    [House Report 104-496]
    [From the U.S. Government Publishing Office]

    104th Congress                                            Rept. 104-496
                            HOUSE OF REPRESENTATIVES

     2d Session                                                      Part 1
    _______________________________________________________________________

           HEALTH COVERAGE AVAILABILITY AND AFFORDABILITY ACT OF 1996

    _______________________________________________________________________

                     March 25, 1996.--Ordered to be printed

                                    _______

        Mr. Archer, from the Committee on Ways and Means, submitted the
                                   following

                                  R E P O R T

                                 together with

                                DISSENTING VIEWS

                            [To accompany H.R. 3103]

          [Including cost estimate of the Congressional Budget Office]

      The Committee on Ways and Means, to whom was referred 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 considered the same, report favorably thereon with an
    amendment and recommend that the bill as amended do pass.
      The amendment is as follows:
      Strike out all after the enacting clause and insert in lieu
    thereof the following:

    SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

      (a) Short Title.--This Act may be cited as the ``Health Coverage
    Availability and Affordability 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--IMPROVED AVAILABILITY AND PORTABILITY OF HEALTH INSURANCE
                                    COVERAGE

                 Subtitle A--Coverage Under Group Health Plans

    Sec. 101. Portability of coverage for previously covered individuals.
    Sec. 102. Limitation on preexisting condition exclusions; no
    application to certain newborns, adopted children, and pregnancy.
    Sec. 103. Prohibiting exclusions based on health status and providing
    for enrollment periods.
    Sec. 104. Enforcement.

                  Subtitle B--Definitions; General Provisions

    Sec. 191. Definitions; scope of coverage.
    Sec. 192. State flexibility to provide greater protection.
    Sec. 193. Effective date.
    Sec. 194. Rule of construction.

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

    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
    discounting and managed care 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. Clarification of level of intent required for imposition of
    sanctions.
    Sec. 233. Penalty for false certification for home health services.

                     Subtitle E--Revisions to Criminal Law

    Sec. 241. Definition of 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.

                   Subtitle F--Administrative Simplification

                 Part 1--General Administrative Simplification

    Sec. 251. Purpose.
    Sec. 252. 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.
            ``Sec. 1178. Effect on State law.
            ``Sec. 1179. Health Information Advisory Committee.

         Part 2--Administrative Simplification for Laboratory Services

    Sec. 261. Administrative simplification for laboratory services.

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

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

                    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 long-term care insurance
    policies.
    Sec. 327. Coordination with State requirements.
    Sec. 328. 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--High-Risk Pools

    Sec. 341. Exemption from income tax for State-sponsored organizations
    providing health coverage for high-risk individuals.

                Subtitle F--Organizations Subject to Section 833

    Sec. 351. Organizations subject to section 833.

                           TITLE IV--REVENUE OFFSETS

    Sec. 400. Amendment of 1986 Code.

       Subtitle A--Repeal of Bad Debt Reserve Method for Thrift Savings
                                  Associations

    Sec. 401. Repeal of bad debt reserve method for thrift savings
    associations.

                 Subtitle B--Reform of the Earned Income Credit

    Sec. 411. Earned income credit denied to individuals not authorized to
    be employed in the United States.

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

    Sec. 421. Revision of income, estate, and gift taxes on individuals who
    lose United States citizenship.
    Sec. 422. Information on individuals losing United States citizenship.
    Sec. 423. Report on tax compliance by United States citizens and
    residents living abroad.

      TITLE I--IMPROVED AVAILABILITY AND PORTABILITY OF HEALTH INSURANCE
                                    COVERAGE

                 Subtitle A--Coverage Under Group Health Plans

    SEC. 101. PORTABILITY OF COVERAGE FOR PREVIOUSLY COVERED INDIVIDUALS.

      (a) Crediting Periods of Previous Coverage Toward Preexisting
    Condition Restrictions.--Subject to the succeeding provisions of this
    section, a group health plan, and an insurer or health maintenance
    organization offering health insurance coverage in connection with a
    group health plan, shall provide that any preexisting condition
    limitation period (as defined in subsection (b)(2)) is reduced by the
    length of the aggregate period of qualified prior coverage (if any, as
    defined in subsection (b)(3)) applicable to the participant or
    beneficiary as of the date of commencement of coverage under the plan.
      (b) Definitions and Other Provisions Relating to Preexisting
    Conditions.--
              (1) Preexisting condition.--
                      (A) In general.--For purposes of this subtitle,
                    subject to subparagraph (B), the term ``preexisting
                    condition'' means a condition, 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 day before--
                              (i) the effective date of the coverage of
                            such participant or beneficiary, or
                              (ii) the earliest date upon which such
                            coverage could have been effective if there
                            were no waiting period applicable,
                    whichever is earlier.
                      (B) Treatment of genetic information.--For purposes
                    of this section, genetic information shall not be
                    considered to be a preexisting condition, so long as
                    treatment of the condition to which the information is
                    applicable has not been sought during the 6-month
                    period described in subparagraph (A).
              (2) Preexisting condition limitation period.--For purposes of
            this subtitle, the term ``preexisting condition limitation
            period'' means, with respect to coverage of an individual under
            a group health plan or under health insurance coverage, the
            period during which benefits with respect to treatment of a
            condition of such individual are not provided based on the fact
            that the condition is a preexisting condition.
              (3) Aggregate period of qualified prior coverage.--
                      (A) In general.--For purposes of this section, the
                    term ``aggregate period of qualified prior coverage''
                    means, with respect to commencement of coverage of an
                    individual under a group health plan or health
                    insurance coverage offered in connection with a group
                    health plan, the aggregate of the qualified coverage
                    periods (as defined in subparagraph (B)) of such
                    individual occurring before the date of such
                    commencement. Such period shall be treated as zero if
                    there is more than a 60-day break in coverage under a
                    group health plan (or health insurance coverage offered
                    in connection with such a plan) between the date the
                    most recent qualified coverage period ends and the date
                    of such commencement.
                      (B) Qualified coverage period.--
                              (i) In general.--For purposes of this
                            paragraph, subject to subsection (c), the term
                            ``qualified coverage period'' means, with
                            respect to an individual, any period of
                            coverage of the individual under a group health
                            plan, health insurance coverage, under title
                            XVIII or XIX of the Social Security Act,
                            coverage under the TRICARE program under
                            chapter 55 of title 10, United States Code, a
                            program of the Indian Health Service, and State
                            health insurance coverage or risk pool, and
                            includes coverage under a health plan offered
                            under chapter 89 of title 5, United States
                            Code.
                              (ii) Disregarding periods before breaks in
                            coverage.--Such term does not include any
                            period occurring before any 60-day break in
                            coverage described in subparagraph (A).
                      (C) Waiting period not treated as a break in
                    coverage.--For purposes of subparagraphs (A) and (B),
                    any period that is in a waiting period for any coverage
                    under a group health plan (or for health insurance
                    coverage offered in connection with a group health
                    plan) shall not be considered to be a break in coverage
                    described in subparagraph (B)(ii).
                      (D) Establishment of period.--A qualified coverage
                    period with respect to an individual shall be
                    established through presentation of certifications
                    described in subsection (c) or in such other manner as
                    may be specified in regulations to carry out this
                    section.
      (c) Certifications of Coverage; Conforming Coverage.--
              (1) In general.--The plan administrator of a group health
            plan, or the insurer or HMO offering health insurance coverage
            in connection with a group health plan, shall, on request made
            on behalf of an individual covered (or previously covered
            within the previous 18 months) under the plan or coverage,
            provide for a certification of the period of coverage of the
            individual under such plan or coverage and of the waiting
            period (if any) imposed with respect to the individual for any
            coverage under the plan.
              (2) Standard method.--Subject to paragraph (3), a group
            health plan, or insurer or HMO offering health insurance
            coverage in connection with a group health plan, shall
            determine qualified coverage periods under subsection (b)(3)(B)
            by including all periods described in such subsection, without
            regard to the specific benefits offered during such a period.
              (3) Alternative method.--Such a plan, insurer, or HMO may
            elect to make such determination on a benefit-specific basis
            for all participants and beneficiaries and not to include as a
            qualified coverage period with respect to a specific benefit
            coverage during a previous period unless such previous coverage
            for that benefit was included at the end of the most recent
            period of coverage. In the case of such an election--
                      (A) the plan, insurer, or HMO shall prominently state
                    in any disclosure statements concerning the plan or
                    coverage and to each enrollee at the time of enrollment
                    under the plan (or at the time the health insurance
                    coverage is offered for sale in the group health
                    market) that the plan or coverage has made such
                    election and shall include a description of the effect
                    of this election; and
                      (B) upon the request of the plan, insurer, or HMO,
                    the entity providing a certification under paragraph
                    (1)--
                              (i) shall promptly disclose to the requesting
                            plan, insurer, or HMO the plan statement
                            (insofar as it relates to health benefits under
                            the plan) or other detailed benefit information
                            on the benefits available under the previous
                            plan or coverage, and
                              (ii) may charge for the reasonable cost of
                            providing such information.

    SEC. 102. LIMITATION ON PREEXISTING CONDITION EXCLUSIONS; NO
                        APPLICATION TO CERTAIN NEWBORNS, ADOPTED CHILDREN,
                        AND PREGNANCY.

      (a) Limitation of Period.--
              (1) In general.--Subject to the succeeding provisions of this
            section, a group health plan, and an insurer or HMO offering
            health insurance coverage in connection with a group health
            plan, shall provide that any preexisting condition limitation
            period (as defined in section 101(b)(2)) does not exceed 12
            months, counting from the effective date of coverage.
              (2) Extension of period in the case of late enrollment.--In
            the case of a participant or beneficiary whose initial coverage
            commences after the date the participant or beneficiary first
            becomes eligible for coverage under the group health plan, the
            reference in paragraph (1) to ``12 months'' is deemed a
            reference to ``18 months''.
      (b) Exclusion Not Applicable to Certain Newborns and Certain
    Adoptions.--
              (1) In general.--Subject to paragraph (2), a group health
            plan, and an insurer or HMO offering health insurance coverage
            in connection with a group health plan, may not provide any
            limitation on benefits based on the existence of a preexisting
            condition in the case of--
                      (A) an individual who within the 30-day period
                    beginning with the date of birth, or
                      (B) an adopted child or a child placed for adoption
                    beginning at the time of adoption or placement if the
                    individual, within the 30-day period beginning on the
                    date of adoption or placement,
            becomes covered under a group health plan or otherwise becomes
            covered under health insurance coverage (or covered for medical
            assistance under title XIX of the Social Security Act).
              (2) Loss if break in coverage.--Paragraph (1) shall no longer
            apply to an individual if the individual does not have any
            coverage described in section 101(b)(3)(B)(i) for a continuous
            period of 60 days, not counting in such period any days that
            are in a waiting period for any coverage under a group health
            plan.
              (3) Placed for adoption defined.--In this subsection and
            section 103(d), 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.
      (c) Exclusion Not Applicable to Pregnancy.--For purposes of this
    section, pregnancy shall not be treated as a preexisting condition.
      (d) Eligibility Period Imposed by Health Maintenance Organizations as
    Alternative to Preexisting Condition Limitation.--A health maintenance
    organization which offers health insurance coverage in connection with
    a group health plan and which does not use the preexisting condition
    limitations allowed under this section and section 101 with respect to
    any particular coverage option may impose an eligibility period for
    such coverage option, but only if such period does not exceed--
              (1) 60 days, in the case of a participant or beneficiary
            whose initial coverage commences at the time such participant
            or beneficiary first becomes eligible for coverage under the
            plan, or
              (2) 90 days, in the case of a participant or beneficiary
            whose initial coverage commences after the date on which such
            participant or beneficiary first becomes eligible for coverage.
    Such an HMO may use alternative methods, from those described in the
    previous sentence, to address adverse selection as approved by the
    applicable State authority. For purposes of this subsection, the term
    ``eligibility 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. Any such eligibility period shall be treated for purposes of
    this subtitle as a waiting period under the plan and shall run
    concurrently with any other applicable waiting period under the plan.

    SEC. 103. PROHIBITING EXCLUSIONS BASED ON HEALTH STATUS AND PROVIDING
                        FOR ENROLLMENT PERIODS.

      (a) Prohibition of Exclusion of Participants or Beneficiaries Based
    on Health Status.--
              (1) In general.--A group health plan, and an insurer or HMO
            offering health insurance coverage in connection with a group
            health plan, may not exclude an employee or his or her
            beneficiary from being (or continuing to be) a participant or
            beneficiary under the terms of such plan or coverage based on
            health status (as defined in section 191(c)(6)).
              (2) Construction.--Nothing in this subsection shall be
            construed as preventing the establishment of preexisting
            condition limitations and restrictions to the extent consistent
            with the provisions of this subtitle.
      (b) Enrollment of Eligible Individuals Who Lose Other Coverage.--A
    group health plan shall permit an uncovered employee who is otherwise
    eligible for coverage under the terms of the plan (or an uncovered
    dependent, as defined under the terms of the plan, of such an employee,
    if family coverage is available) to enroll for coverage under the plan
    under at least one benefit option if each of the following conditions
    is met:
              (1) 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.
              (2) 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.
              (3) The employee or dependent lost coverage under a group
            health plan or health insurance coverage (as a result of loss
            of eligibility for the coverage, termination of employment, or
            reduction in the number of hours of employment).
              (4) The employee requests such enrollment within 30 days
            after the date of termination of such coverage.
      (c) Dependent Beneficiaries.--
              (1) In general.--If a group health plan makes family coverage
            available, the plan may not require, as a condition of coverage
            of an individual as a dependent (as defined under the terms of
            the plan) of a participant in the plan, a waiting period
            applicable to the coverage of a dependent who--
                      (A) is a newborn,
                      (B) is an adopted child or child placed for adoption
                    (within the meaning of section 102(b)(3)), at the time
                    of adoption or placement, or
                      (C) is a spouse, at the time of marriage,
            if the participant has met any waiting period applicable to
            that participant.
              (2) Timely enrollment.--
                      (A) In general.--Enrollment of a participant's
                    beneficiary described in paragraph (1) shall be
                    considered to be timely if a request for enrollment is
                    made within 30 days of the date family coverage is
                    first made available or, in the case described in--
                              (i) paragraph (1)(A), within 30 days of the
                            date of the birth,
                              (ii) paragraph (1)(B), within 30 days of the
                            date of the adoption or placement for adoption,
                            or
                              (iii) paragraph (1)(C), within 30 days of the
                            date of the marriage with such a beneficiary
                            who is the spouse of the participant,
                    if family coverage is available as of such date.
                      (B) Coverage.--If available coverage includes family
                    coverage and enrollment is made under such coverage on
                    a timely basis under subparagraph (A), the coverage
                    shall become effective not later than the first day of
                    the first month beginning 15 days after the date the
                    completed request for enrollment is received.

    SEC. 104. ENFORCEMENT.

      (a) Enforcement Through COBRA Provisions in Internal Revenue Code.--
              (1) Application of COBRA sanctions.--Subsection (a) of
            section 4980B of the Internal Revenue Code of 1986 is amended
            by striking ``the requirements of'' and all that follows and
            inserting ``the requirements of--
              ``(1) subsection (f) with respect to any qualified
            beneficiary, or
              ``(2) subject to subsection (h)--
                      ``(A) section 101 or 102 of the Health Coverage
                    Availability and Affordability Act of 1996 with respect
                    to any individual covered under the group health plan,
                    or
                      ``(B) section 103 of such Act with respect to any
                    individual.''.
              (2) Notice requirement.--Section 4980B(f)(6)(A) of such Code
            is amended by inserting before the period the following: ``and
            subtitle A of title I of the Health Coverage Availability and
            Affordability Act of 1996''.
              (3) Special rules.--Section 4980B of such Code is amended by
            adding at the end the following:
      ``(h) Special Rules.--For purposes of applying this section in the
    case of requirements described in subsection (a)(2) relating to section
    101, section 102, or section 103 of the Health Coverage Availability
    and Affordability Act of 1996--
              ``(1) In general.--
                      ``(A) Definition of group health plan.--The term
                    `group health plan' has the meaning given such term in
                    section 191(a) of the Health Coverage Availability and
                    Affordability Act of 1996.
                      ``(B) Qualified beneficiary.--Subsections (b), (c),
                    and (e) shall be applied by substituting the term
                    `individual' for the term `qualified beneficiary' each
                    place it appears.
                      ``(C) Noncompliance period.--Clause (ii) of
                    subsection (b)(2)(B) and the second sentence of
                    subsection (b)(2) shall not apply.
                      ``(D) Limitation on tax.--Subparagraph (B) of
                    subsection (c)(3) shall not apply.
                      ``(E)  Liability for tax.--Paragraph (2) of
                    subsection (e) shall not apply.
              ``(2) Deferral to state regulation.--No tax shall be imposed
            by this section on any failure to meet the requirements of such
            section by any entity which offers health insurance coverage
            and which is an insurer or health maintenance organization (as
            defined in section 191(c) of the Health Coverage Availability
            and Affordability Act of 1996) regulated by a State unless the
            Secretary of Health and Human Services has made the
            determination described in section 104(c)(2) of such Act with
            respect to such State, section, and entity.
              ``(3) Limitation for insured plans.--In the case of a group
            health plan of a small employer (as defined in section 191 of
            the Health Coverage Availability and Affordability Act of 1996)
            that provides health care benefits solely through a contract
            with an insurer or health maintenance organization (as defined
            in such section), no tax shall be imposed by this section upon
            the employer on a failure to meet such requirements if the
            failure is solely because of the product offered by the insurer
            or organization under such contract.
              ``(4) Limitation on imposition of tax.--In no case shall a
            tax be imposed by this section for a failure to meet such a
            requirement if--
                      ``(A) a civil money penalty has been imposed by the
                    Secretary of Labor under part 5 of subtitle A of title
                    I of the Employee Retirement Income Security Act of
                    1974 with respect to such failure, or
                      ``(B) a civil money penalty has been imposed by the
                    Secretary of Health and Human Services under section
                    104(c) of the Health Coverage Availability and
                    Affordability Act of 1996 with respect to such
                    failure.''.
      (b) Enforcement Through ERISA Sanctions for Certain Group Health
    Plans.--
              (1) In general.--Subject to the succeeding provisions of this
            subsection, sections 101 through 103 of this subtitle shall be
            deemed to be provisions of title I of the Employee Retirement
            Income Security Act of 1974 for purposes of applying such
            title.
              (2) Federal enforcement only if no enforcement through
            state.--The Secretary of Labor shall enforce each section
            referred to in paragraph (1) with respect to any entity which
            is an insurer or health maintenance organization regulated by a
            State only if the Secretary of Labor determines that such State
            has not provided for enforcement of State laws which govern the
            same matters as are governed by such section and which require
            compliance by such entity with at least the same requirements
            as those provided under such section.
              (3) Limitations on liability.--
                      (A) No application where failure not discovered
                    exercising reasonable diligence.--No liability shall be
                    imposed under this subsection on the basis of any
                    failure during any period for which it is established
                    to the satisfaction of the Secretary of Labor that none
                    of the persons against whom the liability would be
                    imposed knew, or exercising reasonable diligence would
                    have known, that such failure existed.
                      (B) No application where failure corrected within 30
                    days.--No liability shall be imposed under this
                    subsection on the basis of 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 persons against
                    whom the liability would be imposed knew, or exercising
                    reasonable diligence would have known, that such
                    failure existed.
              (4) Avoiding duplication of certain penalties.--In no case
            shall a civil money penalty be imposed under the authority
            provided under paragraph (1) for a violation of this subtitle
            for which an excise tax has been imposed under section 4980B of
            the Internal Revenue Code of 1986 or a civil money penalty
            imposed under subsection (c).
      (c) Enforcement Through Civil Money Penalties.--
              (1) Imposition.--
                      (A) In general.--Subject to the succeeding provisions
                    of this subsection, any group health plan, insurer, or
                    organization that fails to meet a requirement of this
                    subtitle is subject to a civil money penalty under this
                    section.
                      (B) Liability for penalty.--Rules similar to the
                    rules described in section 4980B(e) of the Internal
                    Revenue Code of 1986 for liability for a tax imposed
                    under section 4980B(a) of such Code shall apply to
                    liability for a penalty imposed under subparagraph (A).
                      (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 of
                            Health and Human Services shall 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 under section
                            4980B(c)(4) of the Internal Revenue Code of
                            1986.
                              (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 persons 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 persons 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 person
                            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 (D).
                      (E) Judicial review.--
                              (i) Filing of action for review.--Any person
                            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 person 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 be 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 such 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 person
                            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.
              (2) Federal enforcement only if no enforcement through
            state.--Paragraph (1) shall apply to enforcement of the
            requirements of section 101, 102, or 103 with respect to any
            entity which offers health insurance coverage and which is an
            insurer or HMO regulated by a State only if the Secretary of
            Health and Human Services has determined that such State has
            not provided for enforcement of State laws which govern the
            same matters as are governed by such section and which require
            compliance by such entity with at least the same requirements
            as those provided under such section.
              (3) Nonduplication of sanctions.--In no case shall a civil
            money penalty be imposed under this subsection for a violation
            of this subtitle for which an excise tax has been imposed under
            section 4980B of the Internal Revenue Code of 1986 or for which
            a civil money penalty has been imposed under the authority
            provided under subsection (b).
      (d) Coordination in Administration.--The Secretaries of the Treasury,
    Labor, and Health and Human Services shall issue regulations that are
    nonduplicative to carry out this subtitle. Such regulations shall be
    issued in a manner that assures coordination and nonduplication in
    their activities under this subtitle.

                  Subtitle B--Definitions; General Provisions

    SEC. 191. DEFINITIONS; SCOPE OF COVERAGE.

      (a) Group Health Plan.--
              (1) Definition.--Subject to the succeeding provisions of this
            subsection and subsection (d)(1), the term ``group health
            plan'' means an employee welfare benefit plan to the extent
            that the plan provides medical care (as defined in subsection
            (c)(9)) to employees or their dependents (as defined under the
            terms of the plan) directly or through insurance,
            reimbursement, or otherwise, and includes a group health plan
            (within the meaning of section 5000(b)(1) of the Internal
            Revenue Code of 1986).
              (2) Limitation of requirements to plans with 2 or more
            employee participants.--The requirements of subtitle Ashall
            apply in the case of a group health plan for any plan year, or
            for health insurance coverage offered in connection with a
            group health plan for a year, only if the group health plan has
            two or more participants as current employees on the first day
            of the plan year.
              (3) Exclusion of plans with limited coverage.--An employee
            welfare benefit plan shall be treated as a group health plan
            under this title only with respect to medical care which is
            provided under the plan and which does not consist of coverage
            excluded from the definition of health insurance coverage under
            subsection (c)(4)(B).
              (4) Treatment of church plans.--
                      (A) Exclusion.--The requirements of this title
                    insofar as they apply to group health plans shall not
                    apply to church plans.
                      (B) Optional disregard in determining period of
                    coverage.--For purposes of applying section
                    101(b)(3)(B)(i), a group health plan may elect to
                    disregard periods of coverage of an individual under a
                    church plan that, pursuant to subparagraph (A), is not
                    subject to the requirements of this title.
              (5) Treatment of governmental plans.--
                      (A) Election to be excluded.--If the plan sponsor of
                    a governmental plan which is a group health plan to
                    which the provisions of this subtitle otherwise apply
                    makes an election under this paragraph for any
                    specified period (in such form and manner as the
                    Secretary of Health and Human Services may by
                    regulations prescribe), then the requirements of this
                    title insofar as they apply to group health plans shall
                    not apply to such governmental plans for such period.
                      (B) Optional disregard in determining period of
                    coverage if election made.--For purposes of applying
                    section 101(b)(3)(B)(i), a group health plan may elect
                    to disregard periods of coverage of an individual under
                    a governmental plan that, under an election under
                    subparagraph (A), is not subject to the requirements of
                    this title.
              (6) Treatment of medicaid plan as group health plan.--A State
            plan under title XIX of the Social Security Act shall be
            treated as a group health plan for purposes of applying section
            101(c), unless the State elects not to be so treated.
              (7) Treatment of medicare as group health plan.--Title XVIII
            of the Social Security Act shall be treated as a group health
            plan for purposes of applying section 101(c).
      (b) Incorporation of Certain Definitions in Employee Retirement
    Income Security Act of 1974.--Except as provided in this section, the
    terms ``beneficiary'', ``church plan'', ``employee'', ``employee
    welfare benefit plan'', ``employer'', ``governmental plan'',
    ``multiemployer plan'', ``multiple employer welfare arrangement'',
    ``participant'', ``plan sponsor'', and ``State'' have the meanings
    given such terms in section 3 of the Employee Retirement Income
    Security Act of 1974.
      (c) Other Definitions.--For purposes of this title:
              (1) Applicable state authority.--The term ``applicable State
            authority'' means, with respect to an insurer or health
            maintenance organization 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 insurer or organization.
              (2) Bona fide association.--The term ``bona fide
            association'' means 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 all members regardless of
                    health status,
                      (E) does not make health insurance coverage offered
                    through the association available to any individual who
                    is not a member (or dependent of a member) of the
                    association at the time the coverage is initially
                    issued,
                      (F) does not impose preexisting condition exclusions
                    except in a manner consistent with the requirements of
                    sections 101 and 102 as they relate to group health
                    plans, and
                      (G) provides for renewal and continuation of health
                    insurance coverage in a manner consistent with the
                    requirements of section 132 as they relate to the
                    renewal and continuation in force of coverage in a
                    group market.
              (3) 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 (29 U.S.C. 1161
                    et seq.), other than section 609.
                      (C) Title XXII of the Public Health Service Act.
              (4) 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 group contract offered by an
                    insurer or a health maintenance organization.
                      (B) Exception.--Such term does not include coverage
                    under any separate policy, certificate, or contract
                    only for one or more of any of the following:
                              (i) Coverage for accident, credit-only,
                            vision, disability income, long-term care,
                            nursing home care, community-based care dental,
                            on-site medical clinics, or employee assistance
                            programs, or any combination thereof.
                              (ii) Medicare supplemental health insurance
                            (within the meaning of section 1882(g)(1) of
                            the Social Security Act (42 U.S.C.
                            1395ss(g)(1))) and similar supplemental
                            coverage provided under a group health plan.
                              (iii) Coverage issued as a supplement to
                            liability insurance.
                              (iv) Liability insurance, including general
                            liability insurance and automobile liability
                            insurance.
                              (v) Workers' compensation or similar
                            insurance.
                              (vi) Automobile medical-payment insurance.
                              (vii) Coverage consisting of benefit payments
                            made on a periodic basis for a specified
                            disease or illness or period of
                            hospitalization, without regard to the costs
                            incurred or services rendered during the period
                            to which the payments relate.
                              (viii) Short-term limited duration insurance.
                              (ix) Such other coverage, comparable to that
                            described in previous clauses, as may be
                            specified in regulations prescribed under this
                            title.
              (5) Health maintenance organization; hmo.--The terms ``health
            maintenance organization'' and ``HMO'' mean--
                      (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,
            if it 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).
              (6) Health status.--The term ``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
            acts of domestic violence), or disability.
              (7) Individual health insurance coverage.--The term
            ``individual health insurance coverage'' means health insurance
            coverage offered to individuals if the coverage is not offered
            in connection with a group health plan (other than such a plan
            that has fewer than two participants as current employees on
            the first day of the plan year).
              (8) Insurer.--The term ``insurer'' means an insurance
            company, insurance service, or insurance organization which is
            licensed to engage in the business of insurance in a State and
            which is regulated by a State (within the meaning of section
            514(b)(2)(A) of the Employee Retirement Income Security Act of
            1974).
              (9) Medical care.--The term ``medical care'' means--
                      (A) amounts paid for, or items or services in the
                    form of, the diagnosis, cure, mitigation, treatment, or
                    prevention of disease, or amounts paid for, or items or
                    services provided for, the purpose of affecting any
                    structure or function of the body,
                      (B) amounts paid for, or services in the form of,
                    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).
              (10) Network plan.--The term ``network plan'' means, with
            respect to health insurance coverage, an arrangement of an
            insurer or a health maintenance organization 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 insurer or health maintenance organization.
              (11) 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 minimum
            period that must pass with respect to the individual before the
            individual is eligible to be covered for benefits under the
            plan.
      (d) Treatment of Partnerships.--
              (1) Treatment as a group health plan.--Any plan, fund, or
            program which would not be (but for this paragraph) 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 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 (1)) as an employee welfare benefit plan which is a
            group health plan.
              (2) Treatment of partnership and partners and employer and
            participants.--In the case of a group health plan--
                      (A) the term ``employer'' includes the partnership in
                    relation to any partner; and
                      (B) the term ``participant'' includes--
                              (i) in connection with a group health plan
                            maintained by a partnership, an individual who
                            is a partner in relation to the partnership, or
                              (ii) 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.
      (e) Definitions Relating to Markets and Small Employers.--As used in
    this title:
              (1) Individual market.--The term ``individual market'' means
            the market for health insurance coverage offered to individuals
            and not to employers or in connection with a group health plan
            and does not include the market for such coverage issued only
            by an insurer or HMO that makes such coverage available only on
            the basis of affiliation with a bona fide association (as
            defined in subsection (c)(2)).
              (2) Large group market.--The term ``large group market''
            means the market for health insurance coverage offered to
            employers (other than small employers) on behalf of their
            employees (and their dependents) and does not include health
            insurance coverage available solely in connection with a bona
            fide association (as defined in subsection (c)(2)).
              (3) Small employer.--The term ``small employer'' means, in
            connection with a group health plan with respect to a calendar
            year, an employer who employs at least 2 but fewer than 51
            employees on a typical business day in the year. All persons
            treated as a single employer under subsection (a) or (b) of
            section 52 of the Internal Revenue Code of 1986 shall be
            treated as a single employer for purposes of this title.
              (4) 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) on
            the basis of employment or other relationship with respect to a
            small employer and does not include health insurance coverage
            available solely in connection with a bona fide association (as
            defined in subsection (c)(2)).

    SEC. 192. STATE FLEXIBILITY TO PROVIDE GREATER PROTECTION.

      (a) State Flexibility To Provide Greater Protection.--Subject to
    subsection (b), nothing in this title shall be construed to preempt
    State laws that require insurers or HMOs--
              (1) to impose a limitation or exclusion of benefits relating
            to the treatment of a preexisting condition for a period that
            is shorter than the applicable period provided for under this
            title;
              (2) to allow individuals, participants, and beneficiaries to
            be considered to be in a period of previous qualifying coverage
            if such individual, participant, or beneficiary experiences a
            lapse in coverage that is greater than the 60-day periods
            provided for under sections 101(b)(3)(A), 101(b)(3)(B)(ii), and
            102(b)(2); or
              (3) require insurers or HMOs, in defining pre-existing
            condition, to have a look-back period that is shorter than the
            6-month period described in section 101(b)(1)(A).
      (b) No Override of ERISA Preemption.--Nothing in this Act 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. 193. EFFECTIVE DATE.

      (a) In General.--Except as otherwise provided for in this title, the
    provisions of this title shall apply with respect to--
              (1) group health plans, and health insurance coverage offered
            in connection with group health plans, for plan years beginning
            on or after January 1, 1998, and
              (2) individual health insurance coverage issued, renewed, in
            effect, or operated on or after July 1, 1998.
      (b) Consideration of Previous Coverage.--The Secretaries of Health
    and Human Services, Treasury, and Labor shall jointly establish rules
    regarding the treatment (in determining qualified coverage periods
    under sections 102(b) and 141(b)) of coverage before the applicable
    effective date specified in subsection (a).
      (c) Timely Issuance of Regulations.--The Secretaries of Health and
    Human Services, the Treasury, and Labor shall issue such regulations on
    a timely basis as may be required to carry out this title.

    SEC. 194. RULE OF CONSTRUCTION.

      Nothing in this title or any amendment made thereby may be construed
    to require the coverage of any specific procedure, treatment, or
    service as part of a group health plan or health insurance coverage
    under this title or through regulation.

       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 Coverage Availability
                            and Affordability 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).
              ``(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.
                      ``(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.--The Secretary and the Attorney General
            shall submit jointly an annual report to Congress on the amount
            of revenue which is generated and disbursed, and the
            justification for such disbursements, by the Account in each
            fiscal year.''.

    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 private 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 of the United
            States, 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 demonstrates to the Secretary that the
            entity's financial holdings, interests, or relationships will
            not interfere with its ability to perform the functions to be
            required by the contract in an effective and impartial manner;
            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) The Secretary shall determine the appropriate number of
            separate contracts which are necessary to carry out the Program
            and the appropriate times at which the Secretary shall enter
            into such contracts.
              ``(2)(A) Except as provided in subparagraph (B), the
            provisions of section 1153(e)(1) shall apply to contracts and
            contracting authority under this section.
              ``(B) Competitive procedures must be used when entering into
            new contracts under this section, or at any other time
            considered appropriate by the Secretary, except that the
            Secretary may 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) 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.
      ``(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 or who have engaged
            in acts or omissions which constitute grounds for the
            imposition of a sanction under section 1128, section 1128A, or
            section 1128B of the Social Security Act, or who have otherwise
            engaged in fraud and abuse against the medicare program 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.

    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''.
              (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 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 or title XXI 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
                            respond to a party requesting an advisory
                            opinion by not later than 30 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.
      ``(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 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 been convicted after the date of
            the enactment of the Health Coverage Availability and
            Affordability 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 after the date of the enactment of the
            Health Coverage Availability and Affordability 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 after the date
            of the enactment of the Health Coverage Availability and
            Affordability 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, 1996.

    SEC. 216. ADDITIONAL EXCEPTION TO ANTI-KICKBACK PENALTIES FOR
                        DISCOUNTING AND MANAGED CARE 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 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, whether through a
            withhold, capitation, incentive pool, per diem payment, or any
            other similar risk arrangement which places the individual or
            entity at substantial financial risk.''.
      (b) Effective Date.--The amendments made by this section shall apply
    to written agreements entered into on or after January 1, 1997.

    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).
      ``(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 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 respecting 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 this database 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
            this 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) 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.
                              ``(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 Coverage Availability and
            Affordability 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 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) 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))
    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; and
              (3) by inserting after subparagraph (D) the following new
            subparagraph:
                      ``(E) is for a medical or other item or service that
                    a person knows or should know is not medically
                    necessary; or''.
      (e) 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''.
      (f) 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).''.
      (g) 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--
                                      ``(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
                    Coverage Availability and Affordability 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.''.
      (h) Effective Date.--The amendments made by this section shall take
    effect January 1, 1997.

    SEC. 232. CLARIFICATION OF LEVEL OF INTENT REQUIRED FOR IMPOSITION OF
                        SANCTIONS.

      (a) 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 section 231(g)(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.''.
      (b) Effective Date.--The amendments made by this section shall apply
    to acts or omissions occurring on or after January 1, 1997.

    SEC. 233. 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. DEFINITION OF 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. Definition of 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, or 1347 of this title; or
              ``(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'
    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 2 of title 18, United States Code, is amended by inserting
    after the item relating to section 23 the following new item:

    ``24. Definition of 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

      ``(a) Whoever knowingly 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.
      ``(b) As used in this section, 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.''.
              (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 embezzles, steals, or otherwise without authority
    willfully and unlawfully 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--
              ``(1) falsifies, conceals, or covers up by any trick, scheme,
            or device a material fact; or
              ``(2) makes any false, fictitious, or fraudulent statements
            or representations, or makes or uses any false writing or
            document knowing the same to contain any 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.--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 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. A subpoena 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.
      ``(b) Service.--A subpoena issued under this section may be served by
    any person 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 touching the
    matter under investigation. 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 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.

                   Subtitle F--Administrative Simplification

                 PART 1--GENERAL ADMINISTRATIVE SIMPLIFICATION

    SEC. 251. PURPOSE.

      It is the purpose of this part 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. 252. 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

    ``SEC. 1171. DEFINITIONS.

      ``For purposes of this part:
              ``(1) Clearinghouse.--The term `clearinghouse' means a public
            or private entity that--
                      ``(A) processes or facilitates the processing of
                    nonstandard data elements of health information into
                    standard data elements; or
                      ``(B) provides the means by which persons may meet
                    the requirements of this part.
              ``(2) 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.
              ``(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
                    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 a plan which
            provides, or pays the cost of, health benefits. Such term
            includes the following, or any combination thereof:
                      ``(A) Part A or part B of the medicare program under
                    title XVIII.
                      ``(B) The medicaid program under title XIX.
                      ``(C) A medicare supplemental policy (as defined in
                    section 1882(g)(1)).
                      ``(D) Coverage issued as a supplement to liability
                    insurance.
                      ``(E) General liability insurance.
                      ``(F) Worker's compensation or similar insurance.
                      ``(G) Automobile or automobile medical-payment
                    insurance.
                      ``(H) 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).
                      ``(I) A hospital or fixed indemnity income-protection
                    policy.
                      ``(J) An employee welfare benefit plan, as defined in
                    section 3(1) of the Employee Retirement Income Security
                    Act of 1974 (29 U.S.C. 1002(1)), but only to the extent
                    the plan is established or maintained for the purpose
                    of providing health benefits and has 50 or more
                    participants (as defined in section 3(7) of such Act).
                      ``(K) 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.
                      ``(L) The health care program for active military
                    personnel under title 10, United States Code.
                      ``(M) The veterans health care program under chapter
                    17 of title 38, United States Code.
                      ``(N) The Civilian Health and Medical Program of the
                    Uniformed Services (CHAMPUS), as defined in section
                    1073(4) of title 10, United States Code.
                      ``(O) The Indian health service program under the
                    Indian Health Care Improvement Act (25 U.S.C. 1601 et
                    seq.).
                      ``(P) The Federal Employees Health Benefit Plan under
                    chapter 89 of title 5, United States Code.
                      ``(Q) Such other plan or arrangement as the Secretary
                    determines is a health plan.
              ``(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 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 and 1173.
              ``(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.

    ``SEC. 1172. GENERAL REQUIREMENTS FOR ADOPTION OF STANDARDS.

      ``(a) Applicability.--Any standard or modification of a standard
    adopted under this part shall apply to the following persons:
              ``(1) A health plan.
              ``(2) A 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 or modification of a 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 or modification of a standard adopted under this part
            shall be developed or modified by a standard setting
            organization.
              ``(2) Special rules.--
                      ``(A) Different standards.--The Secretary may adopt a
                    standard or modification of a standard that is
                    different from any standard developed or modified by a
                    standard setting organization, if--
                              ``(i) the different standard or modification
                            will substantially reduce administrative costs
                            to health care providers and health plans
                            compared to the alternatives; and
                              ``(ii) the standard or modification 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 adopted or
                    modified any standard relating to a standard, or a
                    modification of 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.
      ``(d) Implementation Specifications.--The Secretary shall establish
    specifications for implementing each of the standards and modifications
    adopted under this part.
      ``(e) Protection of Trade Secrets.--Except as otherwise required by
    law, a standard or modification of 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 Health Information Advisory Committee
    established under section 1179 and shall consult with appropriate
    Federal and State agencies and private organizations. The Secretary
    shall publish in the Federal Register the recommendations of the Health
    Information Advisory Committee regarding the adoption of a standard or
    modification of a standard under this part.

    ``SEC. 1173. STANDARDS FOR INFORMATION TRANSACTIONS AND DATA ELEMENTS.

      ``(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--
                      ``(A) appropriate for the financial and
                    administrative transactions described in paragraph (2);
                    and
                      ``(B) related to 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 the following:
                      ``(A) Claims (including coordination of benefits) or
                    equivalent encounter information.
                      ``(B) Claims attachments.
                      ``(C) Enrollment and disenrollment.
                      ``(D) Eligibility.
                      ``(E) Health care payment and remittance advice.
                      ``(F) Premium payments.
                      ``(G) First report of injury.
                      ``(H) Claims 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 clearinghouse, if it is part of a
                    larger organization, has policies and security
                    procedures which isolate the activities of the
                    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) Privacy Standards for Health Information.--The Secretary shall
    adopt standards with respect to the privacy of individually
    identifiable health information. Such standards shall include standards
    concerning at least the following:
              ``(1) The rights of an individual who is a subject of such
            information.
              ``(2) The procedures to be established for the exercise of
            such rights.
              ``(3) The uses and disclosures of such information that are
            authorized or required.
      ``(f) Electronic Signature.--
              ``(1) In general.--The Secretary, in coordination with the
            Secretary of Commerce, shall adopt standards specifying
            procedures for the electronic transmission and authentication
            of signatures, compliance with which shall be deemed to satisfy
            Federal and State statutory requirements for written signatures
            with respect to the transactions referred to in subsection
            (a)(1).
              ``(2) Payments for services and premiums.--Nothing in this
            part shall be construed to prohibit payment for health care
            services or health plan premiums by debit, credit, payment card
            or numbers, or other electronic means.
      ``(g) Transfer of Information Between Health Plans.--The Secretary
    shall adopt standards for transferring among health plans 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.

    ``SEC. 1174. TIMETABLES FOR ADOPTION OF STANDARDS.

      ``(a) Initial Standards.--The Secretary shall carry out section 1173
    not later than 18 months after the date of the enactment of this part,
    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 additional or modified standards, as
            determined appropriate, but not more frequently than once every
            6 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.

    ``SEC. 1175. REQUIREMENTS.

      ``(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 health 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
                    clearinghouse for processing into standard data
                    elements and transmission by the clearinghouse, and
                    receiving standard data elements through the
                    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 and 1173 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.

    ``SEC. 1176. GENERAL PENALTY FOR FAILURE TO COMPLY WITH REQUIREMENTS
                        AND STANDARDS.

      ``(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.

    ``SEC. 1177. WRONGFUL DISCLOSURE OF INDIVIDUALLY IDENTIFIABLE HEALTH
                        INFORMATION.

      ``(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.

    ``SEC. 1178. EFFECT ON STATE LAW.

      ``(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 and 1173, 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 and 1173, shall not supersede a
            contrary provision of State law, if the provision of State
            law--
                      ``(A) imposes requirements, standards, or
                    implementation specifications that are more stringent
                    than the requirements, standards, or implementation
                    specifications under this part with respect to the
                    privacy of individually identifiable health
                    information; or
                      ``(B) is a provision the Secretary determines--
                              ``(i) is necessary to prevent fraud and
                            abuse, or for other purposes; or
                              ``(ii) addresses controlled substances.
      ``(b) Public Health Reporting.--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.

    ``SEC. 1179. HEALTH INFORMATION ADVISORY COMMITTEE.

      ``(a) Establishment.--There is established a committee to be known as
    the Health Information Advisory Committee (in this section referred to
    as the `committee').
      ``(b) Duties.--The committee shall--
              ``(1) provide assistance to the Secretary in complying with
            the requirements imposed on the Secretary under this part;
              ``(2) study the issues related to the adoption of uniform
            data standards for patient medical record information and the
            electronic exchange of such information;
              ``(3) report to the Secretary not later than 4 years after
            the date of the enactment of this part recommendations and
            legislative proposals for such standards and electronic
            exchange; and
              ``(4) generally be responsible for advising the Secretary and
            the Congress on the status of the implementation of this part.
      ``(c) Membership.--
              ``(1) In general.--The committee shall consist of 15 members
            of whom--
                      ``(A) 3 shall be appointed by the President;
                      ``(B) 6 shall be appointed by the Speaker of the
                    House of Representatives after consultation with the
                    minority leader of the House of Representatives; and
                      ``(C) 6 shall be appointed by the President pro
                    tempore of the Senate after consultation with the
                    minority leader of the Senate.
            The appointments of the members shall be made not later than 60
            days after the date of the enactment of this part. The
            President shall designate 1 member as the Chair.
              ``(2) Expertise.--The membership of the committee shall
            consist of individuals who are of recognized standing and
            distinction in the areas of information systems, information
            networking and integration, consumer health, health care
            financial management, or privacy, and who possess the
            demonstrated capacity to discharge the duties imposed on the
            committee.
              ``(3) Terms.--Each member of the committee shall be appointed
            for a term of 5 years, except that the members first appointed
            shall serve staggered terms such that the terms of not more
            than 3 members expire at one time.
              ``(4) Initial meeting.--Not later than 30 days after the date
            on which a majority of the members have been appointed, the
            committee shall hold its first meeting.
      ``(d) Reports.--Not later than 1 year after the date of the enactment
    of this part, and annually thereafter, the committee shall submit to
    the Congress, and make public, a report regarding--
              ``(1) the extent to which persons required to comply with
            this part are cooperating in implementing the standards adopted
            under this part;
              ``(2) the extent to which such entities are meeting the
            privacy and security standards adopted under this part and the
            types of penalties assessed for noncompliance with such
            standards;
              ``(3) whether the Federal and State Governments are receiving
            information of sufficient quality to meet their
            responsibilities under this part;
              ``(4) any problems that exist with respect to implementation
            of this part; and
              ``(5) the extent to which timetables under this part are
            being met.''.
      (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 clearinghouse (as defined in
            section 1171) that meets each standard and implementation
            specification adopted or established under sections 1172 and
            1173 on or after the date on which the 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''.

