       ``(2) the Secretary of State shall provide to the Secretary 
     a copy of each certificate as to the loss of American 
     nationality under section 358 of the Immigration and 
     Nationality Act which is approved by the Secretary of State, 
     and
       ``(3) the Federal agency primarily responsible for 
     administering the immigration laws shall provide to the 
     Secretary the name of each lawful permanent resident of the 
     United States (within the meaning of section 7701(b)(6)) 
     whose status as such has been revoked or has been 
     administratively or judicially determined to have been 
     abandoned.

     Notwithstanding any other provision of law, not later than 30 
     days after the close of each calendar quarter, the Secretary 
     shall publish in the Federal Register the name of each 
     individual losing United States citizenship (within the 
     meaning of section 877(a)) with respect to whom the Secretary 
     receives information under the preceding sentence during such 
     quarter.
       ``(f) Reporting by Long-Term Lawful Permanent Residents Who 
     Cease To Be Taxed as Residents.--In lieu of applying the last 
     sentence of subsection (a), any individual who is required to 
     provide a statement under this section by reason of section 
     877(e)(1) shall provide such statement with the return of tax 
     imposed by chapter 1 for the taxable year during which the 
     event described in such section occurs.
       ``(g) Exemption.--The Secretary may by regulations exempt 
     any class of individuals from the requirements of this 
     section if he determines that applying this section to such 
     individuals is not necessary to carry out the purposes of 
     this section.''.
       (b) Clerical Amendment.--The table of sections for such 
     subpart A is amended by inserting after the item relating to 
     section 6039E the following new item:
``Sec. 6039F. Information on individuals losing United States 
              citizenship.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to--
       (1) individuals losing United States citizenship (within 
     the meaning of section 877 of the Internal Revenue Code of 
     1986) on or after February 6, 1995, and
       (2) long-term residents of the United States with respect 
     to whom an event described in subparagraph (A) or (B) of 
     section 877(e)(1) of such Code occurs on or after such date.

     In no event shall any statement required by such amendments 
     be due before the 90th day after the date of the enactment of 
     this Act.

     SEC. 513. REPORT ON TAX COMPLIANCE BY UNITED STATES CITIZENS 
                   AND RESIDENTS LIVING ABROAD.

       Not later than 90 days after the date of the enactment of 
     this Act, the Secretary of the Treasury shall prepare and 
     submit to the Committee on Ways and Means of the House of 
     Representatives and the Committee on Finance of the Senate a 
     report--
       (1) describing the compliance with subtitle A of the 
     Internal Revenue Code of 1986 by citizens and lawful 
     permanent residents of the United States (within the meaning 
     of section 7701(b)(6) of such Code) residing outside the 
     United States, and
       (2) recommending measures to improve such compliance 
     (including improved coordination between executive branch 
     agencies).
Subtitle C--Repeal of Financial Institution Transition Rule to Interest 
                            Allocation Rules

     SEC. 521. REPEAL OF FINANCIAL INSTITUTION TRANSITION RULE TO 
                   INTEREST ALLOCATION RULES.

       (a) In General.--Paragraph (5) of section 1215(c) of the 
     Tax Reform Act of 1986 (Public Law 99-514, 100 Stat. 2548) is 
     hereby repealed.
       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     apply to taxable years beginning after December 31, 1995.
       (2) Special rule.--In the case of the first taxable year 
     beginning after December 31, 1995, the pre-effective date 
     portion of the interest expense of the corporation referred 
     to in such paragraph (5) of such section 1215(c) for such 
     taxable year shall be allocated and apportioned without 
     regard to such amendment. For purposes of the preceding 
     sentence, the pre-effective date portion is the amount which 
     bears the same ratio to the interest expense for such taxable 
     year as the number of days during such taxable year before 
     the date of the enactment of this Act bears to 366.
       And the Senate agree to the same.
     Bill Archer,
     Bill Thomas,
     Tom Bliley,
     Michael Bilirakis,
     William F. Goodling,
     H.W. Fawell,
     Henry Hyde,
     Bill McCollum,
     J. Dennis Hastert,
                                Managers on the Part of the House.

     Bill Roth,
     Nancy Landon Kassebaum,
     Trent Lott,
     Ted Kennedy,
                               Managers on the Part of the Senate.

       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

       The managers on the part of the House and the Senate at the 
     conference on the disagreeing votes of the two Houses on the 
     amendment of the Senate to the bill (H.R. 3103) to amend the 
     Internal Revenue Code of 1986 to improve portability and 
     continuity of health insurance coverage in the group and 
     individual markets, to combat waste, fraud, and abuse in 
     health insurance and health care delivery, to promote the use 
     of medical savings accounts, to improve access to long-term 
     care services and coverage, to simplify the administration of 
     health insurance, and for other purposes, submit the 
     following joint statement to the House and the Senate in 
     explanation of the effect of the action agreed upon by the 
     managers and recommended in the accompanying conference 
     report:
       The Senate amendment struck all of the House bill after the 
     enacting clause and inserted a substitute text.
       The House recedes from its disagreement to the amendment of 
     the Senate with an amendment that is a substitute for the 
     House bill and the Senate amendment. The differences between 
     the House bill, the Senate amendment, and the substitute 
     agreed to in conference are noted below, except for clerical 
     corrections, conforming changes made necessary by agreements 
     reached by the conferees, and minor drafting and clerical 
     changes.

      TITLE I.--HEALTH CARE ACCESS, PORTABILITY, AND RENEWABILITY

                              I. Structure

     House bill
       The House bill would amend the Internal Revenue Code (IRC) 
     and the Employee Retirement Income Security Act of 1974 
     (ERISA), and includes free-standing provisions.
     Senate amendment
       The Senate amendment includes free-standing provisions.
     Conference agreement
       The conference agreement adds new provisions to the 
     Employee Retirement Income Security Act of 1974 (ERISA), the 
     Public Health Services (PHS) Act, and the Internal Revenue 
     Code (IRC).

         II. Availability and Portability of Group Health Plans

     Current law
       Current federal law does not impose any requirements on 
     employers to provide or contribute toward the health 
     insurance coverage of their employees or their employees' 
     dependents. However, specific federal requirements do apply 
     to existing employer-sponsored health plans (e.g., fiduciary, 
     notification and disclosure requirements under ERISA and 
     COBRA continuation coverage, non-discrimination requirements 
     under ERISA and the Internal Revenue Code.)
     House bill
       The House bill would provide for federal requirements on 
     group health plans (and insurers and health maintenance 
     organizations (HMOs) selling to such plans) relating to 
     portability, the use of preexisting medical condition, and 
     discrimination based on health status.
     Senate amendment
       The Senate amendment would provide for federal requirements 
     on group health plans, health plan issuers (entities licensed 
     by the state to offer a group or individual health plan) and 
     employee health benefit plans, relating to portability, the 
     use of preexisting medical conditions, and discrimination 
     based on health status.
     Conference agreement
       The conference agreement provides for federal requirements 
     on group health and health insurance issuers offering group 
     health insurance coverage relating to portability, access, 
     and renewability.


                             a. definitions

       (Also see item IX below.)
     Current law
       Section 5000(b)(1) of the Internal Revenue Code (IRC) 
     defines a group health plan as a plan (including a self-
     insured plan) of, or contributed to by, an employer 
     (including a self-employed person) or employee organization 
     to provide health care (directly or otherwise) to the 
     employees, former employees,

[[Page H9517]]

     the employer, others associated or formerly associated with 
     the employer in a business relationship, or their families.
       Section 607(1) of ERISA defines a group health plan as an 
     employee welfare benefit plan providing medical care to 
     participants or beneficiaries directly or through insurance, 
     reimbursement, or otherwise.
       Church plans are excluded from federal requirements on 
     existing employer plans such as ERISA's requirements on 
     employee health benefit plans and COBRA continuation coverage 
     requirements under the IRC and ERISA.
     House bill
       Group health plan means an employee welfare benefit plan to 
     the extent that the plan provides medical care employees and 
     their dependent directly or through insurance, reimbursement, 
     or otherwise, and includes a group health plan within the 
     meaning of section 5000(b)(1) of the IRC.
       The provisions of this subtitle (other than those relating 
     to individual coverage) apply to group health plans with 2 or 
     more participants as current employees on the first day of 
     the plan year.
       The requirements would not apply to church plans unless 
     such plans met the exemption for multiple employer health 
     plans under subtitle c (see item V). For purposes of applying 
     the provisions related to qualified prior coverage (II(B) 
     below), a group health plan could elect to disregard periods 
     of coverage of an individual under a church plan that is not 
     subject to this subtitle.
       Governmental plans could elect not to be a group health 
     plan covered under the subtitle. For purposes of applying the 
     provisions related to qualified prior coverage, a group 
     health plan could elect not to include coverage under a 
     governmental plan that elected to be excluded from this 
     subtitle's requirements.
     Senate amendment
       Employee health benefit plan means any employee welfare 
     benefit plan, governmental plan, or church plan, or any 
     health benefit plan under section 5(e) of the Peace Corps 
     Act, that provides or pays for health benefit for 
     participants or beneficiaries whether directly, through a 
     group health plan offered by a health plan issuer (see item 
     III(A) below), or otherwise.
     Conference agreement
       The conference agreement defines a group health plan as an 
     employee welfare benefit plan to the extent that the plan 
     provides medical care to employees or their dependents 
     directly or through insurance, reimbursement, or otherwise. 
     Both governmental and church plans are included, but certain 
     plans with limited coverage are excluded.
       The portability and guaranteed availability provisions 
     (other than those relating to individual coverage) apply to 
     group health plans with 2 or more participants who are active 
     employees on the first day of the plan year. These provisions 
     would apply to nonfederal governmental plans, unless they 
     elected to be excluded as described below, and to church and 
     governmental plans. (See section III(B)(3) below for 
     exceptions from availability, renewability, and portability 
     requirements for group health plans and group health 
     insurance coverage for certain benefits.)
       Nonfederal governmental plans could elect not to be a group 
     health plan covered under the amendments to the PHS. An 
     election would apply for a single specified plan year, or, in 
     the case of a plan provided pursuant to a collective 
     bargaining agreement, for the term of such agreement. If a 
     nonfederal governmental plan makes this election, it must 
     notify enrollees of the fact and consequences of the 
     election. The plan must still provide certification and 
     disclosure of creditable coverage under the plan to enrollees 
     who leave the plan, for purposes of portability.
       Upon request, Medicare, Medicaid, a program of the Indian 
     Health Service or a tribal organization, and military-
     sponsored health care programs must also provide notice of 
     previous creditable coverage to individuals who leave such 
     coverage.


     b. portability of coverage for previously covered individuals

     Current law
       No provision.
     House bill
       The House bill would provide that in general, a group 
     health plan and an insurer or HMO offering health insurance 
     coverage in connection with a group health plan would have to 
     reduce any preexisting condition limitation period by the 
     length of the aggregate period of prior coverage. Prior 
     coverage would not qualify under this provision if there was 
     more than a 60-day break in coverage under a group health 
     plan. (Waiting periods would not be considered a break in 
     coverage.) Qualified coverage would include coverage of the 
     individual under a group health plan, health insurance 
     coverage, Medicare, Medicaid, Tricare, a program of the 
     Indian Health Service, and State health insurance coverage or 
     risk pool, and coverage under the Federal Employees Health 
     Benefit Program (FEHBP).
     Senate amendment
       The Senate Amendment is similar. An employee benefit plan 
     or a health plan issuer offering a group health plan would 
     have to reduce any preexisting condition limitation period by 
     1 month for each month for which the person was in a period 
     of previous qualifying coverage. This provision would not 
     apply if there was a break of more than 30 days. (Waiting 
     periods would not be considered a break in coverage.) 
     Previous qualifying coverage includes enrollment under an 
     employee health benefit plan, group health plan, individual 
     health plan, or under a public or private health plan 
     established under federal or state law.
     Conference agreement
       The conference agreement provides that in general, group 
     health plans, and health insurance issuers offering group 
     health insurance coverage, would have to reduce any 
     preexisting condition limitation period by the length of the 
     aggregate period of prior creditable coverage. Prior coverage 
     would not qualify under this provision if there was a break 
     in coverage under a group health plan that was longer than a 
     63-day period. (Waiting periods and affiliation periods would 
     not be considered a break in coverage.) Creditable coverage 
     includes coverage of the individual under a group health plan 
     (including a governmental or church plan), health insurance 
     coverage (either group or individual insurance), Medicare, 
     Medicaid, military-sponsored health care, a program of the 
     Indian Health Service, a State health benefits risk pool, the 
     FEHBP, a public health plan as defined in regulations, and 
     any health benefit plan under section 5(e) of the Peace Corps 
     Act. An individual would establish a creditable coverage 
     period through presentation of certifications describing 
     previous coverage, or through other procedures specified in 
     regulations to carry out this provision. The conferees intend 
     that creditable coverage includes short-term, limited 
     coverage.

         1. Method for establishing qualified coverage periods

     Current law
       No provision.
     House bill
       The House bill would provide that a group health plan or 
     insurer or HMO offering health insurance coverage in 
     connection with a group health plan could determine qualified 
     coverage periods without regard to the specific benefits 
     offered, referred to as the standard method. Alternatively, 
     it could make such determination on a benefit-specific basis 
     and not include as a qualified coverage period a specific 
     benefit that had not been included at the end of the most 
     recent period of coverage. If this alternative method were to 
     be used, the group plan or insurer would be required to state 
     prominently in any disclosure statements and to each enrollee 
     at the time of enrollment that such a method of determining 
     qualifying coverage was being used, and include a description 
     of the effect of this method. The plan, insurer, or HMO would 
     request a certification from prior plan administrators, 
     insurers, or HMOs which discloses the plan statement related 
     to health benefits under the plan or other detailed benefit 
     information on the benefits available under the previous plan 
     or coverage. The entity providing the certification could 
     charge the reasonable cost for providing the benefit 
     information to the requesting plan or insurer.
     Senate bill
       The Senate Amendment would provide that an employee health 
     benefit plan or health plan issuer offering a group plan 
     could impose a limitation or exclusion of benefits relating 
     to the treatment of a preexisting condition only to the 
     extent that such service or benefit was not previously 
     covered under the plan in which the participant or 
     beneficiary was enrolled immediately prior to enrollment in 
     the plan involved.
     Conference agreement
       The conference agreement provides that a group health plan, 
     and issuer offering group health insurance coverage, could 
     determine creditable coverage periods without regard to the 
     specific benefits covered during the period. Alternatively, 
     it could make such determination based on several classes or 
     categories of benefits, as specified in regulations. A group 
     health plan and issuer would be required to count a period of 
     creditable coverage with respect to any class or category of 
     benefits if any level of benefits is provided. This 
     alternative would have to be used uniformity for all 
     participants and beneficiaries.
       It is the intent of the conferees that the alternate method 
     be available to account for significant differences in 
     benefits. For example, the inclusion versus exclusion of a 
     category of benefits such as pharmaceuticals could be 
     considered a difference in classes of benefits. Similarly, 
     significant differentials in deductibles could be considered 
     differences in classes of benefits, but the alternative 
     method would not apply to small differences in deductibles, 
     such as $250 versus $200. The alternative method would not 
     apply for differences in specific services or treatments.
       If the alternate method were to be used, the group health 
     plan and issuer would be required to state prominently in any 
     disclosure statements that such a method of determining 
     qualifying coverage was being used, and would be required to 
     include a description of the effect of this election. A group 
     health plan using the alternate method would be required to 
     notify each enrollee at the time of enrollment that the plan 
     had made such an election, and describe the effect. An issuer 
     would be required to notify each employer at the time of 
     offer or sale of the coverage.

                   2. Certification of prior coverage

     Current law
       No provision.

[[Page H9518]]

     House bill
       The House bill would require the plan administrator of a 
     group health plan, or the insurer or HMO offering health 
     insurance coverage to a group plan, on request made on behalf 
     of an individual covered or previously covered within the 
     past 18 months under the plan or coverage, to provide for a 
     certification of the period of coverage of the individual 
     under the plan and of the waiting period (if any) imposed.
     Senate amendment
       The Senate Amendment would require an employee health plan 
     to provide documentation of coverage to participants and 
     beneficiaries whose coverage was terminated under the plan. 
     As specified by regulation, the duty of an employee health 
     benefit plan to verify previous qualifying coverage would be 
     discharged when such plan provided documentation to the 
     participant or beneficiary including the following 
     information: (1) the dates that the person was covered under 
     the plan; and (2) the benefits and costs-sharing arrangement 
     available to the person under the plan.
     Conference agreement
       The conference agreement requires the group health plan, 
     and health insurance issuer offering group health insurance 
     coverage, to provide a certification of the period of 
     creditable coverage under the plan, the coverage under any 
     applicable COBRA continuation provision, and waiting period 
     (if any) (and affiliation period if applicable) imposed on 
     the individual. This certification would have to be provided 
     when the individual ceases to be covered under the plan or 
     otherwise becomes covered under a COBRA continuation 
     provision, after any COBRA continuation coverage ceases, and 
     on the request of an individual not later than 24 months 
     after coverage ceased. The certification may be provided, to 
     the extent practicable, at a time consistent with notices 
     required under any applicable COBRA continuation provision. A 
     group health plan offering medical care through health 
     insurance coverage would not be required to provide 
     certification if the health insurance issuer provides 
     certification.
       If a group health plan or health insurance issuer elects 
     the alternative method of crediting coverage, the plan or 
     issuer would request, from prior entities providing coverage, 
     information on coverage of classes and categories of benefits 
     available under the previous plan or coverage. The entity 
     providing the certification could charge the reasonable cost 
     for providing such information to the requesting plan or 
     insurer. The Secretary is required to establish rules to 
     prevent an entity's failure to provide information on health 
     benefits under previous coverage from adversely affecting any 
     subsequent coverage under another group health plan or health 
     insurance coverage.


   c. restrictions on use of pre-existing condition limitation period

     Current law
       No provision.
     House bill
       The House bill would restrict the use of preexisting 
     condition limitation periods in group health plans and in 
     plans offered by insurers and HMOs to group health plans.
     Senate amendment
       The Senate Amendment is similar but would apply to employee 
     health benefit plans and group plans offered by health plan 
     issuers.
     Conference agreement
       The conference agreement restricts the use of preexisting 
     conditions limitation exclusions by group health plans and 
     health insurance issuers offering group health insurance 
     coverage.

                 1. Definition of preexisting condition

     Current law
       No provision.
     House bill
       The House bill would define a preexisting condition to be a 
     condition, regardless of the cause of condition, for which 
     medical advice, diagnosis, care, or treatment was recommended 
     or received within the 6-months ending on the day before the 
     effective date of the coverage or the earliest date upon 
     which such coverage would have been effective if no waiting 
     period was applicable, whichever was earlier. Genetic 
     information would not be considered a preexisting condition, 
     so long as the treatment of the condition to which the 
     information was applicable had not been sought in the 6-month 
     period just described.
     Senate amendment
       The Senate Amendment provides a similar definition of 
     preexisting condition. It does not include the genetic 
     information language.
     Conference agreement
       The conference agreement defines a preexisting condition 
     exclusion to be a limitation or exclusion of benefits 
     relating to a condition, whether physical or mental, based on 
     the fact that the condition was present before the enrollment 
     date, whether or not any medical advice, diagnosis, care, or 
     treatment was recommended or received before that date. 
     Genetic information would not be considered a condition in 
     the absence of a diagnosis of the condition related to such 
     information.

                  2. Restrictions on limitation period

     Current law
       No provision.
     House bill
       The House bill would prohibit a group health plan, and an 
     insurer or HMO offering health insurance coverage in 
     connection with a group health plan from imposing a 
     preexisting condition limitation period in excess of 12 
     months, or 18 months in the event of a late enrollment. A 
     preexisting condition limitation period could not be applied 
     to a newborn, adopted child, or child placed for adoption, so 
     long as the individual became covered within 30 days of birth 
     or adoption or placement for adoption. Preexisting condition 
     limitation periods would not apply to pregnancies. An HMO 
     could impose an eligibility period as an alternative to a 
     preexisting condition limitation period but only if it did 
     not exceed 60 days for timely enrollment and 90 days for late 
     enrollment. An HMO could use alternative methods to address 
     adverse selection as approved by state regulators.
     Senate amendment
       The Senate Amendment includes a similar provision, but with 
     respect to affiliation periods of an HMO, would specify that 
     during such a period the plan could not be required to 
     provide health care services or benefits and no premium could 
     be charged to the participant or beneficiary.
     Conference agreement
       The conference agreement permits a group health plan and 
     health insurance issuers to impose a preexisting condition 
     exclusion if the exclusion relates to a condition (whether 
     physical or mental), regardless of the cause of condition, 
     for which medical advice, diagnosis, care, or treatment was 
     recommended or received within the 6-month period ending on 
     the enrollment date. The exclusion could extend to not more 
     than 12 months (18 months for late enrollees) after the 
     enrollment date. The exclusion would be reduced by the 
     aggregate of the periods of creditable coverage. Enrollment 
     date is defined as the date of enrollment in the plan or 
     coverage or, if earlier, the first day of the waiting period 
     for such enrollment.
       Any waiting period or affiliation period would run 
     concurrently with any preexisting condition exclusion period. 
     A preexisting condition limitation period could not be 
     applied to a newborn, an adopted child or child placed for 
     adoption under age 18, so long as the individual becomes 
     covered under creditable coverage within 30 days of birth or 
     adoption or placement for adoption. These exceptions for 
     newborns and certain adopted children would not apply if the 
     individual had a break in coverage longer than a 63-day 
     period. Preexisting condition exclusions could not apply to 
     pregnancies.
       A group health plan offering health insurance coverage 
     through an HMO, or an HMO which offers health insurance 
     coverage in connection with a group health plan, may impose 
     an affiliation period only if no preexisting condition 
     exclusion is imposed, the period is imposed uniformly without 
     regard to health status, and does not exceed 2 months for 
     timely enrollment and 3 months for late enrollment. It is the 
     intent of the conferees that any affiliation period would 
     apply to all new enrollees and beneficiaries. During the 
     affiliation period, the HMO could not be required to provide 
     health care services or benefits and no premium could be 
     charged to the participant or beneficiary. The affiliation 
     period would begin on the enrollment date and would run 
     concurrently with any other applicable waiting period under 
     the plan. An HMO could use alternative methods to address 
     adverse selection as approved by state regulators.


       d. prohibiting exclusions based on health status (access)

     Current law
       Under section 510 of ERISA, an employee benefit plan may 
     not discriminate against a particular beneficiary for 
     exercising any right to which he or she is entitled under the 
     provisions of an employee benefit plan. Section 105(h) of the 
     IRC prohibits discrimination in favor of highly compensated 
     individuals by self-insured employer health plans.
     House bill
       Except as specified below, a group health plan, and an 
     insurer or HMO offering coverage in connection with a plan, 
     cannot exclude an employee or his or her beneficiary from 
     being (or continuing to be enrolled) as a participant or 
     beneficiary under the plan based on health status. Health 
     status includes, with respect to an individual, medical 
     condition, claims experience, receipt of health care, medical 
     history, genetic information, evidence of insurability 
     (including conditions arising out of domestic violence), or 
     disability. A group health plan and an insurer or HMO 
     offering coverage in connection with a group health plan 
     cannot require a premium or contribution which is greater 
     than such premium or contribution for a similarly situated 
     participant or beneficiary solely on the basis of health 
     status. It can, however, very the premium or contribution 
     based on factors that are not directly related to health 
     status (such as scope of benefits, geographic area of 
     resident, or wage levels).
       The House bill provides that nothing is intended to affect 
     the premium rates an insurer or HMO could charge an employer 
     for health insurance coverage provided in connection with a 
     group health plan.
       A group health plan (or insurer or HMO providing coverage 
     in connection to a group plan) could establish premium 
     discounts or

[[Page H9519]]

     modify otherwise applicable copayments or deductibles in 
     return for adherence to programs of health promotion and 
     disease prevention.
     Senate amendment
       Except as specified below, a health plan issuer offering a 
     group health plan may not decline to offer whole group 
     coverage to a group purchaser desiring to purchase the 
     coverage. An employee health benefit plan or a health plan 
     issuer offering a group health plan could not condition 
     eligibility, enrollment, or premium contribution requirements 
     based on health status, medical condition, claims experience, 
     receipt of health care, medical history, evidence of 
     insurability (including conditions arising out of domestic 
     violence), genetic information, or disability.
       The bill does not include a specific rule of construction 
     relating to premium rates charged to group health plans other 
     than a prohibition of premium contribution requirements based 
     on health status.
       A group health plan (or insurer of HMO providing coverage 
     in connection to a group plan) could establish premium 
     discounts or modify otherwise applicable copayments or 
     deductibles in return for adherence to programs of health 
     promotion and disease prevention.
     Conference agreement
       Except as specified below, a group health plan, and a 
     health insurance issuer offering group health insurance 
     coverage, cannot establish rules for eligibility (including 
     continued eligibility) of an individual to enroll under the 
     terms of the plan based on any of the following health-
     related factors in relation to the individual or a dependent 
     of the individual: health status, medical condition 
     (including both physical and mental illness), claims 
     experience, receipt of health care, medical history, genetic 
     information, evidence of insurability (including conditions 
     arising out of domestic violence), or disability.
       The inclusion of evidence of insurability in the definition 
     of health status is intended to ensure, among other things, 
     that individuals are not excluded from health care coverage 
     due to their participation in activities such as 
     motorcycling, snowmobiling, all-terrain vehicle riding, 
     horseback riding, skiing and other similar activities.
       It is the intent of the conferees that a plan cannot 
     knowingly be designed to exclude individuals and their 
     dependents on the basis of health status. However, generally 
     applicable terms of the plan may have a disparate impact on 
     individual enrollees. For example, a plan may exclude all 
     coverage of a specific condition, or may include a lifetime 
     cap on all benefits, or a lifetime cap on specific benefits. 
     Although individuals with the specific condition would be 
     adversely affected by an exclusion of coverage for that 
     condition, and individuals with serious illnesses may be 
     adversely affected by a lifetime cap on all or specific 
     benefits, such plan characteristics would be permitted as 
     long as they are not directed at individual sick employees or 
     dependents.
       The Conference agreement does not require a group health 
     plan or health insurance coverage to provide particular 
     benefits other than those provided under the terms of the 
     plan or coverage. Nor does it prevent any plan or coverage 
     from establishing limitations or restrictions on the amount, 
     level, extent, or nature of the benefits or coverage for 
     similarly situated individuals enrolled in the plan or 
     coverage. Rules defining any applicable waiting periods for 
     enrollment may not be established based on health status 
     related factors.
       It is the intent of the conferees that a plan or coverage 
     cannot single out an individual based on the health status or 
     health status related factors of that individual for denial 
     of a benefit otherwise provided other individuals covered 
     under the plan or coverage. For example, the plan or coverage 
     may not deny coverage for prescription drugs to a particular 
     beneficiary or dependent if such coverage is available to 
     other similarly situated individual covered under the plan or 
     coverage. However, the plan or coverage could deny coverage 
     for prescription drugs to all beneficiaries and dependents. 
     The term ``similarly situated'' means that a plan or coverage 
     would be permitted to vary benefits available to different 
     groups of employees, such as full-time versus part-time 
     employees or employees in different geographic locations. In 
     addition, a plan or coverage could have different benefit 
     schedules for different collective bargaining units.
       The conference agreement provides that a group health plan 
     and an issuer offering group coverage cannot require a 
     premium or contribution which is greater than such premium or 
     contribution for a similarly situated individual enrolled in 
     the plan on the basis of any health status-related factor 
     relating to the individual or to any individual enrolled 
     under the plan as a dependent of the individual. It does not 
     restrict the amount that an employer may be charged for 
     coverage under a group health plan. The group health plan and 
     health insurance issuer may establish premium discounts or 
     rebates, or modify otherwise applicable copayments or 
     deductibles in return for adherence to programs of health 
     promotion and disease prevention.
       The conferees intend that these provisions preclude 
     insurance companies from denying coverage to employers based 
     on health status and related factors that they have 
     traditionally used. In addition, this provision is meant to 
     prohibit insurers or employers from excluding employees in a 
     group from coverage or charging them higher premiums based on 
     their health status and other related factors that could lead 
     to higher health costs. This does not mean that an entire 
     group cannot be charged more. But it does preclude health 
     plans from singling out individuals in the group for higher 
     premiums or dropping them from coverage altogether.

          1. Exceptions to the non-discrimination requirement

     Current law
       No provision.
     House bill
       No provision for group health plans (i.e., the plans of the 
     employer). See item III(B) below on requirements on insurers 
     and HMOs.
     Senate amendment
       Exceptions are provided to health plan issuers with respect 
     to enrollment in the event that: (1) the health plan ceases 
     to offer coverage to any additional group purchasers; or (2) 
     the issuer can demonstrate to the state insurance regulator 
     that to enroll new people would impair its financial or 
     provider capacity. See item III-B(3) below.
     Conference agreement
       See item III(B) below on requirements for health plan 
     issuers offering group health insurance coverage.


     e. enrollment of eligible individuals who lose other coverage

     Current law
       No provision.
     House bill
       The House bill would require group health plans to permit 
     an uncovered employee (or uncovered dependent) otherwise 
     eligible for coverage to enroll under at least one benefit 
     option if certain conditions are met: (1) the person was 
     already covered when the plan was previously offered; (2) the 
     person stated in writing at such time that another source of 
     coverage was the reason for declining enrollment; (3) the 
     person lost coverage as a result of a loss of eligibility or 
     termination from or reduction in hours of employment; and (4) 
     the person requested enrollment within 30 days after the date 
     of the coverage's termination.
       If a group health plan offered dependent coverage, it could 
     not require, as a condition of coverage as a dependent, a 
     waiting period applicable to: (1) a newborn, (2) adopted 
     child or child placed for adoption, or (3) a spouse, at the 
     time of marriage if the person had met any applicable waiting 
     period.
       Enrollment of a participant's beneficiary would be 
     considered to be timely if a request for enrollment were made 
     within 30 days of the date family coverage was first made 
     available or, in the case of a newborn or adoption or 
     placement for adoption, within 30 days of that event; and in 
     the case of marriage, within 30 days of the date of the 
     marriage, if family coverage was available.
     Senate amendment
       The Senate Amendment would require employee health benefit 
     plans to provide for special enrollment periods extending for 
     a reasonable time after certain qualifying events to permit 
     the participant to change individual or family basis of 
     coverage or to enroll in the plan if coverage would have 
     otherwise been available. The qualifying events would be: (1) 
     changes in family status affecting eligibility under a plan 
     including marriage, separation, divorce, death, birth, or 
     placement of a child for adoption; (2) changes in employment 
     status that would otherwise cause the loss of eligibility for 
     coverage (other than COBRA continuation coverage); or (3) 
     changes in employment status of a family member that results 
     in a loss of eligibility under a group, individual, or 
     employee health benefit plan.
       The special enrollment period would have to ensure that a 
     child born or placed for adoption was deemed covered as of 
     the date of birth or placement so long as the child was 
     enrolled within 30 days.
     Conference agreement
       The conference agreement requires special enrollment 
     periods for certain individuals losing other coverage and for 
     certain dependent beneficiaries. It requires group health 
     plans, and health insurance issuers offering group health 
     insurance coverage, to permit eligible employees or 
     dependents who lose other coverage to enroll under the terms 
     of the plan if each of the following conditions is met: (1) 
     the employee or dependent was already covered when the plan 
     was previously offered; (2) the employee stated in writing at 
     such time that another source of coverage was the reason for 
     declining enrollment, but only if the plan sponsor or issuer 
     required such a statement and provided the employee with 
     notice of this requirement; (3) the person was covered under 
     COBRA continuation coverage which was exhausted, or coverage 
     was not under a COBRA continuation provision and was 
     terminated as a result of a loss of eligibility for the 
     coverage (including as a result of legal separation, divorce, 
     death, termination of employment, or reduction in hours of 
     employment) or termination of employer contributions towards 
     such coverage; and (4) the person requested enrollment not 
     later than 30 days after the loss of other coverage.
       If a group health plan offers dependent coverage, it must 
     offer a dependent special enrollment period for persons 
     becoming a dependent through marriage, birth, or adoption or 
     placement for adoption. The dependent

[[Page H9520]]

     special enrollment period must last for not less than 30 
     days. The dependent may be enrolled as a dependent of the 
     individual. If the individual is eligible for enrollment, but 
     not enrolled, the individual may also enroll at this time. 
     Moreover, in the case of the birth or adoption of a child, 
     the spouse of the individual also may be enrolled as a 
     dependent of the individual if the spouse is otherwise 
     eligible for coverage but not already enrolled. If an 
     individual seeks to enroll a dependent during the first 30 
     days of a dependent special enrollment period, the coverage 
     would become effective as of the date of birth, of adoption 
     or placement for adoption, or, in the case of marriage, not 
     later than the first day of the first month beginning after 
     the date the completed request for enrollment was received.


     F. Applicability of renewal requirements to multiple employer 
                              arrangements

     Current law
       Under section 3(37) of ERISA, a multiemployer plan is one 
     in which more than one employer contributes and which is 
     established through a collective bargaining agreement. (Such 
     plans are commonly found in unionized sectors of the building 
     and construction, publishing, and entertainment trades, and 
     the lumber, maritime, retail, food, hotel, and restaurant 
     industries.) Under section 3(40) of ERISA, a multiple 
     employer welfare arrangement (MEWA) is an employee welfare 
     benefit plan or any other arrangement which offers or 
     provides health benefits and meets additional criteria, 
     (e.g., it must offer such benefits to the employees of 2 or 
     more employers). There is no provision or definition under 
     current law for ``multiple employer health plans.''
     House bill
       Such plans could not deny an employer who employees are 
     covered under the plan or arrangement continued access to the 
     same or different coverage except: (1) for cause (e.g., 
     nonpayment of premiums, fraud, and noncompliance with plan 
     provisions); (2) because the plan is not offering coverage in 
     a geographic area; or (3) due to a failure to meet the terms 
     of an applicable collective bargaining agreement. Certain 
     collectively bargained arrangements and ``multiple employer 
     health plans'' (MEHPs) would be required to meet specific 
     requirements relating to the nondiscrimination requirements. 
     (MEHPs are established under this bill (see item V below) and 
     are generally non-fully-insured MEWAs that meet certain 
     requirements excepting them from state regulation.)
     Senate amendment
       No provision. (Note that the rules regarding group and 
     individual health plans (e.g., guaranteed renewal, 
     nondiscrimination, and portability) or state laws not 
     preempted by the Senate Amendment also apply to health plans 
     offered by health plan issuers to a purchasing cooperative. 
     See item VIII below).
     Conference agreement
       The conference agreement provides that a group health plan 
     which is a multiemployer plan or a multiple employer welfare 
     arrangement may not deny an employer continued access to the 
     same or different coverage under the terms of such plan 
     except: (1) for nonpayment of contributions; (2) for fraud; 
     (3) for noncompliance with plan provisions; (4) because the 
     plan is ceasing to offer any coverage in a geographic area; 
     (5) in the case of a network plan, there is no longer any 
     individual enrolled through the employer who lives, resides, 
     or works in the service area of the network plan, and the 
     plan applies this provision uniformly without regard to 
     claims experience or health status-related factors; or (6) 
     due to a failure to meet the terms of an applicable 
     collective bargaining agreement, to renew a collective 
     bargaining agreement or other agreement requiring or 
     authorizing contributions to the plan, or to employ employees 
     covered by such an agreement.


            G. Enforcement of group health plan requirements

     Current law
       Federal requirements on existing group health plans are 
     enforced through various laws, including ERISA, the Public 
     Health Service (PHS) Act, the IRC, and Medicare.
     House bill
       The House bill would provide for enforcement of the federal 
     group health plan availability and portability requirements 
     through the IRC, ERISA, and through civil monetary penalties 
     imposed through the Secretary of Health and Human Services
     Senate amendment
       The Senate Amendment would provide for enforcement of the 
     federal group health plan availability and portability 
     requirements through the Secretary of Labor, in consultation 
     with the Secretary of Health and Human Services using ERISA 
     civil enforcement provisions.
     Conference agreement
       The conference agreement provides for enforcement of the 
     federal group health plan availability and portability 
     requirements through the IRC, ERISA, and through civil 
     monetary penalties imposed through the Secretary of Health 
     and Human Services (HHS).

             1. Enforcement through COBRA provisions of IRC

     Current law
       Plans that fail to comply with the IRC COBRA provision are 
     subject to an excise tax of $100 per day per violation. The 
     tax is not applied where the failure was determined to be 
     unintentional or if the failure was corrected within 30 days. 
     An overall limitation on the tax applies in the event of an 
     unintentional failure.
     House bill
       The House bill would provide that noncomplying plans and 
     insurers and HMOs selling to group health plans would be 
     subject to an excise tax of $100 per day per violation 
     enforced through the COBRA provisions of the IRC. Penalties 
     would not be assessed if the failure was determined to be 
     unintentional or a correction was made within 30 days. No tax 
     could be imposed on a noncomplying insurer or HMO subject to 
     state insurance regulation if the Secretary of Health and 
     Human Services (HHS) determined that the state had an 
     effective enforcement mechanism. In the case of a group 
     health plan of a small employer that provided coverage solely 
     through a contract with an insurer or HMO, no tax would be 
     imposed upon the employer if the failure was solely because 
     of the product offered by the insurer or HMO. No tax penalty 
     would be assessed for a failure under this provision if a 
     sanction had been imposed under ERISA or by the Secretary of 
     HHS.
     Senate amendment
       No provision.
     Conference agreement
       See Title IV.

                      2. Enforcement through ERISA

     Current law
       Under section 502 of ERISA, employee benefit plans that 
     fail to comply with applicable requirements can be sued for 
     relief and be subject to civil money penalties, and can be 
     sued to recover any benefits due under the plan. Section 504 
     of ERISA provides the Secretary of Labor with investigative 
     authority to determine whether any person is out of 
     compliance with the law's requirements. Section 506 provides 
     for coordination and responsibility of agencies in 
     enforcement. Section 510 prohibits a health plan from 
     discriminating against a participant or beneficiary for 
     exercising any right under the plan.
     House bill
       The House bill would provide that ERISA sanctions apply to 
     group health plans by deeming the provisions of subtitle A 
     and subtitle D (insofar as it is applicable to this subtitle) 
     to be provisions of title I of ERISA. Such sanctions also 
     would apply to an insurer or HMO that was subject to state 
     law in the event that the Secretary of Labor determined that 
     the state had not provided for enforcement of the above 
     provisions of this Act. Sanctions would not apply in the 
     event that the Secretary of Labor established that none of 
     the persons against whom the liability would be imposed knew, 
     or exercising reasonable diligence, would have known that a 
     failure existed, or if the noncomplying entity acted within 
     30 days to correct the failure. In no case would a civil 
     money penalty be imposed under ERISA for a violation for 
     which an excise tax under the COBRA enforcement provisions 
     was imposed or for which a civil money penalty was imposed by 
     the Secretary of HHS.
     Senate amendment
       The Senate Amendment would provide that for employee health 
     benefit plans, the Secretary would be required to enforce the 
     reform standards established by the bill in the same manner 
     as provided under sections 502, 504, 506, and 510 of ERISA. 
     (See item IV(I) below for enforcement provisions relating to 
     health plan issuers and group health plans sold to employers 
     and others.)
     Conference agreement
       The conference agreement provides that provisions with 
     respect to group health plans would be enforced under Title I 
     of ERISA as under current law. The Secretary of Labor would 
     not enforce the provisions of Title I applicable to health 
     insurance issuers. However, private right of action under 
     part V of ERISA would apply to such issuers. Enforcement of 
     provisions with respect to health insurance issuers generally 
     would be limited to civil remedies established under the PHS 
     Act amendments (as described in the following subsection).
       The conference agreement provides that a state may enter 
     into an agreement with the Secretary for delegation to the 
     state of some or all of the Secretary's authority under 
     sections 502 and 504 of ERISA to enforce the requirements of 
     this part in connection with MEWAs providing medical care 
     which are not group health plans.

              3. Enforcement through civil money penalties

     Current law
       No provision.
     House bill
       The House bill would provide that a group health plan, 
     insurer, or HMO that failed to meet the above requirements 
     would be subject to a civil money penalty. Rules similar to 
     those imposed under the COBRA penalties would apply. The 
     maximum amount of penalty would be $100 for each day for each 
     individual with respect to which a failure occurred. In 
     determining the penalty amount, the Secretary of HHS would 
     have to take into account the previous record of compliance 
     of the person being assessed with the applicable requirements 
     of this subtitle, the gravity of the violation, and the 
     overall limitations for unintentional failures provided

[[Page H9521]]

     under the IRC COBRA provisions. No penalty could be assessed 
     if the failure was not intentional or if the failure was 
     corrected within 30 days. A procedure would be available for 
     administrative and judicial review of a penalty assessment. 
     Collected penalties would be paid to the Secretary of HHS and 
     would be available for the purpose of enforcing the 
     provisions with respect to which the penalty was imposed.
       The authority for the Secretary of HHS to impose civil 
     money penalties would not apply to enforcement with respect 
     to any entity which offered health insurance coverage and 
     which was an insurer or HMO subject to state regulation by an 
     applicable state authority if the Secretary of HHS determined 
     that the state had established an effective enforcement plan. 
     In no case would a civil money penalty be imposed under this 
     provision for a violation for which an excise tax under COBRA 
     or civil money penalty under ERISA was assessed.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement provides that each state may 
     require that health insurance issuers that issue, sell, 
     renew, or offer health insurance coverage in the state in the 
     small or large group markets meet the Act's requirements. In 
     the case of a determination by the Secretary of HHS that a 
     state has failed to substantially enforce a provision or 
     provisions of part A with respect to health insurance issuers 
     in the state, the Secretary would enforce such provision or 
     provisions insofar as they relate to the issuance, sale, 
     renewal, and offering of health insurance coverage in 
     connection with group health plans in the state. Secretarial 
     enforcement would apply only in the absence of state 
     enforcement and with respect to group health plans that are 
     nonfederal governmental plans.
       In the case of a failure by a health insurance issuer, the 
     issuer is liable for any penalty. In the case of failure by a 
     group health plan that is a nonfederal governmental plan, the 
     plan is liable if it is sponsored by 2 or more employers; 
     otherwise the employer is liable. Rules similar to those 
     imposed under the COBRA penalties would apply. The maximum 
     amount of penalty for noncompliance would be $100 per day per 
     individual. In determining the penalty amount, the Secretary 
     of HHS would have to take into account the previous record of 
     compliance and the gravity of the violation. No penalty could 
     be assessed if the failure was not intentional or if the 
     failure was corrected within 30 days. A procedure would be 
     available for administrative and judicial review of a penalty 
     assessment. Collected penalties would be paid to the 
     Secretary of HHS and would be available for the purpose of 
     enforcing the provisions with respect to which the penalty 
     was imposed.

                   4. Coordination in administration

     Current law
       Section 506 of ERISA provides for coordination of other 
     federal agencies (e.g., the Internal Revenue Service) with 
     the Department of Labor in enforcing ERISA.
     House bill
       The House bill would require the Secretaries of Treasury, 
     Labor, and HHS to issue regulations that are not duplicative 
     to carry out this subtitle. The bill would require these 
     regulations to be issued in a manner that assures 
     coordination and nonduplication in their activities under 
     this subtitle.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement provides that the Secretaries of 
     Treasury, Labor, and HHS would ensure, through execution of 
     an interagency memorandum of understanding, that regulations, 
     rulings, and interpretations are administered so as to have 
     the same effect at all times. It requires the Secretaries to 
     coordinate enforcement policies for the same requirements to 
     avoid duplication of enforcement efforts and assign 
     priorities in enforcement.
       It is the intent of the conferees that the committees of 
     jurisdiction should work together to assure the coordination 
     of policies under this Act. Such coordination is considered 
     necessary to maintain consistency in the IRC, ERISA, and the 
     PHS Act.

   III. Availability, Portability, and Renewability Requirements on 
    Insurers, HMOs, and Issuers of Health Plans in the Group Market

     Current law
       The McCarran Ferguson Act of 1945 (P.L. 79-15) exempts the 
     business of insurance from federal antitrust regulation to 
     the extent that it is regulated by the states and indicates 
     that no federal law should be interpreted as overriding state 
     insurance regulation unless it does so explicitly. Section 
     514(b)(2)(A) of ERISA leaves to the states the regulation of 
     insurance. (Employee benefit plans are not insurance and are 
     regulated by the federal government.)
     House bill
       The House bill would establish federal requirements on 
     insurers and HMOs selling in the group market to provide for 
     guaranteed availability of health insurance coverage.
     Senate amendment
       The Senate Amendment is similar but would apply 
     requirements to health plan issuers offering plans in the 
     group market.
     Conference agreement
       The conference agreement establishes federal requirements 
     on health insurance issuers offering group health insurance 
     coverage to provide for guaranteed availability of health 
     insurance coverage.


                             a. definitions

     Current law
       No provision.
     House bill
       The House bill would define insurer to mean an insurance 
     company, insurance service, or insurance organization which 
     is licensed to engage in the business of insurance in a state 
     and which (except for the purposes of individual health 
     insurance availability provisions of this subtitle) is 
     subject to state law which regulates insurance within the 
     meaning of section 514(b)(2)(A) of ERISA.
       The House bill would define a health maintenance 
     organization to mean (a) a federally qualified HMO, (b) an 
     organization recognized under state law as an HMO, or (c) a 
     similar organization regulated under state law for solvency 
     in the same manner and extent as an HMO, if (other than for 
     the purposes of individual health insurance availability 
     provisions of the bill) it is subject to state law which 
     regulates insurance within the meaning of section 514(b)(2) 
     of ERISA.
       Under the House bill, a bona fide association would be 
     defined as an association which (a) has been actively in 
     existence for at least 5 years; (b) has been formed and 
     maintained in good faith for purposes other than obtaining 
     insurance; (c) does not condition membership in the 
     association on health status; (d) makes health insurance 
     coverage offered through the association available to any 
     individual who is a member (or dependent of a member) of the 
     association at the time the coverage is initially issued; (e) 
     does not make health insurance coverage offered through the 
     association available to any member who is not a member (or 
     dependent of a member) of the association at the time 
     coverage is initially issued; (f) does not impose preexisting 
     condition exclusions consistent with the requirements of this 
     bill relating to group health plans; and (g) provides for 
     renewal and continuation of coverage consistent with the 
     requirements of this bill.
     Senate amendment
       The Senate Amendment would define health plan issuer as any 
     entity that is licensed (prior to or after the date of 
     enactment of this Act) by a state to offer a group health 
     plan or an individual health plan.
       The Senate Amendment does not use the terms health 
     maintenance organization, or bona fide association.
     Conference agreement
       The conference agreement defines a health insurance issuer 
     as an insurance company, insurance service, or insurance 
     organization, including an HMO, which is licensed to engage 
     in the business of insurance in a state and which is subject 
     to state law which regulates insurance within the meaning of 
     section 514(b)(2) of ERISA. A group health plan is not a 
     health insurance issuer.
       An HMO is: (a) a federally qualified HMO, (b) an 
     organization recognized under state law as an HMO, or (c) a 
     similar organization regulated under state law for solvency 
     in the same manner and extent as an HMO.
       A bona fide association is an association which: (a) has 
     been actively in existence for at least 5 years; (b) has been 
     formed and maintained in good faith for purposes other than 
     obtaining insurance; (c) does not condition membership in the 
     association on any health status-related factor; (d) makes 
     health insurance coverage offered through the association 
     available to any member, or individuals eligible for coverage 
     through such member, regardless of any health status-related 
     factor; (e) does not make health insurance coverage offered 
     through the association available other than in connection 
     with a member of the association; and (f) meets additional 
     requirements as may be imposed under state law.


                 b. guaranteed availability of coverage

     Current law
       No provision.
     House bill
       The House bill would require each insurer or HMO offering 
     health insurance coverage in the small group market to accept 
     every small employer in the state that applied for coverage 
     and to accept for enrollment under such coverage every 
     eligible individual who applied for enrollment during the 
     initial enrollment period in which the individual first 
     became eligible for the group coverage. No restriction could 
     be imposed on an eligible individual based on his or her 
     health status. An eligible individual is determined in 
     accordance with the terms of the plan consistent with all 
     applicable state laws.
     Senate amendment
       The Senate Amendment would require a health plan issuer 
     offering a group health plan to accept the whole group 
     desiring to purchase the coverage. A health plan issuer 
     offering a group health plan could not condition eligibility, 
     continuation of eligibility, enrollment, or premium 
     contribution requirements based on health status. (Health 
     status is defined the same as under the House bill.)
     Conference agreement
       The conference agreement requires each health insurance 
     issuer that offers health insurance coverage in the small 
     group market in a state to accept every small employer in

[[Page H9522]]

     the state that applies for coverage, and to accept for 
     enrollment under such coverage every eligible individual who 
     applies for enrollment during the period in which the 
     individual first became eligible to enroll under the terms of 
     the group health plan. The health plan issuer may not impose 
     restrictions on any eligible individual being a participant 
     or beneficiary based on his or her health status, or the 
     health status of dependents. An eligible individual is 
     determined in accordance with the terms of the plan, as 
     provided by the health insurance issuer under the rules of 
     the issuer which are uniformly applicable in a state to small 
     employers in the small group market, and consistent with all 
     applicable state laws governing the issuer and market.

                        1. Scope of requirement

     Current law
       No provision.
      House bill
       The House bill provides that the guaranteed availability 
     requirement apply to the small group market only. Small 
     groups are those with 2 to 50 employees.
     Senate amendment
       The Senate Amendment provides that the guaranteed 
     availability requirement apply to all health plan issuers and 
     group health plans.
     Conference agreement
       The conference agreement provides that the guaranteed 
     availability requirement applies to the small group market 
     only. Small groups are those with 2 to 50 employees on a 
     typical business day.
       To assure access in the large group market, the conference 
     agreement provides that the Secretary of HHS request that the 
     chief executive officer of each state submit a report on the 
     access of large employers to health insurance coverage and 
     the circumstances for lack of access to coverage, if any, of 
     large employers, and classes of employers. The Secretary 
     shall request the reports not later than December 31, 2000 
     and every 3 years thereafter. Based on the state reports and 
     other information, the Secretary would be required to prepare 
     a report for Congress, every 3 years, describing the access 
     to health insurance for large employers, and classes of 
     employers in each state. The Secretary may include 
     recommendations to assure access.
       In addition, the Comptroller General will submit to 
     Congress not later than 18 months after the date of enactment 
     of this act, a report on access of classes of large employers 
     to health insurance coverage in the different states, and the 
     circumstances for lack of access, if any.

      2. Restrictions on preexisting condition limitation periods

     Current law
       No provision.
     House bill
       The House bill would provide for the same restrictions on 
     the use of preexisting condition limitations by each insurer 
     and HMO that offers health insurance coverage in connection 
     with a group health plan as those described in above item II-
     (C).
     Senate amendment
       The Senate amendment would provide for the same 
     restrictions on the use of preexisting condition limitations 
     by health plan issuers as described in above item II-(C).
     Conference agreement
       The conference agreement provides us for the same 
     restrictions on the use of preexisting condition limitations 
     by each health insurance issuer that offers group health 
     insurance coverage as those described in above item II-(C).