         PART 2--ADMINISTRATIVE SIMPLIFICATION FOR LABORATORY SERVICES

    SEC. 261. ADMINISTRATIVE SIMPLIFICATION FOR LABORATORY SERVICES.

      (a) In General.--Not later than 1 year after the date of the
    enactment of this Act, the Secretary of Health and Human Services (in
    accordance with the process described in subsection (b)) shall adopt
    uniform coverage, administration, and payment policies for clinical
    diagnostic laboratory tests under part B of the medicare program.
      (b) Process for Adoption of Policies.--The Secretary shall adopt
    uniform policies under subsection (a) in accordance with the following
    process:
              (1) The Secretary shall select from carriers with whom the
            Secretary has a contract under part B during 1996 15 medical
            directors, who will meet and develop recommendations for such
            uniform policies. The medical directors selected shall
            represent various geographic areas and have a varied range of
            experience in relevant medical fields, including pathology and
            clinical laboratory practice.
              (2) The medical directors selected under paragraph (1) shall
            consult with independent experts in each major discipline of
            clinical laboratory medicine including clinical laboratory
            personnel, bioanalysts, pathologists, and practicing
            physicians. The medical directors shall also solicit comments
            from other individuals and groups who wish to participate,
            including consumers and other affected parties. This process
            shall be conducted as a negotiated rulemaking under title 5,
            United States Code.
              (3) Under the negotiated rulemaking, the recommendations for
            uniform policies shall be designed to simplify and reduce
            unnecessary administrative burdens in connection with the
            following:
                      (A) Beneficiary information required to be submitted
                    with each claim.
                      (B) Physicians' obligations regarding documentation
                    requirements and recordkeeping.
                      (C) Procedures for filing claims and for providing
                    remittances by electronic media.
                      (D) The performance of post-payment review of test
                    claims.
                      (E) The prohibition of the documentation of medical
                    necessity except when determined to be appropriate
                    after identification of aberrant utilization pattern
                    through focused medical review.
                      (F) Beneficiary responsibility for payment.
              (4) During the pendency of the adoption by the Secretary of
            the uniform policies, fiscal intermediaries and carriers under
            the Medicare program may not implement any new requirement
            relating to the submission of a claim for clinical diagnostic
            laboratory tests retroactive to January 1, 1996, and carriers
            may not initiate any new coverage, administrative, or payment
            policy unless the policy promotes the goal of administrative
            simplification of requirements imposed on clinical laboratories
            in accordance with the Secretary's promulgation of the
            negotiated rulemaking.
              (5) Not later than 6 months after the date of the enactment
            of this Act, the medical directors shall submit their
            recommendations to the Secretary, and the Secretary shall
            publish the recommendations and solicit public comment using
            negotiated rulemaking in accordance with title 5, United States
            Code. The Secretary shall publish final uniform policies for
            coverage, administration, and payment of claims for clinical
            diagnostic laboratory tests, effective after the expiration of
            the 180-day period which begins on the date of publication.
              (6) After the publication of the final uniform policies, the
            Secretary shall implement identical uniform documentation and
            processing policies for all clinical diagnostic laboratory
            tests paid under the Medicare program through fiscal
            intermediaries or carriers.
      (c) Optional Selection of Single Carrier.--Effective for claims
    submitted after the expiration of the 90-day period which begins on the
    date of the enactment of this Act, an independent laboratory may select
    a single carrier for the processing of all of its claims for payment
    under part B of the medicare program, without regard to the location
    where the laboratory or the patient or provider involved resides or
    conducts business. Such election of a single carrier shall be made by
    the clinical laboratory and an agreement made between the carrier and
    the laboratory shall be forwarded to the Secretary of Health and Human
    Services. Nothing in this subsection shall be construed to require a
    laboratory to select a single carrier under this subsection.
      (d) Consistency With General Administrative Simplification.--In
    complying with this section, the Secretary shall ensure that the
    policies adopted under subsection (a) are consistent, to the maximum
    extent practicable, with part C of title XI of the Social Security Act.

       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.--Effective as if included in the enactment of section
    4354 of the Omnibus Budget Reconciliation Act of 1990, section
    1882(d)(3)(A) (42 U.S.C. 1395ss(d)(3)(A)) is amended--
              (1) by amending clause (i) to read as follows:
      ``(i) It is unlawful for a person to sell or issue to an individual
    entitled to benefits under part A or enrolled under part B of this
    title--
              ``(I) a health insurance policy with knowledge that the
            policy duplicates health benefits to which the individual is
            otherwise entitled under this title or title XIX,
              ``(II) a medicare supplemental policy with knowledge that the
            individual is entitled to benefits under another medicare
            supplemental policy, or
              ``(III) a health insurance policy (other than a medicare
            supplemental policy) with knowledge that the policy duplicates
            health benefits to which the individual is otherwise entitled,
            other than benefits to which the individual is entitled under a
            requirement of State or Federal law.
    Subclause (I) or (III) shall not apply with respect to the sale or
    issuance of a health insurance policy or plan under which all the
    benefits are fully payable directly to or on behalf of the individual
    without regard to other health benefit coverage of the individual.'';
              (2) in clause (iii), by striking ``clause (i)'' and inserting
            ``clause (i)(II)''; and
              (3) by adding at the end of subparagraph (A) the following:
      ``(iv) For purposes of this subparagraph, a health insurance policy
    shall be considered to `duplicate' benefits only when, under its terms,
    the policy provides specific reimbursement for identical items and
    services to the extent paid for under other coverage of such
    individual, and a health insurance 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.
      ``(v) For purposes of this subparagraph, a health insurance policy
    (or a rider to an insurance contract which is not a health insurance
    policy), providing benefits for long-term care, nursing home care, home
    health care, or community-based care, or a contract with a health
    maintenance organization that provides comprehensive health benefits,
    and that coordinates against or excludes items and services available
    or paid for under this title and (for policies other than contracts
    with health maintenance organizations sold or issued on or after 90
    days after the date of enactment of this provision) that discloses such
    coordination or exclusion in the policy's outline of coverage, is not
    considered to `duplicate' health benefits under this title. For
    purposes of this clause, the terms `coordinates' and `coordination'
    mean, with respect to a policy in relation to health benefits under
    this title, 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.
      ``(vi) Notwithstanding any other provision of law, no criminal or
    civil penalty may be imposed at any time under this subparagraph and no
    legal action may be brought or continued at any time in any Federal or
    State court if the penalty or action is based on an act or omission
    that occurred after November 5, 1991, and before the date of the
    enactment of this clause, and relates to the sale, issuance, or renewal
    of any health insurance policy or rider during such period, if such
    policy or rider meets the nonduplication requirements of clause (iv) or
    (v).
      ``(vii) A State may not impose, in the case of the sale, issuance, or
    renewal of a health insurance policy (other than a medicare
    supplemental policy) or rider to an insurance contract which is not a
    health insurance policy, that meets the nonduplication requirements of
    this section pursuant to clause (iv) or (v) to an individual entitled
    to benefits under part A or enrolled under part B, any requirement with
    respect to the duplication or nonduplication of health benefits to
    which the individual is otherwise entitled to under this title.''.
      (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).

                    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 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.--Except as otherwise provided in this
            subsection, the amount allowable as a deduction under
            subsection (a) to an individual for the taxable year shall not
            exceed--
                      ``(A) except as provided in subparagraph (B), the
                    lesser of--
                              ``(i) $2,000, or
                              ``(ii) the annual deductible limit for any
                            individual covered under the high deductible
                            health plan, or
                      ``(B) in the case of a high deductible health plan
                    covering the taxpayer and any other eligible individual
                    who is the spouse or any dependent (as defined in
                    section 152) of the taxpayer, the lesser of--
                              ``(i) $4,000, or
                              ``(ii) the annual limit under the plan on the
                            aggregate amount of deductibles required to be
                            paid by all individuals.
            The preceding sentence shall not apply if the spouse of such
            individual is covered under any other high deductible health
            plan.
              ``(2) Special rule for married individuals.--
                      ``(A) In general.--This subsection shall be applied
                    separately for each married individual.
                      ``(B) Special rule.--If individuals who are married
                    to each other are covered under the same high
                    deductible health plan, then the amounts applicable
                    under paragraph (1)(B) shall be divided equally between
                    them unless they agree on a different division.
              ``(3) 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 paid to any medical savings
                    account of such individual which is excludable from
                    gross income under section 106(b) for such year, or
                      ``(B) in a case described in paragraph (2)(B), any
                    amount is paid to any medical savings account of either
                    spouse which is so excludable for such year.
              ``(4) Proration of limitation.--
                      ``(A) In general.--The limitation under paragraph (1)
                    shall be the sum of the monthly limitations for months
                    during the taxable year that the individual is an
                    eligible individual if--
                              ``(i) such individual is not an eligible
                            individual for all months of the taxable year,
                              ``(ii) the deductible under the high
                            deductible health plan covering such individual
                            is not the same throughout such taxable year,
                            or
                              ``(iii) such limitation is determined under
                            paragraph (1)(B) for some but not all months
                            during such taxable year.
                      ``(B) Monthly limitation.--The monthly limitation for
                    any month shall be an amount equal to \1/12\ of the
                    limitation which would (but for this paragraph and
                    paragraph (3)) be determined under paragraph (1) if the
                    facts and circumstances as of the first day of such
                    month that such individual is covered under a high
                    deductible health plan were true for the entire taxable
                    year.
              ``(5) 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--
                              ``(i) who is covered under a high deductible
                            health plan as of the 1st day of such month,
                            and
                              ``(ii) who 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.
                      ``(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.
              ``(2) High deductible health plan.--The term `high deductible
            health plan' means a health plan which--
                      ``(A) has an annual deductible limit for each
                    individual covered by the plan which is not less than
                    $1,500, and
                      ``(B) has an annual limit on the aggregate amount of
                    deductibles required to be paid with respect to all
                    individuals covered by the plan which is not less than
                    $3,000.
            Such term does not include a health plan if substantially all
            of its coverage is coverage described in paragraph (1)(B). 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.
      ``(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 $4,000.
                      ``(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 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.
              ``(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 by reason of paragraph (2) or (3).
            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.--
                      ``(A) In general.--Any amount paid or distributed out
                    of a medical savings account which is used exclusively
                    to pay qualified medical expenses of any account holder
                    (or any spouse or dependent of the holder) shall not be
                    includible in gross income.
                      ``(B) Treatment after death of account holder.--
                              ``(i) Treatment if holder is spouse.--If,
                            after the death of the account holder, the
                            account holder's interest is payable to (or for
                            the benefit of) the holder's spouse, the
                            medical savings account shall be treated as if
                            the spouse were the account holder.
                              ``(ii) Treatment if designated holder is not
                            spouse.--In the case of an account holder's
                            interest in a medical savings account which is
                            payable to (or for the benefit of) any person
                            other than such holder's spouse upon the death
                            of such holder--
                                      ``(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.
              ``(2) Inclusion of amounts not used for qualified medical
            expenses.--
                      ``(A) In general.--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 or of the spouse or dependents of
                    such holder shall be included in the gross income of
                    such holder.
                      ``(B) Special rules.--For purposes of subparagraph
                    (A)--
                              ``(i) all medical savings accounts of the
                            account holder shall be treated as 1 account,
                              ``(ii) all payments and distributions during
                            any taxable year shall be treated as 1
                            distribution, and
                              ``(iii) any distribution of property shall be
                            taken into account at its fair market value on
                            the date of the distribution.
              ``(3) Excess contributions returned before due date of
            return.--If the aggregate contributions (other than rollover
            contributions) for a taxable year to the medical savings
            accounts of an individual exceed the amount allowable as a
            deduction under this section for such contributions, paragraph
            (2) shall not apply to distributions from such accounts (in an
            amount not greater than such excess) if--
                      ``(A) 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
                      ``(B) such distribution is accompanied by the amount
                    of net income attributable to such excess contribution.
            Any net income described in subparagraph (B) shall be included
            in the gross income of the individual for the taxable year in
            which it is received.
              ``(4) Penalty for 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 10
                    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 age 59\1/
                    2\.--Subparagraph (A) shall not apply to any payment or
                    distribution after the date on which the account holder
                    attains age 59\1/2\.
              ``(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 the
            spouse is the account holder.
      ``(g) Cost-of-Living Adjustment.--
              ``(1) In general.--In the case of any taxable year beginning
            in a calendar year after 1997, each dollar amount in subsection
            (b)(1), (c)(2), or (d)(1)(A) shall be increased by an amount
            equal to--
                      ``(A) such dollar amount, multiplied by
                      ``(B) the medical care cost adjustment for such
                    calendar year.
            If any increase under the preceding sentence is not a multiple
            of $50, such increase shall be rounded to the nearest multiple
            of $50.
              ``(2) Medical care cost adjustment.--For purposes of
            paragraph (1), the medical care cost adjustment for any
            calendar year is the percentage (if any) by which--
                      ``(A) the medical care component of the Consumer
                    Price Index (as defined in section 1(f)(5)) for August
                    of the preceding calendar year, exceeds
                      ``(B) such component for August of 1996.
      ``(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 those regulations.''
      (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, gross income does not include amounts
            contributed by such employee's employer to any medical savings
            account of such employee.
              ``(2) Coordination with deduction limitation.--The amount
            excluded from the gross income of an employee under this
            subsection for any taxable year shall 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.
              ``(3) 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.
              ``(4) 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.
              ``(5) 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.''
              (2) Exclusion from employment taxes.--
                      (A) Social security taxes.--
                              (i) Subsection (a) of section 3121 is amended
                            by striking ``or'' at the end of paragraph
                            (20), by striking the period at the end of
                            paragraph (21) and inserting ``; or'', and by
                            inserting after paragraph (21) the following
                            new paragraph:
              ``(22) 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).''
                              (ii) Subsection (a) of section 209 of the
                            Social Security Act is amended by striking
                            ``or'' at the end of paragraph (17), by
                            striking the period at the end of paragraph
                            (18) and inserting ``; or'', and by inserting
                            after paragraph (18) the following new
                            paragraph:
              ``(19) 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) of the Internal Revenue Code of 1986.''
                      (B) 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).''
                      (C) 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).''
                      (D) 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).''
      (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) Exclusion of Medical Savings Accounts From Estate Tax.--Part IV
    of subchapter A of chapter 11 is amended by adding at the end the
    following new section:

    ``SEC. 2057. MEDICAL SAVINGS ACCOUNTS.

      ``For purposes of the tax imposed by section 2001, the value of the
    taxable estate shall be determined by deducting from the value of the
    gross estate an amount equal to the value of any medical savings
    account (as defined in section 220(d)) included in the gross estate.''
      (f) 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 a medical savings accounts (within the
    meaning of section 220(d)), the term `excess contributions' means the
    sum of--
              ``(1) the amount by which the amount contributed for the
            taxable year to the accounts (other than rollover contributions
            described in section 220(f)(5)) exceeds the amount allowable as
            a deduction under section 220 for such contributions, and
              ``(2) the amount determined under this subsection for the
            preceding taxable year, reduced by the sum of distributions out
            of the account included in gross income under section 220(f)
            (2) or (3) and the excess (if any) of the maximum amount
            allowable as a deduction under section 220 for the taxable year
            over the amount contributed to the accounts.
    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.''
      (g) 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.''
      (h) 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).''
      (i) 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)).''.
      (j) Clerical Amendments.--
              (1) 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.''

              (2) The table of sections for part IV of subchapter A of
            chapter 11 is amended by adding at the end the following new
            item:

                                  ``Sec. 2057. Medical savings accounts.''

      (k) Effective Date.--The amendments made by this section shall apply
    to taxable years beginning after December 31, 1996.

     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 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
                                                             The applicable
                        in calendar year--
                                                            percentage is--
                              1998.......................       35 percent
                              1999, 2000, or 2001........       40 percent
                              2002.......................       45 percent
                              2003 or thereafter.........     50 percent.''

      (b) Effective Date.--The amendment made by this section shall apply
    to taxable years beginning after December 31, 1997.

               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 (f).
              ``(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 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.
                    Nothing in this section shall be construed to require a
                    contract to take into account all of the preceding
                    activities of daily living.
              ``(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 amount of periodic
            payments under all qualified long-term care insurance contracts
            with respect to an insured for any period exceeds the dollar
            amount in effect for such period under paragraph (3), such
            excess payments shall be treated as made for qualified long-
            term care services only to the extent of the costs incurred by
            the payee (not otherwise compensated for by insurance or
            otherwise) for qualified long-term care services provided
            during such period for such insured.
              ``(2) Periodic payments.--For purposes of paragraph (1), 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.
              ``(3) 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).
              ``(4) Inflation adjustment.--In the case of a calendar year
            after 1997, the dollar amount contained in paragraph (3) shall
            be increased at the same time and in the same manner as amounts
            are increased pursuant to section 213(d)(10).
      ``(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
                      ``(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 the coverage
            under a qualified long-term care insurance contract.''
      (b) 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 long-term care insurance contract (as defined in
            section 4980C).''
              (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.''
      (c) Continuation Coverage Excise Tax Not To Apply.--Subsection (f) of
    section 4980B is amended by adding at the end the following new
    paragraph:
              ``(9) Continuation of long-term care coverage not required.--
            A group health plan shall not be treated as failing to meet the
            requirements of this subsection solely by reason of failing to
            provide coverage under any qualified long-term care insurance
            contract (as defined in section 7702B(b)).''
      (d) 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.''.

      (e) Effective Date.--
              (1) In general.--The amendments made by this section shall
            apply to contracts issued after December 31, 1996.
              (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).
              (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.

    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) 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
                                                             The limitation
                        close of the taxable year of:
                                                                    is:
                              40 or less.................         $  200
                              More than 40 but not more              375
                                than 50.
                              More than 50 but not more              750
                                than 60.
                              More than 60 but not more            2,000
                                than 70.
                              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.--
              (1) In general.--The amendments made by this section shall
            apply to taxable years beginning after December 31, 1996.
              (2) Deduction for long-term care services.--Amounts paid for
            qualified long-term care services (as defined in section
            7702B(c) of the Internal Revenue Code of 1986, as added by this
            Act) furnished in any taxable year beginning before January 1,
            1998, shall not be taken into account under section 213 of the
            Internal Revenue Code of 1986.

    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, and
              ``(2) the name, address, and TIN of such individual.
      ``(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 amount paid under a long-term care insurance policy
            (within the meaning of section 4980C(e)), and
              ``(2) payments which are 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:
      ``(f) Consumer Protection Provisions.--
              ``(1) In general.--The requirements of this subsection are
            met with respect to any contract if any long-term care
            insurance policy issued under 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 policy if such policy
                    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 policy if such policy
            meets the requirements of section 4980C(d)(1).
              ``(4) Nonforfeiture requirements.--
                      ``(A) In general.--The requirements of this paragraph
                    are met with respect to any level premium long-term
                    care insurance policy, if the issuer of such policy
                    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 policies
                            approved by the Secretary for the same policy
                            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) Long-term care insurance policy defined.--For purposes
            of this subsection, the term `long-term care insurance policy'
            has the meaning given such term by section 4980C(e).''.

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

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

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

      ``(a) General Rule.--There is hereby imposed on any person failing to
    meet the requirements 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 policy for each day any
            requirements of subsection (c) or (d) are not met with respect
            to each long-term care insurance policy.
              ``(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 long-term
                                    care insurance policy, 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(f)(2)(B).
              ``(2) Delivery of policy.--If an application for a long-term
            care insurance policy (or for a certificate under a group long-
            term care insurance policy) is approved, the issuer shall
            deliver to the applicant (or policyholder or certificateholder)
            the policy (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
            long-term care insurance policy 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) Long-Term Care Insurance Policy Defined.--For purposes of this
    section, the term `long-term care insurance policy' means any product
    which is advertised, marketed, or offered as long-term care
    insurance.''.
      (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
                                            long-term care insurance
                                            policies.''.

    SEC. 327. COORDINATION WITH STATE REQUIREMENTS.

      Nothing in this part shall prevent a State from establishing,
    implementing, or continuing in effect standards related to the
    protection of policyholders of long-term care insurance policies (as
    defined in section 4980C(e) of the Internal Revenue Code of 1986), if
    such standards are not in conflict with or inconsistent with the
    standards established under such Code.

    SEC. 328. 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(g) (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 (as defined in section 7702B(c)(2)) but
                    only if such amount is received under a rider or other
                    provision of such contract which is treated as a
                    qualified long-term care insurance contract under
                    section 7702B and such amount is treated under section
                    7702B (after the application of subsection (d) thereof)
                    as a payment for qualified long-term care services (as
                    defined in such section).
              ``(2) Treatment of viatical settlements.--
                      ``(A) In general.--In the case of a life insurance
                    contract on the life of an insured described in
                    paragraph (1), if--
                              ``(i) any portion of such contract is sold to
                            any viatical settlement provider, or
                              ``(ii) any portion of the death benefit is
                            assigned to such a provider,
                    the amount paid for such sale or assignment shall be
                    treated as an amount paid under the life insurance
                    contract by reason of the death of such insured.
                      ``(B) Viatical settlement provider.--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 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--
                                      ``(I) such person 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.
              ``(3) 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) 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)).
              ``(4) Exception for business-related policies.--This
            subsection shall not apply in the case of any amount paid to
            any taxpayer other 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--High-Risk 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, are unable to
                            acquire medical care coverage for such
                            condition through insurance or from a health
                            maintenance organization or 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.

                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.

                           TITLE IV--REVENUE OFFSETS

    SEC. 400. 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--Repeal of Bad Debt Reserve Method for Thrift Savings
                                  Associations

    SEC. 401. REPEAL OF BAD DEBT RESERVE METHOD FOR THRIFT SAVINGS
                        ASSOCIATIONS.

      (a) In General.--Section 593 (relating to reserves for losses on
    loans) is amended by adding at the end the following new subsections:
      ``(f) Termination of Reserve Method.--Subsections (a), (b), (c), and
    (d) shall not apply to any taxable year beginning after December 31,
    1995.
      ``(g) 6-Year Spread of Adjustments.--
              ``(1) In general.--In the case of any taxpayer who is
            required by reason of subsection (f) to change its method of
            computing reserves for bad debts--
                      ``(A) such change shall be treated as a change in a
                    method of accounting,
                      ``(B) such change shall be treated as initiated by
                    the taxpayer and as having been made with the consent
                    of the Secretary, and
                      ``(C) the net amount of the adjustments required to
                    be taken into account by the taxpayer under section
                    481(a)--
                              ``(i) shall be determined by taking into
                            account only applicable excess reserves, and
                              ``(ii) as so determined, shall be taken into
                            account ratably over the 6-taxable year period
                            beginning with the first taxable year beginning
                            after December 31, 1995.
              ``(2) Applicable excess reserves.--
                      ``(A) In general.--For purposes of paragraph (1), the
                    term `applicable excess reserves' means the excess (if
                    any) of--
                              ``(i) the balance of the reserves described
                            in subsection (c)(1) (other than the
                            supplemental reserve) as of the close of the
                            taxpayer's last taxable year beginning before
                            December 31, 1995, over
                              ``(ii) the lesser of--
                                      ``(I) the balance of such reserves as
                                    of the close of the taxpayer's last
                                    taxable year beginning before January
                                    1, 1988, or
                                      ``(II) the balance of the reserves
                                    described in subclause (I), reduced in
                                    the same manner as under section
                                    585(b)(2)(B)(ii) on the basis of the
                                    taxable years described in clause (i)
                                    and this clause.
                      ``(B) Special rule for thrifts which become small
                    banks.--In the case of a bank (as defined in section
                    581) which was not a large bank (as defined in section
                    585(c)(2)) for its first taxable year beginning after
                    December 31, 1995--
                              ``(i) the balance taken into account under
                            subparagraph (A)(ii) shall not be less than the
                            amount which would be the balance of such
                            reserves as of the close of its last taxable
                            year beginning before such date if the
                            additions to such reserves for all taxable
                            years had been determined under section
                            585(b)(2)(A), and
                              ``(ii) the opening balance of the reserve for
                            bad debts as of the beginning of such first
                            taxable year shall be the balance taken into
                            account under subparagraph (A)(ii) (determined
                            after the application of clause (i) of this
                            subparagraph).
                    The preceding sentence shall not apply for purposes of
                    paragraphs (5) and (6) or subsection (e)(1).
              ``(3) Recapture of pre-1988 reserves where taxpayer ceases to
            be bank.--If, during any taxable year beginning after December
            31, 1995, a taxpayer to which paragraph (1) applied is not a
            bank (as defined in section 581), paragraph (1) shall apply to
            the reserves described in paragraph (2)(A)(ii) and the
            supplemental reserve; except that such reserves shall be taken
            into account ratably over the 6-taxable year period beginning
            with such taxable year.
              ``(4) Suspension of recapture if residential loan requirement
            met.--
                      ``(A) In general.--In the case of a bank which meets
                    the residential loan requirement of subparagraph (B)
                    for the first taxable year beginning after December 31,
                    1995, or for the following taxable year--
                              ``(i) no adjustment shall be taken into
                            account under paragraph (1) for such taxable
                            year, and
                              ``(ii) such taxable year shall be disregarded
                            in determining--
                                      ``(I) whether any other taxable year
                                    is a taxable year for which an
                                    adjustment is required to be taken into
                                    account under paragraph (1), and
                                      ``(II) the amount of such adjustment.
                      ``(B) Residential loan requirement.--A taxpayer meets
                    the residential loan requirement of this subparagraph
                    for any taxable year if the principal amount of the
                    residential loans made by the taxpayer during such year
                    is not less than the base amount for such year.
                      ``(C) Residential loan.--For purposes of this
                    paragraph, the term `residential loan' means any loan
                    described in clause (v) of section 7701(a)(19)(C) but
                    only if such loan is incurred in acquiring,
                    constructing, or improving the property described in
                    such clause.
                      ``(D) Base amount.--For purposes of subparagraph (B),
                    the base amount is the average of the principal amounts
                    of the residential loans made by the taxpayer during
                    the 6 most recent taxable years beginning on or before
                    December 31, 1995. At the election of the taxpayer who
                    made such loans during each of such 6 taxable years,
                    the preceding sentence shall be applied without regard
                    to the taxable year in which such principal amount was
                    the highest and the taxable year in such principal
                    amount was the lowest. Such an election may be made
                    only for the first taxable year beginning after such
                    date, and, if made for such taxable year, shall apply
                    to the succeeding taxable year unless revoked with the
                    consent of the Secretary.
                      ``(E) Controlled groups.--In the case of a taxpayer
                    which is a member of any controlled group of
                    corporations described in section 1563(a)(1),
                    subparagraph (B) shall be applied with respect to such
                    group.
              ``(5) Continued application of fresh start under section 585
            transitional rules.--In the case of a taxpayer to which
            paragraph (1) applied and which was not a large bank (as
            defined in section 585(c)(2)) for its first taxable year
            beginning after December 31, 1995:
                      ``(A) In general.--For purposes of determining the
                    net amount of adjustments referred to in section
                    585(c)(3)(A)(iii), there shall be taken into account
                    only the excess (if any) of the reserve for bad debts
                    as of the close of the last taxable year before the
                    disqualification year over the balance taken into
                    account by such taxpayer under paragraph (2)(A)(ii) of
                    this subsection.
                      ``(B) Treatment under elective cut-off method.--For
                    purposes of applying section 585(c)(4)--
                              ``(i) the balance of the reserve taken into
                            account under subparagraph (B) thereof shall be
                            reduced by the balance taken into account by
                            such taxpayer under paragraph (2)(A)(ii) of
                            this subsection, and
                              ``(ii) no amount shall be includible in gross
                            income by reason of such reduction.
              ``(6) Suspended reserve included as section 381(c) items.--
            The balance taken into account by a taxpayer under paragraph
            (2)(A)(ii) of this subsection and the supplemental reserve
            shall be treated as items described in section 381(c).
              ``(7) Conversions to credit unions.--In the case of a
            taxpayer to which paragraph (1) applied which becomes a credit
            union described in section 501(c) and exempt from taxation
            under section 501(a)--
                      ``(A) any amount required to be included in the gross
                    income of the credit union by reason of this subsection
                    shall be treated as derived from an unrelated trade or
                    business (as defined in section 513), and
                      ``(B) for purposes of paragraph (3), the credit union
                    shall not be treated as if it were a bank.
              ``(8) Regulations.--The Secretary shall prescribe such
            regulations as may be necessary to carry out this subsection
            and subsection (e), including regulations providing for the
            application of such subsections in the case of acquisitions,
            mergers, spin-offs, and other reorganizations.''
      (b) Conforming Amendments.--
              (1) Subsection (d) of section 50 is amended by adding at the
            end the following new sentence:
    ``Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) referred to
    in paragraph (1) of this subsection shall not apply to any taxable year
    beginning after December 31, 1995.''
              (2) Subsection (e) of section 52 is amended by striking
            paragraph (1) and by redesignating paragraphs (2) and (3) as
            paragraphs (1) and (2), respectively.
              (3) Subsection (a) of section 57 is amended by striking
            paragraph (4).
              (4) Section 246 is amended by striking subsection (f).
              (5) Clause (i) of section 291(e)(1)(B) is amended by striking
            ``or to which section 593 applies''.
              (6) Subparagraph (A) of section 585(a)(2) is amended by
            striking ``other than an organization to which section 593
            applies''.
              (7)(A) The material preceding subparagraph (A) of section
            593(e)(1) is amended by striking ``by a domestic building and
            loan association or an institution that is treated as a mutual
            savings bank under section 591(b)'' and inserting ``by a
            taxpayer having a balance described in subsection
            (g)(2)(A)(ii)''.
              (B) Subparagraph (B) of section 593(e)(1) is amended to read
            as follows:
                      ``(B) then out of the balance taken into account
                    under subsection (g)(2)(A)(ii) (properly adjusted for
                    amounts charged against such reserves for taxable years
                    beginning after December 31, 1987),''.
              (C) Paragraph (1) of section 593(e) is amended by adding at
            the end the following new sentence: ``This paragraph shall not
            apply to any distribution of all of the stock of a bank (as
            defined in section 581) to another corporation if, immediately
            after the distribution, such bank and such other corporation
            are members of the same affiliated group (as defined in section
            1504) and the provisions of section 5(e) of the Federal Deposit
            Insurance Act (as in effect on December 31, 1995) or similar
            provisions are in effect.''
              (8) Section 595 is hereby repealed.
              (9) Section 596 is hereby repealed.
              (10) Subsection (a) of section 860E is amended--
                      (A) by striking ``Except as provided in paragraph
                    (2), the'' in paragraph (1) and inserting ``The'',
                      (B) by striking paragraphs (2) and (4) and
                    redesignating paragraphs (3) and (5) as paragraphs (2)
                    and (3), respectively, and
                      (C) by striking in paragraph (2) (as so redesignated)
                    all that follows ``subsection'' and inserting a period.
              (11) Paragraph (3) of section 992(d) is amended by striking
            ``or 593''.
              (12) Section 1038 is amended by striking subsection (f).
              (13) Clause (ii) of section 1042(c)(4)(B) is amended by
            striking ``or 593''.
              (14) Subsection (c) of section 1277 is amended by striking
            ``or to which section 593 applies''.
              (15) Subparagraph (B) of section 1361(b)(2) is amended by
            striking ``or to which section 593 applies''.
              (16) The table of sections for part II of subchapter H of
            chapter 1 is amended by striking the items relating to sections
            595 and 596.
      (c) Effective Dates.--
              (1) In general.--Except as otherwise provided in this
            subsection, the amendments made by this section shall apply to
            taxable years beginning after December 31, 1995.
              (2) Subsection (b)(7).--The amendments made by subsection
            (b)(7) shall not apply to any distribution with respect to
            preferred stock if--
                      (A) such stock is outstanding at all times after
                    October 31, 1995, and before the distribution, and
                      (B) such distribution is made before the date which
                    is 1 year after the date of the enactment of this Act
                    (or, in the case of stock which may be redeemed, if
                    later, the date which is 30 days after the earliest
                    date that such stock may be redeemed).
              (3) Subsection (b)(8).--The amendment made by subsection
            (b)(8) shall apply to property acquired in taxable years
            beginning after December 31, 1995.
              (4) Subsection (b)(10).--The amendments made by subsection
            (b)(10) shall not apply to any residual interest held by a
            taxpayer if such interest has been held by such taxpayer at all
            times after October 31, 1995.

                 Subtitle B--Reform of the Earned Income Credit

    SEC. 411. EARNED INCOME CREDIT DENIED TO INDIVIDUALS NOT AUTHORIZED TO
                        BE EMPLOYED IN THE UNITED STATES.

      (a) In General.--Section 32(c)(1) (relating to individuals eligible
    to claim the earned income credit) is amended by adding at the end the
    following new subparagraph:
                      ``(F) Identification number requirement.--The term
                    `eligible individual' does not include any individual
                    who does not include on the return of tax for the
                    taxable year--
                              ``(i) such individual's taxpayer
                            identification number, and
                              ``(ii) if the individual is married (within
                            the meaning of section 7703), the taxpayer
                            identification number of such individual's
                            spouse.''.
      (b) Special Identification Number.--Section 32 is amended by adding
    at the end the following new subsection:
      ``(l) Identification Numbers.--Solely for purposes of subsections
    (c)(1)(F) and (c)(3)(D), a taxpayer identification number means a
    social security number issued to an individual by the Social Security
    Administration (other than a social security number issued pursuant to
    clause (II) (or that portion of clause (III) that relates to clause
    (II)) of section 205(c)(2)(B)(i) of the Social Security Act).''.
      (c) Extension of Procedures Applicable to Mathematical or Clerical
    Errors.--Section 6213(g)(2) (relating to the definition of mathematical
    or clerical errors) is amended by striking ``and'' at the end of
    subparagraph (D), by striking the period at the end of subparagraph (E)
    and inserting a comma, and by inserting after subparagraph (E) the
    following new subparagraphs:
                      ``(F) an omission of a correct taxpayer
                    identification number required under section 32
                    (relating to the earned income credit) to be included
                    on a return, and
                      ``(G) an entry on a return claiming the credit under
                    section 32 with respect to net earnings from self-
                    employment described in section 32(c)(2)(A) to the
                    extent the tax imposed by section 1401 (relating to
                    self-employment tax) on such net earnings has not been
                    paid.''.
      (d) Effective Date.--The amendments made by this section shall apply
    to taxable years beginning after December 31, 1995.

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

    SEC. 421. 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, 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.''
      (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.''
              (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) 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 11349 shall apply to such
                    individual except that--
                              (i) 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, and
                              (ii) the 1-year period referred to in section
                            877(c) of such Code, as amended by this
                            section, shall not expire before the date which
                            is 1 year after the date of the enactment of
                            this Act.
                      (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. 422. 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--
              ``(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. 423. 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).

                             A. Purpose and Summary

        H.R. 3103 (the ``Health Coverage Availability and
    Affordability Act of 1996''), as amended, includes titles
    relating to improving the availability and portability of
    health insurance coverage (Title I), preventing health care
    fraud and health care administrative simplification (Title II),
    tax-related health provisions (Title III), and providing
    certain revenue offsets for the bill (Title IV).

    Title I. Improved Availability and Portability of Health Insurance
            Coverage

        Title I of the bill provides for portability of coverage
    for previously covered individuals, eliminates or reduces
    preexisting condition limitation periods, prohibits exclusions
    based on health status, gives States flexibility to provide
    greater health care protection, and extends the excise tax for
    failure to satisfy the health care continuation rules to
    failures to comply with the rules.

    Title II. Preventing Health Care Fraud and Abuse; Administrative
            Simplification

        Title II of the bill establishes a national health care
    fraud and abuse control program to coordinate Federal, State
    and local law enforcement to combat health care plan fraud,
    extends certain criminal penalties for violations, increases
    funding for investigations, reviews and prosecutions relating
    to health care plans, and improves the efficiency and
    effectiveness of the health care system by encouraging the
    development of a health care network through the establishment
    of standards and requirements for the electronic transmission
    of certain health information.

    Title III. Tax-Related Health Provisions

        Title III of the bill provides the following tax-related
    health provisions:
        Medical savings accounts.--The bill allows, within certain
    limits, individuals covered by a high deductible health plan to
    make tax deductible contributions to a medical savings account
    (``MSA''). Within the same limits, contributions to an MSA 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.
        Deduction for health insurance costs of self-employed
    individuals.--The bill increases the deduction for health
    insurance costs of self-employed individuals from the current
    30 percent to 35 percent for 1998, 40 percent for 1999-2001, 45
    percent for 2002, and 50 percent for 2003 and thereafter.
        Long-term care insurance provisions.--Under the bill,
    amounts received under a long-term care insurance contract are
    excludable from gross income (subject to an annual dollar limit
    in the case of per diem type contracts). Unreimbursed expenses
    for qualified long-term care services and long-term care
    insurance premiums not exceeding specified dollar limits (based
    on the individual's age) are treated as medical expenses for
    purposes of the itemized deduction for medical expenses.
    Employer-provided long-term care insurance is excludable from
    income, except if provided through a cafeteria plan. In
    addition, long-term care insurance contracts (and issuers of
    contracts) are required to satisfy certain consumer protection
    provisions.
        Accelerated benefits under life insurance contracts.--The
    bill extends the present-law exclusion from income for amounts
    paid under a life insurance contract by reason of the death of
    the insured to accelerated death benefits and viatical
    settlements paid with respect to certain terminally ill and
    chronically ill insured individuals.
        High-risk pools.--The bill provides tax-exempt status to
    membership organizations that are established by a State
    exclusively to provide coverage for medical care on a nonprofit
    basis to certain high-risk individuals.
        Health insurance organizations under Code section 833.--The
    bill allows certain group health insurance organizations to be
    treated as ``Blue Cross/Blue Shield'' organizations for
    purposes of Code section 833.

    Title IV. Revenue Offsets

        Title IV of the bill provides certain revenue offsets for
    the bill to avoid increasing the budget deficit:
        Bad debt deduction for thrift institutions.--The bill
    repeals the Code section 593 deduction for bad debt reserves
    for thrift institutions, effective for taxable years beginning
    after 1995. Thrift institutions required to change their method
    of accounting for bad debt reserves will not be required to
    recapture the portion of their bad debt reserves accumulated
    before 1988.
        Earned income credit provisions.--The bill denies the
    earned income credit (EIC) to individuals not authorized to be
    employed in the United States, and also if the individual does
    not include a taxpayer identification number on the tax return.
    The bill also applies the math error procedures to failures to
    provide a correct tax identification number and in the case of
    a taxpayer who claims the EIC with respect to net earnings from
    self-employment and fails to pay the proper amount of self-
    employment tax on such net earnings.
        Revision of expatriation tax rules.--The bill expands and
    substantially strengthens 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. The bill extends the expatriation tax
    provisions to apply to certain long-term residents of the
    United States whose U.S. residency is terminated, subjects
    certain individuals to the expatriation tax provisions without
    inquiry as to their motive for losing their U.S. citizenship or
    residency, expands the categories of income and gains that are
    taxed under the expatriation tax provisions, and provides
    relief from double taxation in circumstances where another
    country imposes tax on items that would be taxed under the
    expatriation tax provisions. The bill also contains information
    reporting and sharing rules to enhance compliance with the
    expatriation tax provisions, and directs the Treasury
    Department to undertake a study of U.S. tax compliance by
    individuals living abroad.

                     B. Background and Need for Legislation

        Today, over 39 million Americans lack health insurance
    coverage. From 1965 to 1995, health care spending has grown at
    an average annual rate of 11.2% over twice the average annual
    rate of growth in spending as measured in the Consumer Price
    Index for all items and services. Largely because of the cost
    factor, which is harder for many small firms to absorb, the
    rate of employment-based coverage ranges from 92% of workers in
    firms of 1,000-plus employees to only 67% in the smallest firms
    of 10 or fewer workers. Any effort to maintain the employer-
    based health insurance system, while increasing coverage,
    necessarily must focus on increasing health insurance coverage
    among those who own and work for small businesses.
        One specific concern of the public about employer-based
    health insurance is that breadwinners may lose their coverage
    or the coverage for a dependent if they change jobs.
    Frequently, employees will require that new employees go
    through a pre-existing condition waiting period when they
    become eligible for an employer's group health plan. The fear
    that many have of losing coverage during a pre-existing waiting
    period because of the health status of the worker or one of
    their dependents, results in ``job-lock'' for many Americans.
    They simply cannot afford to lose health insurance coverage for
    even a short time, and thus are not able to consider changes in
    employment. In periods of downsizing and other changes in the
    employment market, this problem becomes even more compelling
    because many will have no choice but to switch jobs thereby
    risking pre-existing condition limitation rules, even at the
    risk of great personal cost.
        Separately, with respect to long-term care, Americans spend
    over $70 billion a year on nursing home care. Medicaid covers
    over half of all spending for nursing homes and many of those
    covered by Medicaid ``spent down'' their personal savings and
    other resources in order to qualify for assistance. In
    addition, many Americans who are not in nursing homes require
    assistance simply to perform basic activities of daily living.
    If they had purchased long-term care insurance, many of those
    Americans could have remained more independent instead of being
    forced to rely on Medicaid or family members who may have to
    pay all or part of the costs of their long-term care.
        Additionally, in their efforts to contain the health
    insurance premium costs for their employees, employers have
    chosen two major strategies. Employers are either turning to
    managed care plans to provide coverage of their employees, or
    increasing employee cost sharing in their health insurance. For
    employers and employees who want to make more of their own
    health care decisions, these alternatives do not offer the
    choices many Americans want. An alternative for employers and
    employees would be combining a high deductible health insurance
    plan with a medical savings account (MSA). The personal
    management of the funds in the MSA allows the plan participants
    to take a more active role in their health care spending, and
    provides them greater freedom in making cost effective
    decisions about their medical care. This option, however, does
    not currently have favored tax consideration comparable to that
    of conventionally purchased employer-based health coverage, so
    the use of this alternative has not spread widely.
        In order to address the problem of health care cost
    inflation and make insurance more affordable, it is important
    to focus on key sources affecting levels of the underlying
    health care costs. Two key sources of excessive cost are
    medical fraud and abuse, and the current medical paperwork
    burden.
        According to the General Accounting Office (GAO), as much
    as 10 percent of total health care costs are lost to fraudulent
    or abusive practices by unscrupulous health care providers. The
    GAO reports that only a small fraction of the fraud and abuse
    committed in the health care system is identified and dealt
    with. Federal funding for prevention, detection, and
    prosecutions of the perpetrators of health care fraud and abuse
    has not kept pace with the problem. Coordination of the various
    law enforcement agencies at the federal and state levels has
    been insufficient, and law enforcement agencies agree that
    penalties for health care fraud and abuse should be increased.
        The demand by third party payers and others involved in
    reviewing medical claims for documentation regarding claims has
    increased the paperwork burden on those payers, health care
    providers, employers, and enrollees in health plans. As health
    care claims information moves to a ``paperless'' system it is
    critical for efficiency and cost saving that uniform standards
    for that information be adopted. The lack of uniform data
    standards for financial and administrative information is a
    barrier of modernizing health care information systems as well
    as obtaining the savings that moderation can provide.
        In response to these specific problems of availability and
    affordability of health insurance in the United States, the
    Ways and Means Committee has targeted the reforms it has
    adopted in H.R. 3103. H.R. 3103 specifically addresses the
    concerns outlined here including promoting coverage in the
    small employer group coverage, ensuring portability of health
    insurance from one job to the next, providing for a new tax
    consideration of medical savings accounts, clarifying tax
    consideration of long-term care insurance and expenses,
    providing additional funding, coordination and penalties
    against fraud and abuse, and establishing a process for
    administrative simplification. The bill further makes these
    reforms in a budget neutral manner with savings from increased
    federal fraud and abuse efforts and revenue provisions.
        H.R. 3103 is the culmination of the Committee's work in the
    current Congress on health care reform. The Committees on
    Commerce, Economic and Educational Opportunities, and Judiciary
    are developing health care reform measures to complement the
    Ways and Means Committee's efforts to increase the availability
    and affordability of health insurance.