                3. Exceptions to guaranteed availability

     Current law
       No provision.
     House bill
       The House bill would provide that an HMO or an insurer 
     offering coverage in the small group market through a network 
     plan could: (1) limit employers for such coverage to those 
     with eligible individuals whose place of employment or 
     residence was in the plan's or HMO's service area; (2) limit 
     the individuals who might be enrolled to those whose place of 
     residence or employment was within the service area; (3) 
     within the service area, deny coverage if the plan or HMO 
     demonstrated lack of capacity to deliver services adequately, 
     but only if it was applying the capacity limit to all 
     employers without regard to the group's claims experience or 
     the health status of its participants and beneficiaries. 
     Those denying coverage on the basis of capacity could not 
     offer small groups coverage in the service area for 180 days. 
     Similar exceptions would apply in the event of financial 
     capacity limits.
     Senate amendment
       The Senate amendment would provide that a health plan 
     issuer offering a group health plan could cease offering 
     coverage to group purchasers if (1) the plan ceased to offer 
     coverage to any additional group purchasers, and (2) the 
     issuer could demonstrate to the applicable certifying 
     authority that its financial or provider capacity would be 
     impaired if the issuer were required to offer coverage to 
     additional group purchasers. Such an issuer would be 
     prohibited from offering coverage for 6 months or until the 
     issuer could demonstrate that the capacity was adequate, 
     whichever was later. An issuer would only be eligible for 
     this exception if it offered coverage on a first-come-first-
     served basis or other basis established by a state to ensure 
     a fair opportunity to enroll and avoid risk selection.
     Conference agreement
       The conference agreement provides that a health insurance 
     issuer offering coverage in the small group market through a 
     network plan could: (1) limit employers for such coverage to 
     those with eligible individuals who live, work, or reside in 
     the service area for the network plan; (2) within the service 
     area, deny coverage to small employers if the issuer has 
     demonstrated, if required, to the applicable state authority, 
     the lack of capacity to deliver services adequately to 
     additional groups, but only if it was applying the capacity 
     limit to all employers uniformly without regard to claims 
     experience or any health status-related factor. An issuer 
     denying coverage on the basis of capacity could not offer 
     coverage in the small group market in the service area for 
     180 days.
       A health insurance issuer may deny coverage in the small 
     group market if the issuer has demonstrated, if required, to 
     the applicable state authority, that it does not have the 
     financial reserves necessary to underwrite additional 
     coverage. The issuer would be required to apply the financial 
     capacity limit to all employers in the small group market in 
     the state, consistent with applicable state law, and without 
     regard to claims experience or health status-related factors. 
     An issuer denying coverage on the basis of financial capacity 
     could not offer coverage in the small group market in the 
     service area for 180 days or until the issuer has 
     demonstrated, if required, to the applicable state authority, 
     that it has adequate capacity, whichever is later. A State 
     may provide for determination of adequate capacity on a 
     service-area-specific basis. It is the intent of the 
     conferees that an issuer denying coverage on the basis of 
     capacity limitations may demonstrate compliance if enrollment 
     is provided on a first-come first-serve basis, or other state 
     approved method.
       The conference agreement imposes requirements for renewal 
     and continuation on issuers offering health insurance plans 
     to bona fide associations, but does not require these issuers 
     to guarantee issue of the coverage offered to bona fide 
     associations. The conferees do not intend the provision to 
     mean that issuers of coverage to an association have to offer 
     a particular association plan to any other employer. Thus 
     issuers offering coverage to associations are not required to 
     guarantee issue the association's plan to other small 
     employers. Nondiscrimination rules would apply to these 
     association plans, and no employee or dependent could be 
     excluded from coverage on the basis of any health status-
     related factor.
       The conference agreement provides exceptions to the 
     availability, renewability and portability requirements for 
     group health plans and group health insurance coverage for 
     certain benefits, sometimes under certain conditions. First, 
     these requirements would not apply to provision of certain 
     excepted benefits including: coverage only for accident, or 
     disability insurance, or any combination thereof; coverage 
     issued as a supplement to liability insurance; liability 
     insurance; workers' compensation or similar insurance; 
     automobile medical payment insurance; credit-only insurance; 
     coverage for on-site medical clinics; and, other similar 
     coverage, as specified in regulations, under which benefits 
     for medical care are secondary or incidental to other 
     insurance benefits.
       Second, if the following benefits are (a) provided under a 
     separate policy, certificate, or contract or insurance, or 
     (b) if the benefits are otherwise not an integral part of the 
     plan, the requirements would not apply to: limited scope 
     dental or vision benefits; benefits for long-term care, 
     nursing home care, home health care, community-based care, or 
     any combination thereof; or, similar limited benefits as 
     specified in regulations.
       Third, if the following benefits: (a) are provided under a 
     separate policy, certificate, or contract of insurance; (b) 
     there is no coordination between the provision of these 
     benefits and any exclusion of benefits under any group health 
     plan maintained by the same plan sponsor; and (c) such 
     benefits are paid with respect to an event without regard to 
     whether benefits are provided for that event under any group 
     health plan maintained by the same plan sponsor, the 
     requirements would not apply to: coverage only for a 
     specified disease or illness, or hospital indemnity or other 
     fixed indemnity insurance.
       Fourth, if the following benefits are provided under a 
     separate policy, certificate, or contract of insurance, the 
     requirements would not apply to: Medicare supplemental health 
     insurance; coverage supplemental to coverage provided under 
     military health care; and, similar supplemental coverage 
     provided to coverage under a group health plan.

 4. Exceptions for failure to meet participation or contribution rules

     Current law
       No provision.
     House bill
       The House bill would provide that an exception to the 
     guaranteed availability requirement would apply in the case 
     of any group health plan which failed to meet the 
     participation or contribution rules of the insurer or HMO. 
     Such participation and contribution rules would have to be 
     uniformly applicable and in accordance with state law.

[[Page H9523]]

     Senate amendment
       No provision.
     Conference agreement
       The conference agreement provides that an exception to the 
     guaranteed availability requirement would apply in the case 
     of any group health plan which failed to meet the 
     participation or contribution rules of the health insurance 
     issuer. Such participation and contribution rules would have 
     to be in accordance with state law.


                       c. guaranteed renewability

     Current law
       No provision.
     House bill
       The House bill would provide that regardless of the size of 
     the group, insurers and HMOs would be required to renew or 
     continue in force coverage at the option of the covered 
     employer with certain exceptions.
     Senate amendment
       The Senate provision is similar but at the option of the 
     group purchaser.
     Conference agreement
       The conference agreement provides that a health insurance 
     issuer offering group health insurance coverage in the small 
     or large group market would be required to renew or continue 
     in force coverage at the option of the plan sponsor of the 
     plan.

       1. Exceptions to guaranteed renewability of group coverage

     Current law
       No provision.
     House bill
       The House bill would provide exceptions to the guaranteed 
     renewability requirement for: nonpayment of premiums, fraud, 
     violation of participation and contribution rules, 
     termination of the plan in a state or geographic area, or the 
     employer moved outside the service area (but only if this 
     last provision was applied uniformly without regard to health 
     status). Exceptions to guaranteed renewability would also 
     apply in the event that the insurer or plan no longer offered 
     a particular type of coverage but only if prior notice was 
     provided, the employer was given the chance to buy another 
     plan offered by the insurer or HMO, and the termination was 
     applied uniformly without regard to health status or 
     insurability. An exception would also apply in the event of 
     discontinuance of all coverage, but only if certain 
     conditions were met. In this instance, the insurer or HMO 
     could not market small and/or large group coverage for 5 
     years.
     Senate amendment
       The Senate Amendment is similar. It would include as 
     exceptions to the guaranteed renewability requirement the 
     loss of eligibility of COBRA continuation coverage, and 
     failure of a participant or beneficiary to meet requirements 
     for eligibility for coverage under the group health plan that 
     are not prohibited by this subtitle.
       A network plan could deny continued participation under the 
     plan to participant or beneficiaries who did not live, 
     reside, or work in an area in which the plan was offered, but 
     only if the denial was applied uniformly, without regard to 
     health status or insurability.
       The provisions relating to discontinuation of a plan or of 
     coverage in general are similar to the House bill.
     Conference agreement
       The conference agreement provides exceptions to the 
     guaranteed renewability requirement for one or more of the 
     following: (1) nonpayment of premiums; (2) fraud; (3) 
     violation of participation or contribution rules; (4) 
     termination of coverage in the market in accordance with 
     applicable state law, as outlined below; (5) for network 
     plans, no enrollees connected to the plan live, reside, or 
     work in the service area of the issuer, or area for which the 
     issuer is authorized to do business, and, in the case of the 
     small group market only if the issuer would deny enrollment 
     to the plan under regulations governing guaranteed 
     availability of coverage; (6) for coverage made available to 
     bona fide associations, if membership in the association 
     ceases, but only if coverage is terminated uniformly without 
     regard to any health status-related factor relating to any 
     covered individual.
       Exceptions to guaranteed renewability would also apply if 
     the issuer or plan no longer offered a particular type of 
     group coverage in the small or large group market so long as 
     the issuer, in accordance with applicable state law: (1) 
     provided prior notice to each plan sponsor and participants 
     and beneficiaries; (2) gave the plan sponsor the chance to 
     purchase all (or, in the case of the large group market, any) 
     other plans offered by the issuer in such market; and (3) 
     applied the termination uniformly without regard to the 
     claims experience of the sponsors or any health status-
     related factor to any participants or beneficiaries covered 
     or new participants or beneficiaries who may become eligible 
     for such coverage.
       An exception would also apply in the event of 
     discontinuance of all coverage, but only if certain 
     conditions were met. In this instance, the issuer could not 
     offer coverage in the market and state involved for 5 years.
       Issuers would be permitted to modify the health insurance 
     coverage for a product offered to a group health plan in the 
     large group market, and in the small group market if the 
     modification was effective on a uniform basis among group 
     health plans with that product.
       For example, the conferees intend that issuers could 
     uniformly modify the terms of treatment for particular 
     conditions among group health plans within a type of 
     coverage. An exception would apply to coverage available in 
     the small group market only through 1 or more bona fide 
     associations. Issuers could modify a product offered to a 
     group plan in the large group market.
       See section B(3) above for exceptions from availability, 
     renewability, and portability requirements for certain 
     benefits.


          d. disclosure of information by health plan issuers

     Current law
       Section 101 of ERISA requires covered plans to furnish 
     summary plan descriptions and other information and notices 
     to plan participants and the Secretary of Labor. Section 104 
     of ERISA requires covered plans to file certain information 
     with the Secretary of Labor and to furnish certain 
     information to plan participants.
     House bill
       The House bill does not include a provision.
     Senate amendment
       The Senate Amendment would require that in connection with 
     the offering of any group health plan to a small employer 
     (defined under state law or, if not so defined, one with not 
     more than 50 employees), that a health plan issuer make a 
     reasonable disclosure as part of its solicitation and sales 
     materials of certain information, such as the provisions of 
     the plan concerning the right of the issuer to change premium 
     rates and the factors that could affect such changes, the 
     provision of the plan relating to renewability and any 
     preexisting condition provisions, and descriptive information 
     about the plan's benefits and premiums. The information would 
     have to be understandable by the average small employer and 
     sufficiently accurate and comprehensive to reasonably inform 
     employers, participants, and beneficiaries of their rights 
     and obligations under the plan. These requirements would not 
     apply to proprietary and trade secret information under 
     applicable law and do not preempt state reporting and 
     disclosure requirements.
       The Senate Amendment would amend section 104(b)(1) of ERISA 
     relating to the summary plan description to provide that if 
     there is a modification or change described in the summary 
     plan description that is a material reduction in covered 
     services or benefits provided, a summary of such changes 
     would have to be furnished to participants within 60 days 
     after the date of its adoption. Alternatively, plans sponsors 
     could provide such a description at regular intervals of not 
     more than 90 days. The bill requires the Secretary of Labor 
     to issue regulations providing alternative mechanisms to 
     delivering by mail through which employee benefit plans may 
     notify participants of material reductions in covered 
     services. It further amends the summary plan description 
     provisions of ERISA to require the inclusion of certain 
     information.
     Conference agreement
       The conference agreement requires a health plan issuer 
     offering any health insurance coverage to a small employer to 
     make a reasonable disclosure of the availability of 
     information as part of its solicitation and sales materials. 
     At the small employer's request, the issuer must provide the 
     provisions of the plan concerning the right of the issuer to 
     change premium rates and the factors that could affect such 
     changes, the provisions of the plan relating to renewability 
     and any preexisting condition provisions, and the benefits 
     and premiums under all health insurance coverage for which 
     the employer is qualified. The information would have to be 
     understandable by the average small employer and sufficient 
     to reasonably inform small employers of their rights and 
     obligations under the health insurance coverage. These 
     requirements would not apply to proprietary and trade secret 
     information under applicable law.
       The conference agreement would amend section 104(b)(1) of 
     ERISA relating to the summary plan description to provide 
     that if there is a material reduction in covered services or 
     benefits, a summary of such changes would have to be 
     furnished to participants within 60 days after the date of 
     its adoption. Alternatively, plan sponsors could provide a 
     description at regular intervals of not more than 90 days. 
     The conference agreement requires the Secretary of Labor to 
     issue regulations within 180 days of enactment of this Act 
     which would provide for alternative mechanisms, besides 
     delivery by mail, through which employee benefit plans may 
     notify participants of material reductions in covered 
     services. It further amends the summary plan description 
     provisions of ERISA to require the inclusion of certain 
     information.
       The conference agreement would amend section 101 of ERISA 
     to permit the Secretary, in accordance with regulations 
     prescribed by the Secretary, to require MEWAs that provide 
     medical care benefits, but are not group health plans, to 
     report, not more frequently than annually, in such form and 
     manner as the Secretary may require to determine the extent 
     to which the requirements of this part are being carried out.


                          e. state flexibility

     Current law
       The McCarran Ferguson Act of 1945 (P.L. 79-15) exempts the 
     business of insurance

[[Page H9524]]

     from federal antitrust regulation to the extent that it is 
     regulated by the states and indicates that no federal law 
     should be interpreted as overriding state insurance 
     regulation unless it does so explicitly. Section 514 of ERISA 
     leaves to the states the regulation of insurance. (Employee 
     benefit plans are not insurance and are regulated by the 
     federal government.)
     House bill
       The House bill would provide that unless preempted by 
     section 514 of ERISA, state laws would not be preempted that 
     (1) related to matters not specifically addressed in 
     subtitles A and B, or (2) that required insurers or HMOs to: 
     (a) impose a limitation or exclusion of benefits relating to 
     the treatment of a preexisting condition for periods shorter 
     than specified in the bill, (b) allowed persons to be 
     considered to be in a period of previous qualifying coverage 
     if they experienced a lapse in coverage greater than 60 days, 
     or (c) had a look-back provision shorter than 6 months.
     Senate amendment
       The Senate Amendment does not include ``related to matters 
     not specifically addressed in subtitles A and B.'' The Senate 
     Amendment would provide that unless preempted by section 514 
     of ERISA, state laws would not be preempted that (1) required 
     health plan issuers to impose a limitation or exclusion of 
     benefits relating to the treatment of a preexisting condition 
     for periods that are shorter than specified in the bill; (2) 
     allowed individuals, participants, and beneficiaries to be 
     considered in a period of previous qualifying coverage if 
     such person experienced a lapse in coverage that was greater 
     than the 30-days provided under this bill; or (3) required 
     issuers to have a lookback period shorter than provided for 
     under this subtitle.
     Conference agreement
       The conference agreement provides that any provision of 
     state law which establishes, implements, or continues in 
     effect any standard or requirement solely relating to health 
     insurance issuers in connection with health insurance 
     coverage would not be superseded unless the state standard or 
     requirement prevents the application of a federal requirement 
     of this part. Nothing in this part of the Act would affect or 
     modify the provisions of section 514 of ERISA with respect to 
     group health plans.
       The conferees intend the narrowest preemption. State laws 
     which are broader than federal requirements would not prevent 
     the application of federal requirements. For example, states 
     may require guaranteed availability of coverage for groups of 
     more than 50 employees, or for groups of 1.
       The conference agreement provides special rules in the case 
     of portability requirements. State laws applicable to a 
     preexisting condition exclusion which differ from the 
     standards or requirements specified in this part would be 
     superseded except if they: (1) shorten the lookback period in 
     determination of a preexisting condition limitation (from 6 
     months to any shorter period of time); (2) shorter the length 
     of a preexisting condition limitation exclusion (from 12 
     months, or 18 months for late enrollees, to any shorter 
     period); (3) lengthen the break in coverage time from 63 days 
     to any greater number; (4) lengthen the time for enrollment 
     of newborns, or certain children adopted or placed for 
     adoption, from 30 days to any greater number; (5) prohibit 
     the imposition of any preexisting condition exclusions in 
     cases not described, or expand the exclusions described; (6) 
     require additional special enrollment periods; (7) reduce the 
     maximum period permitted in an affiliation period.
       A group health plan or health insurance coverage is not 
     required to provide specific benefits other than those 
     provided under the terms of such plan or coverage.

                      IV. Individual Market Rules

     Current law
       The individual health insurance market is currently 
     regulated by the states. As of December, 1995, 11 states 
     required that individual insurers write policies on a 
     guaranteed issue basis; 16 states required guaranteed 
     renewal; and 22 states limited the use of preexisting 
     condition limitation periods.
     House bill
       The House bill would provide for federal requirements to 
     guarantee availability of individual health insurance 
     coverage to certain qualified individuals with prior group 
     coverage, without limitation or exclusion of benefits, and to 
     guarantee renewability of individual health insurance 
     coverage.
     Senate amendment
       Similar.
     Conference agreement
       The conference agreement provides for federal requirements 
     to guarantee availability of individual health insurance 
     coverage to certain qualified individuals with prior group 
     coverage, without limitation or exclusion of benefits, and to 
     guarantee renewability of individual health insurance 
     coverage.


   A. Guaranteed availability of individual health insurance coverage

     Current law
       No provision.
     House bill
       The House bill would include goals that any qualifying 
     individual would be able to obtain qualifying coverage and 
     that qualifying individuals would receive credit for prior 
     coverage toward the new coverage's preexisting condition 
     exclusion period, if any. If states fail to implement 
     programs meeting these goals, a federal fall back requirement 
     would take effect requiring that each individual insurer 
     enroll all eligible individuals and that such persons receive 
     credit for their prior coverage toward any preexisting 
     condition limitation period. (See item IV(D) below on 
     exceptions for network plans and HMOs.)
       The House bill would require that any preexisting condition 
     exclusion period be reduced by the length of the aggregate 
     period of qualified prior coverage. To determine qualified 
     coverage, the plan could choose one of two alternatives: (1) 
     it could disregard specific benefits covered and include all 
     periods of coverage from qualified sources; or (2) it could 
     examine prior coverage on a benefit-specific basis, and 
     exclude from qualified coverage any specific benefits not 
     covered under the most recent prior plan. If the second 
     method were chosen, plans would be required to disclose this 
     procedure at the time of enrollment or sale of the plan.
     Senate amendment
       The Senate Amendment would provide that all health plan 
     issuers that issue or renew individual health plans must 
     enroll all eligible individuals except if the insurer 
     demonstrates that it would have financial problems, or, that 
     its ability to service individuals already enrolled in the 
     plan would diminish if new enrollees were allowed to join the 
     plan. In these cases, the insurer would be prohibited from 
     enrolling new individuals for a period of 6 months, or, if 
     later, when the insurer could demonstrate that they could 
     properly service new entrants. An insurer would have to 
     enroll individuals on a first-come-first-served basis, or 
     other basis determined by the state, to be eligible for this 
     limitation. States implementing guaranteed availability 
     programs meeting certain requirements would be excepted from 
     the federal requirements.
       The Senate amendment would provide that a health plan 
     issuer may not impose a limitation or exclusion of benefits 
     on benefits that were covered under prior health plans.
     Conference agreement
       The conference agreement provides that each health 
     insurance issuer that offers health insurance coverage in the 
     individual market in a state may not decline to offer 
     coverage to, or deny enrollment of an eligible individual and 
     may not impose any preexisting condition exclusions with 
     respect to such coverage. This requirement will not apply in 
     States with acceptable alternative mechanisms as described in 
     section IV(E) below. In addition, in States without an 
     acceptable alternative mechanism, a health insurance issuer 
     may limit the coverage offered as described in section IV(C).


                   B. Qualifying/eligible individuals

     Current law
       No provision.
     House bill
       The House bill would provide that qualifying individuals 
     are individuals: with 18 or more months of qualified coverage 
     periods; with most recent prior coverage from a group health 
     plan, governmental plan, or church plan; ineligible for group 
     health coverage, Medicare Parts A or B, Medicaid, and without 
     individual coverage; not terminated from most recent prior 
     coverage for nonpayment of premiums or fraud; who, if 
     eligible for continuation coverage under COBRA or similar 
     state program, elected and exhausted this coverage; and who 
     applied for individual coverage not more than 60 days after 
     the last day of coverage under a group plan, or the 
     termination date of COBRA benefits.
     Senate amendment
       Similar, but individual would have to apply for individual 
     coverage not more than 30 days after the last day of coverage 
     under a group plan.
     Conference agreement
       The conference agreement defines eligible individuals as 
     individuals: with 18 or more months of aggregate creditable 
     coverage; with most recent prior coverage from a group health 
     plan, governmental plan, or church plan (or health insurance 
     coverage offered in connection with any such plan); 
     ineligible for group health coverage, Medicare Parts A or B, 
     Medicaid (or any successor program), and without any other 
     health insurance coverage; not terminated from their most 
     recent prior coverage for nonpayment of premiums or fraud; 
     and who, if eligible for continuation coverage under COBRA or 
     a similar state program, elected and exhausted this coverage.


                         C. Qualifying coverage

     Current law
       No provision.
     House bill
       The House bill would require coverage with an actuarial 
     value of benefits not less than the weighted average 
     actuarial value of the benefits provided by all the 
     individual health insurance coverage (excluding coverage 
     issued under this section) during the previous year, issued 
     by: (1) the insurer or HMO in the state; or (2) all insurers 
     and HMOs in the state. Requires that the actuarial value of 
     benefits be calculated based on a standardized population and 
     a set of standardized utilization and cost factors.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement requires individual health 
     insurance issuers to offer coverage to eligible individuals 
     under all policy

[[Page H9525]]

     forms with exceptions. First, a health insurance issuer may 
     not offer coverage under all policy forms if the state is 
     implementing an acceptable alternative mechanism (see section 
     IV(E) below). If a state is not implementing an acceptable 
     alternative mechanism, the health insurance issuer may elect 
     to limit the policy forms offered to eligible individuals so 
     long as it offers at least two different policy forms of 
     health insurance coverage both of which are designed for, 
     made generally available and actively marketed to, and enroll 
     both eligible and other individuals by the issuer. In 
     addition, the 2 policy forms must meet one of the following: 
     (1) the 2 policy forms have the largest and next to the 
     largest premium volume; or (2) the 2 policy forms are 
     representative of individual health insurance coverage by the 
     issuer. An issuer must apply the election uniformly to all 
     eligible individuals in the state for that issuer, and the 
     election will be effective for policies offered for not less 
     than 2 years.
       The 2 representative policy forms would include a lower and 
     higher-level of coverage, each of which has benefits 
     substantially similar to other individual health insurance 
     coverage offered by the issuer in the state. The lower-level 
     policy form would have benefits with an actuarial value at 
     least 85 percent, but not greater than 100 percent of a 
     weighted average benefit. The higher-level policy form would 
     have benefits with an actuarial value: (1) at least 15 
     percent greater than the actuarial value of the lower-level 
     policy form; and (2) between 100 and 120 percent of the 
     weighted average benefit. Both products must include benefits 
     substantially similar to other individual health insurance 
     coverage offered by the issuer in the state. The weighted 
     average may be either: (1) the average actuarial value of the 
     benefits from individual coverage provided by the issuer; or 
     (2) the average actuarial value of the benefits from 
     individual coverage provided by all issuers in the state. The 
     weighted average will be based on coverage provided during 
     the previous year and exclude coverage of eligible 
     individuals. Actuarial values will be calculated based on a 
     standardized population and a set of standardize utilization 
     and cost factors.
       Network plans may limit coverage to those who live, reside, 
     or work within the service area for the network plan. Within 
     the service area for the plan, the issuer may deny coverage 
     to individuals if the issuer has demonstrated, if required, 
     to the applicable state authority that it will not have the 
     capacity to deliver services adequately to additional 
     individual enrollees. Denial must be made uniformly to 
     individuals without regard to any health status-related 
     factor and without regard to whether the individuals are 
     eligible individuals. Upon denial, the issuer may not offer 
     coverage in the individual market within the service area for 
     180 days. Similar rules apply for financial capacity limits.


                         D. Guaranteed renewal

     Current law
       No provision.
     House bill
       The House bill would require that individual coverage is 
     renewable at the option of the individual except for: 
     nonpayment; fraud; termination of all individual coverage by 
     the insurer or HMO, or termination of coverage in a 
     geographic area in the case of network or HMO plan; movement 
     of the individual outside the insurer's service area; 
     termination of the particular type of coverage by the insurer 
     or HMO, after the insurer has provided 90 day notice, offered 
     the option to purchase any other coverage, and acted without 
     regard to health status or insurability; discontinuation of 
     all individual coverage by the insurer or HMO, after 180 days 
     notice; uniform modification of all health plans within the 
     individual's type of coverage.
     Senate amendment
       The Senate Amendment would require that individual coverage 
     is renewable at the option of the individual except for: 
     nonpayment; fraud; termination of the particular type of 
     coverage by the insurer or HMO, which has provided 90 day 
     notice, offered the option to purchase any other coverage, 
     and acted without regard to health status or insurability; 
     termination of all individual coverage by the insurer or HMO, 
     after 180 days notice, and prohibition against market re-
     entry for 5 years; change such that the individual lives or 
     works outside the insurer's service area but only if denial 
     of coverage is applied uniformly without regard to the health 
     status or insurability of the individual.
     Conference agreement
       The conference agreement provides that a health insurance 
     issuer that provides individual health insurance coverage to 
     an individual must renew or continue in force such coverage 
     at the option of the individual. It provides exceptions to 
     the guaranteed renewability requirement for one or more of 
     the following: (1) nonpayment of premiums or untimely 
     payment; (2) fraud; (3) termination of coverage in the market 
     (as outlined below) in accordance with applicable state law; 
     (4) for network plans, the individual no longer lives, 
     resides, or works in the service area of the issuer, or area 
     for which the issuer is authorized to do business but only if 
     coverage is terminated uniformly without regard to any health 
     status-related factor; (5) for coverage made available to 
     bona fide associations, if membership in the association 
     ceases, but only if the coverage is terminated uniformly 
     without regard to any health status-related factor.
       An issuer may discontinue a particular type of coverage in 
     the individual market only if the issuer: (1) provides prior 
     notice to each covered individual; (2) offers each individual 
     the option to purchase any other individual health insurance 
     coverage offered by the issuer for individuals; and (3) acts 
     uniformly without regard to any health status-related factor 
     of enrolled individuals or individuals who may become 
     eligible for such coverage. An issuer may elect to 
     discontinue offering all health insurance coverage in the 
     individual market in a state only if certain conditions are 
     met. In this case, the issuer could not issue coverage in the 
     market and state involved for 5 years. Issuers could modify 
     the health insurance coverage for a policy form offered to 
     individuals in the individual market so long as the 
     modification was consistent with state law and was effective 
     on a uniform basis among all individuals with that policy 
     form.
       In the case of health insurance coverage that is made 
     available by a health insurance issuer in the individual 
     market to individuals only through one or more associations, 
     the issuer would be required to meet the Act's requirements 
     related to individuals.
       Health insurance issuers in the individual market must 
     provide certifications of coverage in the same manner as 
     health insurance issuers in the small group market.


              E. OPTIONAL STATE PROGRAMS/STATE FLEXIBILITY

                             1. In general

     Current law
       No provision.
     House bill.
       The House bill would provide that a state may establish 
     public or private mechanisms to meet the goals of guaranteed 
     availability of coverage. The chief executive officer of the 
     state must notify the Secretary of HHS if the state elects to 
     use state mechanisms. Under a state mechanism, a state may 
     define qualified coverage as coverage with benefits not less 
     than the weighted average actuarial value of the benefits 
     provided by all the individual health insurance coverage 
     (excluding coverage issued under this section) during the 
     previous year, issued by: the insurer or HMO in the state; or 
     all insurers and HMOs in the state. The state may elect to 
     establish qualified coverage for all insurers and HMOs in the 
     state after it has established qualified coverage for each 
     insurer or HMO.
       State mechanisms could include one or more, or a 
     combination of: health insurance coverage pools or programs 
     authorized or established by the state; mandatory group 
     conversion policies; guaranteed issue of one or more plans; 
     or open enrollment by one or more insurers or HMOs. This list 
     is not exclusive.
       A state with a health insurance coverage pool or risk pool 
     in effect on March 12, 1996, which offers qualified coverage, 
     would automatically be considered to have met the Federal 
     access objectives.
       In general, states would have until July 1, 1997 to 
     implement a state program. States without a regular 
     legislative session between January 1, 1997 and June 30, 1997 
     would have a deadline of July 1, 1998.
     Senate amendment
       Similar. The Senate Amendment would provide that a state 
     may adopt alternative public or private mechanisms to provide 
     access to affordable health benefits for eligible 
     individuals. The Governor of the state must notify the 
     Secretary of Health and Human Services that the state has 
     adopted an alternative mechanism which achieves the goals of 
     portability and renewability, and that the state intends to 
     implement this mechanism.
       State mechanisms could include guaranteed issue, open 
     enrollment by one or more health plan issuers, high-risk 
     pools, mandatory conversion policies, or any combination of 
     these mechanisms. A state high risk pool would meet the 
     portability and renewability requirements if it is: (a) open 
     to eligible individuals; (b) limits preexisting condition 
     waiting periods; and (c) is consistent with premium rates and 
     covered benefits in the National Association of Insurance 
     Commissioners (NAIC) Model Health Plan for Uninsurable 
     Individuals Act. States which adopt a NAIC model act, 
     including group to individual market portability provisions 
     that meet the Federal portability and renewability goals, 
     would not be subject to federal rules.
       A state may notify the Secretary, within 6 months after 
     enactment of this Act, that state alternate mechanism(s) 
     would meet portability and renewability goals. The Secretary 
     would not determine if the state mechanism meets the goals 
     until 12 months after the initial state notification, or 
     January 1, 1998, whichever is later. The Secretary would not 
     make a determination until January 1, 1999 for states without 
     legislative sessions within the 12 months after enactment of 
     this Act.
     Conference agreement
       The conference agreement provides that a state may 
     implement an acceptable alternative mechanism that is 
     designed to provide access to health benefits for 
     individuals. This mechanism must: (1) provide a choice of 
     health insurance coverage to all eligible individuals; (2) 
     not impose any preexisting condition exclusions; and (3) 
     include at least one policy form of coverage that is 
     comparable to either comprehensive health insurance coverage 
     offered in the individual market in

[[Page H9526]]

     the state or a standard option of coverage available under 
     the group or individual health insurance laws in the state. 
     If a state elects to implement the following mechanisms, the 
     state must also meet the preceding requirements. These 
     mechanisms are: (1) the NAIC Small Employer and Individual 
     Health Insurance Availability Model Act (as it applies to 
     individual health insurance coverage) or the Individual 
     Health Insurance Portability Model Act; (2) a qualified high 
     risk pool that meets certain specified requirements; or (3) 
     other mechanisms that provide for risk adjustment, risk 
     spreading, or a risk spreading mechanism (by an issuer or 
     among issuers or policies of an issuer), or otherwise provide 
     some financial subsidies for participating insurers or 
     eligible individuals, or, alternatively, a mechanism under 
     which each eligible individual is provided a choice of all 
     individual health insurance coverage otherwise available.
       Examples of potential alternative mechanisms include health 
     insurance coverage pools or programs, mandatory group 
     conversion policies, guaranteed issue of one or more plans of 
     individual health insurance coverage, or open enrollment by 
     one or more health insurance issuers, or a combination of 
     such mechanisms.
       A state is presumed to be implementing an acceptable 
     alternative mechanism as of January 1, 1998, by not later 
     than July 1, 1997, the chief executive officer of the state 
     notifies the Secretary that the state has enacted any 
     necessary legislation as of January 1, 1998 and provides the 
     Secretary with information needed to review the mechanism and 
     its implementation, or proposed implementation. The state 
     must provide this information to the Secretary every 3 years 
     to continue to be presumed to have an acceptable alternative 
     mechanism. If a state submits notice and information after 
     July 1, 1997, and the Secretary makes no determination within 
     90 days, the mechanism will be considered acceptable after 90 
     days.


                       f. construction/preemption

     Current law
       No provision.
     House bill
       The House bill would provide that states are not prevented 
     from: (1) implementing guaranteed availability mechanisms 
     before the deadline; (2) continuing state mechanisms that 
     were in effect before the enactment of this act; (3) offering 
     guaranteed availability of coverage that is not qualifying 
     coverage; or (4) offering guaranteed availability of coverage 
     to individuals who are not qualifying individuals
     Senate amendment
       The Senate Amendment would provide that states are not 
     required to replace or dissolve high risk pools or other 
     similar state mechanisms which are designed to provide 
     individuals in those states with access to health benefits.
     Conference agreement
       The conference agreement provides that nothing in this part 
     would prevent a state from establishing, implementing, or 
     continuing in effect standards and requirements unless they 
     prevent the application of a requirement in this part. 
     Nothing in this part would affect or modify the provisions of 
     section 514 of ERISA.


     g. federal rules (fallback or in absence of state alternative)

     Current law
       No provision.
     House bill
       The House bill would provide that the Secretary of HHS 
     notify a state that federal rules would apply if: (1) the 
     state has not elected to use a state mechanism; or (2) if the 
     Secretary finds, after consultation with state officials, 
     that the state mechanism would not meet the federal 
     availability goals, and the state has had reasonable 
     opportunity to change or implement a state mechanism to meet 
     the goals.
       Federal rules would provide that each insurer or HMO which 
     issues individual health insurance coverage in the state 
     would have to offer qualifying coverage to qualifying 
     individuals, and credit prior coverage toward any preexisting 
     condition exclusion periods. In addition, no individual could 
     be refused coverage based on health status. Network plans or 
     HMOs could refuse coverage to individuals who did not reside 
     or work in the plan's service area, or if network or 
     financial capacity limits would be exceeded. Federal rules 
     would cease to apply if the state implements a mechanism 
     designed to meet the federal goals of availability.
     Senate amendment
       The Senate Amendment would provide that federal standards 
     would apply if the state does not notify the Secretary of HHS 
     of its intent to implement state mechanisms, or if the 
     Secretary finds that the state mechanism fails to: (1) offer 
     coverage to eligible individuals; (2) prohibit preexisting 
     condition limitations or exclusions for benefits covered 
     under previous health plans; (3) offer eligible individuals a 
     choice of individual health plans, including at least one 
     comprehensive plan, or a plan comparable to a standard option 
     plan available under the group or individual health insurance 
     laws of the state; or (4) implement a risk spreading 
     mechanism, cross subsidy mechanism, risk adjustment 
     mechanism, rating limitation or other mechanism designed to 
     reduce the variation in costs of coverage for eligible 
     individuals and other plans offered by the carrier or 
     available in the state.
       The bill would waive the requirement for a risk spreading 
     mechanism if all individual health plans available in the 
     market are also available to eligible individuals.
       It would provide that if the Secretary determines that the 
     state alternative mechanism fails to meet the above criteria, 
     or if the state mechanism is no longer being implemented, the 
     Secretary would have to notify the Governor of the failure to 
     meet the goals of portability and renewability, and permit 
     the state to come into compliance. Federal individual health 
     plan portability rules would apply if the state still does 
     not meet these criteria. Under these rules, a plan issuer 
     could not, with respect to an eligible individual, decline to 
     offer coverage to or deny enrollment of the individual or 
     impose a limitation or exclusion of benefits, otherwise 
     available under the plan, for which coverage was available 
     under the group health plan or employee health benefit plan 
     in which the person was previously enrolled. (This would not 
     prevent a health plan issuer from establishing premium 
     discounts or modifying otherwise applicable copayments or 
     deductibles in return for adherence to programs of health 
     promotion or disease prevention.)
       Future adoptions of a state mechanism would be subject to 
     the same procedures of: (1) notification of the Secretary; 
     and (2) determination of satisfaction of criteria for 
     compliance, except in the cases of adoption of the NAIC model 
     or high risk pool.
     Conference agreement
       The conference agreement provides that if the Secretary 
     finds that the state mechanism is not acceptable or is no 
     longer being implemented, the Secretary must notify the state 
     of the preliminary determination and consequences of failure 
     to implement an acceptable mechanism. The state will have a 
     reasonable opportunity to modify the mechanism, or adopt a 
     new mechanism. If the Secretary finds that the state 
     mechanism is not acceptable, or is not being implemented, the 
     Secretary must notify the state of the effective date of 
     federal requirements for guaranteed availability. Each issuer 
     would then be required to guarantee issue health insurance 
     coverage to any individual, but could limit coverage to 2 
     policy forms as outlined in section IV(C) above. Secretarial 
     authority would be limited to determinations based only on 
     whether a state mechanism is not an acceptable alternative 
     mechanism or is not being implemented. It is the intent of 
     Congress that the risk adjustment, risk spreading, risk 
     spreading mechanism and financial subsidization standards 
     provide meaningful financial protection and assistance for 
     eligible individuals, both in the case of a state alternative 
     system and alternative coverage provided under section 
     2741(c).


 h. construction (premiums, market requirements, association coverage 
                             and marketing)

     Current law
       No provision.
     House bill
       The House bill would provide that insurers or HMOs are free 
     to determine the premiums for individual health insurance 
     coverage under applicable state law. Insurers or HMOs which 
     only insure groups or associations would not be required to 
     offer individual health insurance coverage. Insurers or HMOs 
     that offer conversion policies in connection with a group 
     health plan would not be required to offer individual 
     coverage. Insurers or HMOs that offer coverage only in 
     connection with a group health plan or in connection with 
     individuals based on affiliation with one or more bona fide 
     associations would not be considered to be offering 
     individual coverage.
       A state could require that insurers or HMOs offering 
     individual coverage actively market this coverage.
     Senate bill
       The Senate Amendment is similar but did not include a 
     provision relating to associations.
     Conference agreement
       Premiums that an issuer may charge an individual for 
     individual health insurance coverage are not restricted by 
     the conference agreement, but must comply with state law. The 
     health insurance issuer may establish premium discounts or 
     rebates, or modify otherwise applicable copayments or 
     deductibles in return for adherence to programs of health 
     promotion and disease prevention.
       Under the conference agreement, health insurance issuers 
     offering health insurance coverage in connection with group 
     health plans, or through one or more bona fide associations, 
     or both, are not required to offer health insurance coverage 
     in the individual market. A health insurance issuer offering 
     group health coverage is not considered to be a health 
     insurance issuer offering individual health insurance 
     coverage solely because the issuer offers a conversion 
     policy.


   i. enforcement of requirements on individual insurers, hmo's, and 
                          health plan issuers

     Current law
       Under section 502 of ERISA, employee benefit plans that 
     fail to comply with applicable requirements can be sued for 
     relief and be subject to civil money penalties, and can be 
     sued to recover any benefits due under the plan. Section 504 
     of ERISA provides the Secretary of Labor with investigative 
     authority

[[Page H9527]]

     to determine whether any person is out of compliance with the 
     law's requirements. Section 506 provides for coordination and 
     responsibility of agencies in enforcement. Section 510 
     prohibits a health plan from discriminating against a 
     participant or beneficiary for exercising any right under the 
     plan.
     House bill
       Noncomplying insurers and HMOs would be subject to 
     enforcement through federal civil money penalties (in the 
     same manner as imposed above (see item II(G)) but only in the 
     event that the Secretary of HHS has determined that the state 
     in which the insurer or HMO is selling coverage is not 
     providing for enforcement.
     Senate amendment
       Noncomplying individual health plans offered by a health 
     plan issuer would be subject to state enforcement. Each state 
     would require each individual health plan issued, sold, 
     renewed, or offered for sale or operated in the state by a 
     health plan issuer to meet the Act's standards pursuant to an 
     enforcement plan filed with the Secretary of Labor. The state 
     would be required to submit such information as required by 
     the Secretary demonstrating effective implementation of the 
     enforcement plan. In the event that the state failed to 
     substantially enforce the Act's standards and requirements, 
     the Secretary of Labor, in consultation with the Secretary of 
     HHS, would implement an enforcement plan. Issuers would then 
     be subject to civil enforcement as provided under sections 
     502, 504, 506 and 510 of ERISA. The Secretary of Labor could 
     issue such regulations as needed to carry out this Act.
     Conference agreement
       Each state may require health insurance issuers that issue, 
     sell, renew, or offer health insurance coverage in the 
     individual market to meet the requirements under this part 
     with respect to such issuers. If a state fails to 
     substantially enforce the federal requirements, the Secretary 
     will provide enforcement in the same manner as in the small 
     group market (see section II(G) above).

               V. Multiple Employer Pooling Arrangements


A. Clarification of duty of the Secretary of Labor to implement current 
law providing for exemptions from State regulation of multiple employer 
                          health plans (MEHPS)

     Current law
       Section 3(40) of ERISA defines a multiple employer welfare 
     benefit plan, or any other arrangement which offers or 
     provides health benefits and meets additional criteria, 
     (e.g., it must offer such benefits to the employees or 2 or 
     more employers and cannot be a plan established under a 
     collective bargaining agreement, a rural electric 
     cooperative, or rural telephone cooperative association). Two 
     or more trades or businesses, whether or not incorporated, 
     are deemed a single employer and thus not a MEWA if such 
     trades or businesses are within the same control group.
       Section 514 of ERISA treats fully-insured MEWAs differently 
     from those that are not fully-insured (i.e., that are partly 
     or fully-insured). With respect to a fully-insured MEWA, a 
     state may apply and enforce its insurance laws (section 
     514(b)(6)(A)(i)). With respect to a not-fully-insured MEWA, a 
     state may apply and enforce its insurance laws so long as 
     such laws or regulations are not inconsistent with ERISA 
     (section 514(b)(6)(A)(ii). Section 514(b)(6)(B) provides that 
     the Department of Labor (DOL) may issue an exemption from 
     state law with respect to non-fully-insured MEWAs. (No such 
     exemptions have been issued.)
     House bill
       The House bill would add a new Part 7 (Rules Governing 
     State Regulation of Multiple Employer Health Plans) to Title 
     I of ERISA.
       It would define the following terms: insurer, fully-
     insured, HMO, participating employer, sponsor, and state 
     insurance comissioner. The House bill would define a multiple 
     employer health plan as a MEWA which provides medical care 
     and which is or has been exempt under section 514(b)(6)(B) of 
     ERISA.
       The bill clarifies the conditions under which multiple 
     employer health plans (MEHPs)--non-fully-insured multiple 
     employer arrangements providing medical care--may apply for 
     an exemption from certain state laws. In provides that only 
     certain legitimate association health plans and other 
     arrangements (described below) which are not fully insured 
     are eligible for an exemption. This is accomplished by 
     clarifying the duty of the Secretary of Labor to implement 
     the provisions of current law section 514(b)(6)(B) to provide 
     exemption from state law for MEHPS.
       The bill would establish criteria which a not fully-insured 
     arrangement must meet to qualify for an exemption and thus 
     become a MEHP. The Secretary could grant an exemption to an 
     arrangement only if: (1) a complete application has been 
     filed, accompanied by the filing fee of $5,000; (2) the 
     application demonstrates compliance with requirements 
     established in new sections 703 and 704 described below; (3) 
     the Secretary finds that the exemption is administratively 
     feasible, not adverse to the interests of the individuals 
     covered under it, and protective of the rights and benefits 
     of the individuals covered under the arrangement, and (4) all 
     other terms of the exemption are met (including financial, 
     actuarial, reporting, participation, and such other 
     requirements as may be specified as a condition of the 
     exemption). The application must include: (1) identifying 
     information about the arrangement and the states in which it 
     will operate; (2) evidence that ERISA's bonding requirements 
     will be met; (3) copies of all plan documents and agreements 
     with service providers; (4) a funding report indicating that 
     the reserve requirements of new section 705 will be met, that 
     contribution rates will be adequate to cover obligations, and 
     that a qualified actuary (a member in good standing of the 
     American Academy of Actuaries or an actuary meeting such 
     other standards the Secretary considers adequate) has issued 
     an opinion with respect to the arrangement's assets, 
     liabilities, and projected costs; and (5) any other 
     information prescribed by the Secretary. Exempt arrangements 
     must notify the Secretary of any material changes in this 
     information at any time, must file annual reports with the 
     Secretary, and must engage a qualified actuary.
       In addition, the bill would provide for a class exemption 
     from section 514(b)(6)(B)(ii) of ERISA for large MEHPs that 
     have been in operation for at least five years on the date of 
     enactment. An arrangement would qualify for this class 
     exemption if, in addition to all other requirements: (1) at 
     the time of application for exemption; the arrangement covers 
     at least 1,000 participants and beneficiaries, or has at 
     least 2,000 employees of eligible participating employers ; 
     (2) a complete application has been filed and is pending; and 
     (3) the application meets requirements established by the 
     Secretary with respect to class exemptions. Class exemptions 
     would be treated as having been granted with respect to the 
     arrangement unless the Secretary provide appropriate notice 
     that the exemption has been denied.

  1. Requirements relating to MEHP sponsors, board of trustees, plan 
                    operations, and covered persons

       The House bill would establish eligibility requirements for 
     MEHPs. Applications must comply with requirements established 
     by the Secretary. They must demonstrate that the 
     arrangement's sponsor has been in existence for a continuous 
     period of at least 5 years and is organized and maintained in 
     good faith, with a constitution and by laws specifically 
     starting its purpose and providing for at least annual 
     meetings, as a trade association, an industry association, a 
     professional association, or a chamber of commerce (or 
     similar business group, including a corporation or similar 
     organization that operates on a cooperative basis within the 
     meaning of section 1381 of the IRC) for purposes other than 
     that of obtaining or providing medical care. Also, the 
     applicant must demonstrate that the sponsor is established as 
     a permanent entity, has the active support of its members, 
     and collects dues from its members without conditioning such 
     on the basis of the health status or claims experience of 
     plan participants or beneficiaries or on the basis of the 
     member's participation in the MEHP.
       The bill would require that the arrangement be operated, 
     pursuant to a trust agreement, by a ``board of trustees'' 
     which has complete fiscal control and which is responsible 
     for all operations of the arrangement. The board of trustees 
     must develop rules of operation and financial control based 
     on a three-year plan of operation which is adequate to carry 
     out the terms of the arrangement and to meet all applicable 
     requirements of the exemption and Title I of ERISA.
       With respect to covered persons, the bill would require 
     that all employers who are association members be eligible 
     for participation under the terms of the plan. Eligible 
     individuals of such participating employers cannot be 
     excluded from enrolling in the plan because of health status 
     (as required under section 103 of the Act as described in 
     item I-(B) above). The rules also stipulate that premium 
     rates established under the plan with respect to any 
     particular participating employer cannot be based on the 
     claims experience of the particular employer.

              2. Additional entities eligible to be MEHPs

       In addition to the associations described above, certain 
     other entities would be provided eligibility to seek an 
     exemption as MEHPs under section 514(b)(6)(B). These include 
     (1) franchise networks (section 703(b)), (2) certain existing 
     collectively bargained arrangements which fail to meet the 
     statutory exemption criteria (section 703(c)), and (3) 
     certain arrangements not meeting the statutory exemption 
     criteria for single employer plans (section 703(d)). (Section 
     709 of ERISA, added by section 166 of this subtitle, also 
     makes eligible certain church plans electing to seek an 
     exemption.)

                  3. Other requirements for exemption

       The House bill would require a MEHP to meet the following 
     additional requirements: (1) its governing instruments must 
     provide that the board of trustees serves as the named 
     fiduciary and plan administrator, that the sponsor serves as 
     plan sponsor, and that the reserve requirements of new 
     section 705 are met; (2) the contribution rates must be 
     adequate, and (3) any other requirements set out in 
     regulations by the Secretary of Labor must be met.

                       4. Maintenance of reserves

       The House bill would require that MEHPs establish and 
     maintain reserves sufficient for unearned contributions, 
     benefit liabilities incurred but not yet satisfied, and for

[[Page H9528]]

     which risk of loss has not been transferred, expected 
     administrative costs, and any other obligations and margin 
     for error recommended by the qualified actuary. The minimum 
     reserves must be no less than 25% of expected incurred claims 
     and expenses for the year or $400,000, whichever is greater. 
     The Secretary may provide additional requirements relating to 
     reserves and excess/stop loss coverage and may provide 
     adjustments to the levels of reserves otherwise required to 
     take into account excess/stop loss coverage or other 
     financial arrangements. The bill provides for an alternative 
     means of compliance in which the Secretary could permit an 
     arrangement to substitute, for all or part of the 
     requirements of this section, such security, guarantee, hold-
     harmless arrangement, or other financial arrangement as the 
     Secretary of Labor determined to be adequate to enable the 
     arrangement to fully meet its financial obligations on a 
     timely basis.

            5. Notice requirements for voluntary termination

       The House bill would provide that, except as permitted in 
     new section 707 below, a MEHP may terminate only if the board 
     of trustees provides 60 days advance written notice to 
     participants and beneficiaries and submits to the Secretary a 
     plan providing for timely payment of all benefit obligations.

            6. Corrective actions and mandatory termination

       The House bill would require a MEHP to continue to meet the 
     reserve requirements even if its exemption is no longer in 
     effect. The board of trustees must quarterly determine 
     whether the reserve requirements of new section 705 (as 
     described above) are being met and, if they are not, must, in 
     consultation with the qualified actuary, develop a plan to 
     ensure compliance and report such information to the 
     Secretary. In any case where a MEHP notifies the Secretary 
     that it has failed to meet the reserve requirements and 
     corrective action has not restored compliance, and the 
     Secretary of Labor determines that the failure will result in 
     a continuing failure to pay benefit obligations, the 
     Secretary may direct the board to terminate the arrangement 
     and take action needed to ensure that the arrangement's 
     affairs are resolved in a manner which will result in timely 
     provision of all benefits for which the arrangement is 
     obligated.

                 7. Temporary application of state laws

       a. Provides for exclusion of arrangements from the small 
     group market in any state upon the state's certification of 
     guaranteed access to health insurance coverage in such state 
     (i.e, state opt-out). Provides that a state which certifies 
     to the Secretary that it provides guaranteed access to health 
     coverage may deny a MEHP the right to offer coverage in the 
     small group market (or otherwise regulate such MEHP with 
     respect to such coverage), except as described below. The 
     certification triggering the state opt-out could be in effect 
     no longer than 3 years.
       A state is considered to provide such guaranteed access, if 
     (1) the state certifies that at least 90% of all state 
     residents are covered by a group health plan or otherwise 
     have health insurance coverage, or (2) the state has, in the 
     small group market, provided for guaranteed issue of at least 
     one standard benefits package and for rating reforms designed 
     to make health insurance coverage more affordable. In states 
     without such guaranteed access, MEHPs could offer coverage in 
     the small group market in the state as long as they met the 
     standards set forth in Part 7 (as established by this 
     subtitle).
       b. Provides for exceptions to the exclusion of MEHPs from 
     state small group markets. Provides a limited exception to 
     the state opt out for certain large, multi-state 
     arrangements. The State opt out would not apply to new and 
     existing MEHPs that meet the following criteria: (1) the 
     sponsor operates in a majority of the 50 states and in at 
     least 2 of the regions of the country; (2) the arrangement 
     covers or will cover at least 7,500 participants and 
     beneficiaries; and (30 at the time the application to become 
     a MEHP is filed, the arrangement does not have pending 
     against it any enforcement action by the state. In addition, 
     the state opt out would not apply in a state in which an 
     arrangement meeting the MEHP standards operates on March 6, 
     1996, to the extent a state enforcement action is not pending 
     against such an entity at the time an application for an 
     exemption is made.
       The above two exceptions do not apply to any state which, 
     as of January 1, 1996, either (1) has enacted a law providing 
     for guaranteed issue of fully community rated individual 
     health insurance coverage offered by insurers and HMOs, or 
     (2) requires insurers offering group health coverage to 
     reimburse insurers offering individual coverage for losses 
     resulting from their offering individual coverage on an open 
     enrollment basis. Regulations may also provide for an 
     exemption to the application of state law for certain single 
     industry plans.
       c. Premium tax assessment authority with respect to new 
     arrangements. Provides that a state could assess new 
     association-based MEHPs (formed after March 6, 1996) 
     nondiscriminatory state premium taxes set at a rate no 
     greater than that applicable to any insurer or health 
     maintenance organization offering health insurance coverage 
     in the state. MEHPs existing as of March 6, 1996 would remain 
     exempt from state premium taxes. However, if they expanded 
     into a new state, the state could apply the above rule.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.