                             C. Legislative History

        H.R. 3103 was introduced by Chairman Archer and Mr. Thomas
    on March 18, 1996, and was amended by the Committee in a markup
    on March 19, 1996. The bill, as amended, was ordered favorably
    reported on March 19, 1996, by a roll call vote of 25-11.
        Provisions substantially similar to the tax-related
    provisions of the bill (except for the provision relating to
    the COBRA tax sanctions and the high-risk pool provision) were
    previously included in legislation approved by the Committee
    and passed by the Congress in H.R. 2491, the ``Balanced Budget
    Act of 1995'' (see conference report, H. Rept. 104-350,
    November 16, 1995), which was vetoed by the President. The
    revenue provision relating to bad debt deductions of thrift
    institutions also was reported by the Committee in H.R. 2494
    (H. Rept. 104-324, November 7, 1995). A substantially similar
    revenue provision relating to expatriation tax rules also was
    reported by the Committee in H.R. 1812 (H. Rept. 104-145, June
    16, 1995).
        Provisions substantially similar to the fraud and abuse
    provisions of the bill were previously included in legislation
    approved by the Committee and passed by the Congress in H.R.
    2425, the ``Medicare Preservation Act of 1995'' (see conference
    report H. Rept. 104-276, October 16, 1995), and H.R. 2491,
    ``The Balanced Budget Act of 1995'' (see conference report, H.
    Rept. 104-350, November 16, 1995), which was vetoed by the
    President. Provisions substantially similar to the
    administrative simplification provisions of the bill were also
    reported by the Committee in H.R. 2425 (H. Rept. 104-276), and
    H.R. 2491 (H. Rept. 104-350).
        The Health Subcommittee held hearings on several
    substantially similar provisions of the bill in 1995 including:
    Long Term Care Provisions in the ``Contract with America''
    (Rept. 104-1, January 20, 1995), Health Insurance Premium Tax
    Deductions for the Self-Employed, (January 17, 1995), Health
    Insurance Portability (Rept. 104-32, May 12, 1995), and H.R.
    1818, The Family Medical Savings and Investment Act (June 27,
    1995).
        In addition to the roll call votes on amendments (as shown
    in Part III of this report), the Committee approved the
    following provisions by voice vote as amendments to Chairman
    Archer's amendment in the nature of a substitute: En bloc
    amendments by Mrs. Johnson to Title I relating to (1) shorter
    look-back period for determination of preexisting condition,
    (2) shorter eligibility periods, (3) nondiscrimination on the
    basis of genetic information, (4) shorter look-back periods for
    State preemption, and (5) counting government programs as
    qualifying previous coverage.
        Amendment to Title I by Mr. English to state that the scope
    of health insurance coverage includes conditions arising out of
    acts of domestic violence.
        Amendment to Title III by Mr. Houghton to add a new section
    relating to the tax treatment of certain health insurance
    organizations under Code section 833.
        Amendment by Mr. Ensign to (1) Title III to treat qualified
    long-term care expenses as deductible medical expenses and (2)
    Title IV to add provisions regarding expatriation tax rules as
    a revenue offset to (1).
        Amendment by Mr. Shaw to strike section 412 of the bill
    (relating to increases in tax return preparer penalties).
        Further, the Committee approved by voice vote the
    Chairman's amendment in the nature of a substitute, as amended.

                          II. EXPLANATION OF THE BILL

      TITLE I.--IMPROVED AVAILABILITY AND PORTABILITY OF HEALTH INSURANCE
                                    COVERAGE

                 subtitle a--coverage under group health plans

    Present law

        Group health plans often exclude coverage for a period of
    time for services related to a preexisting medical condition of
    a newly covered employee or his or her dependents regardless of
    previous health insurance coverage. As a result, individuals
    changing jobs may face gaps in insurance coverage for
    themselves or family members with ongoing health problems, even
    when both jobs provide similar health benefits. Coverage gaps
    are even more likely in the individual market. Most individual
    insurance policies impose pre-existing condition exclusions or
    limitations; individuals with chronic health conditions may be
    entirely denied coverage.
        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.
        The Employee Retirement Income Security Act of 1974 (ERISA)
    imposes Federal requirements on most employer-sponsored health
    plans. Exempt from ERISA are health benefit plans that are
    provided by Federal, State and local governments, churches, and
    certain educational organization plans. The ERISA requirements
    on health benefit plans relate to reporting and disclosure
    obligations, and fiduciary standards. Also applicable to health
    plans are ERISA provisions relating to claims review and
    enforcement. In addition, ERISA extends certain
    nondiscrimination protections to participants in employer-
    sponsored health plans.
        OBRA of 1993 (P.L. 103-66) amended ERISA to require
    existing employer health plans to comply with State laws
    relating to medical child support orders. The 1993 law also
    amended ERISA to require employers with existing plans
    providing dependent coverage to cover adopted children. In
    addition, employer plans were prohibited from reducing coverage
    for the cost of pediatric vaccines below that provided on May
    1, 1993.
        ERISA does not regulate the content and design of health
    plans provided by employers. This is up to the employer in
    negotiation with the employer's workforce. Moreover, under
    section 514 of ERISA, States are preempted from regulating
    employee health benefit plans. Accordingly, while plans
    purchased by employers from insurers must comply with State
    insurance law and regulations, self-insured employers are
    relatively free to structure their plans as they desire, or
    through the collective bargaining process, if their employees
    are represented by a union. (Self-insured plans are those in
    which the employer assumes all or some of the risk for paying
    claims, instead of paying premiums to an insurance company
    which in turn assumes the risk.)
        Employer sponsored health plans (be they insured or self-
    insured) must also comply with the health insurance
    continuation provisions of the Consolidated Omnibus Budget
    Reconciliation Act of 1985 (COBRA, P.L. 99-272). COBRA requires
    that employers with 20 or more employees offer employees and
    their dependents continued coverage under the employer's group
    health plan in the case of certain qualifying events, such as
    termination from employment, reduction in hours, or a change in
    family status. The duration of coverage is 18 to 36 months
    depending on the qualifying event. The employer may require the
    eligible participant or beneficiary to pay 102% of the total
    premium. The requirements under COBRA are enforced through the
    Internal Revenue Code (section 4980B), ERISA, and for State and
    local government plans, the Public Health Service (PHS) Act.
    Under the Internal Revenue Code provisions, noncomplying
    employers are subject to an excise tax. Under ERISA,
    individuals may bring a civil action against the plan or the
    employer to recover benefits due, enforce rights, or to clarify
    rights to future benefits. Noncomplying plans may also be fined
    by the Department of Labor. Under the PHS Act, an individual
    who is aggrieved may bring an action for appropriate equitable
    relief. In OBRA of 1993 (P.L. 103-66), Congress provided for
    the COBRA tax penalties to apply to plans that failed to
    continue paying as much for the costs of pediatric
    immunizations as they had prior to May 1, 1993.
        Additional federal laws also apply. For example, self-
    insured employer health plans must comply with
    nondiscrimination requirements under section 105(h) of the
    Internal Revenue Code. Under a 1978 amendment to the Civil
    Rights Act (P.L. 95-555), it is unlawful for an employer to
    discriminate between men and women with regard to fringe
    benefits. The effect of this law is to prohibit existing
    employer health plans covering 15 or more employees from
    discriminating on the basis of pregnancy, child birth, or
    related conditions. Finally, under a series of amendments to
    the Social Security Act, (beginning with the Omnibus Budget
    Reconciliation Act of 1981), employer health plans must be the
    first payer of health services in the event that an employee or
    other eligible beneficiary is also eligible for Medicare.
        Regulation of the business of insurance has traditionally
    been left to the states and presently there is no Federal law
    regulating the terms of sale of private insurance by insurers
    sold to small or large employers. One exception is that the
    federal government regulates certain health maintenance
    organizations (HMOs) that have elected to meet certain federal
    financial, organizational, and operational standards and become
    a ``qualified HMO'' under title XIII of the Public Health
    Service Act. Non-federally qualified HMOs are regulated under
    state law.
        In recent years, most states have adopted small group
    health insurance market reform laws that are identical or
    similar to a model law issued by the National Association of
    Insurance Commissioners (NAIC) in 1992, and revised in 1995.
    These laws seek to ensure greater availability, portability,
    and more affordable coverage in the small group market. A much
    smaller number of states have enacted laws providing for reform
    of the individual (nongroup) health insurance market. These too
    are aimed at expanding the availability of coverage and making
    it more portable and affordable. However, under the federal
    preemption provision of ERISA (section 514), these state laws
    do not apply to employer-sponsored health plans. They only
    apply to insurance that is sold to employers and directly to
    individuals. As a result, employees covered under self-insured
    (i.e., self-funded) employer plans are not subject to state
    insurance laws.

      Sec. 101. Portability of Coverage for Previously Covered Individuals

    Reasons for change

        One of the most compelling issues faced by workers and
    their families is the problem referred to as ``job-lock.'' Job-
    lock occurs when breadwinners are reluctant to take new jobs or
    pursue new career opportunities because doing so could result
    in a loss of health insurance coverage because they or one of
    their dependents have medical conditions that existed prior to
    their change in employment. Further, if a breadwinner is facing
    lay-offs, involuntary transfers or other types of employment
    dislocations, they still must cope with the potential loss of
    health insurance coverage, even if the worker seeks and secures
    a new position. This occurs because employers or insurers may
    choose to impose preexisting condition exclusions on
    individuals (or their dependents, if family coverage is
    offered), when the worker changes jobs. Such exclusions can be
    time-limited, but sometimes they are permanent, causing the
    potential of genuine hardship for some.
        To place this problem in context, it is important to
    understand that employer-based health insurance is the
    principal source of health insurance protection in the United
    States. After paid vacations, health insurance is the most
    common fringe benefit offered by employers to employees.
    According to recent data, over 62% of all Americans are covered
    by employment-based health insurance. Therefore, the practices
    of employers and insurers with respect to the administration of
    group health plans are of considerable significance to all
    workers and their families, and have been receiving the careful
    attention of members of this Committee.
        In designing the portability provisions, it was the
    Committee's intent to both encourage workers to maintain health
    insurance coverage whenever it is offered through their
    employers and to require group health plans to credit such
    coverage towards any preexisting condition limitation the plan
    would otherwise be permitted to impose. The Committee views
    this as an important step to correcting the practice that some
    employers and insurers engage in of repeatedly screening
    individuals and their dependents whenever workers change jobs,
    even when the individual has ``played by the rules'' and
    continuously maintained health insurance.
        In addition, in order to facilitate portability of
    benefits, it is important for plans to certify to the coverage
    that a worker has previously carried to assist coverage
    determinations as the worker enrolls in a new plan. The
    Committee views these requirements on employers and insurers to
    be relatively modest and necessary if employers are going to be
    required to forgo imposition of preexisting condition
    limitations based on a new employee's prior group coverage.
        The bill would offer group health plans two options for
    judging the scope of prior coverage carried by an individual.
    It is the Committee's hope and expectation that the standard
    option will become routine operating procedure for most or all
    group health plans. This option simply accepts prior group
    health plan coverage as being bona-fide, ``qualified'' coverage
    for crediting purposes towards any otherwise applicable
    preexisting condition exclusion. However, currently many plans
    make judgments about the scope of prior coverage on a benefit-
    by-benefit basis to determine whether there were important gaps
    in the prior coverage that, if not addressed in the new plan,
    would be a source of costly adverse selection to the new plan.
    These are benefit-specific judgments that are permitted to lead
    to time-limited exclusions from coverage in the new plan. The
    Committee was reluctant to propose immediately halting a
    practice that may have some validity in discouraging
    individuals from skimping on coverage until they have a medical
    reason for seeking more comprehensive coverage. However, as
    stated earlier, it is the Committee's preference and
    expectation that the employer-based insurance system will
    evolve towards the more administratively simple, primary
    standard described in the bill.

    Explanation of provision

        Group health plans, and insurers and health maintenance
    organizations offering health insurance coverage in connection
    with a group health plan, would be required to credit periods
    of qualified previous coverage toward the fulfillment of a
    preexisting condition exclusion period when an individual moved
    from one source of group health coverage to another.
    Specifically, a preexisting condition limitation period would
    be reduced by the length of the aggregate period of any
    qualified prior coverage. Prior coverage would not have to be
    credited toward a preexisting condition limitation period if
    the individual experienced a break in qualified group coverage
    of more than 60 days. (Qualified group coverage means any
    period of coverage of the individual under a group health-plan,
    health insurance coverage, Medicaid.) A waiting period for any
    coverage under a group health plan (or for health insurance
    coverage offered in connection with a group health plan) would
    not be considered a break in coverage.
        Presentation of a certification of prior coverage would
    establish an individual's eligibility for credit against a
    preexisting condition limitation period. Group health plan
    administrators, insurers, HMOs, and state Medicaid programs
    would be required to provide such certifications of coverage
    upon request of the individual.
        In determining whether an individual has met qualified
    coverage periods, a group health plan, insurer, or HMO offering
    group coverage could elect one of two methods. Under the
    standard method, first, it could include all periods, without
    regard to the specific benefits offered during the period of
    prior coverage. Under the second alternative method, it could
    look at periods of prior coverage on a benefit-specific basis
    and not include as a qualified coverage period a specific
    benefit unless coverage for that benefit was included at the
    end of the most recent period of coverage. Entities electing
    the second method would have to state prominently in any
    disclosure statements concerning the plan or coverage and to
    each enrollee at the time of enrollment or sale that the plan
    or coverage had made such an election and would have to include
    a description of the effect of this election. Upon the request
    of the plan, insurer, or HMO, the entity providing the
    certification would have to promptly disclose information on
    benefits under its plan. It could charge the reasonable cost
    for providing this information.

         Sec. 102. Limitation of Preexisting Conditions Exclusions; No
        Application to Certain Newborns, Adopted Children, and Pregnancy

    Reasons for change

        It was the Committee's intent to set a ceiling on the
    extent to which group health plans could exclude preexisting
    conditions of otherwise eligible individuals from coverage.
    Plans may choose to not exclude preexisting conditions or
    impose shorter exclusion periods. However, consistent with the
    Committee's intent to encourage workers to maintain coverage,
    the bill would permit group health plans to impose a longer
    exclusion period, not to exceed 18 months, if the individual
    refuses coverage when it is initially offered but subsequently
    enrolls late.
        Note that nothing here is intended to define the benefits
    offered by employers and that an employer can choose to impose
    waiting periods between initial employment and eligibility for
    enrollment in the employer's group health plan. Such waiting
    periods are not counted as a lapse in coverage for purposes of
    determining whether an individual has maintained qualified
    prior coverage.

    Explanation of provision

        Group health plans, and insurers and health maintenance
    organization offering health insurance coverage in connection
    with a group health plan, would be prohibited from imposing a
    preexisting condition exclusion that exceeded 12 months for
    conditions for which medial advice, diagnosis, or treatment was
    received or recommended within the previous 6 months prior to
    becoming insured. In the event that the individual was a late
    enrollee, the preexisting condition exclusion could not exceed
    18 months for conditions arising within 6 months prior to
    becoming insured.
        Preexisting condition exclusions or limitations could not
    be applied to newborns and adopted children so long as these
    individuals became insured within 30 days of birth or placement
    for adoption. Pregnancy could not be treated as a pre-existing
    condition.

     Sec. 103. Prohibiting Exclusions Based on Health Status and Providing
                             for Enrollment Periods

    Explanation of provision

        This section would ensure that individuals in group health
    plans could not be excluded from coverage or from renewing
    their coverage based on their health status. Health status is
    defined to include, with respect to an individual, medical
    condition, claims experience, receipt of health care, medical
    history, evidence of insurability, or disability.
        The Committee notes that the inclusion of evidence of
    insurability in the definition of ``health status'' is intended
    to ensure, among other things, the 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.
        Group health plans would be required to provide for special
    enrollment periods for eligible individuals who lose other
    sources of coverage if certain conditions were met. An
    individual would have to be allowed to enroll under at least
    one benefit option if: (1) the employee (or dependent) had been
    covered under another group health plan at the time coverage
    was previously offered, (2) that this was the reason for
    declining enrollment, (3) that the individual lost their
    coverage as a result of certain event (loss of eligibility for
    coverage, termination or employment, or reduction in the number
    of hours of employment), and (4) the employee requested such
    enrollment within 30 days of termination of the coverage.
        In the event that a group health plan provided family
    coverage, the plan could not require, as a condition of
    coverage of a beneficiary or participant in the plan, a waiting
    period applicable to the coverage of a beneficiary who is a
    newborn, an adopted child or child placed for adoption, or a
    spouse, at the time of marriage, if the participant has met any
    waiting period applicable to that participant. The bill defines
    timely enrollment as being within 30 days of the birth,
    adoption, or marriage if family coverage was available as of
    that date.

                             Sec. 104. Enforcement

    Explanation of provision

        The above provisions would be enforced through penalties
    assessed through the Internal Revenue Code (IRC), ERISA, or
    through civil money penalties assessed by the Secretary of
    Health and Human Services. The Secretaries of Treasury, Labor,
    and HHS would be required to issue regulations that were
    nonduplicative and in a manner that assured coordination and
    nonduplication in their activities as provided for under this
    Act.
                Enforcement through the IRC
        IRC enforcement would be done through the COBRA health
    insurance continuation provisions (section 4980B). In general,
    a noncomplying plan would be subject to an excise tax of $100
    per day per violation. Penalties would not be assessed in the
    event that the failure was determined to be unintentional or a
    correction was made within 30 days. For purposes of applying
    the COBRA enforcement language, special rules would apply:
        No tax could be imposed by this provision on a noncomplying
    insurer or HMO subject to state insurance regulation if the
    Secretary of HHS determined that the state had an effective
    enforcement mechanism.
        In the case of a group health plan of a small employer the
    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 with respect to such failure.
                Enforcement through ERISA
        Enforcement on certain group health plans would also be
    through ERISA sanctions. Such sanctions would only 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 effective 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.
                Enforcement through civil money penalties
        A group health plan, insurer, or HMO that failed to meet
    the above requirements would be subject to 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 would be
    required to take into account the previous record of compliance
    of the person being assessed with the applicable requirements
    of the bill, the gravity of the violation, and the overall
    limitations for unintentional failures provided 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. Any penalties
    collected would be paid to the Secretary and would be available
    without appropriation 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.

                  subtitle b--definitions; general provisions

    Present law

        See Subtitle A.

                    Sec. 191. Definitions; Scope of Coverage

    Explanation of provision

        Definitions are provided for these terms: group health
    plan, church plans, governmental plans, bona fide association,
    health insurance coverage, health maintenance organization,
    health status, individual health insurance coverage, insurer,
    medical care, network plan, waiting period, individual market,
    large group market, small employer, and small group market.

           Sec. 192. State Flexibility to Provide Greater Protection

    Explanation of provision

        This provides for state flexibility to provide greater
    protection than required under the Act. Specifically, nothing
    in this bill should be construed to preempt state laws that
    require insurers or HMOs to impose a limitation or exclusion of
    benefits relating to the treatment of a preexisting condition
    period for a period that is shorter than the applicable period
    provided under this Act; to allow individuals, participants,
    and beneficiaries to be considered to be in a period of
    previous qualifying coverage if such individual, participant,
    or beneficiary experiences a lapse in coverage that is greater
    than the 60-day periods provided for under this Act, or to
    impose shorter look-back periods for determining whether a
    preexisting condition period exists.
        Nothing in this Act shall be construed to affect or modify
    the provisions of section 514 of ERISA (relating to federal
    preemption of laws regulating employee benefit plans).

                            Sec. 193. Effective Date

    Explanation of provision

        In general, except as otherwise provided for in this title,
    the provisions of this title would apply with respect to: (1)
    group health plans and health insurance coverage offered in
    connection with group health plans, for plan years beginning on
    or after January 1, 1998; and (2) individual insurance coverage
    issued, renewed, in effect, or operated on or after January 1,
    1998.
        The Secretaries of HHS, Treasury, and Labor would be
    required to issue regulations on a timely basis as may be
    required to carry out this title.

                         Sec. 194. Rule of Construction

    Explanation of provision

        Nothing in this title or any amendment made thereby may be
    construed to require the coverage of any specific procedure,
    treatment, or service as part of a group health plan or health
    insurance coverage under this title or through regulation.

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

                  subtitle a--fraud and abuse control program

                   Sec. 201. Fraud and Abuse Control Program

    Present 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.

    Reasons for change

        A multiplicity of Federal, State and local law enforcement
    agencies, as well as private health insurers and health plans,
    are involved in various aspects of the investigation and
    prosecution of health care fraud. It is crucial that these
    efforts be as coordinated as possible in order to detect,
    prevent, and successfully prosecute health care fraud and
    abuse.

    Explanation of provision

        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,
    interpretive rulings 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 and would receive reimbursement
    for costs of investigations, audits and other functions under
    this section.
        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.
                Establishment of Health Care Fraud and Abuse Control
                        Account in Federal Hospital Insurance Trust Fund
        The Health Care Fraud and Abuse Control Account would be
    established as an expenditure account within the Federal
    Hospital Insurance (HI) Trust Fund. Monies derived from the
    coordinated health care anti-fraud and abuse programs from the
    imposition of civil money penalties, fines, 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. 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 for
    each fiscal year beginning with 1996.
        There are also 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. Amounts in the Account would also be
    available to the various State Medicaid fraud control units to
    reimburse such units for the costs of certain activities. The
    Secretary and the Attorney General are 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.

                      Sec. 202. Medicare Integrity Program

    Present 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.

    Reasons for change

        Federal spending for the prevention, detection, and
    enforcement of health care fraud and abuse has not kept pace
    with the growth in Medicare or other health care expenditures.
    As a result, today, Medicare spends 30 percent less per claim
    on fraud and abuse activities of what was spent in 1989,
    despite strong evidence that fraud and abuse is on the rise.
    These provisions provide a mandatory funding stream to
    modernize Medicare's fraud and abuse detection and prevention
    capacities, and give Medicare greater flexibility to contract
    with firms that have demonstrated expertise in the area of
    claims review and fraud and abuse detection and prevention. The
    overall commitment by the federal government to fighting
    Medicare fraud and abuse will also be increased dramatically.
    The HHS Office of the Inspector General (IG) and the FBI will
    receive fixed increases in funding over the next six years with
    funding not less than $150 million a year after 2002 for the IG
    and funding of $114 million a year after 2002 for the FBI.

    Explanation of provision

                Establishment of Medicare Integrity Program
        This provision would establish 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.
                Eligibility of entities
        The Secretary would impose certain eligibility requirements
    on entities entering into contracts under this Medicare
    Integrity Program, including conflict of interest requirements.
        The Secretary would be authorized to establish, by
    regulation, procedures for entering into contracts, with
    eligible entities including procedures relating to the number
    of contracts and the timing of contracts, competitive
    procedures for new contracts, and waiver of competitive
    procedures for renewed contracts under certain circumstances.
        The Secretary would be required to provide, by regulation,
    for the limitation of a contractor's liability under the
    Medicare Integrity Program. The Secretary would employ, to the
    extent he finds appropriate, the same or comparable standards
    and other substantive and procedural provisions as are
    contained in section 1157 of the Social Security Act.
                Elimination of fiscal intermediary and carrier
                        responsibility for carrying out activities subject
                        to program
        This provision prohibits any agency, organization, or
    carrier, from carrying out (or receiving 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.

                    Sec. 203. Beneficiary Incentive Programs

    Present law

        No provision.

    Reasons for change

        Medicare beneficiaries are in the best position to identify
    potentially fraudulent or abusive practices or excessive
    charges. The Committee believes they should be given incentives
    to provide information to the Medicare program concerning such
    suspect practices. Moreover, the Committee believes that the
    Medicare beneficiaries and the medical providers and suppliers
    should have an incentive to identify opportunities to improve
    the efficiency of the Medicare program and reduce fraud and
    abuse.

    Explanation of provision

                Clarification of requirement to provide explanation of
                        Medicare benefits
        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.
                Program to collect information on fraud and abuse
        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.
                Program to collect information on program efficiency
        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 could make a payment to the individual of
    an amount the Secretary considers appropriate.

    Sec. 204. Application of Certain Health Anti-Fraud and Abuse Sanctions
            to Fraud and Abuse Against Federal Health Care Programs

    Present law

        Section 1128B provides for certain criminal penalties for
    convictions of Medicare and Medicaid (and other state health
    care programs) program-related fraud.

    Reasons for change

        The Committee felt that greater deterrence was needed
    against fraud and abuse in all of the traditional fee-for-
    service federal programs in addition to Medicare and Medicaid.
        However, the Committee decided that the current anti-
    kickback statute is not well suited to the Federal Employee
    Health Benefit Program (FEHBP) which operates more like a
    private sector program with a wide range of primarily managed
    care options for federal employees. The fee-for-service and
    entitlement nature of the Medicare program and other federal
    health programs give rise to potentially fraudulent or abusive
    practices that are not present in an environment with managed
    care coverage.

    Explanation of provision

        This section 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 health insurance program under chapter 89 of
    title 5, United States Code). The term also would include any
    state health care program, which under section 1228(h),
    includes Medicaid, the Maternal and Child Health Services Block
    Grant Program and the Social Services Block Grant Program.

    Sec. 205. Guidance Regarding Application of Health Care Fraud and Abuse
                                   Sanctions

    Present 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.

    Reasons for change

        Greater public involvement in the process for identifying
    changes or additions to safe harbors, and fraud alerts will
    stimulate more timely and responsive information for assisting
    providers and suppliers in understanding Medicare requirements,
    as well as, enabling federal and state criminal justice
    agencies to focus on the most deliberate cases of fraudulent
    and abusive practices.

    Explanation of provision

        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.

                               ADVISORY OPINIONS

    Present law

        No provision.

    Reasons for change

        Providers want to comply with the fraud and abuse statute,
    but many are unsure of how the statute affects them. These
    providers should be able to receive guidance from the
    government regarding financial arrangements. Little or no
    guidance is currently provided because there are no regulations
    and only insufficient safe harbors. Without this ability, a
    chilling effect is placed on legitimate arrangements,
    particularly when providers are attempting to structure new and
    innovative health care delivery systems to contain health care
    cost.

    Explanation of provision

        The Secretary shall issue written advisory opinions
    regarding (i) what constitutes prohibited remuneration under
    section 1128B(b); (ii) whether an arrangement or proposed
    arrangement satisfies the criteria for activities which do not
    result in prohibited remuneration; (iii) what constitutes an
    inducement to reduce or limit services to individuals entitled
    to benefits; and (iv) whether an activity constitutes grounds
    for the imposition of a sanction under section 1128, 1128A, or
    1128B(b). Advisory opinions shall be binding as to the
    Secretary and the party requesting the opinion.

                              SPECIAL FRAUD ALERTS

    Present law

        No provision.

    Reasons for change

        Providers should be able to receive information and
    warnings on practices that the government has determined are
    suspect and are of particular concern.

    Explanation of provision

        Any person may 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 shall issue a
    special fraud alert in response to the request, published in
    the Federal Register.

         SUBTITLE B--REVISIONS TO CURRENT SANCTIONS FOR FRAUD AND ABUSE

    Sec. 211. Mandatory Exclusion From Participation in Medicare and State
                              Health Care Programs

    Present 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 Services 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 five 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.

    Reasons for change

        The Committee felt that greater deterrence was needed to
    protect the Medicare program from providers who have been
    convicted of health care, fraud felonies and felonies relating
    to controlled substances.

    Explanation of provision

                Individual convicted of felony relating to health care
                        fraud
        This section 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
    offense, 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.
                Individual convicted of felony relating to controlled
                        substance
        This section 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
    controlled substances for a minimum five year period. The
    Secretary would retain the discretionary authority to exclude
    individual from Medicare and State health care programs who
    have been convicted of misdemeanor offenses relating to
    controlled substances.

    Effective date

        This section would apply to convictions after the date of
    the enactment of this statute.

      Sec. 212. Establishment of Minimum Period of Exclusion for Certain
    Individuals and Entities Subject to Permissive Exclusion From Medicare
                         and State Health Care Programs

    Present law

        Section 1128 of the Social Security Act authorizes the
    Secretary to impose mandatory and permissive exclusions of
    individuals and entities from participation in 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 five 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.

    Reason for change

        The Committee felt that greater deterrence was needed to
    protect the Medicare program from providers who have been
    convicted of misdemeanor health care fraud offenses,
    obstructing an investigation, or whose health care license has
    been suspended or revoked.

    Explanation of provision

        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 exclusions from any Federal health care
    program or State health care program for reasons bearing on an
    individual's or entity's professional competence or 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 furnished 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.

    Sec. 213. Permissive Exclusion of Individuals With Ownership or Control
                        Interest in Sanctioned Entities

    Present 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 Services 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 five 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.

    Reasons for change

        The Committee felt that greater deterrence against fraud
    and abuse was needed in the Medicare program.

    Explanation of provision

        Entities owned, controlled, or managed by a sanctioned
    individual are already subject to permissive exclusion from
    participation in Medicare and State health programs by the
    Secretary. Under this new authority 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 previously
    been convicted of an offense listed in Section 1129(a) or
    (b)(1), (2) or (3) or otherwise excluded from program
    participation. Under the new provision, the culpable individual
    would also be subject to program exclusion, even if not
    initially convicted or excluded.

     Sec. 214. Sanctions Against Practitioners and Persons for Failure to
                       Comply With Statutory Obligations

    Present law

        The Secretary has the authority to impose administrative
    sanctions against practitioners and persons who have failed to
    comply with certain statutory obligations relating to the
    quality of medical care rendered. Under this section the
    Secretary may require, in cases involving medically improper or
    unnecessary health care services, that the practitioner or
    person pay the United States an amount up to $10,000 for each
    instance of medically improper or unnecessary health care
    services. In such cases the practitioner or person would be
    permitted to continue to be eligible to receive reimbursement
    for health care services rendered to program beneficiaries.

    Reasons for change

        The Committee felt that greater deterrence was needed to
    protect Medicare beneficiaries from providers who have failed
    to comply with certain statutory obligations relating to the
    quality of medical care rendered.

    Explanation of provision

                Minimum period of exclusion for practitioners and persons
                        failing to meet statutory obligations
        Under this section, the Secretary may exclude a
    practitioner or person for such period as the Secretary may
    prescribe, except that such period shall not be less than one
    year.
                Repeal of ``unwilling or unable'' conditions for imposition
                        of sanction
        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.

       Sec. 215. Intermediate Sanctions for Medicare Health Maintenance
                                 Organizations

    Present law

        A contract between the Secretary and a Medicare Health
    Maintenance Organization (HMO) is generally for a one 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) of
    the Social Security Act.

    Reasons for change

        The Committee determined that there could be situations
    where a Medicare HMO has failed substantially to carry out its
    contract, however, the offense is not sufficiently egregious to
    warrant termination of an HMO's contract with Medicare. In
    those situations, intermediate sanctions such as civil monetary
    penalties should be available to be imposed by the Secretary.

    Explanation of provision

                Application of intermediate sanctions for any program
                        violations
        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) 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 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.
                Agreements With Peer Review Organizations
        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.

    Effective date

        The amendments made by this section shall apply to the
    contract years beginning on or after January 1, 1997.

         Sec. 216. Additional Exception to Anti-Kickback Penalties for
                   Discounting and Managed Care Arrangements

    Present law

        The anti-kickback provision in Section 1128(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 coinsurance 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.

    Reasons for change

        Absent this exception, nearly all managed care arrangements
    (except those that comply with the current safe harbors for
    HMO's that contract with Medicare and Medicaid) could
    potentially be deemed unlawful. This is because an essential
    feature of managed care is the offer of remuneration (in the
    form of discounting or risk sharing arrangements in exchange
    for provider access to the health plan's enrollee population.
    Another common feature of managed care is the offer by health
    plans to providers of incentives to encourage adherence to
    cost-saving measures and practice protocols. There is no
    assurance that either of these (as well as other arrangements
    inherent in managed care) are permissible under the anti-
    kickback law. In addition, without the discount exception, cost
    saving measures such as combined products like procedure kits
    which contain all items needed to perform a specific procedure
    or provide a specific treatment, and aggregate discounts for a
    group of products purchased, such as radiology supplies could
    be prohibited. The current statute places a chilling effect
    even on cost saving measures because manufacturers are steering
    away from this discounting arrangements such as combined
    products and aggregate discounts within the Medicare program
    for fear of acting in violation of the current statute.
        It is the intent of the Committee that the managed care
    exception apply to waiver of any deductible amount under Part A
    of Title XVIII as part of a price reduction agreement between a
    provider and a third-party payor that is part of a contract for
    the furnishing of items and services to a beneficiary of a
    Medicare supplemental policy approved by a state and issued
    under the terms of Section 1882(t)(1) of the Social Security
    Act. This provision would apply to hospitals providing services
    under Title XVIII, including PPS-exempt hospitals and units
    such as psychiatric, rehabilitation, and long-term care
    facilities.

    Explanation of provision

        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 or
    omissions occurring after January 1, 1997.

    Sec. 217. Criminal Penalty for the Fraudulent Disposition of Assets in
                       Order to Obtain Medicaid Benefits

    Present 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.

    Explanation of provision

        This section 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 a state health care program,
    including the Medicaid program, if disposing of the assets
    results in the imposition of a period of ineligibility.

                            Sec. 218. Effective Date

    Explanation of provision

        Except as otherwise provided, the amendments made by this
    chapter shall take effect January 1, 1997.

                          Subtitle C--Data Collection

        Sec. 221. Establishment of the Health Care Fraud and Abuse Data
                               Collection Program

    Present law

        No provision.

    Reasons for change

        Beside the current lack of a coordinated effort between
    Federal agencies and state agencies on fraud and abuse
    prevention, detection, and prosecution, there is an
    insufficient lack of uniform data on providers and suppliers
    who have had adverse actions against them. This data bank would
    provide a source for up-to-date information on adverse actions
    against providers and suppliers that can be used in
    investigating fraud and abuse cases, and used when providers or
    suppliers are seeking new licenses, renewal of licenses, or
    hospital privileges.

    Explanation of provision

                In general
        The Secretary of Health and Human Services is 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
    practioners.
        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 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 data
    base.
        No person or entity would be held liable in a civil action
    with respect to any report made as required by this section,
    unless the person or entity knows the information is false. The
    definition for ``final adverse action'' and other related terms
    are specified in this section.
                Improved prevention in issuance of Medicare provider
                        numbers
        The Secretary may impose appropriate fees on physicians to
    cover the cost of investigation and recertification activities
    with respect to the issuance of identifiers for physicians who
    furnish services for which Medicare payments are made.

                      SUBTITLE D--CIVIL MONETARY PENALTIES

             Sec. 231. Social Security Act Civil Monetary Penalties

    Present 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 Services 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 program, 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 five 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.
        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.

    Reason for change

        The Committee determined that greater deterrence was needed
    to protect the Medicare program from providers who have been
    convicted of defrauding Medicare and other federal programs.

    Explanation of provision

                General civil monetary penalties
        The provisions under the Medicare and Medicaid programs
    which provide for civil money 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 and FEHBP.
        Civil money penalties and assessments received by the
    Secretary would be deposited into the Health Care Fraud and
    Abuse Control Account established under this Act.
                Excluded individual retaining ownership or control interest
                        in participating entity
        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 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 money penalty of not more than $10,000 for each day the
    prohibited relationship occurs.
                Modification of amounts of penalties and assessments
        This section would amend the civil money 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. This section 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.
                Claim for item or service based on incorrect coding or
                        medically unnecessary services
        This section would add 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 that the person knows or
    should know is for a medical item or service which is not
    medically necessary.
        The sanction against practitioners and person 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 medical improper or unnecessary
    services provided.
                Procedural provisions
        The procedural provisions outlined in Section 1128A, such
    as notice, hearings, and judicial review rights shall apply to
    civil money penalties assessed against Medicare Health
    Maintenance Organizations in the same manner as they apply to
    civil money penalties assessed against health care providers
    generally.
                Prohibition against offering inducements to individuals
                        enrolled under programs or plans
        This section would add a new practice to the list of
    prohibited practices for which civil money penalties may be
    assessed. Any person who offers remuneration to an individual
    eligible for benefits under Medicare or a State health program
    that such individual 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
    reimbursable under Medicare or a State health care program,
    shall be subject to the various civil money 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 are 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 coinsurance
    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 meet 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.

    Effective date

        January 1, 1997.

     Sec. 232. Clarification of Level of Intent Required for Imposition of
                            Civil Monetary Penalties

    Present law

        Civil money penalties may be imposed for seeking
    reimbursement under the Medicare and Medicaid programs for
    items or 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 limiting payment due to assignment of a patient
    (2) agreements with state agencies limiting permitted charges,
    (3) agreement with participating physicians or supplier, and
    (4) agreements with providers of service. Civil 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 they presented a claim and he or
    she ``knows or should have known'' that the claim fell into one
    of the categories listed above.

    Reasons for change

        The current standard of ``knows or should know'' is
    inconsistent with the Civil False Claims Act which applies to
    all other federal programs. Additionally, concerns have been
    raised that the standard currently applied by the Health and
    Human Services Department Office of the Inspector General may
    be less specific, and can result in the pursuit of allegation
    based on honest and simple mistakes where a provider had no
    knowledge of an alleged violation. The IG reports that the
    providers they generally pursue have shown deliberate patterns
    of abuse. Therefore, a modification in the intent standard
    should have no impact on the IG's ability to pursue offenders
    under this Act.

    Explanation of provision

        This section 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'' fell 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 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. The requirement that a person
    ``knowingly'' presents a claim or ``knowingly'' makes a false
    or misleading statement which influences discharge would
    prevent charging persons who inadvertently perform these acts.

       Sec. 233. Penalty for False Certification for Home Health Services

    Present law

        No provision.

    Reasons for change

        Expert testimony has indicated that physicians sometimes do
    not adequately review statements certifying patients'
    eligibility for home health care.

    Explanation of provision

                In general
        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.

    Effective date

        The amendment by this section would apply to certifications
    made on or after the date of enactment of this Act.

                   subtitle f--administrative simplification

                 Part 1. General Administrative Simplification

                               Sec. 251. Purpose

    Present law

        No provision.

     Reason for change

        One of the primary barriers to cost-effective health
    information is the lack of uniform standards for financial
    administrative health information. Uniform standards for health
    information would reduce health care spending by enabling the
    public and private sectors to reduce paperwork, expose fraud
    and abuse, provide consumers with the information they need to
    compare health plans and services, and would be less burdensome
    for providers. It is estimated that an electronic health
    information system could produce net savings to health care
    spending of over $29 billion over a five year period to health
    plans and providers.

    Explanation of provision

        Provides the purpose of the subtitle as improving the
    Medicare and Medicaid programs, 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. 252. Amends Title XI of the Social Security Act by Adding Part C--
                         Administrative Simplification

    Explanation of provision

        Amends title XI of the Social Security Act by adding Part
    C--Administrative Simplification.

              Sec. 1171. Administrative Simplification Definitions

    Present law

        No provision.

    Explanation of provision

        Provides definitions for the part including the following:
    clearinghouse, code set, health care provider, health
    information, health plan, individually identifiable health
    information, standard, and standard setting organization. A
    clearinghouse would be a public or private entity that
    processes or facilitates the processing of nonstandard data
    elements of health information into standard data elements, or
    provides the means by which persons may meet the requirements
    of this part. A health plan would include Medicare, Medicaid, a
    Medicare supplemental policy, supplemental liability insurance,
    general liability insurance, worker's compensation or similar
    insurance, automobile or automobile medical-payment insurance,
    a long-term care policy, a hospital or fixed indemnity income-
    protection policy, and employee welfare benefit plan provided
    for 50 or more participants, an employee welfare benefit plan
    provided for 2 or more employers, the health care program for
    active military personnel, the veterans health care program,
    the Civilian Health and Medical Program of the Uniformed
    Services (CHAMPUS), the Indian health service program, the
    Federal Employees Health Benefits Plan, and such other plan or
    arrangement as the Secretary determines is a health plan

           Sec. 1172. General Requirements for Adoption of Standards

    Present law

        No provision.

    Reasons for change

        Most health plans already transmit data electronically, but
    the data is transmitted in a non-standard or incomplete form,
    and generally cannot be used to transfer information between
    health plans or be used to effectively track fraud and abuse.
    These provisions build upon the public/private framework
    originally established by HHS Secretary Louis Sullivan through
    the private sector industry group, the Workgroup for Electronic
    Data Interchange (WEDI). Despite the fact, under current law,
    that HCFA has the authority to adopt government standards for
    health information, and to mandate the use of those standards
    by the private sector, current law provisions do not extend
    HCFA's authority to allow it to adopt standards that have been
    developed by a voluntary, consensus process of private and
    public sector payors. This bill establishes such a process for
    the standardization of health data that builds on the progress
    in the private sector. This process would ensure that the
    Secretary integrates Medicare's standards with the standards
    developed by the private sector.

    Explanation of provision

        Requires that any standard or modification of a standard
    adopted applies to the following persons: (1) a health plan,
    (2) a clearinghouse, or (3) a health care provider, but only to
    the extent that the provider was conducting 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 rule-making 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. If no standard-setting organization has adopted
    or modified any standard relating to a standard, the Secretary
    would be required to rely on recommendations of the Health
    Information Advisory Committee, and would be required to
    consult with appropriate Federal and State agencies and private
    organizations.

      Sec. 1173. Standards for Information Transactions and Data Elements

    Present law

        No provision.

    Reasons for change

        This section provides uniformity for health plans providing
    health benefits in the area of information transactions,
    limited to financial and administrative transactions. The
    Committee does not intend for these requirements apply to
    information collected that is beyond this scope such as, for
    example, but not limited to, personnel records of employers who
    provide health plan benefits or medical records of patients.
    While requiring standardization of data transmitted
    electronically among persons governed by this part, the
    provisions in this part would not impose any requirement for
    information collection or reporting. Health plans only, and not
    providers, are required to comply with these standards.
        The Committee recognizes the role of the private sector in
    establishing innovative data transaction systems relating to
    electronic exchange, unique health identifiers, code sets,
    security standards, privacy standards, and electronic
    signatures. The standards adopted would protect the privacy and
    confidentiality of health information. Health information is
    considered relatively ``safe'' today, not because it is secure,
    but because it is difficult to access. These standards improve
    access and establish strict privacy protections. The term
    ``equivalent encounter information'' pertains to health plans
    such as HMO's, that do not generate a claims form at the time a
    medical professional renders a service. At the time, an
    enrollee has contact with a medical professional, a notation is
    made which includes the name of the provider, and the treatment
    rendered.
        This section further directs the Secretary to adopt
    standards relating to the privacy of individually identifiable
    health information concerning the rights of individuals who are
    the subject of such information, the procedures for exercising
    such rights, and the authorized uses and disclosures of such
    information. Protecting the privacy of individuals is
    paramount. However, the Committee recognizes 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 care plans and providers continue
    to focus on outcomes research and innovation, it is important
    that the exchange and aggregate use of health care research be
    allowed.

    Explanation of provisions

        Requires 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 adopt standards that select code sets for appropriate data
    elements or establish such code sets, and establish efficient
    and low-cost procedures for the distribution of code sets and
    modifications.
        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. Each
    person who maintains or transmits health information or data
    elements of health information would be required to maintain
    reasonable and appropriate administrative, technical and
    physical safeguards to (1) ensure the integrity and
    confidentiality of the information, (2) protect against any
    reasonably anticipated threats or hazards to the security or
    integrity of the information and the unauthorized uses or
    disclosures of the information, and (3) otherwise ensure
    compliance with these requirements by the officers and
    employees of such person.
        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. Such standards would be required to
    include at least (1) the rights of an individual who is subject
    to such information, (2) the procedures to be established for
    the exercise of such rights, and (3) the uses and disclosures
    of such information that are authorized or required. 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 electronics 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, and for transferring among
    health plans appropriate standard 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.

                Sec. 1174. Timetables for Adoption of Standards

                            Sec. 1175. Requirements

    Present law

        No provision.

    Reasons for change

        The Committee determined that it is necessary to place the
    Secretary on a rapid timetable in order that the new electronic
    transactions system is put into place as soon as possible.

    Explanation of provisions

        Requires 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
    standard 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.

    Present law

        No provision.

    Explanation of provision

        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 many
    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.
    If the Secretary modified a standard or implementation
    specification, each person to whom it applied would be required
    to comply with the modified standard at such time as the
    Secretary determine appropriate, but no earlier than 180 days
    after such modification was adopted.

    Sec. 1176. General Penalty for Failure to Comply With Requirements and
                                   Standards

    Present law

        No provision.

    Explanation of provision

        Requires 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 was corrected
    during the 30-day period beginning on the first date the person
    liable for the penalty know, or would have known, that the
    failure to comply occurred. The Secretary would be permitted to
    extend the 30-day period when appropriate, and could provide
    technical assistance to the person that failed to comply
    because they were unable to comply. In cases of a failure to
    comply due to reasonable cause and not to willful neglect, any
    penalty that was not entirely waived, could be waived to the
    extent that the payment of such penalty would be excessive
    relative to the compliance failure involved.

      Sec. 1177. Wrongful Disclosure of Individually Identifiable Health
                                  Information

        No provision.

    Reasons for change

        This section reflects the Committee's concern that an
    individual's privacy be protected.

    Explanation of provision

        Defines 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 in violation of a provision in this part, (2)
    obtains individually identifiable health information for
    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.

                         Sec. 1178. Effect on State Law

        No provision.

    Reasons for change

        The intent of this section is to ensure that state privacy
    laws that are more stringent than the requirements and
    standards contained in the bill are not superseded.

    Explanation of provision

        Requires 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 than 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. Nothing in this section would 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.

                Sec. 1179. Health Information Advisory Committee

    Present law

        No provision.

    Reasons for change

        This section directs the Secretary to rely on
    recommendations of the Health Information Advisory Committee,
    the membership of which will consist of individuals who are of
    recognized standing and distinction in the areas of information
    systems, information networking and integration, consumer
    health, health care financial management, or privacy. This
    development process depends on expert advice from individuals
    in the private sector, and it is imperative that the Secretary
    consult with the Advisory Committee on issues related to the
    adoption of uniform transaction standards.

    Explanation of provision

        Provides for the establishment of a committee known as the
    Health Information Advisory Committee, consisting of 15
    members. The committee would be required to (1) provide
    assistance to the Secretary 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
    recommendations and legislative proposals for such standards
    and electronic exchange; and (4) be generally responsible for
    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 met their
    responsibilities; (4) any problems that exist with
    implementation of the network; and (5) the extent to which
    timetables established under this part of the bill were being
    met.

         Part 2. Administrative Simplification for Laboratory Services

         Sec. 261 Administrative Simplification for Laboratory Services

    Present law

        No provision.

    Reasons for change

        Concerns have been raised about the widely varying
    documentation required by Medicare carriers regarding claims
    for clinical laboratory tests. The resulting significant
    administrative costs associated with this documentation,
    particularly for laboratories which send claims to multiple
    carriers.

    Explanation of provision

        Requires the Secretary to adopt uniform coverage,
    administration and payment policies for clinical diagnostic
    laboratory tests within one year of enactment. The Secretary
    would be required to select 15 carrier medical directors to
    develop recommendations to the Secretary for such policies. The
    directors would be representative of geographic areas and have
    a varied range of interest in relevant fields including
    pathology and clinical laboratory practice. The directors would
    be required to consult with independent experts in each major
    discipline of clinical laboratory medicine (including clinical
    laboratory personnel, bioanalysts, pathologists, and practicing
    physicians). The medical directors would also solicit comments
    from other individuals and groups wishing to participate. The
    provision would provide that the process would be conducted as
    negotiated rule-making as provided under the Administrative
    Procedure Act.
        Provide that the negotiated rule-making would result in
    recommendations for uniform policies in the following areas:
    (i) beneficiary information required to be submitted with each
    claim; (ii) physicians' obligations regarding documentation and
    record keeping; (iii) procedures for filing claims and for
    providing remittances electronically; (iv) performance of post-
    payment review; (v) prohibition of documentation of medical
    necessity except where determined to be appropriate after
    identification of aberrant medical patterns through focused
    medical review; and beneficiary responsibility for payment.
        Prohibits carriers and intermediaries from implementing any
    new requirements for submission of claims retroactive to
    January 1, 1995 during the period when the Secretary is
    adopting new policies. Further, carriers would be prohibited
    from issuing new coverage, administration or payment policies
    unless they promote the goal of administrative simplification.
        Requires the medical directors to forward their
    recommendations to the Secretary within six months of
    enactment. The Secretary would provide for publication of
    recommendations for public comment using negotiated rule-
    making. The Secretary would publish final uniform policies
    which would become effective 180 days following publication.
    Following publication, the Secretary would implement uniform
    documentation and processing policies.
        Permits any independent laboratory to select one carrier
    for processing all of its claims for payment regardless of
    where the laboratory, patient, or provider resides or conducts
    business. The election would be made by the laboratories and an
    agreement between the carrier and the laboratory would be
    forwarded to the Secretary. No laboratory would be required to
    select a single carrier.

           Duplication and Coordination of Medicare-Related Products

    Present law

        Many Medicare beneficiaries purchase private health
    insurance to supplement their Medicare coverage. These
    individually purchased policies are commonly known as Medigap
    policies. OBRA 90, P.L. 101-508 provided for a standardization
    of Medigap policies. OBRA 90 also substantially modified the
    antiduplication provision contained in law. The intent of the
    OBRA 90 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. 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 it 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.

    Reasons for change

        The enactment of H.R. 5252, the Social Security Act
    Amendments of 1994 (P.L. 103-432) has created confusion in the
    market regarding the sale of Medigap polices and other health
    insurance policies to individuals on Medicare. This has
    resulted because the new law is confusing and unclear, and
    imposes a nearly impossible requirement that is misleading,
    contradictory and potentially harmful to the very population it
    is intended to serve. First, the statute does not define the
    term ``duplication'' and, as a result the NAIC has declared
    that all policies are duplicative of Medicare without findings
    of any factual duplication. Second, the extent of duplication
    cannot be determined except on a case by case basis after
    application of Medicare's medical necessity determination,
    exclusions, and other limitations to a specific beneficiaries
    circumstance. The disclosure statements developed by the NAIC
    do not offer any helpful assistance to beneficiaries by
    declaring all policies are duplicative.
        With respect to long-term care policies, the NAIC has
    recommended a disclosure statement which declares the long-term
    care policies duplicate some Medicare benefits, and significant
    issues are raised with respect to long-term care policies that
    coordinate against Medicare. The Secretary's approval and
    publication of the disclosure statements in the Federal
    Register on June 12, 1995 has resulted in the adoption of a
    position which is adverse to long-term care policies that
    coordinate against Medicare. The Secretary has essentially
    taken the position that such policies are technically illegal
    as of October 31, 1994, which is the effective date of H.R.
    5252. However, the agency has not issued a written legal
    explanation or rule stating its position. The HCFA position on
    long-term care policies assumes that duplication exists and
    therefore policies must pay regardless of other coverage.
        Concerns have been expressed to the Committee that HCFA's
    unofficial pronouncements are having a significant chilling
    effect on the long-term care insurance industry and the
    industry has no benefit of a written legal rulemaking or
    explanation of HCFA's rationale.
        In addition, HCFA appears to be arguing that coordination
    is not good public policy. However, coordination against
    Medicare by long-term care policies is consistent with current
    public policy. Both State and Congressional policy is
    supportive of long-term care policies coordinating against
    Medicare. The Robert Wood Johnson State Medicaid and private
    long-term care policy partnership program requires coordination
    with Medicare. The bill includes provisions to clarify the tax
    treatment of long-term care insurance contracts. The Committee
    has determined that clarifying the tax treatment of long-term
    care insurance will help contribute to the development of the
    private long-term care insurance market. Therefore, it is
    imperative that Medicare plans are able to coordinate with
    long-term care insurance plans.
        The developed statements far exceed the intent of Congress
    in both allowing coordination of long-term care policies and
    providing clear understandable information to Medicare
    beneficiaries regarding the choice of health insurance.
        Finally, the current provisions are preventing the sale of
    individual major medical insurance policies to Medicare-
    eligible disabled persons.

    Explanation of provision

                Duplication and coordination of Medicare-related products
        The Provision would modify the anti-duplication provisions.
    It would be unlawful to sell to a Medicare beneficiary a health
    insurance policy (other than a Medigap policy) with knowledge
    that it duplicated benefits under Medicare or Medicaid. It
    would be unlawful to sell, to persons not electing
    MedicarePlus, a Medigap policy with knowledge that the person
    is entitled to benefits under another Medigap policy. A policy
    would be considered duplicative if the policy provided specific
    reimbursement for identical items and services to the extent
    paid for under Medicare. A policy would not be considered
    duplicative if it provided for payment of benefits without
    regard to other health benefits coverage of the individual. The
    provision would change the disclosure requirements contained in
    P.L. 103-432 to require plans to disclose the extent to which
    they may coordinate benefits with Medicare as part of their
    separate outline of coverage.
        A health insurance policy (or a rider to an insurance
    contract which is not a health insurance policy) that
    coordinates against or excludes items and services covered
    under Medicare, and for policies sold after January 1, 1996,
    discloses such coordination or exclusion in the policy's
    outline of coverage would not be considered duplicative. For
    this purpose, health insurance policies would include policies
    providing benefits for long-term care, nursing home care, home
    health care, or community-based care; or a contract with an HMO
    providing comprehensive health benefits.
        The provision would prohibit the imposition of criminal or
    civil penalties or the bringing or continuing of legal action
    relating to selling duplicative policies if the penalty or
    action was based on actions occurring after November 1, 1991
    and before enactment of OBRA of 1995 and if the policy was not
    duplicative under the revised language. The provision would
    also prohibit a State from imposing any requirement related to
    the sale or issuance of a policy (or rider) to a Medicare
    beneficiary based on the premise that the policy or rider was
    duplicative of Medicare.

    Effective date

        The provisions of this section are effective as if they
    were included in the enactment of section 4354 of the Omnibus
    Budget Reconciliation Act of 1990.

                    TITLE III. TAX-RELATED HEALTH PROVISIONS

      A. Application of COBRA Sanctions (sec. 104(b) of the bill and sec.
                               4980B of the Code)

    Present law

        The health care continuation rules (referred to as
    ``COBRA,'' after the name of the law that imposed the rules \1\
    require that most employer-sponsored group health plans must
    offer qualified beneficiaries the opportunity to continue to
    participate for a specified period of the employer's group
    health plan after the occurrence of certain qualifying events
    (such as termination for employment) that otherwise would have
    terminated such participation.
        \1\ The Consolidated Omnibus Budget Reconciliation Act of 1985.
    ---------------------------------------------------------------------------
        A tax is imposed on the failure of a plan to satisfy the
    health care continuation rules. The tax may 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 equal to $100 dollars a day for
    each day for each day on which here is noncompliance. The
    maximum tax that can be imposed for a year with respect to
    violations occurring during the 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 the plan, the
    maximum penalty for failures during the year is $2 million. The
    Secretary of the Treasury may waive all or part of the tax to
    the extent that payment of the tax would be excessive relative
    to the failure involved.

    Reasons for change

        The Committee believes that the present-law sanctions for
    violations of the health care continuation rules will be an
    effective enforcement mechanism with the respect to the
    provisions of the bill relating to portability, limitations on
    exclusion of preexisting conditions, and prohibitions on
    excluding individuals from coverage based on health status.

    Explanation of provision

        Under the bill, group health plus, insurers, and health
    maintenance organizations are subject to certain requirements
    regarding portability, limitations on exclusion of preexisting
    conditions, and prohibitions on excluding individuals from
    coverage based on health status. The provision extends the tax
    for failure to satisfy the health care continuation rules to
    failures to comply with these requirements. No tax is imposed
    on an insurer that is governed under a State law that the
    Secretary of Health and Human Services has determined to
    provide similar enforcement. In addition, no tax is impose if
    here 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.

     B. Medical Savings Accounts (sec. 301 of the bill and new sec. 220 of
                                   the Code)

    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 are
    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 the self-employed individual and his or her spouse or
    dependents. The 30-percent deduction is available with respect
    to 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. Individuals who itemize their 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.

    Reasons for change

        The fact that Americans with low-deductible health
    insurance have few incentives to lower their health costs or
    benefit from staying well is a major factor affecting health
    care cost growth. One approach to providing incentives for
    Americans to be more cost conscious purchasers of medical
    services is to make available alternatives to low-deductible
    insurance such as medical savings accounts (``MSAs''). MSAs
    will give people more control over their health care dollars.
    Because MSAs afford people the opportunity to save unspent MSA
    funds for future health and long-term care needs, the Committee
    believes that people will be more prudent in their purchase of
    health care services.

    Explanation of provision

                In general
        Under the bill, within limits, individuals covered by a
    high deductible health plan may make tax deductible
    contributions to an MSA. Similarly, within limits,
    contributions to an MSA are excludable from income (and wages
    for social security purposes) if made by the employer of an
    individual covered under a high deductible health plan.
    Earnings on amounts in an MSA are not currently taxable.
    Distributions from an MSA for medical expenses are not taxable.
    Distributions not used for medical expenses are taxable. In
    addition, distributions not used for medical expenses are
    subject to an additional 10-percent tax unless the distribution
    is made after age 59\1/2\, death, or disability.
                Eligible individuals
        An individual (including a self-employed 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).\2\ An individual is
    not eligible to make contributions to an MSA for a year if any
    employer contributions are made to an MSA or behalf of the
    individual for the year.
        \2\ 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 or 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.
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                Tax treatment of and limits on contributions
        Under the bill, individual contributions to an MSA are
    deductible (within limits) in determining AGI. Subject to the
    same limits, employer contributions to an MSA are excludable
    from gross income and wages for employment tax purposes, except
    that this exclusion does not apply to contributions made
    through a cafeteria plan. If the high deductible plan covers
    only the individual, the maximum amount of contributions that
    may be deducted or excluded for a year is equal to the lesser
    of (1) the deductible under the high deductible plan or (2)
    $2,000. If the high deductible plan covers the individual and a
    spouse or a dependent, the maximum that may be excluded or
    deducted for a year is the lesser of (1) the annual limit under
    the plan on the aggregate amount of deductibles required to be
    paid with respect to all individuals, and (2) $4,000. 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 may the maximum contribution limit for a year 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 plan
        A high deductible health plan is a health insurance plan,
    whether self-insured or provided through commercial insurance,
    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. A plan does
    not fail to be considered a high deductible plan merely
    because, under state law, the plan is required to provide that
    there is no deductible for preventive care. In the case of a
    self-insured plan, the plan must in fact be insurance (e.g.,
    there must be appropriate risk shifting) and not merely a
    reimbursement arrangement.
                Tax treatment of MSAs
        MSAs are exempt from tax. Thus, earnings on amounts in an
    MSA are not currently includible in income.
                Taxation of distributions
        Under the bill, distributions from an MSA for the
    unreimbursed medical expenses of the individual (including a
    self-employed individual) and his or her spouse or dependents
    are excludable from income. The exclusion applies regardless of
    whether the payment is made directly from the MSA to the
    service provider, the MSA distribution reimburses the
    individual for expenses already incurred, or the individual
    uses the MSA distribution to pay the service provider. The
    exclusion also applies regardless of whether the individual is
    eligible to make MSA contributions at the time of the
    distribution.
        Medical expenses are defined as defined as under the rules
    relating to the itemized deduction for medical expenses, except
    that medical expenses for this purpose do not include insurance
    premiums other than (1) premiums for long-term care insurance;
    (2) premiums for health care continuation coverage under any
    Federal law; and (3) premiums while the individual is receiving
    unemployment compensation.\3\ Thus, for example, amounts in an
    MSA can be used, at the account holder's discretion, for
    services performed by a variety of health care professionals
    either licensed, certified, or otherwise credentialed to
    provide health care services under State law (or under a State
    regulatory mechanism provided by State law, to the extent such
    services are treated as medical expenses under the rules
    relating to the itemized deduction for medical expenses.
        \3\ The long-term care provisions of the bill (see part D., below)
    provide that expenses for long-term care services are treated as
    medical expenses for purposes of the itemized deduction for medical
    expenses. Thus, an individual could use amounts in an MSA to pay
    expenses for long-term care insurance or services.
    ---------------------------------------------------------------------------
        Distributions that are not for medical expenses are
    included in income. In addition, such distributions are subject
    to an additional 10-percent tax unless made after age 59\1/2\,
    death, or disability.
        Upon death, if the beneficiary of the MSA is the
    individual's surviving spouse, the spouse may continue the MSA
    as his or her own. If the beneficiary is not the surviving
    spouse, the beneficiary must include the MSA balance in income
    in the year of death. If there is no beneficiary, the MSA
    balance includible on the final return of the decedent. In all
    cases, no estate tax applies.
                Definition of an 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. An MSA trustee (or custodian) may be a
    bank, insurance company, or other person who demonstrates to
    the satisfaction of the Secretary that the manner in which such
    person will administer the trust will be consistent with
    applicable requirements. The MSA trustee (or custodian) is
    required to make such reports as may be required by the
    Secretary. The acquisition expenses of an insurance company
    relating to the establishment of an MSA is not subject to the
    rules relating to the capitalization of policy acquisition
    costs.

    Effective date

        The provision is effective for taxable years beginning
    after December 31, 1996.

    C. Deduction for Health Insurance Expenses of Self-Employed Individuals
               (sec. 311 of the bill and sec. 162(I) of the Code)

    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 or 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.

    Reasons for change

        The Committee believes it appropriate to increase the
    deduction for health insurance expenses of self-employed
    individuals in order to reduce the disparity of treatment of
    such expenses and employer-provided health insurance and to
    help make health insurance more affordable for self-employed
    individuals.

    Explanation of provision

        Under the provision, 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 is 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.

    D. Treatment of Long-Term Care Insurance and Services (secs. 321-328 of
      the bill, and secs. 106, 125, 213, 4980B of the Code, and new secs.
                      4980C, 6050Q, and 7702B of the Code)

    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
    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); (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,\4\ amounts reimbursed for
    nontaxable benefits from an FSA are excludable from income.
        \4\ 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.

    Reasons for change

        The long-term care rules of the bill provide an incentive
    for individuals to take financial responsibility for their
    long-term care needs. The bill therefore generally provides
    favorable tax treatment with respect to long-term care
    insurance contracts and services meeting the bill's
    requirements.

    Explanation of provision

                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 payments under all per diem
    contracts with respect to any one insured exceed $175 per day,
    then the excess is not excludable from gross income. 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.\5\
        \5\ 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.
    ---------------------------------------------------------------------------

                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.
        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 \6\ 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.\7\
        \6\ The 90-day period is not a waiting period. Thus, for example,
    an individual can be certified as 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.
        \7\ 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.
    ---------------------------------------------------------------------------
        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)(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 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 dependent
    are treated as medical expenses for 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 for 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)).\8\
        \8\ 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 is 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.
    ---------------------------------------------------------------------------

         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.\9\ The
    limits are as follows:
        \9\ 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 beforThe limitation on
      the close of the taxable year opremiums paid for such taxable year 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 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) \10\ 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.
        \10\ 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.
    ---------------------------------------------------------------------------
        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 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 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 proposal 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
    is treated as a long-term care insurance contract, and services
    provided under or reimbursed by the contract are 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 provisions relating to treatment of eligible long-term
    care premiums and long-term care services as a medical expense
    generally are effective for taxable years beginning after
    December 31, 1996, however, amounts paid for long-term care
    services furnished in any taxable year beginning before January
    1, 1998 are not deductible as medical expenses.
        The provisions relating to the maximum exclusion for
    certain long-term care benefits and reporting are effective for
    taxable years 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 1988, with respect to
    long-term care benefits paid in 1997.

      E. Tax Treatment of Accelerated Death Benefits Under Life Insurance
    Contracts (secs. 323 and 331-332 of the bill and secs. 101(g), 818(g),
                          605Q, and 7702B of the Code)

    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 includible 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
    \11\ 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
    contact 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.
        \11\ Prop. Treas. Reg. Secs. 1.108-8, 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.\12\
    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.
        \12\ 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 apply to viatical settlements.

    Reasons for change

        The Committee wishes to extend the present-law rule
    permitting an exclusion from income for amounts paid under a
    life insurance contract by reason of the death of the insured
    to accelerated death benefits paid with respect to certain
    terminally ill and chronically ill insured individuals. In
    addition, the Committee believes that this exclusion from
    income should be extended to certain sales or assignments of
    all or a portion of a life insurance contract to a viatical
    settlement provider. The Committee believes that a single set
    of rules should apply to benefit received with respect to a
    chronically ill individual. To provide parity in treatment, the
    same definition of a chronically ill individual applies for
    purposes of the rules under this provision and the rules
    governing long-term care insurance contracts. Further the $175
    per day ($63,875 annual) limit on excludability of benefits
    under per diem type long-term care insurance contracts applies
    for chronically ill individuals.

    Explanation of provision

        The 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.\13\
        \13\ 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.
    ---------------------------------------------------------------------------
        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 financially 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.\14\
        \14\ 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.\15\ 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.
    The payor of a payment with respect to an individual who is
    chronically ill 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.
        \15\ 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.
    ---------------------------------------------------------------------------
        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 the 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 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
    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 of the contract
    (and is not intended to affect the issue date of any contract
    under section 101(f)).

        F. Exemption From Income Tax for State-Sponsored Organizations
     Providing Health Coverage for High-Risk Individuals (sec. 341 of the
                  bill and new section 501(c)(26) of the Code)

    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 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 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.

    Reasons for change

        The Committee believes that eliminating the uncertainty
    concerning the eligibility of certain State health insurance
    risk pools for tax-exempt status will assist States in
    providing medical care coverage for their uninsured high-risk
    residents.

    Explanation of provision

        The 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.\16\ 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'').
        \16\ 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 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.

    G. Health Insurance Organizations Eligible for Benefits of Section 833
                (sec. 351 of the bill and sec. 833 of the Code)

    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 business. 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.

    Reasons for change

        The Committee believes fairness dictates that the special
    rules benefitting Blue Cross and Blue Shield organizations
    under section 833 should apply to certain organizations that
    became taxable by reason of the same provision of the Tax
    Reform Act of 1986 that made Blue Cross and Blue Shield
    organizations taxable, if such organizations are not Blue Cross
    or Blue Shield organizations, but otherwise meet the
    eligibility requirements.

    Explanation of provision

        The 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.

                           TITLE IV. REVENUE OFFSETS

    A. Treatment of Bad Debt Deductions of Thrift Institutions (sec. 401 of
                       the bill and sec. 593 of the Code)

    Present law and background

                Reserve method of accounting for bad debts of thrift
                        institutions
        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'' method
    of sec. 166). Certain thrift institutions (building and loan
    associations, mutual savings banks, or cooperative banks) are
    allowed deductions for bad debts under rules 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. To qualify for this reserve
    method, a thrift institution must meet an asset test, requiring
    that 60 percent of its assets consist of ``qualifying assets''
    (generally cash, government obligations, and loans secured by
    residential real property). This percentage must be computed at
    the close of the taxable year, or at the option of the
    taxpayer, as the annual average of monthly, quarterly, or
    semiannual computations of similar percentages.
        If a thrift institution uses the reserve method of
    accounting, it must establish and maintain a reserve for bad
    debts and charge actual losses against the reserve, and is
    allowed a deduction for annual additions to restore the reserve
    to its permitted balance. Under section 593, a thrift
    institution annually may elect to calculate its addition to its
    bad debt reserve 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. For taxable years beginning before 1988, the
    ``base year'' was the last taxable year before the most recent
    adoption of the experience method (i.e., generally, the last
    year the taxpayer was on the percentage of taxable income
    method). For taxable years beginning after 1987, the base year
    is the last taxable year beginning before 1988. Prior to 1988,
    computing bad debts under a ``base year'' rule allowed a thrift
    institution to claim a deduction for bad debts for an amount at
    least equal to the institution's actual losses that were
    charged off during the taxable year.
                Bad debt methods of commercial banks
        A small commercial bank (i.e., one with adjusted bases of
    assets of $500 million or less) may use the experience method
    or the specific charge-off method for purposes of computing its
    deduction for bad debts. A large commercial bank only may use
    the specific charge-off method of section 166. If a small bank
    becomes a large bank, it must recapture its existing bad debt
    reserve (i.e., include the amount of the reserve in income)
    through one of two elective methods. Under the 4-year recapture
    method, the bank generally includes 10 percent of the reserve
    in income in the first taxable year 20 percent in the second
    year, 30 percent in the third year, and 40 percent in the
    fourth year. Under the cut-off method, the bank generally
    neither restores its bad debt reserve to income nor may it
    deduct losses relating to loans held by the bank as of the date
    of the required change in the method of accounting. Rather, the
    amount of such losses are charged against and reduce the
    existing bad debt reserve; any losses in excess of the reserve
    are deductible. Any reserve balance in excess of the balance of
    related loans is includable in income.
                Recapture of bad debt reserves by thrift institutions
        If a thrift institution becomes a commercial bank, or if
    the institution fails to satisfy the 60-percent qualified asset
    test, it is required to change its method of accounting for bad
    debts and, under proposed Treasury regulations,\17\ is required
    to recapture its bad debt reserve. The percentage-of-taxable-
    income portion of the reserve generally is included in income
    ratably over a 6-taxable year period. The experience method
    portion of the reserve is not restored to income if the former
    thrift institution qualifies as a small bank. If the former
    thrift institution is treated as a large bank, the experience
    method portion of the reserve is restored to income ratably
    over a 6-taxable year period, or under the 4-year recapture
    method or the cut-off method described above.
        \17\ Prop. Treas. reg. sec. 1.593-13.
    ---------------------------------------------------------------------------
        In addition, a thrift institution may be subject to a form
    of reserve recapture even if the institution continues to
    qualify for the percentage of taxable income method.
    Specifically, if a thrift institution distributes to its
    shareholders an amount in excess of its post-1951 earnings and
    profits, such excess is deemed to be distributed from the
    nonexperience potion of the institution's bad debt reserve and
    is restored to income. In the case of any distribution in
    redemption of stock or in partial or complete liquidation of an
    institution, the distribution is treated as first coming from
    the nonexperience potion of the bad debt reserves of the
    institution (sec. 593(e)).
                Financial accounting treatment of tax reserves of bad debts
                        of thrift institutions
        The recapture of a bad debt reserve for Federal income tax
    purposes may have significant financial and regulatory
    accounting implications for a thrift institution. In general,
    for financial accounting purposes, a corporation must record a
    deferred tax liability with respect to items that are deducted
    for tax purposes in a period earlier than they are expensed for
    book purposes. The deferred tax liability signifies that,
    although a corporation may be reducing its current tax expense
    because of the accelerated tax deduction, the corporation will
    become liable for tax in a future period when the timing item
    ``reverses'' (i.e., when the item is expensed for book purposes
    but for which the tax deduction had already been allowed).
    Under the applicable accounting standard (Accounting Principles
    Board Opinion 23), deferred tax liabilities generally were not
    required for pre-1988 tax deductions attributable to the bad
    debt reserve method of thrift institutions because the
    potential reversal of the bad debt reserve was indefinite
    (i.e., generally, a reversal only would occur by operation of
    sec. 593(e), a condition within the control of a thrift
    institution). However, the establishment of 1987 as a base year
    increased the likelihood of bad debt reserve reversals with
    respect to post-1987 additions to the reserve and it appears
    that thrift institutions generally have recorded additional
    deferred tax liabilities for these additions under the current
    generally accepted accounting principles.\18\
        \18\ For taxable years beginning before 1988, the base year balance
    of a thrift institution was the reserve balance whenever the
    institution changed from one bad debt method to another (e.g., from the
    percentage of taxable income method to the experience method). How the
    establishment of 1987 as a permanent base year changed the nature of
    the bad reserves of thrift institutions between pre-1988 years and
    post-1987 years (which, in turn, contributed to the change in the
    financial accounting treatment of such reserves) can be illustrated by
    the following example.
        Assume that thrift institution (``T'') always had used the
    percentage of taxable income (``PTI'') method to deduct bad debts
    through 1986 when its reserve balance was $10,000. Further assume that
    in 1987, T: (1) has insufficient taxable income to use the PTI method,
    (2) has actual bad debt losses of $1,000, and (3) under the six-year
    average formula of the experience method, would be allowed a deduction
    of $900. Under these facts, T would be allowed a bad debt deduction of
    $1,000 (rather than $900) in 1987 because $1,000 is the amount
    necessary to restore the reserve to its base year (PTI) level.
    Specifically, in 1987, T would charge the year-end 1986 reserve of
    $10,000 for the $1,000 actual loss and then add (and deduct) $1,000 to
    the reserve so that the balance of the reserve at year end 1987 is once
    again 10,000. Thus, T's former PTI deductions, which gave rise to the
    $10,000 reserve balance, generally would not be restored to income
    (unless subject to sec. 593(e)).
        Further assume that in 1988, T has sufficient taxable income to be
    allowed a PTI deduction of $1,500, increasing the balance of the
    reserve to $11,500 at year-end 1988. Further assume that in 1989, T:
    (1) again has insufficient taxable income to use the PTI method, (2)
    has actual bad debts of $2,500, and (3) under the six-year average
    formula of the experience method would be allowed a deduction of $900.
    Under these facts, T would be allowed a deduction of $1,000 (i.e., the
    amount necessary to restore the reserve to its base year (year-end
    1987) level). Specifically, T would charge the year-end 1988 reserve
    balance of $11,500 for the $2,500 actual loss and then add (and deduct)
    $1,000 to the reserve to restore the balance to the $10,000 base year
    amount. Thus, T's post-1987 PTI deduction of $1,500 is restored to
    income (i.e., T actually had losses of $2,500 in 1989, but only was
    allowed to deduct $1,000).
        A thrift institution also may record a current or deferred tax
    liability in cases where the institution's deduction for bad debts may
    be limited under section 585(b)(2)(B)(ii) because the amount of
    institution's loans outstanding diminished from the close of the base
    year to the close of the current year.
    ---------------------------------------------------------------------------
        Under proposed Treasury regulations, if a thrift
    institution becomes a commercial bank (or is otherwise
    ineligible to use the bad debt reserve method of section 593),
    the institution would be required to recapture all or a portion
    of its bad debt reserve. As described in detail below, it
    appears that such recapture would require the institution
    immediately to record, for financial accounting purposes, a
    current or deferred tax liability for the amount of bad debt
    recapture for which liabilities previously had not be recorded
    (generally, with respect to the pre-1988 reserves), regardless
    of when such recapture is taken into account for Federal income
    tax purposes. To the extent regulatory accounting principles
    follow these financial accounting principles, the recording of
    this liability generally would decrease the regulatory capital
    of the institution.

    Reasons for change

        The Committee believes that the reserve method of bad debts
    accorded to qualified thrift institutions under present law
    results in a mismeasurement of economic income and provides
    those institutions with a tax benefit not provided to
    similarly-situated depository institutions.
        The Committee also believes that whenever a taxpayer
    changes its method of accounting, it is appropriate to
    implement such change in a manner such that items of income or
    expense are not taken into account twice--once under the old
    method and again under the new method. Thus, under present law,
    most accounting method changes are implemented under section
    481 which requires that calculation of an adjustment that
    reflects the cumulative effect of the method change and is
    restored to income over a specified period of time.
    Specifically, under present law, whenever a thrift institution
    no longer qualifies for the reserve method of accounting for
    bad debts, the bad debt reserve of the thrift institution must
    be restored to income.
        The Committee believes that in order to further national
    banking policy, certain changes to the Internal Revenue Code
    are warranted. First, the Committee believes that, in order to
    provide similar treatment to similarly-situated depository
    institutions, the special bad debt reserve methods available to
    qualified thrift institutions should be repealed. However, the
    Committee understands that requiring full recapture of the bad
    debt reserves of thrift institutions in implementing this
    change in accounting method may impose significant financial
    accounting and regulatory capital burdens on institutions that
    have not recorded the appropriate amount of deferred tax
    liabilities with respect to such recapture. Thus, the Committee
    believes it is appropriate to provide relief from the recapture
    of the portion of the bad debt reserves that arose prior to
    1988. The Committee believes that this relief should not
    directly benefit the shareholders of the institutions in a
    manner similar to the way in which present-law section 593(e)
    provides a limitation on the direct enjoyment of the benefits
    of section 593 by shareholders of thrift institutions.
        Further, the Committee is concerned that the repeal of
    section 593 may cause a change in thrift institutions'
    traditional roles as home mortgage lenders and may result in a
    temporary shortage in the availability of mortgage loans in
    some regions. The Committee bill addresses this issue by
    providing an incentive for institutions to continue to provide
    a level of residential mortgage financing for a period of time.
    The Committee recognizes that it may be appropriate to
    reexamine, in the future, this and other issues raised by the
    bill.

    Explanation of provision

                Repeal of section 593
        The 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.\19\ Thus, the
    percentage of taxable income method of accounting for bad debts
    is no longer available for any financial institution. The bill
    also repeals the following present-law provisions that only
    apply to thrift institutions to which section 593 applies: (1)
    the denial of a portion of certain tax credits to a thrift
    institution (sec. 50(d)(1)); (2) the special rules with respect
    to the foreclosure of property securing loans of a thrift
    institution (sec. 595); (3) the reduction in the dividends
    received reduction of a thrift institution (sec. 596); and (4)
    the ability of a thrift institution to use a net operating loss
    to offset its income from a residual interest in a REMIC (sec.
    860E(a)(2)).
        \19\ Under present-law section 581, the definition of a ``bank''
    includes a thrift institution. Whether an institution is a ``large'' or
    ``small'' bank is determined under section 585(c)(2).
    ---------------------------------------------------------------------------

                  Treatment of recapture of bad debt reserves

    In general

        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.\20\ Any section 481(a) adjustment required to be
    taken into account 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 shall 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'' (as determined under sec. 585(c)(2)),
    the amount of the institution's applicable excess reserves
    generally is the excess of (1) the balance of its reserves
    described in section 593(c)(1) other than its supplemental
    reserve for losses on loans (i.e., 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 balance of such
    reserves (i.e., 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, 1988 (i.e., the ``pre-1988 reserves'').\21\
    Thus, a thrift institution that is treated as a large bank
    generally is required to recapture its post-1987 additions to
    its bad debt reserves, whether such additions are made pursuant
    to the percentage of taxable income method or the experience
    method. The timing of this recapture may be delayed for a two-
    year period to the extent the residential loan requirement
    described below applies.
        \20\ A thrift institution that uses a reserve method described in
    section 593 will be deemed to have changed its method of computing
    reserves for bad debts even though such institution will be allowed to
    use the reserve method of section 585. Similarly, a large thrift
    institution will be deemed to have changed its method of computing
    reserves for bad debts even though such institution used the
    experience-method portion of section 593 in lieu of the percentage-of-
    taxable-income method of section 593.
        \21\ The balance of a taxpayer's pre-1988 reserves is reduced if
    the taxpayer's loan portfolio had decreased since 1988. The permitted
    balance of a taxpayer's pre-1988 reserves is reduced by multiplying
    such balance by the ratio of the balance of the taxpayer's loans
    outstanding at the close of the last taxable beginning before 1996, to
    the balance of the taxpayer's loans outstanding at the close of the
    last taxable beginning before 1988. This reduction is required for both
    large and small banks.
    ---------------------------------------------------------------------------
        In the case of a thrift institution that becomes a ``small
    bank'' (as determined under sec. 582(c)(2)), the amount of the
    institution's excess reserves will be the excess of (1) the
    balance of its reserves described in section 593(c)(1) as of
    the close of its last taxable year beginning before January 1,
    1996, over (2) the greater of the balance of: (a) its pre-1988
    reserves or (b) what the institution's reserves would have been
    at the close of its last taxable year beginning before January
    1, 1996, has the institution always used the experience method
    described in section 585(b)(2)(A) (i.e., the six-year average
    method). For purposes of the future application of section 585,
    the beginning balance of the small bank's reserve for its first
    taxable year beginning after December 31, 1995, will be the
    greater of the two amounts described in (2) in the preceding
    sentence, and the balance of the reserve at the close of the
    base year (for purposes of sec. 585(b)(2)(B)) will be the
    amount of its pre-1988 reserves. The residential loan
    requirement described below also applies to small banks. If
    such small bank later becomes a large bank, any section 481(a)
    adjustment amount required to be taken into account under
    section 585(c)(3) will not include any portion of the bank's
    pre-1988 reserve. Similarly, if the bank elects the cut-off
    method to implement its conversion to large bank status, the
    amount of the reserve against which the bank charges its actual
    losses will not include any portion of the bank's pre-1988
    reserve and the amount by which the pre-1988 reserve exceeds
    actual losses will not be included in gross income.
        The balance of the pre-1988 reserves is subject to the
    provisions of present-law section 593(e) (requiring recapture
    in the case of certain excess distributions to, and redemptions
    of, shareholders). Thus, section 593(e) will continue to apply
    to an institution regardless of whether the institution becomes
    a commercial bank or remain a thrift institution. In addition,
    the balances of the pre-1988 reserve and the supplemental
    reserve will be treated as tax attributes to which section 381
    applies. The Committee expects that Treasury regulations will
    provide rules for the continued application of section 593(e)
    in the case of mergers, acquisitions, spin-offs, and other
    reorganizations of thrift and other institutions. The Committee
    believes that any such regulations should provide that, if the
    stock of an institution with a pre-1988 reserve is acquired by
    another depository institution, the pre-1988 reserve will not
    be restored to income by reason of the acquisition. Similarly,
    if an institution with a pre-1988 reserve is merged or
    liquidated tax-free into a commercial bank that never was a
    thrift institution, the pre-1988 reserve should not be restored
    to income by reason of the merger or liquidation.\22\ Rather,
    the surviving institution will inherit the pre-1988 reserve and
    the post-1951 earnings and profits of the former thrift
    institution and section 593(e) will apply to the surviving
    institution as if it were a thrift institution. That is, the
    pre-1988 reserve will be restored into income in the case of
    any distribution in redemption of the stock of the surviving
    institution or in partial or complete liquidation of the
    institution following the merger or liquidation. In the case of
    any other distribution, the pre-1988 reserve will not be
    restored to income unless the distribution is in excess of the
    sum of the post-1951 earnings and profits inherited from the
    thrift institution and the post-1913 earnings and profits of
    the acquiring bank.\22\ The Committee expects that Treasury
    regulations will address the case where the shareholders of an
    institution with a pre-1988 reserve are ``cashed out'' in a
    taxable merger of the institution and a commercial bank. Such
    regulations may provide that the pre-1988 reserve may be
    restored to income if such redemption represents a concealed
    distribution from the former thrift institution. For example,
    cash received by former thrift shareholders pursuant to a
    taxable reverse merger may represent a concealed distribution
    if, immediately preceding the merger, the acquiring bank had no
    available resources to distribute and its existing debt
    structure, indenture restrictions, financial condition, or
    regulatory capital requirements precluded it from borrowing
    money for purposes of making the cash payment to the former
    thrift shareholders. No inference is intended by the Committee
    as to the application of section 593(e) to these and similar
    transactions under present law.
        \22\ The issue of whether section 593(e) applies in cases where a
    thrift institution is merged into a bank generally does not arise under
    present law because such merger results in a charter change and, under
    proposed Treasury regulations, requires full bad debt reserve
    recapture.
        \23\ If the acquiring bank is a former thrift institution itself
    and the pre-1988 reserves of neither institution are restored to income
    pursuant to the merger, the Committee expects that the pre-1988
    reserves and the post-1951 earnings and profits of the two institutions
    will be combined for purposes of the continued application of section
    593(e) with respect to the combined institution.
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        Further, if a taxpayer no longer qualifies as a bank (as
    defined by sec. 581), the balances of the taxpayer's pre-1988
    reserve and supplement reserves are restored to income ratably
    over a six-year period, beginning in the taxable year the
    taxpayer no longer qualifies as a bank.
                Residential loan requirement
        Under a special rule, if the taxpayer meets the
    ``residential loan requirement'' for a taxable year, the
    recapture of the applicable excess reserves otherwise required
    to be taken into account as a section 481(a) adjustment for
    such year will be suspended. A taxpayer meets the residential
    loan requirement if, for the taxable year, the principal amount
    of residential loans made by the taxpayer during the year is
    not less than its base amount. The residential loan requirement
    is applicable only for taxable years that begin after December
    31, 1995, and before January 1, 1998, and must be applied
    separately with respect to each such year. Thus, all taxpayers
    are required to recapture their applicable excess reserves
    within six, seven, or eight years after the effective date of
    the provision.
        The ``base amount'' of a taxpayer means the average of the
    principal amounts of the residential loans made by the taxpayer
    during the six most recent taxable years beginning before
    January 1, 1996. At the election of the taxpayer, the base
    amount may be computed by disregarding the taxable years within
    that six-year period in which the principal amounts of loans
    made during such years were highest and lowest. This election
    must be made for the first taxable year beginning after
    December 31, 1995, and applies to the succeeding taxable year
    unless revoked with the consent of the Secretary of the
    Treasury or his delegate.
        For purposes of the residential loan requirement, a loan
    will be deemed to be ``made'' by a financial institution to the
    extent the institution is, in fact, the principal source of the
    loan financing. Thus, any loan only can be ``made'' once. The
    Committee expects that loans ``made'' by a financial
    institution may include, but are not limited to, loans (1)
    originated directly by the institution through its place of
    business or its employees, (2) closed in the name of the
    institution, (3) originated by a broker that acts as an agent
    for the institution, and (4) originated by another person
    (other than a financial institution) and that are acquired by
    the institution pursuant to a pre-existing, enforceable
    agreement to acquire such loans. In addition, Treasury
    regulations also may provide that loans ``made'' by a financial
    institution may include loans originated by another person
    (other than a financial institution) acquired by the
    institution soon after origination if such acquisition is
    pursuant to a customary practice of acquiring such loans from
    such person. A loan acquired by a financial institution from
    another financial institution generally will be considered to
    be made by the transferor rather than the transferee of the
    loan; however, such loan may be completely disregarded if a
    principal purpose of the transfer was to allow the transferor
    to meet the residential loan requirement. A loan may be
    considered to be made by a financial institution even if such
    institution has an arrangement to transfer such loan to the
    Federal National Mortgage Association or the Federal Home Loan
    Mortgage Corporation.
        For purposes of the residential loan requirement, a
    ``residential loan'' is a loan described in section
    7701(a)(19)(C)(v) (generally, loans secured by residential real
    and church property and certain mobile homes),\24\ but only to
    the extent the loan is made to the owner of the property to
    acquire, construct, or improve the property. Thus, mortgage
    refinancings and home equity loans are not considered to be
    residential loans, except to the extent the proceeds of the
    loan are used to acquire, construct, or improve qualified
    residential real property. The Committee understands that
    pursuant to the Home Mortgage Disclosure Act, financial
    institutions are required to disclose the purpose for which
    loans are made. The Committee further understands that for
    purposes of this disclosure, institutions are required to
    classify loans as home purchase loans, home improvement loans,
    refinancings, and multifamily dwelling loans (whether for
    purchase, improvement or refinancing of such property). The
    Committee expects that taxpayers (and the Secretary of the
    Treasury in promulgating guidance) may take such reporting into
    account, and make such adjustments as are appropriate,\25\ in
    determining: (1) whether or not a loan qualifies as a
    ``residential loan'' and (2) whether the institution ``made''
    the loan. A taxpayer must use consistent standards for
    determining whether loans qualify as residential loans made by
    the institution both for purposes of determining its base
    amount and for purposes of determining whether it met the
    residential loan requirement for a taxable year.
        \24\ For this purpose, as under present law, if a multifamily
    structure securing a loan is used in part for nonresidential purposes,
    the entire loan will be deemed a residential real property loan if the
    planned residential use exceeds 80 percent of the property's planned
    use (determined as of the time the loan is made). In addition, loans
    made to finance the acquisition or development of land will be deemed
    to be loans secured by an interest in residential real property if,
    under regulations prescribed by the Secretary of the Treasury, there is
    a reasonable assurance that the property will become residential real
    property within a period of three years from the date of acquisition of
    the land.
        \25\ For example, adjustments will be required with respect to the
    reporting of multifamily dwellings in order to distinguish home
    purchase, home improvement, and refinancing loans.
    ---------------------------------------------------------------------------
        The residential loan requirement is determined on a
    controlled group basis. Thus, for example, if a controlled
    group consists of two thrift institutions with applicable
    excess reserves that are wholly-owned by a bank, the
    residential loan requirement will be met (or not met) with
    respect to both thrift institutions by comparing the principal
    amount of the residential loans made by all three members of
    the group during the taxable year to the group's base amount.
    The group's base amount will be the average principal amount of
    residential loans made by all three members of the group during
    the base period. The election to disregard the high and low
    taxable years during the 6-year base period also would be
    applied on a controlled group basis (i.e., generally by
    treating the members of the group as one taxpayer so that all
    members of the group must join in the election, and the same
    corresponding years of each member would be so disregarded).
        Treasury regulations may provide rules for the application
    of the residential loan requirement in the case of mergers,
    acquisitions, and other reorganizations of thrift and other
    institutions. The Committee expects that the balance of a
    taxpayer's applicable excess reserve will be treated as a tax
    attribute to which section 381 applies. Thus, if an institution
    with an applicable excess reserve is acquired in a tax-free
    reorganization, the balance of such reserve will not be
    immediately restored to income but will continue to be subject
    to the residential loan requirement in the hands of the
    acquirer. The Committees further expect that if a financial
    institution joins or merges into (or leaves) a group of
    financial institutions, the base amount of the acquiring (or
    remaining) group will be appropriately adjusted to reflect the
    base amount of the acquired (or departing) institution for
    purposes of determining whether the group meets the residential
    loan requirement for the year of the acquisition (or departure)
    and subsequent years. Similarly, if a controlled group of
    institutions had made an election to disregard its high and low
    years in computing its base amount, it is anticipated that such
    election shall be binding on any institution that subsequently
    joins the group and the election shall be applied to the new
    member by disregarding the high and low years of the new member
    even if such years do not correspond to the years applicable to
    the other members of the group.
                Treatment of conversions to credit unions
        The bill provides that if a thrift institution to which the
    repeal of section 593 applies becomes a credit union, the
    credit union will be treated as an institution that is not a
    bank and any section 481(a) adjustment required to be included
    in gross income will be treated as derived from an unrelated
    trade or business. Thus, if a thrift institution becomes a
    credit union in its first taxable year beginning after December
    31, 1995, the entire balance of the institution's bad debt
    reserve will be included in income, and subject to tax, over a
    six-year period beginning with such taxable year. No inference
    is intended as to the Federal income tax treatment of any other
    aspect of the conversion of a financial institution to a credit
    union.