               VI. State Authority Over Non-Exempt MEWAs

     Current law
       Under section 514(6)(A) of ERISA, a state may apply and 
     enforce state insurance laws with respect to a MEWA so long 
     as the law or regulation is not inconsistent with ERISA.
     House bill
       The House bill would provide that states have the authority 
     under ERISA to regulate without limitation non-fully-insured 
     MEWAs which are not provided an exemption under new Part 7 of 
     ERISA (see item V above). In other words, states can continue 
     to regulate MEWAs that are not MEHPs.
     Senate amendment
       No provision.
     Conference agreement
       the conference agreement does not include the House 
     provision.

              VII. Additional MEWA and Related Provisions


     A. Clarification of treatment of single-employer arrangements

     Current law
       Section 3(40) of ERISA defines a MEWA and specifies the 
     conditions under which two or more trades or businesses shall 
     be deemed a single employer, if such trades or businesses are 
     within the same control group. Common control could not be 
     based on an interest of less than 25%.
     House bill
       The House bill would modify the treatment of certain single 
     employer arrangements under section 3(40) of ERISA. The 
     treatment of a single employer plan as being excluded from 
     the definition of a MEWA (and thus from state law) is 
     clarified by defining the minimum interest required for two 
     or more entities to be in ``common control'' as a percentage 
     which cannot be required to be greater than 25%. Also a plan 
     would be considered a single employer plan if less than 25% 
     of the covered employees are employed by other participating 
     employers.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.


    b. clarification of treatment of certain collectively-bargained 
                              arrangements

     Current law
       Under section 3(40) of ERISA, a MEWA is defined not to 
     include any plan or arrangement which is established or 
     maintained under or pursuant to one or more agreements which 
     the Secretary finds to be collective bargaining agreements, 
     or by a rural electric cooperative. (No such Secretarial 
     finding has ever been issued).
     House bill
       The House bill would establish the conditions under which 
     multiemployer and other collectively-bargained arrangements 
     are exempted from the MEWA definition, and thus exempt from 
     state law. Amends the definition of a MEWA to exclude a plan 
     or arrangement which is established or maintained under or 
     pursuant to a collective bargaining arrangement (as described 
     in the National Labor Relations Act, the Railway Labor Act, 
     and similar state public employee relations laws). It then 
     specifies additional conditions which must be met for such a 
     plan to be a statutorily excluded collectively bargained 
     arrangement and thus not a MEWA.
       These conditions include: (1) The plan cannot utilize the 
     services of any licensed insurance agent or broker to solicit 
     or enroll employers or pay a commission or other form of 
     compensation to certain persons that is related to the volume 
     or number of employers or individuals solicited or enrolled 
     in the plan; (2) a maximum 15 percent rule applies to the 
     number of covered individuals in the plan who are not 
     employees (or their beneficiaries) within a bargaining unit 
     covered by any of the collective bargaining agreements with a 
     participating employer or who are not present or former 
     employees (or their beneficiaries) of sponsoring employee 
     organizations or employers who are or were a party to any of 
     the collective bargaining agreements (provides for a higher 
     maximum in the case of certain plans or arrangements in 
     existence as of the date of enactment); and (3) the employee 
     organization or other entity sponsoring the plan or 
     arrangement must certify annually to the Secretary the plan 
     has met the previous requirements.
       If the plan or arrangement is not fully insured, it must be 
     a multiemployer plan meeting specific requirements of the 
     Labor Management Relations Act (i.e., the requirement for 
     joint labor-management trusteeship under section 
     302(c)(5)(B)).
       If the plan or arrangement is not in effect as of the date 
     of enactment, the employee organization or other entity 
     sponsoring the plan or arrangement must have existed for at 
     least 3 years or have been affiliated with another employee 
     organization in existence for at least 3 years, or 
     demonstrates to the Secretary that certain of the above 
     requirements have been met.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.

[[Page H9529]]

                      c. treatment of church plans

     Current law
       Section 4(b)(2) of ERISA exempts from its requirements 
     church plans that do not elect to participate in qualified 
     pension plans under the IRC.
     House bill
       The House bill would add a new section 709 to ERISA 
     treating certain church plans (including a church, convention 
     or association of churches or similar organization) as a MEWA 
     and permitting such plans to voluntarily elect to apply to 
     the Department of Labor for an exemption from state laws that 
     would otherwise apply to a MEWA under section 514(b)(6)(B) 
     and in accordance with new ERISA Part 7. An exempted church 
     plan would, with certain exceptions, have to comply with the 
     provisions of ERISA Title I in order to receive an exception 
     from state law. The election to be covered by ERISA would be 
     irrevocable. A church plan is covered under this section if 
     the plan provides benefits which include medical care and 
     some or all of the benefits are not fully insured. (Certain 
     provisions of ERISA, such as its COBRA continuation coverage 
     requirements, would not apply to the church plans described 
     herein.)
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.


                d. enforcement provisions relating mewas

     Current law
       MEWAs are subject to ERISA's enforcement and other 
     provisions of title I.
     House bill
       The House bill would amend ERISA to establish enforcement 
     provisions relating to the multiple employer elements of the 
     bill: (1) a civil penalty would apply for failure of MEWAs to 
     file registration statements; (2) state enforcement would be 
     authorized through Federal courts with respect to violations 
     by multiple employer health plans, subject to the existence 
     of enforcement agreements between the states and the federal 
     government; (3) willful misrepresentation that an entity is 
     an exempted MEWA or collectively-bargained arrangement could 
     result in criminal penalties; (4) cease activity orders could 
     be issued for arrangements found to be neither licensed, 
     registered, or otherwise approved under State insurance law, 
     or operating in accordance with the terms of an exemption 
     granted by the Secretary under new part 7; and (5) provides 
     that each MEHP require its fiduciary or board of trustees to 
     comply with the required claims procedure under ERISA.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.


          e. cooperation between federal and state authorities

     Current law
       Section 506 of ERISA provides for coordination between the 
     Department of Labor and other federal agencies in the 
     enforcement of ERISA. The Secretary is authorized to use the 
     facilities or services of the states, with the consent of the 
     affected departments, agencies, or establishments in 
     enforcing ERISA.
     House bill
       The House bill would amend section 506 of ERISA to specify 
     State responsibility with respect to self-insured MEHPs and 
     voluntary health insurance associations (VHIAs). A State 
     could enter into an agreement with the Secretary for 
     delegation to the State of some or all of the Secretary's 
     authority to enforce provisions of ERISA applicable to 
     exempted MEHPs or to VHIAs. The Secretary would be required 
     to enter into the agreement if the Secretary determined that 
     delegation to the State would not result in a lower level or 
     quality of enforcement. However, if the Secretary delegated 
     authority to a State, the Secretary could continue to 
     exercise such authority concurrently with the State. The 
     Secretary would be required to provide enforcement assistance 
     to the States with respect to MEWAs.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.


    f. filing and disclosure requirements for mewas offering health 
                                benefits

     Current law
       ERISA provides for certain reporting and disclosure 
     requirements.
     House bill
       The reporting and disclosure requirements of ERISA would be 
     amended to require MEWAs offering health benefits to file 
     with the Secretary a registration statement within 60 days 
     before beginning operations (for those starting on or after 
     January 1, 1997) and no later than February 15 of each year. 
     In addition, MEWAs providing medical care would be required 
     to issue to participating employers certain information 
     including summary plan descriptions, contribution rates, and 
     the status of the arrangement (whether fully-insured or an 
     exempted self-insured plan).
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.


        g. single annual filing for all participating employers

     Current law
       Section 110 of ERISA provides for alternative methods of 
     compliance with reporting and disclosure requirements to 
     those specified in previous sections of the law.
     House bill
       This section would amend ERISA's section 110 to provide for 
     a single annual filing for all participating employers of 
     fully insured MEWAs.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.


                  h. effective dates/transition rules

     Current law
       No provision.
     House bill
       The House bill would provide that in general, the 
     amendments made by this title would be effective January 1, 
     1998. In addition, the Secretary would be required to issue 
     all regulations needed to carry out the amendments before 
     January 1, 1998.
       The bill would provide for transition rules for self-
     insured MEWAs which meet the requirements of Part 7 and which 
     are in operation as of the effective date so that those 
     applying to the Secretary for an exemption from State 
     regulation are deemed to be excluded for a period not to 
     exceed 18 months unless the Secretary denies the exemption or 
     finds the MEWAs application deficient, provided that the 
     arrangement does not have pending against it an enforcement 
     action by a state. The Secretary could revoke the exemption 
     at any time if it would be detrimental to the interests of 
     individuals covered under the Act.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.

 VIII. Voluntary Health Insurance Associations/Health Plan Purchasing 
                          Cooperatives (HPPCs)

     Current law
       While the states regulate insurance sold to purchasing 
     cooperatives, a purchasing cooperative that is also a MEWA is 
     also regulated under ERISA. Under ERISA, a state may apply 
     and enforce its insurance laws with respect to fully-insured 
     MEWAs.
       As of December 1995, 15 states had enacted laws relating to 
     voluntary purchasing alliances/cooperatives.
     House bill
       The House bill would add a new subsection (d) to section 
     514 of ERISA defining under ERISA voluntary health insurance 
     associations and establishing federal requirements for such 
     associations. Associations meeting these requirements would 
     be exempt from specific state laws.
     Senate amendment
       The Senate Amendment would provide for limited exemptions 
     from state laws for health insurance purchasing cooperatives 
     that meet the requirements established by this section.
     Conference agreement
       The conference agreement does not include the House or 
     Senate provision.


                 a. definitions/nature of organization

     Current law
       No provision.
     House bill
       The House bill would define a voluntary health insurance 
     association as a multiple employer welfare arrangement, 
     maintained by a qualified association, under which all 
     medical benefits are fully-insured, under which no employer 
     is excluded as a participating employer (subject to minimum 
     participation requirements of an insurer), under which the 
     enrollment requirements of section 103 of the Act apply (see 
     item II above), under which all health insurance coverage 
     options are aggressively marketed, and under which the health 
     insurance coverage is provided by an insurer or HMO to which 
     the laws of the state in which it operates apply.
       A qualified association would be an association in which 
     the sponsor of the association is, and has been (together 
     with its immediate predecessor, if any) for a continuous 
     period of not less than 5 years, organized and maintained in 
     good faith, with a constitution and bylaws specifically 
     stating its purpose, as a trade association, an industry 
     association, a professional association, or a chamber of 
     commerce (or similar business group), for substantial 
     purposes other than that of obtaining or providing medical 
     care, is established as a permanent entity which receives the 
     active support of its members and meets at least annually, 
     and collects dues without conditioning such dues on the basis 
     of the health status or claims experience of plan 
     participants or beneficiaries or on the basis of 
     participation in a VHIA.
       A ``small employer'' would be defined as one who employs at 
     least 2 but fewer than 51 employees on a typical business day 
     in the year.

[[Page H9530]]

     Senate amendment
       The Senate Amendment would define a ``health plan 
     purchasing cooperative'' or HPPC to mean a group of employees 
     or a group of individuals and employers that, on a voluntary 
     basis and in accordance with this section, form a cooperative 
     for the purpose of purchasing an individual health plan or 
     group health plans offered by health plan issuers.
       An HPPC could not: (a) perform any activity relating to the 
     licensing of health plan issuers; (b) assume financial risk 
     directly or indirectly (that is, it would have to be fully-
     insured); (c) establish eligibility, enrollment, or premium 
     contribution requirements for individual participants or 
     beneficiaries based on health status, medical condition, 
     claims experience, receipt of health care, medical history, 
     evidence of insurability, genetic information, or disability; 
     (d) operate on a for-profit or other basis where the legal 
     structure of the cooperative permits profits to be made and 
     not returned to the members of the cooperative, or (e) 
     perform any other activities that conflict or are 
     inconsistent with the performance of its duties under this 
     Act. A for-profit cooperative could be formed by a nonprofit 
     organization or organizations in which: (1) membership in 
     such organization is not based on health status, medical 
     condition, claims experience, receipt of health care, medical 
     history, evidence of insurability, genetic information, or 
     disability and (2) that accepts as members all employers or 
     individuals on a first-come, first-serve basis, subject to 
     any established limit on the maximum size of an employer that 
     may become a member.
     Conference agreement
       The conference agreement does not include the House or 
     Senate provision.


                            b. certification

     Current law
       No provision.
     House bill
       No provision.
     Senate agreement
       The Senate Amendment would provide that a state certify a 
     group as a HPPC if it appropriately notifies the state and 
     the Secretary of Labor that it wants to form a HPPC under the 
     requirements of this section. The state would be required to 
     determine in a timely fashion whether the group is in 
     compliance with the section's requirements and to oversee the 
     operations of the HPPC to ensure continued compliance with 
     the requirements. Each certified HPPC would have to register 
     with the Secretary of Labor.
       If a state failed to implement a HPPC certification program 
     in accordance with this Act's standards, the Secretary of 
     Labor would certify and oversee the HPPCs in that state.
       However, the Secretary would not certify a HPPC if, upon 
     submission of an application of the state to the Secretary, 
     the Secretary determined that a state law was in effect on 
     the date of enactment of this Act providing that all small 
     employers in the state had a means readily available that 
     ensured: (a) that individuals and employees had a choice of 
     multiple, unaffiliated health plan issuers; (b) that health 
     plan coverage was subject to state premium rating 
     requirements that were not based on the health and other risk 
     factors described above and that contained a mandatory 
     minimum loss ratio; (c) that comparative health plan 
     materials were disseminated (including information about 
     cost, quality, benefits, and other information); and that (d) 
     the state program otherwise met the objectives of this Act.
       A HPPC operating in more than one state would be certified 
     by the state in which the cooperative was domiciled. States 
     could enter into cooperative agreements for the purpose of 
     overseeing a HPPC's operation. A HPPC would be considered to 
     be domiciled in the state in which most of the members of the 
     HPPC reside.
     Conference agreement
       The conference agreement does not include the Senate 
     provision.


           c. structure and responsibilities of organization

     Current law
       No provision.
     House bill
       The House bill would provide that VHIAs and qualified 
     associations meet certain conditions (described in items 
     VIII(A) and VIII(D)) to qualify as a VHIA and therefore for 
     exemption from state insurance laws.
     Senate amendment
       The Senate Amendment would provide for the following 
     requirements for HPPCs:
       I. Board of Directors.--Requires each HPPC to be governed 
     by a board of directors that would be responsible for 
     ensuring the performance of the HPPC. The board would have to 
     be composed of a cross-section of representatives of 
     employers, employees, and individuals participating in the 
     HPPC. The board members could not be compensated but could 
     receive reimbursement for reasonable and necessary expenses 
     incurred in performing their HPPC responsibilities.
       2. Membership and marketing area.--Permits a HPPC to 
     establish limits on the maximum size of employers who could 
     become members and to determine whether to allow individuals 
     to be members. Once membership limits were established, the 
     HPPC would be required to accept all employers (or 
     individuals) residing within the area served by the HPPC who 
     met the membership requirements on a first-come, first-served 
     basis, or on another basis established by the state to ensure 
     equitable access to the HPPC.
       3. Duties and responsibilities.--Requires a HPPC to: (a) 
     objectively evaluate potential health plan issuers and enter 
     into agreements with multiple, unaffiliated ones, except that 
     this requirement would not apply in regions, such as remote 
     or frontier areas, where compliance was not possible; (b) 
     enter into agreements with employers and individuals who 
     become members; (c) participate in any program of risk-
     adjustment or reinsurance, or any similar program established 
     by the state; (d) prepare and disseminate comparative health 
     plan materials concerning the plans offered through the HPPC; 
     (e) broadly solicit and actively market to all eligible 
     employers and individuals residing within the service area; 
     and (f) act as an ombudsman for enrollees.
       4. Permissible activities.--Permits a HPPC to perform other 
     functions as needed to further the purposes of this Act, such 
     as: (a) collecting and distributing premiums and performing 
     other administrative functions; (b) collecting and analyzing 
     surveys of satisfaction; (c) charging fees for membership and 
     participation fees to issuers; (d) cooperating with (or 
     accepting as members) employers who provide health benefits 
     directly but only for the purpose of negotiating with 
     providers; and (5) negotiating with health care providers and 
     health plan issuers.
       5. Limitation on cooperative activities.--see item VIII(A) 
     above.
       6. Conflict of interest.--Prohibits any individual, 
     partnership, or corporation from serving on the HPPC board, 
     being employed by or receiving compensation from the HPPC, or 
     initiating or financing a HPPC if such individual, 
     partnership, or corporation (a) fails to discharge the duties 
     and responsibilities in a manner that is solely in the 
     interest of the members; or (b) derives personal benefit from 
     the sale of, or financial interest in, health plans, 
     services, or products sold through the HPPC. However, a HPPC 
     could contract with third parties to provide administrative, 
     marketing, consultive, or other services.
     Conference agreement
       The conference agreement does not include the House or 
     Senate provision.


                      d. preemption of state laws

     Current law
       Section 514(a) of ERISA preempts state laws relating to 
     employee benefit plans. Section 514(b)(2) of ERISA provides 
     that state laws apply in the case of the regulation of 
     insurance.
     House bill
       The House bill would amend section 514 of ERISA to preempt 
     the following state laws: (1) laws that preclude an insurer 
     or HMO from offering health insurance coverage under VHIAs; 
     (2) laws that preclude an insurer or HMO from setting premium 
     rates under a VHIA based on the claims experience of the VHIA 
     (except the VHIA's premium rates could not vary on the basis 
     of any particular employer's claims experience); (3) laws 
     that require coverage in connection with a VHIA to include 
     specific items or services of medical care or that require an 
     insurer or HMO offering coverage in connection with a VHIA to 
     include specific item or services consisting of medical care, 
     except to the extent that such state laws prohibit an 
     exclusion for a specific disease in such coverage. This 
     preemption of mandated benefits would apply only with respect 
     to those items and services specified in a list which would 
     be prescribed in regulations by the Secretary of Labor.
       In general, states would be able to apply their laws if 
     they had in place guaranteed access measures meeting certain 
     conditions. A state which certified to the Secretary that it 
     provided ``guaranteed access'' to health coverage could deny 
     a VHIA the right to offer coverage in the small group market 
     (or otherwise regulate such VHIA with respect to such 
     coverage), except as described below. (The certification 
     could not be in effect for more than 3 years.)
       A state would be considered to provide such guaranteed 
     access, if (1) it certified that at least 90% of all state 
     residents were covered by a group health plan or otherwise 
     had health insurance coverage, or (2) that it had, in the 
     small group market, provided for guaranteed issue of at least 
     one option of coverage and for small group rating reforms 
     designed to make health insurance coverage more affordable. 
     However, an exception to this provision would apply for 
     certain large, multi-state arrangements that demonstrated to 
     the Secretary that it met the following criteria. In other 
     words, state laws would not apply if: (1) the VHIA sponsor 
     operates in a majority of the 50 states and in at least 2 of 
     the regions of the country; (2) the arrangement covers or 
     will cover (in the case of new VHIAs) at least 7,500 
     participants and beneficiaries; and (3) under the terms of 
     the arrangement, either the qualified association does not 
     exclude from membership any small employer in the state, or 
     the arrangement accepts every small employer in the state 
     that applies for coverage. In addition, state laws would not 
     apply in a state in which a VHIA operated on March 6, 1996 
     and under the terms of the arrangement, either the qualified 
     association does not exclude from membership any small 
     employer in the state, or the arrangement accepts every small 
     employer in the state that applies for coverage.

[[Page H9531]]

       The exemption from state laws for multistate plans and 
     existing plans would not apply to any state which, as of 
     January 1, 1996, either (1) had enacted a law providing for 
     guaranteed issue of fully community rated individual health 
     insurance coverage offered by insurers and HMOs, or (2) 
     required insurers offering group health coverage to reimburse 
     insurers offering individual coverage for losses resulting 
     from their offering individual coverage on an open enrollment 
     basis. In other words, such states could apply their 
     insurance laws.
     Senate amendment
       The Senate Amendment would provide that HPPCs that meet the 
     requirements of this Act would be exempt from state 
     fictitious group laws.
       A health plan issuer offering a group or individual health 
     plan through a HPPC meeting the requirements of this Act 
     would be required to comply with all otherwise applicable 
     state rating requirements if the plan were to be offered 
     outside the cooperative except a state would be required to 
     permit an issuer to reduce its premiums negotiated with a 
     HPPC to reflect savings derived from administrative costs, 
     marketing costs, profit margins, economies of scale, or other 
     factors. However, such premium reductions could not be based 
     on the health status, demographic factors, industry type, 
     duration, or other indicators of risk of HPPC members.
       Health plan issuers offering coverage through the HPPC 
     would be required to comply with state mandated benefit laws. 
     However, in states that have enacted laws authorizing 
     alternative benefit plans for small employers, such issuers 
     could offer such small employer plan through a HPPC.
     Conference agreement
       The conference agreement does not include the House or 
     Senate provision.


                        e. rules of construction

     Current law
       No provision.
     House bill
       No provision.
     Senate amendment
       The Senate Amendment would provide that nothing in this 
     section should be construed to: (1) require that a state 
     organize, operate, or create HPPCs; (2) otherwise establish 
     HPPCs; (3) require individuals, plan sponsors, or employers 
     to purchase coverage through a HPPC; (4) preempt a state from 
     requiring licensure for individuals who are involved in 
     directly supplying advice or selling health plans on behalf 
     of a HPPC; (5) require that a HPPC be the only type of 
     purchasing arrangement permitted to operate in a state; (6) 
     confer authority upon a state that the state would not 
     otherwise have to regulate health plan issuers or employee 
     health benefit plans; (7) confer authority upon a state (or 
     the federal government) that it would not otherwise have to 
     regulate group purchasing arrangements, coalitions, 
     association plans, or similar entities that do not desire to 
     become a HPPC; or (8) except as specifically provided for 
     above, prevent the application of state laws and regulations 
     otherwise to health plan issuers offering coverage through a 
     HPPC.
     Conference agreement
       The conference agreement does not include the Senate 
     provision.


                      f. enforcement through erisa

     Current law
       Part 4 of subtitle B of title I of ERISA provides for 
     fiduciary responsibilities, including the fiduciary duties of 
     a plan sponsor and prohibited transactions; part 5 provides 
     for administration and enforcement, including criminal and 
     civil penalties.
     House bill
       The House bill contains no specific provision (but as 
     MEWAs, VHIAs would be subject to ERISA requirements including 
     those related to fiduciary responsibilities and 
     administration and enforcement, including enforcement of the 
     new VHIA rules as added by this subtitle.)
     Senate amendment
       The Senate Amendment would provide that for enforcement 
     purposes only, that parts 4 and 5 of subtitle B of title I of 
     ERISA apply to a HPPC as if such plan were an employee 
     benefit plan.
     Conference agreement
       The conference agreement does not include the Senate 
     provision.

              IX. Additional Definitions/Other Provisions

     Current law
       Section 3 of ERISA defines numerous terms relating to 
     pension and employee welfare benefit plans.
     House bill
       The House bill:
       A. Defines the following terms: group health plan, 
     including treatment of governmental and church plans, and 
     defines Medicaid, medicare, and the Indian Health Service 
     programs as group health plans.
       B. Incorporates specific ERISA definitions such as 
     beneficiary, participant, employee, and employer.
       C. Provides additional definitions including applicable 
     state authority, bona fide association, COBRA continuation 
     provision, health insurance coverage, health maintenance 
     organization, health status, individual health insurance 
     coverage, insurer, medical care network plan, and waiting 
     period.
       D. Provides for the treatment of partnerships.
       E. Provides definitions related to markets and small 
     employers, including individual market, large group market, 
     small employer and small group market.
     Senate bill
       The Senate Amendment:
       A. Defines an employee health benefit plan to include a 
     governmental or church plan. An employee health benefit plan 
     is not a group health plan, individual plan, or a health 
     plan. Provides different definition for group health plan.
       B. Similarly incorporates many ERISA definitions such as 
     that for beneficiary, participant, employee, and employer.
       C. Defines group purchaser and health plan issuer.
     Conference agreement
       The conference agreement:
       A. Defines under ERISA the following terms relating to 
     health insurance: health insurance coverage, health insurance 
     issuer, health maintenance organization, group health 
     insurance coverage, and excepted benefits. Also defines 
     placed for adoption.
       B. Defines under PHS Act the following terms relating to 
     health insurance: health insurance coverage, health insurance 
     issuer, health maintenance organization, group health 
     insurance coverage, and excepted benefits.
       C. Defines under the PHS Act: state, applicable state 
     authority, state law, beneficiary, and bona fide association. 
     Also, provides definitions under the PHS Act relating to 
     markets and small employers for: large group market, small 
     employer, and small group market.
       D. Provides definitions under ERISA and the PHS Act 
     relating to portability for: preexisting condition exclusion, 
     enrollment date, late enrollee, waiting period, creditable 
     coverage, and affiliation period.
       E. Defines under ERISA and the PHS Act group health plan, 
     medical care, COBRA continuation provision, and health 
     status-related factor.
       The definition of medical care is intended to parallel that 
     of the IRC using current law, and is intended to be broad 
     enough to encompass the services of Christian Science 
     practitioners, nurses, and sanatoriums and nursing 
     facilities.
       F. Amends ERISA to provide for the treatment of 
     partnerships.
       G. Incorporated in the PHS Act specific ERISA definitions 
     such as employee, employer, beneficiary, church plan, 
     governmental plan, participant, plan sponsor.
       H. Provides definitions under the PHS Act for federal 
     governmental plan, nonfederal governmental plan, and placed 
     for adoption.

                           X. Effective Dates

     Current law
       No provision.
     House bill
       The House bill, except as otherwise provided, would apply 
     with respect to (a) group health plans, and health insurance 
     coverage offered in connection with group health plans, for 
     plan years beginning on or after January 1, 1998; (b) 
     individual health insurance coverage issued, renewed, in 
     effect, or operated on or after July 1, 1998. The bill would 
     require the Secretaries of HHS, Treasury, and Labor to 
     jointly establish rules regarding the treatment of certain 
     coverage periods before the applicable effective dates, and 
     would require the 3 Secretaries to issue such regulations on 
     a timely basis.
     Senate amendment
       The Senate Amendment, except as otherwise provided, (a) 
     with respect to group health plans, would apply to plans 
     offered, sold, issued, renewed, in effect, or operated on or 
     after January 1, 1997; (b) with respect to individual health 
     plans, would apply to plans offered, sold, issued, renewed, 
     in effect, or operated on or after the date that is 6 months 
     after enactment or January 1, 1997, whichever is later; and 
     (c) with respect to employee health benefit plans, would 
     apply on the first day of the first plan year beginning on or 
     after January 1, 1997, whichever is later.
     Conference agreement
       The conference agreement, except as otherwise provided, 
     would apply with respect to (a) group health plans, and 
     health insurance coverage offered in connection with group 
     health plans, for plan years beginning after July 1, 1997; 
     (b) individual health insurance coverage offered, sold, 
     issued, renewed, in effect, or operated after July 1, 1997. 
     In general, group health plans and health plan issuers would 
     be required to issue certifications of coverage for periods 
     of coverage after July 1, 1996; actual certifications need 
     not be issued before October 1, 1996. A special rule directs 
     the Secretaries to provide for a process whereby individuals 
     who need to establish creditable coverage for periods before 
     July 1, 1996 may be given credit through the presentation of 
     documents or other means. A special rule would apply to 
     collective bargaining agreements.
       A good faith compliance provision is provided with respect 
     to a transition period.

                XI. Health Coverage Availability Studies

     Current law
       No provision.
     House bill
       No provision.
     Senate amendment
       The Senate Amendment would require the Secretary of HHS, in 
     consultation with the Secretary of Labor, representatives of 
     state

[[Page H9532]]

     officials, consumers, and other representatives of 
     individuals and entities that have expertise in health 
     insurance and employee benefits, to conduct a three-part 
     study and prepare and submit reports. (A) By January 1, 1998, 
     the Secretary would be required to prepare and submit to 
     Congress an evaluation of the various mechanisms used to 
     ensure the availability of reasonably priced health coverage 
     and whether standards that limit premium variations would 
     further the purposes of this Act. (B) No later than January 
     1, 1999, the Secretary would be required to prepare and 
     submit to Congress a report concerning the effectiveness of 
     provisions of the Act and various state laws in ensuring the 
     availability of reasonably priced health coverage. (C) No 
     later than January 1, 1998, the Secretary would be required 
     to prepare and submit to Congress a report (1) evaluating the 
     extent to which patients have direct access to, and choice 
     of, health care providers, as well as the opportunity to 
     utilize providers outside of the network, under the various 
     types of coverage offered under the provisions of this Act; 
     (2) evaluating the cost to the insurer of providing out-of-
     network access to providers and the feasibility of offering 
     out-of-network access under all plans offered under this Act; 
     and (3) evaluating the percent of premium used for medical 
     care administration of the various types of coverage offered.
     Conference agreement
       The conference agreement requires the Secretary of HHS, in 
     consultation with the Secretary of Labor, representatives of 
     state officials, consumers, and other representatives of 
     individuals and entities that have expertise in health 
     insurance and employee benefits, to conduct two studies by 
     January 1, 2000. The first study, on the effectiveness of 
     federal and state reforms, would examine the availability of 
     reasonably priced health coverage to employers purchasing 
     group coverage and individuals purchasing coverage on a non-
     group basis. The second study, on access and choice, would 
     examine the extent to which patients have direct access to, 
     and choice of, health care providers, including specialty 
     providers, within a network plan, as well as the opportunity 
     to use providers outside of the network plan, under the 
     various types of coverage offered under the provisions of 
     this title. This study will also examine the cost and cost-
     effectiveness to health insurance issuers of providing access 
     to out-of-network providers, and the potential impact of 
     providing such access on the cost and quality of health 
     insurance coverage offered under provisions of this title.

                   XII. Reimbursement of Telemedicine

     Current law
       No provision.
     House bill
       No provision.
     Senate amendment
       The Senate amendment would direct the Health Care Financing 
     Administration (HCFA) to complete its ongoing study of 
     reimbursement of all telemedicine services and submit a 
     report to Congress with a proposal for reimbursement of fee-
     for-service medicine by March 1, 1997. The report would be 
     required to use data compiled from the current demonstration 
     projects already under review and gather data from other 
     ongoing telemedicine networks, and include an analysis of the 
     cost of services provided via telemedicine.
     Conference agreement
       The conference agreement directs the HCFA to complete its 
     ongoing study of Medicare reimbursement of all telemedicine 
     services and submit a report to Congress on reimbursement of 
     telemedicine services by March 1, 1997. The report would be 
     required to use data compiled from the current demonstration 
     projects already under review and gather data from other 
     ongoing telemedicine networks, include an analysis of the 
     cost of services provided via telemedicine, and include a 
     proposal for Medicare reimbursement of telemedicine services.

             XIII. HMOs and Medical Savings Accounts (MSAs)

     Current law
       Under the Public Health Service Act, federally qualified 
     HMOs may require enrollees to pay only nominal copayments and 
     a reasonable deductible if services are obtained from an out-
     of-network provider.
     House bill
       No provision, but see Title III, Subtitle A on Medical 
     Savings Accounts.
     Senate amendment
       The PHS Act would be amended to allow federally-qualified 
     HMOs, at the request of the HMO member, to charge a 
     deductible to the HMO member if he or she has an MSA.
       Provides that it is the sense of the Committee on Labor and 
     Human Resources that the establishment of MSAs should be 
     encouraged as part of any health insurance reform legislation 
     passed by the Senate through the use of tax incentives 
     relating to contributions to, the income growth of, and the 
     qualified use of, such accounts.
       Provides that it is the sense of the Senate that Congress 
     should take measures to further the purposes of this Act, 
     including any necessary changes to the Internal Revenue Code 
     to encourage groups and individuals to obtain health 
     coverage, and to promote access, equity, portability, 
     affordability, and security of health benefits.
     Conference agreement
       The conference agreement amends the PHS Act to allow 
     federally qualified HMOs to offer a high-deductible health 
     plan as defined in the IRC. All other requirements of the 
     federal HMO Act remain in effect.

   XIV. Volunteer Services Provided by Health Professionals at Free 
                                Clinics

       See report language for Title II.

                       XV. Findings; Severability

     Current law
       No provision.
     House bill
       The House bill would provide that Congress finds: (1) that 
     group health plans and health insurance coverage that impose 
     preexisting conditions impact the ability of employees to 
     seek employment in interstate commerce and thereby impedes 
     such commerce; (2) that health insurance coverage is 
     commercial in nature and is in and affects interstate 
     commerce; (3) that it is a necessary and proper exercise of 
     congressional authority to impose requirements on group 
     health plans and health insurance coverage to promote 
     commerce among states; and (4) that Congress intends however 
     to defer to the states to the maximum extent practicable in 
     carrying out requirements with respect to insurers and HMOs 
     that are subject to state regulation, consistent with ERISA.
     Senate amendment
       The Senate Amendment would provide that if any provision of 
     the Act or application of a provision of the Act to any 
     person or circumstance is held to be unconstitutional, the 
     remainder of the Act and the application of the provisions of 
     such to any person or circumstances would not be affected.
     Conference agreement
       The conference agreement provides that Congress finds: (1) 
     that group health plans and health insurance coverage that 
     impose preexisting conditions impact the ability of employees 
     to seek employment in interstate commerce and thereby impedes 
     such commerce; (2) that health insurance coverage is 
     commercial in nature and is in and affects interstate 
     commerce; (3) that it is a necessary and proper exercise of 
     congressional authority to impose requirements under this 
     title on group health plans and health insurance coverage, 
     including coverage offered to individuals previously covered 
     under group health plans, to promote commerce among states; 
     and (4) that Congress intends to defer to the states, to the 
     maximum extent practicable, in carrying out such requirements 
     with respect to insurers and HMOs that are subject to state 
     regulation, consistent with ERISA.
       The conference agreement provides that if any provision of 
     this title or application of such provision to any person or 
     circumstance is held to be unconstitutional, the remainder of 
     this title and the application of the provisions of such to 
     any person or circumstances would not be affected.

                       XVI. COBRA Clarifications

     Current law
       Title X of the Consolidated Omnibus Budget Reconciliation 
     Act of 1985 (COBRA, P.L. 99-272) amends the Internal Revenue 
     Code (IRC), ERISA, and the Public Health Service Act to 
     require employers who provide group health plans with 20 or 
     more employees to offer continuation coverage to employees 
     and their dependents who experience specific qualifying 
     events, including changes in job or family status. In 
     general, when a covered employee experiences termination or 
     reductions in hours of employment, the continued coverage of 
     the employee and any qualified beneficiaries is for 18 
     months. For other qualifying events (e.g., death, divorce, 
     legal separation, and child turns age of majority under the 
     plan), the duration of coverage is 3 years. The Omnibus 
     Budget Reconciliation Act of 1989 (P.L. 10-239) provides that 
     if a covered employee is determined to be disabled under the 
     Social Security Act at the time in which he or she terminates 
     or reduces hours of employment, then the employee is eligible 
     for 29 months of continued coverage.
     House bill
       No provision.
     Senate amendment
       The Senate Amendment would amend the PHS Act, ERISA, and 
     the IRC to provide for clarifications of COBRA continuation 
     requirements. Provides that individuals who have disabled 
     family members or who become disabled at any time during 
     their coverage under an initial COBRA period (the first 18 
     months) be able to extend their coverage for the additional 
     11 month period currently available only to workers who are 
     disabled at the time they lose their coverage.
       Provides that newborns and children who are placed for 
     adoption may be covered immediately under a parent's COBRA 
     policy.
     Conference agreement
       See Title IV, Subtitle B.

            XVII. Sense of the Committee Regarding Medicare

     Current law
       No provision.
     House bill
       No provision.
     Senate amendment
       The Committee on Labor and Human Resources notes that the 
     Medicare trustees concluded in their 1995 report that: (i) 
     the Medicare program is unsustainable in its present form; 
     (ii) that the hospital insurance

[[Page H9533]]

     trust fund will only be able to pay for benefits for about 7 
     years and is severely out of financial balance in the long 
     run; and (iii) the Public Trustees recommended that the 
     problems be urgently addressed on a comprehensive basis 
     including a review of the program's financing methods, 
     benefit provisions, and delivery mechanisms. The provision 
     expresses the sense of the Committee that the Senate should 
     take up measures necessary to reform the Medicare program, to 
     provide increased choice for seniors, and to respond to the 
     findings of the Public Trustees by protecting the short term 
     solvency and long-term sustainability of the Medicare 
     program.
     Conference agreement
       The conference agreement does not include the Senate 
     provision.

                XVIII. Parity for Mental Health Services

     Current law
       No provision.
     House bill
       No provision.
     Senate amendment
       The Senate Amendment would prohibit an employee health 
     benefit plan, or a health plan issuer offering a group health 
     plan or individual health plan from imposing treatment 
     limitations or financial requirements on the coverage of 
     mental health services if similar requirements are not 
     imposed on coverage for services for other conditions.
       It would provide for a rule of construction that the 
     preceding should not be construed as prohibiting an employee 
     health benefit plan or a health plan issuer offering a group 
     or individual health plan from requiring preadmission 
     screening prior to the authorization of services covered 
     under the plan or from applying other limitations that 
     restrict coverage for mental health services to those 
     services that are medically necessary.
     Conference agreement
       The conference agreement does not include the Senate 
     provision.

XIX. Waiver of Foreign Country Residence With Respect to International 
                           Medical Graduates

     Current law
       The Immigration and Nationality Technical Corrections Act 
     of 1994 provides for a waiver of the requirement that 
     nonimmigrant international medical graduates entering as J 
     exchange visitors return to their country of nationality for 
     two years before being eligible to return to the U.S. The 
     provision applies to aliens admitted to the U.S. before June 
     1, 1996.
     House bill
       No provision.
     Senate bill
       The Senate Amendment would extend waivers for the 
     requirement that nonimmigrant international medical graduates 
     entering as J exchange visitors return to their country of 
     nationality for two years before being eligible to return to 
     the U.S. through June 1, 2002.
       It would amend provisions related to federally requested 
     waivers requested by an interested U.S. agency on behalf of 
     certain aliens.
     Conference agreement
       The conference agreement does not include the Senate 
     provision.

  XX. Organ and Tissue Donation Information Included With Income Tax 
                            Refund Payments

     Current law
       No provision.
     House bill
       No provision.
     Senate bill
       The Senate Amendment would require the Secretary of 
     Treasury to include with any payment of a refund of 
     individual income tax made during the period beginning on 
     February 1, 1997 through June 30, 1997, a copy of the 
     document developed in consultation with the Secretary of HHS 
     and organizations promoting organ and tissue donation which 
     encourages organ and tissue donation. The document would also 
     include a detachable organ and tissue donor card, and would 
     urge recipients to sign the card, discuss organ and tissue 
     donations with family members, and encourage family members 
     to request or authorize organ and tissue donation if the 
     occasion arises.
     Conference agreement
       The conference agreement does not include the Senate 
     provision.

 XXI. Sense of the Senate Regarding Adequate Health Care Coverage for 
                    all Children and Pregnant Women

     Current law
       No provision.
     House bill
       No provision.
     Senate amendment
       The Senate Amendment provides that the Senate finds that 
     the health care coverage of mothers and children in the 
     United States is unacceptable, with more than 9.3 million 
     children and 500,000 expectant mothers having no health 
     insurance, in addition to there being high levels of infant 
     and maternal mortality and other enumerated indicators of 
     inadequate access to care.
       The Senate Amendment provides that it is the sense of the 
     Senate that the issue of adequate health care for our mothers 
     and children is important to the future of the United States, 
     and in consideration of the importance of such issue, the 
     Senate should pass health care legislation that will ensure 
     health care coverage for all of the United States' pregnant 
     women and children.
     Conference agreement
       The conference agreement does not include the Senate 
     provision.

        XXII. Sense of the Senate Regarding Available Treatments

     Current law
       No provision.
     House bill
       No provision.
     Senate amendment
       The Senate Amendment provides that it is the sense of the 
     Senate that patients deserve to know the full range of 
     treatments available to them and Congress should thoughtfully 
     examine these issues to ensure that all patients get the care 
     they deserve.
     Conference agreement
       The conference agreement does not include the Senate 
     provision.

                      XXIII. Rule of Construction

     Current law
       No provision.
     House bill
       The House bill would provide that nothing in this title or 
     any amendment made by it may be construed to require (or to 
     authorize any regulation that requires) the coverage of any 
     specific procedure, treatment, or service under a group 
     health plan or health insurance coverage.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision, but see section III(E).

   TITLE II--PREVENTING HEALTH CARE FRAUD AND ABUSE: ADMINISTRATIVE 
                SIMPLIFICATION; MEDICAL LIABILITY REFORM

                   1. Fraud and abuse control program

       (Subtitle A of title II of the House bill; title V of the 
     Senate amendment.)


                             I. In general

                   A. Fraud and Abuse Control Program

       (Section 201 of the House bill; section 501 of the Senate 
     amendment.)
     Current law
       Currently, the investigation and prosecution of fraud 
     related to Federal health programs is the responsibility of 
     the Department of Health and Human Services (DHHS), the FBI 
     and the Department of Justice. The DHHS Office of Inspector 
     General investigates Federal cases of fraud regarding 
     Medicare, Medicaid, and the Maternal and Child Health Block 
     Grant programs and is authorized by the Secretary to impose 
     civil monetary penalties and program exclusions on fraudulent 
     providers. The FBI can investigate both Federal and private 
     payer cases of fraud but cannot impose sanctions. Both the 
     Office of Inspector General and the FBI refer investigative 
     findings to the Department of Justice which may prosecute 
     persons for violations of federal criminal laws. State 
     Medicaid fraud control units are responsible for the 
     investigation, prosecution, or referral for prosecution, of 
     fraudulent activities associated with State Medicaid 
     programs.
     House bill
       The Secretary of the Department of Health and Human 
     Services (acting through the Office of the Inspector General) 
     and the Attorney General would be required to jointly 
     establish a national health care fraud and abuse control 
     program to coordinate Federal, State and local law 
     enforcement to combat fraud with respect to health plans. To 
     facilitate the enforcement of this fraud and abuse control 
     program the Secretary and Attorney General would be 
     authorized to conduct investigations, audits, evaluations and 
     inspections relating to the delivery of and payment for 
     health care, and would be required to arrange for the sharing 
     of data with representatives of public and private third 
     party payers. This program, implemented by guidelines issued 
     by the Secretary and the Attorney General, would also 
     facilitate the enforcement of applicable Federal statutes 
     relating to health care fraud and abuse, and would provide 
     for the provision of guidance to health care providers 
     through the issuance of safe harbors, advisory opinions and 
     special fraud alerts.
       The Secretary and Attorney General would consult with and 
     share data with representatives of health plans. Guidelines 
     issued by the Secretary and Attorney General would ensure the 
     confidentiality of information furnished by health plans, 
     providers and others, as well as the privacy of individuals 
     receiving health care services. The Inspector General would 
     retain all current authorities.
       For purposes of this section the term ``health plan'' means 
     a plan or program that provides health benefits through 
     insurance or otherwise. Such plans include health insurance 
     policies, contracts of service benefit organizations, and 
     membership agreements with health maintenance organizations 
     or other prepaid health plans.
       The Health Care Fraud and Abuse Control Account would be 
     established as an expenditure account within the Federal 
     Hospital Insurance (HI) Trust Fund. Amounts equal to monies 
     derived from the coordinated health care anti-fraud and abuse 
     programs from the imposition of civil money penalties, fines,

[[Page H9534]]

     forfeitures and damages assessed in criminal, civil or 
     administrative health care cases, along with any gifts or 
     bequests would be transferred into the Medicare HI trust fund 
     from the U.S. Treasury. There are appropriated from the HI 
     trust fund to the Account such sums as the Secretary and the 
     Attorney General certify are necessary to carry out certain 
     functions, subject to specified limits to each fiscal year 
     beginning with 1997.
       There would be appropriated from the general fund of the 
     U.S. Treasury to the Fraud and Abuse Account for transfer to 
     the FBI certain funds, subject to fiscal year limitations, 
     for specified functions. These functions include prosecuting 
     health care matters, investigations, audits of health care 
     programs and operations, inspections and other evaluations, 
     and provider and consumer education regarding compliance with 
     fraud and abuse provisions. Specified amounts in the Account 
     would also be available to carry out the Medicare Integrity 
     Program. The Secretary and the Attorney General would be 
     required to submit a joint annual report to Congress on the 
     revenues and expenditures, and the justification for such 
     disbursements from the Health Care Fraud and Abuse Control 
     Account.
     Senate amendment
       Similar.
     Conference agreement
       The conference agreement includes the House provision with 
     an amendment adding a requirement that the Comptroller 
     General submit to Congress a report for certain fiscal years 
     regarding amounts deposited in the Hospital Insurance Trust 
     Fund under this section. The conference agreement also 
     includes a provision regarding the availability of recoveries 
     and forfeitures for purposes of certain provisions of the 
     Employee Retirement Income Security Act of 1974.


                     B. Medicare Integrity Program

       (Section 202 of the House bill; section 502 of the Senate 
     amendment.)
     Current law
       Currently Medicare's program integrity functions are 
     subsumed under Medicare's general administrative budget. 
     These functions are performed, along with general claims 
     processing functions, by insurance companies under contract 
     with the Health Care Financing Administration.
     House bill
       Establishes a Medicare Integrity Program under which the 
     Secretary would promote the integrity of the Medicare program 
     by entering into contracts with eligible private entities to 
     carry out certain activities. These activities would include 
     the following: (1) review of activities of providers of 
     services or other individuals and entities furnishing items 
     and services for which payment may be made under the Medicare 
     program, including medical and utilization review and fraud 
     review, (2) audit of cost reports, (3) determinations as to 
     whether payment should not be, or should not have been, made 
     by reason of Medicare as secondary payor provisions and 
     recovery of payments that should not have been made, (4) 
     education of providers of services, beneficiaries and other 
     persons with respect to payment integrity and benefit quality 
     assurance issues, and (5) developing and updating a list of 
     durable medical equipment pursuant to section 1834(a)(15) of 
     the Social Security Act. An entity is eligible to enter into 
     a contract under this program if it meets certain 
     requirements, including demonstrating to the Secretary that 
     the entity's financial holdings, interests, or relationships 
     will not interfere with its ability to perform the required 
     functions.
     Senate amendment
       Similar except for differences in applicable conflict of 
     interest requirements with regard to entities eligible to 
     enter into contracts under this program.
     Conference agreement
       The conference agreement includes the House provision with 
     a modification of the applicable conflict of interest 
     requirements for eligible entities and assurance that current 
     contractors meeting applicable requirements may compete for 
     contracts on new program integrity activities.


                   c. beneficiary incentive programs

       (Section 203 of the House bill; section 503 of the Senate 
     amendment.)
     Current law
       No provision.
     House bill
       The Secretary would be required to provide an explanation 
     of Medicare benefits with respect to each item or service for 
     which payment may be made, without regard to whether a 
     deductible or coinsurance may be imposed with respect to the 
     item or service.
       This provision would require the Secretary, within three 
     months after enactment of this bill, to establish a program 
     to encourage individuals to report to the Secretary 
     information on individuals and entities who are engaging or 
     who have engaged in acts or omissions that constitute grounds 
     for sanctions under sections 1128, 1128A, or 1128B of the 
     Social Security Act, or who have otherwise engaged in fraud 
     and abuse against the Medicare program. If an individual 
     reports information to the Secretary under this program that 
     serves as a basis for the collection by the Secretary or the 
     Attorney General of any amount of at least $100 (other than 
     amounts paid as a penalty under section 1128B), the Secretary 
     may pay a portion of the amount collected to the individual, 
     under procedures similar to those applicable under section 
     7623 of the Internal Revenue Code of 1986.
       The Secretary would be required, within three months after 
     enactment of this bill, to establish a program to encourage 
     individuals to submit to the Secretary suggestions on methods 
     to improve the efficiency of the Medicare program. If the 
     Secretary adopts a suggestion and savings to the program 
     result, the Secretary would make a payment to the individual 
     of an amount the Secretary considers appropriate.
     Senate amendment
       Identical.
     Conference agreement
       The conference agreement includes the House provision.


  d. application of certain health anti-fraud and abuse sanctions to 
          fraud and abuse against federal health care programs

       (Section 204 of the House bill; section 504 of the Senate 
     amendment.)
     Current law
       Section 1128B provides for certain criminal penalties for 
     convictions of Medicare and Medicaid (and certain other state 
     health care programs) program-related fraud.
     House bill
       This provision would extend certain criminal penalties for 
     fraud and abuse violations under the Medicare and Medicaid 
     programs to similar violations in Federal health care 
     programs generally. The term ``Federal health care program'' 
     would mean any plan or program that provides health benefits, 
     whether directly, through insurance, or otherwise which is 
     funded directly, in whole or in part by the United States 
     Government (other than the Federal Employee Health Benefit 
     Program, Chapter 89 of Title 5 of the United States Code). 
     The term also would include any state health care program, 
     which under section 1128(h), includes Medicaid, the Maternal 
     and Child Health Services Block Grant Program and the Social 
     Services Block Grant Program.
     Senate amendment
       Identical.
     Conference agreement
       The conference agreement includes the House provision.


   e. guidance regarding application of health care fraud and abuse 
                               sanctions

       (Section 205 of House bill, section 505 of Senate 
     amendment.)
     Current law
       The 1987 Medicare and Medicaid Patient and Program 
     Protection Act specified various payment practices which, 
     although potentially capable of including referrals of 
     business under Medicare or State health care programs, are 
     protected from criminal prosecution or civil sanction under 
     the anti-kickback provisions of the law. The 1987 law also 
     established authority for the Secretary to promulgate 
     regulations specifying additional payment practices, known as 
     ``safe harbors,'' which will not be subject to sanctions 
     under the fraud and abuse provisions.
     House bill
       The Secretary would publish an annual notice in the Federal 
     Register soliciting proposals for modifications to existing 
     safe harbors and new safe harbors. After considering such 
     proposals the Secretary, in consultation with the Attorney 
     General, would issue final rules modifying existing safe 
     harbors and establishing new safe harbors, as appropriate. 
     The Inspector General would submit an annual report to 
     Congress describing the proposals received, as well as the 
     action taken regarding the proposals. The Secretary, in 
     considering proposals, may consider a number of factors 
     including the extent to which the proposals would affect 
     access to health care services, quality of care services, 
     patient freedom of choice among health care providers, 
     competition among health care providers, ability of health 
     care facilities to provide services in medically underserved 
     areas or to medically underserved populations, and the like.
       The Secretary of Health and Human Services would publish 
     the first notice in the Federal Register soliciting proposals 
     for new or modified safe harbors no later than January 1, 
     1997.
       The Secretary would issue written advisory opinions 
     regarding what constitutes prohibited remuneration under 
     section 1128B(b), whether an arrangement or proposed 
     arrangement satisfies the criteria for activities which do 
     not result in prohibited remuneration, what constitutes an 
     inducement to reduce or limit services to individuals 
     entitled to benefits, and, whether an activity constitutes 
     grounds for the imposition of civil or criminal sanctions 
     under sections 1128, 1128A or 1128B. Advisory opinions would 
     be binding as to the Secretary and the party requesting the 
     opinion.
       Any person would be able to request the Inspector General 
     to issue a special fraud alert informing the public of 
     practices which the Inspector General considers to be suspect 
     or of particular concern under the Medicare program or a 
     State health care program, as defined in section 1128(h) of 
     the Social Security Act. After investigation of the subject 
     matter of the request, and, if appropriate, the Inspector 
     General would issue a special fraud alert in response to the 
     request, published in the Federal Register.