    Effective date

        The repeal of section 593 is effective for taxable years
    beginning after December 31, 1995. The repeal of section 595 is
    effective for property acquired in taxable years beginning
    after December 31, 1995. The amendment to section 860E does not
    apply to any residual interest in a REMIC held by the taxpayer
    on October 31, 1995, and at all times thereafter.
        The amendments to section 593(e) do not apply to any
    distributions with respect to preferred stock if (1) such stock
    is issued and outstanding on October 31, 1995, and at all times
    thereafter before the distribution and (2) such distribution is
    made within the later of (a) one year after the date of
    enactment of this Act or (b) if the stock is redeemable by the
    issuer or a related party, 30 days after the date such stock
    first may be redeemed. For this purpose, the first date a
    preferred stock may be redeemed is the day upon which the
    issuer or a related party has the right to call the stock,
    regardless of the amount of call premium.

     B. Earned Income Credit Provisions (sec. 411 of the bill and secs. 32
                          and 6213(g)(2) of the Code)

    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 taxpayer may claim depends upon whether the
    taxpayer has one, more than one, or no qualifying children and
    is determined by multiplying the credit rate by the taxpayer's
    earned income up to an earned income threshold. The maximum
    amount of the credit is the product of the credit rate and the
    earned income threshold. For taxpayers with earned income (or
    adjusted gross income (AGI), if greater) in excess of the
    phaseout threshold, 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 phaseout threshold. For
    taxpayers with earned income (or AGI, if greater) in excess of
    the phaseout limit, no credit is allowed.
        The parameters for the credit depend upon the number of
    qualifying children the taxpayer claims. For 1996, the
    parameters are given in the following table:

    ----------------------------------------------------------------------------------------------------------------
                                                                        Two or more
                                                                        qualifying    One qualifying   No qualifying
                                                                         children          child         children
    ----------------------------------------------------------------------------------------------------------------
    Credit rate.....................................................          40.00%          34.00%           7.65%
    Phaseout rate...................................................          21.06%          15.98%           7.65%
    Earned income threshold.........................................          $8,890          $6,330          $4,220
    Maximum credit..................................................           3,556           2,152             323
    Phaseout threshold..............................................          11,610          11,610           5,280
    Phaseout limit..................................................          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 threshold and the phaseout threshold are indexed for
    inflation; because the phaseout limit will also increase if
    there is inflation.
        In order to claim the credit, a taxpayer must either have
    an qualifying child or meet other requirements. A qualifying
    child must meet a relationship test, an age test, an
    indentification test, and a residence test. In order to claim
    the credit without a qualifyng child, a taxpayer must not be a
    dependent and must be over age 24 and under age 65.
        To satisfy the identification test, taxpayers must include
    on their tax return the name and age of each qualifying child.
    For returns filed with respect to tax year 1996, taxpayers 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, taxpayers must provide TINs for all qualifying children,
    regardless of their age. A taxpayer's TIN is generally that
    taxpayer's social security number.
                Mathematical errors
        The Internal Revenue Service may summarily assess
    additional tax due as a result of a mathematical 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 believes the assessment was made in error.

    Reasons for change

        The Committee does not believe that individuals who are not
    authorized to work in the United States should be able to claim
    the credit. To enforce the requiremnt that credit claimants and
    their qualifying children have proper social security numbers
    and to insure that credit claimants have paid self-employment
    taxes on any self=employment income used to qualify for the
    credit, the Committee believes the IRS should be able to use
    the streamlined procedures it currently uses for mathematical
    and clerical errors.

    Explanation of provision

                Deny credit to individuals not authorized to be employed in
                        the United States
        Under the bill, taxpayers 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).
                Use mathematical error procedures for certain omissions
        If a taxpayer fails to provide a correct taxpayer
    identification number, such omission will be treated as a
    mathematical or clerical error. If a taxpayer 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. Thus, any notification that the taxpayer owes
    additional tax because of these omissions will not be treated
    as a notice of deficiency.

     Effective date

        The provision is effective for taxable years beginning
    after December 31, 1995.

     C. Revision of Expatriation Tax Rules (secs. 421-322 of the bill and
             secs. 877, 2107, 2501 and new sec. 6039F of the Code)

    Present law

       1. Taxation of United States citizens, residents, and nonresidents

        a. Individual income taxation.

    Income taxation of U.S. citizens and residents

                In general
        A United States citizen generally is subject to the U.S.
    individual income tax on his or her worldwide taxable
    income.\26\ All income earned by a U.S. citizen, from sources
    inside and outside the United States, is taxable, whether or
    not the individual lives within the United States. A non-U.S.
    citizen who resides in the United States generally is taxed in
    the same manner as a U.S. citizen if the individual meets the
    definition of a ``resident alien,'' described below.
        \26\ The determination of who is a 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. See
    Treas. Reg. section 1.1-1(c).
    ---------------------------------------------------------------------------
        The taxable income of a U.S. citizen or resident is equal
    to the taxpayer's total income less certain exclusions,
    exemptions, and deductions. The appropriate tax rates are then
    applied to a taxpayer's taxable income to determine his or her
    individual income tax liability. A taxpayer may reduce his or
    her income tax liability by any applicable tax credits. When an
    individual disposes of property, any gain or loss on the
    disposition is determined by reference to the taxpayer's cost
    basis in the property, regardless of whether the property was
    acquired during the period in which the taxpayer was a citizen
    or resident of the United States.
        If a U.S. citizen or resident earns income from sources
    outside the United States, and that income is subject to
    foreign income taxes, the individual generally is permitted a
    foreign tax credit against his or her U.S. income tax liability
    to the extent of foreign income taxes paid on that income.\27\
    In addition, a United States citizen who lives and works in a
    foreign country generally is permitted to exclude up to $70,000
    of annual compensation from being subject to U.S. income taxes,
    and is permitted an exclusion or deduction for certain housing
    expenses.\28\
        \27\ See sections 901-907.
        \28\ Section 911.
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                Resident aliens
        In general, a non-U.S. citizen is considered a resident of
    the United States if the individual (1) has entered the United
    States as a lawful permanent U.S. resident (the ``green card
    test''); or (2) is present in the United States for 31 or more
    days during the current calendar year and has been present in
    the United States for a substantial period of time--183 or more
    days during a 3-year period weighted toward the present year
    (the ``substantial presence test'').\29\
        \29\ The definitions of resident and nonresident aliens are set
    forth in section 7701(b). The substantial presence test will compare
    183 days to the sum of (1) the days present during the current calendar
    year, (2) one-third of the days present during the preceding calendar
    year, and (3) one-sixth of the days present during the second preceding
    calendar year. Presence for 122 days (or more) per year over the 3-year
    period would constitute substantial presence under the test.
    ---------------------------------------------------------------------------
        If an individual is present in the United States for fewer
    than 183 days during the calendar year, and if the individual
    establishes that he or she has a closer connection with a
    foreign country than with the United States and has a tax home
    in that country for the year, the individual generally is not
    subject to U.S. tax as a resident on account of the substantial
    presence test. If an individual is present for as many as 183
    days during a calendar year, this closer connections/tax home
    exception is not available. An alien who has an application
    pending to change his or her status to permanent resident or
    who has taken other steps to apply for status as a lawful
    permanent U.S. resident is not eligible for the closer
    connections/tax home exception.
        For purposes of applying the substantial presence test, any
    days that an individual is present as an ``exempt individual''
    are not counted. Except individuals include certain foreign
    government-related individuals, teachers, trainees, students,
    and professional athletes temporarily in the United States to
    complete in charitable sports events. In addition, the
    substantial presence test does not count days of presence of an
    individual who is physically unable to leave the United States
    because of a medical condition that arose while he or she was
    present in the United States, if the individual can establish
    to the satisfaction of the Secretary of the Treasury that he or
    she qualifies for this special medical exception.
        In some circumstances, an individual who meets the
    definition of a U.S. resident (as described above) could also
    be defined as a resident of another country under the internal
    laws of that country. In order to avoid the double taxation of
    such individuals, most income tax treaties include a set of
    ``tie-breaker'' rules to determine the individual's country of
    residence for income tax purposes. In general, a dual resident
    is deemed to be a resident of the country in which such person
    has a permanent home. If the individual has a permanent home
    available in both countries, the individual's residence is
    deemed to be the country with which his or her personal and
    economic relations are closer (i.e., the ``center of vital
    interests.'') If the country in which such individual has his
    or her center or vital interests cannot be determined, or if
    such individual does not have a permanent home available in
    either country, he or she is deemed to be a resident of the
    country in which he or she has an habitual abode. If the
    individual has an habitual abode in both countries or in
    neither country, he or she is deemed to be a resident of the
    country of which he or she is a citizen. If each country
    considers the person to be its citizen or if he or she is a
    citizen of neither country, the competent authorities of the
    countries are to settle the question of residence by mutual
    agreement.
                Income taxation of nonresident aliens
        Non-U.S. citizens who do not meet the definition of
    ``resident aliens'' are considered to be nonresident aliens for
    tax purposes. Nonresident aliens are subject to U.S. tax only
    to the extent their income is from U.S. sources or is
    effectively connected with the conduct of a trade or business
    within the United States. Bilateral income tax treaties may
    modify the U.S. taxation of a nonresident alien.
        A nonresident alien is taxed at regular graduated rates on
    net profits derived from a U.S. business.\30\ Nonresident
    aliens also are taxed at a flat rate of 30 percent on certain
    types of passive income derived from U.S. sources, although a
    lower rate may be provided by treaty (e.g., dividends are
    frequently taxed at a reduced rate of 15 percent). Such passive
    income includes interest, dividends, rents, salaries, wages,
    premiums, annuities, compensations, remunerations, emoluments,
    and other fixed or determinable annual or periodical gains,
    profits and income. There is no U.S. tax imposed, however, on
    interest earned by nonresident aliens with respect to deposits
    with U.S. banks and certain types of portfolio debt
    investments.\31\ Gains on the sale of stocks or securities
    issued by U.S. persons generally are not taxable to a
    nonresident alien because they are considered to be foreign
    source income.\32\
        \30\ Section 871.
        \31\ See sections 871(h) and 871(i)(3).
        \32\ Section 865(a).
    ---------------------------------------------------------------------------
        Nonresident aliens are subject to U.S. income taxation on
    any gain recognized on the disposition of an interest in U.S.
    real property.\33\ Such gains generally are subject to tax at
    the same rates that apply to similar income received by U.S.
    persons. If a U.S. real property interest is acquired from a
    foreign person, the purchaser generally is required to withhold
    10 percent of the amount realized (gross sales price).
    Alternatively, either party may request that the Internal
    Revenue Service (``IRS'') determine the transferor's maximum
    tax liability and issue a certificate prescribing a reduced
    amount of withholding (not to exceed the transferor's maximum
    tax liability).\34\
        \33\ Sections 897, 1445, 6039C, and 6652(f), known as the Foreign
    Investment in Real Property Tax Act (``FIRPTA''). Under the FIRPTA,
    provisions, tax is imposed on gains from the disposition of an interest
    (other than an interest solely as a creditor) in real property
    (including an interest in a mine, well, or other natural deposit)
    located in the United States or the U.S. Virgin Islands. Also included
    in the definition of a U.S. real property interest in any interest
    (other than an interest solely as a creditor) in any domestic
    corporation unless the taxpayer establishes that the corporation was
    not a U.S. real property holding corporation (``USRPHC'') at any time
    during the five-year period ending on the date of the disposition of
    the interest (sec. 897(c)(1)(A)(ii). A USRPHC is any corporation, the
    fair market value of whose U.S. real property interests equals or
    exceeds 50 percent of the sum of the fair market values of (1) its U.S.
    real property interests, (2) its interests in foreign real property,
    plus (3) any other of its assets which are used or held for use in a
    trade or business (sec. 897(c)(2)).
        \34\ Section 1445.
    ---------------------------------------------------------------------------
        b. Estate and gift taxation.
        The United States imposes a gift tax on any transfer of
    property by gift made by a U.S. citizen or resident,\35\
    whether made directly or indirectly and whether made in trust
    or otherwise. Nonresident aliens are subject to the gift tax
    with respect to transfers of tangible real or personal property
    where the property is located in the United States at the time
    of the gift. No gift tax is imposed, however, on gifts made by
    nonresident aliens of intangible property having a situs within
    the United States (e.g., stocks and bonds).\36\
        \35\ Section 2501.
        \36\ Section 2501(a)(2).
    ---------------------------------------------------------------------------
        The United States also imposes an estate tax on the
    worldwide ``gross estate'' of any person who was a citizen or
    resident of the United States at the time of death, and on
    certain property belonging to a nonresident of the United
    States that is located in the United States at the time of
    death.\37\
        \37\ Sections 2001, 2031, 2101, and 2103.
    ---------------------------------------------------------------------------
        Since 1976, the gift tax and the estate tax have been
    unified so that a single graduated rate schedule applies to
    cumulative taxable transfers made by a U.S. citizen or resident
    during his or her lifetime and at death. Under this rate
    schedule, the unified estate and gift tax rates begin at 18
    percent on the first $10,000 in cumulative taxable transfers
    and reach 55 percent on cumulative taxable transfers over $3
    million.\38\ A unified credit of $192,800 is available with
    respect to taxable transfers by gift and at death. The unified
    credit effectively exempts a total of $600,000 in cumulative
    taxable transfers from the estate and gift tax.
        \38\ Section 2001(c).
    ---------------------------------------------------------------------------
        Residency for purposes of estate and gift taxation is
    determined under different rules than those applicable for
    income tax purposes. In general, an individual is considered to
    be a resident of the United States for estate and gift tax
    purposes if the individual is ``domiciled'' in the United
    States. An individual is domiciled in the United States if the
    individual (a) is living in the United States and has the
    intention to remain in the United States indefinitely; or (b)
    has lived in the United States with such an intention and has
    not formed the intention to remain indefinitely in another
    country. In the case of a U.S. citizen who resided in a U.S.
    possession at the time of death, if the individual acquired
    U.S. citizenship solely on account of his birth or residence in
    a U.S. possession, that individual is not treated as a U.S.
    citizen or resident for estate tax purposes.\39\
        \39\ Section 2209.
    ---------------------------------------------------------------------------
        In addition to the estate and gift taxes, a separate
    transfer tax is imposed on certain ``generation-skipping''
    transfers.

       2. Special tax rules with respect to the movement of persons and
                   property into or out of the United States

    Individuals who relinquish U.S. citizenship with a principal purpose of
                               avoiding U.S. tax

        An individual who relinquishes his or her U.S. citizenship
    with a principal purpose of avoiding U.S. taxes is subject to
    an alternative method of income taxation for 10 years after
    expatriation under section 877.\40\ Under this provision, if
    the Treasury Department establishes that it is reasonable to
    believe that the expatriate's loss of U.S. citizenship would,
    but for the application of this provision, result in a
    substantial reduction in U.S. tax based on the expatriate's
    probable income for the taxable year, then the expatriate has
    the burden of proving that the loss of citizenship did not have
    as one of its principal purposes the avoidance of U.S. income,
    estate or gift taxes. Section 877 does not apply to resident
    aliens who terminate their U.S. residency.
        \40\ Treasury regulations provide that an individual's citizenship
    status is governed by the provisions of the Immigration and Nationality
    Act, specifically referring to the ``rules governing loss of
    citizenship [set forth in] sections 349 to 357, inclusive, of such Act
    (8 U.S.C. 1481-1489).'' Treas. Reg. section 1.1-1(c). Under the
    Immigration and Nationality Act, an individual is generally considered
    to lose U.S. citizenship on the date that an expatriating act is
    committed. The present-law rules governing the loss of citizenship, and
    a description of the types of expatriating acts that lead to a loss of
    citizenship, are discussed more fully below.
    ---------------------------------------------------------------------------
        The alternative method modifies the rules generally
    applicable to the taxation of nonresident aliens in two ways.
    First, the expatriate 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 nonresident aliens. (Unlike
    U.S. citizens, however, individuals subject to section 877 are
    not taxed on any foreign source income.) Second, the scope of
    items treated as U.S. source income for section 877 purposes is
    broader than those items generally considered to be U.S. source
    income under the Code. For example, gains on the sale of
    personal property located in the United States and gains on the
    sale or exchange of stocks and securities issued by U.S.
    persons, generally are not considered to be U.S. source income
    under the Code. However, if an individual is subject to the
    alternative taxing method of section 877, such gains are
    treated as U.S. source income with respect to that individual.
    The alternative method applies only if it results in a higher
    U.S. tax liability than would otherwise be determined if the
    individual were taxed as a nonresident alien.
        Because section 877 alters the sourcing rules generally
    used to determine the country having primary taxing
    jurisdiction over certain items of income, there is an
    increased potential for such items to be subject to double
    taxation. For example, a former U.S. citizen subject to the
    section 877 rules may have capital gains derived from stock in
    a U.S. corporation. Under section 877, such gains are treated
    as U.S. source income, and are, therefore, subject to U.S. tax.
    Under the internal laws of the individual's new country of
    residence, however, that country may provide that all capital
    gains realized by a resident of that country are subject to
    taxation in that country, and thus the individual's gain from
    the sale of U.S. stock also would be taxable in his or her
    country of residence. If the individual's new country of
    residence has an income tax treaty with the United States, the
    treaty may provide for the amelioration of this potential
    double tax.
        Similar rules apply in the context of estate and gift
    taxation if the transferor relinquished U.S. citizenship with a
    principal purpose of avoiding U.S. taxes within the 10-year
    period ending on the date of the transfer. A special rule is
    applied to the estate tax treatment of any decedent who
    relinquished his or her U.S. citizenship within 10 years of
    death, if the decedent's loss of U.S. citizenship had as one of
    its principal purposes a tax avoidance motive.\41\ Once the
    Secretary of the Treasury establishes a reasonable belief that
    the expatriate's loss of U.S. citizenship would result in a
    substantial reduction in estate, inheritance, legacy and
    succession taxes, the burden of proving that one of the
    principal purposes of the loss of U.S. citizenship was not
    avoidance of U.S. income or estate tax is on the executor of
    the decedent's estate.
        \41\ Section 2107.
    ---------------------------------------------------------------------------
        In general, the estates of individuals who have
    relinquished U.S. citizenship are taxed in accordance with the
    rules generally applicable to the estates of nonresident aliens
    (i.e., the gross estate includes all U.S.-situs property held
    by the decedent at death, is subject to U.S. estate tax at the
    rates generally applicable to the estates of U.S. citizens, and
    is allowed a unified credit of $13,000, as well as credits for
    State death taxes, gift taxes, and prior transfers). However, a
    special rule provides that the individual's gross estate also
    includes his or her pro-rata share of any U.S.-situs property
    held through a foreign corporation in which the decedent had a
    10-percent or greater voting interest, provided that the
    decedent and related parties together owned more than 50
    percent of the voting power of the corporation. Similarly,
    gifts of intangible property having a situs within the United
    States (e.g., stocks and bonds) made by a nonresident alien who
    relinquished his or her U.S. citizenship within the 10-year
    period ending on the date of transfer are subject to U.S. gift
    tax, if the loss of U.S. citizenship had as one of its
    principal purposes a tax avoidance motive.\42\
        \42\ Section 2501(a)(3).
    ---------------------------------------------------------------------------
                Aliens having a break in residency status
        A special rule applies in the case of an individual who has
    been treated as a resident of the United States for at least
    three consecutive years, if the individual becomes a
    nonresident but regains residency status within a three-year
    period.\43\ In such cases, the individual is subject to U.S.
    tax for all intermediate years under the section 877 rules
    described above (i.e., the individual is taxed in the same
    manner as a U.S. citizen who renounced U.S. citizenship with a
    principal purpose of avoiding U.S. taxes). The special rule for
    a break in residency status applies regardless of the
    subjective intent of the individual.
        \43\ Section 7701(b)(10).
    ---------------------------------------------------------------------------
                Transfers to foreign corporations
        Certain transfers of property by shareholders to a
    controlled corporation are generally tax-free if the persons
    transferring the property own at least 80 percent of the
    corporation after the transfer.\44\ Also, in certain corporate
    reorganizations, including qualifying acquisitions and
    dispositions, shareholders of one corporation may exchange
    their stock or securities for stock or securities of another
    corporation that is a party to the reorganization without a
    taxable event except to the extent they receive cash or other
    property that is not permitted stock or securities. In
    addition, a corporation may transfer property to another
    corporation that is a party to the reorganization without a
    taxable event, except to the extent certain non-permitted
    consideration is received.\45\ A liquidation of an 80-percent
    owned corporate subsidiary into its parent corporation is also
    generally tax-free.\46\
        \44\ Section 351.
        \45\ Sections 368, 354, 356, and 361. (See also sec. 355.)
        \46\ Section 332.
    ---------------------------------------------------------------------------
        Under the rules applicable to these types of transfers,
    property transferred to a corporation retains its basis, to the
    extent the transfer was tax-free, so that any appreciation
    (i.e., built-in gain) will be subject to tax if the property is
    subsequently sold by the recipient corporation. Similarly, a
    shareholder who exchanges stock of one corporation for stock of
    another retains his or her original basis so that a subsequent
    sale of the acquired stock can produce a taxable gain.
        Section 367 applies special rules, however, if property is
    transferred by a U.S. person to a foreign corporation in a
    transaction that would otherwise be tax-free under these
    provisions. These special rules are generally directed at
    situations where property is transferred to a foreign
    corporation, outside of the U.S. taxing jurisdiction, so that a
    subsequent sale by that corporation could escape U.S. tax
    notwithstanding the carryover basis of the asset. In some
    instances, such a transfer causes an immediate taxable event so
    that the generally applicable tax-free rules are overridden. In
    other instances, the taxpayer may escape immediate tax by
    entering a gain recognition agreement (``GRA'') obligating the
    taxpayer to pay tax if the property is disposed of within a
    specified time period after the transfer. The GRA rules
    generally require the taxpayer to agree to file an amended
    return for the year of the original transfer if the property is
    disposed of by the transferee (including payment of interest
    from the due date of the return for the year of the original
    transfer to the time the additional tax under the agreement is
    actually paid following the disposition).
        Section 367 also imposes rules directed at situations where
    a U.S. person has an interest in a foreign corporation, such as
    a controlled foreign corporation (``CFC'') meeting the specific
    U.S. shareholder ownership requirements, that could result in
    the U.S. person being taxed on its share of certain foreign
    corporate earnings. These rules are designed to prevent the
    avoidance of tax in circumstances where a reorganization or
    other nonrecognition transaction restructures the stock or
    asset ownership of the foreign corporation so that the
    technical requirements for imposition of U.S. tax on foreign
    earnings under the CFC or other rules are no longer met and
    there is therefore potential for removing the earnings of the
    original CFC from current or future U.S. tax, or changing the
    character of the earnings for U.S. tax purposes (e.g., from
    dividend to capital gain).
        The rules of section 367 do not generally apply unless
    there is a transfer by a U.S. person to a foreign corporation,
    or unless a foreign corporation of which a U.S. person is a
    shareholder engages in certain transactions. Because an
    individual who expatriates is no longer a U.S. person, section
    367 has no effect on actions taken by such individuals after
    expatriation. The Treasury Department has considerable
    regulatory authority under section 367 to address situations
    that may result in U.S. tax avoidance. For example, section
    367(b) provides that any of certain tax-free corporate
    transactions that do not involve a transfer of property from a
    U.S. person (described in section 367(a)(1)) can be
    recharacterized as taxable ``to the extent provided in
    regulations prescribed by the Secretary which are necessary or
    appropriate to prevent the avoidance of Federal income taxes.''
    The legislative history of this provision suggests that it was
    directed principally at situations involving avoidance of U.S.
    tax on foreign earnings and profits; \47\ however, the
    statutory language is quite broad and was provided in
    conjunction with the general rules taxing certain transfers by
    U.S. persons.
        \47\ See, e.g., H. Rept. No. 94-658, pp. 239-248 (94th Cong. 1st
    Sess, 1975); S. Rept. No. 94-938, pp. 261-271 (94th Cong., 2d Sess,
    1976); H. Rept. No. 94-1515, p. 463 (94th Cong., 2d Sess., 1976)
    ---------------------------------------------------------------------------
        Under the existing section 367 regulations and the relevant
    expatriation sections of the Code, a U.S. person who
    expatriates, even for a principal purpose of avoiding U.S. tax,
    may subsequently engage in transactions that involve the
    transfer of property to a foreign corporation without any
    adverse consequences under section 367, since expatriation
    (even for a principal purpose of tax avoidance) is not an event
    covered by section 367 or the current regulations under that
    section. Similarly, a U.S. person who has expatriated is not
    considered a U.S. shareholder for purposes of applying the
    rules that address restructurings of foreign corporations with
    U.S. shareholders. By engaging in such a transaction, a
    taxpayer that has expatriated could transfer assets that would
    otherwise generate income which would be subject to tax under
    section 877 into a foreign corporation, thus transforming the
    income into non-U.S. source income not subject to tax under
    section 877. For example, under section 877, if a principal
    purpose of tax avoidance existed, an expatriate would be taxed
    for 10 years on any sale of U.S. corporate stock. However,
    after expatriation, the person would no longer be a U.S. person
    for purposes of section 367, and thus could transfer U.S.
    corporate stock to a foreign corporation controlled by the
    expatriate under section 351 without any section 367 effect.
    The foreign corporation could then sell the U.S. corporate
    stock within the 10-year period, but the gain would not be
    subject to U.S. tax.
        In addition, the IRS or Treasury might encounter
    difficulties enforcing a gain recognition agreement if a U.S.
    person who has entered into such an agreement to pay tax on a
    later disposition of an asset subject to the agreement and then
    expatriates. The GRA regulations contain provisions requiring
    security arrangements if a U.S. natural person who has entered
    an agreement dies (or if a U.S. entity goes out of existence)
    but these provisions do not apply if a U.S. natural person
    expatriates.\48\
        \48\ See, e.g., Temp. Reg. section 1.367(a)-3T(g)(9) and (10),
    Notice 87-85, 1987-2 C.B. 395.
    ---------------------------------------------------------------------------
        Even if an individual is subject to the alternative taxing
    method of section 877 (because the person expatriated with a
    principal purpose of avoiding U.S. tax), section 877 does not
    impose a tax on foreign source income. Thus, such an individual
    could expatriate and subsequently transfer appreciated property
    to a foreign corporation or other entity beyond the U.S. taxing
    jurisdiction, without any U.S. tax being imposed on the
    appreciation under section 877.
        Similar issues exist under section 1491 of the Code.
    Section 1491 imposes a 35-percent tax on otherwise untaxed
    appreciation when appreciated property is transferred by a U.S.
    citizen or resident, or by a domestic corporation, partnership,
    estate or trust, to certain foreign entities in a transaction
    not covered by section 367. In some cases, taxpayers may elect
    to enter into a gain recognition agreement (rather than pay
    immediate tax) pursuant to section 1492.\49\ As in the case of
    section 367, an individual who has expatriated is no longer a
    U.S. citizen and may also no longer be a U.S. resident, thus a
    transfer by such a person would be unaffected by section 1491.
        \49\ See, e.g., PLR 9103033.
    ---------------------------------------------------------------------------

     3. Requirements for United States citizenship, immigration, and visas

                United States citizenship
        An individual may acquire U.S. citizenship in one of three
    ways: (1) being born within the geographical boundaries of the
    United States; (2) being born outside the United States to at
    least one U.S. citizen parent (as long as that parent had
    previously been resident in the United States for a requisite
    period of time); or (3) through the naturalization process. All
    U.S. citizens are required to pay U.S. income taxes on their
    worldwide income. The State Department estimates that there are
    approximately 3 million U.S. citizens living abroad, although
    thousands of these individuals may not even know that they are
    U.S. citizens.
        A U.S. Citizen may voluntarily give up his or her U.S.
    citizenship at any time by performing one of the following acts
    (``expatriating acts'') with the intention of relinquishing
    U.S. nationality: (1) becoming naturalized in another country;
    (2) formally declaring allegiance to another country; (3)
    serving in a foreign army; (4) serving in certain types of
    foreign government employment; (5) making a formal renunciation
    of nationality before a U.S. diplomatic or consular officer in
    a foreign country; (6) making a formal renunciation of
    nationality in the United States during a time of war; or (7)
    committing an act of treason.\50\ An individual who wishes
    formally to renounce citizenship (item (5), above) must execute
    an Oath of Renunciation before a consular officer, and the
    individual's loss of citizenship is effective on the date the
    oath is executed. In all other cases, the loss of citizenship
    is effective on the date that the expatriating act is
    committed, even though the loss may not be documented until a
    later date. The State Department generally documents loss in
    such cases when the individual acknowledges to a consular
    officer that the act was taken with the requisite intent. In
    all cases, the consular officer abroad submits a certificate of
    loss of nationality (``CLN'') to the State Department in
    Washington, D.C. for approval.\51\ Upon approval, a copy of the
    CLN is issued to the affected individual. However, the date
    upon which the CLN is approved is not the effective date for
    loss of citizenship.
        \50\ 8 U.S.C. section 1481.
        \51\ 8 U.S.C. section 1501.
    ---------------------------------------------------------------------------
        Before a CLN is issued, the State Department reviews the
    individual's files to confirm that: (1) the individual was a
    U.S. citizen; (2) an expatriating act was committed; (3) the
    act was undertaken voluntarily; and (4) the individual had the
    intent of relinquishing citizenship when the expatriating act
    was committed. If the expatriating act involved an action of a
    foreign government (for example, if the individual was
    naturalized in a foreign country or joined a foreign army), the
    State Department will not issue a CLN until it has obtained an
    official statement from the foreign government confirming the
    expatriating act. If a CLN is not issued because the State
    Department does not believe that an expatriating act has
    occurred (for example, if the requisite intent appears to be
    lacking), the issue is likely to be resolved through
    litigation. Whenever the loss of U.S. nationality is put in
    issue, the burden of proof is on the person or party claiming
    that a loss of citizenship has occurred to establish, by a
    preponderance of the evidence, that the loss occurred.\52\
    Similarly, if a CLN has been issued, but the State Department
    later discovers that such issuance was improper (for example,
    because fraudulent documentation was submitted, or the
    requisite intent appears to be lacking), the State Department
    could initiate proceedings to revoke the CLN. If the recipient
    is unable to establish beyond a preponderance of the evidence
    that citizenship was lost on the date claimed, the CLN would be
    revoked. To the extent that the IRS believes a CLN was
    improperly issued, the IRS could present such evidence to the
    State Department and request that revocation proceedings be
    commenced. If it is determined that the individual has indeed
    committed an expatriating act, the date for loss of citizenship
    will be the date of the expatriating act.
        \52\ 8 U.S.C. sec. 1481(b).
    ---------------------------------------------------------------------------
        A child under the age of 18 cannot lose U.S. citizenship by
    naturalizing in a foreign state or by taking an oath of
    allegiance to a foreign state. A child under 18 can, however,
    lose U.S. citizenship by serving in a foreign military or by
    formally renouncing citizenship, but such individuals my regain
    their citizenship by asserting a claim of citizenship before
    reaching the age of eighteen years and six months.
        A naturalized U.S. citizen can have his or her citizenship
    involuntarily revoked if a U.S. court determines that the
    certificate of naturalization was illegally procured, or was
    procured by concealment of a material fact or by willful
    misrepresentation (for example, if the individual concealed the
    fact that he served as a concentration camp guard during World
    Ware II).\53\ In such cases, the individual's certificate of
    naturalization is cancelled, effective as of the original date
    of the certificate; in other words, it is as if the individual
    were never a U.S. citizen at all.
        \53\ See Section 340(a) of the Immigration and Nationality Act, 8
    U.S.C. section 1451(a). See also, U.S. v. Demjanjuk, 680 F.2d 32, cert.
    denied, 459 U.S. 1036 (1982).
    ---------------------------------------------------------------------------
                United States immigration and visas
        In general, a non-U.S. citizen who enters the United States
    is required to obtain a visa.\54\ An immigrant visa (also known
    as a ``green card'') is issued to an individual who intends to
    relocate to the United States permanently. Various types of
    nonimmigrant visas are issued to individuals who come to the
    United States on a temporary basis and intend to return home
    after a certain period of time. The type of nonimmigrant visa
    issued to such individuals is dependent upon the purpose of the
    visit and its duration. An individual holding a nonimmigrant
    visa is prohibited from engaging in activities that are
    inconsistent with the purpose of the visa (for example, an
    individual holding a tourist visa is not permitted to obtain
    employment in the United States).
        \54\ Under the Visa Waiver Pilot Program, nationals of most
    European countries are not required to obtain a visa to enter the
    United States if they are coming as tourists and staying a maximum of
    90 days. Also, citizen of Canada, Mexico, and certain islands in close
    proximity to the United States do not need visas to enter the United
    States, although other types of travel documents may be required.
    ---------------------------------------------------------------------------
        Foreign business people and investors often obtain ``E''
    visas to come into the United States. Generally an ``E'' visa
    is initially granted for a one-year period, but it can be
    routinely extended for additional two-year periods. There is no
    overall limit on the amount of time an individual may retain an
    ``E'' visa. There are two types of ``E'' visas: an ``E-1''
    visa, for ``treaty traders'' and an ``E-2'' visa, for ``treaty
    investors.''
                Relinquishment of green cards
        There are several ways in which a green card can be
    relinquished. First, an individual who wishes to terminate his
    or her permanent residency may simply mails his or her green
    card back to the INS. Second, an individual may be
    involuntarily deported from the United States (through a
    judicial or administrative proceeding), and the green card must
    be relinquished at that time. Third, a green card holder who
    leaves the United States and attempts to re-enter more than a
    year later may have his or her green card taken away by the INS
    border examiner, although the individual may appeal to an
    immigration judge to have the green card reinstated. A green-
    card holder may permanently leave the United States without
    relinquishing his or her green card, although such individuals
    would continue to be taxed as U.S. residents.\55\
        \55\ Section 7701(b)(6)(B) provides that an individual who has
    obtained the status of residing permanently in the United States as an
    immigrant (i.e., an individual who has obtained a green card) will
    continue to be taxed as a lawful permanent resident of the United
    States until such status is revoked, or is administratively or
    judicially determined to have been abandoned.
    ---------------------------------------------------------------------------

    Reasons for change

        The Committee has been informed that a small number of very
    wealthy individuals each year relinquish their U.S. citizenship
    for the purpose of avoiding U.S. income, estate, and gift tax.
    By so doing, such individuals may reduce their annual U.S.
    income tax liability and their eventual U.S. estate tax
    liability.
        The Committee recognizes that citizens of the United States
    clearly have a basic right under both U.S. and international
    law not only to leave the United States to live elsewhere, but
    also to relinquish their U.S. citizenship. The Committee does
    not believe that the Internal Revenue Code should be used to
    stop U.S. citizens or residents from expatriating; however, the
    Committee also does not believe that the Code should provide a
    tax incentive for expatriating.
        The Committee is concerned that present law, which bases
    the application of the alternative method of taxation under
    sections 877, 2107 and 2501(a)(3) (``expatriation tax
    provisions'') to former citizens on proof of a tax-avoidance
    purpose, may be difficult to administer. Thus, the bill
    generally subjects certain former citizens to the expatriation
    tax provisions without inquiry as to their motive for losing
    their U.S. citizenship, but allows certain individuals to
    request a ruling from the Secretary of Treasury as to whether
    the loss of citizenship had a principal purpose of tax
    avoidance. The Committee believes that long-term permanent
    residents of the United States (i.e., green-card holders)
    should similarly be taxed under the expatriation tax provisions
    for 10 years after their U.S. residency is terminated.
        The Committee is aware that taxpayers may circumvent
    present-laws section 877 by converting U.S. source income to
    foreign source income. To eliminate taxpayers' ability to
    escape U.S. tax by such conversions, the bill substantially
    expands the scope of section 877 to apply to foreign property
    acquired in nonrecognition transactions. In addition, for
    purposes of determining the tax liability under section 877,
    the 10-year period is suspended with respect to any property
    during the period in which the individual's risk of loss with
    respect to such property is substantially diminished.
        The Committee further believes that it is appropriate to
    tax amounts earned by formed U.S. citizens and residents
    through certain controlled foreign corporations where the
    taxation of such amounts have been deferred during the period
    of U.S. citizenship or residency. Therefore, income or gains
    derived from stock in a foreign corporation that is more than
    50-percent owned by a former citizen or resident is taxable
    under the bill to the extent of the earnings and profits
    attributable to such stock if the income or gains are realized
    within the 10-year period after the relinquishment of U.S.
    citizenship or termination of U.S. residency. This rule applies
    to earnings and profits attributable to such stock but only to
    the extent earned during the pre-expatiation period.
        The Committee understands that amounts taxed under the
    expatriation tax provisions could be subject to double taxation
    (e.g., taxed by both the United States and the country of
    residence of the expatriate). Therefore, the bill provides
    relief from double taxation in circumstances where another
    country also taxes the same items that is subject to tax under
    the expatriation tax provisions.
        The Committee is also aware that certain existing U.S.
    Income tax treaties may not permit the Untied States to assert
    its taxing jurisdiction on former citizens or long-term
    residents who are residents of such countries. the Committee
    believes that the modified expatriation tax provisions are
    generally consistent with the underlying principles of income
    tax treaties to the extent the bill provides a foreign tax
    credit for items that are taxed by another country, thus ceding
    primary taxing jurisdiction to the foreign country. To the
    extent that the modified expatriation provisions do conflict
    with the provisions of tax treaties, the Committees expects
    that the Treasury Department will renegotiate those treaties to
    eliminate any such conflicts. In the interim, the new
    provisions take precedence over the treaties for a period of 10
    years.
        In order to enhance compliance with the expatriation tax
    provisions, and to assist the IRS in identifying former U.S.
    citizens and residents who are subject to the expatriation tax
    provisions, the bill imposes an information reporting
    obligation on former citizens and long-term residents at the
    time of expatriation and requires the State Department and
    other governmental entities to share certain information with
    the IRS with respect to such individuals.

    Explanation of provision

                Overview
        The 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 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 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 motives 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 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 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 bill also contains provisions to enhance compliance
    with the expatriation tax provisions. The 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
    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 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 years ending 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 provision if the
    asset is sold within the 10-year period.
        Under the 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 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 of 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 of 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 of 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 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 exception are not available to long-term
    residents whose U.S. residency is terminated. However, the bill
    authorizes the Secretary of the Treasury to prescribe
    regulations to exempt certain categories of long-term residents
    from the bill's provisions.
                Items subject to section 877
        Under section 877, an individual covered by the
    expatriation tax 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.\56\ 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.
        \56\ 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 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 exchanges 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 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 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 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 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 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
    bill, the 10-year period under section 877 is suspended during
    such period. Accordingly, under the bill, if Ms. C sells her
    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 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 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 bill, are generally consistent with the
    underlying principles of income tax treaties to the extent the
    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
    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 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 to 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 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 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 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 bill
    generally apply to any individual who loses U.S. citizenship,
    and any long-term resident 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 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 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 bill. Mr. E would not, however, be
    liable for U.S. income taxes on his worldwide income for any
    period after October 1, 1994.

                          III. VOTES OF THE COMMITTEE

        In compliance with clause 2(l)(2)(B) of Rule XI of the
    Rules of the House of Representatives, the following statement
    is made concerning the roll call votes of the Committee in its
    consideration of the bill, H.R. 3103.
                Motion to Report the Bill
        The bill, as amended, was ordered favorably reported on
    March 19, 1996, by a roll call vote of 25 yeas and 11 nays,
    with a quorum present.
        The roll call vote was as follows:

    ----------------------------------------------------------------------------------------------------------------
            Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present
    ----------------------------------------------------------------------------------------------------------------
    Mr. Archer.....................        X   ........  .........  Mr. Gibbons......  ........        X   .........
    Mr. Crane......................        X   ........  .........  Mr. Rangel.......  ........  ........  .........
    Mr. Thomas.....................        X   ........  .........  Mr. Stark........  ........        X   .........
    Mr. Shaw.......................        X   ........  .........  Mr. Jacobs.......        X   ........  .........
    Mrs. Johnson...................        X   ........  .........  Mr. Ford.........  ........        X   .........
    Mr. Bunning....................        X   ........  .........  Mr. Matsui.......  ........        X   .........
    Mr. Houghton...................        X   ........  .........  Mrs. Kennelly....  ........        X   .........
    Mr. Herger.....................        X   ........  .........  Mr. Coyne........  ........        X   .........
    Mr. McCrery....................        X   ........  .........  Mr. Levin........  ........        X   .........
    Mr. Hancock....................        X   ........  .........  Mr. Cardin.......        X   ........  .........
    Mr.Camp........................        X   ........  .........  Mr. McDermott....  ........        X   .........
    Mr. Ramstad....................        X   ........  .........  Mr. Kleczka......        X   ........  .........
    Mr. Zimmer.....................        X   ........  .........  Mr. Lewis........  ........        X   .........
    Mr. Nussle.....................        X   ........  .........  Mr. Payne........        X   ........  .........
    Mr. Johnson....................        X   ........  .........  Mr. Neal.........  ........        X   .........
    Ms. Dunn.......................        X   ........  .........  Mr. McNulty......  ........        X   .........
    Mr. Collins....................        X   ........  .........
    Mr. Portman....................        X   ........  .........
    Mr. Hayes......................  ........  ........  .........
    Mr. Laughlin...................  ........  ........  .........
    Mr. English....................        X   ........  .........
    Mr. Ensign.....................        X   ........  .........
    Mr. Christensen................        X   ........  .........
    ----------------------------------------------------------------------------------------------------------------

                Votes on Amendments
        Roll call votes were conducted on the following amendments
    to the Chairman's substitute markup amendment.
        An amendment by Mr. Rangel to Title II on duplication and
    coordination of Medicare plans, which would modify the anti-
    duplication provisions contained in the 1990 Medigap law, was
    defeated by a roll call vote of 18 yeas to 19 nays. The vote
    was as follows:

    ----------------------------------------------------------------------------------------------------------------
            Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present
    ----------------------------------------------------------------------------------------------------------------
    Mr. Archer.....................  ........        X   .........  Mr. Gibbons......        X   ........  .........
    Mr. Crane......................  ........        X   .........  Mr. Rangel.......        X   ........  .........
    Mr. Thomas.....................  ........        X   .........  Mr. Stark........        X   ........  .........
    Mr. Shaw.......................  ........        X   .........  Mr. Jacobs.......        X   ........  .........
    Mrs. Johnson...................  ........        X   .........  Mr. Ford.........        X   ........  .........
    Mr. Bunning....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
    Mr. Houghton...................        X   ........  .........  Mrs. Kennelly....        X   ........  .........
    Mr. Herger.....................  ........        X   .........  Mr. Coyne........        X   ........  .........
    Mr. McCrery....................  ........        X   .........  Mr. Levin........        X   ........  .........
    Mr. Hancock....................  ........        X   .........  Mr. Cardin.......        X   ........  .........
    Mr.Camp........................  ........        X   .........  Mr. McDermott....        X   ........  .........
    Mr. Ramstad....................        X   ........  .........  Mr. Kleczka......        X   ........  .........
    Mr. Zimmer.....................  ........        X   .........  Mr. Lewis........        X   ........  .........
    Mr. Nussle.....................  ........        X   .........  Mr. Payne........        X   ........  .........
    Mr. Johnson....................  ........        X   .........  Mr. Neal.........        X   ........  .........
    Ms. Dunn.......................  ........        X   .........  Mr. McNulty......        X   ........  .........
    Mr. Collins....................  ........        X   .........
    Mr. Portman....................  ........        X   .........
    Mr. Hayes......................  ........  ........  .........
    Mr. Laughlin...................  ........  ........  .........
    Mr. English....................  ........        X   .........
    Mr. Ensign.....................  ........        X   .........
    Mr. Christensen................  ........        X   .........
    ----------------------------------------------------------------------------------------------------------------

        An amendment by Mr. Collins to Title II to add a new
    Subtitle G on duplication and coordination of Medicare-related
    plans was approved by a roll call vote of 28 yeas to 9 nays.
    The vote was as follows:

    ----------------------------------------------------------------------------------------------------------------
            Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present
    ----------------------------------------------------------------------------------------------------------------
    Mr. Archer.....................        X   ........  .........  Mr. Gibbons......  ........        X
    Mr. Crane......................        X   ........  .........  Mr. Rangel.......        X   ........  .........
    Mr. Thomas.....................        X   ........  .........  Mr. Stark........  ........        X   .........
    Mr. Shaw.......................        X   ........  .........  Mr. Jacobs.......        X   ........  .........
    Mrs. Johnson...................        X   ........  .........  Mr. Ford.........  ........        X   .........
    Mr. Bunning....................        X   ........  .........  Mr. Matsui.......  ........        X   .........
    Mr. Houghton...................        X   ........  .........  Mrs. Kennelly....        X   ........  .........
    Mr. Herger.....................        X   ........  .........  Mr. Coyne........  ........        X   .........
    Mr. McCrery....................        X   ........  .........  Mr. Levin........  ........        X   .........
    Mr. Hancock....................        X   ........  .........  Mr Cardin........  ........        X   .........
    Mr. Camp.......................        X   ........  .........  Mr. McDermott....  ........        X   .........
    Mr. Ramstad....................        X   ........  .........  Mr. Kleczka......  ........        X   .........
    Mr. Zimmer.....................        X   ........  .........  Mr. Lewis........        X   ........  .........
    Mr. Nussle.....................        X   ........  .........  Mr. Payne........        X   ........  .........
    Mr. Johnson....................        X   ........  .........  Mr. Neal.........        X   ........  .........
    Ms. Dunn.......................        X   ........  .........  Mr. McNulty......        X   ........  .........
    Mr. Collins....................        X   ........  .........  .................  ........  ........  .........
    Mr. Portman....................        X   ........  .........  .................  ........  ........  .........
    Mr. Hayes......................  ........  ........  .........  .................  ........  ........  .........
    Mr. Laughlin...................  ........  ........  .........  .................  ........  ........  .........
    Mr. English....................        X   ........  .........  .................  ........  ........  .........
    Mr. Ensign.....................        X   ........  .........  .................  ........  ........  .........
    Mr. Christensen................        X   ........  .........  .................  ........  ........  .........
    ----------------------------------------------------------------------------------------------------------------

        An amendment by Mr. Cardin to Title II to strike Section
    205 on advisory opinions was defeated by a roll call vote of 16
    yeas to 21 nays. The vote was as follows:

    ----------------------------------------------------------------------------------------------------------------
           Representatives            Yea       Nay     Present    Representatives      Yea         Nay     Present
    ----------------------------------------------------------------------------------------------------------------
    Mr. Archer...................  ........        X   .........  Mr. Gibbons.....           X   ........  .........
    Mr. Crane....................  ........        X   .........  Mr. Rangel......           X   ........  .........
    Mr. Thomas...................  ........        X   .........  Mr. Stark.......           X   ........  .........
    Mr. Shaw.....................  ........        X   .........  Mr. Jacobs......           X   ........  .........
    Mrs. Johnson.................  ........        X   .........  Mr. Ford........           X   ........  .........
    Mr. Bunning..................  ........        X   .........  Mr. Matsui......           X   ........  .........
    Mr. Houghton.................  ........        X   .........  Mrs. Kennelly...           X   ........  .........
    Mr. Herger...................  ........        X   .........  Mr. Coyne.......           X   ........  .........
    Mr. McCrery..................  ........        X   .........  Mr. Levin.......           X   ........  .........
    Mr. Hancock..................  ........        X   .........  Mr Cardin.......           X   ........  .........
    Mr. Camp.....................  ........        X   .........  Mr. McDermott...           X   ........  .........
    Mr. Ramstad..................  ........        X   .........  Mr. Kleczka.....           X   ........  .........
    Mr. Zimmer...................  ........        X   .........  Mr. Lewis.......           X   ........  .........
    Mr. Nussle...................  ........        X   .........  Mr. Payne.......           X   ........  .........
    Mr. Johnson..................  ........        X   .........  Mr. Neal........           X   ........  .........
    Ms. Dunn.....................  ........        X   .........  Mr. McNulty.....           X   ........  .........
    Mr. Collins..................  ........        X   .........  ................  ...........  ........  .........
    Mr. Portman..................  ........        X   .........  ................  ...........  ........  .........
    Mr. Hayes....................  ........  ........  .........  ................  ...........  ........  .........
    Mr. Laughlin.................  ........  ........  .........  ................  ...........  ........  .........
    Mr. English..................  ........        X   .........  ................  ...........  ........  .........
    Mr. Ensign...................  ........        X   .........  ................  ...........  ........  .........
    Mr. Christensen..............  ........        X   .........  ................  ...........  ........  .........
    ----------------------------------------------------------------------------------------------------------------

        An amendment by Mr. Levin to Title II to strike Section 232
    on the clarification of level of intent required for imposition
    of sanctions was defeated by a roll call vote of 15 yeas to 21
    nays. The vote was as follows:

    ----------------------------------------------------------------------------------------------------------------
            Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present
    ----------------------------------------------------------------------------------------------------------------
    Mr. Archer.....................  ........        X   .........  Mr. Gibbons......        X   ........  .........
    Mr. Crane......................  ........        X   .........  Mr. Rangel.......        X   ........  .........
    Mr. Thomas.....................  ........        X   .........  Mr. Stark........        X   ........  .........
    Mr. Shaw.......................  ........        X   .........  Mr. Jacobs.......  ........  ........  .........
    Mrs. Johnson...................  ........        X   .........  Mr. Ford.........        X   ........  .........
    Mr. Bunning....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
    Mr. Houghton...................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
    Mr. Herger.....................  ........        X   .........  Mr. Coyne........        X   ........  .........
    Mr. McCrery....................  ........        X   .........  Mr. Levin........        X   ........  .........
    Mr. Hancock....................  ........        X   .........  Mr. Cardin.......        X   ........  .........
    Mr. Camp.......................  ........        X   .........  Mr. McDermott....        X   ........  .........
    Mr. Ramstad....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
    Mr. Zimmer.....................  ........        X   .........  Mr. Lewis........        X   ........  .........
    Mr. Nussle.....................  ........        X   .........  Mr. Payne........        X   ........  .........
    Mr. Johnson....................  ........        X   .........  Mr. Neal.........        X   ........  .........
    Ms. Dunn.......................  ........        X   .........  Mr. McNulty......        X   ........  .........
    Mr. Collins....................  ........        X   .........
    Mr. Portman....................  ........        X   .........
    Mr. Hayes......................  ........  ........  .........
    Mr. Laughlin...................  ........  ........  .........
    Mr. English....................  ........        X   .........
    Mr. Ensign.....................  ........        X   .........
    Mr. Christensen................  ........        X   .........
    ----------------------------------------------------------------------------------------------------------------

        A substitute amendment to the Chairman's amendment, in the
    nature of a substitute, by Mr. Gibbons was defeated by a roll
    call vote of 15 yeas to 21 nays. The vote was as follows:

    ----------------------------------------------------------------------------------------------------------------
            Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present
    ----------------------------------------------------------------------------------------------------------------
    Mr. Archer.....................  ........        X   .........  Mr. Gibbons......        X   ........  .........
    Mr. Crane......................  ........        X   .........  Mr. Rangel.......  ........  ........  .........
    Mr. Thomas.....................  ........        X   .........  Mr. Stark........        X   ........  .........
    Mr. Shaw.......................  ........        X   .........  Mr. Jacobs.......        X   ........  .........
    Mrs. Johnson...................  ........        X   .........  Mr. Ford.........        X   ........  .........
    Mr. Bunning....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
    Mr. Houghton...................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
    Mr. Herger.....................  ........        X   .........  Mr. Coyne........        X   ........  .........
    Mr. McCrery....................  ........        X   .........  Mr. Levin........        X   ........  .........
    Mr. Hancock....................  ........        X   .........  Mr. Cardin.......        X   ........  .........
    Mr. Camp.......................  ........        X   .........  Mr. McDermott....        X   ........  .........
    Mr. Ramstad....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
    Mr. Zimmer.....................  ........        X   .........  Mr. Lewis........        X   ........  .........
    Mr. Nussle.....................  ........        X   .........  Mr. Payne........        X   ........  .........
    Mr. Johnson....................  ........        X   .........  Mr. Neal.........        X   ........  .........
    Ms. Dunn.......................  ........        X   .........  Mr. McNulty......        X   ........  .........
    Mr. Collins....................  ........        X   .........
    Mr. Portman....................  ........        X   .........
    Mr. Hayes......................  ........  ........  .........
    Mr. Laughlin...................  ........  ........  .........
    Mr. English....................  ........        X   .........
    Mr. Ensign.....................  ........        X   .........
    Mr. Christensen................  ........        X   .........
    ----------------------------------------------------------------------------------------------------------------

                         IV. BUDGET EFFECTS OF THE BILL

                   A. Committee Estimate of Budgetary Effects

        In compliance with clause 7(a) of Rule XIII of the Rules of
    the House of Representatives, the following statement is made
    concerning the effects on the budget of the bill, H.R. 3103, as
    reported.
        The bill, as amended, is estimated to have the following
    effects on the budget for fiscal years 1996-2002:

                          ESTIMATED REVENUE EFFECTS OF PROVISIONS CONTAINED IN H.R. 3103 AS APPROVED BY THE COMMITTEE ON WAYS AND MEANS
                                                                      [Millions of Dollars]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    Fiscal years
                                                      ------------------------------------------------------------------------------------------------------
               Provision                Effective                                                                                     1996 to      1996 to
                                                          1996       1997       1998       1999       2000       2001       2002        2000         2002
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    1. COBRA tax penalties........  1/1/98...........
    (8)Negligible Revenue Effect
    2. Medical savings accounts:    tyba 12/31/96....  .........       -134       -246       -290       -340       -369       -399       -1,010       -1,778
     (a) maximum contribution
     limit ($2,000 single and
     $4,000 family); (b) tax-free
     build up of earnings; (c)
     definition of qualified
     medical expenses; (d) post-
     death distribution rules; and
     (e) clarification relating to
     capitalization of policy
     acquisition costs.
    3. Increase the self-employed   tyba 12/31/97....  .........  .........        -36       -153       -250       -272       -347         -439       -1,058
     health insurance deduction
     (35% in 1998; 40% in 1999
     through 2001; 45% in 2002;
     and 50% in 2003 and
     thereafter.
    4. Long-term care provisions:   tyba 12/13/96....  .........        -35       -227       -266       -305       -341       -377         -833       -1,551
     (a) deduction for long-term
     care premiums; (b) exclude
     employer contributions for
     long-term care insurance from
     gross income; and (c) allow
     long-term care premiums to be
     deducted subject to the self-
     employed health care rules.
    5. Deduction for long-term      tyba 12/31/97....  .........  .........        -78       -265       -291       -326       -363         -634       -1,323
     care expenses.
    6. Tax treatment of             tyba 12/31/96....  .........        -10       -107       -166       -214       -265       -316         -497       -1,077
     accelerated death benefits
     under life insurance
     contracts.
    7. Exemption from income tax    tyba 12/31/96....  .........         -1         -1         -1         -2         -2         -2           -5           -8
     for State-sponsored
     organizations providing
     health coverage for high-risk
     individuals.
    8. Health insurance             tyea 12/31/96....  .........         -1         -1         -1         -1         -1         -1           -4           -7
     organizations eligible for
     benefits of section 833.
    9. Repeal bad debt reserve      tyba 12/31/95....         63         95        216        280        277        272        260          931        1,462
     deduction for thrift
     institutions, with
     residential loan test for
     1996 and 1997.
    10. Earned income credit
     (``EIC'') provisions:
        a. Require Social Security
         numbers for primary and
         secondary taxpayers,
         treat omission of a
         correct Social Security
         number as a math error:.
            Revenue...............  tyba 12/31/95....          1         24         24         25         25         25         26           99          150
            Outlay reduction......  tyba 12/31/95....         10        195        203        205        210        212        217          823        1,251
        b. Treat omission of the
         proper self-employment
         tax by an EIC recipient
         with self-employment
         income as a math error:.
            Revenue...............  tyba 12/31/95....        \1\          4          4          5          5          5          5           18           28
            Outlay reduction......  tyba 12/31/95....          1         28         30         31         31         33         35          122          190
    11. Expatriation tax            2/6/95...........         52         97        146        199        254        289        304          748        1,341
     provisions.
                                                      ------------------------------------------------------------------------------------------------------
        TOTAL REVENUE EFFECT......  .................        127        262        -73       -397       -600       -740       -958         -681       -2,380
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Note: Details may not add to totals due to rounding.
    Legend for ``Effective'' column: tyba=taxable years beginning after; tyea=taxable years ending after.
    \1\ Gain of less than $500,000.

        B. Statement Regarding New Budget Authority and Tax Expenditures

        In compliance with subdivision (B) of clause 2(l)(3) of
    Rule XI of the Rules of the House of Representatives, the
    Committee makes the following statements concerning budget
    authority and tax expenditures.

    Budget authority

        The Committee states that Titles I and II of the bill
    (relating to availability and portability of health insurance
    coverage, prevention of health care fraud and abuse, and
    administrative simplification) are estimated to reduce budget
    authority (outlays) by $2.2 billion over the fiscal year period
    1996-2002. (See Part IV.C., above). Also, the outlay reduction
    portions of the earned income credit changes in Title IV
    involve reduced budget authority (reduction in outlays).

    Tax expenditures

        The Committee states that the revenue-reducing provisions
    of Title III involve increased tax expenditures. (For amounts
    for fiscal years 1996-2002, see table in Part IV.A., above.)
    The deduction for health insurance expenses of self-employed
    individuals involves an increase in an existing tax
    expenditure, while the other revenue-reducing provisions
    involve new tax expenditures (except for the COBRA tax penalty
    provision, which is not a tax expenditure provision).
        The revenue offset provisions (in Title IV) relating to bad
    debt deductions of thrift institutions and the earned income
    credit (revenue-increase portion) involve reductions in
    existing tax expenditures. The expatriation tax provisions (in
    Title IV) do not affect tax expenditures during the fiscal year
    1996-2002 period.

          C. Cost Estimate Prepared by the Congressional Budget Office

        In compliance with subdivision (C) of clause 2(l)(3) of
    Rule XI of the Rules of the House of Representatives, requiring
    a cost estimate prepared by the Congressional Budget Office
    (CBO), the following statement by CBO is provided.
                                         U.S. Congress,
                                   Congressional Budget Office,
                                        Washington, DC, March 25, 1996.
    Hon. Bill Archer,
    Chairman, Committee on Ways and Means
    Washington, D.C. 20515
        Dear Mr. Chairman: The Congressional Budget Office (CBO)
    has reviewed H.R. 3103, the Health Coverage Availability and
    Affordability Act of 1996, as ordered reported by the House
    Committee on Ways and Means on March 19, 1996. Enclosed are
    CBO's federal cost estimate and estimates of the costs of
    intergovernmental and private sector mandates.
        If you wish further details on these estimates, we will be
    pleased to provide them. The CBO staff contacts are identified
    in the separate estimates.
                Sincerely,
                                               June E. O'Neill,
                                                              Director.

               Congressional Budget Office Federal Cost Estimate

        1. Bill number: H.R. 3103.
        2. Bill title: Health Coverage Availability and
    Affordability Act of 1996.
        3. Bill status: As ordered reported by the House Committee
    Ways and Means on March 19, 1996.
        4. Bill purpose: Title I would make it easier for people
    who change jobs to maintain health insurance coverage by
    limiting exclusions for preexisting conditions and increasing
    portability of coverage.
        Title II would prevent health care fraud and abuse and
    would simplify the administration of health insurance.
        Titles III and IV would change the tax treatment of Medical
    Savings Accounts (MSAs), increase the deductibility of health
    insurance costs of self-employed individuals, and make other
    changes to the tax code.
        5. Estimated cost to the Federal Government: CBO and the
    Joint Committee on Taxation (JCT) estimate that H.R. 3103 would
    increase the federal deficit by about $300 million over seven
    years, with outlays falling by $2.2 billion and revenues
    falling by $2.5 billion over the period (see the attached
    table).
        CBO estimates that title I, concerning portability of group
    health coverage, would increase private group health premiums
    by a small amount, resulting in a slight increase in employer-
    paid premiums. A portion of this increase would be passed on to
    employees as reduced wages and salaries. Federal income and
    payroll taxes, therefore, would be reduced slightly as well.
    CBO and JCT estimate that revenues would be reduced by $0.2
    billion over seven years as a result of this section.
        CBO estimates that title II, concerning the prevention of
    fraud and abuse and other matters, would reduce Federal outlays
    for Medicare by approximately $2.2 billion over seven years.
        JCT estimates that the tax changes in titles III and IV
    would reduce revenues by $2.4 billion over seven years. The
    provision to increase tax deductions for MSAs would reduce
    revenues by $1,778 million; the provision to increase the
    deduction for health costs of the self-employed would reduce
    revenues by $1,058 million; and other tax changes would
    increase revenues by $457 million over the period.
        6. Basis of the estimate:

                      title i, group insurance portability

        H.R. 3103 addresses health insurance purchased in large and
    small groups--usually by employers and employees. The bill does
    not regulate individually-purchased insurance or state and
    local government employers.
        The bill would create uniform national standards to govern
    the portability of private group health insurance policies. For
    example, these standards would allow workers with employment-
    based policies to continue their coverage more easily when
    changing or leaving jobs. Because private insurance plans often
    require a waiting period before new employees become eligible
    for coverage, especially for those with preexisting medical
    conditions, workers with chronic conditions or other potential
    health risks may face gaps in their coverage when they change
    jobs. Alternatively, such workers may be hesitant to change
    jobs because they fear the temporary loss of coverage--a
    situation know as job-lock.
        H.R. 3103 would reduce the effective length of exclusions
    for preexisting conditions by crediting enrollees for
    continuous coverage by a previous insurer. Plans would be
    prohibited from denying coverage based on an employee's health
    status. The bill would allow workers to change their enrollment
    status under certain conditions without being subject to
    penalties for late enrollment. To the extent that states have
    not already implemented similar rules, these changes would
    clarify the insurance situation for many people.
        Because the bill would not regulate the premiums that plans
    could charge, the number of people covered by health insurance
    and the premiums that they pay would continue to be influenced
    primarily by market forces. Although this provision would make
    insurance more portable for some people, it would not
    dramatically increase the availability of insurance in general.

    Budgetary impact

        Title I could affect the federal budget in two ways. First,
    if the bill changed the amount of employer-paid health
    premiums, total federal tax revenues could change. For example,
    if the total amount employers paid for premiums fell, cash
    wages would rise, thereby increasing income and payroll tax
    revenues. Second, if the bill caused people insured by
    government health programs to obtain private coverage, then
    federal outlays for those programs could change.
                Impact on federal revenues
        According to the General Accounting Office (GAO), 38 states
    have enacted legislation to improve the portability and
    renewability of health plans among small employers. State laws
    do not apply to employees of firms with self-funded insurance
    plans, although large employer plans--those most likely to
    self-insure--generally have fewer long exclusions for
    preexisting conditions than smaller firms. Health maintenance
    organizations and other health plans that use organized
    networks of health providers use few exclusions for preexisting
    conditions within their networks. Most group insurance is now
    provided through these managed care networks. The new standards
    for insurance portability created by H.R. 3103 would increase
    the price of health insurance for group plans, with a
    corresponding reduction in coverage. Because many insurance
    reforms have already been implemented by the states, however,
    and because most health plans tend not to use long exclusions
    for preexisting conditions, these changes would be relatively
    small.
        CBO estimates that the portability requirements of H.R.
    3103 would initially increase group premiums by approximately
    $300 million a year, beginning in 1998. This increase would
    consist of $200 million from shortening exclusions for
    preexisting conditions to 12 months and $100 from the crediting
    of coverage in a previous group. Employers and employees would
    react to these costs by reducing health benefits or other
    fringe benefits or by lowering cash wages. CBO assumes that
    cash wages would fall by about $100 million, one-third of the
    initial $300 million cost increase. JCT estimates that income
    and payroll tax revenues would fall by about $35 million a year
    and by $164 million over seven years.
                Impact on federal outlays
        CBO assumes that federal outlays for Medicaid would not
    change because any persons eligible for free coverage from
    Medicaid under current law would still seek Medicaid coverage
    if H.R. 3103 was enacted. CBO also estimates that the bill
    would cause no appreciable changes to federal outlays for
    Medicare, Federal Employees Health Benefits,or other government
    programs.

      title ii, limiting fraud and abuse and administrative simplification

    Limiting fraud and abuse

        The proposal includes several proposals to limit fraud and
    abuse in Medicare.
                Payment safeguards and enforcement
        The bill would establish mandatory appropriations for
    Medicare payment safeguards and for the anti-fraud activities
    of the Inspector General (IG) of the Department of Health and
    Human Services (HHS) and the Federal Bureau of Investigation
    (FBI). It would also increase the resources devoted to these
    two activities. After a few years, reduced Medicare spending
    and additional fines and penalties would more than offset the
    added administrative costs. Over the 1996-2002 period, the net
    savings would total $2,900 million.
        CBO's estimate attributes savings only to the projected
    increase in resources, not to the base level itself. The
    estimate assumes that the Health Care Financing Administration
    (HCFA), the IG, and the FBI could productively use only limited
    additional resources each year, and that additional resources
    would be subject to diminishing marginal returns. Based on
    studies by the General Accounting Office and HCFA, the estimate
    assumes that an additional dollar devoted to HCFA payment
    safeguard activities would at first return eight dollars in
    lower benefit payments. Data from the IG indicate that an
    additional dollar devoted to its enforcement efforts would
    initially return seven dollars in recoveries. The estimate
    assumes that the marginal benefit-to-cost ratio in each case
    would decline to approximately four-to-one by 2002. Data on
    recoveries from the FBI's Health Care Fraud Unit indicate an
    initial nine-to-one ratio of recoveries to cost. As with HHS,
    the estimate assumes that the ratio at the margin would decay
    over time to seven-to-one by 2002. If this proposal is adopted,
    CBO expects that the savings would be documented and subject to
    an independent audit. These documented savings would then be
    used to make any estimates of new proposals and provide a basis
    for updating projections of spending under current law.
                Additional health care fraud and abuse guidance
        The bill would require the Secretary to create a program
    enabling providers of health care to seek advisory opinions
    regarding the application of health care fraud and abuse
    sanctions. According to the IG, such a provision would
    substantially hinder its ability to prosecute fraud and abuse
    cases successfully. It would also require the IG to hire
    additional legal staff. Based on data provided by the IG, CBO
    estimates that this provision would cost $390 million in lost
    recoveries and additional staff over the 1996-2002 period.
                New and increased civil monetary penalties
        The bill would increase current law civil monetary
    penalties for fraudulent claims for reimbursement under
    Medicare and Medicaid and apply these penalties to all federal
    health care programs. New civil monetary penalties would apply
    to individuals who retained control of a provider entity while
    they were excluded from Medicare or a State health care
    program, coded billed procedures incorrectly, prescribed
    services that were not medically necessary, offered kickbacks
    for using particular providers, or falsely certified home
    health services, and to Medicare health maintenance
    organizations (HMOs) that failed to fulfill their contracts.
    Based on an analysis of the recoveries generated by the IG's
    current caseload and expectations of the impact of the new
    penalties, CBO estimates that these provisions would generate
    $320 million in savings over the 1996-2002 period.
                Additional exclusion authorities
        The bill would require the Secretary of HHS to exclude
    providers from program participation for three years following
    felony convictions for fraud, obstructing an investigation, and
    controlled substance violations. Providers would be excluded
    for one year following the provision of substandard or
    unnecessary services and for the term of a provider's loss of
    license for violations of state law. The Secretary could also
    exclude individuals in control of a sanctioned entity. CBO
    estimates that these provisions would result in $190 million in
    fraud avoided over six years. The estimate is based on the IG's
    data on program savings resulting from provider convictions and
    expectations for additional successful actions.
                Criminal provisions
        The bill would make certain offenses involving health care
    fraud federal crimes. The bill would also grant the Attorney
    General the authority to subpoena information relating to
    suspected health care fraud. Based on conversations with
    officials of the Department of Justice, CBO assumes that these
    provisions would modestly increase successful prosecutions and
    result in recovery of $70 million in fraudulent Medicare
    payments over the next seven years.
        In addition, the bill would create an additional exception
    to anti-kickback penalties for discounting and managed care
    arrangements. Based on recoveries data and conversations with
    the IG, CBO estimates that this would result in $580 million
    lost in anti-kickback recoveries.
                Other items
        The bill would require the Secretary of HHS to establish a
    fraud and abuse data collection program to report the final
    settlements from adverse actions against health care providers,
    suppliers, or practitioners. The bill would also require the
    Secretary to establish a hotline and provide incentives for
    beneficiaries to report suspected fraud and to provide
    suggestions to improve the Medicare program. Based on an
    examination of a similar program operated by the Department of
    Defense, CBO estimates that this program would produce a net
    benefit of $30 million from additional recoveries over six
    years.

    Administrative simplification

        This provision would require the Secretary to adopt uniform
    standards and data elements for the electronic transmission of
    health information and claims. The Secretary would adopt
    standards developed by standard-setting organizations, or a
    modification of these standards, with the goal of reducing
    administrative costs. A Health Information Advisory Committee
    would assist the Secretary with this task and would make
    recommendations regarding standards and electronic data
    exchange. The proposal would also require the Secretary to take
    measures to protect the privacy and security of electronically
    transmitted health information. CBO estimates that this
    provision would cost the federal government $60 million over
    seven years. Because this spending would require appropriations
    action, these costs are not included in the attached table.
        These new standards would apply to health plans, claims
    clearinghouses, and providers transmitting health information
    electronically, and would supersede existing state laws and
    regulations. Large health plans, clearinghouses and providers
    must conform to these standards within 24 months of their
    adoption, while small plans would have 36 months to comply.
    Penalties would be levied against those who violated the
    standards or improperly used or distributed individually
    identifiable health information. However, these penalties would
    be waived if violators demonstrated reasonable cause of
    diligence.
                Laboratory services
        The provision relating to laboratory services would cost
    the federal government approximately $330 million over seven
    years. This provision would mandate that, within a year of the
    enactment of H.R. 3063, the Secretary develop standardized
    coverage, payment, and administrative policies for clinical
    laboratory tests reimbursed under Medicare Part B. The
    Secretary would select medical directors from various carriers
    to develop recommendations regarding these policies, in
    consultation with affected groups. The purpose of these
    recommendations would be to simplify the processes of reporting
    beneficiary information, filing claims, and record keeping.
        The bill would also excuse labs from documenting the
    medical necessity of tests unless reviews indicate aberrant
    utilization patterns. In fiscal year 1995, 17 Medicare carriers
    saved $41 million through localized policies requiring labs to
    document medical necessity. Therefore, repealing the
    requirement would cost a similar amount. These costs would not
    accrue immediately because the bill prohibits intermediaries
    and carriers from implementing new requirements for claims
    submission for lab tests pending the implementation of the
    uniform policies retroactive to January 1996. Since most
    carriers' local policies regarding the documentation of medical
    necessity were established by 1995, these policies could remain
    in place until the uniform policies were fully implemented.
    Thus, this proposal would cost the federal government about
    $240 million over seven years.
        An independent lab would also be allowed to select a single
    carrier to process its Medicare claims under this proposal;
    currently, labs use multiple carriers to process claims. This
    provision would increase costs to the federal government for
    independent lab services, although the magnitude of these costs
    is difficult to estimate. If independent labs were permitted to
    select a single carrier, carriers would face incentives to
    adopt more lenient policies to attract a higher volume of
    business. Also, the carrier processing lab test claims for a
    beneficiary might not be the same carrier handling other claims
    for that person. This fragmentation could make it more
    difficult for the Health Care Financing Administration to
    determine the medical necessity of tests performed by
    independent labs. If this provision were to increase Medicare
    costs for independent lab services by one-half of one percent
    annually, it would cost the federal government an additional
    $90 million over seven years.

                       Titles III and IV, Tax Provisions

    Medical savings accounts (MSAs)

        Under the legislation, individuals covered by high-
    deductible health insurance plans could make deductible
    contributions to MSAs, or their employers could make
    contributions on their behalf that would be excluded from
    earnings for income and payroll tax purposes. Investment
    earnings of amounts in the MSA would also be excluded from
    taxable income in the year earned. Withdrawals from MSAs for
    medical expenses would be tax-free, but withdrawals for other
    purposes would be included in taxable income and subject to an
    additional tax of 10 percent. The additional tax would be
    waived if the account holder were over age 59\1/2\, disabled,
    or had died.
        High-deductible insurance would be defined as insurance
    having a deductible of at least $1,500 per person covered, and
    a deductible of at least $3,000 per family. Contributions would
    be limited to the lesser of the deductible of the insurance
    plan or $2,000 for individual coverage and $4,000 for family
    coverage. To be eligible for an MSA, individuals and families
    could not have other insurance policies that covered the
    deductible of the high-deductible policy. Allowable medical
    expenses would be those permitted under the itemized deduction
    for medical expenses, except for certain insurance premiums.
    Expenses for long-term care would also qualify as medical
    expenses.
        The proposal would be effective for taxable years beginning
    after December 31, 1996, and is projected by the Joint
    Committee on Taxation to reduce income tax revenues by $1.778
    billion in 1997-2002.

    Deduction for health insurance expenses of self-employed individuals

        Under current law, self-employed individuals are allowed to
    deduct 30 percent of the cost of health insurance premiums they
    pay for coverage of themselves, their spouse, and dependents,
    as long as they are not eligible for insurance provided by an
    employer. The proposal would increase the fraction deductible
    to 50 percent in the following steps: 35 percent for 1998; 40
    percent for 1999, 2000, and 2001; 45 percent for 2002; and 50
    percent for 2003 and years thereafter.
        The Joint Committee on Taxation estimates that this
    proposal would reduce revenue by $1.058 billion between fiscal
    years 1998 and 2002.

    Other tax provisions

        The Joint Committee on Taxation estimates that the combined
    effect of other provisions in Titles III and IV of H.R. 3103
    would increase revenues by $457 million over seven years.
        7. Pay-as-you-go considerations: The Balanced Budget and
    Emergency Deficit Control Act of 1985 sets up pay-as-you-go
    procedures for legislation affecting direct spending or
    receipts through 1998. The bill would have the following pay-
    as-you-go impact:

    ----------------------------------------------------------------------------------------------------------------
                                                                           1996            1997            1998
    ----------------------------------------------------------------------------------------------------------------
    Change in Outlays...............................................               0             340             -40
    Change in Revenues..............................................             127             262             -97
    ----------------------------------------------------------------------------------------------------------------

        8. Previous CBO estimate: CBO has prepared cost estimates
    for several health care reform bills--S. 1028 as reported by
    the Senate Committee on Labor and Human Resources, H.R. 995 as
    reported by the House Committee on Economic and Educational
    Opportunities, H.R. 3070 as reported by the House Committee on
    Commerce, and H.R. 3103 as reported by the House Committee on
    Ways and Means. All four bills contain provisions restricting
    preexisting conditions and increasing portability of health
    insurance. In addition, H.R. 3070 and H.R. 3103 contain
    provisions designed to reduce fraud and abuse in Medicare and
    simplify the administration of health insurance.
        9. Estimate prepared by: Jeff Lemieux (insurance reform),
    Anne Hunt (administrative simplification), Cynthia Dudzinski
    (fraud and abuse).
        10. Estimate approved by: Paul N. Van de Water, Assistant
    Director for Budget Analysis.

                                        ESTIMATED BUDGETARY EFFECTS OF H.R. 3103
                                        [By fiscal year, in billions of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                               1996     1997     1998     1999     2000     2001     2002     Total
    ----------------------------------------------------------------------------------------------------------------
                                                     DIRECT SPENDING
    Title I................................        0        0        0        0        0        0        0         0
    Title II:
        Fraud and Abuse:
            A. Recoveries from Payment
             Safeguards and Law Enforcement        0      330     -110     -490     -780     -890     -960    -2,900
            B. Cost of Additional Health
             Care Fraud and Abuse Guidance.        0       60       60       60       70       70       70       390
            C. New and Increased Civil
             Monetary Penalties............        0      -30      -50      -50      -60      -60      -70      -320
            D. Additional Exclusion
             Authorities...................        0      -10      -10      -40      -40      -50      -50      -190
            E. Criminal Provisions.........        0      -10       10       40       90      190      190       510
            F. Other Items.................        0    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       -30
                                            ------------------------------------------------------------------------
              Total, Fraud and Abuse.......        0      330     -100     -480     -730     -740     -810    -2,540
                                            ========================================================================
        Administrative Simplification:
            A. Administrative
             Simplification Standards \2\..        0        0        0        0        0        0        0         0
            B. Administrative
             Simplification for Labs.......        0       10       60       60       60       70       70       330
                                            ------------------------------------------------------------------------
              Total, Administrative
               Simplification..............        0       10       60       60       60       70       70       330
                                            ========================================================================
              Total, Title II..............        0      340      -40     -420     -670     -670     -740    -2,200
    Titles III and IV......................        0        0        0        0        0        0        0         0
                                            ------------------------------------------------------------------------
              Total, Outlays...............        0      340      -40     -420     -670     -670     -740    -2,200
                                            ========================================================================
                                                        REVENUES
    Title I................................        0        0      -24      -35      -35      -35      -35      -164
    Title II...............................        0        0        0        0        0        0        0         0
    Titles III and IV:
        A. Medical Savings Accounts........        0     -134     -246     -290     -340     -369     -399    -1,778
        B. Deduction for the Self-Employed.        0        0      -36     -153     -250     -272     -347    -1,058
        C. Other...........................      127      396      209       46      -10      -99     -212       457
                                            ------------------------------------------------------------------------
              Total, Titles III and IV.....      127      262      -73     -397     -600     -740     -958    -2,379
                                            ------------------------------------------------------------------------
              Total, Revenues..............      127      262      -97     -432     -635     -775     -993    -2,543
                                            ========================================================================
                                                         DEFICIT
              Total........................     -127       78       57       12      -35      105      253       343
    ----------------------------------------------------------------------------------------------------------------
    \1\ Savings or cost of less than $10 million.
    \2\ Costs of about $10 million per year for this provision would be discretionary spending.

    Note: Estimate based on CBO December 1995 baseline assumptions.

      Congressional Budget Office Estimate of Costs of Intergovernmental
                                    Mandates

        1. Bill number: H.R. 3103.
        2. Bill title: Health Coverage Availability and
    Affordability Act of 1996.
        3. Bill status: As ordered reported by the House Committee
    on Ways and Means on March 19, 1996.
        4. Bill purpose: Title I would make it easier for people
    who change jobs to maintain adequate coverage by limiting
    preexisting condition exclusions and increasing portability of
    coverage. State and local governments could elect to be exempt
    from these requirements.
        Title II would require the Secretary of Health and Human
    Services and the Attorney General to establish a program to
    control health care fraud. The program would include a national
    data base of criminal actions, civil actions, and license
    revocations against health care providers, practitioners, and
    suppliers. State and local governments would be required to
    provide this information for the data base.
        Title II would also require the Secretary of Health and
    Human Services to establish national standards for health care
    transactions, such as claims and eligibility, that are
    transmitted electronically. Health care plans would be required
    to have the capability of receiving and transmitting this
    information three and one-half years after enactment.
        Title III and Title IV would make numerous changes to
    federal tax law, many of which deal with health care.
        5. Intergovernmental mandates contained in bill: H.R. 3103
    contains various mandates, two of which have budgetary
    implications. First, state and local agencies would be required
    to report criminal and civil actions and license revocations
    against health care providers, practitioners, and suppliers.
    Second, state and local governments, as providers of health
    insurance or health care, would have to transmit health care
    transactions under new national standards.
        6. Estimated Direct Costs to State, Local, and Tribal
    Governments:
        (a) Is the $50 Million Threshold Exceeded? No
        (b) Total Direct Costs of Mandates: Not significant.
        (c) Estimate of Necessary Budget Authority: None
        7. Basis of estimate:
        Reporting requirements. State and local agencies would be
    required to report criminal and civil actions and license
    revocations against health care providers, practitioners, and
    suppliers. Based on the information from the National
    Association of Attorneys General and the National Health Care
    Anti-Fraud Association, CBO expects that this requirement would
    not impose a significant administrative burden on state and
    local governments. Most health care fraud cases carried out by
    states deal with Medicaid. Under current law, states are
    already required to report criminal and civil actions relating
    to Medicaid to the Department of Health and Human Services.
        National standards. The bill would require state and local
    governments, as providers of health insurance to their
    employees, to have the capability to receive and transmit
    transactions electronically under the national standards. Such
    transactions include enrollment, eligibility, and claims.
    Because the Secretary of Health and Human services would be
    required to adopt standards only if they reduce the
    administrative costs of providing and paying for health care,
    this mandate should save states and local governments money in
    the long run. Some state and local governments would face one-
    time costs as they purchase computer hardware and software and
    reconfigure their computer systems. Because many of these
    health plans already have the hardware to transmit information
    electronically and many more will acquire the hardware over the
    next the three and one-half years under current law, however,
    additional costs would be negligible.
        The national standards would also apply to state and local
    government agencies that provide health care, for example,
    through public hospitals or clinics, and that transmit any
    health information electronically. CBO estimates that the
    additional costs faced by these providers would be negligible.
        8. Appropriation or other Federal financial assistance
    provided in bill to cover mandate costs: None
        9. Other impacts on State, local, and tribal governments:
        National standards. The capability to transmit health
    information electronically would also apply to the Medicaid
    program. States are already in the forefront in administering
    the Medicaid program electronically; the only costs--which
    should not be significant--would involve bringing the software
    and computer systems for the Medicaid programs into compliance
    with the new standards. Moreover, under Public Law 104-4
    increases in requirements for large entitlement programs are
    not considered mandates if the states have the programmatic
    flexibility to reduce their financial responsibilities. States
    have the ability to reduce their coverage of optional services
    or benefits.
        Preexisting condition and portability. H.R. 3103 also would
    require state and local governments, as providers of health
    coverage to their employees, to comply with the preexisting
    condition and portability requirements unless they specifically
    opt out in a form and manner determined by the Secretary of
    Health and Human Services. If state and local governments
    decide to comply with these requirements, they would face an
    increase in health care costs of less than $50 million, a 0.1
    percent increase in such costs. CBO estimates that state and
    local governments spend about $40 billion annually on health
    insurance for their employees. CBO assumes that state and local
    governments would pass these costs onto their employees in the
    form of adjustments to pay or other benefits.
        Enforcement. States would have the option of enforcing the
    requirements of H.R. 3103 on issuers of group health insurance.
    If a state decides not to enforce the new requirements, the
    federal government would do so. States currently regulate the
    group insurance market, and CBO does not expect any state to
    give up this authority and responsibility. States would thus
    incur additional costs as they enforce the new requirements. In
    1995, according to the National Association of Insurance
    Commissioners, states spent $650 million regulating all form of
    insurance (health and others). CBO expects that H.R. 3103 would
    increase these costs only marginally.
        Other impacts. H.R. 3103 would also require state and local
    governments to pay a fee if they want to access information
    from the national data base of health care fraud; these costs
    would not be significant. In addition, to the extent that the
    private sector mandates result in an increase in health care
    premiums collected by insurance companies and health
    maintenance organizations, state premium taxes would increase.
    Such increases would be offset by lower income tax revenues if
    higher premiums are passed onto employees in the form of lower
    wages. The net effect of the premium tax increase and income
    tax decrease should be no more than a few million dollars.
    Finally, to the extent that state and local governments
    piggyback their income tax systems on the federal tax system,
    they would face changes in revenue as result of the changes to
    federal tax law contained in this bill. CBO is unable to
    determine the net effect of these changes.
        10. Previous CBO estimate: CBO has prepared cost estimates
    of various other health care reform bills--S. 1028 as reported
    by the Senate Committee on Labor and Human Resources on October
    12, 1995, H.R. 995 as ordered reported by the House Committee
    on Economic and Educational Opportunities on March 6, 1995, and
    H.R. 3070 as ordered reported by the House Committee on
    Commerce on March 20, 1996. All three bills have preexisting
    condition and portability provisions similar to those in H.R.
    3103, but only under S. 1028 do these provisions constitute a
    mandate on state and local governments. The House bills allow
    state and local governments to opt out of these requirements.
    All for bills differ with respect to other provisions, but H.R.
    3103 and H.R. 3070 would impose similar data reporting and
    electronic transmission requirements on state and local
    governments.
        11. Estimate prepared by: John Patterson.
        12. Estimate approved by: Paul N. Van de Water, Assistant
    Director for Budget Analysis.