[[Page H9535]]

     Senate amendment
       Identical to the House bill provisions regarding the 
     issuance of safe harbors and special fraud alerts. However, 
     provides for the issuance of ``interpretative rulings'' 
     instead of ``advisory opinions'' by the Secretary.
     Conference agreement
       The conference agreement includes the House provision with 
     modifications to the advisory opinion provisions. The 
     Secretary will be required to issue to a party requesting an 
     advisory opinion within 60 days and the advisory opinion 
     provisions will apply to requests made for opinions on or 
     after the date which is 6 months after the date of enactment 
     of this section and before the date which is 4 years after 
     such date of enactment.

         II. Revision to Current Sanctions for Fraud and Abuse

       (Subtitle B of the House bill; subtitle B of the Senate 
     amendment.)


A. Mandatory Exclusion from Participation in Medicare and State Health 
                             Care Programs

       (Section 211 of the House bill; section 511 of the Senate 
     amendment.)
     Current law
       Section 1128 of the Social Security Act authorizes the 
     Secretary to impose mandatory and permissive exclusions of 
     individuals and entities from participation in the Medicare 
     program, Medicaid program and programs receiving funds under 
     the Maternal and Child Health Service Block Grant, or the 
     Social Services Block Grant. Mandatory exclusions are 
     authorized for convictions of criminal offenses related to 
     the delivery of health care services under Medicare and State 
     health care programs, as well as for convictions relating to 
     patient abuse in connection with the delivery of a health 
     care item or service. In the case of an exclusion under the 
     mandatory exclusion authority the minimum period of exclusion 
     could be no less than 5 years, with certain exceptions. 
     Permissive exclusions are authorized for a number of offenses 
     relating to fraud, kickbacks, obstruction of an 
     investigation, and controlled substances, and activities 
     relating to license revocations or suspensions, claims for 
     excessive charges or unnecessary services, and the like. Thee 
     are no specified minimum periods of exclusion under the 
     permissive exclusion authority.
       Under Section 1128A of the Social Security Act civil 
     monetary penalties may be imposed for false and fraudulent 
     claims for reimbursement under the Medicare and State health 
     care programs.
       Under section 1128B, upon conviction of a program-related 
     felony, an individual may be fined not more than $25,000 or 
     imprisoned for not more than five years, or both.
     House bill
       The provision would require the Secretary to exclude 
     individuals and entities from Medicare and State health care 
     programs who have been convicted of felony offenses relating 
     to health care fraud for a minimum five year period. The 
     Secretary would also retain the discretionary authority to 
     exclude individuals from Medicare and State health care 
     programs who have been convicted of misdemeanor criminal 
     health care fraud offenses, or who have been convicted of a 
     criminal offense relating to fraud, theft, embezzlement, 
     breach of fiduciary responsibility, or other financial 
     misconduct in programs (other than health care programs) 
     funded in whole or part by any Federal, State or local 
     agency.
       The Secretary would also be required to exclude individuals 
     and entities from Medicare and State health care programs who 
     have been convicted of felony offenses relating to controlled 
     substances for a minimum five year period. The Secretary 
     would retain the discretionary authority to exclude 
     individuals from Medicare and State health care programs who 
     have been convicted of misdemeanor offenses relating to 
     controlled substances.
     Senate amendment
       Identical.
     Conference agreement
       The conference agreement includes the House provision.


B. Establishment of Minimum Period of Exclusion for Certain Individuals 
       and Entities Subject to Permissive Exclusion from Medicare

       (Section 212 of the House bill; section 512 of the Senate 
     amendment.)
     Current law
       See above.
     House bill
       This section would establish a minimum period of exclusion 
     for certain permissive exclusions from participation in 
     Medicare and State health care programs.
       For convictions of misdemeanor criminal health care fraud 
     offenses, criminal offenses relating to fraud in non-health 
     care Federal or State programs, convictions relating to 
     obstruction of an investigation of health care fraud 
     offenses, and convictions of misdemeanor offenses relating to 
     controlled substances, the minimum period of exclusion would 
     be three years, unless the Secretary determines that a longer 
     or shorter period is appropriate, due to aggravating or 
     mitigating circumstances.
       For permissive exclusions from Medicare or State health 
     care programs due to the revocation or suspension of a health 
     care license of an individual or entity, the minimum period 
     of exclusion would not be less than the period during which 
     the individual's or entity's license was revoked or 
     suspended.
       For permissive exclusions from Medicare or State health 
     care programs due to exclusion from any Federal health care 
     program or State health care program for reasons bearing on 
     an individual's or entity's professional competence of 
     financial integrity, the minimum period of exclusion would 
     not be less than the period the individual or entity is 
     excluded or suspended from a Federal or State health care 
     program.
       For permissive exclusions from Medicare or State health 
     care programs due to a determination by the Secretary that an 
     individual or entity has furnish items or services to 
     patients substantially in excess of the needs of such 
     patients or of a quality which fails to meet professionally 
     recognized standards of health care, the period of exclusion 
     would be not less than one year.
     Senate amendment
       Identical.
     Conference agreement
       The conference agreement includes the House provision.


   c. permissive exclusion of Individuals with ownership or control 
                    interest in sanctioned entities

       (Section 213 of the House bill; section 513 of the Senate 
     amendment.)
     Current law
       See above.
     House bill
       Under this provision an individual who has a direct or 
     indirect ownership or control interest in a sanctioned entity 
     and who knows or should know of the action constituting the 
     basis for the conviction or exclusion, or who is an officer 
     or managing employee of such an entity, may also be excluded 
     from participation in Medicare and State health care programs 
     by the Secretary if the entity has been convicted of an 
     offense listed in section 1129(a) or (b)(1), (2) or (3) or 
     otherwise excluded from program participation. Under this 
     provision, the culpable individual would also be subject to 
     program exclusion, even if not initially convicted or 
     excluded.
     Senate amendment
       Identical.
     Conference agreement
       The conference agreement includes the House provision.


 d. sanctions against practitioners and persons for failure to comply 
                       with statutory obligations

       (Section 214 of the House bill; section 514 of the Senate 
     amendment.)
     Current law
       See above.
     House bill
       Under this provision the Secretary may exclude a 
     practitioner or person who has failed to comply with certain 
     statutory obligations relating to quality of health care for 
     such period as the Secretary may prescribe, except that such 
     period shall be not less than one year.
       The Secretary, in making his determination that a 
     practitioner or person should be sanctioned for failure to 
     comply with certain statutory obligations relating to quality 
     of health care, will no longer be required to prove that the 
     individual was either unwilling or unable to comply with such 
     obligations.
     Senate amendment
       Identical.
     Conference agreement
       The conference agreement includes the House provision.


e. intermediate sanctions for medicare health maintenance organizations

       (Section 215 of the House bill; section 515 of the Senate 
     amendment.)
     Current law
       A contract between the Secretary and a Medicare Health 
     Maintenance Organization (HMO) is generally for a 1 year 
     term, with an option for automatic renewal. However, the 
     Secretary may terminate any such contract at any time, after 
     reasonable notice and an opportunity for a hearing, if the 
     Medicare HMO has failed substantially to carry out the 
     contract, or is carrying out the contract in a manner 
     inconsistent with the efficient and effective administration 
     of the requirements of section 1876 of the Social Security 
     Act, or if the Medicare HMO no longer substantially meets the 
     statutory requirements contained in Section 1876(b), (c), (e) 
     and (f).
     House bill
       Under this section the Secretary may terminate a contract 
     with a Medicare Health Maintenance Organization (HMO) or may 
     impose certain intermediate sanctions on the organization if 
     the Secretary determines that the Medicare HMO has failed 
     substantially to carry out the contract; is carrying out the 
     contract in a manner substantially inconsistent with the 
     efficient and effective administration of this section; or, 
     if the Medicare HMO no longer substantially meets the 
     statutory requirements contained in Section 1876(b), (c), (e) 
     and (f) of the Social Security Act.
       If the basis for the determination by the Secretary that 
     intermediate sanctions should be imposed on an eligible 
     organization is other than that the organization has failed 
     substantially to carry out its contract with the Secretary, 
     then the Secretary may

[[Page H9536]]

     apply intermediate sanctions as follows: civil money 
     penalties of not more than $25,000 for each determination if 
     the deficiency that is the basis of the determination has 
     directly adversely affected (or has the substantial 
     likelihood of adversely affecting) an individual covered 
     under the organization's contract; civil money penalties or 
     not more than $10,000 for each week of a continuing 
     violation; and suspension of enrollment of individuals until 
     the Secretary is satisfied that the deficiency has been 
     corrected and is not likely to recur.
       Whenever the Secretary seeks to either terminate a Medicare 
     HMO contract or impose intermediate sanctions on such an 
     organization, the Secretary must do so pursuant to a formal 
     investigation and under compliance procedures which provide 
     the organization with a reasonable opportunity to develop and 
     implement a corrective action plan to correct the 
     deficiencies that were the basis of the Secretary's adverse 
     determination. In making a decision whether to impose 
     sanctions the Secretary is required to consider aggravating 
     factors such as whether an entity has a history of 
     deficiencies or has not taken action to correct deficiencies 
     the Secretary has brought to their attention. The Secretary's 
     compliance procedures must also include notice and 
     opportunity for a hearing (including the right to appeal an 
     initial decision) before the Secretary imposes any sanction 
     or terminates the contract of a Medicare HMO, and there must 
     not be any unreasonable or unnecessary delay between the 
     finding of a deficiency and the imposition of sanctions.
       Under this section each risk-sharing contract with a 
     Medicare HMO must provide that the organization will maintain 
     a written agreement with a utilization and quality control 
     peer review organization or similar organization for quality 
     review functions.
       The amendments made by this section would apply to contract 
     years beginning on or after January 1, 1996.
     Senate amendment
       Same as the House bill provision except specifies a 
     different effective date, i.e., January 1, 1997.
     Conference agreement
       The Conference agreement includes the House provision, but 
     with an effective date of January 1, 1997.


  F. Additional Exception to Anti-Kickback Penalties for Risk-sharing 
                              Arrangements

       (Section 216 of the House bill; section 516 of the Senate 
     amendment,)
     Current law
       The anti-kickback provision in section 1128B(b) contains 
     several exceptions. These exceptions include discounts or 
     other reductions in price obtained by a provider of services 
     or other entity under Medicare or a State health care program 
     if the reduction in price is properly disclosed and 
     appropriately reflected in the costs claimed or charges made 
     by the provider or entity under Medicare or a State health 
     care program; any amount paid by an employer to an employee 
     for employment in the provision of covered items or services; 
     any amount paid by a vendor of goods or services to a person 
     authorized to act as a purchasing agent for a group of 
     individuals or entities under specified conditions; a waiver 
     of any co-insurance under Part B of Medicare by a federally 
     qualified health care center with respect to an individual 
     who qualifies for subsidized services under a provision of 
     the Public Health Service Act; and any payment practice 
     specified by the Secretary as a safe harbor exception.
     House bill
       This section would add a new exception to the anti-kickback 
     provisions allowing remuneration between an eligible 
     organization under section 1876 and an individual or entity 
     providing items or services pursuant to a written agreement 
     between an eligible organization under section 1876 and the 
     individual or entity. Remuneration would also be allowed 
     between an organization and an individual or entity if a 
     written agreement places the individual or entity at 
     substantial financial risk for the cost or utilization of the 
     items or services which the individual or entity is obligated 
     to provide. The risk arrangement may be provided through a 
     withhold, capitation, incentive pool, per diem payment or 
     other similar risk arrangement. This amendment would apply to 
     acts of omissions occurring after January 1, 1997.
     Senate amendment
       Similar. However, the House provision specifically lists 
     two permissible risk arrangements, i.e., incentive pools, and 
     per diem payments, which are not listed in the Senate 
     provision, and the Senate provision provides for the issuance 
     of regulations by the Secretary, in consultation with the 
     Attorney General, to define substantial financial risk as 
     necessary to protect program or patient abuse.
     Conference agreement
       The conference agreement includes the House provision with 
     modifications to the definition of allowable remuneration. In 
     addition, the conference agreement adds a provision setting 
     forth a negotiated rulemaking process for standards relating 
     to the new exception to the anti-kickback penalties added by 
     this section.


 G. Criminal Penalty for Fraudulent Disposition of Assets in Order to 
                        Obtain Medicaid Benefits

       (Section 217 of the House bill.)
     Current law
       Under section 1128B, upon conviction of a program-related 
     felony, an individual may be fined not more than $25,000 or 
     imprisoned for not more than five years or both.
     House bill
       This provision would add a new crime to the list of 
     prohibited activities under section 1128B of the Social 
     Security Act for cases where a person knowingly and willfully 
     disposes of assets by transferring assets in order to become 
     eligible for benefits under the Medicaid program, if 
     disposing of the assets results in the imposition of a period 
     of ineligibility.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision.

                          III. Data Collection

       (Subtitle C of the House bill; subtitle C of the Senate 
     amendment.)


  A. Establishment of the Health Care Fraud and Abuse Data Collection 
                                program

       (Section 221 of the House bill; section 521 of the Senate 
     amendment.)
     Current law
       No provision.
     House bill
       The Secretary of Health and Human Services would be 
     required to establish a national health care fraud and abuse 
     data collection program for reporting final adverse actions 
     (not including settlements in which no findings of liability 
     have been made) against health care providers, suppliers, or 
     practitioners.
       Each government agency and health plan would, on a monthly 
     basis, report any final adverse action taken against a health 
     care provider, supplier, or practitioner. Certain information 
     would be included in the report, including a description of 
     the acts or omissions and injuries upon which the final 
     adverse action was taken. The Secretary would, however, 
     protect the privacy of individuals receiving health care 
     services.
       The Secretary would, by regulation, provide for disclosure 
     of the information about adverse actions, upon request, to 
     the health care provider, supplier, or licensed practitioner 
     and provide procedures in the case of disputed accuracy of 
     the information. Each government agency and health plan is 
     required to report corrections of information already 
     reported about any final adverse action taken against a 
     health care provider, supplier, or practitioner in such form 
     and manner that the Secretary prescribes by regulation.
       The information in the database would be available to 
     Federal and State government agencies and health plans. The 
     Secretary may approve reasonable fees for the disclosure of 
     information in the data base (other than with respect to 
     requests by Federal agencies). The amount of such a fee shall 
     be sufficient to recover the full costs of operating the data 
     base.
       No person or entity would be held liable in any civil 
     action with respect to any report made as required by this 
     section, unless the person or entity knows the information is 
     false.
       The Secretary may impose appropriate fees on physicians to 
     cover the costs of investigation and recertification 
     activities with respect to the issuance of identifiers for 
     physicians who furnish services for which Medicare payments 
     are made.
     Senate amendment
       Similar with one additional provision requiring that the 
     Secretary implement this section in such a manner as to avoid 
     duplication with the reporting requirements established for 
     the National Practitioner Data Bank.
     Conference agreement
       The conference agreement includes the House provision with 
     a modification directing the Secretary to implement this 
     section so as to avoid duplication with the reporting 
     requirements of the National Practitioner Data Bank under the 
     Health Care Quality Improvement Act of 1986.

                      IV. Civil Monetary Penalties

       (Subtitle D of the House bill; subtitle D of the Senate 
     amendment.)


            a. social security act civil monetary penalties

       (Section 231 of the House bill; section 531 of the Senate 
     amendment.)
     Current law
       Under Section 1128A of the Social Security Act civil 
     monetary penalties may be imposed for false and fraudulent 
     claims for reimbursement under the Medicare and State health 
     care programs.
     House bill
       The Medicare and Medicaid program provisions providing for 
     civil monetary penalties for specified fraud and abuse 
     violations would apply to similar violations involving other 
     Federal health care programs. Federal health care programs 
     would include any health insurance plans or programs funded, 
     in whole or part, by the Federal government, such as CHAMPUS. 
     Civil monetary penalties and assessments received by the 
     Secretary would be deposited into the Health Care Fraud and 
     Abuse Control Account established under this Act.
       Any person who has been excluded from participating in 
     Medicare or a State health care program and who retains a 
     direct or indirect ownership or control interest in an entity 
     that is participating in a program under

[[Page H9537]]

     Medicare or a State health care program, and who knows or 
     should know of the action constituting the basis for the 
     exclusion, or who is an officer or managing employee of such 
     an entity, would be subject to a civil monetary penalty of 
     not more than $10,000 for each day the prohibited 
     relationship occurs.
       Amends the civil monetary penalty provisions of Section 
     1128A(a) by increasing the amount of a civil money penalty 
     from $2,000 to $10,000 for each item or service involved. 
     Also increases the assessment which a person may be subject 
     to from ``not more than twice the amount'' to ``not more than 
     three times the amount'' claimed for each such item or 
     service in lieu of damages sustained by the United States or 
     a State agency because of such claim.
       Adds two practices to the list of prohibited practices for 
     which civil money penalties may be assessed. The first occurs 
     when a person engages in a pattern or practice of presenting 
     a claim for an item or service based on a code that the 
     person knows or should know will result in greater payments 
     than appropriate. The second is the practice whereby a person 
     submits a claim or claims that the person knows or should 
     know is for a medical item or service which is not medically 
     necessary.
       The sanction against practitioners and persons who fail to 
     comply with certain statutory obligations is changed from an 
     amount equal to ``the actual or estimated cost'' of the 
     medically improper or unnecessary services provided, to ``up 
     to $10,000 for each instance of medically improper or 
     unnecessary services provided.
       The procedural provisions outlined in Section 1128A, such 
     as notice, hearings, and judicial review rights, would apply 
     to civil monetary penalties assessed against Medicare Health 
     Maintenance Organizations in the same manner as they apply to 
     civil monetary penalties assessed against health care 
     providers generally.
       This provision also adds a new practice to the list of 
     prohibited practices for which civil monetary penalties could 
     be assessed. Any person who offers remuneration to an 
     individual eligible for benefits under Medicare or a State 
     health care program that such individual knows or should know 
     is likely to influence such individual to order or received 
     from a particular provider, practitioner or supplier any item 
     or service reimbursable under Medicare or a State health care 
     program would be subject to the various civil monetary 
     penalties, assessments and exclusion provisions of section 
     1128A of the Social Security Act.
       The term ``remuneration'' is defined to include the waiver 
     of part or all of coinsurance and deductible amounts, as well 
     as transfers of items or services for free, or for other than 
     fair market value. There would be exceptions to this 
     definition. The waiver of part or all of coinsurance and 
     deductible amounts would not be considered remuneration under 
     this section if the waiver is not offered as part of any 
     advertisement or solicitation, the person does not routinely 
     waive coinsurence or deductible amounts, and the person 
     either waives the coinsurance and deductible amounts because 
     the individual is in financial need, or fails to collect the 
     amounts after reasonable collection efforts, or provides for 
     a permissible waiver under regulations issued by the 
     Secretary. In addition, the term remuneration would not 
     include differentials in coinsurance and deductible amounts 
     as part of a benefit plan design if the differentials have 
     been disclosed in writing to all beneficiaries, third party 
     payors, and providers, and if the differentials meeting the 
     standards defined in the Secretary's regulations. 
     Remuneration would also not include incentives given to 
     individuals to promote the delivery of preventive care under 
     the Secretary's regulations.
       The effective date of these provisions is January 1, 1997.
     Senate amendment
       Identical.
     Conference agreement
       The conference agreement includes the House provision. The 
     conferees do not intend that the language of section 231(d) 
     create any new standard for coverage of a claim. The intent 
     is to assure that a proper evaluation by a practitioner is 
     completed and evidence of treatment need is established 
     before services are delivered for which claims are submitted. 
     The conferees recognize that under current law the 
     reasonableness of a service provided by a non-medical 
     practitioner, including a practitioner of alternative 
     medicine, in judged by the application of principles 
     particular to such non-medical health care professions. For 
     example, the provision and reasonableness of chiropractic 
     services under Medicare is judged by the application of 
     chiropractic principles.
       There is significant concern regarding the impact of the 
     anti-fraud provisions on the practice of complementary or 
     alternative medicine and health care. The practice of 
     complementary or alternative medical or health care practice 
     itself would not constitute fraud.
       The conferees do not intend to penalize the exercise of 
     medical judgment of health care treatment choices made in 
     good faith and which are supported by significant evidence or 
     held by a respectable minority of those providers who 
     customarily provide similar methods of treatment. The Act is 
     not intended to penalize providers simply because of a 
     professional difference of opinion regarding diagnosis or 
     treatment.
       A sanction is not intended for providers who submit claims 
     they know will not be considered reimbursable as medically 
     necessary services, but who are required to submit the claims 
     because their patients need to document that Medicare will 
     not reimburse the service. In submitting such claims, 
     providers shall notify carriers that a claim is being 
     submitted solely for purpose of seeking reimbursement from 
     secondary payers.
       Moreover, the conferees intend that a penalty will be 
     imposed on presentation of a claim that is false or 
     fraudulent. No sanction is intended for providers who simply 
     inform beneficiaries that are particular service is not 
     covered by Medicare. Moreover, nothing in this section is 
     intended to supersede the limitation on liability provisions 
     established under Section 1879 of the Social Security Act.
       In addition, the conferees intend, with respect to 
     allowable remuneration, that this provision not preclude the 
     provision of items and services of nominal value, including, 
     for example, refreshments, medical literature, complimentary 
     local transportation services, or participation in free 
     health fairs.


    B. Clarification of Level of Intent Required for Imposition of 
                               Sanctions

       (Section 232 of the House bill.)
     Current law
       Civil monetary penalties may be imposed for seeking 
     reimbursement under the Medicare and Medicaid programs for 
     items of services not provided or for services provided by 
     someone who is not a licensed physician, whose license was 
     obtained through misrepresentation, or who misrepresented his 
     or her qualification as a specialist, or where the claim is 
     otherwise fraudulent. Civil penalties may also be sought for 
     presenting a claim due for payments which are in violation of 
     (1) contracts payment due to assignment of a patient, (2) 
     agreements with state agencies limiting permitted charges, 
     (3) agreements with participating physicians or suppliers, 
     and (4) agreements with providers of services. Civil monetary 
     penalties may also be sought against persons who provide 
     false or misleading information that could reasonably be 
     expected to influence a decision to discharge a person from a 
     hospital. A person is subject to these provisions if he or 
     she presented a claim and he or she ``knows or should have 
     known'' that the claim fell into one of the categories listed 
     above.
     House bill
       This provision adds a requirement, similar to the False 
     Claims Act, that a person is subject to this provision when 
     the person ``knowingly'' presents a claim that the person 
     ``knows or should know'' falls into one of the prohibited 
     categories. Thus, an assessment under this provision would 
     only be made where a person had actual knowledge that he or 
     she had submitted a claim or had provided false or misleading 
     information, and where the person had actual knowledge of the 
     fraudulent nature of the claim, acted in deliberate 
     ignorance, or acted in reckless disregard of the truth or 
     falsity of the information. The requirement that a person 
     ``knowingly'' present a claim or ``knowingly'' make a false 
     or misleading statement which influences discharge would 
     prevent charging persons who inadvertently perform these 
     acts.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision, but 
     this provision has been added to the section of this bill 
     entitled ``Social Security Act Civil Monetary Penalties'', 
     above.


      c. penalty for false certification for home health services

       (Section 233 of the House bill.)
     Current law
       No provision.
     House bill
       This provision would add an additional civil monetary 
     penalty of not more than three times the amount of the 
     payments, or $5,000, whichever is greater, for a physician 
     who certifies that an individual meets all of Medicare's 
     requirements to receive home health care while knowing that 
     the individual does not meet all such requirements. This 
     provision would apply to certifications made on or after the 
     date of enactment of this Act.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision.

                      V. Revisions to Criminal Law

       (Subtitle E of the House bill; subtitle E of the Senate 
     amendment.)


         a. definitions relating to federal health care offense

       (Section 241 of the House bill; section 542 of the Senate 
     amendment.)
     Current law
       No provision.
     House bill
       This provision defines the term ``Federal health care 
     offense'' to include violations of, or criminal conspiracies 
     to violate, section 669, 1035, 1347 or 1518 of Title 18 of 
     the United States Code, or section 287, 371, 664, 666, 1001, 
     1027, 1341, 1343, or 1954 of this title, if the violation or 
     conspiracy relates to a health care benefit program. A 
     ``health care benefit program'' is any public or private plan 
     affecting

[[Page H9538]]

     commerce under which any medical benefit, item or service is 
     provided to any individual, and includes any individual or 
     entity providing such a medical benefit, item or service for 
     which payment may be made under the plan.
     Senate amendment
       The Senate amendment defines ``Federal health care 
     offense'' as a violation of, or a criminal conspiracy to 
     violate section 1128B of the Social Security Act, section 
     1347 of this title, and sections 287, 371, 664, 666, 669, 
     1001, 1027, 1341, 1343, or 1954 of this title if the 
     violation or conspiracy relates to health care fraud.
     Conference agreement
       The conference agreement includes the House provision.


                          b. health care fraud

       (Section 242 of the House bill; section 541 of the Senate 
     amendment.)
     Current law
       Depending on the facts of a particular case, criminal 
     penalties may be imposed on persons engaged in health care 
     fraud under federal mail and wire fraud statutes, the False 
     Claims Act, false statement statues, money laundering 
     statutes, racketeering, and other related laws.
     House bill
       Under this provision criminal penalties would be imposed 
     for knowingly executing or attempting to execute a scheme or 
     artifice (1) to defraud any health care benefit program; or 
     (2) to obtain, by means of false or fraudulent pretense, 
     money or property owned by, or under the custody or control 
     of, any health care benefit program. Penalties include fines 
     and up to 10 years imprisonment. If the violation results in 
     serious bodily injury, the person may be imprisoned up to 20 
     years. If the violation results in death, the person may be 
     imprisoned for life.
     Senate amendment
       Similar. However, the Senate provision provides that the 
     crime be commended ``willfully'' as well as knowingly, and 
     the penalties are listed as ``any term of years'' if the 
     violation results in serious bodily injury. The Senate 
     provision also provides that criminal fines imposed under 
     this section be deposited into the Federal Hospital Insurance 
     Trust Fund.
     Conference agreement
       The conference agreement includes the House provision with 
     a modification specifying that the standard of intent will be 
     ``knowingly and willfully''.
       There has been significant concern regarding the impact of 
     the anti-fraud provisions on the practice of complementary 
     and alternative medicine and health care. The practice of 
     complementary, alternative, innovative, experimental or 
     investigational medical or health care itself would not 
     constitute fraud. The conferees intend that this proposal not 
     be interpreted as a prohibition of the practice of these 
     types of medical or health care. The Act is not intended to 
     penalize a person who exercises a health care treatment 
     choice or makes a medical or health care judgment in good 
     faith simply because there is a difference of opinion 
     regarding the form of diagnosis or treatment. Nor does this 
     provision in general prohibit plans from covering specific 
     types of treatment. Whether certain complementary and 
     alternative practices will be covered is and should be a 
     decision left to health care plan administrators.


                        c. theft or embezzlement

       Section 243 of the House bill; section 546 of the Senate 
     amendment)
     Current law
       No provision.
     House bill
       Criminal penalties would be imposed for embezzling, 
     stealing, or otherwise without authority knowingly converting 
     or intentionally misapplying any of the moneys, funds, 
     securities, premiums, credits, property, or other assets of a 
     health care benefit program. A person convicted under this 
     provision would be subject to a fine under Title 18 of the 
     United States Code, or imprisoned not more than 10 years, or 
     both. If the value of property does not exceed $100, the 
     defendant would be fined or imprisoned not more than one 
     year, or both.
     Senate amendment
       Requires that this crime be committed ``willfully'', and 
     the person convicted is subject to a fine under this title or 
     imprisonment of not more than 10 years, or both.
     Conference agreement
       The conference agreement includes the House provision with 
     a modification specifying that the standard of intent will be 
     ``knowingly and willfully''.


                          d. false statements

       (Section 244 of the Hose bill; section 544 of the Senate 
     amendment.)
     Current law
       The Federal false statements provision at 18 U.S.C. 
     Sec. 1001 generally prohibits false statements with regard to 
     any matter within the jurisdiction of a Federal department or 
     agency.
     House bill
       Criminal penalties would be imposed for knowingly 
     falsifying, concealing, or covering up by any trick, scheme, 
     or device a material fact, or making false, fictitious, or 
     fraudulent statements or representations, or making or using 
     any falsewriting or document knowing the same to contain any 
     false, fictitious, or fraudulent statement or entry in any 
     matter involving a health care benefit program. A person 
     convicted under this provision may be punished by the 
     imposition of fines under title 18 of the United States Code, 
     or by imprisonment of not more than 5 years, or both.
     Senate amendment
       Contains additional elements of the crime of false 
     statements, including the words ``willfully'' and 
     ``materially''. The House bill language specifying that the 
     false statements be ``in connection with the delivery of or 
     payment for health care benefits, items, or services'' does 
     not appear in the Senate amendment provision.
     Conference agreement
       The conference agreement includes the House provision with 
     a modification specifying that the standard of intent will be 
     ``knowingly and willfully''.


   e. obstruction of criminal investigations of health care offenses

       (Section 245 of the House bill; section 545 of the Senate 
     amendment.)
     Current law
       Under current law, criminal penalties are imposed for 
     obstructing, delaying or preventing the communication of 
     information to law enforcement officials regarding the 
     violation of criminal statues by using bribery, intimidation, 
     threats, corrupt persuasion, or harassment.
     House bill
       Criminal penalties would be imposed for willfully 
     preventing, obstructing, misleading, delaying or attempting 
     to prevent, obstruct, mislead or delay the communication of 
     information or records relating to a Federal health care 
     offense to a criminal investigator. A person convicted under 
     this provision could be punished by the imposition of fines 
     under title 18 of the United States Code or by imprisonment 
     of not more than 5 years, or both. Criminal investigator 
     would mean any individual duly authorized by a department, 
     agency, or armed force of the United States to conduct or 
     engage investigations for prosecution for violations of 
     health care offenses.
     Senate amendment
       Similar, with only minor drafting differences.
     Conference agreement
       The conference agreement includes the House provision.


                 f. laundering of monetary instruments

       (Section 246 of the House bill; section 547 of the Senate 
     amendment.)
     Current law
       The current Federal money laundering provision is found at 
     18 U.S.C. Sec. 1956(c)(7), but does not include money 
     laundering as related to health care fraud.
     House bill
       An act or activity constituting a Federal health care 
     offense would be considered a ``specified unlawful activity'' 
     for purposes of the prohibition on money laundering, so that 
     any person who engages in money laundering in connection with 
     a Federal health care offense would be subject to existing 
     criminal penalties.
     Senate amendment
       Similar, with only minor drafting differences.
     Conference agreement
       The conference agreement includes the House provision.


         g. injunctive relief relating to health care offenses

       (Section 247 of the House bill; section 543 of the Senate 
     amendment.)
     Current law
       Depending on the facts of a particular case, injunctive 
     relief may be imposed on persons who are committing or about 
     to commit health care fraud under federal racketeering 
     statutes and other related laws.
     House bill
       If a person is violating or about to commit a Federal 
     health care offense, the Attorney General of the United 
     States could commence a civil action in any Federal court to 
     enjoin such a violation. If a person is alienating or 
     disposing of property or intends to alienate or dispose of 
     property obtained as a result of a Federal health care 
     offense, the Attorney General could seek to enjoin such 
     alienation or disposition, or could seek a restraining order 
     to prohibit the person from withdrawing, transferring, 
     removing, dissipating or disposing of any such property or 
     property of equivalent value and appoint a temporary receiver 
     to administer such restraining order.
     Senate amendment
       Similar.
     Conference agreement
       The conference agreement includes the House provision.


             h. authorized investigative demand procedures

       (Section 248 of the House bill; section 548 of the Senate 
     amendment.)
     Current law
       No provision.
     House bill
       This provision would establish procedures for the Attorney 
     General to make investigative demands in cases regarding 
     health care

[[Page H9539]]

     fraud. Under this section, the Attorney General could issue a 
     summons for records and/or a witness to authenticate the 
     records.
       Administrative summons would be authorized for 
     investigations of any scheme to defraud an health care 
     benefit program in connection with the delivery of or payment 
     for health care. This section would provide for service of a 
     subpoena and enforcement of a subpoena in all United States 
     courts, as well as a grant of immunity to persons responding 
     to a subpoena from civil liability for disclosure of such 
     information.
       The provision would also provide that health information 
     about an individual that is disclosed under this section may 
     not be used in, or disclosed to any person for use in any 
     administrative, civil, or criminal action or investigation 
     directed against the individual who is the subject of the 
     information unless the action or investigation arises out of, 
     and is directly related to, receipt of health care of payment 
     for health care or action involving a fraudulent claim 
     related to health, or if good cause is shown.
     Senate amendment
       Contains additional language relating to testimony by a 
     custodian of records, the production of records, witness 
     fees, and administrative summons.
     Conference agreement
       The conference agreement includes the House provision with 
     an amendment to include Senate bill language relating to 
     testimony by a custodian of records.


            I. Forfeitures for Federal Health Care Offenses

       (Section 249 of the House bill; section 542 of the Senate 
     amendment.)
     Current law
       Depending on the facts of a particular case, criminal 
     forfeiture may be imposed on persons convicted under federal 
     money laundering statutes, racketeering statutes, and other 
     related laws.
     House bill
       A court imposing a sentence on a person convicted of a 
     Federal health care offense could order the person to forfeit 
     all real or personal property that is derived, directly or 
     indirectly, from proceeds traceable to the commission of the 
     offense. After payment of the costs of asset forfeiture have 
     been made, the Secretary of the Treasury would deposit into 
     the Federal Hospital Insurance Trust Fund an amount equal to 
     the net amount realized from the forfeiture of property by 
     reason of a federal health care offense.
     Senate amendment
       Identical.
     Conference agreement
       The conference agreement includes the House provision.


                     J. Relation to ERISA Authority

       (Section 250 of the House bill.)
     Current law
       The Employee Retirement Income Security Act of 1974 sets 
     forth comprehensive requirements for employee pension and 
     welfare benefit plans, including reporting and disclosure 
     requirements and fiduciary standards for trustees and 
     fiduciaries; pension plans are also subject to funding, 
     participation, and vesting requirements.
     House bill
       The provision states that nothing in this subtitle 
     (Revisions to Criminal law), shall affect the authority of 
     the Secretary of Labor under section 506(b) of ERISA to 
     detect and investigate civil and criminal violations related 
     to ERISA.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision.

                    2. Administrative simplification

       (Sections 251 and 252 of subtitle F of title II of the 
     House bill.)
     Current law
       No provision.
     House bill
       The bill would provide that the purpose of the subtitle was 
     to improve the Medicare and Medicaid programs, and the 
     efficiency and effectiveness of the health care system, by 
     encouraging the development of health information network 
     through the establishment of standards and requirements for 
     the electronic transmission of certain health information. 
     Amends title XI of the Social Security Act by adding Part C--
     Administrative Simplification.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision.


                             A. Definitions

       (New section 1171 of the Social Security Act.)
     Current law
       No provision.
     House bill
       The bill would provide definitions for this part of the Act 
     including the following: clearinghouse, code set, 
     coordination of benefits, health care provider, health 
     information, health plan, individually identifiable health 
     information, standard, and standard setting organization.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision with 
     an amendment to exclude a definition for coordination of 
     benefits and clarifies the definition of health plan.


           B. General requirements for adoption of standards

       (New section 1172 of the Social Security Act.)
     Current law
       No provision.
     House bill
       The bill would require that any standard or modification of 
     a standard adopted would apply to the following: (1) a health 
     plan, (2) a clearinghouse, or (3) a health care provider, but 
     only to the extent that the provider was conducting 
     electronic transactions referred to in the bill. The bill 
     would require that any standard or modification of a standard 
     adopted must reduce the administrative cost of providing and 
     paying for health care. The standard setting organization 
     would be required to develop or modify any standard or 
     modification adopted. The Secretary could adopt a standard or 
     modification of a standard that was different from any 
     standard developed by such organization if the different 
     standard or modification was promulgated in accordance with 
     rulemaking procedures and would substantially reduce 
     administrative costs to providers and plans. The Secretary 
     would be required to establish specifications for 
     implementing each of the standards and modifications adopted. 
     The standards adopted would be prohibited from requiring 
     disclosure of trade secrets or confidential commercial 
     information by a participant in the health information 
     network. In complying with the requirements of this part, the 
     Secretary would be required to rely on the recommendations of 
     the Health Information Advisory Committee established by the 
     bill, and consult with appropriate Federal and State agencies 
     and private organizations.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision with 
     a modification that requires the Secretary to rely on the 
     recommendations of the National Committee on Vital and Health 
     Statistics. The standard-setting organization should consult 
     with the National Uniform Billing Committee, the National 
     Uniform Claim Committee, the Working Group for Electronic 
     Data Interchange, and the American Dental Association.


      C. Standards for information transactions and data elements

       New section 1173 of the Social Security Act.)
     Current law
       No provision.
     House bill
       The bill would require the Secretary to adopt appropriate 
     standards for financial and administrative transactions and 
     data elements exchanged electronically that are consistent 
     with the goals of improving the operation of the health care 
     system and reducing administrative costs. Financial and 
     administrative transactions would include claims, claims 
     attachments, enrollment and disenrollment, eligibility, 
     health care payment and remittance advice, premium payments, 
     first report of injury, claims status, and referral 
     certification and authorization. Standards adopted by the 
     Secretary would be required to accommodate the needs of 
     different types of health care providers.
       The Secretary would be required to adopt standards 
     providing for a standard unique health identifier for each 
     individual, employer, health plan, and health care provider 
     for use in the health care system. The Secretary would be 
     required to establish security standards that (1) take into 
     account the technical capabilities of record systems to 
     maintain health information, the costs of security measures, 
     the need for training persons with access to health 
     information, the value of audit trails in computerized record 
     systems used, and the needs and capabilities of small health 
     care providers and rural health care providers; and (2) 
     ensure that a clearinghouse, if it is part of a larger 
     organization, has policies and security procedures which 
     isolate the activities of such service to prevent 
     unauthorized access to such information by such larger 
     organization. The Secretary would be required to establish 
     standards and modifications to such standards regarding the 
     privacy of individually identifiable health information that 
     is in the health information network. The Secretary, in 
     coordination with the Secretary of Commerce, would be 
     required to adopt standards specifying procedures for the 
     electronic transmission and authentication of signatures, 
     compliance with which would be deemed to satisfy Federal and 
     State statutory requirements for written signatures with 
     respect to the transactions specified by the bill. This part 
     would not be construed to prohibit the payment of health care 
     services or health plan premiums by debit, credit, payment 
     card or numbers, or other electronic means. The Secretary 
     would be required to adopt standards for determining the 
     financial liability of health plans when health benefits are 
     payable under two or more health plans, the sequential 
     processing of claims, and other data elements for individuals 
     who have more than one health plan.

[[Page H9540]]

     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision.
     The conferees recognize that certain uses of individually 
         identifiable information are appropriate, and do not 
         compromise the privacy of an individual. Examples of such 
         use of information include the transfer of information 
         when making referrals from primary care to specialty 
         care, and the transfer of information from a health plan 
         to an organization for the sole purpose of conducting 
         health care-related research. As health plans and 
         providers continue to focus on outcomes research and 
         innovation, it is important that the exchange and 
         aggregated use of health care data be allowed.
     The conference agreement includes a modification that this 
         part would not be construed to regulate the payment of 
         health care services or health care premiums by debit, 
         credit, payment card or other electronic means.


                D. Timetables for adoption of standards

       (New section 1174 of the Social Security Act.)
     Current law
       No provision.
     House bill
       The bill would require the Secretary to adopt standards 
     relating to the transactions, data elements of health 
     information, security and privacy by not later than 18 months 
     after the date of enactment of the part, except that 
     standards relating to claims attachments would be required to 
     be adopted not later than 30 months after enactment. The 
     Secretary would be required to review the adopted standards 
     and adopt additional or modified standards as appropriate, 
     but not more frequently than once every 6 months, except 
     during the first 12-month period after the standards are 
     adopted unless the Secretary determines that a modification 
     is necessary in order to permit compliance with the 
     standards. The Secretary would also be required to ensure 
     that procedures exist for the routine maintenance, testing, 
     enhancement, and expansion of code sets.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision with 
     a modification that the Secretary would be required to adopt 
     additional or modified standards not more frequently than 12 
     months.


                            e. requirements

       (New section 1175 of the Social Security Act.)
     Current law
       No provision.
     House bill
       The bill would establish that if a person desires to 
     conduct a financial or administrative transaction with a 
     health plan as a standard transaction, (1) the health plan 
     may not refuse to conduct such transaction as a standard 
     transaction, (2) the health plan may not delay such 
     transaction, or otherwise adversely affect, or attempt to 
     adversely affect, the person or the transaction on the 
     grounds that the transaction is a standard transaction, and 
     (3) the information transmitted and received in connection 
     with the transaction would be required to be in a form of 
     standard data elements for health information. Health plans 
     could satisfy the transmission of information by directly 
     transmitting standard data elements of health information, or 
     submitting nonstandard data elements to a clearinghouse for 
     processing in to standard data elements and transmission. Not 
     later than 24 months after the date on which standard or 
     implementation specification was adopted or established under 
     this part, each person to which the standard applied would be 
     required to comply with the standard or specification. Small 
     health plans, determined by the Secretary, would be required 
     to comply not later than 36 months after standards were 
     adopted.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision.


    f. general penalty for failure to comply with requirements and 
                               standards

       (Section 1176 of the Social Security Act.)
     Current law
       No provision.
     House bill
       The bill would require the Secretary to impose on any 
     person who violates a provision under the bill a penalty of 
     not more than $100 for each such violation of a specific 
     standard or requirement, except that the total amount imposed 
     on the person for all such violations during a calendar year 
     would not exceed $25,000. A penalty would not be imposed if 
     it was established that the person liable for the penalty did 
     not know, and by exercising reasonable diligence would not 
     have known, that such person violated the provision. A 
     penalty would not be imposed if (1) the failure to comply was 
     due to reasonable cause and not willful neglect, and (2) the 
     failure to comply with corrected during the 30-day period 
     beginning on the first date the person liable for the penalty 
     knows, or would have known, that the failure to comply 
     occurred.
     Senate amendment
       No provision.
     Conference agreement.
       The conference agreement includes the House provision.


 g. wrongful disclosure of individually identifiable health information

       (New section 1177 of the Social Security Act.)
     Current law
       No provision.
     House bill
       The bill would define the offense of wrongful disclosure of 
     individually identifiable health information as instances 
     when a person who knowingly (1) uses or causes to be used a 
     unique health identifier violation of a provision in this 
     part, (2) obtains individually identifiable health 
     information relating to an individual in violation of a 
     provision in this part, or (3) discloses individually 
     identifiable health information to another person in 
     violation of this part. A person committing such an offense 
     would be required to (1) be fined not more than $50,000, 
     imprisoned not more than 1 year, or both; (2) if the offense 
     was committed under false pretenses, be fined not more than 
     $100,000, imprisoned not more than 5 years, or both; and (3) 
     if the offense was committed with intent to sell, transfer, 
     or use individually identifiable health information for 
     commercial advantage, personal gain, or malicious harm, fined 
     not more than $250,000, imprisoned not more than 10 years, or 
     both.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision.


                         h. effect on state law

       (New section 1178 of the Social Security Act.)
     Current law
       No provision.
     House bill
       The bill would require that a provision, requirement, or 
     standard provided by the bill supersede any contrary 
     provision of state law, including a provision of state law 
     that required medical or health plan records (including 
     billing information) to be maintained or transmitted in 
     written rather that electronic form. A provision under the 
     bill would not supersede a contrary provision of state law if 
     the provision of state law (1) was more stringent than the 
     requirements of the bill with respect to privacy or 
     individually identifiable health information, or (2) was a 
     provision the Secretary determined was necessary to prevent 
     fraud and abuse with respect to controlled substances or for 
     other purposes.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision with 
     a modification, that the provision would not supersede a 
     contrary State law only if the Secretary determines that the 
     State law (1) is necessary to prevent fraud and abuse; (2) to 
     ensure appropriation State regulation of insurance and health 
     plans; (3) for state reporting on health care delivery or 
     costs, or for other purposes; or (4) addresses controlled 
     substances.
       The conference agreement also includes the requirement that 
     any standard adopted under this part would not apply to the 
     following: (1) the use or disclosure of information for 
     authorizing, processing, clearing, settling, billing, 
     transferring, collecting, or reconciling a payment for, 
     health plan premiums or health care, where such payment is 
     made by means of a credit, debit, or other payment card, or 
     by an account, check, electronic funds transfer or other such 
     means; (2) the use or disclosure of information relating to a 
     payment described above for transferring receivables, 
     resolving customer disputes or inquiries, auditing, supplying 
     a statement to a consumer of a financial institution 
     regarding the customer's account with such an institution, 
     reporting to customer reporting agencies, or complying with a 
     civil or criminal subpoena or a Federal or State law 
     regulating financial institutions.
       The conferees do not intend to exclude the activities of 
     financial institutions or their contractors from compliance 
     with the standards adopted under this part if such activities 
     would be subject to this part. However, conferees intend that 
     this part does not apply to use or disclosure of information 
     when an individual utilizes a payment system to make a 
     payment for, or related to, health plan premiums or health 
     care. For example, the exchange of information between 
     participants in a credit card system in connection with 
     processing a credit card payment for health care would not be 
     covered by this part. Similarly sending a checking account 
     statement to an account holder who uses a credit or debit 
     card to pay for health care services, would not be covered by 
     this part. However, this part does apply if a company clears 
     health care claims, the health care claims activities remain 
     subject to the requirements of this part.


 1. changes in membership and duties of national committee on vital and 
                           health statistics

       (Section 253 of the House bill.)
     Current law
       No provision.

[[Page H9541]]

     House bill
       The bill would amend the membership and duties of the 
     National Committee on Vital and Health Statistics, authorized 
     under section 306(k) of the Public Health Service Act, as 
     amended, by increasing the number of members to 18. The 
     committee would be required to (1) provide assistance and 
     advice to the Secretary on issues related to health 
     statistical and health information; health with complying 
     with the requirements of the bill; (2) study the issues 
     related to the adoption of uniform data standards for patient 
     medical record information and electronic exchange of such 
     information; (3) report to the Secretary not later than 4 
     years after enactment of the Health Coverage Availability and 
     Affordability Act of 1996, and annually thereafter, 
     recommendations and legislative proposals for such standards 
     and electronic exchange; and (4) be generally advising the 
     Secretary and the Congress on the status of the future of the 
     health information network. The committee would be required, 
     not later than 1 year after enactment, to report to Congress, 
     health care providers, health plans, and other entities using 
     the health information network regarding (1) the extent to 
     which entities using the network were meeting the standards 
     adopted and working together to form an integrated network 
     that meets the needs of its users; (2) the extent to which 
     entities were meeting the privacy and security standards, and 
     the types of penalties assessed for noncompliance; (3) 
     whether the federal and state governments were receiving 
     information of sufficient quality to meet their 
     responsibilities; (4) any problems that exist with 
     implementation of the network; and (5) the extent to which 
     timetables established by under this part of the bill were 
     being met.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision.
       The conference agreement also includes a requirement that 
     the Secretary submit detailed recommendations on standards 
     with respect to the privacy of individually identifiable 
     health information not later than 12 months after enactment. 
     The recommendations would be required to address at least: 
     (1) the rights an individual should have relating to 
     individually identifiable health information; (2) the 
     procedures that should be established for the exercise of 
     such rights; and (3) the uses and disclosures of such 
     information that should be authorized or required. The 
     Secretary would be required to consult with the Attorney 
     General, and the National Committee on Vital and Health 
     Statistics for carrying out this requirement. If Congress 
     fails to enact privacy legislation, the Secretary is required 
     to develop standards with respect to privacy of individually 
     identifiable health information not later than 42 months from 
     the date of enactment.
       The conferees recognize that industry experts are essential 
     to the membership of the National Committee on Vital and 
     Health Statistics. It is the conferees' intent that the 
     Committee select representatives from the insurer, HMO, 
     provider, employer, accreditation communities, and a 
     representative from the Workgroup for Electronic Data 
     Interchange (WEDI).
       The conferees recognize that technological innovation with 
     respect to electronic transmission of health-care related 
     transactions is progressing rapidly in the marketplace. The 
     conferees do not intend to stifle innovation in this area. 
     Therefore, the conferees intend that the Committee take into 
     account private sector initiatives.