        Congressional Budget Office Estimate of Costs of Private Sector
                                    Mandates

        1. Bill number: H.R. 3103.
        2. Bill title: The Health Coverage Availability and
    Affordability Act of 1996.
        3. Bill status: As ordered reported by the House Committee
    on Ways and Means on March 19, 1996.
        4. Bill purpose: The purpose of H.R. 3103 is to improve
    portability of health insurance coverage, to simplify
    administration of health insurance, to reduce waste, fraud, and
    abuse in health insurance and health care delivery, to promote
    the use of medical savings accounts, and to improve access to
    long-term care coverage. It would also modify certain
    provisions of the Internal Revenue Code.
        5. Private sector mandates contained in the bill: H.R. 3103
    contains several private sector mandates as defined in P.L.
    104-4. Provisions in Title I would affect the private group and
    employer-sponsored health insurance industry. They would apply
    both to sellers of group insurance and to employee health
    benefit plans that are ``self-insured'' by firms.
        The bill would limit the use of pre-existing condition
    exclusions--clauses that exempt the plan from paying for
    expenses related to a medical condition that already existed
    when an enrollee first joined the plan. Under its provisions,
    twelve months would be the maximum allowable duration of a pre-
    existing condition exclusion (eighteen months for employees who
    did not join the plan at their first enrollment opportunity).
    In addition, month-for-month credit against that exclusion
    would have to be given to enrollees for continuous coverage (as
    specified in the bill) that they had prior to joining a new
    plan. A break in coverage of 60 days or less would not be
    counted against the prior continuous coverage requirement.
    (Insurers and health benefit plans would be required to
    disclose information that would facilitate the administration
    of those ``portability'' requirements.) In addition, pregnancy
    could not be excluded by a pre-existing condition clause, and
    children who were signed up with a plan within thirty days of
    birth could not have any existing conditions excluded from
    coverage. (A similar provision applies for adopted children.)
        Health maintenance organizations would be allowed to use
    ``eligibility'' periods, in which new enrollees would not be
    eligible for benefits, as long as pre-existing condition
    exclusions were not part of the plan. However, such periods
    would be limited to sixty days (ninety days for late
    enrollees).
        Finally, a health plan could not exclude an employee or his
    or her beneficiary from the plan on the basis of health status.
    The bill would require that group health plans offer special
    enrollment periods during which enrollment in at least one
    benefit option would be possible for participants or family
    members, for various changes in family or employment status
    that resulted in a loss of insurance coverage.
        Title II of the bill would impose a mandate on all private
    sector insurers and those providers who submit claims
    electronically. It would require that certain specified health-
    related electronic transmittals conform to standards adopted by
    the Secretary of Health and Human Services. The bill states
    that any standards adopted must reduce the administrative costs
    of providing and paying for health care. Title II would also
    establish a health care fraud and abuse data collection
    program, with a mandate on each government agency and private
    health plan to report any final adverse action taken against a
    health care provider, supplier, or practitioner.
        Title IV includes revenue provisions that would raise
    private-sector costs. Those provisions would repeal the bad
    debt reserve method for thrift savings associations, modify
    eligibility for the earned income credit, and revise tax
    provisions relating to individuals who give up U.S.
    citizenship.
        In addition to these mandates, Title III includes
    provisions that would reduce tax payments. Those provisions
    would establish or amend tax rules for medical savings
    accounts, long-term care insurance, accelerated death benefits
    under life insurance contracts, and some health insurance
    organizations. They would also increase the percentage of
    health insurance costs that can be deducted by self-employed
    individuals.
        6. Estimated direct cost to the private sector: This
    section provides estimates of the direct private-sector costs
    of the non-tax and tax mandates in the bill. It also provides
    information on tax reductions the bill contains. CBO estimated
    the cost of the non-tax provisions, while the Joint Committee
    on Taxation (JCT) estimated the effects of the other provisions
    (See the attached letter for more details on the JCT
    estimates.)
        CBO estimates that the direct cost of the main non-tax
    private sector mandates in H.R. 3103 would total about $300
    million in each full year that the provisions would be
    effective, as shown below:

    ----------------------------------------------------------------------------------------------------------------
                                            1996       1997       1998       1999       2000       2001       2002
    ----------------------------------------------------------------------------------------------------------------
    Direct cost of non-tax mandates....  .........  .........        225        300        300        300        300
    ----------------------------------------------------------------------------------------------------------------

        The specific mandates examined in this estimate are
    contained in Title I of the bill, and include: (1) limiting the
    length of time employer-sponsored and group insurance plans
    could withhold coverage for pre-existing conditions, and (2)
    requiring that periods of continuous prior health plan coverage
    be credited against pre-existing condition exclusions of a new
    plan.
        The $300 million annual direct cost is approximately 0.2
    percent of the total premium payments in the group and
    employer-sponsored market, although their distribution among
    health insurance plans would be uneven. (Plans that cover
    public sector employees are not included in this analysis.)
    This estimate is subject to considerable uncertainty because a
    number of underlying assumptions rely on limited data or
    judgements about future changes in health insurance markets.
        CBO estimates that the direct cost of the mandates in Title
    II of the bill would be negligible. Health plans (and those
    providers who choose to submit claims electronically) would be
    required to modify their computer software to incorporate new
    standards as they are adopted or modified, but modifications
    could not be made more frequently than once every six months.
    Uniform standards would generate offsetting savings for plans
    and providers by simplifying the claims process and
    coordination of benefits. Data reporting requirements for the
    health care fraud and abuse data collection program would be
    negligible.
        The JCT estimates that the direct mandate cost of tax
    increases in H.R. 3103 would total $116 million in 1996,
    growing to $590 million in 2002, as shown below:

    ----------------------------------------------------------------------------------------------------------------
                                            1996       1997       1998       1999       2000       2001       2002
    ----------------------------------------------------------------------------------------------------------------
    Direct cost of tax increases.......        116        216        386        504        556        586        590
    ----------------------------------------------------------------------------------------------------------------

        These tax increases are contained in Title IV of the bill.
        In addition to these mandates, the bill also provides for
    reductions in taxes. At this point, it is unclear to CBO
    whether these tax reductions should be viewed as offsets to the
    direct costs of the mandates in the bill in determining whether
    the $100 million threshold in P.L. 104-4 is exceeded. JCT
    estimates that the saving associated with the tax reductions in
    H.R. 3103 would total about $180 million in 1997, growing to
    about $1.8 billion in 2002, as shown below:

    ----------------------------------------------------------------------------------------------------------------
                                            1996       1997       1998       1999       2000       2001       2002
    ----------------------------------------------------------------------------------------------------------------
    Reductions in taxes................  .........       -181       -696      -1142      -1403      -1576      -1805
    ----------------------------------------------------------------------------------------------------------------

        These tax reductions are contained in Title III of the
    bill.
        Basis of the estimate: The remainder of this analysis
    discusses the basis for CBO's estimate of the direct cost of
    the main non-tax private sector mandates in H.R. 3103. The
    direct costs of those mandates consist of the additional health
    expenses that would be covered by insurance as a direct result
    of their implementation. Expenses for pre-existing conditions
    that would have to be paid by insurers under the bill but would
    not have been insured under current law, for example, are
    included in aggregate direct costs. In contrast, insured
    expenses that would be transferred among different insurers
    bases of the bill are not included in aggregate direct costs.
        In making this estimate, CBO did not attempt to value any
    social benefits that might result from expansions in insurance
    coverage. That is, the estimate accounts only for the
    additional insurance costs of the mandates, not the value of
    additional insurance coverage to beneficiaries. Nor was there
    an attempt to quantify any indirect costs or benefits. Such
    indirect effects could include, for example, loss of coverage
    if an employer ceases to offer group coverage when premiums
    rise, or increases in worker mobility (or reduced ``job lock'')
    with greater portability of benefits. It would be important to
    weigh all such factors in considering the bill, but only
    estimates of the direct costs of the mandates in the bill are
    required by P.L. 104-4, the Unfunded Mandates Reform Act.

    Limiting the maximum length of an exclusion

        The mandate to limit exclusions for pre-existing conditions
    to 12 months (18 months for late enrollees) is estimated to
    have a direct private-sector cost of about $200 million per
    year. This estimate is based on two components: (1) the number
    of people who would have more of their medical expenses covered
    by insurance if exclusions were limited to one year or less,
    and (2) the average cost to insurers of that newly insured
    medical care.
        CBO used data from the Survey of Employee Benefits in the
    April 1993 Current Population Survey (CPS) to estimate the
    number of people with conditions that are not now covered
    because of a pre-existing condition exclusion of more than one
    year. The survey asks respondents whether they or a family
    member have a medical condition that their employment-based
    plan is not covering because of a pre-existing condition
    exclusion. It also asks respondents how long they have been
    with their present firm. For people with medical conditions
    excluded by a pre-existing condition clause, responses to the
    second question are used to estimate whether the exclusion
    period exceeds one year.
        A number of adjustments were made to the data. In
    particular, CBO's estimate of the number of people affected by
    H.R. 3103 excluded people who said they were limited by a pre-
    existing restriction but who also had other health insurance
    coverage, because the other insurance plan might have covered
    their pre-existing condition. Under those circumstances, the
    limitation imposed on employment-based plans by H.R. 3103 would
    not raise their aggregate costs.
        The second modification to the CPS data adjusted for
    changes in the insurance market that have occurred since the
    survey date of 1993. In particular, since that time, about 40
    states have implemented laws affecting the small group
    insurance market that would limit pre-existing condition
    exclusions to one year or less and require that previous
    coverage be credited against those exclusions. Those laws
    generally apply to groups of 50 or fewer employees and do not
    include self-funded health benefit plans. Because plans covered
    by such state laws would not have to change their provisions as
    a result of H.R. 3103, CBO lowered its initial estimate of the
    number of people affected by the bill.
        CBO's analysis led to the conclusion that approximately
    300,000 people would gain coverage under H.R. 3103 for some
    condition that would otherwise be excluded by a long (more than
    one year) pre-existing condition clause. This estimate
    represents less than 0.3 percent of people with private
    employment-based coverage.
        The other component of the estimated private-sector cost is
    the average cost of the coverage that would become available
    under H.R. 3103. A recent monograph from the American Academy
    of Actuaries (referred to as the academy) indicated a surge in
    claims costs of 40 to 60 percent when a pre-existing condition
    exclusion period expired for a sample of people with high
    expected medical costs.\1\ That range is consistent with
    information from Spencer and Associates indicating that the
    costs of policies for former employees who have chosen to take
    extended COBRA coverage are 55 percent higher than those of
    active employees.\2\ Applying those percentages to the average
    premium cost in the employer-sponsored market yields additional
    costs of about $900 a year per person who would gain coverage
    under H.R. 3103.
        \1\ See American Academy of Actuaries, ``Providing Universal Access
    in a Voluntary Private-Sector Market,'' February 1996.
        \2\ Charles D. Spencer and Associates, Inc. ``1995 COBRA Survey:
    Almost One in Five Elect Coverage, Cost is 155% of Actives' Cost,''
    Spencer's Research Reports (August 25, 1995).
    ---------------------------------------------------------------------------

    Crediting prior coverage against current exclusions

        Another provision in H.R. 3103 would require insurers under
    certain circumstances to credit previous continuous health
    insurance coverage against pre-existing condition periods. That
    provision is estimated to have a private sector cost of about
    $100 million per year. The key components of this estimate are:
    (1) the number of people who would receive some added coverage,
    and (2) the additional full-year cost of coverage, adjusted to
    reflect the estimated number of months of that coverage.
        CPS data were used to estimate the number of people who
    would receive some added coverage under this mandate. These are
    people who would otherwise face some denial of coverage under a
    pre-existing condition exclusion period of one year or less,
    and who would qualify for a shortened exclusion period based on
    prior continuous coverage. CBO estimates that about 100,000
    people would receive some added coverage under this provision
    of the bill. The relatively small size of this estimate is due
    largely to the difficulty of meeting the restrictive
    eligibility criteria for the reduction in the exclusion
    period--particularly the requirement that at most a 60-day gap
    separate prior periods of insurance coverage from the
    enrollment in the new plan.
        The average number of months of coverage these people would
    gain is constraint by the one-year limit on the exclusion
    period that would be required under the bill. Based on
    information from a 1995 study by KPMG Peat Marwick, CBO
    estimates that people who would qualify would gain coverage for
    an average of 10 months.\3\
        \3\ Based on unpublished tabulations from KPMG Peat Marwick, LLP,
    Survey of Employer-Sponsored Benefits, 1995.
    ---------------------------------------------------------------------------
        CBO's estimates of the additional insured costs per person
    is based on evidence from the Academy, which suggested that
    people with pre-existing condition exclusions may not seek
    treatment during the exclusion period but have rapid increases
    in expenses when that period expire. That behavior would reduce
    the effectiveness of exclusion periods in protecting insurers
    from treatment costs. The shorter the exclusion period, the
    less effective the pre-existing exclusion is at reducing the
    insurer's costs. CBO consequently assumed that full-year
    insured costs of people getting coverage for pre-existing
    conditions under this provision would rise by less than 40
    percent.

    Other considerations

        The estimated direct cost of the mandate to limit the
    length of pre-existing condition exclusions is about $200
    million annually, and the cost of the mandate to credit
    previous coverage against pre-existing condition exclusions is
    about $100 million. Together, those mandate costs amount to
    about 0.2 percent of total premium payments in the group and
    employer-sponsored market.
        Those estimates are subject to considerable uncertainty for
    several reasons. First, they are based on individual's
    responses to surveys, which should be treated with caution. In
    addition, unforeseen changes in health insurance markets could
    result in the estimates being too low or too high. Larger than
    expected increases in medical costs would result in higher
    direct costs than estimated. On the other hand, the growth of
    managed care plans would lower the direct costs of the bill.
    The magnitude of this effect would depend on the relative
    growth of HMOs, which generally do not use pre-existing
    conditions, as compared to PPO and POS plans, many of which do
    use pre-existing condition exclusions.
        The distribution of the direct costs of the mandates would
    be uneven across health plans. Only plans that currently use
    pre-existing condition exclusion of more than 12 months would
    face the $200 million direct cost of the first mandate. Data
    from the Peat Marwick survey indicate that 2.5 percent of
    employees are in such heath plans. Consequently, the costs to
    health plans that use long pre-existing exclusions would be
    about 4.5 percent of their premium costs. Likewise, only health
    plans that use pre-existing condition exclusions would face the
    direct cost of the mandate to credit previous coverage against
    the pre-existing exclusion. The data indicate that almost half
    of employees are in such plans--implying that the plans
    directly affected by this mandate would have direct costs equal
    to about one-tenth of one percent of their premiums under
    current law.
        Employers could respond in a number of ways to the
    additional insured costs that would arise under these
    provisions of the bill. They could reduce other insurance
    benefits, increase employees' premium contributions, or reduce
    other components of employee compensation. Employers would be
    likely to respond in different ways, and these changes could
    take time. Some employers that currently offer health insurance
    to their employees might drop that coverage if the costs became
    too large, although the magnitude of such a reaction would
    probably be modest. These employer responses, which would
    offset the costs of the mandates, are indirect effects and do
    not enter into our estimates of the direct costs to the private
    sector of the insurance mandates.
        7. Appropriations or other Federal financial assistance:
    None.
        8. Previous CBO estimate: CBO has prepared cost estimates
    of various other health care reform bills--S. 1028 as reported
    by the Senate Committee on Labor and Human Resources on October
    12, 1995, and H.R. 3070 as reported by the House Committee on
    Commerce on March 20, 1996. All three bills have similar pre-
    existing conditions and portability provisions affecting the
    group health insurance market, but they differ in other
    respects. For example, the Senate and Commerce Committee bills
    both include provisions for group-to-individual portability, HR
    3103 does not have. In addition, S. 1028 includes provisions to
    guarantee the availability of insurance to employers, and H.R.
    3070 has provisions to guarantee availability in the small
    group market only. The Ways and Means Committee bill, by
    contrast, has no provisions to guarantee availability. It is
    also the only one of the three bills to include provisions
    promoting the use of medical savings accounts and modifying the
    Internal Revenue Code in various other ways.
        9. Estimate prepared by: James Baumgardner (non-tax items)
    and Rick Kasten (tax items).
        10. Estimate approved by: Joseph Antos, Assistance Director
    for Health and Human Resources.

         V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

              A. Committee Oversight Findings and Recommendations

        With respect to subdivision (A) of clause 2(l)(3) of rule
    XI of the Rules of the House of Representatives (relating to
    oversight findings), the Committee advises that it was a result
    of the Committee's oversight activities concerning improved
    availability and portability of health insurance coverage,
    prevention of health care fraud and abuse, health care
    administrative simplification, certain tax-related health
    provisions to improve health care accessibility and coverage,
    and certain revenue offsets needed to pay for the other
    provisions in the bill that the Committee concluded that it is
    appropriate to enact the provisions contained in the bill as
    amended.

        B. Summary of Findings and Recommendations of the Committee on
                          Government Reform Oversight

        With respect to subdivision (D) of clause 2(l)(3) of rule
    XI of the Rules of the House of Representatives, the Committee
    advises that no oversight findings or recommendations have been
    submitted to this Committee by the Committee on Government
    Reform and Oversight with respect to the provisions of the
    bill.

                        C. Inflationary Impact Statement

        In compliance with clause 2(l)(4) of rule XI of the Rules
    of the House of Representatives, the Committee states that the
    provisions of the bill are not expected to have an overall
    inflationary impact on prices and costs in the operation of the
    national economy.

                  D. Information Relating to Unfunded Mandates

        This information is provided in accordance with section 423
    of the Unfunded Mandates Reform Act of 1995 (Public Law 104-4).

    Non-revenue provisions

        The Committee has determined that the following provisions
    of the bill contain Federal mandates on the private sector: (1)
    limiting the length of time employer-sponsored and group
    insurance plans could withhold coverage for pre-existing
    conditions, and (2) requiring that periods of continuous prior
    health plan coverage be credited against pre-existing condition
    exclusions of a new plan, (3) imposing a mandate on all private
    sector insurers and those providers who submit claims
    electronically by requiring that certain specified health-
    related electronic transmittals conform to standards adopted by
    the Secretary of Health and Human Services (the bill states
    that any standards adopted must reduce the administrative costs
    of providing and paying for health care), and (4) requiring the
    establishment of a health care fraud and abuse data collection
    program, with a mandate on each Government agency and private
    health plan to report any final adverse action taken against a
    health care provider, supplier, or practitioner.
        The direct cost of the administrative simplification and
    fraud and abuse provisions (items #3 and #4 above) are
    negligible. Benefits from the administrative simplification
    provisions include improved administration and reduced costs
    for the millions of health care claims and other related
    informational transactions in the health care system. Data
    reporting requirements for the health care fraud and abuse data
    collection program would be negligible and benefit the entire
    system by contributing to the identification of fraudulent
    behavior and enforcement actions taken to address such
    behavior.
        The provisions limiting pre-existing condition exclusions
    and requiring crediting of prior qualified coverage (items #1
    and #2 above) have important social benefits because they
    expand the availability of health insurance and increase the
    value of insurance coverage to beneficiaries. In addition, by
    improving portability of health insurance benefits from one
    group health plan to another, the bill's provisions promote
    mobility of workers by easing ``job-lock'', which in turn could
    create more efficient employment markets. Finally, since all
    group health plans would be required to comply with these
    standards, the bill's provisions help level the field because
    no employer or insurer gains a competitive advantage from a
    cost standpoint, attributable to restricting benefits through
    lengthy pre-existing condition exclusions.
        Separately, the Committee has determined that the following
    provisions of the bill contain Federal mandates on the public
    sector. First, State and local agencies would be required to
    report criminal and civil actions and license revocations
    against health care providers, practitioners, and suppliers.
    Second, State and local governments, as providers of health
    insurance or health care, would have to transmit health care
    transactions under new national standards. The national
    standards would also apply to State and local government
    agencies that provide health care, for example, through public
    hospitals or clinics, and that transmit any health information
    electronically. Third, the bill's provisions also would require
    State and local governments, as providers of health coverage to
    their employees, to comply with the pre-existing condition and
    portability requirements unless they specifically opt out in a
    form and manner determined by the Secretary of Health and Human
    Services.
        The Committee has determined that the direct costs of all
    of these provisions are negligible. As in the private sector,
    the national standards would improve administration and reduce
    the costs of informational transactions in the public sector.
    Second, the reporting of criminal and civil actions, and
    license revocations against entities guilty of fraudulent
    actions has the broad social benefit of aiding in reducing
    fraud and abuse and the excessive costs such actions create in
    the health care sector. Although state and local governments
    could choose to opt out of the pre-existing condition and
    portability requirements, the application of those requirements
    would ensure that public sector workers enjoy the same
    protections and opportunities for career mobility as workers in
    the private sector.
        The non-revenue provisions of the bill uniformly affect
    activities engaged in by both the private and public sectors.
    Therefore, they do not affect the competitive balance between
    state, local or tribal governments and the private sector.

    Revenue provisions

        The Committee has determined that three of the revenue
    provisions of the bill contain Federal mandates on the private
    sector: (1) the provision relating to treatment of bad debt
    deductions of thrift institutions (repeal of Internal Revenue
    Code section 593); (2) the earned income credit (``EIC'')
    compliance provision; and (3) the provision relating to
    expatriation.\57\ In general, the first provision repeals a
    special rule regarding the treatment of bad debt reserves by
    thrift institutions and conforms the treatment of such reserves
    to the manner in which such reserves are required to be treated
    by banks. The provision relating to EIC compliance denies the
    EIC to individuals not authorized to be employed in the United
    States. The provision relating to expatriation expands and
    substantially strengthens the present-law provisions that
    subject U.S. citizens who relinquish their citizenship for tax
    avoidance purposes to special tax rules. These provisions will
    increase the Federal tax liabilities of certain taxpayers.
        \57\ The bill also amends the so-called COBRA tax sanctions. These
    provisions are integrally related to the effects of the health care
    provisions, and the discussion of the mandates in the health care
    provisions takes into account the additional COBRA tax sanctions.
    ---------------------------------------------------------------------------
        The cost required to comply with each mandate generally is
    no greater than the revenue estimate for the provision.
    Benefits from the provisions include improved administration of
    the Federal income tax laws and greater availability of and
    more affordable health care insurance. The Committee believes
    that the benefits of the provisions are greater than the cost
    required to comply with the mandates.
        The provision relating to bad debt reserves of thrift
    institutions corrects a present-law provision that results in a
    mismeasurement of economic income and provides thrift
    institutions with a tax benefit not provided to similarly
    situated depository institutions. It also facilitates national
    banking policy. The provision relating to the EIC will in
    effect reduce Federal tax expenditures by denying the credit to
    individuals who are not legally working in the United States.
    The expatriation provision helps to ensure that the Federal tax
    laws do not provide individuals with an incentive to
    expatriate.
        These revenue-raising provisions offset the revenue loss of
    the tax provisions in the bill relating to health care,
    including provisions relating to long-term care, medical
    savings accounts, and an increase in the deduction for health
    insurance costs of self-employed individuals. These latter
    provisions will help make health care insurance more
    affordable, will encourage individuals to take control of their
    health care expenses and reward individuals for reducing health
    costs, and encourage individuals to provide for their long-term
    care needs. The revenue offsets are critical to achieving these
    goals.
        The revenue provisions of the bill do not contain any
    intergovernmental mandates.
        The revenue provisions of the bill affect activities that
    are only engaged in by the private sector and thus do not
    affect the competitive balance between State, local, or tribal
    governments and the private sector.

               E. Applicability of Federal Advisory Committee Act

        Pursuant to the Federal Advisory Committee Act (5 U.S.C.,
    App., section 5(b)), the Committee states that any advisory
    bodies created by the bill, such as the Health Information
    Advisory Committee created by section 1179, are consciously
    created, and are deemed appropriate and necessary to carry out
    the purposes of the bill. It is the view of the Committee that
    the functions of any such advisory bodies are not being and
    could not be performed by one or more agencies or by an
    advisory committee already in existence, or by enlarging the
    mandate of an existing advisory committee under the Social
    Security Act.

           VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

        In compliance with clause 3 of rule XIII of the Rules of
    the House of Representatives, changes in existing law made by
    the bill, as reported, are shown as follows (existing law
    proposed to be omitted is enclosed in black brackets, new
    matter is printed in italics, existing law in which no change
    is proposed is shown in roman):

                         INTERNAL REVENUE CODE OF 1986

              * * * * * * *

                            Subtitle A--Income Taxes

                      CHAPTER 1--NORMAL TAXES AND SURTAXES

                  Subchapter A--Determination of Tax Liability

              * * * * * * *

                         PART IV--CREDITS AGAINST TAXES

              * * * * * * *

                         Subpart C--Refundable Credits

              * * * * * * *

    SEC. 32. EARNED INCOME.

        (a)  * * *
              * * * * * * *
        (c) Definitions and Special Rules.--For purposes of this
    section--
              (1) Eligible individual.--
                      (A)  * * *
              * * * * * * *
                      (F) Identification number requirement.--The
                    term ``eligible individual'' does not include
                    any individual who does not include on the
                    return of tax for the taxable year--
                              (i) such individual's taxpayer
                            identification number, and
                              (ii) if the individual is married
                            (within the meaning of section 7703),
                            the taxpayer identification number of
                            such individual's spouse.
              * * * * * * *
        (l) Identification Numbers.--Solely for purposes of
    subsections (c)(1)(F) and (c)(3)(D), a taxpayer identification
    number means a social security number issued to an individual
    by the Social Security Administration (other than a social
    security number issued pursuant to clause (II) (or that portion
    of clause (III) that relates to clause (II)) of section
    205(c)(2)(B)(i) of the Social Security Act).
              * * * * * * *

                Subpart E--Rules for Computing Investment Credit

              * * * * * * *

    SEC. 50. OTHER SPECIAL RULES.

          (a)  * * *
              * * * * * * *
        (d) Certain Rules Made Applicable.--For purposes of this
    subpart, rules similar to the rules of the following provisions
    (as in effect of the day before the date of the enactment of
    the Revenue Reconciliation Act of 1990) shall apply:
              (1) Section 46(e) (relating to limitations with
            respect to certain persons).
              (2) Section 46(f) (relating to limitation in case of
            certain regulated companies).
              (3) Section 46(h) (relating to special rules for
            cooperatives).
              (4) Paragraphs (2) and (3) of section 48(b) (relating
            to special rule for sale-leasebacks).
              (5) Section 48(d) (relating to certain leased
            property).
              (6) Section 48(f) (relating to estates and trusts).
              (7) Section 48(r) (relating to certain 501(d)
            organizations.
    Paragraphs (1)(A), (2)(A), and (4) of the section 46(e)
    referred to in paragraph (1) of this subsection shall not apply
    to any taxable year beginning after December 31, 1995.
              * * * * * * *

              Subpart F--Rules for Computing Targeted Jobs Credit

              * * * * * * *

    SEC. 52. SPECIAL RULES.

        (a)  * * *
              * * * * * * *
        (e) Limitations With Respect to Certain Persons.--Under
    regulations prescribed by the Secretary, in the case of--
              [(1) an organization to which section 593 (relating
            to reserves for losses on loans) applies,
              [(2)] (1) a regulated investment company or a real
            estate investment trust subject to taxation under
            subchapter M (section 851 and following), and
              [(3)] (2) a cooperative organization described in
            section 1381(a),
    rules similar to the rules provided in subsections (e) and (h)
    of section 46 (as in effect on the day before the date of the
    enactment of the Revenue Reconciliation Act of 1990) shall
    apply in determining the amount of the credit under this
    subpart.
              * * * * * * *

                        PART VI--ALTERNATIVE MINIMUM TAX

              * * * * * * *

    SEC. 57. ITEMS OF TAX PREFERENCE.

        (a) General Rule.--For purposes of this part, the items of
    tax preference determined under this section are--
              (1)  * * *
              * * * * * * *
              [(4) Reserves for losses on bad debts of financial
            institutions.--In the case of a financial institution
            to which section 593 applies, the amount by which the
            deduction allowable for the taxable year for a
            reasonable addition to a reserve for bad debts exceeds
            the amount that would have been allowable had the
            institution maintained its bad debt reserve for all
            taxable years on the basis of actual experience.]
              * * * * * * *

                  Subchapter B--Computation of Taxable Income

      PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
                                  INCOME, ETC.

              * * * * * * *

    SEC. 62. ADJUSTED GROSS INCOME DEFINED.

        (a) General Rule.--For purposes of this subtitle, the term
    ``adjusted gross income'' means, in the case of an individual,
    gross income minus the following deductions:
              (1)  * * *
              * * * * * * *
              (16) Medical savings accounts.--The deduction allowed
            by section 220.
              * * * * * * *

            PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

              * * * * * * *

    SEC. 101. CERTAIN DEATH BENEFITS.

        (a)  * * *
              * * * * * * *
        (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 (as defined
                    in section 7702B(c)(2)) but only if such amount
                    is received under a rider or other provision of
                    such contract which is treated as a qualified
                    long-term care insurance contract under section
                    7702B and such amount is treated under section
                    7702B (after the application of subsection (d)
                    thereof) as a payment for qualified long-term
                    care services (as defined in such section).
              (2) Treatment of viatical settlements.--
                      (A) In general.--In the case of a life
                    insurance contract on the life of an insured
                    described in paragraph (1), if--
                              (i) any portion of such contract is
                            sold to any viatical settlement
                            provider, or
                              (ii) any portion of the death benefit
                            is assigned to such a provider,
                    the amount paid for such sale or assignment
                    shall be treated as an amount paid under the
                    life insurance contract by reason of the death
                    of such insured.
                      (B) Viatical settlement provider.--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 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--
                                      (I) such person 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.
              (3) 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) 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)).
              (4) Exception for business-related policies.--This
            subsection shall not apply in the case of any amount
            paid to any taxpayer other 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.
              * * * * * * *

    SEC. 106. CONTRIBUTIONS BY EMPLOYER TO ACCIDENT AND HEALTH PLANS.

        [Gross income of an employee does not include employer-
    provided coverage under an accident or health plan.]
        (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, gross income does not include
            amounts contributed by such employee's employer to any
            medical savings account of such employee.
              (2) Coordination with deduction limitation.--The
            amount excluded from the gross income of an employee
            under this subsection for any taxable year shall 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.
              (3) 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.
              (4) 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.
              (5) 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.
        (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.
              * * * * * * *

    SEC. 125. CAFETERIA PLANS.

        (a)  * * *
              * * * * * * *
        (f) Qualified Benefits Defined.--For purposes of this
    section, the term ``qualified benefit'' means any benefit
    which, with the application of subsection (a), is not
    includible in the gross income of the employee by reason of an
    express provision of this chapter (other than section 106(b),
    117, 127, or 132). Such term includes any group term life
    insurance which is includible in gross income only because it
    exceeds the dollar limitation of section 79 and such term
    includes any other benefit permitted under regulations. Such
    term shall not include any long-term care insurance contract
    (as defined in section 4980C).
              * * * * * * *

         PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

              * * * * * * *

    SEC. 162. TRADE OR BUSINESS EXPENSES.

        (a)  * * *
              * * * * * * *
        (l) Special Rules for Health Insurance Costs of Self-
    Employed Individuals.--
              [(1) In general.--In the case of an individual who is
            an employee within the meaning of section 401(c)(1),
            there shall be allowed as a deduction under this
            section an amount equal to 30 percent of the amount
            paid during the taxable year for insurance which
            constitutes medical care for the taxpayer, his spouse,
            and dependents.]
              (1) Allowance of deduction.--
                      (A) In general.--In the case of an individual
                    who is an employee within the meaning of
                    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                   The applicable
                  in calendar year--                         percentage is--
                    1998....................................     35 percent
                    1999, 2000, or 2001.....................     40 percent
                    2002....................................     45 percent
                    2003 or thereafter......................     50 percent.

              * * * * * * *

            PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

    Sec. 211. Allowance of deductions.
         * * * * * * *
    [Sec. 220. Cross references.]
    Sec. 220. Medical savings accounts.
    Sec. 221. Cross reference.

              * * * * * * *

    SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES.

          (a)  * * *
              * * * * * * *
          (d) Definitions.--For purposes of this section--
              (1) The term ``medical care'' means amounts paid--
                      (A) for the diagnosis, cure, mitigation,
                    treatment, or prevention of disease, or for the
                    purpose of affecting any structure or function
                    of the body,
                      (B) for transportation primarily for and
                    essential to medical care referred to in
                    subparagraph (A), [or]
                      (C) for qualified long-term care services (as
                    defined in section 7702B(c)), or
                      [(C)] (D) for insurance (including amounts
                    paid as premiums under part B of title XVIII of
                    the Social Security Act, relating to
                    supplementary medical insurance for the aged)
                    covering medical care referred to in
                    subparagraphs (A) and (B) or for any qualified
                    long-term care insurance contract (as defined
                    in section 7702B(b)).
            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).
              * * * * * * *
              (6) In the case of an insurance contract under which
            amounts are payable for other than medical care
            referred to in [subparagraphs (A) and (B)]
            subparagraphs (A), (B), and (C) of paragraph (1)--
                      (A) no amount shall be treated as paid for
                    insurance to which [paragraph (1)(C)] paragraph
                    (1)(D) applies unless the charge for such
                    insurance is either separately stated in the
                    contract, or furnished to the policyholder by
                    the insurance company in a separate statement,
              * * * * * * *
              (7) Subject to the limitations of paragraph (6),
            premiums paid during the taxable year by a taxpayer
            before he attains the age of 65 for insurance covering
            medical care (within the meaning of [subparagraphs (A)
            and (B)] subparagraphs (A), (B), and (C) of paragraph
            (1)) for the taxpayer, his spouse, or a dependent after
            the taxpayer attains the age of 65 shall be treated as
            expenses paid during the taxable year for insurance
            which constitutes medical care if premiums for such
            insurance are payable (on a level payment basis) under
            the contract for a period of 10 years or more or until
            the year in which the taxpayer attains the age of 65
            (but in no case for a period of less than 5 years).
              * * * * * * *
              (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             The limitation
                  close of the taxable year of:                    is:
                40 or less..................................        $  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.

                      (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.
              * * * * * * *

    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 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.--Except as otherwise provided in this
            subsection, the amount allowable as a deduction under
            subsection (a) to an individual for the taxable year
            shall not exceed--
                      (A) except as provided in subparagraph (B),
                    the lesser of--
                              (i) $2,000, or
                              (ii) the annual deductible limit for
                            any individual covered under the high
                            deductible health plan, or
                      (B) in the case of a high deductible health
                    plan covering the taxpayer and any other
                    eligible individual who is the spouse or any
                    dependent (as defined in section 152) of the
                    taxpayer, the lesser of--
                              (i) $4,000, or
                              (ii) the annual limit under the plan
                            on the aggregate amount of deductibles
                            required to be paid by all individuals.
            The preceding sentence shall not apply if the spouse of
            such individual is covered under any other high
            deductible health plan.
              (2) Special rule for married individuals.--
                      (A) In general.--This subsection shall be
                    applied separately for each married individual.
                      (B) Special rule.--If individuals who are
                    married to each other are covered under the
                    same high deductible health plan, then the
                    amounts applicable under paragraph (1)(B) shall
                    be divided equally between them unless they
                    agree on a different division.
              (3) 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 paid to any medical savings
                    account of such individual which is excludable
                    from gross income under section 106(b) for such
                    year, or
                      (B) in a case described in paragraph (2), any
                    amount is paid to any medical savings account
                    of either spouse which is so excludable for
                    such year.
              (4) Proration of limitation.--
                      (A) In general.--The limitation under
                    paragraph (1) shall be the sum of the monthly
                    limitations for months during the taxable year
                    that the individual is an eligible individual
                    if--
                              (i) such individual is not an
                            eligible individual for all months of
                            the taxable year,
                              (ii) the deductible under the high
                            deductible health plan covering such
                            individual is not the same throughout
                            such taxable year, or
                              (iii) such limitation is determined
                            under paragraph (1)(B) for some but not
                            all months during such taxable year.
                      (B) Monthly limitation.--The monthly
                    limitation for any month shall be an amount
                    equal to \1/12\ of the limitation which would
                    (but for this paragraph and paragraph (3)) be
                    determined under paragraph (1) if the facts and
                    circumstances as of the first day of such month
                    that such individual is covered under a high
                    deductible health plan were true for the entire
                    taxable year.
              (5) 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--
                              (i) who is covered under a high
                            deductible health plan as of the 1st
                            day of such month, and
                              (ii) who 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.
                      (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.
              (2) High deductible health plan.--The term ``high
            deductible health plan'' means a health plan which--
                      (A) has an annual deductible limit for each
                    individual covered by the plan which is not
                    less than $1,500, and
                      (B) has an annual limit on the aggregate
                    amount of deductibles required to be paid with
                    respect to all individuals covered by the plan
                    which is not less than $3,000.
            Such term does not include a health plan if
            substantially all of its coverage is coverage described
            in paragraph (1)(B). 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.
      (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 $4,000.
                      (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
                    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.
              (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 by reason of
            paragraph (2) or (3). 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.--
                      (A) In general.--Any amount paid or
                    distributed out of a medical savings account
                    which is used exclusively to pay qualified
                    medical expenses of any account holder (or any
                    spouse or dependent of the holder) shall not be
                    includible in gross income.
                      (B) Treatment after death of account
                    holder.--
                              (i) Treatment if holder is spouse.--
                            If, after the death of the account
                            holder, the account holder's interest
                            is payable to (or for the benefit of)
                            the holder's spouse, the medical
                            savings account shall be treated as if
                            the spouse were the account holder.
                              (ii) Treatment if designated holder
                            is not spouse.--In the case of an
                            account holder's interest in a medical
                            savings account which is payable to (or
                            for the benefit of) any person other
                            than such holder's spouse upon the
                            death of such holder--
                                      (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.
              (2) Inclusion of amounts not used for qualified
            medical expenses.--
                      (A) In general.--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 or of the spouse or dependents of such
                    holder shall be included in the gross income of
                    such holder.
                      (B) Special rules.--For purposes of
                    subparagraph (A)--
                              (i) all medical savings accounts of
                            the account holder shall be treated as
                            1 account,
                              (ii) all payments and distributions
                            during any taxable year shall be
                            treated as 1 distribution, and
                              (iii) any distribution of property
                            shall be taken into account at its fair
                            market value on the date of the
                            distribution.
              (3) Excess contributions returned before due date of
            return.--If the aggregate contributions (other than
            rollover contributions) for a taxable year to the
            medical savings accounts of an individual exceed the
            amount allowable as a deduction under this section for
            such contributions, paragraph (2) shall not apply to
            distributions from such accounts (in an amount not
            greater than such excess) if--
                      (A) 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
                      (B) such distribution is accompanied by the
                    amount of net income attributable to such
                    excess contribution.
            Any net income described in subparagraph (B) shall be
            included in the gross income of the individual for the
            taxable year in which it is received.
              (4) Penalty for 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 10
                    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 age
                    59\1/2\.--Subparagraph (A) shall not apply to
                    any payment or distribution after the date on
                    which the account holder attains age 59\1/2\.
              (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 the spouse is the account holder.
          (g) Cost-of-Living Adjustment.--
              (1) In general.--In the case of any taxable year
            beginning in a calendar year after 1997, each dollar
            amount in subsection (b)(1), (c)(2), or (d)(1)(A) shall
            be increased by an amount equal to--
                      (A) such dollar amount, multiplied by
                      (B) the medical care cost adjustment for such
                    calendar year.
    If any increase under the preceding sentence is not a multiple
    of $50, such increase shall be rounded to the nearest multiple
    of $50.
              (2) Medical care cost adjustment.--For purposes of
            paragraph (1), the medical care cost adjustment for any
            calendar year is the percentage (if any) by which--
                      (A) the medical care component of the
                    Consumer Price Index (as defined in section
                    1(f)(5)) for August of the preceding calendar
                    year, exceeds
                      (B) such component for August of 1996.
          (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 those regulations.

    SEC. [220.] 221. CROSS REFERENCE.

            For deductions in respect of a decedent, see section 691.
              * * * * * * *

                 PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS

              * * * * * * *

    SEC. 246. RULES APPLYING TO DEDUCTIONS FOR DIVIDENDS RECEIVED.

        (a)  * * *
              * * * * * * *
        [(f) Cross Reference.--
              [For special rule relating to mutual savings banks, etc., to
            which section 593 applies, see section 596.]
              * * * * * * *

         PART XI--SPECIAL RULES RELATING TO CORPORATE PREFERENCE ITEMS

              * * * * * * *

    SEC. 291. SPECIAL RULES RELATING TO CORPORATE PREFERENCE ITEMS.

        (a)  * * *
              * * * * * * *
        (e) Definitions.--For purposes of this section--
              (1) Financial institution preference item.--The term
            ``financial institution preference item'' includes the
            following:
                      (A)  * * *
                      (B) Interest on debt to carry tax-exempt
                    obligations acquired after december 31, 1982,
                    and before august 8, 1986.--
                              (i) In general.--In the case of a
                            financial institution which is a bank
                            (as defined in section 585(a)(2)) [or
                            to which section 593 applies], the
                            amount of interest on indebtedness
                            incurred or continued to purchase or
                            carry obligations acquired after
                            December 31, 1982, and before August 8,
                            1986, the interest on which is exempt
                            from taxes for the taxable year, to the
                            extent that a deduction would (but for
                            this paragraph or section 265(b)) be
                            allowable with respect to such interest
                            for such taxable year.
              * * * * * * *

                       Subchapter F--Exempt Organizations

              * * * * * * *

                              PART I--GENERAL RULE

              * * * * * * *

    SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.

        (a)  * * *
              * * * * * * *
        (c) List of Exempt Organizations.--The following
    organizations are referred to in subsection (a):
              (1)  * * *
              * * * * * * *
              (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, are
                            unable to acquire medical care coverage
                            for such condition through insurance or
                            from a health maintenance organization
                            or 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.
              * * * * * * *

                       Subchapter H--Banking Institutions

              * * * * * * *

                               PART I--DEDUCTIONS

              * * * * * * *

    SEC. 585. RESERVES FOR LOSSES ON LOANS OF BANKS.

        (a) Reserve for Bad Debts.--
              (1)  * * *
              (2) Bank.--For purposes of this section--
                      (A) In general.--The term ``bank'' means any
                    bank (as defined in section 581) [other than an
                    organization to which section 593 applies].
              * * * * * * *

                      PART II--MUTUAL SAVINGS BANKS, ETC.

    Sec. 591. Deduction for dividends paid on deposits.
         * * * * * * *
    [Sec. 595. Foreclosure on property securing loans.]
    [Sec. 596. Limitation on dividends received deduction.]
              * * * * * * *

    SEC. 593. RESERVES FOR LOSSES ON LOANS.

      (a)  * * *
              * * * * * * *
      (e) Distributions to Shareholders.--
              (1) In general.--For purposes of this chapter, any
            distribution of property (as defined in section 317(a))
            [by a domestic building and loan association or an
            institution that is treated as a mutual savings bank
            under section 591(b)] by a taxpayer having a balance
            described in subsection (g)(2)(A)(ii) to a shareholder
            with respect to its stock, if such distribution is not
            allowable as a deduction under section 591, shall be
            treated as made--
                      (A) first out of its earnings and profits
                    accumulated in taxable years beginning after
                    December 31, 1951, to the extent thereof,
                      [(B) then out of the reserve for losses on
                    qualifying real property loans, to the extent
                    additions to such reserve exceed the additions
                    which would have been allowed under subsection
                    (b)(3),]
                      (B) then out of the balance taken into
                    account under subsection (g)(2)(A)(ii)
                    (properly adjusted for amounts charged against
                    such reserves for taxable years beginning after
                    December 31, 1987),
              * * * * * * *
    This paragraph shall apply in the case of any distribution in
    redemption of stock or in partial or complete liquidation of
    the association, or an institution that is treated as a mutual
    savings bank under section 591(b), except that any such
    distribution shall be treated as made first out of the amount
    referred to in subparagraph (B), second out of the amount
    referred to in subparagraph (C), third out of the amount
    referred to in subparagraph (A), and then out of such other
    accounts as may be proper. This paragraph shall not apply to
    any transaction to which section 381 applies, or to any
    distribution to the Federal Savings and Loan Insurance
    Corporation (or any successor thereof) or the Federal Deposit
    Insurance Corporation in redemption of an interest in an
    association, if such interest was originally received by any
    such entity in exchange for assistance provided under a
    provision of law referred to in section 597(c). This paragraph
    shall not apply to any distribution of all of the stock of a
    bank (as defined in section 581) to another corporation if,
    immediately after the distribution, such bank and such other
    corporation are members of the same affiliated group (as
    defined in section 1504) and the provisions of section 5(e) of
    the Federal Deposit Insurance Act (as in effect on December 31,
    1995) or similar provisions are in effect.
              * * * * * * *
      (f) Termination of Reserve Method.--Subsections (a), (b),
    (c), and (d) shall not apply to any taxable year beginning
    after December 31, 1995.
      (g) 6-Year Spread of Adjustments.--
              (1) In general.--In the case of any taxpayer who is
            required by reason of subsection (f) to change its
            method of computing reserves for bad debts--
                      (A) such change shall be treated as a change
                    in a method of accounting,
                      (B) such change shall be treated as initiated
                    by the taxpayer and as having been made with
                    the consent of the Secretary, and
                      (C) the net amount of the adjustments
                    required to be taken into account by the
                    taxpayer under section 481(a)--
                              (i) shall be determined by taking
                            into account only applicable excess
                            reserves, and
                              (ii) as so determined, shall be taken
                            into account ratably over the 6-taxable
                            year period beginning with the first
                            taxable year beginning after December
                            31, 1995.
              (2) Applicable excess reserves.--
                      (A) In general.--For purposes of paragraph
                    (1), the term ``applicable excess reserves''
                    means the excess (if any) of--
                              (i) the balance of the reserves
                            described in subsection (c)(1) (other
                            than the supplemental reserve) as of
                            the close of the taxpayer's last
                            taxable year beginning before December
                            31, 1995, over
                              (ii) the lesser of--
                                      (I) the balance of such
                                    reserves as of the close of the
                                    taxpayer's last taxable year
                                    beginning before January 1,
                                    1988, or
                                      (II) the balance of the
                                    reserves described in subclause
                                    (I), reduced in the same manner
                                    as under section
                                    585(b)(2)(B)(ii) on the basis
                                    of the taxable years described
                                    in clause (i) and this clause.
                      (B) Special rule for thrifts which become
                    small banks.--In the case of a bank (as defined
                    in section 581) which was not a large bank (as
                    defined in section 585(c)(2)) for its first
                    taxable year beginning after December 31,
                    1995--
                              (i) the balance taken into account
                            under subparagraph (A)(ii) shall not be
                            less than the amount which would be the
                            balance of such reserves as of the
                            close of its last taxable year
                            beginning before such date if the
                            additions to such reserves for all
                            taxable years had been determined under
                            section 585(b)(2)(A), and
                              (ii) the opening balance of the
                            reserve for bad debts as of the
                            beginning of such first taxable year
                            shall be the balance taken into account
                            under subparagraph (A)(ii) (determined
                            after the application of clause (i) of
                            this subparagraph).
                    The preceding sentence shall not apply for
                    purposes of paragraphs (5) and (6) or
                    subsection (e)(1).
              (3) Recapture of pre-1988 reserves where taxpayer
            ceases to be bank.--If, during any taxable year
            beginning after December 31, 1995, a taxpayer to which
            paragraph (1) applied is not a bank (as defined in
            section 581), paragraph (1) shall apply to the reserves
            described in paragraph (2)(A)(ii) and the supplemental
            reserve; except that such reserves shall be taken into
            account ratably over the 6-taxable year period
            beginning with such taxable year.
              (4) Suspension of recapture if residential loan
            requirement met.--
                      (A) In general.--In the case of a bank which
                    meets the residential loan requirement of
                    subparagraph (B) for the first taxable year
                    beginning after December 31, 1995, or for the
                    following taxable year--
                              (i) no adjustment shall be taken into
                            account under paragraph (1) for such
                            taxable year, and
                              (ii) such taxable year shall be
                            disregarded in determining--
                                      (I) whether any other taxable
                                    year is a taxable year for
                                    which an adjustment is required
                                    to be taken into account under
                                    paragraph (1), and
                                      (II) the amount of such
                                    adjustment.
                      (B) Residential loan requirement.--A taxpayer
                    meets the residential loan requirement of this
                    subparagraph for any taxable year if the
                    principal amount of the residential loans made
                    by the taxpayer during such year is not less
                    than the base amount for such year.
                      (C) Residential loan.--For purposes of this
                    paragraph, the term ``residential loan'' means
                    any loan described in clause (v) of section
                    7701(a)(19)(C) but only if such loan is
                    incurred in acquiring, constructing, or
                    improving the property described in such
                    clause.
                      (D) Base amount.--For purposes of
                    subparagraph (B), the base amount is the
                    average of the principal amounts of the
                    residential loans made by the taxpayer during
                    the 6 most recent taxable years beginning on or
                    before December 31, 1995. At the election of
                    the taxpayer who made such loans during each of
                    such 6 taxable years, the preceding sentence
                    shall be applied without regard to the taxable
                    year in which such principal amount was the
                    highest and the taxable year in such principal
                    amount was the lowest. Such an election may be
                    made only for the first taxable year beginning
                    after such date, and, if made for such taxable
                    year, shall apply to the succeeding taxable
                    year unless revoked with the consent of the
                    Secretary.
                      (E) Controlled groups.--In the case of a
                    taxpayer which is a member of any controlled
                    group of corporations described in section
                    1563(a)(1), subparagraph (B) shall be applied
                    with respect to such group.
              (5) Continued application of fresh start under
            section 585 transitional rules.--In the case of a
            taxpayer to which paragraph (1) applied and which was
            not a large bank (as defined in section 585(c)(2)) for
            its first taxable year beginning after December 31,
            1995:
                      (A) In general.--For purposes of determining
                    the net amount of adjustments referred to in
                    section 585(c)(3)(A)(iii), there shall be taken
                    into account only the excess (if any) of the
                    reserve for bad debts as of the close of the
                    last taxable year before the disqualification
                    year over the balance taken into account by
                    such taxpayer under paragraph (2)(A)(ii) of
                    this subsection.
                      (B) Treatment under elective cut-off
                    method.--For purposes of applying section
                    585(c)(4)--
                              (i) the balance of the reserve taken
                            into account under subparagraph (B)
                            thereof shall be reduced by the balance
                            taken into account by such taxpayer
                            under paragraph (2)(A)(ii) of this
                            subsection, and
                              (ii) no amount shall be includible in
                            gross income by reason of such
                            reduction.
              (6) Suspended reserve included as section 381(c)
            items.--The balance taken into account by a taxpayer
            under paragraph (2)(A)(ii) of this subsection and the
            supplemental reserve shall be treated as items
            described in section 381(c).
              (7) Conversions to credit unions.--In the case of a
            taxpayer to which paragraph (1) applied which becomes a
            credit union described in section 501(c) and exempt
            from taxation under section 501(a)--
                      (A) any amount required to be included in the
                    gross income of the credit union by reason of
                    this subsection shall be treated as derived
                    from an unrelated trade or business (as defined
                    in section 513), and
                      (B) for purposes of paragraph (3), the credit
                    union shall not be treated as if it were a
                    bank.
              (8) Regulations.--The Secretary shall prescribe such
            regulations as may be necessary to carry out this
            subsection and subsection (e), including regulations
            providing for the application of such subsections in
            the case of acquisitions, mergers, spin-offs, and other
            reorganizations.
              * * * * * * *

    [SEC. 595. FORECLOSURE ON PROPERTY SECURING LOANS.