       3. Duplication and coordination of Medicare-related plans

       (Subtitle G of title II of the House bill.)


       a. duplication and coordination of medicare-related plans

       (Section 281 of House bill.)
     Current law
       Many Medicare beneficiaries purchase private health 
     insurance to supplement their Medicare coverage. These 
     individually purchased policies are known as Medigap 
     policies. The Omnibus Budget Reconciliation Act of 1990 (OBRA 
     1990, P.L. 101-508) provided for a standardization of Medigap 
     policies. OBRA also substantially modified the 
     antiduplication provision contained in law. The intent of the 
     OBRA 1990 anti-duplication provision was to prohibit sales of 
     duplicative Medigap policies. However, the statutory language 
     applied, with very limited exceptions, to all ``health 
     insurance policies'' sold to Medicare beneficiaries. 
     Observers noted that this provision could thus apply to a 
     broad range of policies including hospital indemnity plans, 
     dread disease policies, and long-term care insurance 
     policies.
       The Social Security Amendments of 1994 (P.L. 103-432) 
     included a number of technical modifications to the Medigap 
     statute, including modifications to the anti-duplication 
     provisions contained in section 1882(d)(3) of the Act. Under 
     the revised language, it is illegal to sell or issue the 
     following policies to Medicare beneficiaries: (i) a health 
     insurance policy with knowledge that is duplicates Medicare 
     or Medicaid benefits to which a beneficiary is otherwise 
     entitled; (ii) a Medigap policy, with knowledge that the 
     beneficiary already has a Medigap policy; or (iii) a health 
     insurance policy (other than Medigap) with knowledge that it 
     duplicates private health benefits to which the beneficiary 
     is already entitled.
       A number of exceptions to these prohibitions are 
     established. The sale of a medigap policy is not in violation 
     of the provisions relating to duplication of Medicaid 
     coverage if: (i) the State Medicaid program pays the premiums 
     for the policy; (ii) in the case of qualified Medicare 
     beneficiaries (QMBs), the policy includes prescription drug 
     coverage; or (iii) the only Medicaid assistance the 
     individual is entitled to is payment of Medicare Part B 
     premiums.
       The sale of a health insurance policy (other than a Medigap 
     policy) that duplicates private coverage is not prohibited if 
     the policy pays benefits directly to the individual without 
     regard to other coverage. Further, the sale of a health 
     insurance policy (other than a Medigap policy to an 
     individual entitled to Medicaid) is not in violation of the 
     prohibition relating to selling of a policy duplicating 
     Medicare or Medicaid, if the benefits are paid without regard 
     to the duplication in coverage. This exception is conditional 
     on the prominent disclosure of the extent of the duplication, 
     as part of or together with, the application statement.
       P.L. 103-432 provided for the development by the National 
     Association of Insurance Commissioners (NAIC) of disclosure 
     statements describing the extent of duplication for each of 
     the types of private health insurance policies. Statements 
     were to be developed, at a minimum, for policies paying fixed 
     cash benefits directly to the beneficiary and policies 
     limiting benefits to specific diseases. The NAIC identified 
     10 types of health insurance policies requiring disclosure 
     statements and developed statements for them. These were 
     approved by the Secretary and published in the Federal 
     Register on June 12, 1995.
     House bill
       The provision would modify the anti-duplication provisions. 
     The requirement for obtaining a written application statement 
     would be limited to the sale of Medigap policies to persons 
     already having Medigap policies.
       Anti-duplicative provisions would specifically state that a 
     policy which pays benefits to or on behalf of an individual 
     without regard to other health benefit coverage would not be 
     considered to duplicate any health benefits under Medicare, 
     Medicaid, or a health insurance policy. Further, such 
     policies would be excluded from the sales prohibitions.
       The provision would specifically state that a health 
     insurance policy (or a rider to an insurance contract which 
     is not a health policy) which provides benefits for long term 
     care, nursing home care, home health care or community-based 
     care and that coordinates or excludes against services 
     covered under Medicare would not be considered duplicative, 
     provided such coordination or exclusion was disclosed in the 
     policy's outline of coverage.
       The provision would specify that a health insurance policy 
     (which may be a contract with a health maintenance 
     organization), provided to a disabled beneficiary, that is a 
     replacement product for another policy that is being 
     terminated by the insurer would not be considered duplicative 
     if it coordinates with Medicare.
       The provision would prohibit the imposition of criminal or 
     civil penalties, or taking of legal action, with respect to 
     any actions which occurred between enactment of P.L. 103-432 
     and enactment of this measure, provided the policies the 
     policies met the new requirements.
       The provision would prohibit States from imposing 
     duplication requirements with respect to a policy (other than 
     Medigap policy) or rider to an insurance contract which is 
     not a health policy if the policy or rider pays benefits 
     without regard to other benefits coverage or if it is a long-
     term care, policy or policy sold to the disabled (as such 
     policies are described above).
       The provision would also delete current language relating 
     to required disclosure statements.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement includes the House provision with 
     modifications. The agreement would clarify that policies 
     offering only long-term care nursing home care, home health 
     care, or community based care, or any combination thereof 
     would be allowed to coordinate benefits with Medicare and not 
     be considered duplicative, provided such coordination was 
     disclosed. The conference agreement does not include the 
     provision relating to replacement policies sold to disabled 
     persons.
       The conference agreement would modify, rather than repeal, 
     the current law requirement for disclosure statements for 
     policies that pay regardless of other coverage. Disclosure 
     statements, for the type of policy being applied for, would 
     be furnished to a Medicare beneficiary applying for a health 
     insurance policy. The statement would be furnished as a part 
     of (or together with) the policy application.
       The conference agreement would specify that whoever issues 
     or sells a health insurance policy to a Medicare beneficiary 
     and fails to furnish the required disclosure statement would 
     be fined under title 18 of the United States Code, or 
     imprisoned not more than five years or both. In addition, or 
     in lieu of the criminal penalty, a civil money penalty of 
     $25,000 (or $15,000 in the case of someone who is not an 
     issuer) could be imposed for each violation.

[[Page H9542]]

       The disclosure requirements would not apply to Medigap 
     policies or health insurance policies identified in the July 
     12, 1995 Federal Register notice (i.e. policies that do not 
     duplicate Medicare (even incidentally), life insurance 
     policies that contain long-term care riders or accelerated 
     death benefits, disability insurance policies, property and 
     casualty policies, employer and union group health plans, 
     managed care organizations with Medicare contracts, and 
     health care prepayment plans (HCPPs) that provide some or all 
     of Part B benefits under an agreement with HCFA.)
       The conference agreement would modify existing disclosure 
     statements to remove the wording that implies the policies 
     duplicate Medicare coverage. New language would be 
     substituted which states that: ``Some health care services 
     paid for by Medicare may also trigger the payment of benefits 
     under this policy''.
       The agreement would further modify the required statement 
     for policies providing both nursing home and non-
     institutional coverage, nursing home benefits only, or home 
     health care benefits only. The reference to Federal law would 
     be modified to read: ``Federal law requires us to inform you 
     that in certain situations this insurance may pay for some 
     care also covered by Medicare''. All other policies would be 
     required to include the following statement: ``This policy 
     must pay benefits without regard to other health benefit 
     coverage to which you may be entitled under Medicare or other 
     insurance.''
       The conference agreement would further modify the language 
     relating to State actions. The law would specifically state 
     that nothing in the provision restricts or precludes a 
     State's ability to regulate health insurance, including the 
     policies subject to disclosure requirements. However, a State 
     may not declare or specify, in statute, regulation, or 
     otherwise, that a health insurance policy (other than a 
     Medigap policy) or rider to an insurance contract which is 
     not a health insurance policy that pays regardless of other 
     coverage duplicates Medicare or Medigap benefits.
       The conference agreement further narrows the language 
     relating to application of penalties and legal action with 
     respect to non-duplication requirements during a transition 
     period, defined as beginning on November 5, 1991 and ending 
     on the date of enactment. No criminal or civil monetary 
     penalty could be imposed for an act or omission that occurred 
     during the transition period relating to policies that pay 
     benefits without regard to other coverage or long-term care 
     policies. No legal action could be brought or continued in 
     any Federal or State court with respect to the sale of such 
     policies insofar as such action includes a cause of action 
     which arose or is based on action occurring during the 
     transition period and relating to non-duplication 
     requirements. This limitation on legal actions would be 
     conditional on the existing disclosure requirements being met 
     with respect to any policy sold during the period beginning 
     on the effective date of the disclosure requirements required 
     by the 1994 Act (i.e. August 11, 1995) and ending 30 days 
     after enactment.
       The conference agreement further provides that the new 
     disclosure rules only apply after enactment to health 
     insurance policies that pay regardless of other coverage and 
     30-days after enactment to another health insurance policy.
       The conference agreement would further permit a seller or 
     issuer of a health insurance policy to use current disclosure 
     statements rather than the new disclosure statements.

                      4. Medical liability reform

       (Subtitle H of title II of the House bill; section 310 of 
     title I of the Senate amendment.)

                         I. General Provisions


           A. Federal reform of health care liability actions

       (Section 271 of House bill.)
     Current law
       There are no uniform Federal standards governing health 
     care liability actions.
     House bill
       (1) Applicability. The provision would provide for Federal 
     reform of health care liability actions. It would apply to 
     any health care liability action brought in any State or 
     Federal court. The provisions would not apply to any action 
     for damages arising from a vaccine-related injury or death or 
     to the extent that the provisions of the National Vaccine 
     Injury Compensation Program apply. The provisions would also 
     not apply to actions under the Employment Retirement Income 
     Security Act.
       (2) Preemption; Effect on Sovereign Immunity. The 
     provisions would preempt State law to the extent State law 
     provisions were inconsistent with the new requirements. 
     However, it would not preempt State law to the extent State 
     law provisions were more stringent. The provision specifies 
     that nothing in the preemption provision could be construed 
     to: (i) waive or affect any defense of sovereign immunity 
     asserted by any State under any provision of law; (ii) waive 
     or affect any defense of sovereign immunity asserted by the 
     U.S.: (iii) affect any provision of the Foreign Services 
     Immunity Act of 1976; (iv) preempt State choice-of-law rules 
     with respect to claims brought by a Foreign nation or a 
     citizen of a foreign nation; or (v) affect the right of any 
     court to transfer venue or to apply the law of a foreign 
     nation or to dismiss a claim of a foreign nation or of a 
     citizen of a foreign nation on the ground of inconvenient 
     forum.
       (3) Amount in Controversy; Federal Court Jurisdiction. The 
     provision would specify that in the case of a health care 
     liability action brought under section 1332 of Title 28 of 
     the U.S. Code, the amount of noneconomic and punitive damages 
     and attorneys fees would not be included in establishing the 
     amount in controversy for purposes of establishing original 
     jurisdiction. Further, the provision would specify that 
     nothing in this subtitle would be construed to establish any 
     jurisdiction in the U.S. district courts over health care 
     liability action on the basis of Federal question grounds 
     specified in section 1331 or 1337 of title 28 of the U.S. 
     Code.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.


                             b. definitions

       (Section 272 of House bill.)
     Current law
       No provision.
     House bill
       The provision would define the following terms for purposes 
     of the Federal reforms: actual damages; alternative dispute 
     resolution system; claimant; clear and convincing evidence; 
     collateral source payments; drug; economic loss; harm; health 
     benefit plan; health care liability action; health care 
     liability claim; health care provider; health care service; 
     medical device; noneconomic damages; person; product seller; 
     punitive damages; and State.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.


                           c. effective date

       (Section 273 of House bill.)
     Current law
       No provision.
     House bill
       The provision would specify that Federal reforms apply to 
     any health care liability action brought in any State or 
     Federal court that is initiated after the date of enactment. 
     The provision would also apply to any health care liability 
     claim subject to an alternative dispute resolution system, 
     Any health care liability claim or action arising from an 
     injury occurring prior to enactment would be governed by the 
     statute of limitations in effect at the time the injury 
     occurred.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.

        II. Uniform Standards for Health Care Liability Actions


                       a. statute of limitations

       (Section 281 of House bill.)
     Current law
       To date reforms of the malpractice system have occurred 
     primarily at the State level and have generally involved 
     changes in the rules governing tort cases. (A tort case is a 
     civil action to recover damages, other than for a breach of 
     contract.)
     House bill
       The provision would establish a uniform statute of 
     limitations. Actions could not be brought more than two years 
     after the injury was discovered or reasonably should have 
     been discovered. In no event could the action be brought more 
     than five years after the date of the alleged injury.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.


                 B. Calculation and payment of damages

       (Section 282 of House bill.)
     Current bill
       No provision.
     House bill
       1. Noneconomic Damages. The provision would limit 
     noneconomic damages to $250,000 in a particular case. The 
     limit would apply regardless of the number of persons against 
     whom the action was brought or the number of actions brought.
       The provision would specify that a defendant would only be 
     liable for the amount of noneconomic damages attributable to 
     that defendant's proportionate share of the fault or 
     responsibility for that claimant's injury.
       2. Punitive Damages. The provision would permit the award 
     of punitive damages (to the extent allowed under State law) 
     only if the claimant established by clear and convincing 
     evidence either that the harm was the result of conduct that 
     specifically intended to cause harm or the conduct manifested 
     a conscious flagrant indifference to the rights or safety of 
     others. The amount of punitive damages awarded could not 
     exceed $250,000 or three times the amount of economic 
     damages, whichever was greater. The determination of punitive 
     damages would be determined by the court and not be disclosed 
     to the jury. The provision would not create a cause of action 
     for punitive damages. Further, it would not preempt or 
     supersede any State or Federal law to the extent that such 
     law would further limit punitive damage awards.

[[Page H9543]]

       The provision would permit either party to request a 
     separate proceeding (bifurcation) on the issue of whether 
     punitive damages should be awarded and in what amount. If a 
     separate proceeding was requested, evidence related only to 
     the claim of punitive damages would be inadmissible in any 
     proceeding to determine whether actual damages should be 
     awarded.
       The provision would prohibit the award of punitive damages 
     in a case where the drug or device was subject to premarket 
     approval by the Food and Drug Administration, unless there 
     was misrepresentation or fraud. A manufacturer or product 
     seller would not be held liable for punitive damages related 
     to adequacy of required tamper resistant packaging unless the 
     packaging or labeling was found by clear and convincing 
     evidence to be substantially out of compliance with the 
     regulations.
       3. Periodic Payments for Future Losses. The provision would 
     permit the periodic (rather than lump sum) payment of future 
     losses in excess of $50,000. The judgment of a court awarding 
     periodic payments could not, in the absence of fraud, be 
     reopened at any time to contest, amended, or modify the 
     schedule or amount of payments. The provision would not 
     preclude a lump sum settlement.
       4. Treatment of Collateral Source Payments. the provision 
     would permit a defendant to introduce evidence of collateral 
     source payments. Such payments are those which are any 
     amounts paid or reasonably likely to be paid by health or 
     accident insurance, disability coverage, workers 
     compensation, or other third party sources. If such evidence 
     was introduced, the claimant could introduce evidence of any 
     amount paid or reasonably likely to be paid to secure the 
     right to such collateral source payments. No provider of 
     collateral source payments would be permitted to recover any 
     amount against the claimant or against the claimant's 
     recovery. The provision would apply to settlements as well as 
     actions resolved by the courts.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.


                   C. Alternative dispute resolution

       (Section 283 of House bill.)
     Current law
       No provision.
     House bill
       The provision would require that any alternative dispute 
     resolution system used to resolve health care liability 
     actions or claims must include provisions identical to those 
     specified in the bill.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House 
     provision.

                        III. Medical Volunteers

       (Section 310 of Senate bill.)
     Current law
       The Federally Supported Health Centers Assistance Act of 
     1992 (P.L. 102-501) provides protection from legal liability 
     for certain health professionals providing services under the 
     Public Health Service Act P.L. 104-73 made the provision 
     permanent.
     House bill
       No provision.
     Senate amendment
       Section 310 of the bill would be known as the Medical 
     Volunteer Act. It would provide that under certain 
     circumstances a health care professional would be regarded 
     for purposes of a malpractice claim to be a Federal employee 
     for purposes of the Federal tort claims provisions of title 
     28 of the U.S. Code. Specifically this would occur when such 
     professional provided services to a medically underserved 
     person without receiving compensation for such services. The 
     professional would be deemed to have provided services 
     without providing compensation only if prior to furnishing 
     services the professional: (i) agreed to furnish services 
     without charge to any person, including any health insurance 
     plan or program under which the recipient is covered; and 
     (ii) provided the recipient with adequate notice (as 
     determined by the Secretary) of the limited liability of the 
     professional. These provisions would preempt any State law to 
     the extent such law was inconsistent; they would not preempt 
     any State law that provided greater incentives or 
     protections.
       A medically underserved person would be defined as a person 
     residing in either: (I) a medically underserved area as 
     defined for purposes of determining a medically underserved 
     population under section 330 of the Public Health Service 
     Act; or (ii) a health professional shortage area as defined 
     in section 332 of that Act. Further the individual would have 
     to receive care in a facility substantially comparable to any 
     of those designated in the Federally-Supported Health Centers 
     Act, as determined in regulations of the Secretary.
     Conference agreement
       The conference agreement includes the Senate provision. The 
     provision extends Federal Tort Claims Act coverage to certain 
     medical volunteers in free clinics in order to expand access 
     to health care services to low-income individuals in 
     medically underserved areas. Such coverage is currently 
     provided in the Public Health Service Act to certain 
     community and other health centers under the Federally 
     Supported Health Centers Assistance Act. The provision tracks 
     to the extent possible the provisions of that Act with 
     respect to the coverage provided, quality assurance, and the 
     process by which a free clinic applies to have a free clinic 
     health professional deemed an employee of the Public Health 
     Service.
       Health professionals must meet certain conditions before 
     they are deemed employees of the Public health Service Act. 
     They must be licensed or certified in accordance with 
     applicable law and they must be volunteers; they may not 
     receive compensation for the services in the form of salary, 
     fees, or third-party payments. However, they may receive 
     reimbursement from the clinic for reasonable expenses, such 
     as costs of transportation and the cost of supplies they 
     provide. Further, the free clinic may receive a voluntary 
     donation from the individual served.
       Eligible health professionals must provide qualifying 
     services (i.e., otherwise available for Medicaid 
     reimbursement) at a free clinic or through programs or events 
     conducted by the clinic. These programs or events may include 
     the provision of health services in a clinic-owned or clinic-
     operated mobile van or at a booth in a health fair. They may 
     not include the provision of health services in a private 
     physician's office following a referral from the free clinic. 
     The health care professional or the free clinic must provide 
     prior written notice of the extent of the limited liability 
     to the individual.
       The free clinic must be licensed or certified under 
     applicable law and may not impose a charge on or accept 
     reimbursement from any private or public third-party payor. 
     The free clinic may, however, receive voluntary donations 
     from individuals receiving health care services and is not 
     precluded from receiving donations, grants, contracts, or 
     awards from private or public sources for the general support 
     of the clinic, or for specific purposes other than for 
     payment or reimbursement for a health care service.
       A free clinic must apply, consistent with the provisions 
     applicable to community health centers, to have each health 
     care professional ``deemed'' an employee of the Public Health 
     Service Act, and therefore eligible for coverage under the 
     Federal Tort Claims Act. A free clinic may not be deemed such 
     an employee under this provision.
       The Committee is aware that each of the 50 states have 
     passed laws to limit the liability of volunteers in a variety 
     of circumstances. This provision does not preempt those laws 
     beyond the preemption provided in the Federal Tort Claims 
     Act. Instead, the United States shall be liable in the same 
     manner and to the same extent as a private individual in the 
     same circumstances under State law.
       The provision applies only to causes of action filed 
     against a health professional for acts or omissions occurring 
     on or after the date on which the health professional is 
     determined by the Secretary to be a ``free clinic health 
     professional.''
       The provision establishes for free clinics funding and 
     estimating mechanisms that match to the extent possible those 
     for community health centers. No funds appropriated for 
     purposes of community health centers will be available to 
     free clinics.

                          4. Other provisions

          I. Extension of Medicare Secondary Payer Provisions

       (Sec. 621 of Senate Amendment.)
     Current law
       Generally Medicare is the ``primary payer,'' that is, it 
     pays health claims first, with an individual's private or 
     other public insurance filling in some or all of Medicare's 
     coverage gaps. However, in certain instances, the 
     individual's other coverage pays first, while Medicare is the 
     secondary payer. This phenomenon is referred to as the MSP 
     program. A group health plan offered by an employer (with 20 
     or more employees is required to offer workers age 65 or over 
     (and workers spouses age 65 or over) the same group health 
     insurance coverage as is offered to younger workers. If the 
     worker accepts the coverage, the employer is the primary 
     payer, with Medicare becoming the secondary payer.
       Similarly, a group health plan offered by a large employer 
     (100 or more employees) is the primary payer for employees or 
     their dependents who are on the Medicare disability program. 
     The provision applies only to persons covered under the group 
     plan because the employee is in ``current employment status'' 
     (i.e. is an employee or is treated as an employee by the 
     employer). The MSP provision for the disabled population 
     expires October 1, 1998.
       The MSP provisions apply to end-stage renal (ESRD) 
     beneficiaries with employer group health plans, regardless of 
     employer size. The group health plan is the primary payer for 
     18 months for persons who become eligible for Medicare ESRD 
     benefits. The employer's role as primary payer is limited to 
     a maximum of 21 months (18 months plus the usual 3-month 
     waiting period for Medicare ESRD coverage). The 18-month MSP 
     provisions for the ESRD population expire October 1, 1998; at 
     that time the period would revert to 12 months.
       The law authorizes a data match program which is intended 
     to identify potential secondary payer situations. Medicare 
     beneficiaries are matched against data contained

[[Page H9544]]

     in Social Security Administration (SSA) and Internal Revenue 
     Service (IRS) files to identify cases in which a working 
     beneficiary (or working spouse) may have employer-based 
     health insurance coverage. Cases of previous incorrect 
     Medicare payments are identified and recoveries are 
     attempted. The authority for the program extends through 
     Sept. 30, 1998.
     House bill
       No provision.
     Senate Amendment
       The provision would make permanent the MSP provisions for 
     the disabled and the 18-month period for the ESRD population. 
     It would also make permanent the data match requirement.
     Conference agreement
       The conference agreement does not include the Senate 
     provision.

                Title III. Tax-Related Health Provisions


                      a. medical savings accounts

       (Sec. 301 of the House bill.)
     Present law
       The tax treatment of health expenses depends on whether the 
     individual is an employee or self employed, and whether the 
     individual is covered under an employer-sponsored health 
     plan. Employer contributions to a health plan for coverage 
     for the employee and the employee's spouse and dependents is 
     excludable from the employee's income and wages for social 
     security tax purposes. Self-employed individuals are entitled 
     to deduct 30 percent of the amount paid for health insurance 
     for a self-employed individual and his or her spouse or 
     dependents. Any individual who itemizes tax deductions may 
     deduct unreimbursed medical expenses (including expenses for 
     medical insurance) paid during the year to the extent that 
     the total of such expenses exceeds 7.5 percent of the 
     individual's adjusted gross income (``AGI''). Present law 
     does not contain any special rules for medical savings 
     accounts.
     House bill
       In general
       Within limits, contributions to a medical savings account 
     (``MSA'') are deductible if made by an eligible individual 
     and are excludable from income (and wages for social security 
     purposes) if made by the employer of an eligible individual. 
     Earnings on amounts in an MSA are not currently taxable. 
     Distributions from an MSA for medical expenses are not 
     taxable.
       Eligible individuals
       An individual is eligible to make a deductible contribution 
     to an MSA (or to have employer contributions made on his or 
     her behalf) if the individual is covered under a high 
     deductible health plan and is not covered under another 
     health plan (other than a plan that provides certain 
     permitted coverage). An individual with other coverage in 
     addition to a high deductible plan is still eligible for an 
     MSA if such other coverage is certain permitted insurance or 
     is coverage (whether provided through insurance to otherwise) 
     for accidents, disability, dental care, vision care, or long-
     term care. Permitted insurance is (1) Medicare supplemental 
     insurance; (2) insurance if substantially all of the coverage 
     provided under such insurance relates to (a) liabilities 
     incurred under worker's compensation law, (b) tort 
     liabilities, (c) liabilities relating to ownership or use of 
     property (e.g., auto insurance), or (d) such other similar 
     liabilities as the Secretary may prescribe by regulations, 
     (3) insurance for a specified disease or illness, and (4) 
     insurance that provides a fixed payment for hospitalization. 
     An individual is not eligible to make deductible 
     contributions to an MSA for a year if any employer 
     contributions are made to an MSA on behalf of the individual 
     for the year.
       Tax treatment of and limits on contributions
       Individuals contributions to an MSA are deductible (within 
     limits) in determining AGI. Employer contributions are 
     excludable (within the same limits) from gross income and 
     wages for employment tax purposes, except that this exclusion 
     does not apply to contributions made through a cafeteria 
     plan. The maximum amount of contributions that can be 
     deducted or excluded for a year is equal to the lesser of (1) 
     the deductible under the high deductible health plan or (2) 
     $2,000 in the case of single coverage and $4,000 if the high 
     deductible plan covers the individual and a spouse or 
     dependent. The annual limit is the sum of the limits 
     determined separately for each month, based on the 
     individual's status as of the first day of the month. The 
     maximum contribution limit to an MSA is determined separately 
     for each spouse in a married couple. In no event can the 
     maximum contribution limit exceed $4,000 for a family. The 
     dollar limits are indexed for medical inflation and rounded 
     to the nearest multiple of $50.
       Definition of high deductible health plan
       A high deductible health plan is a health plan with a 
     deductible of at least $1,500 in the case of single coverage 
     and $3,000 in the case of coverage of more than one 
     individual. These dollar limits are indexed for medical 
     inflation, rounded to the nearest multiple of $50.
       Tax treatment of MSAs
       Earnings on amounts in an MSA are not currently includible 
     in income.
       Taxation of distributions
       Distributions from an MSA for the medical expenses of the 
     individual and his or her spouse or dependents are excludable 
     from income. For this purpose, medical expenses do not 
     include expenses for insurance other than long-term care 
     insurance, premiums for health care continuation coverage, 
     and premiums for health care coverage while an individual is 
     receiving unemployment compensation under Federal or State 
     law.
       Distributions that are not for medical expenses are 
     includible in income. Such distributions are also subject to 
     an additional 10-percent tax unless made after age 59\1/2\, 
     death or disability.
       Upon death, if the beneficiary is the individual's 
     surviving spouse, the spouse may continue the MSA as his or 
     her own. Otherwise, the beneficiary must include the MSA 
     balance in income in the year of death. If there is no 
     beneficiary, the MSA balance is includible on the final 
     return of the decedent. In any case, no estate tax applies.
       Definition of MSA
       In general, an MSA is a trust or custodial account created 
     exclusively for the benefit of the account holder and is 
     subject to rules similar to those applicable to individual 
     retirement arrangements.
       Effective date
       Taxable years beginning after December 31, 1996.
     Senate amendment
       The Senate amendment does not contain provisions providing 
     favorable tax treatment for MSAs. However, the Senate 
     amendment amends the Public Health Services Act to permit 
     health maintenance organizations to charge deductibles to 
     individuals with an MSA. In addition, the Senate amendment 
     provides that it is the sense of the Committee on Labor and 
     Human Resources that the establishment of MSAs should be 
     encouraged as part of any health insurance legislation passed 
     by the Senate through the use of tax incentives relating to 
     contributions to, the income growth of, and the qualified use 
     of, MSAs. The Senate amendment also provides that it is the 
     sense of the Senate that the Congress should take measures to 
     further the purposes of the Senate amendment, including any 
     necessary changes to the Internal Revenue Code to encourage 
     groups and individuals to obtain health coverage, and to 
     promote access, equity, portability, affordability, and 
     security of health benefits.
     Conference agreement
       The conference agreement follows the House bill, with 
     modifications.
       In general
       Within limits, contributions to a medical savings account 
     (``MSA'') are deductible if made by an eligible individual 
     and are excludable if made by the employer of an eligible 
     individual. Earnings on amounts in an MSA are not currently 
     taxable. Distributions from an MSA for medical expenses are 
     not taxable.
       Eligible individuals
       Beginning in 1997, MSAs are available to employees covered 
     under an employer-sponsored high deductible plan of a small 
     employer and self-employed individuals. An employer is a 
     small employer if it employed, on average, no more than 50 
     employees during either the preceding or the second preceding 
     year.
       In determining whether an employer is a small employer, a 
     preceding year is not taken into account unless the employer 
     was in existence throughout such year. In the case of an 
     employer that was not in existence through the first 
     preceding year, the determination of whether the employer has 
     no more than 50 employees is based on the average number of 
     employees that the employer reasonably expects to employ in 
     the current year. In determining the number of employees of 
     an employer, employers under common control are treated as a 
     single employer.
       In order for an employee of an eligible employer to be 
     eligible to make MSA contributions (or to have employer 
     contributions made on his or her behalf), the employee must 
     be covered under an employer-sponsored high deductible health 
     plan and must not be covered under any other health plan 
     (other than a plan that provides certain permitted coverage). 
     In the case of an employee, contributions can be made to an 
     MSA either by the individual or by the individual's employer. 
     However, an individual is not eligible to make contributions 
     to an MSA for a year if any employer contributions are made 
     to an MSA on behalf of the individual for the year.
       Similarly, in order to be eligible to make contributions to 
     an MSA, a self-employed individual must be covered under a 
     high deductible health plan and no other health plan (other 
     than a plan that provides certain permitted coverage).
       An individual with other coverage in addition to a high 
     deductible plan is till eligible for an MSA if such other 
     coverage is certain permitted insurance or is coverage 
     (whether provided through insurance to otherwise) for 
     accidents, disability, dental care, vision care, or long-term 
     care. Permitted insurance is: (1) Medicare supplemental 
     insurance; (2) insurance if substantially all of the coverage 
     provided under such insurance relates to (a) liabilities 
     incurred under worker's compensation law, (b) tort 
     liabilities, (c) liabilities relating to ownership or use of 
     property (e.g., auto insurance), or (d) such other similar 
     liabilities as the Secretary may prescribe by regulations, 
     (3) insurance for a specified disease or illness, and (4) 
     insurance that provides a fixed payment for hospitalization.

[[Page H9545]]

       If a small employer with an MSA plan (i.e., the employer or 
     its employees made contributions to an MSA) ceases to become 
     a small employer (i.e., exceeds the 50-employee limit), then 
     the employer (and its employees) can continue to establish 
     and make contributions to MSAs (including contributions for 
     new employees and employees that did not previously have an 
     MSA) until the year following the first year in which the 
     employer has more than 200 employees. After that, those 
     employees who had an MSA (to which individual or employer 
     contributions were made in any year) can continue to make 
     contributions (or have contributions made on their behalf) 
     even if the employer has more than 200 employees. For 
     example, suppose Employer A has 48 employees in 1995 and 
     1996, and 205 employees in 1997 and 1998. A would be a small 
     employer in 1997 and 1998 because it has 50 or fewer 
     employees in the preceding or the second preceding year. 
     Employer A would still be considered a small employer in 
     1999. However, in years after 1999, Employer A would not be 
     considered a small employer (even if the number of employees 
     fell to 50 or below), and in years after 1999, only employees 
     who previously had MSA contributions (or have employer 
     contributions made on their behalf).
       Tax treatment of and limits on contributions
       Individual contributions to an MSA are deductible (within 
     limits) in determining AGI (i.e., ``above the line''). In 
     addition, employer contributions are excludable (within the 
     same limits), except that this exclusion does not apply to 
     contributions made through a cafeteria plan.
       In the case of a self-employed individual, the deduction 
     cannot exceed the individual's earned income from the trade 
     or business with respect to which the high deductible plan is 
     established. In the case of an employee, the deduction cannot 
     exceed the individual's compensation attributable to the 
     employer sponsoring the high deductible plan in which the 
     individual is enrolled.
       The maximum annual contribution that can be made to an MSA 
     for a year is 65 percent of the deductible under the high 
     deductible plan in the case of individual coverage and 75 
     percent of the deductible in the case of family coverage. No 
     other dollar limits on the maximum contribution apply. The 
     annual contribution limit is the sum of the limits determined 
     separately for each month, based on the individual's status 
     and health plan coverage as of the first day of the month.
       Contributions for a year can be made until the due date for 
     the individual's tax return for the year (determined without 
     regard to extensions).
       In order to facilitate application of the cap on the number 
     of MSA participants, described below, the employer is 
     required to report employer MSA contributions, and the 
     individual is required to report such employer MSA 
     contributions on the individual's tax return.
       Comparability rule for employer contributions
       If an employer provides high deductible health plan 
     coverage coupled with an MSA to employees and makes employer 
     contributions to the MSAs, the employer must make available a 
     comparable contribution on behalf of all employees with 
     comparable coverage during the same period. Contributions are 
     considered comparable if they are either of the same amount 
     or the same percentage of the deductible under the high 
     deductible plan. The comparability rule is applied separately 
     to part-time employees (i.e., employees who are customarily 
     employed for fewer than 30 hours per week). No restrictions 
     are placed on the ability of the employer to offer different 
     plans to different groups of employees.
       For example, suppose an employer maintains two high 
     deductible plans, Plan A, with a deductible of $1,500 for 
     individual coverage and $3,000 for family coverage, and Plan 
     B, with a deductible of $2,000 for individual coverage and 
     $4,000 for family coverage. The employer offers an MSA 
     contribution to full-time employees in Plan A of $500 for 
     individual coverage and $750 for family coverage. In order to 
     satisfy the comparability rule, the employer would have to 
     offer full-time employees covered under Plan B one of the 
     following MSA contributions (1) $500 for employees with 
     individual coverage and $750 for employees with family 
     coverage or (2) $667 for employees with individual coverage 
     and $1,000 for employees with family coverage. Different 
     contributions (or no contributions) could be made for part-
     time employees covered under either high deductible plan.
       If employer contributions do not comply with the 
     comparability rule during a period, then the employer is 
     subject to an excise tax equal to 35 percent of the aggregate 
     amount contributed by the employer to MSAs of the employer 
     for that period. The excise tax is designed as a proxy for 
     the denial of employer contributions. In the case of a 
     failure to comply with the comparability rule which is due to 
     reasonable cause and not to willful neglect, the Secretary 
     may waive part of all of the tax imposed to the extent that 
     the payment of the tax would be excessive relative to the 
     failure involved.
       For purposes of the comparability rule, employers under 
     common control are aggregated in the same manner as in 
     determining whether the employer is a small employer. The 
     comparability rule does not fail to be satisfied in a year if 
     the employer is precluded from making contributions for all 
     employees with high deductible plan coverage because the 
     employer has more than 200 employees or due to operation of 
     the cap during the initial 4-year period.
       Definition of high deductible plan
       A high deductible plan is a health plan with an annual 
     deductible of a least $1,500 and no more than $2,250 in the 
     case of individual coverage and at least $3,000 and no more 
     than $4,500 in the case of family coverage. In addition, the 
     maximum out-of-pocket expenses with respect to allowed costs 
     (including the deductible) must be no more than $3,000 in the 
     case of individual coverage and no more than $5,500 in the 
     case of family coverage. Beginning after 1998, these dollar 
     amounts are indexed for inflation in $50 dollar increments 
     based on the consumer price index. In plan does not fail to 
     qualify as a high deductible plan merely because it does not 
     have a deductible for preventive care as required by State 
     law.
       As under present law, State insurance commissions would 
     have oversight over the issuance of high deductible plans 
     issued in conjunction with MSAs and could impose additional 
     consumer protections. It is intended that the National 
     Association of Insurance Commissioners (``NAIC'') will 
     develop model standards for high deductible plans that 
     individual States could adopt.
       Tax treatment of MSAs
       Earnings on amounts in an MSA are not currently includible 
     in income.
       Taxation of distributions
       Distributions from an MSA for the medical expenses of the 
     individual and his or her spouse or dependents generally are 
     excludable from income. However, in any year for which a 
     contribution is made to an MSA, withdrawals from an MSA 
     maintained by that individual are excludable from income only 
     if the individual for whom the expenses were incurred was 
     eligible to make an MSA contribution at the time the expenses 
     were incurred. This rule is designed to ensure that MSAs are 
     in fact used in conjunction with a high deductible plan, and 
     that they are not primarily used by other individuals who 
     have health plans that are not high deductible plans. For 
     example, suppose that, in 1997, individual A is covered by a 
     high deductible plan, and A's spouse (``B'') is covered by a 
     health plan that is not a high deductible plan. A makes 
     contributions to an MSA for 1997. Withdrawals from the MSA to 
     pay B's medical expenses incurred in 1997 would be includible 
     in income (and subject to the additional tax on nonmedical 
     withdrawals) because B is not covered by a high deductible 
     plan.
       For this purpose, medical expenses are defined as under the 
     itemized deduction for medical expenses, except that medical 
     expenses do not include expenses for insurance other than 
     long-term care insurance, premiums for health care 
     continuation coverage, and premiums for health care coverage 
     while an individual is receiving unemployment compensation 
     under Federal or State law.
       Distributions that are not for medical expenses are 
     includible in income. Such distributions are also subject to 
     an additional 15-percent tax unless made after age 65, death, 
     or disability.
       Estate tax treatment
       Upon death, any balance remaining in the decedent's MSA is 
     includible in his or her gross estate.
       If the account holder's surviving spouse is the named 
     beneficiary of the MSA, then, after the death of the account 
     holder, the MSA becomes the MSA of the surviving spouse and 
     the amount of the MSA balance may be deducted in computing 
     the decedent's taxable estate, pursuant to the estate tax 
     marital deduction provided in Code section 2056. The MSA 
     qualifies for the marital deduction because the account 
     holder has sole control over disposition of the assets in the 
     MSA. The surviving spouse is not required to include any 
     amount in income as a result of the death; the general rules 
     applicable to MSAs apply to the surviving spouse's MSA (e.g., 
     the surviving spouse is subject to income tax only on 
     distributions from the MSA for nonmedical purposes). The 
     surviving spouse can exclude from income amounts withdrawn 
     from the MSA for expenses incurred by the decedent prior to 
     death, to the extent they otherwise are qualified medical 
     expenses.
       If, upon death, the MSA passes to a named beneficiary other 
     than the decedent's surviving spouse, the MSA ceases to be an 
     MSA as of the date of the decedent's death, and the 
     beneficiary is required to include the fair market value of 
     MSA assets as of the date of death in gross income for the 
     taxable year that includes the date of death. The amount 
     includable in income is reduced by the amount in the MSA 
     used, within one year of the death, to pay qualified medical 
     expenses incurred prior to the death. As is the case with 
     other MSA distributions, whether the expenses are qualified 
     medical expenses is determined as of the time the expenses 
     were incurred. In computing taxable income, the beneficiary 
     may claim a deduction for that portion of the Federal estate 
     tax on the decendent's estate that was attributable to the 
     amount of the MSA balance (calculated in accordance with the 
     present-law rules relating to income in respect of a decedent 
     set forth in sec. 691(c)).
       If there is no named beneficiary for the decedent's MSA, 
     the MSA ceases to be an MSA as of the date of death, and the 
     fair market value of the assets in the MSA as of such date 
     are includible in the decedent's gross income for the year of 
     the death. This rule applies in all cases in which there is 
     no named

[[Page H9546]]

     beneficiary, even if the surviving spouse ultimately obtains 
     the right to MSA assets (e.g., if the surviving spouse is the 
     sole beneficiary of the decedent's estate). Because of the 
     significant tax consequences if a married individual fails to 
     name his or her spouse as the MSA beneficiary, even if the 
     rights to MSA assets are otherwise acquired by the surviving 
     spouse, it is anticipated that the marketing materials 
     describing other tax aspects of MSAs will explain the 
     consequences of failure to name the spouse as the 
     beneficiary.
       Cap on taxpayers utilizing MSAs
       In general.--The number of taxpayers benefiting annually 
     from an MSA contribution is limited to a threshold level 
     (generally 750,000 taxpayers). If it is determined in a year 
     that the threshold level has been exceeded (called a ``cut-
     off'' year) then, in general, for succeeding years during the 
     4-year pilot period 1997-2000, only those individuals who (1) 
     made an MSA contribution or had an employer MSA contribution 
     for the year or a preceding year (i.e. are active MSA 
     participants) or (2) are employed by a participating 
     employer, would be eligible for an MSA contribution. In 
     determining whether the threshold for any year has been 
     exceeded, MSAs of individuals who were not covered under a 
     health insurance plan for the six month period ending on the 
     date on which coverage under a high deductible plan commences 
     would not be taken into account.\1\ However, if the threshold 
     level is exceeded in a year, previously uninsured individuals 
     would be subject to the same restriction on contributions in 
     succeeding years as other individuals. That is, they would 
     not be eligible for an MSA contribution for a year following 
     a cut-off-year unless they are an active MSA participant 
     (i.e. had an MSA contribution for the year or a preceding 
     year) or are employed by a participating employer.
---------------------------------------------------------------------------
     \1\ Permitted coverage, as described above, does not 
     constitute coverage under a health insurance plan for this 
     purpose.
---------------------------------------------------------------------------
       In a year after a cut-off year, employees of a 
     participating employer can establish new MSAs and make new 
     contributions (even if the employee is a new employee or did 
     not previously have an MSA). An employer is a participating 
     employer if (1) the employer made any MSA contributions on 
     behalf of employees in any preceding year or (2) at least 20 
     percent of the employees covered under a high deductible plan 
     made an MSA contribution of at least $100 in the preceding 
     year.
       In the case of a cut-off year before 2000, an individual is 
     not an eligible individual or an active MSA participant 
     unless the individual was first covered under a high 
     deductible plan on or before the cut-off date. The cut-off 
     date is generally October 1 of the cut-off year. However, if 
     the individual was enrolled in a plan pursuant to a regularly 
     scheduled enrollment period, then the cut-off date is 
     December 31. Similarly, an employer is not considered a 
     participating employer if it first offered coverage after 
     October 1 of a cut-off year unless the high deductible plan 
     is offered pursuant to a regularly scheduled enrollment 
     period. In addition, a self-employed individual is not 
     considered an eligible individual or an active MSA 
     participant unless the individual was covered under a high 
     deductible plan on or before November 1 of a cut-off year.
       These rules are designed to prevent high deductible plans 
     from being offered just before the limitation on MSAs is 
     effective in order to avoid application of the cap. They are 
     not, however, intended to preclude individuals who first 
     enroll in an employer-sponsored high deductible health plan 
     or employees of employers that adopt a high deductible plan 
     in a cut-off year due to normal health plan operation from 
     having MSAs. For example, suppose a small employer offers a 
     high deductible plan that provides that new employees may be 
     covered under the plan beginning the first day of the month 
     after the month in which they are hired. New employee A 
     (whose previous coverage was not high deductible coverage) is 
     hired on October 15, and is enrolled in the high deductible 
     plan November 1 of that year. If the year is a cut-off year, 
     Employee A is an eligible individual and, if he has an MSA 
     contribution for the year, an active participant for the year 
     because he was enrolled pursuant to a regularly scheduled 
     enrollment period. Similarly, suppose that employer A is a 
     small employer and does not currently offer health care 
     coverage. In 1997, A decides to offer health plan coverage to 
     its employees, including a high deductible plan coupled with 
     an MSA. A takes steps to provide such coverage on or before 
     October 1 of the year (e.g., making arrangements with 
     insurance companies or distributing plan material to 
     employees). The first enrollment period for the health plans 
     begins September 1, and coverage under the plan will begin 
     November 1. If the year is a cut-off year, the employer is a 
     participating employer because the plan was established 
     pursuant to a regularly scheduled enrollment period.
       Under certain circumstances, MSA participation may be 
     reopened after a cut-off year so that MSAs are again 
     available to all individuals in the qualifying group of self-
     employed individuals and employees of small employers.
       For the 1997 tax year, taxpayers are permitted to establish 
     MSAs provided that they are in the qualifying group of self-
     employed individuals or employees working for small 
     employers.
       Rules for 1997
       On or before June 1, 1997, each trustee or custodian of an 
     MSA (e.g., insurance company or financial institution) is 
     required to report to the Internal Revenue Service (``IRS'') 
     the total number of MSAs established as of April 30, 1997, 
     for which it acts as trustee or custodian, including the 
     number of MSAs established for previously uninsured 
     individuals.\2\ If, based on this reporting, the number of 
     MSAs established (but excluding those established for 
     previously uninsured individuals) as of April 30, 1997, 
     exceeds 375,000 (50 percent of 750,000), on or before 
     September 1, 1997, the IRS would publish guidance providing 
     that only active MSA participants or employees of 
     participating employers would be eligible for an MSA 
     contribution for the 1998 tax year and thereafter. If this 
     threshold is exceeded, an individual who is first covered by 
     an employer-sponsored high deductible health plan after 
     September 1, 1997, is not an eligible individual or an active 
     MSA participant (and therefore cannot have an MSA for 1997 or 
     a subsequent year) unless the high deductible coverage is 
     elected pursuant to a regularly scheduled enrollment period. 
     Similarly, an employer is not considered a participating 
     employer if it first offered a high deductible plan after 
     September 1, 1997, unless the plan was offered pursuant to a 
     regularly scheduled enrollment period. Also, a self-employed 
     individual would not be an eligible individual or an active 
     MSA participant unless the individual was first covered under 
     a high deductible plan on or before October 1, 1997.
---------------------------------------------------------------------------
     \2\ This report would include the name and social security 
     number of taxpayers establishing an MSA. Failures to report 
     are subject to a penalty of $25 for each MSA up to a maximum 
     of $5,000. A trustee or custodian required to report could 
     elect to do so on a company-wide or branch-by-branch basis.
---------------------------------------------------------------------------
       If the 375,000 cap is not exceeded, then another 
     determination of MSA participation will be made, as follows. 
     On or before August 1, 1997, each trustee or custodian of an 
     MSA (e.g., insurance company or financial institution) is 
     required to report to the Internal Revenue Service (``IRS'') 
     the total number of MSAs established as of June 30, 1997, for 
     which it acts as trustee or custodian, including the number 
     of MSAs established for previously uninsured individuals. If, 
     based on this reporting, the number of MSAs established (but 
     excluding those established for previously uninsured 
     individuals) exceeds the 1997 threshold level of 525,000 (70 
     percent of 750,000), on or before October 1, 1997, the IRS 
     would publish guidance providing that only active MSA 
     participants or employees of participating employers would be 
     eligible for an MSA contribution for the 1998 tax year and 
     thereafter. If the 1997 threshold is exceeded, an individual 
     who is first covered by an employer-sponsored high deductible 
     health plan after October 1, 1997, is not an eligible 
     individual or an active MSA participant (and therefore cannot 
     have an MSA for 1997 or a subsequent year) unless the high 
     deductible coverage is elected pursuant to a regularly 
     scheduled enrollment period. Similarly, an employer is not 
     considered a participating employer if it first offered a 
     high deductible plan after October 1, 1997, unless the plan 
     was offered pursuant to a regularly scheduled enrollment 
     period. Also, a self-employed individual would not be an 
     eligible individual or an active MSA participant unless the 
     individual was first covered under a high deductible plan on 
     or before November 1, 1997.
       If the 1997 threshold level is not exceeded, all taxpayers 
     in the qualifying eligible group (i.e., self-employed 
     individuals and employees working for employers with 50 or 
     fewer employees) would be permitted to have MSA contributions 
     for the 1998 tax year.
       Rules for 1998 and succeeding years
       In general--In 1998 and succeeding years, on or before 
     August 1 of the year, each trustee or custodian of an MSA is 
     required to report to the IRS the total number of MSAs 
     established as of June 30 for the current year,\3\ including 
     the number of such MSAs established for previously uninsured 
     individuals. In addition, the IRS is directed to collect data 
     with respect to the number of taxpayers showing an MSA 
     contribution on their individual income tax returns for the 
     prior year and the extent to which such taxpayers were 
     previously uninsured.\4\ If, based on this information, the 
     IRS determines as described below that the number of 
     taxpayers anticipated to have MSA contributions (disregarding 
     previously uninsured individuals) exceeds the applicable 
     threshold level, the IRS is required to issue guidance to the 
     public by no later than October 1. If this guidance is 
     issued, then only taxpayers who are active MSA participants 
     or who are employed by a participating employer would be 
     entitled to MSA contributions in tax years following the year 
     the guidance is issued.
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     \3\ That is, the report would not include MSAs to which 
     contributions are made for the prior year.
     \4\ Each income tax return on which an MSA contribution is 
     shown is treated as one taxpayer for purposes of the cap. It 
     is anticipated that the IRS would adjust the actual return 
     information to take into account MSAs that may have been 
     established by late filers.
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       For 1998 and succeeding years, the threshold is exceeded if 
     either of the following limits are exceeded. The numerical 
     limit is exceeded if: (1) the number of MSA returns filed on 
     or before April 1 of the year, plus the estimate of the 
     number of MSA returns for such year that will be filed after 
     such date exceeds the threshold, or (2) 90 percent of the 
     amount determined under (1), plus 15/6ths of the MSAs 
     established for the year before July 1 exceeds $750,000.

[[Page H9547]]

       1998.--In 1998, the IRS would analyze the return data from 
     the filing of 1997 tax year returns and would determine, 
     based on this data, the number of taxpayers with MSA 
     contributions for 1997 and who were not previously uninsured. 
     If the IRS determines that (1) MSA returns filed on or before 
     April 15, 1998, plus the estimated number of MSA return for 
     1997 filed after such date exceeds 600,000, or (2) that 90 
     percent of the MSA returns in (1), plus 15/6ths of the number 
     of MSAs established for 1998 between January 1 and July 1, 
     1998, the IRS would publish guidance on or before October 1, 
     1998, advising taxpayers that only taxpayers who had 
     previously had MSA contributions (i.e., for either the 1997 
     or 1998 tax year) or who are employed by a participating 
     employer would be eligible for MSA contributions in 
     succeeding tax years. If the 1998 threshold is exceeded, an 
     individual who is first covered by an employer-sponsored high 
     deductible health plan after October 1, 1998, is not an 
     eligible individual or an active MSA participant (and 
     therefore cannot have an MSA for 1998 or a subsequent year) 
     unless the high deductible coverage is elected pursuant to a 
     regularly scheduled enrollment period. Similarly, an employer 
     is not considered a participating employer if it first 
     offered a high deductible plan after October 1, 1998, unless 
     the plan was offered pursuant to a regularly scheduled 
     enrollment period. Also, a self-employed individual would not 
     be an eligible individual or an active MSA participant unless 
     the individual was first covered under a high deductible plan 
     on or before November 1, 1998.
       In the event that the threshold level had not been 
     exceeded, all taxpayers in the qualifying eligible group 
     would be permitted to establish MSAs during the 1999 tax 
     year.
       1999.--In 1999, the IRS would analyze the return data from 
     the filing of 1998 tax year returns and would determine, 
     based on this data, the number of taxpayers with MSA 
     contributions for 1998 and who were not previously uninsured. 
     If the IRS determines that (1) MSA returns filed on or before 
     April 15, 1999, plus the estimated number of MSA returns for 
     1998 filed after such date exceeds 600,000, or (2) that 90 
     percent of the MSA returns in (1), plus 15/6ths of the number 
     of MSAs established for 1998 between January 1 and July 1, 
     1999, the IRS would publish guidance on or before October 1, 
     1999, advising taxpayers that only taxpayers who had 
     previously had MSA contributions (i.e., for the 1997, 1998, 
     or 1999 tax year) or who are employed by a participating 
     employer would be eligible for MSA contributions in 
     succeeding tax years. If the 1999 threshold is exceeded, an 
     individual who is first covered by an employer-sponsored high 
     deductible health plan after October 1, 1999, is not an 
     eligible individual or an active MSA participant (and 
     therefore cannot have an MSA for 1999 or a subsequent year) 
     unless the high deductible coverage is elected pursuant to a 
     regularly scheduled enrollment period. Similarly, an employer 
     is not considered a participating employer if it first 
     offered a high deductible plan after October 1, 1999, unless 
     the plan was offered pursuant to a regularly scheduled 
     enrollment period. Also, a self-employed individual would not 
     be an eligible individual or an active MSA participant unless 
     the individual was first covered under a high deductible plan 
     on or before November 1, 1999.
       In the event that the threshold level had not been 
     exceeded, all taxpayers in the qualifying eligible group 
     would be permitted to establish MSAs during the 2000 tax 
     year.
       Reopening of MSA participation.--If 1997 is a cut-off year, 
     then in 1998, the IRS would (as described above) analyze the 
     return data from the filing of 1997 tax year returns and 
     would determine, based on this data, the number of taxpayers 
     with MSA contributions for 1997 and who were not previously 
     uninsured. If the IRS determines that MSA returns filed on or 
     before April 15, 1998, plus the estimated number of MSA 
     return for 1997 filed after such date (disregarding MSAs of 
     previously uninsured individuals) exceeds 750,000, then the 
     IRS will announce by October 1, 1998, that MSAs will be 
     available to all eligible individuals in the qualifying 
     eligible group of self-employed individuals and employees of 
     small employers covered under a high deductible health plan 
     during the first 6 months of 1999. Similarly, if 1998, is a 
     cut-off year, then in 1999, MSA returns filed on or before 
     April 15, 1999, plus the estimated number of MSA returns for 
     1998 filed after such date (disregarding MSAs of previously 
     uninsured individuals) exceeds 750,000, then IRS will 
     announce by October 1, 1998, that MSAs will be available to 
     all eligible individuals in the qualifying eligible group of 
     self-employed individual and employees of small employers 
     with high deductible plan coverage during the first 6 months 
     of 2000.
       End of pilot project
       After December 31, 2000, no new contributions may be made 
     to MSAs except by or on behalf of individuals who previously 
     had MSA contributions and employees who are employed by a 
     participating employer. An employer is a participating 
     employer if (1) the employer made any MSA contributions for 
     any year to an MSA on behalf of employees or (2) at least 20 
     percent of the employees covered under a high deductible plan 
     made MSA contributions of at least $100 in the year 2000.
       Self-employed individuals who made contributions to an MSA 
     during the period 1997-2000 also may continue to make 
     contributions after 2000.
       Measuring the effects of MSAs
       During 1997-2000, the Department of the Treasury will 
     evaluate MSA participation and the reduction in Federal 
     revenues due to such participation and make such reports of 
     such evaluations to the Congress as the Secretary determines 
     appropriate.
       The General Accounting Office is directed to contract with 
     an organization with expertise in health economics, health 
     insurance markets and actuarial science to conduct a study 
     regarding the effects of MSAs in the small group market on 
     (1) selection (including adverse selection), (2) health 
     costs, including the impact on premiums of individuals with 
     comprehensive coverage, (3) use of preventive care, (4) 
     consumer choice, (5) the scope of coverage of high deductible 
     plans purchased in conjunction with an MSA and (6) other 
     relevant issues, to be submitted to the Congress by January 
     1, 1999.
       The conferees intend that the study be broad in scope, 
     gather sufficient data to fully evaluate the relevant issues, 
     and be adequately funded. The conferees expect the study to 
     utilize appropriate techniques to measure the impact of MSAs 
     on the broader health care market, including in-depth 
     analysis of local markets with high penetration. The 
     conferees expect the study to evaluate the impact of MSAs on 
     individuals and families experience high health care costs, 
     especially low- and middle-income families.
       Definiton of MSA
       In general, an MSA is a trust or custodial account created 
     exclusively for the benefit of the account holder and his 
     subject to rules similar to those applicable to individual 
     retirement arrangements.
       Effective date
       The provisions are effective for taxable years beginning 
     after December 31, 1996.


b. increase in deduction for health insurance expenses of Self-employed 
                              individuals

       (Sec. 311 of the House bill and sec. 401 of the Senate 
     amendment.)
     Present law
       Under present law, self-employed individuals are entitled 
     to deduct 30 percent of the amount, paid for health insurance 
     for the self-employed individual and the individual's spouse 
     and dependents. The deduction is not available for any month 
     in which the taxpayer is eligible to participate in a 
     subsidized health plan maintained by the employer of the 
     taxpayer of the taxpayer's spouse. The 30-percent deduction 
     is available in the case of self insurance as well as 
     commercial insurance. The self-insured plan must in fact be 
     insurance (e.g., there must be appropriate risk shifting) and 
     not merely a reimbursement arrangement.
     House bill
       Under the House bill, the deduction for health insurance 
     for self-employed individuals is phased up to 50 percent as 
     follows: for taxable years beginning in 1998, the amount of 
     the deduction would be 35 percent of health insurance 
     expenses; for taxable years beginning in 1999, 2000, and 
     2001, 40 percent; for taxable years beginning in 2002, 45 
     percent; and for taxable years beginning in 2003 and 
     thereafter, 50 percent.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.
     Senate amendment
       Beginning in 1997, the Senate amendment phases up the 
     deduction in 5 percent increments until it is 80 percent in 
     2006 and thereafter.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996.
     Conference agreement
       The conference agreement increases the deduction for health 
     insurance of self-employed individuals as follows: the 
     deduction would be 40 percent in 1997; 45 percent in 1998 
     through 2002, 50 percent in 2003; 60 percent in 2004, 70 
     percent in 2005; and 80 percent in 2006 and thereafter.
       The conference agreement also provides that payments for 
     personal injury or sickness through and arrangements having 
     the effect of accident or health insurance (and that are not 
     merely reimbursement arrangements) are excludable from 
     income. In order for the exclusion to apply, the arrangement 
     must be insurance (e.g., there must be adequate risk 
     shifting). This provision equalizes the treatment of payments 
     under commercial insurance and arrangements other than 
     commercial insurance that have the effect of insurance. Under 
     this provision, a self-employed individual who receives 
     payments from such an arrangement could exclude the payments 
     from income.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996. No inference is 
     intended with respect to the excludability of payments under 
     arrangements having the effect of accident or health 
     insurance under present law.


         c. treatment of long-term care insurance and services

       (Secs. 321-323 and 325-328 of the House bill and secs. 411-
     415 and 421-424 of the Senate amendment.)
     Present law
       In general
       Present law generally does not provide explicit rules 
     relating to the tax treatment of long-term care insurance 
     contracts or long-term care services. Thus, the treatment of

[[Page H9548]]

     long-term care contracts and services is unclear. Present law 
     does provide rules relating to medical expenses and accident 
     or health insurance.
       Itemized deduction for medical expenses
       In determining taxable income for Federal income tax 
     purposes, a taxpayer is allowed an itemized deduction for 
     unreimbursed expenses that are paid by the taxpayer during 
     the taxable year for medical care of the taxpayer, the 
     taxpayer's spouse, or a dependent of the taxpayer, to the 
     extent that such expenses exceed 7.5 percent of the adjusted 
     gross income of the taxpayer for such year (sec. 213). For 
     this purpose, expenses paid for medical care generally are 
     defined as amounts paid: (1) for the diagnosis, cure, 
     mitigation, treatment, or prevention of disease (including 
     prescription medicines or drugs and insulin), or for the 
     purpose of affecting any structure or function of the body 
     (other than cosmetic surgery not related to disease, 
     deformity, or accident); (2) for transportation primarily 
     for, and essential to, medical care referred to in (1); or 
     (3) for insurance (including Part B Medicare premiums) 
     covering medical care referred to in (1) and (2).
       Exclusion for amounts received under accident or health 
           insurance
       Amounts received by a taxpayer under accident or health 
     insurance for personal injuries or sickness generally are 
     excluded from gross income to the extent that the amounts 
     received are not attributable to medical expenses that were 
     allowed as a deduction for a prior taxable year (sec. 104).
       Treatment of accident or health plans maintained by 
           employers
       Contributions of an employer to an accident or health plan 
     that provides compensation (through insurance or otherwise) 
     to an employee for personal injuries or sickness of the 
     employee, the employee's spouse, or a dependent of the 
     employee, are excluded from the gross income of the employee 
     (sec. 106). In addition, amounts received by an employee 
     under such a plan generally are excluded from gross income to 
     the extent that the amounts received are paid, directly or 
     indirectly, to reimburse the employee for expenses for the 
     medical care of the employee, the employee's spouse, or a 
     dependent of the employee (sec. 105). for this purpose, 
     expenses incurred for medical care are defined in the same 
     manner as under the rules regarding the deduction for medical 
     expenses.
       A cafeteria plan is an employer-sponsored arrangement under 
     which employees can elect among cash and certain employer-
     provided qualified benefits. No amount is included in the 
     gross income of a participant in a cafeteria plan merely 
     because the participant has the opportunity to make such an 
     election (sec. 125). Employer-provided accident or health 
     coverage is one of the benefits that may be offered under a 
     cafeteria plan.
       A flexible spending arrangement (``FSA'') is an arrangement 
     under which an employee is reimbursed for medical expenses or 
     other nontaxable employer-provided benefits, such as 
     dependent care, 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 such participant's 
     coverage. Under proposed Treasury regulations, a maximum 
     amount of reimbursement is not substantially in excess of the 
     total premium if such maximum amount is less than 500 percent 
     of the premium. An FSA may be part of a cafeteria plan or 
     provided by an employer outside a cafeteria plan. FSAs are 
     commonly used to reimburse employees for medical expenses not 
     covered by insurance. If certain requirements are 
     satisfied,\5\ amounts reimbursed for nontaxable benefits from 
     an FSA are excludable from income.
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     \5\ These requirements include a requirement that a health 
     FSA can only provide reimbursement for medical expenses (as 
     defined in sec. 213) and cannot provide reimbursement for 
     premium payments for other health coverage and that the 
     maximum amount of reimbursement under a health FSA must be 
     available at all times during the period of coverage.
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       Health care continuation rules
       The health care continuation rules require that an employer 
     must provide qualified beneficiaries the opportunity to 
     continue to participate for a specified period in the 
     employer's health plan after the occurrence of certain events 
     (such as termination of employment) that would have 
     terminated such participation (sec. 4980B). Individuals 
     electing continuation coverage can be required to pay for 
     such coverage.
     House bill
       Tax treatment and definition of long-term care insurance 
           contracts and qualified long-term care services
       Exclusion of long-term care proceeds.--A long-term care 
     insurance contract generally is treated as an accident and 
     health insurance contract. Amounts (other than policyholder 
     dividends or premium refunds) received under a long-term care 
     insurance contract generally are excludable as amounts 
     received for personal injuries and sickness, subject to a cap 
     of $175 per day, or $63,875 annually, on per diem contracts 
     only. If the aggregate amount of periodic payments under all 
     qualified long-term care contracts exceeds the dollar cap for 
     the period, then the amount of such excess payments is 
     excludable only to the extent of the individual's costs (that 
     are not otherwise compensated for by insurance or otherwise) 
     for long-term care services during the period. The dollar cap 
     is indexed by the medical care cost component of the consumer 
     price index.
       Exclusion for employer-provided long-term care coverage.--A 
     plan of an employer providing coverage under a long-term care 
     insurance contract generally is treated as an accident and 
     health plan. Employer-provided coverage under a long-term 
     care insurance contract is not, however, excludable by an 
     employee if provided through a cafeteria plan; similarly, 
     expenses for long-term care services cannot be reimbursed 
     under an FSA.\6\
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     \6\ The bill does not otherwise modify the requirements 
     relating to FSAs. An FSA is defined as a benefit program 
     providing employees with coverage under which specified 
     incurred expenses may be reimbursed (subject to maximums and 
     other reasonable conditions), and the maximum amount of 
     reimbursement that is reasonably available to a participant 
     is less than 500 percent of the value of the coverage.
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       Definition of long-term care insurance contract.--A long-
     term care insurance contract is defined as any insurance 
     contract that provides only coverage of qualified long-term 
     care services and that meets other requirements. The other 
     requirements are that (1) the contract is guaranteed 
     renewable, (2) the contract does not provide for a cash 
     surrender value or other money that can be paid, assigned, 
     pledged or borrowed, (3) refunds (other than refunds on the 
     death of the insured or complete surrender or cancellation of 
     the contract) and dividends under the contract may be used 
     only to reduce future premiums or increase future benefits, 
     and (4) the contract generally does not pay or reimburse 
     expenses reimbursable under Medicare (except where Medicare 
     is a secondary payor, or the contract makes per diem or other 
     periodic payments without regard to expenses).
       A contract does not fail to be treated as a long-term care 
     insurance contract solely because it provides for payments on 
     a per diem or other periodic basis without regard to expenses 
     incurred during the period.
       Medicare duplication rules.--The bill provides that no 
     provision of law shall be construed or applied so as to 
     prohibit the offering of a long-term care insurance contract 
     on the basis that the contract coordinates its benefits with 
     those provided under Medicare. Thus, long-term care insurance 
     contracts are not subject to the rules requiring duplication 
     of Medicare benefits.
       Definition of qualified long-term care services.--Qualified 
     long-term care services means necessary diagnostic, 
     preventive, therapeutic, curing, treating, mitigating and 
     rehabilitative services, and maintenance or personal care 
     services that are required by a chronically ill individual 
     and that are provided pursuant to a plan of care prescribed 
     by a licensed health care practitioner.
       Chronically ill individual.--A chronically ill individual 
     is one who has been certified within the previous 12 months 
     by a licensed health care practitioner as (1) being unable to 
     perform (without substantial assistance) at least 2 
     activities of daily living for at least 90 days \7\ due to a 
     loss of functional capacity, (2) having a similar level of 
     disability as determined by the Secretary of the Treasury in 
     consultation with the Secretary of Health and Human Services, 
     or (3) requiring substantial supervision to protect such 
     individual from threats to health and safety due to severe 
     cognitive impairment. Activities of daily living are eating, 
     toileting, transferring, bathing, dressing and continence.\8\
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     \7\ The 90-day period is not a waiting period. Thus, for 
     example, an individual can be certified was chronically ill 
     if the licensed health care practitioner certifies that the 
     individual will be unable to perform at least 2 activities of 
     daily living for at least 90 days.
     \8\ Nothing in the bill requires the contract to take into 
     account all of the activities of daily living. For example, a 
     contract could require that an individual be unable to 
     perform (without substantial assistance) 2 out of any 5 such 
     activities, or for another example, 3 out of the 6 
     activities.
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       it is intended that an individual who is physically able 
     but has a cognitive impairment such as Alzheimer's disease or 
     another form of irreversible loss of mental capacity be 
     treated similarly to an individual who is unable to perform 
     (without substantial assistance) at least 2 activities of 
     daily living. Because of the concern that eligibility for the 
     medical expense deduction not be diagnosis-driven, the 
     provision requires the cognitive impairment to be severe. It 
     is intended that severe cognitive impairment mean a 
     deterioration or loss in intellectual capacity that is 
     measured by clinical evidence and standardized tests which 
     reliably measure impairment in: (1) short- or long-term 
     memory; (2) orientation to people, places or time; and (3) 
     deductive or abstract reasoning. In addition, it is intended 
     that such deterioration or loss place the individual in 
     jeopardy of harming self or others and therefore require 
     substantial supervision by another individual.
       A licensed health care practitioner is a physician (as 
     defined in sec. 1861(r)(l) of the Social Security Act) and 
     any registered professional nurse, licensed social worker or 
     other individual who meets such requirements as may be 
     prescribed by the Secretary of the Treasury.
       Expenses for long-term care services treated as medical 
     expenses.--Unreimbursed expenses for qualified long-term care 
     services provided to the taxpayer or the taxpayer's spouse or 
     dependents are treated as medical expenses for

[[Page H9549]]

     purposes of the itemized deduction for medical expenses 
     (subject to the present-law floor of 7.5 percent of adjusted 
     gross income). For this purpose, amounts received under a 
     long-term care insurance contract (regardless of whether the 
     contract reimburses expenses or pays benefits on a per diem 
     or other periodic basis) are treated as reimbursement for 
     expenses actually incurred for medical care.
       For purposes of the deduction for medical expenses, 
     qualified long-term care services do not include services 
     provided to an individual by a relative or spouse (directly, 
     or through a partnership, corporation, or other entity), 
     unless the relative is a licensed professional with respect 
     to such services, or by a related corporation (within the 
     meaning of Code section 267(b) or 707(b)).\9\
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     \9\ The rule limiting such services provided by a relative or 
     a related corporation does not apply for purposes of the 
     exclusion for amounts received under a long-term care 
     insurance contract, whether the contract is employer-provided 
     or purchased by an individual. The limitation in unnecessary 
     in such cases because it is anticipated that the insurer will 
     monitor reimbursements to limit opportunities for fraud in 
     connection with the performance of services by the taxpayer's 
     relative or a related corporation.
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       Long-term care insurance premiums treated as medical 
     expenses.--Long-term care insurance premiums that do not 
     exceed specified dollar limits are treated as medical 
     expenses for purposes of the itemized deduction for medical 
     expenses.\10\ The limits are as follows:

     \10\ Similarly, within certain limits, in the case of a rider 
     to a life insurance contract, charges against the life 
     insurance contract's cash surrender value that are includible 
     in income are treated as medical expenses (provided the rider 
     constitutes a long-term care insurance contract).

In the case of an individual with an attained age before the close of 
  the taxableThe limitation on premiums paid for such taxable years is:
    Not more than 40...............................................$200
    More than 40 but not more than 50...............................375
    More than 50 but not more than 60...............................750
    More than 60 but not more than 70.............................2,000
    More than 70..................................................2,500

       For taxable years beginning after 1997, these dollar limits 
     are indexed for increases in the medical care component of 
     the consumer price index. The Secretary of the Treasury, in 
     consultation with the Secretary of Health and Human Services, 
     is directed to develop a more appropriate index to be applied 
     in lieu of the foregoing. Such an alternative might 
     appropriately be based on increases in skilled nursing 
     facility and home health care costs. It is intended that the 
     Treasury Secretary annually publish the indexed amount of the 
     limits as early in the year as they can be calculated.
       Deduction for long-term care insurance of self-employed 
     individuals.--The present-law 30 percent deduction for health 
     insurance expenses of self-employed individuals is phased up 
     to 50 percent under the bill. Because the bill treats 
     payments of eligible long-term care insurance premiums in the 
     same manner as medical insurance premiums, the self-employed 
     health insurance deduction applies to eligible long-term care 
     insurance premiums under the bill.
       Long-term care riders on life insurance contracts.--In the 
     case of long-term care insurance coverage provided by a rider 
     on or as part of a life insurance contract, the requirements 
     applicable to long-term care insurance contracts apply as if 
     the portion of the contract providing such coverage were a 
     separate contract. The term ``portion'' means only the terms 
     and benefits that are in addition to the terms and benefits 
     under the life insurance contract without regard to long-term 
     care coverage. As a result, if the applicable requirements 
     are met by the long-term care portion of the contract, 
     amounts received under the contract as provided by the rider 
     are treated in the same manner as long-term care insurance 
     benefits, whether or not the payment of such amounts causes a 
     reduction in the contract's death benefit or cash surrender 
     value. The guideline premium limitation applicable under 
     section 7702(c)(2) is increased by the sum of charges (but 
     not premium payments) against the life insurance contract's 
     cash surrender value, the imposition of which reduces 
     premiums paid for the contract (within the meaning of sec. 
     7702(f)(1)). In addition, it is anticipated that Treasury 
     regulations will provide for appropriate reduction in 
     premiums paid (within the meaning of sec. 7702(f)(1)) to 
     reflect the payment of benefits under the rider that reduce 
     the cash surrender value of the life insurance contract. A 
     similar rule should apply in the case of a contract governed 
     by section 101(f) and in the case of the payments under a 
     rider that are excludable under section 101(g) of the Code 
     (as added by this bill).
       Health care continuation rules.--The health care 
     continuation rules do not apply to coverage under a long-term 
     care insurance contract.
       Inclusion of excess long-term care benefits
       In general, the bill provides that the maximum annual 
     amount of long-term care benefits under a per diem type 
     contract that is excludable from income with respect to an 
     insured who is chronically ill (not including amounts 
     received by reason of the individual being terminally ill) 
     \11\ cannot exceed the equivalent of $175 per day for each 
     day the individual is chronically ill. Thus, for per diem 
     type contracts, the maximum annual exclusion for long-term 
     care benefits with respect to any chronically ill individual 
     (not including amounts received by reason of the individual 
     being terminally ill) is $63,875 (for 1997). If payments 
     under such contracts exceed the dollar limit, then the excess 
     is excludable only to the extent the individual has incurred 
     actual costs for long-term care services. If the insured is 
     not the same as the holder of the contract, the insured may 
     assign some or all of this limit to the contract holder at 
     the time and manner prescribed by the Secretary.
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     \11\ Terminally ill is defined as under the provision of the 
     bill relating to accelerated death benefits. In general, 
     under that provision, an individual is considered to be 
     terminally ill if he or she is certified as having an illness 
     or physical condition that reasonably can be expected to 
     result in death within 24 months of the date of the 
     certification.
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       This $175 per day limit is indexed for inflation after 1997 
     for increases in the medical care component of the consumer 
     price index. The Treasury Secretary, in consultation with the 
     Secretary of Health and Human Services, is directed to 
     develop a more appropriate index, to be applied in lieu of 
     the foregoing. Such an alternative might appropriately be 
     based on increases in skilled nursing facility and home 
     health care costs. It is intended that the Treasury Secretary 
     annually publish the indexed amount of the limit as early in 
     the year as it can be calculated.
       A payor of long-term care benefits (defined for this 
     purpose to include any amount paid under a product 
     advertised, marketed or offered as long-term care insurance) 
     is required to report to the IRS the aggregate amount of such 
     benefits paid to any individual during any calendar year, and 
     the name, address and taxypayer identification number of such 
     individual. A copy of the report must be provided to the 
     payee by January 31 following the year of payment, showing 
     the name of the payor and the aggregate amount of benefits 
     paid to the individual during the calendar year. Failure to 
     file the report or provide the copy to the payee is subject 
     to the generally applicable penalties for failure to file 
     similar information reports.
       Consumer protection provisions
       Under the bill, long-term care insurance contracts, and 
     issuers of contracts, are required to satisfy certain 
     provisions of the long-term care insurance model Act and 
     model regulations promulgated by the National Association of 
     Insurance Commissioners (as adopted as of January 1993). The 
     policy requirements relate to disclosure, nonforfeitability, 
     guaranteed renewal or noncancellability, prohibitions on 
     limitations and exclusions, extension of benefits, 
     continuation or conversion of coverage, discontinuance and 
     replacement of policies, unintentional lapse, post-claims 
     underwriting, minimum standards, inflation protection, 
     preexisting conditions, and prior hospitalization. The bill 
     also provides disclosure and nonforfeiture requirements. The 
     nonforfeiture provision gives consumers the option of 
     selecting reduced paid-up insurance, extended term insurance, 
     or a shortened benefit period in the event a policyholder who 
     elects a nonforfeiture provision is unable to continue to pay 
     premiums. The requirements for issuers of long-term care 
     insurance contracts relate to application forms, reporting 
     requirements, marketing, appropriateness of purchase, format, 
     delivering a shopper's guide, right to return, outline of 
     coverage, group plans, policy summary, monthly reports on 
     accelerated death benefits, and incontestability period. A 
     tax is imposed equal to $100 per policy per day for failure 
     to satisfy these requirements.
       Nothing in the bill prevents a State from establishing, 
     implementing or continuing standards related to the 
     protection of policyholders of long-term care insurance 
     policies, if such standards are not inconsistent with 
     standards established under the bill.
       Effective date
       The provisions defining long-term care insurance contracts 
     and qualified long-term care services apply to contracts 
     issued after December 31, 1996. Any contract issued before 
     January 1, 1997, that met the long-term care insurance 
     requirements in the State in which the policy was sitused at 
     the time it was issued shall be treated as a long-term care 
     insurance contract, and services provided under or reimbursed 
     by the contract treated as qualified long-term care services.
       A contract providing for long-term care insurance may be 
     exchanged for a long-term care insurance contract (or the 
     former cancelled and the proceeds reinvested in the latter 
     within 60 days) tax free between the date of enactment and 
     January 1, 1998. Taxable gain would be recognized to the 
     extent money or other property is received in the exchange.
       The issuance or conformance of a rider to a life insurance 
     contract providing long-term care insurance coverage is not 
     treated as a modification or a material change for purposes 
     of applying sections 101(f), 7702, and 7702A of the Code.
       The provision relating to treatment of eligible long-term 
     care premiums as a medical expense is effective for taxable 
     years beginning after December 31, 1996. The provision 
     treating amounts paid for long-term care services as a 
     medical expense (for purposes of the medical expense 
     deduction) is effective for services furnished in taxable 
     years beginning after December 31, 1997.
       The provisions relating to the maximum exclusion for 
     certain long-term care benefits and reporting are effective 
     for taxable years

[[Page H9550]]

     beginning after December 31, 1996. Thus, the initial year in 
     which reports will be filed with the IRS and copies provided 
     to the payee will be 1998, with respect to long-term care 
     benefits paid in 1997.
     Senate amendment
       The Senate amendment is the same as the House bill, except 
     as follows.
       Life insurance company reserves
       In determining reserves for insurance company tax purposes, 
     the Senate amendment provides that the Federal income tax 
     reserve method applicable for a long-term care insurance 
     contract issued after December 31, 1996, is the method 
     prescribed by the National Association of Insurance 
     Commissioners (``NAIC'') (or, if no reserve method has been 
     so prescribed, a method consistent with the tax reserve 
     method for life insurance, annuity or noncancellable accident 
     and health insurance contracts, whichever is most 
     appropriate). The method currently prescribed by the NAIC for 
     long-term care insurance contracts is the one-year full 
     preliminary term method. As under present law, however, in no 
     event may the tax reserve for a contract as of any time 
     exceed the amount which would be taken into account with 
     respect to the contract as of such time in determining 
     statutory reserves.
       Exchanges of life insurance and other contracts for long-
           term care insurance contracts
       The exchange of a life insurance contract or an endowment 
     or annuity contract for a qualified long-term care insurance 
     contract is not taxable under the Senate amendment.
       Distributions from IRAs and retirement plans for long-term 
           care insurance
       The Senate amendment permits certain plans to make 
     distributions to pay premiums for long-term care insurance 
     for the individual or the individual's spouse and provides 
     that the 10-percent tax on early withdrawals does not apply 
     to such distributions. The provision applies to distributions 
     from individual retirement arrangements (``IRAs'') and 
     distributions attributable to elective deferrals to qualified 
     cash or deferred arrangements (sec. 401(k) plans), tax-
     sheltered annuities (sec. 403(b) plans), nonqualified 
     deferred compensation plans of governmental or tax-exempt 
     employers (sec. 457 plans), and section 501(c)(18) plans used 
     to pay premiums for long-term care insurance for the 
     individual or the individual's spouse. Such distributions are 
     includable in income (as under present law).
       Effective dates
       The effective dates are the same as the House bill, except 
     as follows.
       The provision treating long-term care services as a medical 
     expense is effective for taxable years beginning after 
     December 31, 1996.
       The change in treatment of reserves for long-term care 
     insurance contracts is effective for contracts issued after 
     December 31, 1996.
       The provision relating to tax-free exchanges of life 
     insurance, endowment and annuity contracts for long-term care 
     insurance contracts is effective for taxable years beginning 
     after December 31, 1997.
       The provision relating to certain distributions from IRSs 
     and elective deferrals used to pay long-term care insurance 
     premiums is effective for payments and distributions after 
     December 31, 1996.
     Conference agreement
       The conference agreement generally follows the House bill, 
     except as follows.
       Tax treatment and definition of long-term care insurance 
           contracts and qualified long-term care services
       Chronically ill individual.--The conference agreement 
     provides that, for purposes of determining whether an 
     individual is chronically ill, the number of activities of 
     daily living that are taken into account under the contract 
     may not be less than five. For example, a contract could 
     require that an individual be unable to perform (without 
     substantial assistance) two out of any five of the activities 
     listed in the bill. By contrast, a contract does not meet 
     this requirement if it required that an individual be unable 
     to perform two out of any four of the activities listed in 
     the bill.
       In addition, the conference agreement modifies the second 
     test for whether an individual is chronically ill (i.e., that 
     the individual has a level of disability similar to an 
     individual who is unable to perform (without substantial 
     assistance) at least two activities of daily living). Under 
     the conference agreement, this test is met if the individual 
     has been certified within the previous 12 months by a 
     licensed health care practitioner as having a similar level 
     of disability, as determined under regulations prescribed by 
     the Secretary in consultation with the Secretary of Health 
     and Human Services.
       Health care continuation rules.--The health care 
     continuation rules do not apply to coverage under a plan, 
     substantially all of the coverage under which is for 
     qualified long-term care services.
       State-maintained plans.--The conference agreement modifies 
     the definition of a qualified long-term care insurance 
     contract. Under the conference agreement, an arrangement is 
     treated as a qualified long-term care insurance contract if 
     an individual receives coverage for qualified long-term care 
     services under a State long-term care plan, and the terms of 
     the arrangement would satisfy the requirements for a long-
     term care insurance contract under the provision, were the 
     arrangement an insurance contract. For this purpose, a State 
     long-term care plan is any plan established and maintained by 
     a State (or instrumentality of such State) under which only 
     employees (and former employees, including retirees) of a 
     State or of a political subdivision or instrumentality of the 
     State, and their relatives, and their spouses and spouses' 
     relatives, may receive coverage only for qualified long-term 
     care services. Relative is defined as under section 
     152(a)(1)-(8). No inference is intended with respect to the 
     tax consequences of such arrangements under present law.
       Inclusions of excess long-term care benefits
       The conference agreement modifies the calculation of the 
     dollar cap applicable to aggregate payments under per diem 
     type long-term care insurance contracts and amounts received 
     with respect to a chronically ill individual pursuant to a 
     life insurance contract.\12\ The amount of the dollar cap 
     with respect to any one chronically ill individual (who is 
     not terminally ill) is $175 per day ($63,875 annually, as 
     indexed), reduced by the amount of reimbursements and 
     payments received by anyone for the cost of qualified long-
     term care services for the chronically ill individual. If 
     more than one payee receives payments with respect to any one 
     chronically ill individual, then everyone receiving periodic 
     payments with respect to the same insured is treated as one 
     person for purposes of the dollar cap. The amount of the 
     dollar cap is utilized first by the chronically ill person, 
     and any remaining amount is allocated in accordance with 
     Treasury regulations. If payments under such contracts exceed 
     the dollar cap, then the excess is excludable only to the 
     extent of actual costs (in excess of the dollar cap) incurred 
     for long-term care services. Amounts in excess of the dollar 
     cap, with respect to which no actual costs were incurred for 
     long-term care services, are fully includable in income 
     without regard to rules relating to return of basis under 
     Code section 72.
---------------------------------------------------------------------------
     \12\ See item D, below.
---------------------------------------------------------------------------
       The managers of the bill wish to clarify that, although the 
     legislation imposes a daily (or equivalent) dollar cap on the 
     amount of excludable benefits under certain types of long-
     term care insurance in certain circumstances, this limitation 
     is not intended to suggest a preference or otherwise convey 
     or facilitate a competitive advantage to one type of long-
     term care insurance compared to another type of long-term 
     care insurance.
       The Chairmen of the House Committee on Ways and Means and 
     the Senate Finance Committee shall jointly request that the 
     NAIC, in consultation with representatives of the insurance 
     industry and consumer organizations, develop and conduct a 
     study to determine the marketing and other effects, if any, 
     of the dollar limit on excludable long-term care benefits 
     under certain types of long-term care insurance contracts 
     under the bill. Such Chairmen are to request that the NAIC, 
     if it agrees to such request, shall submit the results of its 
     study to the such Committees by no later than two years after 
     agreeing to the request.
       The conference agreement modifies the reporting requirement 
     for payors of amounts excludable under the provision. Thus, 
     in addition to the reporting requirements of the House bill, 
     a payor is required to report the name, address, and taxpayer 
     identification number of the chronically ill individual on 
     account of whose condition such amounts are paid, and whether 
     the contract under which the amount is paid is a per diem-
     type contract.
       A grandfather rule is provided under the conference 
     agreement in the case of a per diem type contract issued to a 
     policyholder on or before July 31, 1996. Under the 
     grandfather rule, the amount of the dollar cap with respect 
     to such a per diem contract is calculated without any 
     reduction for reimbursements for qualified long-term care 
     services under any other contract issued with respect to the 
     same insured on or before July 31, 1996. The other provisions 
     of the dollar cap are not affected by the grandfather rule. 
     The grandfather rule ceases to apply as of the time that any 
     of the contracts issued on or before July 31, 1996, with 
     respect to the insured are exchanged, or benefits are 
     increased.
       Life insurance company reserves
       The conference agreement includes the Senate amendment 
     provision with respect to life insurance reserves. Thus, 
     under the conference agreement, in determining reserves for 
     insurance company tax purposes, the Senate amendment provides 
     that the Federal income tax reserve method applicable for a 
     long-term care insurance contract is the method prescribed by 
     the NAIC (or, if no reserve method has been so prescribed, a 
     method consistent with the tax reserve method for life 
     insurance, annuity or noncancellable accident and health 
     insurance contracts, whichever is most appropriate). As under 
     present law, in no event may the tax reserve for a contract 
     as of any time exceed the amount which would be taken into 
     account with respect to the contract as of such time in 
     determining statutory reserves.
       Consumer protection provisions
       The conference agreement clarifies and modifies the 
     category of contracts to which the consumer protection 
     provisions apply. The conference agreement clarifies that the 
     consumer protection provisions that apply with respect to the 
     terms of the contract apply only for purposes of determining 
     whether a contract is a qualified long-term

[[Page H9551]]

     care insurance contract (within the meaning of the bill).
       The conference agreement provides that, for purposes of 
     both the requirements as to contract terms and the 
     requirements relating to issuers of contracts, the 
     determination of whether any requirement of a model 
     regulation or model Act has been met is made by the Secretary 
     of the Treasury. It is not intended that the Secretary create 
     a Federal standard, but rather, look to applicable or 
     appropriate State standards or to those provided specifically 
     in the model regulation or model Act.
       The conference agreement modifies the $100-per-day tax on 
     failure to satisfy the requirements for issuers of contracts, 
     to provide that the amount of the tax imposed is $100 per 
     insured per day. The conference agreement provides that the 
     consumer protection requirements for issues of contracts 
     apply with respect to contracts that are qualified long-term 
     care insurance contracts (within the meaning of the bill).
       The conference agreement modifies the rule relating to 
     State establishment of standards relating to contract terms 
     or issuers of contracts. The conference agreement provides 
     that an otherwise qualified long-term care insurance contract 
     will not fail to be a qualified long-term care insurance 
     contract, and will not be treated as failing to meet the 
     analogous requirement under the conference agreement, solely 
     because it satisfies a consumer protection standard imposed 
     under applicable State law that is more stringent than the 
     analogous standard provided in the bill. The conference 
     agreement does not preclude States from enacting more 
     stringent consumer protection provisions than the analogous 
     standards under the bill.
       Effective date
       The conference agreement follows the Senate amendment with 
     respect to the effective date of the provision treating long-
     term care services as a medical expenses. Thus, under the 
     conference agreement, this provision is effective for taxable 
     years beginning after December 31, 1996.
       The conference agreement provides that the provision 
     relating to life insurance company reserves is effective for 
     contracts issued after December 31, 1997.


    d. treatment of accelerated death benefits under life insurance 
                               contracts

       (Secs. 331-332 of the House bill and secs. 431-432 of the 
     Senate amendment).
     Present law
       Treatment of amounts received under a life insurance 
           contract
       If a contract meets the definition of a life insurance 
     contract, gross income does not include insurance proceeds 
     that are paid pursuant to the contract by reason of the death 
     of the insured (sec. 101(a)). In addition, the undistributed 
     investment income (``inside buildup'') earned on premiums 
     credited under the contract is not subject to current 
     taxation to the owner of the contract. The exclusion under 
     section 101 applies regardless of whether the death benefits 
     are paid as a lump sum or otherwise.
       Amounts received under a life insurance contract (other 
     than a modified endowment contract) prior to the death of the 
     insured are includable in the gross income of the recipient 
     to the extent that the amount received constitutes cash value 
     in excess of the taxpayer's investment in the contract 
     (generally, the investment in the contract is the aggregate 
     amount of premiums paid less amounts previously received that 
     were excluded from gross income).
       If a contract fails to be treated as a life insurance 
     contract under section 7702(a), inside buildup on the 
     contract is generally subject to tax (sec. 7702(g)).
       Requirements for a life insurance contract
       To qualify as a life insurance contract for Federal income 
     tax purposes, a contract must be a life insurance contract 
     under the applicable State or foreign law and must satisfy 
     either of two alternative tests: (1) cash value accumulation 
     test or (2) a test consisting of a guideline premium 
     requirement and a cash value corridor requirement (sec. 
     7702(a)). A contract satisfies the cash value accumulation 
     test if the cash surrender value of the contract may not at 
     any time exceed the net single premium that would have to be 
     paid at such time to fund future benefits under the contract. 
     A contract satisfies the guideline premium and cash value 
     corridor tests if the premiums paid under the contract do not 
     at any time exceed the greater of the guideline single 
     premium or the sum of the guideline level premiums, and if 
     the death benefit under the contract is not less than a 
     varying statutory percentage of the cash surrender value of 
     the contract.
       Proposed regulations on accelerated death benefits
       The Treasury Department has issued proposed regulations 
     \13\ under which certain ``qualified accelerated death 
     benefits'' paid by reason of the terminal illness of an 
     insured would be treated as paid by reason of the death of 
     the insured and therefore qualify for exclusion under section 
     101. In addition, the proposed regulations would permit an 
     insurance contract that includes a qualified accelerated 
     death benefit rider to qualify as a life insurance contract 
     under section 7702. Thus, the proposed regulations provide 
     that including this benefit would not cause an insurance 
     contract to fail to meet the definition of a life insurance 
     contract.
---------------------------------------------------------------------------
     \13\ Prop. Treas. Reg. Secs. 1.101-8, 1.7702.0, 1.7702.2, and 
     1.7702A-1 (December 15, 1992).
---------------------------------------------------------------------------
       Under the proposed regulations, a benefit would qualify as 
     a qualified accelerated death benefit only if it meets three 
     requirements. First, the accelerated death benefit can be 
     payable only if the insured becomes terminally ill. Second, 
     the amount of the benefit must equal or exceed the present 
     value of the reduction in the death benefit otherwise 
     payable.\14\ Third, the cash surrender value and the death 
     benefit payable under the policy must be reduced 
     proportionately as a result of the accelerated death benefit.
---------------------------------------------------------------------------
     \14\ For purposes of determining the present value under the 
     proposed regulations, the maximum permissible discount rate 
     would be the greater of (1) the applicable Federal rate that 
     applies under the discounting rules for property and casualty 
     insurance loss reserves, and (2) the interest rate applicable 
     to policy loans under the contract. Also, the present value 
     would be determined assuming that the death benefit would 
     have been paid twelve months after payment of the accelerated 
     death benefit.
---------------------------------------------------------------------------
       For purposes of the proposed regulations, an insured would 
     be treated as terminally ill if he or she has an illness 
     that, despite appropriate medical care, the insurer 
     reasonably expects to result in death within twelve months 
     from the payment of the accelerated death benefit. The 
     proposed regulations would not apply to viatical settlements.
     House bill
       The House bill provides an exclusion from gross income as 
     an amount paid by reason of the death of an insured for (1) 
     amounts received under a life insurance contract and (2) 
     amount received for the sale or assignment of a life 
     insurance contract to a qualified viatical settlement 
     provider, provided that the insured under the life insurance 
     contract is either terminally ill or chronically ill. The 
     exclusion for amounts received under a life insurance 
     contract on the life of an insured who is chronically ill 
     applies if the amount is received under a rider or other 
     provision of the contract that is treated as a long-term care 
     insurance contract under section 7702B (as added by the 
     bill), and the amount is excludable as a payment for long-
     term care services under section 7702B (including under the 
     dollar cap on per diem type payments ($175 per day, or 
     $63,875 annually, in 1997).
       The provision does not apply in the case of an amount paid 
     to any taxpayer other than the insured, if such taxpayer has 
     an insurable interest by reason of the insured being a 
     director, officer or employee of the taxpayer, or by reason 
     of the insured being financial interested in any trade or 
     business carried on by the taxpayer.
       A terminally ill individual is defined as one who has been 
     certified by a physician as having an illness or physical 
     condition that reasonably can be expected to result in death 
     within 24 months of the date of certification. A physician is 
     defined for this purpose in the same manner as under the 
     long-term care insurance rules of the bill.\15\
---------------------------------------------------------------------------
     \15\ A physician is defined for these purposes as in section 
     1861(r)(1) of the Social Security Act, which provides that a 
     physician means a doctor of medicine or osteopathy legally 
     authorized to practice medicine and surgery by the State in 
     which he performs such function or action (including a 
     physician within the meaning of section 1101(a)(7) of that 
     Act). Section 1101(a)(7) of that Act provides that the term 
     physician includes osteopathic practitioners within the scope 
     of their practice as defined by State law.
---------------------------------------------------------------------------
       A chronically ill individual is defined under the long-term 
     care provisions of the bill.\16\ In the case of amounts 
     received with respect to a chronically ill individual (but 
     not amounts received by reason of the individual being 
     terminally ill), the $175 per day ($63,875 annual) limitation 
     on excludable benefits that applies for per diem type long-
     term care insurance contracts also limits amounts that are 
     excludable with respect to such contracts under this 
     provision.
---------------------------------------------------------------------------
     \16\ Thus, a chronically ill individual is one who has been 
     certified within the previous 12 months by a licensed health 
     care practitioner as (1) being unable to perform (without 
     substantial assistance) at least 2 activities of daily living 
     for at least 90 days due to a loss of functional capacity, 
     (2) having a similar level of disability as determined by the 
     Secretary of the Treasury in consultation with the Secretary 
     of Health and Human Services, or (3) requiring substantial 
     supervision to protect such individual from threats to health 
     and safety due to severe cognitive impairment. Activities of 
     daily living are eating, toileting, transferring, bathing, 
     dressing and continence. Nothing in the bill requires the 
     contract to take into account all of the activities of daily 
     living.
---------------------------------------------------------------------------
       The payor of a payment to which this provision applies is 
     required to report to the IRS the aggregate amount of such 
     benefits paid to any individual during any calendar year, and 
     the name, address and taxpayer identification number of such 
     individual. A copy of the report must be provided to the 
     payee by January 31 following the year of payment, showing 
     the name of the payer and the aggregate amount of such 
     benefits paid to the individual during the calendar year. 
     Failure to file the report or provide the copy to the payee 
     is subject to the generally applicable penalties for failure 
     to file similar information reports.
       A qualified viatical settlement provider is any person that 
     regularly purchases or takes assignments of life insurance 
     contracts on the lives of the terminally ill individuals and 
     either (1) is licensed for such purposes in the State in 
     which the insured resides; or (2) if the person is not 
     required to be licensed by that State, meets the requirements 
     of sections 8 and 9 of the Viatical Settlements Model Act 
     (issued by the National Association of Insurance 
     Commissioners (NAIC)), and also meets the section of the NAIC

[[Page H9552]]

     Viatical Settlements Model Regulation relating to standards 
     for evaluation of reasonable payments, including discount 
     rates, in determining amounts paid by the viatical settlement 
     provider.
       For life insurance company tax purposes, the bill provides 
     that a life insurance contract is treated as including a 
     reference to a qualified accelerated death benefit rider to a 
     life insurance contract (except in the case of any rider that 
     is treated as a long-term care insurance contract under 
     section 7702B, as added by the bill). A qualified accelerated 
     death benefit rider is any rider on a life insurance contract 
     that provides only for payments of a type that are excludable 
     under this provision.
       Effective date
       The provision applies to amounts received after December 
     31, 1996. The provision treating a qualified accelerated 
     death benefit rider as life insurance for life insurance 
     company tax purposes takes effect on January 1, 1997. The 
     issuance of a qualified accelerated death benefit rider to a 
     life insurance contract, or the addition of any provision 
     required to conform an accelerated death benefit rider to 
     these provisions, is not treated as a modification or 
     material change to the contract (and is not intended to 
     affect the issue date of any contract under section 101(f)).
     Senate amendment
       The Senate amendment is the same as the House bill, except 
     that, in the case of a chronically ill insured, while the 
     Senate amendment does provide that the exclusion for amounts 
     received under a life insurance contract applies if the 
     amount is received under a rider or other provision of the 
     contract that is treated as a long-term care insurance 
     contract under section 7702B (as added by the bill), the 
     Senate amendment does not include the explicit language of 
     the House bill requiring that the amount be treated as a 
     payment for long-term care services under section 7702B.
     Conference agreement
       The conference agreement follows the House bill and the 
     Senate amendment, with technical modifications and 
     clarifications.
       The conference agreement provides that the amount paid for 
     the sale or assignment of any portion of the death benefit 
     under a life insurance contract on the life of a terminally 
     or chronically ill individual to a viatical settlement 
     provider is excludable by the recipient as an amount paid 
     under the contract by reason of the death of the insured. For 
     example, the sale or assignment of a life insurance contract 
     that has a rider providing for long-term care insurance, 
     payments under which rider are funded by and reduce the death 
     benefit, is considered the sale or assignment of the death 
     benefit. Sale or assignment of a stand-alone rider providing 
     for long-term care insurance (where payments under the rider 
     are not funded by reductions in the death benefit), however, 
     is not considered the sale or assignment of the death 
     benefit.
       The conference agreement provides that a viatical 
     settlement provider is any person regularly engaged in the 
     trade or business of purchasing or taking assignments of life 
     insurance contracts on the lives of insured individuals who 
     are terminally ill or chronically ill, so long as the 
     viatical settlement provider meets certain requirements. The 
     viatical settlement provider must either (1) be licensed, in 
     the State where the insured resides, to engage in such 
     transactions with terminally ill individuals (if the insured 
     is terminally ill) or with chronically ill individuals (if 
     the insured is chronically ill), or (2) if such licensing 
     with respect to the insured individual is not required in the 
     State, meet other requirements depending on whether the 
     insured is terminally or chronically ill. If the insured is 
     terminally ill, the viatical settlement provider must meet 
     the requirements of sections 8 and 9 of the Viatical 
     Settlements Model Act, relating to disclosure and general 
     rules (issued by the National Association of Insurance 
     Commissioner (NAIC)), and also meet the section of the NAIC 
     Viatical Settlements Model Regulation relating to standards 
     for evaluation of reasonable payments, including discount 
     rates, in determining amounts paid by the viatical settlement 
     provider. If the insured is chronically ill, the viatical 
     settlement provider must meet requirements similar to those 
     of sections 8 and 9 of the NAIC Viatical Settlements Model 
     Act, and also must meet the standards, if any, promulgated by 
     the NAIC for evaluating the reasonableness of amounts paid in 
     viatical settlement transactions with chronically ill 
     individuals.
       The conference agreement clarifies the rules for 
     chronically ill insureds so that the tax treatment of 
     payments with respect to chronically ill individuals is 
     reasonably similar under the long-term care rules of the bill 
     and under this provision. In the case of a chronically ill 
     individual, the exclusion under this provision with respect 
     to amounts paid under a life insurance contract and amounts 
     paid in a sale or assignment to a viatical settlement 
     provider applies if the payment received is for costs 
     incurred by the payee (not compensated by insurance or 
     otherwise) for qualified long-term care services (as defined 
     under the long-term care rules of the bill) for the insured 
     person for the period, and two other requirements (similar to 
     requirements applicable to long-term care insurance contracts 
     under the bill) are met. The first requirement is that under 
     the terms of the contract giving rise to the payment, the 
     payment is not a payment or reimbursement of expenses 
     reimbursable under Medicare (except where Medicare is a 
     secondary payor under the arrangement, or the arrangement 
     provides for per diem or other periodic payments without 
     regard to expenses for qualified long-term care services). 
     The conference agreement provides that no provision of law 
     shall be construed or applied so as to prohibit the offering 
     of such a contract giving rise to such a payment on the basis 
     that the contract coordinates its payments with those 
     provided under Medicare. The second requirement is that the 
     arrangement complies with those consumer protection 
     provisions applicable under the bill to long-term care 
     insurance contracts and issuers that are specified in 
     Treasury regulations. It is intended that such guidance 
     incorporate rules similar to those of section 6F (relating to 
     right to return, permitting the payee 30 days to rescind the 
     arrangement) of the NAIC Long-Term Care Insurance Model Act, 
     and section 13 (relating to requirements for application, 
     requiring that the payee be asked if he or she already has 
     long-term care insurance, Medicaid, or similar coverage) of 
     the NAIC Long-Term Care Insurance Model Regulations. If the 
     NAIC or the State in which the policyholder resides issues 
     standards relating to chronically ill individuals, then the 
     analogous requirements under Treasury regulations cease to 
     apply.
       An individual who meets the definition of a terminally ill 
     individual is not treated as chronically ill, for purposes of 
     this provision.
       Payments made on a per diem or other periodic basis, 
     without regard to expenses incurred for qualified long-term 
     care services, are nevertheless excludable under this 
     provision, subject to the dollar cap on excludable benefits 
     that applies for amounts that are excludable under per diem 
     type long-term care insurance contracts. The conference 
     agreement modifies the calculation of the dollar cap 
     applicable to aggregate payments under per diem type long-
     term care insurance contracts and amounts received with 
     respect to a chronically ill individual pursuant to a life 
     insurance contract.\17\ The amount of the dollar cap with 
     respect to the aggregate amount received under per diem type 
     long-term care insurance contracts and this provision with 
     respect to any one chronically ill individual (who is not 
     terminally ill) is $175 per day ($63,875 annually) (indexed), 
     reduced by the amount of reimbursements and payments received 
     by anyone for the cost of qualified long-term care services 
     for the chronically ill individual. If more than one payee 
     receives payments with respect to any one chronically ill 
     individual, the amount of the dollar cap is utilized first by 
     the chronically ill person, and any remaining amount is 
     allocated in accordance with Treasury regulations. If 
     payments under such contracts exceed the dollar cap, then the 
     excess is excludable only to the extent of actual costs 
     incurred for long-term care services. Amounts in excess of 
     the dollar cap, with respect to which no actual costs (in 
     excess of the dollar cap) were incurred for long-term care 
     services, are fully includable in income without regard to 
     rules relating to return of basis under Code section 72.
---------------------------------------------------------------------------
     \17\ See item C, above.
---------------------------------------------------------------------------
       The conference agreement modifies the reporting requirement 
     for payors of amounts excludable under the provision. Thus, 
     in addition to the reporting requirements of the House bill, 
     a payor is required to report the name, address, and taxpayer 
     identification number of the chronically ill individual on 
     account of whose condition such amounts are paid, and whether 
     the contract under which the amount is paid is a per diem-
     type contract.


    e. exemption from income tax for state-sponsored organizations 
  providing health coverage for high-risk individuals; exemption from 
   income tax for state-sponsored workers' compensation reinsurance 
                             organizations

       (Sec. 341 of the House bill and sec. 451 of the Senate 
     amendment).
     Present law
       In general, the Internal Revenue Service (``IRS'') takes 
     the position that organizations that provide insurance for 
     their members or other individuals are not considered to be 
     engaged in a tax-exempt activity. The IRS maintains that such 
     insurance activity is either (1) a regular business of a kind 
     ordinarily carried on for profit, or (2) an economy or 
     convenience in the conduct of members' businesses because it 
     relieves the members from obtaining insurance on an 
     individual basis.
       Certain insurance risk pools have qualified for tax 
     exemption under Code section 501(c)(6). In general, these 
     organizations (1) assign any insurance policies and 
     administrative functions to their member organizations 
     (although they may reimburse their members for amounts paid 
     and expenses), (2) serve an important common business 
     interest of their members, and (3) must be membership 
     organizations financed, at least in part, by membership dues.
       State insurance risk pools may also qualify for tax-exempt 
     status under section 501(c)(4) as a social welfare 
     organizations or under section 115 as serving an essential 
     governmental function of a State. In seeking qualification 
     under section 501(c)(4), insurance organizations generally 
     are constrained by the restrictions on the provision of 
     ``commercial-type insurance'' contained in section

[[Page H9553]]

     501(m). Section 115 generally provides that gross income does 
     not include income derived from the exercise of any essential 
     governmental function and accruing to a State or any 
     political subdivision thereof. However, the IRS may be 
     reluctant to rule that particular State risk-pooling entities 
     satisfy the section 501(c)(4) or 115 requirements for tax-
     exempt status.
     House bill
       Health coverage for high-risk individuals
       The House bill provides tax-exempt status to any membership 
     organization that is established by a State exclusively to 
     provide coverage for medical care on a nonprofit basis to 
     certain high-risk individuals, provided certain criteria are 
     satisfied.\18\ The organization may provide coverage for 
     medical care either by issuing insurance itself or by 
     entering into an arrangement with a health maintenance 
     organization (``HMO'').
---------------------------------------------------------------------------
     \18\ No inference is intended as to the tax treatment of 
     other types of State-sponsored organizations.
---------------------------------------------------------------------------
       High-risk individuals eligible to receive medical care 
     coverage from the organization must be residents of the State 
     who, due to a pre-existing medical condition, are unable to 
     obtain health coverage for such condition through insurance 
     or an HMO, or are able to acquire such coverage only at a 
     rate that is substantially higher than the rate charged for 
     such coverage by the organization. The State must determine 
     the composition of membership in the organization. For 
     example, a State could mandate that all organizations that 
     are subject to insurance regulation by the State must be 
     members of the organization.
       The House bill further requires the State or members of the 
     organization to fund the liabilities of the organization to 
     the extent that premiums charged to eligible individuals are 
     insufficient to cover such liabilities. Finally, no part of 
     the net earnings of the organization can inure to the benefit 
     of any private shareholder or individual.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.
       Workers' compensation reinsurance organizations
       No provision.
     Senate amendment
       The Senate amendment is the same as the House bill.
     Conference agreement
       Health coverage for high-risk individuals
       The conference agreement follows the House bill and the 
     Senate amendment.
       Workers' compensation reinsurance organizations
       The conference agreement provides tax-exempt status to any 
     membership organization that is established by a State before 
     June 1, 1996, exclusively to reimburse its members for 
     workers' compensation insurance losses, and that satisfies 
     certain other conditions. A State must require that the 
     membership of the organization consist of all persons who 
     issue insurance covering workers' compensation losses in such 
     State, and all persons who issue insurance covering workers' 
     compensation losses in such State, and all persons and 
     governmental entities who self-insure against such losses. In 
     addition, the organization must operate as a nonprofit 
     organization by returning surplus income to members or to 
     workers' compensation policyholders on a periodic basis and 
     by reducing initial premiums in anticipation of investment 
     income.
       Effective date.--The provision applies to taxable years 
     ending after the date of enactment.


 f. health insurance organizations eligible for benefits of section 833

       (Sec. 351 of the House bill).
     Present law
       An organization described in sections 501(c)(3) or (4) of 
     the Code is exempt from tax only if no substantial part of 
     its activities consists of providing commercial-type 
     insurance (sec. 501(m)). Special rules apply to certain 
     eligible health insurance organizations. Eligible health 
     insurance organizations are (1) Blue Cross and Blue Shield 
     organizations existing on August 16, 1986, which have not 
     experienced a material change in structure or operations 
     since that date, and (2) other organizations that meet 
     certain community-service related requirements and 
     substantially all of whose activities involve the providing 
     of health insurance. Section 833 provides that eligible 
     organizations are generally treated as stock property and 
     casualty insurance companies.
       Section 833 provides a special deduction for eligible 
     organizations, equal to 25 percent of the claims and expenses 
     incurred during the year, less the adjusted surplus at the 
     beginning of the year. This deduction is calculated by 
     computing surplus, taxable income, claims incurred, expenses 
     incurred, tax-exempt income, net operating loss carryovers, 
     and other items attributable to health expenses. The 
     deduction may not exceed taxable income attributable to 
     health business for the year (calculated without regard to 
     this deduction).
       In addition, section 833 eliminates, for eligible 
     organizations, the 20 percent reduction in unearned premium 
     reserves that applies generally to all property and casualty 
     insurance companies.
     House bill
       The House bill applies the special rules under section 833 
     to the same extent they are provided to certain existing Blue 
     Cross or Blue Shield organizations, in the case of any 
     organization that (1) is not a Blue Cross or Blue Shield 
     organization existing on August 16, 1986, and (2) otherwise 
     meets the requirements of section 833(c)(2) (including the 
     requirement of no material change in operations or structure 
     since August 16, 1986). Under the provision, an organization 
     qualifies for this treatment only if (1) it is not a health 
     maintenance organization and (2) it is organized under and 
     governed by State laws which are specifically and exclusively 
     applicable to not-for-profit health insurance or health 
     service type organizations.
       Effective date.--The provision is effective for taxable 
     years ending after December 31, 1996.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement follows the House bill.


       g. penalty-free withdrawals from iras for medical expenses

       (Sec. 461 of the Senate amendment).
     Present law
       Amounts withdrawn from an individual retirement arrangement 
     (``IRA'') are includible in income (except to the extent of 
     any nondeductible contributions). In addition, a 10-percent 
     additional tax applies to withdrawals from IRAs made before 
     age 59\1/2\, unless the withdrawal is made on account of 
     death or disability or is made in the form of annuity 
     payments.
       A similar additional tax applies to early withdrawals from 
     employer-sponsored tax-qualified pension plans. However, the 
     10-percent additional tax does not apply to withdrawals form 
     such plans to the extent used for medical expenses that 
     exceed 7.5 percent of adjusted gross income (``AGI'').
     House bill
       No provision.
     Senate amendment
       The Senate amendment extends the exception to the 10-
     percent tax for medical expenses in excess of 7.5 percent of 
     AGI to withdrawals from IRAs. In addition, the Senate 
     amendment provides that the 10-percent additional tax does 
     not apply to withdrawals for medical insurance (without 
     regard to the 7.5 percent of AGI floor) if the individual 
     (including a self-employed individual) has received 
     unemployment compensation under Federal or State law for at 
     least 12 weeks, and the withdrawal is made in the year such 
     unemployment compensation is received or the following year. 
     If a self-employed individual is not eligible for 
     unemployment compensation under applicable law, then, to the 
     extent provided in regulations, a self-employed individual is 
     treated as having received unemployment compensation for at 
     least 12 weeks if the individual would have received 
     unemployment compensation but for the fact that the 
     individual was self-employed.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996.
     Conference agreement
       The conference agreement follows the Senate amendment, with 
     the modification that the exception ceases to apply if the 
     individual has been reemployed for at least 60 days.


 h. require treasury to include organ and tissue donation information 
                            with tax refunds

       (Sec. 307 of the Senate amendment).
     Present law
       There is no statutory requirement that Treasury include 
     organ and tissue donation information with any payment of a 
     refund of individual income taxes.
     House bill
       No provision.
     Senate amendment
       The Senate amendment requires Treasury to include organ and 
     tissue donation information with any payment of a refund of 
     individual income taxes made on or after February 1, 1997, 
     through June 30, 1997.
       Effective date.--The provision is effective for refunds 
     made on or after February 1, 1997, through June 30, 1997.
     Conference agreement
       The conference agreement generally follows the Senate 
     amendment, with two technical modifications. the first 
     modification requires that the organ donor card be included 
     to the extent particable. The second modification clarifies 
     that the organ donor card is to be included with the mailing 
     of any payment of a refund of individual income taxes.
       Effective date.--The provision is effective for refunds 
     made on or after February 1, 1997, through June 30, 1997.

Title IV. Application and Enforcement of Group Health Plan Requirements


   a. application and enforcement of group health plan portability, 
                 access, and renewability requirements

       (Sec. 104(b) of the House bill).
     Present Law
       Under present law, the health care continuation rules 
     (referred to as ``COBRA'' rules, after the Consolidated 
     Omnibus Budget Reconciliation Act of 1985 in which they were 
     enacted) require that most employer-sponsored group health 
     plans must offer certain employees and their dependents 
     (``qualified beneficiaries'') the option of purchasing

[[Page H9554]]

     continued health coverage in the case of certain qualifying 
     events. These qualifying events include: termination or 
     reduction in hours of employment, death, divorce or legal 
     separation, enrollment in Medicare, or the end of a child's 
     dependency under a parent's health plan. In general, the 
     maximum period of COBRA coverage is 18 months. An employer is 
     permitted to charge qualified beneficiaries 102 percent of 
     the applicable premium for COBRA coverage.
       A tax is imposed on the failure of a group health plan to 
     satisfy the COBRA rules. The tax must be imposed on the 
     employer sponsoring the plan in the case of a plan other than 
     a multiemployer plan, on the plan in the case of a 
     multiemployer plan, or on each person who is responsible for 
     administering or providing benefits under the plan if such 
     person has, by written agreement, assumed responsibility for 
     performing the act pursuant to which the violation occurs.
       The amount of the tax is generally equal to $100 per day 
     for each day on which there is a violation. The tax applies 
     separately with respect to each qualified beneficiary for 
     whom a failure occurs. In general, a tax will not be imposed 
     if the violation was unintentional and is corrected within 30 
     days. The maximum tax for unintentional violations that can 
     be imposed for a taxable year generally is the lesser of (1) 
     10 percent of the employer's payments under group health 
     plans (or under the trust funding the plan in the case of a 
     multiemployer plan), or (2) $500,000. If the tax is imposed 
     on another person responsible for administering or providing 
     benefits under the plan, the maximum penalty for failures 
     during the year is $2 million. The Secretary may waive all or 
     part of the tax to the extent that payment of the tax would 
     be excessive relative to the failure involved.
       Other than the COBRA rules, there are no other requirements 
     in the Code which apply to group health plans (or insurers or 
     health maintenance organizations (``HMOs'')) regarding 
     portability through limitations on preexisting condition 
     exclusions, prohibitions on excluding individuals from 
     coverage based on health status, and guaranteed renewability 
     of health plan coverage.
     House bill
       Under the House bill, group health plans, insurers, and 
     HMOs are subject to certain requirements regarding 
     portability through limitations on preexisting condition 
     exclusions and prohibitions on excluding individuals from 
     coverage based on health status. The House bill generally 
     extends the tax for failures to satisfy the COBRA rules to 
     failures to comply with these requirements.
       No tax is imposed on an insurer or HMO that is governed 
     under a State law that the Secretary of Health and Human 
     Services has determined to provide enforcement of similar 
     requirements. In addition, no tax may be imposed on a small 
     employer (defined as an employer who employs at least 2, but 
     fewer than 51 employees on a typical business day) that 
     provides health care benefits through a contract with an 
     insurer or HMO and the violation is solely because of the 
     product offered by the insurer or HMO under such contract. In 
     addition, no tax is imposed if there has been enforcement by 
     the Secretary of Labor or the Secretary of Health and Human 
     Services.
       Effective date.--The provision generally is effective with 
     respect to plan years beginning on or after January 1, 1998.
     Senate amendment
       No provision. The requirements in the Senate amendment on 
     group health plans, insurers, and HMOs regarding portability 
     through limitations on preexisting condition exclusions and 
     prohibitions on excluding individuals from coverage based on 
     health status are not applied or enforced through the Code.
     Conference agreement
       Under the conference agreement, group health plans are 
     subject to certain requirements regarding portability through 
     limitations on preexisting condition exclusions, prohibitions 
     on excluding individuals from coverage based on health 
     status, and guaranteed renewability of health insurance 
     coverage.\19\ The conference agreement incorporates these 
     requirements into the Code and generally imposes a tax with 
     respect to any failure of a group health plan to comply with 
     the requirements. The tax may generally be imposed on the 
     employer sponsoring the plan. However, the tax may be imposed 
     on the plan in the case of a multiemployer plan, and, with 
     respect to violations of the requirements relating to 
     guaranteed renewability, on the arrangement in the case of a 
     multiple employer welfare arrangement.
---------------------------------------------------------------------------
     \19\ These requirements are discussed earlier in greater 
     detail.
---------------------------------------------------------------------------
       The group health plan requirements contained in the Code do 
     not apply to governmental plans and plans which on the first 
     day of the plan year cover less than 2 current employees. In 
     addition, no tax may be imposed on a small employer (defined 
     as an employer who employed an average of 50 or fewer 
     employees on business days during the preceding calendar 
     year) that provides health care benefits through a contract 
     with an insurer or HMO and the violation is solely because of 
     the coverage offered by the insurer or HMO.
       The amount of the tax is generally equal to $100 per day 
     for each day during which a failure occurs until the failure 
     is corrected. The tax applies separately with respect to each 
     individual affected by the failure. In general, a tax will 
     not be imposed if the violation was unintentional and is 
     corrected within 30 days.\20\ The maximum tax for 
     unintentional violations that can be imposed generally is the 
     lesser of (1) 10 percent of the employer's payments during 
     the taxable year in which the failure occurred under group 
     health plans (or 10 percent of the amount paid by the 
     multiemployer plan or multiple employer welfare arrangement 
     during the plan year in which the failure occurred for 
     medical care, if applicable), or (2) $500,000. The Secretary 
     may waive all or part of the tax to the extent that payment 
     of the tax would be excessive relative to the failure 
     involved.
---------------------------------------------------------------------------
     \20\ In the case of a church plan, this correction is 
     generally extended to 270 days after the date of mailing by 
     the Secretary of a notice of default with respect to a 
     failure to comply with the group health plan requirements.
---------------------------------------------------------------------------
       Effective date.--The provision applies with respect to 
     failures of group health plans to satisfy the requirements 
     regarding portability through limitations on preexisting 
     condition exclusions, prohibitions on excluding individuals 
     from coverage based on health status, and guaranteed 
     renewability of health insurance coverage.


b. clarification of certain cobra health care continuation requirements

       (Sec. 121 of the Senate amendment).
     Present law
       Under present law, the health care continuation rules 
     (referred to as ``COBRA'' rules, after the Consolidated 
     Omnibus Budget Reconciliation Act of 1985 in which they were 
     enacted) require that most employer-sponsored group health 
     plans must offer certain employees and their dependents 
     (``qualified beneficiaries'') the option of purchasing 
     continued health coverage in the case of certain qualifying 
     events. These qualifying events include; termination or 
     reduction in hours of employment, death, divorce or legal 
     separation, enrollment in Medicare, or the end of a child's 
     dependency under a parent's health plan. In general, the 
     maximum period of COBRA coverage is 18 months. An employer is 
     permitted to charge qualified beneficiaries 102 percent of 
     the applicable premium for COBRA coverage. A $100 per day tax 
     generally may be assessed against employers (plans in the 
     case of multiemployer plans) for failures to comply with the 
     COBRA rules, subject to certain exceptions and limitations.
       The 18-month maximum COBRA coverage period is extended to 
     29 months if the qualified beneficiary is determined under 
     the Social Security Act to have been disabled at the time of 
     the qualifying event and the qualified beneficiary provides 
     notice of such determination to the employer before the end 
     of the 18-month period. A qualified beneficiary has 60 days 
     to notify the employer of a disability determination. During 
     the 11-month period of extended COBRA coverage, the qualified 
     beneficiary may be charged 150 percent of the applicable 
     premium.
       COBRA coverage may be terminated before the 18-month 
     maximum coverage period in the case of certain events. These 
     include: the employer ceases to maintain any group health 
     plan, the qualified beneficiary fails to pay the premium, the 
     qualified beneficiary becomes covered under another group 
     health plan with no preexisting condition limitation or 
     exclusion, or the qualified beneficiary becomes entitled to 
     Medicare.
       Under present law, the term qualified beneficiary only 
     includes individuals who were either the spouse or the 
     dependent of the covered employee at the time of the 
     qualifying event.
       A group health plan is required to notify each covered 
     employee and the covered employee's spouse of their COBRA 
     rights upon commencement of participation in the plan. 
     Further, the group health plan administrator must notify each 
     qualified beneficiary of their COBRA rights within 14 days 
     after notification of the occurrence of a qualifying event.
     House bill
       No provision. However, the House bill modifies the COBRA 
     rules so that the penalties applicable to failures to comply 
     with the COBRA rules generally apply to failures to comply 
     with the requirements in the House bill on group health 
     plans, insurers, and health maintenance organizations 
     (``HMOs'') regarding portability through limitations on 
     preexisting condition exclusions and prohibitions on 
     excluding individuals from coverage based on health status.
     Senate amendment
       The Senate amendment modifies the COBRA rules by clarifying 
     that the extended maximum COBRA coverage period of 29 months 
     in cases of disability also applies to the disabled qualified 
     beneficiary of the covered employee. In addition, the Senate 
     amendment provides the extended COBRA coverage if the 
     disability exists at any time during the initial 18-month 
     COBRA coverage period as opposed to requiring the disability 
     to exist at the time of the qualifying event. As under 
     present law, the disability determination still has to be 
     made, and the notice of the disability still has to be given, 
     before the end of the initial COBRA coverage period.

[[Page H9555]]

       The Senate amendment coordinates the COBRA rules with the 
     new requirements regarding preexisting condition exclusions 
     so that COBRA coverage can be terminated if a qualified 
     beneficiary becomes covered under another group health plan, 
     even if such group health plan contains a preexisting 
     condition limitation or exclusion, provided the preexisting 
     condition limitation or exclusion does not apply to the 
     qualified beneficiary by reason of the new requirements 
     restricting the application of preexisting condition 
     limitations and exclusions.
       The Senate amendment also modifies the definition of 
     qualified beneficiary to include a child born to our placed 
     for adoption with the covered employee during the period of 
     COBRA coverage. Consequently, since the health care 
     availability provisions in the Senate amendment require group 
     health plans to allow participants to change their coverage 
     status (i.e., to change from individual coverage to family 
     coverage, or to add on the new child) upon the birth or 
     adoption of a new child, COBRA participants would also be 
     allowed to change their coverage status upon the birth or 
     adoption of a new child.
       The Senate amendment requires a group health plan to notify 
     each qualified beneficiary who has elected COBRA coverage of 
     the changes to the COBRA rules contained in the Senate 
     amendment no later than November 1, 1996.
       Effective date.--The provision applies to qualifying events 
     occurring on or after the date of enactment for plan years 
     beginning after December 31, 1997.
     Conference agreement
       The conference agreement follows the Senate amendment, 
     except the extended period of COBRA coverage in cases of 
     disability applies if the disability exists at any time 
     during the first 60 days of COBRA coverage.
       Effective date.--The provision is effective on January 1, 
     1997, regardless of whether the qualifying event occurred 
     before, on, or after such date.

                        TITLE V. REVENUE OFFSETS


   a. disallow interest deduction for corporate-owned life insurance 
                              policy loans

       (Sec. 495 of the Senate amendment).
      Present law
       No Federal income tax generally is imposed on a 
     policyholder with respect to the earnings under a life 
     insurance contract (``inside buildup''). \21\ Further, an 
     exclusion from Federal income tax is provided for amounts 
     received under a life insurance contract paid by reason of 
     the death of the insured (sec. 101(a)). The policyholder may 
     borrow with respect to the life insurance contract without 
     affecting these exclusions, subject to certain limitations.
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     \21\ This favorable tax treatment is available only if a life 
     insurance contract meets certain requirements designed to 
     limit the investment character of the contract (sec. 7702). 
     Distributions from a life insurance contract (other than a 
     modified endowment contract) that are made prior to the death 
     of the insured generally are includible in income, to the 
     extent that the amounts distributed exceed the taxpayer's 
     basis in the contract; such distributions generally are 
     treated first as a tax-free recovery of basis, and then as 
     income (sec. 72(e)). In the case of a modified endowment 
     contract, however, in general, distributions are treated as 
     income first, loans are treated as distributions (i.e., 
     income rather than basis recovery first), and an additional 
     10 percent tax is imposed on the income portion of 
     distributions made before age 59-\1/2\ and in certain other 
     circumstances (secs. 72 (e) and (v)). A modified endowment 
     contract is a life insurance contract that does not meet a 
     statutory ``7-pay'' test, i.e., generally is funded more 
     rapidly than 7 annual level premiums (sec. 7702A).
---------------------------------------------------------------------------
       The limitations on borrowing with respect to a life 
     insurance contract under present law provide that no 
     deduction is allowed for any interest paid or accrued on any 
     indebtedness with respect to one or more life insurance 
     policies owned by the taxpayer covering the life of any 
     individual who (1) is an officer or employee of, or (2) is 
     financially interested in, any trade or business carried on 
     by the taxpayer to the extent that the aggregate amount of 
     such debt with respect to policies covering the individual 
     exceeds $50,000 (sec. 264(a)(4)).
       Further, no deduction is allowed for any amount paid or 
     accrued on debt incurred or continued to purchase or carry a 
     life insurance, endowment, or annuity contract pursuant to a 
     plan of purchase that contemplates the systematic direct or 
     indirect borrowing of part or all of the increases in the 
     cash value of the contract.\22\ An exception to the latter 
     rule is provided, permitting deductibility of interest on 
     bona fide debt that is part of such a plan, if no part of 4 
     of the annual premiums due during the first 7 years is paid 
     by means of debt (the ``4-out-of-7 rule'') (sec. 264(c)(1)). 
     Provided the transaction gives rise to debt for Federal 
     income tax purposes, and provided the 4-out-of-7 rule is 
     met,\23\ a company may under present law borrow up to $50,000 
     per employee, officer, or financially interested person to 
     purchase or carry a life insurance contract covering such a 
     person, and is not precluded under section 264 from deducting 
     the interest on the debt, even though the earnings inside the 
     life insurance contract (inside buildup) are tax-free, and in 
     fact the taxpayer has full use of the borrowed funds.
---------------------------------------------------------------------------
     \22\ The statute provides that the $50,000 limitation applies 
     only with respect to contracts purchased after June 20, 1986. 
     However, additional limitations are imposed on the 
     deductibility of interest with respect to single premium 
     contracts (sec. 264(a)(2)), and on the deductibility of 
     premiums paid on a life insurance contract covering the life 
     of any officer or employee or person financially interested 
     in a trade or business of the taxpayer when the taxpayer is 
     directly or indirectly a beneficiary under the contract (sec. 
     264(a)(1)).
     \23\ Interest deductions are disallowed if any of the 
     disallowance rules of section 264(a) (2)-(4) apply. The 
     disallowance rule of section 264(a)(3) is not applicable if 
     one of the exceptions of section 264(c), such as the 4-out-
     of-7 rule (sec. 264(c)(1)) is satisfied. In addition to the 
     specific disallowance rules of section 264, generally 
     applicable principles of tax law apply.
---------------------------------------------------------------------------
     House bill
       No provision.
     Senate amendment
       Under the Senate amendment, no deduction is allowed for 
     interest paid or accrued on any indebtedness with respect to 
     one or more life insurance policies or annuity or endowment 
     contracts owned by the taxpayer covering any individual who 
     is (1) an officer or employee of, or (2) financially 
     interested in, any trade or business carried on by the 
     taxpayer, regardless of the aggregate amount of debt with 
     respect to policies or contracts covering the individual.
       An exception is provided retaining present law for interest 
     on indebtedness with respect to life insurance policies 
     covering up to 10 key persons. A key person is an individual 
     who is either an officer or a 20-percent owner of the 
     taxpayer. The number of individuals that can be treated as 
     key persons may not exceed the greater of (1) 5 individuals, 
     or (2) the lesser of 5 percent of the total number of 
     officers and employees of the taxpayer or 10 individuals. 
     Interest paid or accrued on debt with respect to a life 
     insurance contract covering a key person is deductible only 
     to the extent the rate of interest does not exceed Moody's 
     Corporate Bond Yield Average--Monthly Average Corporates for 
     each month interest is paid or accrued.
       Effective date.--The Senate amendment provision generally 
     is effective with respect to interest paid or accrued after 
     December 31, 1995 (subject to a phase-in rule).
       The phase-in rule provides that with respect to debt 
     incurred before January 1, 1996, any otherwise deductible 
     interest paid or accrued after October 13, 1995, and before 
     January 1, 1999, is allowed to the extent the rate of 
     interest does not exceed the lesser of (1) the borrowing rate 
     specified in the contract as of October 13, 1995, or (2) a 
     percentage of Moody's Corporate Bond Yield Average--Monthly 
     Average Corporates for each month the interest is paid or 
     accrued. For interest paid or accrued after October 13, 1995, 
     and before January 1, 1996, the percentage of the Moody's 
     rate is 100 percent; for interest paid or accrued in 1996, 
     the percentage is 90 percent; for interest paid or accrued in 
     1997, the percentage is 80 percent; for 1998, the percentage 
     is 70 percent; for 1999 and thereafter, the percentage is 0 
     percent. Only interest that would have been allowed as a 
     deduction but for the provision is allowed under the phase-
     in. Interest that is deductible under the phase-in rules does 
     not include interest on borrowings by the taxpayer with 
     respect to contracts on the lives of more than 20,000 insured 
     individuals, effective for interest paid or accrued after 
     December 31, 1995. For this purpose, all persons treated as a 
     single employer are treated as one taxpayer.
       An exception is provided under the effective date with 
     respect to any life insurance contract entered into during 
     1994 or 1995. In the case of such contracts, with respect to 
     debt incurred before January 1, 1997, a deduction is allowed 
     for interest (that is otherwise deductible) only (1) with 
     respect to policies that satisfy the key person exception, 
     and (2) as provided under the phase-in rule. Thus, with 
     respect to interest on amounts borrowed during 1996 with 
     respect to such a contract, the phase-in rule applies, 
     capping the rate for determining the amount of deductible 
     interest at the lesser of (1) the borrowing rate specified in 
     the contracts as of October 13, 1995, or (2) the applicable 
     percentage of Moody's Corporate Bond Yield Average--Monthly 
     Average Corporates for each month the interest is paid or 
     accrued. For example, for interest paid or accrued in 1996 on 
     amounts borrowed in 1996 with respect to such a contract, the 
     applicable percentage is 90 percent.
       The provision generally does not apply to interest on debt 
     with respect to contracts purchased on or before June 20, 
     1986 (thus generally continuing the effective date provision 
     of the $50,000 limitation enacted in the 1986 Act.) If the 
     policy loan interest rate under such a contract provides for 
     a fixed rate of interest, then interest on such a contract 
     paid or accrued after October 13, 1995, is allowable only to 
     the extent the fixed rate of interest does not exceed Moody's 
     Corporate Bond Yield Average--Monthly Average Corporates for 
     the month in which the contract was purchased. If the policy 
     loan interest rate under such a contract does not provide for 
     a fixed rate of interest, then interest on such a contract 
     paid or accrued after October 13, 1995, is allowable only to 
     the extent the rate of interest for each fixed period 
     selected by the taxpayer does not exceed Moody's Corporate 
     Bond Yield Average--Monthly Average Corporates, for the month 
     immediately preceding the beginning of the fixed period. The 
     fixed period must be 12 months or less. it is intended that 
     conforming a contract to satisfy this interest rate 
     limitation not be treated as a material modification for 
     purposes of this grandfather rule or sections 101(f), 7702 or 
     7702A. No inference is intended as to whether such a change 
     is a material modification under present law.
       Any amount included in income during 1996, 1997, or 1998, 
     that is received under a contract described in the proposal 
     on the

[[Page H9556]]

     complete surrender, redemption or maturity of the contract or 
     in full discharge of the obligation under the contract that 
     is in the nature of a refund of the consideration paid for 
     the contract, is includable ratably over the first 4 taxable 
     years beginning with the taxable year the amount would 
     otherwise have been includable. Utilization of this 4-year 
     income-spreading rule does not cause interest paid or accrued 
     prior to January 1, 1999, to be nondeductible solely by 
     reason of (1) failure to meet the 4-out-or-7 rule, or (2) 
     causing the contract to be treated as single premium contract 
     within the meaning of section 264(b)(1) (i.e., a contract in 
     which substantially all of the premiums are paid within 4 
     years after the date of purchase). In addition, the lapse of 
     a contract after October 13, 1995, due to nonpayment of 
     premiums does not cause interest paid or accrued prior to 
     January 1, 1999, to be nondeductible solely by reason of (1) 
     failure to meet the 4-out-of-7 rule, or (2) causing the 
     contract to be treated as a single premium contract within 
     the meaning of section 264(b)(1).
       In the case of an insurance company, the unamortized 
     balance of policy expense attributable to a contract with 
     respect to which the 4-year income-spreading treatment is 
     allowed to the policyholder is deductible in the year in 
     which the transaction giving rise to income-spreading occurs.
       No inference, is intended as to the treatment of interest 
     paid or accrued under present law.
     Conference agreement
       The conference agreement follows the Senate amendment, with 
     the following modifications.
       The exception relating to key persons is modified to apply 
     to life insurance policies covering up to 20 key persons. 
     Thus, under the conference agreement, the number of 
     individuals that can be treated as key persons may not exceed 
     the greater of (1) 5 individuals, or (2) the lesser of 5 
     percent of the total number of officers and employees of the 
     taxpayer or 20 individuals.
       The cap (based on Moody's Corporate Bond Yield Average--
     Monthly Average Corpo- 
     rates) on deductible interest paid or accrued with respect to 
     (1) interest paid or accrued on debt with respect to a life 
     insurance contract covering a key person, and (2) interest on 
     debt with respect to contracts purchased on or before June 
     20, 1986, applies only for interest paid or accrued for any 
     month beginning after December 31, 1995.
       In addition, in the case of a contract purchased on or 
     before June 20, 1986, where the policy loan interest rate 
     under the contract does not provide for a fixed rate of 
     interest, the interest is allowable only to the extent the 
     rate of interest for each period does not exceed Moody's 
     Corporate Bond Yield Average--Monthly Average Corporates for 
     the third month preceding the first month preceding the first 
     month preceding the period.
       Effective date.--The conference agreement modifies the 
     percentages of the Moody's Corporate Bond Yield Average--
     Monthly Average Corporates that apply with respect to 
     qualified interest under the phase-in rule. Thus, under the 
     conference agreement, the percentage of the Moody's rate is 
     100 percent for interest paid or accrued in 1996; 90 percent 
     for interest paid or accrued in 1997; 80 percent for interest 
     paid or accrued in 1998; and 0 percent thereafter. The rule 
     limiting deductible interest to the applicable percentage of 
     the Moody's rate does not apply for interest paid or accrued 
     in any month beginning before January 1, 1996.


                     B. Expatriation Tax Provisions

       (Secs. 421-423 of the House bill and secs. 471-473 of the 
     Senate amendment.)
     Present law
       Individuals who relinquish U.S. citizenship with a 
     principal purpose of avoiding U.S. taxes are subject to 
     special tax provisions for 10 years after expatriation. The 
     determination of who is U.S. citizen for tax purposes, and 
     when such citizenship is lost, is governed by the provisions 
     of the Immigration and Nationality Act, 8 U.S.C. section 
     1401, et seq.
       An individual who relinquishes his U.S. citizenship with a 
     principal purpose of avoiding U.S. taxes is subject to tax on 
     his or her U.S. source income at the rates applicable to U.S. 
     citizens, rather than the rates applicable to other non-
     resident aliens, for 10 years after expatriation. In 
     addition, the scope of items treated as U.S. source income 
     for this purpose is broader than those items generally 
     considered to be U.S. source income. For example, gains on 
     the sale of personal property located in the United States 
     and gains on the sale or exchange of stock or securities 
     issued by U.S. persons are treated as U.S. source income. 
     This alternative method of income taxation applies only if it 
     results in higher U.S. tax liability.
        Rules applicable in the estate and gift tax contexts 
     expand the categories of items that are subject to the gift 
     and estate taxes in the case of a U.S. citizen who 
     relinquished citizenship with a principal purpose of avoiding 
     U.S. taxes within the 10-year period ending on the date of 
     the transfer. For example, U.S. property held through a 
     foreign corporation controlled by such individual and related 
     persons is included in his or her estate and gifts of U.S.-
     situs intangible property by such individual are subject to 
     the gift tax.
     House bill
       Overview
       The House bill expands and substantially strengthens in 
     several ways the present-law provisions that subject U.S. 
     citizens who lose their citizenship for tax avoidance 
     purposes to special tax rules for 10 years after such loss of 
     citizenship (secs. 877, 2107, and 2501(a)(3)). First, the 
     House bill extends the expatriation tax provisions to apply 
     not only to U.S. citizens who lose their citizenship but also 
     to certain long-term residents of the United States whose 
     U.S. residency is terminated. Second, the House bill subjects 
     certain individuals to the expatriation tax provisions 
     without inquiry as to their motive for losing their U.S. 
     citizenship or residency, but allows certain categories of 
     citizens to show an absence of tax-avoidance motive if they 
     request a ruling from the Secretary of the Treasury as to 
     whether the loss of citizenship had a principal purpose of 
     tax avoidance. Third, the House bill expands the categories 
     of income and gains that are treated as U.S. source (and 
     therefore subject to U.S. income tax under section 877) if 
     earned by an individual who is subject to the expatriation 
     tax provisions and includes provisions designed to eliminate 
     the ability to engage in certain transactions that under 
     current law partially or completely circumvent the 10-year 
     reach of section 877. Further, the House bill provides relief 
     from double taxation in circumstances where another country 
     imposes tax on items that would be subject to U.S. tax under 
     the expatriation tax provisions.
       The House bill also contains provisions to enhance 
     compliance with the expatriation tax provisions. The House 
     bill imposes information reporting obligations on U.S. 
     citizens who lose their citizenship and long-term residents 
     whose U.S. residency is terminated at the time of 
     expatriation. In addition, the House bill directs the 
     Treasury Department to undertake a study regarding compliance 
     by individuals living abroad with their U.S. tax reporting 
     obligations and to make recommendations with respect to 
     improving such compliance.
       Individuals covered
       The present-law expatriation tax provisions apply only to 
     certain U.S. citizens who lose their citizenship. The House 
     bill extends these expatriation tax provisions to apply also 
     to long-term residents of the United States whose U.S. 
     residency is terminated. For this purpose, a long-term 
     resident is any individual who was a lawful permanent 
     resident of the United States for at least 8 out of the 15 
     taxable year sending with the year in which such termination 
     occurs. In applying this 8-year test, an individual is not 
     considered to be a lawful permanent resident for any year in 
     which the individual is taxed as a resident of another 
     country under a treaty tie-breaker rule. An individual's U.S. 
     residency is considered to be terminated when either the 
     individual ceases to be a lawful permanent resident pursuant 
     to section 7701(b)(6) (i.e., the individual loses his or her 
     green-card status) or the individual is treated as a resident 
     of another country under a tie-breaker provision of a tax 
     treaty (and the individual does not elect to waive the 
     benefits of such treaty). Furthermore, a long-term resident 
     may elect to use the fair market value basis of property on 
     the date the individual became a U.S. resident (rather than 
     the property's historical basis) to determine the amount of 
     gain subject to the expatriation tax provisions if the asset 
     is sold within the 10-year period.
       Under present law, the expatriation tax provisions are 
     applicable to a U.S. citizen who loses his or her citizenship 
     unless such loss did not have as a principal purpose the 
     avoidance of taxes. Under the House bill, U.S. citizens who 
     lose their citizenship and long-term residents whose U.S. 
     residency is terminated are generally treated as having lost 
     such citizenship or terminated such residency with a 
     principal purpose of the avoidance of taxes if either: (1) 
     the individual's average annual U.S. Federal income tax 
     liability for the 5 taxable years ending before the date of 
     such loss or termination is greater than $100,000 (the ``tax 
     liability test''), or (2) the individual's net worth as of 
     the date of such loss or termination is $500,000 or more (the 
     ``net worth test''). The dollar amount thresholds contained 
     in the tax liability test and the net worth test are indexed 
     for inflation in the case of a loss of citizenship or 
     termination of residency occurring in any calendar year after 
     1996. An individual who falls below the thresholds specified 
     in both the tax liability test and the net worth test is 
     subject to the expatriation tax provisions unless the 
     individual's loss of citizenship or termination of residency 
     did not have as a principal purpose the avoidance of tax (as 
     under present law in the case of U.S. citizens).
       A U.S. citizen, who loses his or her citizenship and who 
     satisfies either the tax liability test or the net worth 
     test, is not subject to the expatriation tax provisions if 
     such individual can demonstrate that he or she did not have a 
     principal purpose of tax avoidance and the individual is 
     within one of the following categories: (1) the individual 
     was born with dual citizenship and retains only the non-U.S. 
     citizenship; (2) the individual becomes a citizen of the 
     country in which the individual, the individual's spouse, or 
     one of the individual's parents, was born; (3) the individual 
     was present in the United States for no more than 30 days 
     during any year in the 10-year period immediately preceding 
     the date of his or her loss of citizenship; (4) the 
     individual relinquishes his or her citizenship before 
     reaching age 18\1/2\; or (5) any other category of 
     individuals prescribed by Treasury regulations. In all of 
     these situations, the individual would have been subject to 
     tax on

[[Page H9557]]

     his or her worldwide income (as are all U.S. citizens) until 
     the time of expatriation. In order to qualify for one of 
     these exceptions, the former U.S. citizen must, within one 
     year from the date of loss of citizenship, submit a ruling 
     request for a determination by the Secretary of the Treasury 
     as to whether such loss had as one of its principal purposes 
     the avoidance of taxes. A former U.S. citizen who submits 
     such a ruling request is entitled to challenge an adverse 
     determination by the Secretary of the Treasury. However, a 
     former U.S. citizen who fails to submit a timely ruling 
     request is not eligible for these exceptions. It is expected 
     that in making a determination as to the presence of a 
     principal purpose of tax avoidance, the Secretary of the 
     Treasury will take into account factors such as the 
     substantiality of the former citizen's ties to the United 
     States (including ownership of U.S. assets) prior to 
     expatriation, the retention of U.S. citizenship by the former 
     citizen's spouse, and the extent to which the former citizen 
     resides in a country that imposes little or no tax.
       The foregoing exceptions are not available to long-term 
     residents whose U.S. residency is terminated. However, the 
     House bill authorizes the Secretary of the Treasury to 
     prescribe regulations to exempt certain categories of long-
     term residents from the House bill's provisions.
       Items subject to section 877
       Under section 877, an individual covered by the 
     expatriation tax provisions is subject to tax on U.S. source 
     income and gains for a 10-year period after expatriation at 
     the graduated rates applicable to U.S. citizens.\24\ The tax 
     under section 877 applies to U.S. source income and gains of 
     the individual for the 10-year period, without regard to 
     whether the property giving rise to such income or gains was 
     acquired before or after the date the individual became 
     subject to the expatriation tax provisions. For example, a 
     U.S. citizen who inherits an appreciated asset immediately 
     before losing citizenship and disposes of the asset 
     immediately after such loss would not recognize any taxable 
     gain on such disposition (because of the date of death fair 
     market value basis accorded to inherited assets), but the 
     individual would continue to be subject to tax under section 
     877 on the income or gain derived from any U.S. property 
     acquired with the proceeds from such disposition.
---------------------------------------------------------------------------
     \24\ Under present law, all nonresident aliens (including 
     expatriates) are subject to U.S. income tax at graduated 
     rates on certain types of income. Such income includes income 
     effectively connected with a U.S. trade or business and gains 
     from the disposition of interests in U.S. real property. For 
     example, compensation (including deferred compensation) paid 
     with respect to services performed in the United States is 
     subject to such tax. Thus, under current law, a U.S. citizen 
     who earns a stock option while employed in the United States 
     and delays the exercise of such option until after such 
     individual loses his or her citizenship is subject to U.S. 
     tax on the compensation income recognized upon exercise of 
     the stock option (even if the stock received upon the 
     exercise is stock in a foreign corporation).
---------------------------------------------------------------------------
       In addition, section 877 currently recharacterizes as U.S. 
     source income certain gains of individuals who are subject to 
     the expatriation tax provisions, thereby subjecting such 
     individuals to U.S. income tax on such gains. Under this 
     rule, gain on the sale or exchange of stock of a U.S. 
     corporation or debt of a U.S. person is treated as U.S. 
     source income. In this regard, under current law, the 
     substitution of a foreign obligor for a U.S. obligor is 
     generally treated as a taxable exchange of the debt 
     instrument, and therefore any gain on such exchange is 
     subject to tax under section 877. The House bill extends this 
     recharacterization to income and gains derived from property 
     obtained in certain transactions on which gain or loss is not 
     recognized under present law. An individual covered by 
     section 877 who exchanges property that would produce U.S. 
     source income for property that would produce foreign source 
     income is required to recognize immediately as U.S. source 
     income any gain on such exchange (determined as if the 
     property had been sold for its fair market value on such 
     date). To the extent gain is recognized under this provision, 
     the property would be accorded the step-up in basis provided 
     under current law. This rule requiring immediate gain 
     recognition does not apply if the individual enters into an 
     agreement with the Secretary of the Treasury specifying that 
     any income or gains derived from the property received in the 
     exchange during the 10-year period after the loss of 
     citizenship (or termination of U.S. residency, as applicable) 
     would be treated as U.S. source income. Such a gain 
     recognition agreement terminates if the property transferred 
     in the exchange is disposed of by the acquiror, and any gain 
     that had not been recognized by reason of such agreement is 
     recognized as U.S. source as of such date. It is expected 
     that a gain recognition agreement would be entered into not 
     later than the due date for the tax return for the year of 
     the exchange. In this regard, the Secretary of the Treasury 
     is authorized to issue regulations providing similar 
     treatment for nonrecognition transactions that occur within 5 
     years immediately prior to the date of loss of citizenship 
     (or termination of U.S. residency, as applicable).
       The Secretary of Treasury is authorized to issue 
     regulations to treat removal of tangible personal property 
     from the United States, and other circumstances that result 
     in a conversion of U.S. source income to foreign source 
     income without recognition of any unrealized gain, as 
     exchange for purposes of computing gain subject to section 
     877. The taxpayer may defer the recognition of the gain if he 
     or she enters into a gain recognition agreement as described 
     above. For example, a former citizen who removes appreciated 
     artwork that he or she owns from the United States could be 
     subject to immediate tax on the appreciation under this 
     provision unless the individual enters into a gain 
     recognition agreement.
       The foregoing rules regarding the treatment under section 
     877 of nonrecognition transactions are illustrated by the 
     following examples: Ms. A loses her U.S. citizenship on 
     January 1, 1996, and is subject to section 877. On June 30, 
     1997, Ms. A transfers the stock she owns in a U.S. 
     corporation, USCo, to a wholly-owned foreign corporation, 
     FCo, in a transaction that qualifies for tax-free treatment 
     under section 351. At the time of such transfer, A's basis in 
     the stock of USCo is $100,000 and the fair market value of 
     the stock is $150,000. Under present law, Ms. A. would not be 
     subject to U.S. tax on the $50,000 of gain realized on the 
     exchange. Moreover, Ms. A would not be subject to U.S. tax on 
     any distribution of the proceeds from a subsequent 
     disposition of the USCo stock by FCo. Under the House bill, 
     if Ms. A does not enter into a gain recognition agreement 
     with the Secretary of the Treasury, Ms. A would be deemed to 
     have sold the USCo stock for $150,000 on the date of the 
     transfer, and would be subject to U.S. tax in 1997 on the 
     $50,000 of gain realized. Alternatively, if Ms. A enters into 
     a gain recognition agreement, she would not be required to 
     recognize for U.S. tax purposes in 1997 the $50,000 of gain 
     realized upon the transfer of the USCo stock to FCo. However, 
     under the gain recognition agreement, for the 10-year period 
     ending on December 31, 2005, any income (e.g., dividends) or 
     gain with respect to the FCo stock would be treated as U.S. 
     source, and therefore Ms. A would be subject to tax on such 
     income or gain under section 877. If FCo disposes of the USCo 
     stock on January 1, 2002, Ms. A's gain recognition agreement 
     would terminate on such date, and Ms. A would be required to 
     recognize as U.S. source income at that time the $50,000 of 
     gain that she previously deferred under the gain recognition 
     agreement. (The amount of gain required to be recognized by 
     Ms. A in this situation would not be affected by any changes 
     in the value of the USCo stock since her June 30, 1997 
     transfer of such stock to FCo.)
       The House bill also extends the recharacterization rules of 
     section 877 to treat as U.S. source any income and gains 
     derived from stock in a foreign corporation if the individual 
     losing citizenship or terminating residency owns, directly or 
     indirectly, more than 50 percent of the vote or value of the 
     stock of the corporation on the date of such loss or 
     termination or at any time during the 2 years preceding such 
     date. Such income and gains are recharacterized as U.S. 
     source only to the extent of the amount of earnings and 
     profits attributable to such stock earned or accumulated 
     prior to the date of loss of citizenship (or termination of 
     residency, as applicable) and while such ownership 
     requirement is satisfied.
       The following example illustrates this rule: Mr. B loses 
     his U.S. citizenship on July 1, 1996 and is subject to 
     section 877. Mr. B has owned all of the stock of a foreign 
     corporation, FCo, since its incorporation in 1991. As of 
     FCo's December 31, 1995 year-end, FCo has accumulated 
     earnings and profits of $500,000. FCo has earnings and 
     profits of $100,000 for 1996 and does not have any subpart F 
     income (as defined in sec. 952). FCo makes a $100,000 
     distribution to Mr. B in each of 1997 and 1998. On January 1, 
     1999, Mr. B disposes of all his stock of FCo and realizes 
     $400,000 of gain. Under present law, neither the 
     distributions from FCo nor the gain on the disposition of the 
     FCo stock would be subject to U.S. tax. Under the House bill, 
     the distributions from FCo and the gain on the sale of the 
     stock of FCo would be treated as U.S. source income and would 
     be taxed to Mr. B under section 877, subject to the earnings 
     and profits limitation. For this purpose, the amount of FCo's 
     earnings and profits for 1996 is prorated based on the number 
     of days during 1996 that Mr. B is a U.S. citizen. Thus, the 
     amount of FCo's earnings and profits earned or accumulated 
     before Mr. B's loss of citizenship is $550,000. Accordingly, 
     the $100,000 distributions from FCo in 1997 and 1998 would be 
     treated as U.S. source income taxable to Mr. B under section 
     877 in such years. In addition, $350,000 of the gain realized 
     from the sale of the stock of FCo in 1999 would be treated as 
     U.S. source income taxable to Mr. B under section 877 in that 
     year.
       Special rule for shift in risks of ownership
       Section 877 applies to income and gains for the 10-year 
     period following the loss of citizenship (or termination of 
     residency, as applicable). For purposes of applying section 
     877, the House bill suspends this 10-year period for gains 
     derived from a particular property during any period in which 
     the individual's risk of loss with respect to such property 
     is substantially diminished. For example, Ms. C loses her 
     citizenship on January 1, 1996 and is subject to section 877. 
     On that date Ms. C owns 10,000 shares of stock of a U.S. 
     corporation, USCo, with a value of $1 million. On the same 
     date Ms. C enters into an equity swap with respect to such 
     USCo stock with a 5-year term. under the transaction, Ms. C 
     will transfer to the counter-party an amount equal to the 
     dividends on the USCo stock and any increase in the value of 
     the USCo stock for the 5-year period. The counter-party will 
     transfer to Ms. C an amount equal to a market rate of 
     interest on $1 million and any decrease in the

[[Page H9558]]

     value of the USCo stock for the same period. Ms. C's risk of 
     loss with respect to the USCo stock is substantially 
     diminished during the 5-year period in which the equity swap 
     is in effect, and therefore, under the House bill, the 10-
     year period under section 877 is suspended during such 
     period. Accordingly, under the House bill, if Ms. C sells 
     here USCo stock for a gain on January 1, 2010, such gain 
     would be treated as U.S. source income taxable to Ms. C under 
     section 877. Such gain would not be subject to U.S. tax under 
     present law.
       Double tax relief
       In order to avoid the double taxation of individuals 
     subject to the expatriation tax provisions, the House bill 
     provides a credit against the U.S. tax imposed under such 
     provisions for any foreign income, gift, estate or similar 
     taxes paid with respect to the items subject to such 
     taxation. This credit is available only against the tax 
     imposed solely as a result of the expatriation tax 
     provisions, and is not available to be used to offset any 
     other U.S. tax liability. For example, Mr. D loses his 
     citizenship on January 1, 1996 and is subject to section 877. 
     Mr. D becomes a resident of Country X. During 1996, Mr. D 
     recognizes a $100,000 gain upon the sale of stock of a U.S. 
     corporation, USCo. Country X imposes $20,000 tax on this 
     capital gain. But for the double tax relief provision, Mr. D 
     would be subject to tax of $28,000 on this gain under section 
     877. However, Mr. D's U.S. tax under section 877 would be 
     reduced by the $20,000 of foreign tax paid, and Mr. D's 
     resulting U.S. tax on this gain would be $8,000.
       Effect on tax treaties
       While it is believed that the expatriation tax provisions, 
     as amended by the House bill, are generally consistent with 
     the underlying principles of income tax treaties to the 
     extent the House bill provides a foreign tax credit for items 
     taxed by another country, it is intended that the purpose of 
     the expatriation tax provisions, as amended, not be defeated 
     by any treaty provision. The Treasury Department is expected 
     to review all outstanding treaties to determine whether the 
     expatriation tax provisions, as revised, potentially conflict 
     with treaty provisions and to eliminate any such potential 
     conflicts through renegotiation of the affected treaties as 
     necessary. Beginning on the tenth anniversary of the 
     enactment of the House bill, any conflicting treaty 
     provisions that remain in force would take precedence over 
     the expatriation tax provisions as revised.
       Required information reporting and sharing
       Under the House bill, a U.S. citizen who loses his or her 
     citizenship is required to provide a statement to the State 
     Department (or other designated government entity) which 
     includes the individual's social security number, forwarding 
     foreign address, new country of residence and citizenship 
     and, in the case of individuals with a net worth of at least 
     $500,000, a balance sheet. The entity to which such statement 
     is to be provided is required to provide the Secretary of the 
     Treasury copies of all statements received and the names of 
     individuals who refuse to provide such statements. A long-
     term resident whose U.S. residency is terminated is required 
     to attach a similar statement to his or her U.S. income tax 
     return for the year of such termination. An individual's 
     failure to provide the required statement results in the 
     imposition of a penalty for each year the failure continues 
     equal to the greater of (1) 5 percent of the individual's 
     expatriation tax liability for such year, or (2) $1,000.
       The House bill requires the State Department to provide the 
     Secretary of the Treasury with a copy of each certificate of 
     loss of nationality (CLN) approved by the State Department. 
     Similarly, the House bill requires the agency administering 
     the immigration laws to provide the Secretary of the Treasury 
     with the name of each individual whose status as a lawful 
     permanent resident has been revoked or has been determined to 
     have been abandoned.
       Further, the House bill requires the Secretary of the 
     Treasury to publish in the Federal Register the names of all 
     former U.S. citizens from whom it receives the required 
     statements or whose names it receives under the foregoing 
     information-sharing provisions.
       Treasury report on tax compliance by U.S. citizens and 
           residents living abroad
       The Treasury Department is directed to undertake a study on 
     the tax compliance of U.S. citizens and green-card holders 
     residing outside the United States and to make 
     recommendations regarding the improvement of such compliance. 
     The findings of such study and such recommendations are 
     required to be reported to the House Committee on Ways and 
     Means and the Senate Committee on Finance within 90 days of 
     the date of enactment.
       During the course of the 1995 Joint Committee on Taxation 
     staff study on expatriation (see Joint Committee on Taxation, 
     Issues Presented by Proposals to Modify the Tax Treatment of 
     Expatriation (JCS-17-95), June 1, 1995), a specific issue was 
     identified regarding the difficulty in determining when a 
     U.S. citizen has committed an expatriating act with the 
     requisite intent, and thus no longer has the obligation to 
     continue to pay U.S. taxes on his or her worldwide income due 
     to the fact that the individual is no longer a U.S. citizen. 
     Neither the Immigration and Nationality Act nor any other 
     Federal law requires an individual to request a CLN within a 
     specified amount of time after an expatriating act has been 
     committed, even though the expatriating act terminates the 
     status of the individual as a U.S. citizen for all purposes, 
     including the status of being subject to U.S. tax on 
     worldwide income. Accordingly, it is anticipated that the 
     Treasury report, in evaluating whether improved coordination 
     between executive branch agencies could improve compliance 
     with the requirements of the Internal Revenue Code, will 
     review the process through which the State Department 
     determines when citizenship has been lost, and make 
     recommendations regarding changes to such process to 
     recognize the importance of such date for tax purposes. In 
     particular, it is anticipated that the Treasury Department 
     will explore ways of working with the State Department to 
     insure that the State Department will not issue a CLN 
     confirming the commission of an expatriating act with the 
     requisite intent necessary to terminate citizenship in the 
     absence of adequate evidence of both the occurrence of the 
     expatriating act (e.g., the joining of a foreign army) and 
     the existence of the requisite intent.
       Effective date
       The expatriation tax provisions as modified by the House 
     bill generally apply to any individual who loses U.S. 
     citizenship, and any long-term residents whose U.S. residency 
     is terminated, on or after February 6, 1995. For citizens, 
     the determination of the date of loss of citizenship remains 
     the same as under present law (i.e., the date of loss of 
     citizenship is the date of the expatriating act). However, a 
     special transition rule applies to individuals who committed 
     an expatriating act within one year prior to February 6, 
     1995, but had not applied for a CLN as of such date. Such an 
     individual is subject to the expatriation tax provisions as 
     amended by the House bill as of the date of application for 
     the CLN, but is not retroactively liable for U.S. income 
     taxes on his or her worldwide income. In order to qualify for 
     the exceptions provided for individuals who fall within one 
     of the specified categories, such individual is required to 
     submit a ruling request within 1 year after the date of 
     enactment of the House bill.
       The special transition rule is illustrated by the following 
     example. Mr. E joined a foreign army on October 1, 1994 with 
     the intent to relinquish his U.S. citizenship, but Mr. E does 
     not apply for a CLN until October 1, 1995. Mr. E would be 
     subject to the expatriation tax provisions (as amended) for 
     the 10-year period beginning on October 1, 1995. Moreover, if 
     Mr. E falls within one of the specified categories (i.e., Mr. 
     E is age 18 when he joins the foreign army), in order to 
     qualify for the exception provided for such individuals, Mr. 
     E would be required to submit his ruling request within 1 
     year after the date of enactment of the House bill. Mr. E 
     would not, however, be liable for U.S. income taxes on his 
     worldwide income for any period after October 1, 1994.
     Senate amendment
       In general
       The Senate amendment replaces the present-law expatriation 
     income tax rules with rules that generally subject certain 
     U.S. citizens who relinquish their U.S. citizenship and 
     certain long-term U.S. residents who relinquish their U.S. 
     residency to tax on the net unrealized gain in their property 
     as if such property were sold for fair market value on the 
     expatriation date. The Senate amendment also imposes 
     information reporting obligations on U.S. citizens who 
     relinquish their citizenship and long-term residents whose 
     U.S. residency is terminated.
       Individuals covered
       The Senate amendment applies the expatriation tax to 
     certain U.S. citizens and long-term residents who terminate 
     their U.S. citizenship or residency. For this purpose, a 
     long-term resident is any individual who was a lawful 
     permanent resident of the United States for at least 8 out of 
     the 15 taxable years ending with the year in which the 
     termination of residency occurs. In applying this 8-year 
     test, an individual is not considered to be a lawful 
     permanent resident of the United States for any year in which 
     the individual is taxed as a resident of another country 
     under a treaty tie-breaker rule. An individual's U.S. 
     residency is considered to be terminated when either the 
     individual ceases to be a lawful permanent resident pursuant 
     to section 7701(b)(6) (i.e., the individual loses his or her 
     green-card status) or the individual is treated as a resident 
     of another country under a tie-breaker provision of a tax 
     treaty (and the individual does not elect to waive the 
     benefits of such treaty).
       The expatriation tax under the Senate amendment applies 
     only to individuals whose average income tax liability or net 
     worth exceeds specified levels. U.S. citizens who lose their 
     citizenship and long-term residents who terminate U.S. 
     residency are subject to the expatriation tax if they meet 
     either of the following tests: (1) the individual's average 
     annual U.S. Federal income tax liability for the 5 taxable 
     years ending before the date of such loss or termination is 
     greater than $100,000, or (2) the individual's net worth as 
     of the date of such loss or termination is $500,000 or more. 
     The dollar amount thresholds contained in these tests are 
     indexed for inflation in the case of a loss of citizenship or 
     termination of residency occurring in any calendar year after 
     1996.
       Exceptions from the expatriation tax under the Senate 
     amendment are provided for individuals in two situations. The 
     first exception applies to an individual who was

[[Page H9559]]

     born with citizenship both in the United States and in 
     another country, provided that (1) as of the date of 
     relinquishment of U.S. citizenship the individual continues 
     to be a citizen of, and is taxed as a resident of, such other 
     country, and (2) the individual was a resident of the United 
     States for no more than 8 out of the 15 taxable years ending 
     with the year in which the relinquishment of U.S. citizenship 
     occurred. The second exception applies to a U.S. citizen who 
     relinquishes citizenship before reaching age 18\1/2\, 
     provided that the individual was a resident of the United 
     States for no more than 5 taxable years before such 
     relinquishment.
       Deemed sale of property upon expatriation
       Under the Senate amendment, individuals who are subject to 
     the expatriation tax generally are treated as having sold all 
     of their property at fair market value immediately prior to 
     the relinquishment of citizenship or termination of 
     residency. Gain or loss from the deemed sale of property is 
     recognized at that time, generally without regard to 
     provisions of the Code that would otherwise provide 
     nonrecognition treatment. The net gain, if any, on the deemed 
     said of all such property is subject to U.S. tax at such time 
     to the extent it exceeds $600,000 ($1.2 million in the case 
     of married individuals filing a joint return, both of whom 
     expatriate).
       The deemed sale rule of the Senate amendment generally 
     applies to all property interests held by the individual on 
     the date of relinquishment of citizenship or termination of 
     residency, provided that the gain on such property interest 
     would be includible in the individual's gross income if such 
     property interest were sold for its fair market value on such 
     date. Special rules apply in the case of trust interests (see 
     ``Interests in trusts,'' below). U.S. real property 
     interests, which remain subject to U.S. taxing jurisdiction 
     in the hands of nonresident aliens, generally are excepted 
     from the Senate amendment. An exception also applies to 
     interests in qualified retirement plans and, subject to a 
     limit of $500,000, interests in certain foreign pension plans 
     as prescribed by regulations. The Secretary of the Treasury 
     is authorized to issue regulations exempting other property 
     interests as appropriate. For example, an exclusion may be 
     provided for an interest in a nonqualified compensation plan 
     of a U.S. employer, where payments from such plan to the 
     individual following expatriation would continue to be 
     subject to U.S. withholding tax.
       Under the Senate amendment, an individual who is subject to 
     the expatriation tax is required to pay a tentative tax equal 
     to the amount of tax that would be due for a hypothetical 
     short tax year ending on the date the individual relinquished 
     citizenship or terminated residency. Thus, the tentative tax 
     is based on all income, gain, deductions, loss and credits of 
     the individual for the year through such date, including 
     amounts realized from the deemed sale of property. The 
     tentative tax is due on the 90th day after the date of 
     relinquishment of citizenship or termination of residency.
       Deferral of payment of tax
       Under the Senate amendment, an individual is permitted to 
     elect to defer payment of the expatriation tax with respect 
     to the deemed sale of any property. Under this election, the 
     expatriation tax with respect to a particular property, plus 
     interest thereon, is due when the property is subsequently 
     disposed of. For this purpose, except as provided in 
     regulations, the disposition of property in a nonrecognition 
     transaction constitutes a disposition. In addition, if an 
     individual holds property until his or her death, the 
     individual is treated as having disposed of the property 
     immediately before death. In order to elect deferral of the 
     expatriation tax, the individual is required to provide 
     adequate security to ensure that the deferred expatriation 
     tax and interest ultimately will be paid. A bond in the 
     amount of the deferred tax and interest constitutes adequate 
     security. Other security mechanisms are also permitted 
     provided that the individual establishes to the satisfaction 
     of the Security of the Treasury that the security is 
     adequate. In the event that the security provided with 
     respect to a particular property subsequently becomes 
     inadequate and the individual fails to correct such 
     situation, the deferred expatriation tax and interest with 
     respect to such property will become due. As a further 
     condition to making this election, the individual is required 
     to consent to the waiver of any treaty rights that would 
     preclude the collection of the expatriation tax.
       Interests in trusts
       In general.--Under the Senate amendment, special rules 
     apply to trust interests held by the individual at the time 
     of relinquishment of citizenship or termination of residency. 
     The treatment of trust interests depends upon whether the 
     trust is a qualified trust. For this purpose, a ``qualified 
     trust'' is a trust that is organized under and governed by 
     U.S. law and that is required by its instruments to have at 
     least one U.S. trustee.
       Constructive ownership rules apply to a trust beneficiary 
     that is a corporation, partnership, trust or estate. In such 
     cases, the shareholders, partners or beneficiaries of the 
     entity are deemed to be the direct beneficiaries of the trust 
     for purposes of applying these provisions. In addition, an 
     individual who holds (or who is treated as holding) a trust 
     interest at the time of relinquishment of citizenship or 
     termination of residency is required to disclose on his or 
     her tax return the methodology used to determine his or her 
     interest in the trust, and whether such individual knows (or 
     has reason to know) that any other beneficiary of the trust 
     uses a different method.
       Nonqualified trusts.--If an individual holds an interest in 
     a trust that is not a qualified trust, a special rule applies 
     for purposes of determining the amount of the expatriation 
     tax due with respect to such trust interest. The individuals 
     interest in the trust is treated as a separate trust 
     consisting of the trust assets allocable to such interest. 
     Such separate trust is treated as having sold its assets as 
     of the date of relinquishment of citizenship or termination 
     of residency and having distributed all proceeds to the 
     individual, and the individual is treated as having 
     recontributed such proceeds to the trust. The individual is 
     subject to the expatriation tax with respect to any net 
     income or gain arising from the deemed distribution from the 
     trust. The election to defer payment is available for the 
     expatriation tax attributable to a nonqualifed trust 
     interest.
       A beneficiary's interest in a nonqualified trust is 
     determined on the basis of all facts and circumstances. These 
     include the terms of the trust instrument itself, any letter 
     of wishes or similar document, historical patterns of trust 
     distributions, and the role of any trust protector or similar 
     advisor.
       Qualified trusts.--If the individual has an interest in a 
     qualified trust, a different set of rules applies. Under 
     these rules, the amount of unrealized gain allocable to the 
     individual's trust interest is calculated at the time of 
     expatriation. In determining this amount, all contingencies 
     and discretionary interests are assumed to be resolved in the 
     individual's favor (i.e., the individual is allocated the 
     maximum amount that he or she potentially could receive under 
     the terms of the trust instrument). the expatriation tax 
     imposed on such gains generally is collected when the 
     individual receives distributions from the trust, or, if 
     earlier, upon the individual's death. Interest is charged for 
     the period between the date of expatriation and the date on 
     which the tax is paid.
       If an individual has an interest in a qualified trust, the 
     individual is subject to expatriation tax upon the receipt of 
     any distribution from the trust. Such distributions may also 
     be subject to U.S. income tax. For any distribution from a 
     qualified trust made to an individual after he or she has 
     expatriated, expatriation tax is imposed in an amount equal 
     to the amount of the distribution multiplied by the highest 
     tax rate generally applicable to trusts and estates, but in 
     no event will the tax imposed exceed the deferred tax amount 
     with respect to such trust interest. The ``deferred tax 
     amount'' would be equal to (1) the tax calculated with 
     respect to the unrealized gain allocable to the trust 
     interest at the time of expatriation, (2) increased by 
     interest thereon, and (3) reduced by the tax imposed under 
     this provision with respect to prior trust distributions to 
     the individual.
       If an individual's interest in a trust is vested as of the 
     expatriation date (e.g., if the individual's interest in the 
     trust is non-contingent and non-discretionary), the gain 
     allocable to the individual's trust interest is determined 
     based on the truth assets allocable to his or her trust 
     interest. If the individual's interest in the trust is not 
     vested as of the expatriation date (e.g., if the individual's 
     trust interest is a contingent or discretionary interest), 
     the gain allocable to his or her trust interest is determined 
     based on all of the trust assets that could be allocable to 
     his or her trust interest, determined by resolving all 
     contingencies and discretionary powers in the individual's 
     favor. In the case where more than one trust beneficiary is 
     subject to the expatriation tax with respect to trust 
     interests that are not vested, the rules are intended to 
     apply so that the same unrealized gain with respect to assets 
     in the trust is not taxed to both individuals.
       If the individual disposes of his or her trust interest, 
     the trust ceases to be a qualified trust, or the individual 
     dies, expatriation tax is imposed as of such date. The amount 
     of such tax equal to the lesser of (1) the tax calculated 
     under the rules for nonqualified trust interests applied as 
     of such date or (2) the deferred tax amount with respect to 
     the trust interest as of such date.
       If the individual agrees to waive any treaty rights that 
     would preclude collection of the tax, the tax is imposed 
     under this provision with respect to distributions from a 
     qualified trust to the individual deducted and withheld from 
     distributions. If the individual does not agree to such a 
     waiver of treaty rights, the tax with respect to 
     distributions to the individual is imposed on the trust, the 
     trustee is personally liable therefore, and any other 
     beneficiary of the trust has a right of contribution against 
     such individual with respect to such tax. Similarly, in the 
     case of the tax imposed in connection with an individual's 
     disposition of a trust interest, the individual's death while 
     holding a trust interest or the individual's holding of an 
     interest in a trust that ceases to be qualified, the tax is 
     imposed on the trust, the trustee is personnaly liable 
     therefor, and any other beneficiary of the trust has a right 
     of contribution against such individual with respect to such 
     tax.
       Election to be treated as a U.S. citizen
       Under the Senate amendment, an individual is permitted to 
     make an irrevocable election to continue to be taxed as a 
     U.S. citizen with respect to all property that otherwise is

[[Page H9560]]

     covered by the expatriation tax. This election is an ``all-
     or-nothing'' election; an individual is not permitted to 
     elect this treatment for some property but not other 
     property. The election, if made, applies to all property that 
     would be subject to the expatriation tax and to any property 
     the basis of which is determined by reference to such 
     property. Under this election, the individual continues to 
     pay U.S. income taxes at the rates applicable to U.S. 
     citizens following expatriation on any income generated by 
     the property and on any gain realized on the disposition of 
     the property, as well as any excise tax imposed with respect 
     to property (see, e.g., sec 1491). In addition, the property 
     continues to be subject to U.S. gift, estate, and generation-
     shipping taxes. However, the amount of any transfer tax so 
     imposed is limited to the amount of income tax that would 
     have been due if the property had been sold for its fair 
     market value immediately before the transfer or death. The 
     $600,000 exclusion provided with respect to the expatriation 
     tax under the Senate amendment is available to reduce the tax 
     imposed by reason of this election. In order to make this 
     election, the taxpayer is required to waive any treaty rights 
     that would preclude the collection of the tax. The individual 
     is also required to provide security to ensure payment of the 
     tax under this election in such form, manner, and amount as 
     the Secretary of the Treasury requires.
       Date of relinquishment of citizenship
       Under the Senate amendment, as individual is treated as 
     having relinquished U.S. citizenship on the date that the 
     individual first makes known to U.S. government of consular 
     officer his or her intention to relinquish U.S. citizenship. 
     Thus, a U.S. citizen who relinquishes citizenship by formally 
     renouncing his or her U.S. nationality before a diplomatic or 
     consular officer for the United States is treated as having 
     relinquished ciizenship on that date, provided that the 
     renunciation is later confirmed by the issuance of a CLN. A 
     U.S. citizen who furnishes to the State Department a signed 
     statement of voluntary relinquishment of U.S. nationality 
     confirming the performance of an expatriating act with the 
     requisite interest to relinquish his or her citizenship is 
     treated as having relinquished his or her citizenship on the 
     date the statement is so furnished (regardless of when the 
     expatriating act was performed), provided that the voluntary 
     relinquishment is later confirmed by the issuance of a CLN. 
     If neither of these circumstances exist, the individual is 
     treated as having relinquished citizenship on the date a CLN 
     is issued or a certificate of naturalization is cancelled. 
     The date of relinquishment of citizenship determined under 
     the Senate amendment applies for all purposes.
       Effect on present-law expatriation provisions
       Under the Senate amendment, the present-law income tax 
     provisions with respect to U.S. citizens who expatriate with 
     a principal purpose of avoiding tax (sec. 877) and certain 
     aliens who have a break in residency status (sec. 
     7701(b)(10)) do applying to U.S. citizens who are treated as 
     relinquishing their citizenship on or after February 6, 1995 
     or to long-term U.S. residents who terminate their residency 
     on or after such date. The special estate and gift tax 
     provisions with respect to individuals who expatriate with a 
     principal purpose of avoiding tax (secs. 2107 and 
     2501(a)(3)), however, continue to apply; a credit against the 
     tax imposed solely by reason of such special provisions is 
     allowed for the expatriation tax imposed with respect to the 
     same property.
       Treatment of gifts and inheritances from an expatriate
       Under the Senate amendment, the exclusion from income 
     provided in section 102 does not apply to the value of any 
     property received by gift or inheritance from an individual 
     who was subject to the expatriation tax (i.e., an individual 
     who relinquished citizenship or terminated residency and to 
     whom the expatriation tax was applicable). Accordingly, a 
     U.S. taxpayer who receives a gift or inheritance from such an 
     individual is required to include the value of such gift or 
     inheritance in gross income and is subject to U.S. income tax 
     on such amount.
       Required information reporting and sharing
       Under the Senate amendment, an individual who relinquishes 
     citizenship or terminates residency is required to provide a 
     statement which includes the individual's social security 
     number, forwarding foreign address, new country of residence 
     and citizenship and, in the case of individuals with a net 
     worth of at least $500,000, a balance sheet. In the case of a 
     former citizen, such statement is due not later than the date 
     the individual's citizenship is treated as relinquished and 
     is to be provided to the State Department (or other 
     government entity involved in the administration of such 
     relinquishment). The entity to which the statement is to be 
     provided by former citizens is required to provide to the 
     Secretary of the Treasury copies of all statements received 
     and the names of individuals who refuse to provide such 
     statements. In the case of a former long-term resident, the 
     statement is provided to the Secretary of the Treasury with 
     the individual's tax return for the year in which the 
     individual's U.S. residency is terminated. An individual's 
     failure to provide the statement required under this 
     provision results in the imposition of a penalty for each 
     year the failure continues equal to the greater of (1) 5 
     percent of the individual's expatriation tax liability for 
     such year or (2) $1,000.
       The Senate amendment requires the State Department to 
     provide the Secretary of the Treasury with a copy of each CLN 
     approved by the State Department. Similarly, the Senate 
     amendment requires the agency administering the immigration 
     laws to provide the Secretary of the Treasury with the name 
     of each individual whose status as a lawful permanent 
     resident has been revoked or has been determined to have been 
     abandoned.
       Further, the Senate amendment requires the Secretary of the 
     Treasury to publish in the Federal Register the names of all 
     former U.S. citizens with respect to whom it receives the 
     required statements or whose names it receives under the 
     foregoing information-sharing provisions.
       Treasury report on tax compliance by U.S. citizens and 
           residents living abroad
       The Treasury Department is directed to undertake a study on 
     the tax compliance of U.S. citizens and green-card holders 
     residing outside the United States and to make 
     recommendations regarding the improvement of such compliance. 
     The findings of such study and such recommendations are 
     required to be reported to the House Committee on Ways and 
     Means and the Senate Committee on Finance within 90 days of 
     the date of enactment.
       Effective date
       The provision is effective for U.S. citizens whose date of 
     relinquishment of citizenship (as determined under the Senate 
     amendment, see ``Date of relinquishment of citizenship'' 
     above) occurs on or after February 6, 1995. Similarly, the 
     provision is effective for long-term residents who terminate 
     their U.S. residency on or after February 6, 1995.
       U.S. citizens who committed an expatriating act with the 
     requisite intent to relinquish their U.S. citizenship prior 
     to February 6, 1995, but whose date of relinquishment of 
     citizenship (as determined under the Senate amendment) does 
     not occur until after such date, are subject to the 
     expatriation tax under the Senate amendment as of date of 
     relinquishment of citizenship. However, the individual is not 
     subject retroactively to worldwide tax as a U.S. citizen for 
     the period after he or she committed the expatriating act 
     (and therefore ceased being U.S. citizen for tax purposes 
     under present law). Such an individual continues to be 
     subject to the expatriation tax imposed by present-law 
     section 877 until the individual's date of relinquishment of 
     citizenship (at which time the individual would be subject to 
     the expatriation tax of the Senate amendment). The rules 
     described in this paragraph do not apply to an individual who 
     committed an expatriating act prior to February 6, 1995, but 
     did not do so with the requisite intent to relinquish his or 
     her U.S. citizenship.
       The tentative tax is not required to be paid, and the 
     reporting requirements would not be required to be met, until 
     90 days after the date of enactment. Such provisions apply to 
     all individuals whose date of relinquishment of U.S. 
     citizenship or termination of U.S. residency occurs on or 
     after February 6, 1995.
     Conference agreement
       The conference agreement follows the House bill with 
     modifications. Under the conference agreement, modified rules 
     apply if an individual who is covered by section 877 
     contributes property that would produce U.S. source income to 
     a foreign corporation if (1) the individual, directly or 
     indirectly, owns 10 percent or more (by vote) of the stock of 
     such corporation and (2) the individual, directly, indirectly 
     or constructively, owns more than 50 percent (by vote or by 
     value) of the stock of such corporation. For purposes of 
     determining indirect and constructive ownership, the rules of 
     section 958 apply. Under the modified rules, for the ten-year 
     period following expatriation the individual is treated as 
     receiving or accruing directly the income or gains received 
     or accrued by the foreign corporation with respect to the 
     contributed property (or other property which has a basis 
     determined by reference to the basis of such contributed 
     property). Moreover, if the individual disposes of the stock 
     of the foreign corporation, the individual is subject to U.S. 
     tax on the gain that would have been recognized if the 
     corporation had sold such property immediately before the 
     disposition. If the individual disposes of less than all of 
     his or her stock in the foreign corporation, such disposition 
     is treated as a disposition of a pro rata share (determined 
     based on value) of such contributed property (e.g., if the 
     individual owns 100 shares of the foreign corporation's stock 
     and disposes of 10 of such shares, such disposition is 
     treated as a disposition of 10 percent of the property 
     contributed to the foreign corporation). Regulatory authority 
     is provided to prescribe regulations to prevent the avoidance 
     of this rule. Information reporting will be required as 
     necessary to carry out the purposes of this rule. In 
     addition, under the conference agreement, in the case of any 
     former U.S. citizen, a request for a ruling that such 
     individual's loss of citizenship would be due not earlier 
     than 90 days after date of enactment.


       c. treatment of bad debt deductions of thrift institutions

       (Sec. 401 of the House bill and and sec. 611 of the Senate 
     amendment.)
     Present law
       Generally, a taxpayer engaged in a trade or business may 
     deduct the amount of any debt that becomes wholly or 
     partially worthless during the year (the ``specific charge-
     off''

[[Page H9561]]

     method of sec. 166). Certain thrift institutions (building 
     and loan associations, mutual savings banks, or cooperative 
     banks) are allow deductions for bad debts under methods more 
     favorable than those granted to other taxpayers (and more 
     favorable than the rules applicable to other financial 
     institutions). Qualified thrift institutions may compute 
     deductions for bad debts using either the specific charge-off 
     method or the reserve method of section 593.
       Under section 593, a thrift institution annually may elect 
     to deduct bad debts under either (1) the ``percentage of 
     taxable income'' method applicable only to thrift 
     institutions, or (2) the ``experience'' method that also is 
     available to small banks. Under the ``percentage of taxable 
     income'' method, a thrift institution generally is allowed a 
     deduction for an addition to its bad debt reserve equal to 8 
     percent of its taxable income (determined without regard to 
     this deduction and with additional adjustments). Under the 
     experience method, a thrift institution generally is allowed 
     a deduction for an addition to its bad debt reserve equal to 
     the greater of (1) an amount based on its actual average 
     experience for losses in the current and five preceding 
     taxable years, or (2) an amount necessary to restore the 
     reserve to its balance as of the close of the base year.
       If a thrift institution becomes ineligible to use the 
     section 593 method, it is required to change its method of 
     accounting for bad debts and, under proposed Treasury 
     regulations, is required to recapture all or a portion of its 
     bad debt reserve. In addition, a thrift institution eligible 
     to use the section 593 method may be subject to a form of 
     reserve recapture if the institution makes certain excessive 
     distributions to its shareholders (sec. 593(e)).
     House bill
       Repeal of section 593
       The House bill repeals the section 593 reserve method of 
     accounting for bad debts by thrift institutions, effective 
     for taxable years beginning after 1995. Thrift institutions 
     that would be treated as small banks are allowed to utilize 
     the experience method applicable to such institutions, while 
     thrift institutions that are treated as large banks are 
     required to use only the specific charge-off method. Thus, 
     the percentage of taxable income method of accounting for bad 
     debts is no longer available for any financial institution.
       Treatment of recapture of bad debt reserves
       A thrift institution required to change its method of 
     computing reserves for bad debts will treat such change as a 
     change in a method of accounting, initiated by the taxpayer, 
     and having been made with the consent of the Secretary of the 
     Treasury. Any section 481(a) adjustment required to be 
     recaptured with respect to such change generally will be 
     determined solely with respect to the ``applicable excess 
     reserves'' of the taxpayer. The amount of applicable excess 
     reserves will be taken into account ratably over a six-
     taxable year period, beginning with the first taxable year 
     beginning after 1995, subject to the residential loan 
     requirement described below. In the case of a thrift 
     institution that becomes a large bank, the amount of the 
     institution's applicable excess reserves generally is the 
     excess of (1) the balances of its reserve for losses on 
     qualifying real property loans and its reserve for losses on 
     nonqualifying loans as of the close of its last taxable year 
     beginning before January 1, 1996, over (2) the balances of 
     such reserves as of the close of its last taxable year 
     beginning before January 1, 1988 (i.e., the ``pre-1988 
     reserves.'') Similar rules are provided for small banks that 
     are allowed to use the experience method.
       For taxable years that begin after December 31, 1995, and 
     before January 1, 1998, if the taxpayer continues to make a 
     certain level of residential loans, the recapture of the 
     applicable excess reserves otherwise required to be taken 
     into account for such years will be suspended.
       The balance of the pre-1988 reserves is subject to the 
     provisions of section 593(e), as modified by the House bill 
     (requiring recapture in the case of certain excessive 
     distributions to shareholders.)
       Other special recapture rules are provided if a thrift 
     institution no longer qualifies as a bank or if a thrift 
     institution becomes a credit union.
       Effective date
       The provision generally is effective for taxable years 
     beginning after December 31, 1995.
     Senate amendment
       The Senate amendment generally is the same as the House 
     bill, with certain modifications.
     Conference agreement
       The conference agreement does not include either the 
     provision in the House bill or the provision in the Senate 
     amendment.


                   d. earned income credit provisions

       (Sec. 411 of the House bill.)
     Present law
       In general
       Certain eligible low-income workers are entitled to claim a 
     refundable credit on their income tax return. The amount of 
     the credit an eligible individual may claim depends upon 
     whether the individual has one, more than one or no 
     qualifying children and is determined by multiplying the 
     credit rate by the individual's \25\ earned income up to an 
     earned income amount. The maximum amount of the credit is the 
     product of the credit rate and the earned income amount. For 
     individuals with earned income (or adjusted gross income 
     (AGI), if greater) in excess of the beginning of the phaseout 
     range, the maximum credit amount is reduced by the phaseout 
     rate multiplied by the amount of earned income (or AGI, if 
     greater) in excess of the beginning of the phaseout range. 
     For individuals with earned income (or AGI, if greater) in 
     excess of the end of the phaseout range, no credit is 
     allowed.
---------------------------------------------------------------------------
     \25\ In the case of a married individual who files a joint 
     return with his or her spouse, the income for purposes of 
     these tests is the combined income of the couple.
---------------------------------------------------------------------------
       The parameters for the credit depend upon the number of 
     qualifying children the individual claims. For 1996, the 
     parameters are given in the following table:

------------------------------------------------------------------------
                                   Two or more      One           No    
                                    qualifying   qualifying   qualifying
                                    children--    child--     children--
------------------------------------------------------------------------
Credit rate (percent)............        40.00        34.00         7.65
Earned income amount.............       $8,890       $6,330       $4,220
Maximum credit...................       $3,356       $2,152         $323
Phaseout begins..................      $11,610      $11,610       $5,280
Phaseout rate (percent)..........        21.06        15.98         7.65
Phaseout ends....................      $28,495      $25,078       $9,500
------------------------------------------------------------------------

       For years after 1996, the credit rates and the phaseout 
     rates will be the same as in the preceding table. The earned 
     income amount and the beginning of the phaseout range are 
     indexed for inflation; because the end of the phaseout range 
     depends on those amounts as well as the phaseout rate and the 
     credit rate, the end of the phaseout range will also increase 
     if there is inflation.
       In order to claim the credit, an individual must either 
     have a qualifying child or meet other requirements. A 
     qualifying child must meet a relationship test, an age test, 
     an identification test, and a residence test. In order to 
     claim the credit without a qualifying child, an individual 
     must not be a dependent and must be over age 24 and under age 
     65.
       To satisfy the identification test, individuals must 
     include on their tax return the name and age of each 
     qualifying child. For returns filed with respect to tax year 
     1996, individuals must provide a taxpayer identification 
     number (TIN) for all qualifying children born on or before 
     November 30, 1996. For returns filed with respect to tax year 
     1997 and all subsequent years, individuals must provide TINs 
     for all qualifying children, regardless of their age. An 
     individual's TIN is generally that individual's social 
     security number.
       Mathematical or clerical errors
       The IRS may summarily assess additional tax due as a result 
     of a mathematical or clerical error without sending the 
     taxpayer a notice of deficiency and giving the taxpayer an 
     opportunity to petition the Tax Court. Where the IRS uses the 
     summary assessment procedure for mathematical or clerical 
     errors, the taxpayer must be given an explanation of the 
     asserted error and a period of 60 days to request that the 
     IRS abate its assessment. The IRS may not proceed to collect 
     the amount of the assessment until the taxpayer has agreed to 
     it or has allowed the 60-day period for objecting to expire. 
     If the taxpayer files a request for abatement of the 
     assessment specified in the notice, the IRS must abate the 
     assessment. Any reassessment of the abated amount is subject 
     to the ordinary deficiency procedures. The request for 
     abatement of the assessment is the only procedure a taxpayer 
     may use prior to paying the assessed amount in order to 
     contest an assessment arising out of a mathematical or 
     clerical error. Once the assessment is satisfied, however, 
     the taxpayer may file a claim for refund if he or she 
     believes the assessment was made in error.
     House bill
       Under the House bill, individuals are not eligible for the 
     credit if they do not include their taxpayer identification 
     number (and, if married, their spouse's taxpayer 
     identification number) on their tax return. Solely for these 
     purposes and for purposes of the present-law identification 
     test for a qualifying child, a taxpayer identification number 
     is defined as a social security number issued to an 
     individual by the Social Security Administration other than a 
     number issued under section 205(c)(2)(B)(i)(II) (or that 
     portion of sec. 205(c)(2)(B)(i)(III) relating to it) of the 
     Social Security Act (regarding the issuance of a number to an 
     individual applying for or receiving Federally funded 
     benefits).
       If an individual fails to provide a correct taxpayer 
     identification number, such omission will be treated as a 
     mathematical or clerical error. If an individual who claims 
     the credit with respect to net earnings from self-employment 
     fails to pay the proper amount of self-employment tax on such 
     net earnings, the failure will be treated as a mathematical 
     or clerical error for purposes of the amount of credit 
     allowed.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1995.
     Senate amendment
       No provision.
     Conference agreement
       The conference agreement does not include the House bill 
     provision.


                 e. modify treatment of foreign trusts

       (Secs. 601-606 of the Senate amendment).
     Present law
       Inbound grantor trusts with foreign grantors
       Under the grantor trust rules (secs. 671-679), a grantor 
     that retains certain rights or

[[Page H9562]]

     powers generally is treated as the owner of the trust's 
     assets without regard to whether the grantor is a domestic or 
     foreign person. Under these rules, U.S. trust beneficiaries 
     are not subject to U.S. tax on distributions from a trust 
     where a foreign grantor is treated as owner of the trust, 
     even though no tax may be imposed on the trust income by any 
     jurisdiction. In addition, a special rule provides that if a 
     U.S. beneficiary of an inbound grantor trust transfers 
     property to the foreign grantor by gift, that U.S. 
     beneficiary is treated as the grantor of the trust to the 
     extent of the transfer.
       Foreign trusts that are not grantor trusts
       Under the accumulation distribution rules (which generally 
     apply to distributions from a trust in excess of the trust's 
     distributable net income for the taxable year), a 
     distribution by a foreign nongrantor trust of previously 
     accumulated income generally is taxed at the U.S. 
     beneficiary's average marginal rate for the prior 5 years, 
     plus interest (secs. 666 and 667). Interest is computed at a 
     fixed annual rate of 6 percent, with no compounding (sec. 
     668). If adequate records of the trust are not available to 
     determine the proper application of the rules relating to 
     accumulation distributions to any distribution from a trust, 
     the distribution is treated as an accumulation distribution 
     out of income earned during the first year of the trust (sec. 
     666(d)).
       If a foreign nongrantor trust makes a loan to one of its 
     beneficiaries, the principal of such a loan generally is not 
     taxable as income to the beneficiary.
       Outbound foreign grantor trusts with U.S. grantors
       Under the grantor trust rules, a U.S. person that transfers 
     property to a foreign trust generally is treated as the owner 
     of the portion of the trust comprising that property for any 
     taxable year in which there is a U.S. beneficiary of any 
     portion of the trust (sec. 679(a)). This treatment generally 
     does not apply, however, to transfers by reason of death, to 
     transfers made before the transferor became a U.S. person, or 
     to transfers that represent sales or exchanges of property at 
     fair market value where gain is recognized to the transferor.
       Residence of trusts and estates
       An estate or trust is treated as foreign if it is not 
     subject to U.S. income taxation on its income that is neither 
     derived from U.S. sources nor effectively connected with the 
     conduct of a U.S. trade or business. Thus, if a trust is 
     taxed in a manner similar to a nonresident alien individual, 
     it is considered to be a foreign trust. Any other trust is 
     treated as domestic.
       Section 1491 generally imposes a 35-percent excise tax on a 
     U.S. person that transfers appreciated property to certain 
     foreign entities, including a foreign trust. In the case of a 
     domestic trust that changes its situs and becomes a foreign 
     trust, it is unclear whether property has been transferred 
     from a U.S. person to a foreign entity and, thus, whether the 
     transfer is subject to the excise tax.
       Information reporting and penalties related to foreign 
           trusts
       Any U.S. person that creates a foreign trust or transfers 
     money or property to a foreign trust is required to report 
     that event to the Treasury Department without regard to 
     whether the trust is a grantor trust or a nongrantor trust. 
     Similarly, any U.S. person that transfers property to a 
     foreign trust that has one or more U.S. beneficiaries is 
     required to report annually to the Treasury Department. In 
     addition, any U.S. person that makes a transfer described in 
     section 1491 is required to report the transfer to the 
     Treasury Department.
       Any person that fails to file a required report with 
     respect to the creation of, or a transfer to, a foreign trust 
     may be subject to a penalty of 5 percent of the amount 
     transferred to the foreign trust. Similarly, any person that 
     fails to file a required annual report with respect to a 
     foreign trust with U.S. beneficiaries may be subject to a 
     penalty of 5 percent of the value of the corpus of the trust 
     at the close of the taxable year. The maximum amount of the 
     penalty imposed under either case may not exceed $1,000. A 
     reasonable cause exception is available.
       Reporting of foreign gifts
       There is no requirement to report gifts or bequests from 
     foreign sources.
     House bill
       No provision.
     Senate amendment
       Inbound grantor trusts with foreign grantors
       The Senate amendment generally applies the grantor trust 
     rules only to the extent that they result, directly or 
     indirectly, in income or other amounts being currently taken 
     into account in computing the income of a U.S. citizen or 
     resident or a domestic corporation. Certain exceptions apply 
     to this general rule. Under one exception, the grantor trust 
     rules continue to apply to a revocable trust. Under another 
     exception, the grantor trust rules continue to apply to a 
     trust where the only amounts distributable during the 
     lifetime of the grantor are to the grantor or the grantor's 
     spouse. The general rule denying grantor trust status does 
     not apply to trusts established to pay compensation, and 
     certain trusts in existence as of September 19, 1995 provided 
     that such trust is treated as owned by the grantor under 
     section 676 or 677 (other than sec. 677(a)(3)).\26\ In 
     addition, the grantor trust rules generally apply where the 
     grantor is a controlled foreign corporation (as defined in 
     sec. 957). Finally, the grantor trust rules continue to apply 
     in determining whether a foreign corporation is characterized 
     as a passive foreign investment company (``PFIC''). Thus, a 
     foreign corporation cannot avoid PFIC status by transferring 
     its assets to a grantor trust.
---------------------------------------------------------------------------
     \26\ The exception does not apply to the portion of any such 
     trust attributable to any transfers made after September 19, 
     1995.
---------------------------------------------------------------------------
       If a U.S. beneficiary of an inbound grantor trust transfers 
     property to the foreign grantor, such beneficiary generally 
     is treated as a grantor of a portion of the trust to the 
     extent of the transfer. This rule applies without regard to 
     whether the foreign grantor is otherwise treated as the owner 
     of any portion of such trust. However, this rule does not 
     apply if the transfer is a gift that qualifies for the annual 
     exclusion described in section 2503(b).
       The Senate amendment provides a special rule that allows 
     the Secretary of the Treasury to recharacterize a transfer, 
     directly or indirectly, from a partnership or foreign 
     corporation which the transferee treats as a gift or bequest, 
     to prevent the avoidance of the purpose of section 672(f). In 
     a case where a foreign person (that would be treated as the 
     owner of a trust but for the above rule) actually pays tax on 
     the income of the trust to a foreign country, it is 
     anticipated that Treasury regulations will provide that, for 
     foreign tax credit purposes, U.S. beneficiaries that are 
     subject to U.S. income tax on the same income will be treated 
     as having paid the foreign taxes that are paid by the foreign 
     grantor. Any resulting foreign tax credits will be subject to 
     applicable foreign tax credit limitations.
       Effective date.--The provisions described in this part are 
     effective on the date of enactment.
       Foreign trusts that are not grantor trusts
       The Senate amendment changes the interest rate applicable 
     to accumulation distributions from foreign trusts from simple 
     interest at a fixed rate of 6 percent to compound interest 
     determined in the same manner as interest imposed on 
     underpayments of tax under section 6621(a)(2). Simple 
     interest is accrued at the rate of 6 percent through 1995. 
     Beginning on January 1, 1996 compound interest based on the 
     underpayment rate is imposed on tax amounts determined under 
     the accumulation distribution rules and the total simple 
     interest for pre-1996 periods, if any. For purposes of 
     computing the interest charge, the accumulation distribution 
     is allocated proportionately to prior trust years in which 
     the trust has undistributed net income (and the beneficiary 
     receiving the distribution was a U.S. citizen or resident), 
     rather than to the earliest of such years. An accumulation 
     distribution is treated as reducing proportionately the 
     undistributed net income from prior years.
       In the case of a loan of cash or marketable securities by 
     the foreign trust to a U.S. grantor or a U.S. beneficiary (or 
     a U.S. person related to such grantor or beneficiary), except 
     to the extent provided by Treasury regulations, the Senate 
     amendment treats the full amount of the loan as distributed 
     to the grantor or beneficiary. It is expected that the 
     Treasury regulations will provide an exception from this 
     treatment for loans with arm's-length terms. In applying this 
     exception, it is further expected that consideration be given 
     to whether there is a reasonable expectation that a loan will 
     be repaid. In addition, any subsequent transaction between 
     the trust and the original borrower regarding the principal 
     of the loan (e.g., repayment) is disregarded for all purposes 
     of the Code. This provision does not apply to loans made to 
     persons that are exempt from U.S. income tax.
       Effective date.--The provision to modify the interest 
     charge on accumulation distributions applies to distributions 
     after the date of enactment. The provision with respect to 
     loans to U.S. grantors, U.S. beneficiaries or a U.S. person 
     related to such a grantor or beneficiary applies to loans 
     made after September 19, 1995.
       Outbound foreign grantor trusts with U.S. grantors
       The Senate amendment makes several modifications to the 
     general rule of section 679(a)(1) under which a U.S. person 
     who transfers property to a foreign trust generally is 
     treated as the owner of the portion of the trust comprising 
     that property for any taxable year in which there is a U.S. 
     beneficiary of the trust. The Senate amendment also conforms 
     the definition of certain foreign corporations the income of 
     which is deemed to be accumulated for the benefit of a U.S. 
     beneficiary to the definition of controlled foreign 
     corporations (as defined in sec. 957(a)).
       Sale or exchange at market value.--Present law contains 
     several exceptions to grantor trust treatment under section 
     679(a)(1) described above. Under one of the exceptions, 
     grantor trust treatment does not result from a transfer of 
     property by a U.S. person to a foreign trust in the form of a 
     sale or exchange at fair market value where gain is 
     recognized to the transferor. In determining whether the 
     trust paid fair market value to the transferor, the Senator 
     amendment provides that obligations issued (or, to the extent 
     provided by regulations, guaranteed) by the trust, by any 
     grantor or beneficiary of the trust, or by any person related 
     to any grantor or beneficiary (referred to as ``trust 
     obligations'') are not taken into account except as provided 
     in Treasury regulations. It

[[Page H9563]]

     is expected that the Treasury regulations will provide an 
     exception from this treatment for loans with arm's-length 
     terms. In applying this exception, it is further expected 
     that consideration be given to whether there is a reasonable 
     expectation that a loan will be repaid. Principal payments by 
     the trust on any such trust obligations generally will reduce 
     the portion of the trust attributable to the property 
     transferred (i.e., the portion of which the transferor is 
     treated as the grantor).
       Other transfers.--The Senate amendment adds a new exception 
     to the general rule of section 679(a)(1) described above. 
     Under the Senate amendment, a transfer of property to certain 
     charitable trusts is exempt from the application of the rules 
     treating foreign trusts with U.S. grantors and U.S. 
     beneficiaries as grantor trusts.
       Transferors or beneficiaries who become U.S. persons.--The 
     Senate amendment applies the rule of section 679(a)(1) to 
     certain foreign persons who transfer property to a foreign 
     trust and subsequently become U.S. persons. A nonresident 
     alien individual who transfers property, directly or 
     indirectly, to a foreign trust and then becomes a resident of 
     the United States within 5 years after the transfer generally 
     is treated as making a transfer to the foreign trust on the 
     individual's U.S. residency starting date (as defined in sec. 
     7701(b)(2)(A)). The amount of the deemed transfer is the 
     portion of the trust (including undistributed earnings) 
     attributable to the property previously transferred. 
     Consequently, the individual generally is treated under 
     section 679(a)(1) as the owner of that portion of the trust 
     in any taxable year in which the trust has U.S. 
     beneficiaries.
       Outbound trust migrations.--The Senate amendment applies 
     the rules of section 679(a)(1) to a U.S. person that 
     transferred property to a domestic trust if the trust 
     subsequently becomes a foreign trust while the transferor is 
     still alive. Such a person is deemed to make a transfer to 
     the foreign trust on the date of the migration. The amount of 
     the deemed transfer is the portion of the trust (including 
     undistributed earnings) attributable to the property 
     previously transferred. Consequently, the individual 
     generally is treated under the rules of section 679(a)(1) as 
     the owner of that portion of the trust in any taxable year in 
     which the trust has U.S. beneficiaries.
       Effective date.--The provisions to amend section 679 apply 
     to transfers of property after February 6, 1995.
       Anti-abuse regulatory authority
       The Senate amendment includes an anti-abuse rule which 
     authorizes the Secretary of the Treasury to issue 
     regulations, on or after the date of enactment, that may be 
     necessary or appropriate to carry out the purposes of the 
     rules applicable to estates, trusts and beneficiaries, 
     including regulations to prevent the avoidance of those 
     purposes.
       Effective date.--The provision is effective on the date of 
     enactment.
       Residence of trusts and estates
       The Senate amendment establishes a two-part objective test 
     for determining for tax purposes whether a trust is foreign 
     or domestic. If both parts of the test are satisfied, the 
     trust is treated as domestic. Only the first part of the test 
     applies to estates. Under the first part of the test, if a 
     U.S. court (i.e., Federal, State, or local) exercises primary 
     supervision over the administration of a trust or estate, the 
     trust or estate is treated as domestic. Under the second part 
     of the test, in order for a trust to be treated as domestic, 
     one or more U.S. fiduciaries must have the authority to 
     control all substantial decisions of the trust.
       Under the Senate amendment, if a domestic trust changes its 
     situs and becomes a foreign trust, the trust is treated as 
     having made a transfer of its assets to a foreign trust and 
     is subject to the 35-percent excise tax imposed by present-
     law section 1491 unless one of the exceptions to this excise 
     tax is applicable.
       Effective date.--The provision to modify the treatment of a 
     trust or estate as a U.S. person applies to taxable years 
     beginning after December 31, 1996. In addition, if the 
     trustee of a trust so elects, the provision would apply to 
     taxable years ending after the date of enactment. The 
     amendment to section 1491 is effective on the date of 
     enactment.
       Information reporting and penalties relating to foreign 
           trusts
       The Senate amendment generally requires the grantor, 
     transferor or executor (i.e., the ``responsible party'') to 
     notify the Treasury Department upon the occurrence of certain 
     reportable events. The term ``reportable event'' means the 
     creation of any foreign trust by a U.S. person, the direct 
     and indirect transfer of any money or property to a foreign 
     trust, including a transfer by reason of death, and the death 
     of a U.S. citizen or resident if any portion of a foreign 
     trust was included in the gross estate of the decedent. In 
     addition, a U.S. owner of any portion of a foreign trust is 
     required to ensure that the trust files an annual return to 
     provide full accounting of all the trust activities for the 
     taxable year. Finally, any U.S. person that relieves 
     (directly or indirectly) any distribution from a foreign 
     trust is required to file a return to report the aggregate 
     amount of the distributions received during the year.
       The Senate amendment provides that if a U.S. owner of any 
     portion of a foreign trust fails to appoint a limited U.S. 
     agent to accept service of process with respect to any 
     requests and summons by the Secretary of the Treasury in 
     connection with the tax treatment of any items related to the 
     trust, the Secretary of the Treasury may determine the tax 
     consequences of amounts to be taken into account under the 
     grantor trust rules. In cases where adequate records are not 
     provided to the Secretary of Treasury to determine the proper 
     treatment of any distributions from a foreign trust, the 
     distribution is includible in the gross income of the U.S. 
     distributee and is treated as an accumulation distribution 
     from the middle year of a foreign trust (i.e., computed by 
     taking the number of years that the trust has been in 
     existence divided by 2) for purposes of computing the 
     interest charge applicable to such distribution, unless the 
     foreign trust elects to have a U.S. agent for the limited 
     purpose of accepting service of process (as described above).
       Under the Senate amendment, a person that fails to provide 
     the required notice or return in cases involving the transfer 
     of property to a new or existing foreign trust, or a 
     distribution by a foreign trust to a U.S. person, is subject 
     to an initial penalty equal to 35 percent of the gross 
     reportable amount (generally the value of the property 
     involved in the transaction). A failure to provide an annual 
     reporting of trust activities will result in an initial 
     penalty equal to 5 percent of the gross reportable amount. An 
     additional $10,000 penalty is imposed for continued failure 
     for each 30-day period (or fraction thereof) beginning 90 
     days after the Treasury Department notifies the responsible 
     party of such failure. Such penalties are subject to a 
     reasonable cause exception. In no event will the total amount 
     of penalties exceed the gross reportable amount.
       Effective date.--The reporting requirements and applicable 
     penalties generally apply to reportable events occurring or 
     distributions received after the date of enactment. The 
     annual reporting requirement and penalties applicable to U.S. 
     grantors apply to taxable years of such persons beginning 
     after the date of enactment.
       Reporting of foreign gifts
       The Senate amendment generally requires any U.S. person 
     (other than certain tax-exempt organizations) that receives 
     purported gifts or bequests from foreign sources totaling 
     more than $10,000 during the taxable year to report them to 
     the Treasury Department. The threshold for this reporting 
     requirement is indexed for inflation. The definition of a 
     gift to a U.S. person for this purpose excludes amounts that 
     are qualified tuition or medical payments made on behalf of 
     the U.S. person, as defined for gift tax purposes (sec. 
     2503(e)(2)). If the U.S. person fails, without reasonable 
     cause, to report foreign gifts as required, the Treasury 
     Secretary is authorized to determine, in his sole discretion, 
     the tax treatment of the unreported gifts. In addition, the 
     U.S. person is subject to a penalty equal to 5 percent of the 
     amount of the gift for each month that the failure continues, 
     with the total penalty not to exceed 25 percent of such 
     amount.
       Effective date.--The provision applies to amounts received 
     after the date of enactment.
     Conference agreement
       The conference agreement does not include the Senate 
     amendment.


    f. repeal of financial institution transition rule to interest 
                            allocation rules

     Present law
       For foreign tax credit purposes, taxpayers generally are 
     required to allocate and apportion interest expense between 
     U.S. and foreign source income based on the proportion of the 
     taxpayer's total assets in each location. Such allocation and 
     apportionment is required to be made for affiliated groups 
     (as defined in sec. 864(e)(5)) as a whole rather than on a 
     subsidiary-by-subsidiary basis. However, certain types of 
     financial institutions that are members of an affiliated 
     group are treated as members of a separate affiliated group 
     for purposes of allocating and apportioning their interest 
     expense. Section 1215(c)(5) of the Tax Reform Act of 1986 
     (P.L. 99-514, 100 Stat. 2548) includes a targeted rule which 
     treats a certain corporation as a financial institution for 
     this purpose.
     House bill
       No provision.
     Senate amendment
       No provision. However, section 1606 of the Senate amendment 
     to H.R. 3448 (Small Business Job Protection Act of 1996) 
     contained a provision that repeals section 1215(c)(5) of the 
     Tax Reform Act of 1986.
       Effective date.--Taxable years beginning after December 31, 
     1995.
     Conference agreement
       The conference agreement includes the provision in the 
     Senate amendment to H.R. 3448 with one modification. The 
     conference agreement repeals section 1215(c)(5) of the Tax 
     Reform Act of 1986 effective on the date of enactment. Under 
     the conference agreement, a taxpayer will perform two 
     computations with respect to its taxable year that includes 
     the enactment date. Under the first computation, the 
     taxpayer's pre-effective date interest expense is allocated 
     and apportioned taking into account the targeted rule, and 
     under the second computation, the taxpayer's post-effective 
     date interest expense is allocated and apportioned without 
     regard to the targeted rule. These computations will not 
     require a closing of a taxpayer's books and records and it is 
     intended that an

[[Page H9564]]

     administratively simple approach be used in applying this 
     rule.

     Bill Archer,
     Bill Thomas,
     Tom Bliley,
     Michael Bilirakis,
     William F. Goodling,
     H.W. Fawell,
     Henry Hyde,
     Bill McCollum,
     J. Dennis Hastert,
                                Managers on the Part of the House.

     Bill Roth
     Nancy Landon Kassebaum,
     Trent Lott,
     Ted Kennedy,
     Managers on the Part of the Senate.

                          ____________________