      [(a) Nonrecognition of Gain or Loss as a Result of
    Foreclosure.--In the case of a creditor which is an
    organization described in section 593(a), no gain or loss shall
    be recognized, and no debt shall be considered as becoming
    worthless or partially worthless, as the result of such
    organization having bid in at foreclosure, or having otherwise
    reduced to ownership or possession by agreement or process of
    law, any property which was security for the payment of any
    indebtedness.
        [(b) Character of Property.--For purposes of sections 166
    and 1221, any property acquired in a transaction with respect
    to which gain or loss to an organization was not recognized by
    reason of subsection (a) shall be considered as property having
    the same characteristics as the indebtedness for which such
    property was security. Any amount realized by such organization
    with respect to such property shall be treated for purposes of
    this chapter as a payment on account of such indebtedness, and
    any loss with respect thereto shall be treated as a bad debt to
    which the provisions of section 166 (relating to allowance of a
    deduction for bad debts) apply.
        [(c) Basis.--The basis of any property to which subsection
    (a) applies shall be the basis of the indebtedness for which
    such property was security (determined as of the date of the
    acquisition of such property), properly increased for costs of
    acquisition.
        [(d) Regulatory Authority.--The Secretary shall prescribe
    such regulations as he may deem necessary to carry out the
    purposes of this section.

    [SEC. 596. LIMITATION ON DIVIDENDS RECEIVED DEDUCTION.

        [In the case of an organization to which section 593
    applies and which computes additions to the reserve for losses
    on loans for the taxable year under section 593(b)(2), the
    total amount allowed under sections 243, 244, and 245
    (determined without regard to this section) for the taxable
    year as a deduction with respect to dividends received shall be
    reduced by an amount equal to 8 percent of such total amount.]
              * * * * * * *

                       Subchapter L--Insurance Companies

              * * * * * * *

                        PART I--LIFE INSURANCE COMPANIES

              * * * * * * *

                    Subpart E--Definitions and Special Rules

              * * * * * * *

    SEC. 818. OTHER DEFINITIONS AND SPECIAL RULES.

        (a)  * * *
              * * * * * * *
        (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.
              * * * * * * *

                       PART II--OTHER INSURANCE COMPANIES

              * * * * * * *

    SEC. 833. TREATMENT OF BLUE CROSS AND BLUE SHIELD ORGANIZATIONS, ETC.

        (a)  * * *
              * * * * * * *
        (c) Organizations to Which Section Applies.--
              (1)  * * *
              * * * * * * *
              (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.
              * * * * * * *

                  PART III--PROVISIONS OF GENERAL APPLICATION

              * * * * * * *

    SEC. 848. CAPITALIZATION OF CERTAIN POLICY ACQUISITION EXPENSES.

        (a)  * * *
              * * * * * * *
        (e) Classification of Contracts.--For purposes of this
    section--
              (1) Specified insurance contract.--
                      (A)  * * *
                      (B) Exceptions.--The term ``specified
                    insurance contract'' shall not include--
                              (i) any pension plan contract (as
                            defined in section 818(a)),
                              (ii) any flight insurance or similar
                            contract, [and]
                              (iii) any qualified foreign contract
                            (as defined in section 807(e)(4)
                            without regard to paragraph (5) of this
                            subsection)[.], and
                              (iv) any contract which is a medical
                            savings account (as defined in section
                            220(d)).
              * * * * * * *

    Subchapter M--Regulated Investment Companies and Real Estate Investment
                                     Trusts

              * * * * * * *

               PART IV--REAL ESTATE MORTGAGE INVESTMENT CONDUITS

              * * * * * * *

    SEC. 860E. TREATMENT OF INCOME IN EXCESS OF DAILY ACCRUALS ON RESIDUAL
                        INTERESTS.

        (a) Excess Inclusions May Not Be Offset By Net Operating
    Losses.--
              (1) In general.--[Except as provided in paragraph
            (2), the] The taxable income of any holder of a
            residual interest in a REMIC for any taxable year shall
            in no event be less than the excess inclusion for such
            taxable year.
              [(2) Exception for certain financial institutions.--
            Paragraph (1) shall not apply to any organization to
            which section 593 applies. The Secretary may by
            regulations provide that the preceding sentence shall
            not apply where necessary or appropriate to prevent
            avoidance of tax imposed by this chapter.
              [(3)] (2) Special rule for affiliated groups.--All
            members of an affiliated group filing a consolidated
            return shall be treated as 1 taxpayer for purposes of
            this subsection[, except that paragraph (2) shall be
            applied separately with respect to each corporation
            which is a member of such group and to which section
            593 applies].
              [(4) Treatment of certain subsidiaries.--
                      [(A) In general.--For purposes of this
                    subsection, a corporation to which section 593
                    applies and each qualified subsidiary of such
                    corporation shall be treated as a single
                    corporation to which section 593 applies.
                      [(B) Qualified subsidiary.--For purposes of
                    this subsection, the term ``qualified
                    subsidiary'' means any corporation--
                              [(i) all the stock of which, and
                            substantially all the indebtedness of
                            which, is held directly by the
                            corporation to which section 593
                            applies, and
                              [(ii) which is organized and operated
                            exclusively in connection with the
                            organization and operation of 1 or more
                            REMIC's.
              [(5)] (3) Coordination with section 172.--Any excess
            inclusion for any taxable year shall not be taken into
            account--
                      (A) in determining under section 172 the
                    amount of any net operating loss for such
                    taxable year, and
                      (B) in determining taxable income for such
                    taxable year for purposes of the 2nd sentence
                    of section 172(b)(2).
              * * * * * * *

     Subchapter N--Tax Based on Income From Sources Within or Without the
                                 United States

              * * * * * * *

              PART II--NONRESIDENT ALIENS AND FOREIGN CORPORATIONS

                    Subpart A--Nonresident Alien Individuals

              * * * * * * *

    SEC. 877. EXPATRIATION TO AVOID TAX.

        [(a) In General.--Every nonresident alien individual who at
    any time after March 8, 1965, and within the 10-year period
    immediately preceding the close of the taxable year lost United
    States citizenship, unless such loss did not have for one 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.]
        (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, 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 (after
            any reduction in such tax under the last sentence of
            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) Alternative Tax.--A nonresident alien individual
    described in subsection (a) shall be taxable for the taxable
    year as provided in section 1, 55, or 402(d)(1), except that--
              (1) the gross income shall include only the gross
            income described in section 872(a) (as modified by
            subsection [(c)] (d) of this section), and
              (2) the deductions shall be allowed if and to the
            extent that they are connected with the gross income
            included under this section, except that the capital
            loss carryover provided by section 1212(b) shall not be
            allowed; and the proper allocation and apportionment of
            the deductions for this purpose shall be determined as
            provided under regulations prescribed by the Secretary.
    For purposes of paragraph (2), the deductions allowed by
    section 873(b) shall be allowed; and the deduction (for losses
    not connected with the trade or business if incurred in
    transactions entered into for profit) allowed by section
    165(c)(2) shall be allowed, but only if the profit, if such
    transaction had resulted in a profit, would be included in
    gross income under this section. 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.
        (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.
          [(c) Special Rules of Source.--For purposes of subsection
    (b), the following items of gross income shall be treated as
    income from sources within the United States:
              [(1) Sale of property.--Gains on the sale or exchange
            of property (other than stock or debt obligations)
            located in the United States.
              [(2) 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.
    [For purposes of this section, gain on the sale or exchange of
    property which has a basis determined in whole or in part by
    reference to property described in paragraph (1) or (2) shall
    be treated as gain described in paragraph (1) or (2).]
      (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.
          [(d) Exception for Loss of Citizenship for Certain
    Causes.--Subsection (a) shall not apply to a nonresident alien
    individual whose loss of United States citizenship resulted
    from the application of section 301(b), 350, or 355 of the
    Immigration and Nationality Act, as amended (8 U.S.C. 1401(b),
    1482, or 1487).]
      (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).
        [(e)] (f) Burden of Proof.--If the Secretary establishes
    that it is reasonable to believe that an individual's loss of
    United States citizenship would, but for this section, result
    in a substantial reduction for the taxable year in the taxes on
    his probable income for such year, the burden of proving for
    such taxable year that such loss of citizenship did not have
    for one of its principal purposes the avoidance of taxes under
    this subtitle or subtitle B shall be on such individual.
              * * * * * * *

               PART IV--DOMESTIC INTERNATIONAL SALES CORPORATION

              * * * * * * *

                Subpart A--Treatment of Qualifying Corporations

              * * * * * * *

    SEC. 992. REQUIREMENTS OF A DOMESTIC INTERNATIONAL SALES CORPORATION.

        (a) * * *
              * * * * * * *
        (d) Ineligible Corporations.--The following corporations
    shall not be eligible to be treated as a DISC--
              (1) * * *
              * * * * * * *
              (3) a financial institution to which section 581 [or
            593] applies,
              * * * * * * *

             Subchapter O--Gain or Loss on Disposition of Property

              * * * * * * *

                     PART III--COMMON NONTAXABLE EXCHANGES

              * * * * * * *

    SEC. 1038. CERTAIN REACQUISITIONS OF REAL PROPERTY.

        (a) * * *
              * * * * * * *
        [(f) Reacquisitions by Domestic Building and Loan
    Associations.--This section shall not apply to a reacquisition
    of real property by an organization described in section 593(a)
    (relating to domestic building and loan associations, etc.).]
              * * * * * * *

    SEC. 1042. SALES OF STOCK TO EMPLOYEE STOCK OWNERSHIP PLANS OR CERTAIN
                        COOPERATIVES.

        (a) * * *
              * * * * * * *
        (c) Definitions; Special Rules.--For purposes of this
    section--
              (1) * * *
              * * * * * * *
              (4) Qualified replacement property.--
                      (A) * * *
                      (B) Operating corporation.--For purposes of
                    this paragraph--
                              (i) * * *
                              (ii) Financial institutions and
                            insurance companies.--The term
                            ``operating corporation'' shall
                            include--
                                      (I) any financial institution
                                    described in section 581 [or
                                    593], and
                                      (II) an insurance company
                                    subject to tax under subchapter
                                    L.
              * * * * * * *

                     Subchapter P--Capital Gains and Losses

              * * * * * * *

          PART V--SPECIAL RULES FOR BONDS AND OTHER DEBIT INSTRUMENTS

              * * * * * * *

                      Subpart B--Market Discount on Bonds

              * * * * * * *

    SEC. 1277. DEFERRAL OF INTEREST DEDUCTION ALLOCABLE TO ACCRUED MARKET
                        DISCOUNT.

        (a) * * *
              * * * * * * *
        (c) Net Direct Interest Expense.--For purposes of this
    section, the term ``net direct interest expense'' means, with
    respect to any market discount bond, the excess (if any) of--
              (1) the amount of interest paid or accrued during the
            taxable year on indebtedness which is incurred or
            continued to purchase or carry such bond, over
              (2) the aggregate amount of interest (including
            original issue discount) includible in gross income for
            the taxable year with respect to such bond.
        In the case of any financial institution which is a bank
    (as defined in section 585(a)(2)) [or to which section 593
    applies], the determination of whether interest is described in
    paragraph (1) shall be made under principles similar to the
    principles of section 291(e)(1)(B)(ii). Under rules similar to
    the rules of section 265(a)(5), short sale expenses shall be
    treated as interest for purposes of determining net direct
    interest expense.
              * * * * * * *

      Subchapter S--Tax Treatment of S Corporations and Their Shareholders

              * * * * * * *

                               PART I--IN GENERAL

              * * * * * * *

    SEC. 1361. S CORPORATION DEFINED.

        (a) * * *
        (b) Small business corporation.--
              (1) * * *
              (2) Ineligible corporation defined.--For purposes of
            paragraph (1), the term ``ineligible corporation''
            means any corporation which is--
                      (A) a member of an affiliated group
                    (determined under section 1504 without regard
                    to the exceptions contained in subsection (b)
                    thereof),
                      (B) a financial institution to which section
                    585 applies (or would apply but for subsection
                    (c) thereof) [or to which section 593 applies],
                      (C) an insurance company subject to tax under
                    subchapter L,
              * * * * * * *

                       Subtitle B--Estate and Gift Taxes

              * * * * * * *

                             CHAPTER 11--ESTATE TAX

                 Subchapter A--Estates of Citizens or Residents

              * * * * * * *

                            PART IV--TAXABLE ESTATE

    Sec. 2051. Definition of taxable estate.
         * * * * * * *
    Sec. 2057. Medical savings account.
              * * * * * * *

    SEC. 2057. MEDICAL SAVINGS ACCOUNTS.

        For purposes of the tax imposed by section 2001, the value
    of the taxable estate shall be determined by deducting from the
    value of the gross estate an amount equal to the value of any
    medical savings account (as defined in section 220(d)) included
    in the gross estate.
              * * * * * * *

               Subchapter B--Estates of Nonresidents Not Citizens

              * * * * * * *

    SEC. 2107. EXPATRIATION TO AVOID TAX.

        [(a) 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 dying after November 13, 1966, if after March
    8, 1965, and within the 10-year period ending with the date of
    death such decedent lost United States citizenship, unless such
    loss did not have for one of its principal purposes the
    avoidance of taxes under this subtitle or subtitle A.]
        (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) Gross Estate.--For purposes of the tax imposed by
    subsection (a), the value of the gross estate of every decedent
    to whom subsection (a) applies shall be determined as provided
    in section 2103, except that--
              (1) if such decedent owned (within the meaning of
            section 958(a)) at the time of his death 10 percent or
            more of the total combined voting power of all classes
            of stock entitled to vote of a foreign corporation, and
              (2) if such decedent owned (within the meaning of
            section 958(a)), or is considered to have owned (by
            applying the ownership rules of section 958(b)), at the
            time of his death, [more than 50 percent of the total
            combined voting power of all classes of stock entitled
            to vote of such foreign corporation,] 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,
            then that proportion of the fair market value of the
            stock of such foreign corporation owned (within the
            meaning of section 958(a)) by such decedent at the time
            of his death, which the fair market value of any assets
            owned by such foreign corporation and situated in the
            United States, at the time of his death, bears to the
            total fair market value of all assets owned by such
            foreign corporation at the time of his death, shall be
            included in the gross estate of such decedent. For
            purposes of the preceding sentence, a decedent shall be
            treated as owning stock of a foreign corporation at the
            time of his death if, at the time of a transfer, by
            trust or otherwise, within the meaning of sections 2035
            to 2038, inclusive, he owned such stock.
      (c) Credits.--
              (1) * * *
              (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.
              [(2)] (3) Other credits.--The tax imposed by
            subsection (a) shall be credited with the amounts
            determined in accordance with subsections (a) and (b)
            of section 2102. For purposes of subsection (a) of
            section 2102, sections 2011 to 2013, inclusive, shall
            be applied as if the credit allowed under paragraph (1)
            were allowed under section 2010.
      [(d) Exception for Loss of Citizenship for Certain Causes.--
    Subsection (a) shall not apply to the transfer of the estate of
    a decedent whose loss of United States citizenship resulted
    from the application of section 301(b), 350, or 355 of the
    Immigration and Nationality Act, as amended (8 U.S.C. 1401(b),
    1482, or 1487).]
      [(e)] (d) Burden of Proof.--If the Secretary establishes that
    it is reasonable to believe that an individual's loss of United
    States citizenship would, but for this section, result in a
    substantial reduction in the estate, inheritance, legacy, and
    succession taxes in respect of the transfer of his estate, the
    burden of proving that such loss of citizenship did not have
    for one of its principal purposes the avoidance of taxes under
    this subtitle or subtitle A shall be on the executor of such
    individual's estate.
      (e) Cross Reference.--
            For comparable treatment of long-term lawful permanent
            residents who ceased to be taxed as residents, see section
            877(e).
              * * * * * * *

                              CHAPTER 12--GIFT TAX

              * * * * * * *

                  Subchapter A--Determination of Tax Liability

              * * * * * * *

    SEC. 2501. IMPOSITION OF TAX.

      (a) Taxable Transfers.--
              (1)  * * *
              * * * * * * *
              [(3) Exceptions.--Paragraph (2) shall not apply in
            the case of a donor who at any time after March 8,
            1965, and within the 10-year period ending with the
            date of transfer lost United States citizenship
            unless--
                      [(A) such donor's loss of United States
                    citizenship resulted from the application of
                    section 301(b), 350, or 355 of the Immigration
                    and Nationality Act, as amended (8 U.S.C.
                    1401(b), 1482, or 1487), or
                      [(B) such loss did not have for one of its
                    principal purposes the avoidance of taxes under
                    this subtitle or subtitle A.]
              (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.
                      (E) Cross reference.--
              For comparable treatment of long-term lawful permanent
            residents who ceased to be taxed as residents, see section
            877(e).
              * * * * * * *

                          Subtitle C--Employment Taxes

              * * * * * * *

                CHAPTER 21--FEDERAL INSURANCE CONTRIBUTIONS ACT

              * * * * * * *

                        Subchapter C--General Provisions

              * * * * * * *

    SEC. 3121. DEFINITIONS.

      (a) Wages.--For purposes of this chapter, the term ``wages''
    means all remuneration for employment, including the cash value
    of all remuneration (including benefits) paid in any medium
    other than cash; except that such term shall not include--
              (1) * * *
              * * * * * * *
              (20) any benefit provided to or on behalf of an
            employee if at the time such benefit is provided it is
            reasonable to believe that the employee will be able to
            exclude such benefit from income under section 74(c),
            117, or 132; [or]
              (21) in the case of a member of an Indian tribe, any
            remuneration on which no tax is imposed by this chapter
            by reason of section 7873 (relating to income derived
            by Indians from exercise of fishing rights)[.]; or
              (22) 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).
    Nothing in the regulations prescribed for purposes of chapter
    24 (relating to income tax withholding) which provides an
    exclusion from ``wages'' as used in such chapter shall be
    construed to require a similar exclusion from ``wages'' in the
    regulations prescribed for purposes of this chapter. Except as
    otherwise provided in regulations prescribed by the Secretary,
    any third party which makes a payment included in wages solely
    by reason of the parenthetical matter contained in subparagraph
    (A) of paragraph (2) shall be treated for purposes of this
    chapter and chapter 22 as the employer with respect to such
    wages.

                      CHAPTER 22--RAILROAD RETIREMENT ACT

              * * * * * * *

                         Subchapter C--Tax on Employees

              * * * * * * *

    SEC. 3231. DEFINITIONS.

      (a) * * *
              * * * * * * *
      (e) Compensation.--For purposes of this chapter--
              (1) * * *
              * * * * * * *
              (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).
              * * * * * * *

                    CHAPTER 23--FEDERAL UNEMPLOYMENT TAX ACT

              * * * * * * *

    SEC. 3306. DEFINITIONS.

      (a) * * *
      (b) Wages.--For purposes of this chapter, the term ``wages''
    means all remuneration for employment, including the cash value
    of all remuneration (including benefits) paid in any medium
    other than cash; except that such term shall not include--
              (1) * * *
              * * * * * * *
              (15) any payment made by an employer to a survivor or
            the estate of a former employee after the calendar year
            in which such employee died; [or]
              (16) any benefit provided to or on behalf of an
            employee if at the time such benefit is provided it is
            reasonable to believe that the employee will be able to
            exclude such benefit from income under section 74(c),
            117, or 132[.]; or
              (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).
              * * * * * * *

            CHAPTER 24--COLLECTION ON INCOME TAX AT SOURCE ON WAGES

              * * * * * * *

                      Subchapter A--Withholding From Wages

              * * * * * * *

    SEC. 3401. DEFINITIONS.

        (a) Wages. For purposes of this chapter, the term ``wages''
    means all remuneration (other than fees paid to a public
    official) for services performed by an employee for his
    employer, including the cash value of all remuneration
    (including benefits) paid in any medium other than cash; except
    that such term shall not include remuneration paid--
              (1) * * *
              * * * * * * *
              (19) any benefit provided to or on behalf of an
            employee if at the time such benefit is provided it is
            reasonable to believe that the employee will be able to
            exclude such benefit from income under section 74(c),
            117, or 132; [or]
              (20) for any medical care reimbursement made to or
            for the benefit of an employee under a self-insured
            medical reimbursement plan (within the meaning of
            section 105(h)(6))[.]; or
              (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).
              * * * * * * *

                     Subtitle D--Miscellaneous Excise Taxes

              * * * * * * *

                   CHAPTER 43--QUALIFIED PENSION, ETC., PLANS

    Sec. 4971. Taxes on failure to meet minimum funding standards.
         * * * * * * *
    Sec. 4980C. Requirements for issuers of long-term care insurance
              policies.

    SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO INDIVIDUAL RETIREMENT
                        ACCOUNTS, MEDICAL SAVINGS ACCOUNTS, CERTAIN SECTION
                        403(b) CONTRACTS, AND CERTAIN INDIVIDUAL RETIREMENT
                        ANNUITIES.

        (a) Tax Imposed.--In the case of--
              (1) an individual retirement account (within the
            meaning of section 408(a)), [or]
              (2) a medical savings account (within the meaning of
            section 220(d)), or
              [(2)] (3) an individual retirement annuity (within
            the meaning of section 408(b)), a custodial account
            treated as an annuity contract under section
            403(b)(7)(A) (relating to custodial accounts for
            regulated investment company stock),
    there is imposed for each taxable year a tax in an amount equal
    to 6 percent of the amount of the excess contributions to such
    individual's accounts or annuities (determined as of the close
    of the taxable year). The amount of such tax for any taxable
    year shall not exceed 6 percent of the value of the account or
    annuity (determined as of the close of the taxable year). In
    the case of an endowment contract described in section 408(b),
    the tax imposed by this section does not apply to any amount
    allocable to life, health, accident, or other insurance under
    such contract. The tax imposed by this subsection shall be paid
    by such individual.
              * * * * * * *
        (d) Excess Contributions to Medical Savings Accounts.--For
    purposes of this section, in the case of a medical savings
    accounts (within the meaning of section 220(d)), the term
    `excess contributions' means the sum of--
              ``(1) the amount by which the amount contributed for
            the taxable year to the accounts (other than rollover
            contributions described in section 220(f)(5)) exceeds
            the amount allowable as a deduction under section 220
            for such contributions, and
              (2) the amount determined under this subsection for
            the preceding taxable year, reduced by the sum of
            distributions out of the account included in gross
            income under section 220(f) (2) or (3) and the excess
            (if any) of the maximum amount allowable as a deduction
            under section 220 for the taxable year over the amount
            contributed.
    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.
              * * * * * * *

    SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.

        (a) * * *
              * * * * * * *
        (c) Prohibited Transaction.--
              (1) General rule.--For purposes of this section, the
            term ``prohibited transaction'' means any direct or
            indirect--
                      (A) * * *
              * * * * * * *
              (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.
              * * * * * * *
        (e) Definitions.--
              [(1) Plan.--For purposes of this section, the term
            ``plan'' means 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), an individual retirement account
            described in section 408(a) or an individual retirement
            annuity described in section 408(b) (or a trust, plan,
            account, or annuity which, at any time, has been
            determined by the Secretary to be such a trust, plan,
            or account).]
              (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.
              * * * * * * *

    SEC. 4980B. FAILURE TO SATISFY CONTINUATION COVERAGE REQUIREMENTS OF
                        GROUP HEALTH PLANS.

        (a) General Rule.--There is hereby imposed a tax on the
    failure of a group health plan to meet [the requirements of
    subsection (f) with respect to any qualified beneficiary.] the
    requirements of--
              (1) subsection (f) with respect to any qualified
            beneficiary, or
              (2) subject to subsection (h)--
                      (A) section 101 or 102 of the Health Coverage
                    Availability and Affordability Act of 1996 with
                    respect to any individual covered under the
                    group health plan, or
                      (B) section 103 of such Act with respect to
                    any individual.
              * * * * * * *
          (f) Continuation Coverage Requirements of Group Health
    Plans.--
              (1) * * *
              * * * * * * *
              (6) Notice requirement.--In accordance with
            regulations prescribed by the secretary--
                      (A) The group health plan shall provide, at
                    the time of commencement of coverage under the
                    plan, written notice to each covered employee
                    and spouse of the employee (if any) of the
                    rights provided under this subsection and
                    subtitle A of title I of the Health Coverage
                    Availability and Affordability Act of 1996.
              * * * * * * *
              (9) Continuation of long-term care coverage not
            required.--A group health plan shall not be treated as
            failing to meet the requirements of this subsection
            solely by reason of failing to provide coverage under
            any qualified long-term care insurance contract (as
            defined in section 7702B(b)).
              * * * * * * *
        (h) Special Rules.--For purposes of applying this section
    in the case of requirements described in subsection (a)(2)
    relating to section 101, section 102, or section 103 of the
    Health Coverage Availability and Affordability Act of 1996--
              (1) In general.--
                      (A) Definition of group health plan.--The
                    term ``group health plan'' has the meaning
                    given such term in section 191(a) of the Health
                    Coverage Availability and Affordability Act of
                    1996.
                      (B) Qualified beneficiary.--Subsections (b),
                    (c), and (e) shall be applied by substituting
                    the term ``individual'' for the term
                    ``qualified beneficiary'' each place it
                    appears.
                      (C) Noncompliance period.--Clause (ii) of
                    subsection (b)(2)(B) and the second sentence of
                    subsection (b)(2) shall not apply.
                      (D) Limitation on tax.--Subparagraph (B) of
                    subsection (c)(3) shall not apply.
                      (E)  Liability for tax.--Paragraph (2) of
                    subsection (e) shall not apply.
              (2) Deferral to state regulation.--No tax shall be
            imposed by this section on any failure to meet the
            requirements of such section by any entity which offers
            health insurance coverage and which is an insurer or
            health maintenance organization (as defined in section
            191(c) of the Health Coverage Availability and
            Affordability Act of 1996) regulated by a State unless
            the Secretary of Health and Human Services has made the
            determination described in section 104(c)(2) of such
            Act with respect to such State, section, and entity.
              (3) Limitation for insured plans.--In the case of a
            group health plan of a small employer (as defined in
            section 191 of the Health Coverage Availability and
            Affordability Act of 1996) that provides health care
            benefits solely through a contract with an insurer or
            health maintenance organization (as defined in such
            section), no tax shall be imposed by this section upon
            the employer on a failure to meet such requirements if
            the failure is solely because of the product offered by
            the insurer or organization under such contract.
              (4) Limitation on imposition of tax.--In no case
            shall a tax be imposed by this section for a failure to
            meet such a requirement if--
                      (A) a civil money penalty has been imposed by
                    the Secretary of Labor under part 5 of subtitle
                    A of title I of the Employee Retirement Income
                    Security Act of 1974 with respect to such
                    failure, or
                      (B) a civil money penalty has been imposed by
                    the Secretary of Health and Human Services
                    under section 104(c) of the Health Coverage
                    Availability and Affordability Act of 1996 with
                    respect to such failure.
              * * * * * * *

    SEC. 4980C. REQUIREMENTS FOR ISSUERS OF LONG-TERM CARE INSURANCE
                        POLICIES.

          (a) General Rule.--There is hereby imposed on any person
    failing to meet the requirements 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 policy for each day
            any requirements of subsection (c) or (d) are not met
            with respect to each long-term care insurance policy.
              (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 long-term care insurance
                                    policy, 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(f)(2)(B).
              (2) Delivery of policy.--If an application for a
            long-term care insurance policy (or for a certificate
            under a group long-term care insurance policy) is
            approved, the issuer shall deliver to the applicant (or
            policyholder or certificateholder) the policy (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 long-term care insurance policy 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) Long-Term Care Insurance Policy Defined.--For purposes
    of this section, the term ``long-term care insurance policy''
    means any product which is advertised, marketed, or offered as
    long-term care insurance.
              * * * * * * *

                    Subtitle F--Procedure and Administration

              * * * * * * *

                      CHAPTER 61--INFORMATION AND RETURNS

                       Subchapter A--Returns and Records

              * * * * * * *

                         PART III--INFORMATION RETURNS

              * * * * * * *

    Subpart A--Information Concerning Persons Subject to Special Provisions

    Sec. 6031. Return of partnership income.
         * * * * * * *
    Sec. 6039F. Information on individuals losing United States citizenship.
         * * * * * * *

    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--
              (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.
              * * * * * * *

       Subpart B--Information Concerning Transactions With Other Persons

              * * * * * * *
    Sec. 6041. Information at source.
                * * * * * * *
    Sec. 6050Q. Certain long-term care benefits.
                * * * * * * *

    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,
            and
              (2) the name, address, and TIN of such individual.
        (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 any amount paid under
    a long-term care insurance policy (within the meaning of
    section 4980C(e)).
              * * * * * * *

                             CHAPTER 63--ASSESSMENT

              * * * * * * *

      Subchapter B--Deficiency Procedures in the Case of Income, Estate,
                         Gift, and Certain Excise Taxes

              * * * * * * *

    SEC. 6213. RESTRICTIONS APPLICABLE TO DEFICIENCIES; PETITION TO TAX
                        COURT.

        (a) * * *
              * * * * * * *
        (g) Definitions.--For purposes of this section--
              (1) Return.--The term ``return'' includes any return,
            statement, schedule, or list, and any amendment or
            supplement thereto, filed with respect to any tax
            imposed by subtitle A or B, or chapter 41, 42, 43, or
            44.
              (2) Mathematical or clerical error.--The term
            ``mathematical or clerical error'' means--
                      (A) an error in addition, subtraction,
                    multiplication, or division shown on any
                    return,
                      (B) an incorrect use of any table provided by
                    the Internal Revenue Service with respect to
                    any return if such incorrect use is apparent
                    from the existence of other information on the
                    return,
                      (C) an entry on a return of an item which is
                    inconsistent with another entry of the same or
                    another item on such return,
                      (D) an omission of information which is
                    required to be supplied on the return to
                    substantiate an entry on the return, [and]
                      (E) an entry on a return of a deduction or
                    credit in an amount which exceeds a statutory
                    limit imposed by subtitle A or B, or chapter
                    41, 42, 43, or 44, if such limit is expressed--
                              (i) as a specified monetary amount,
                            or
                              (ii) as a percentage, ratio, or
                            fraction,
                    and if the items entering into the application
                    of such limit appear on such return[.],
                      (F) an omission of a correct taxpayer
                    identification number required under section 32
                    (relating to the earned income credit) to be
                    included on a return, and
                      (G) an entry on a return claiming the credit
                    under section 32 with respect to net earnings
                    from self-employment described in section
                    32(c)(2)(A) to the extent the tax imposed by
                    section 1401 (relating to self-employment tax)
                    on such net earnings has not been paid.
              * * * * * * *

     CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE
                                   PENALTIES

              * * * * * * *

                       Subchapter B--Assessable Penalties

              * * * * * * *

                           PART I--GENERAL PROVISIONS

              * * * * * * *

    SEC. 6693. FAILURE TO PROVIDE REPORTS ON INDIVIDUAL RETIREMENT ACCOUNTS
                        OR ANNUITIES; PENALTIES RELATING TO DESIGNATED
                        NONDEDUCTIBLE CONTRIBUTIONS.

      [(a) The person required by subsection (i) or (l) of section
    408 to file a report regarding an individual retirement account
    or individual retirement annuity at the time and in the manner
    required by such subsection shall pay a penalty of $50 for each
    failure unless it is shown that such failure is due to
    reasonable cause.]
        (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).
              * * * * * * *

         PART II--FAILURE TO COMPLY WITH CERTAIN INFORMATION REPORTING
                                  REQUIREMENTS

              * * * * * * *

    SEC. 6724. WAIVER; DEFINITIONS AND SPECIAL RULES.

        (a) * * *
              * * * * * * *
        (d) Definitions.--For purposes of this part--
              (1) Information return.--The term `information
            return' means--
                      (A) * * *
                      (B) any return required by--
                              (i) * * *
              * * * * * * *
                              (ix) section 6050Q (relating to
                            certain long-term care benefits),
                              [(ix)] (x) section 6052(a) (relating
                            to reporting payment of wages in the
                            form of group-life insurance),
                              [(x)] (xi) section 6053(c)(1)
                            (relating to reporting with respect to
                            certain tips),
                              [(xi)] (xii) subsection (b) or (e) of
                            section 1060(b) (relating to reporting
                            requirements of transferors and
                            transferees in certain asset
                            acquisitions),
                              [(xii)] (xiii) subparagraph (A) or
                            (C) of subsection (c)(4), or section
                            4093 (relating to information reporting
                            with respect to tax on diesel and
                            aviation fuels), or
                              [(xiii)] (xiv) section 4101(d)
                            (relating to information reporting with
                            respect to fuels taxes)
                              [(xiv)] (xv) subparagraph (C) of
                            section 338(h)(10)(relating to
                            information required to be furnished to
                            the Secretary in case of elective
                            recognition of gain or loss).
            Such term also includes any form, statement, or
            schedule required to be filed with the Secretary with
            respect to any amount from which tax was required to be
            deducted and withheld under chapter 3 (or from which
            tax would be required to be so deducted and withheld
            but for an exemption under this title or any treaty
            obligation of the United States).
              (2) Payee statement.--The term `payee statement'
            means any statement required to be furnished under--
                      (A) * * *
              * * * * * * *
                      (Q) section 6050Q(b) (relating to certain
                    long-term care benefits),
                      [(Q)] (R) section 6051 (relating to receipts
                    for employees),
                      [(R)] (S) section 6052(b) (relating to
                    returns regarding payment of wages in the form
                    of group-term life insurance),
                      [(S)] (T) section 6053(b) or (c) (relating to
                    reports of tips), or
                      [(T)] (U) section 4093(c)(4)(B) (relating to
                    certain purchasers of diesel and aviation
                    fuels).
            Such term also includes any form, statement, or
            schedule required to be furnished to the recipient of
            any amount from which tax was required to be deducted
            and withheld under chapter 3 (or from which tax would
            be required to be so deducted and withheld but for an
            exemption under this title or any treaty obligation of
            the United States).
              * * * * * * *

                            CHAPTER 79--DEFINITIONS

        Sec. 7701. Definitions.
              * * * * * * *
        Sec. 7702B. Treatment of qualified long-term care
    insurance.
              * * * * * * *

    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 (f).
              (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 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.
                    Nothing in this section shall be construed to
                    require a contract to take into account all of
                    the preceding activities of daily living.
              (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 amount of periodic
            payments under all qualified long-term care insurance
            contracts with respect to an insured for any period
            exceeds the dollar amount in effect for such period
            under paragraph (3), such excess payments shall be
            treated as made for qualified long-term care services
            only to the extent of the costs incurred by the payee
            (not otherwise compensated for by insurance or
            otherwise) for qualified long-term care services
            provided during such period for such insured.
              (2) Periodic payments.--For purposes of paragraph
            (1), 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.
              (3) 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).
              (4) Inflation adjustment.--In the case of a calendar
            year after 1997, the dollar amount contained in
            paragraph (3) shall be increased at the same time and
            in the same manner as amounts are increased pursuant to
            section 213(d)(10).
        (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
                      (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 the coverage under a
            qualified long-term care insurance contract.
      (f) Consumer Protection Provisions.--
              (1) In general.--The requirements of this subsection
            are met with respect to any contract if any long-term
            care insurance policy issued under 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 policy if
                    such policy 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 policy if such
            policy meets the requirements of section 4980C(d)(1).
              (4) Nonforfeiture requirements.--
                      (A) In general.--The requirements of this
                    paragraph are met with respect to any level
                    premium long-term care insurance policy, if the
                    issuer of such policy 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 policies approved by the
                            Secretary for the same policy 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) Long-term care insurance policy defined.--For
            purposes of this subsection, the term ``long-term care
            insurance policy'' has the meaning given such term by
            section 4980C(e).
              * * * * * * *
                                  ----------

                              SOCIAL SECURITY ACT

              * * * * * * *

                              definition of wages

        Sec. 209. (a) For the purposes of this title, the term
    ``wages'' means remuneration paid prior to 1951 which was wages
    for the purposes of this title under the law applicable to the
    payment of such remuneration, and remuneration paid after 1950
    for employment, including the cash value of all remuneration
    (including benefits) paid in any medium other than cash; except
    that, in the case of remuneration paid after 1950, such term
    shall not include--
              (1) * * *
              * * * * * * *
              (17) Any benefit provided to or on behalf of an
            employee if at the time such benefit is provided it is
            reasonable to believe that the employee will be able to
            exclude such benefit from income under section 74(c),
            117, or 132 of the Internal Revenue Code of 1986; [or]
              (18) Remuneration consisting of income excluded from
            taxation under section 7873 of the Internal Revenue
            Code of 1986 (relating to income derived by Indians
            from exercise of fishing rights)[.]; or
              (19) 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)
            of the Internal Revenue Code of 1986.
              * * * * * * *

       [TITLE XI--GENERAL PROVISIONS AND PEER REVIEW] TITLE XI--GENERAL
           PROVISIONS, PEER REVIEW, AND ADMINISTRATIVE SIMPLIFICATION

                           Part A--General Provisions

      exclusion of certain individuals and entities from participation in
                    medicare and state health care programs

        Sec. 1128. (a) Mandatory Exclusion.--The Secretary shall
    exclude the following individuals and entities from
    participation in any program under title XVIII and shall direct
    that the following individuals and entities be excluded from
    participation in any State health care program (as defined in
    subsection (h)):
              (1) * * *
              * * * * * * *
              (3) Felony conviction relating to health care
            fraud.--Any individual or entity that has been
            convicted after the date of the enactment of the Health
            Coverage Availability and Affordability 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.
              (4) Felony conviction relating to controlled
            substance.--Any individual or entity that has been
            convicted after the date of the enactment of the Health
            Coverage Availability and Affordability 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.
              (b) Permissive Exclusion.--The Secretary may exclude
            the following individuals and entities from
            participation in any program under title XVIII and may
            direct that the following individuals and entities be
            excluded from participation in any State health care
            program:
              [(1) Conviction relating to fraud.--Any individual or
            entity that has been convicted, 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 program operated by or financed in whole or in
            part by any Federal, State, or local government agency,
            of a criminal offense relating to fraud, theft,
            embezzlement, breach of fiduciary responsibility, or
            other financial misconduct.]
              (1) Conviction relating to fraud.--Any individual or
            entity that has been convicted after the date of the
            enactment of the Health Coverage Availability and
            Affordability 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.
              * * * * * * *
              (3) [Conviction] Misdemeanor conviction relating to
            controlled substance.--Any individual or entity that
            has been convicted, under Federal or State law, of a
            [criminal offense] criminal offense consisting of a
            misdemeanor relating to the unlawful manufacture,
            distribution, prescription, or dispensing of a
            controlled substance.
              * * * * * * *
                (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.
        (c) Notice, Effective Date, and Period of Exclusion.--(1) *
    * *
              * * * * * * *
        (3)(A) * * *
              * * * * * * *
        (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.
              * * * * * * *

                            civil monetary penalties

        Sec. 1128A. (a) Any person (including an organization,
    agency, or other entity, but excluding a beneficiary, as
    defined in subsection (i)(5)) that--
                (1) knowingly presents or causes to be presented to
            an officer, employee, or agent of the United States, or
            of any department or agency thereof, or of any State
            agency (as defined in subsection (i)(1)), a claim (as
            defined in subsection (i)(2)) that the Secretary
            determines--
                        (A) is for a medical or other item or
                    service that the person knows or should know
                    was not provided as [claimed], 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,
                      (C) is presented for a physician's service
                    (or an item or service incident to a
                    physician's service) by a person who knows or
                    should know that the individual who furnished
                    (or supervised the furnishing of) the service--
                              (i) was not licensed as a physician,
                              (ii) was licensed as a physician, but
                            such license had been obtained through
                            a misrepresentation of material fact
                            (including cheating on an examination
                            required for licensing), or
                              (iii) represented to the patient at
                            the time the service was furnished that
                            the physician was certified in a
                            medical specialty by a medical
                            specialty board when the individual was
                            not so certified, [or]
                      (D) is for a medical or other item or service
                    furnished during a period in which the person
                    was excluded from the program under which the
                    claim was made pursuant to a determination by
                    the Secretary under this section or under
                    section 1128, 1156, 1160(b) (as in effect on
                    September 2, 1982), 1862(d) (as in effect on
                    the date of the enactment of the Medicare and
                    Medicaid Patient and Program Protection Act of
                    1987), or 1866(b) or as a result of the
                    application of the provisions of section
                    1842(j)(2); [or],or
                      (E) is for a medical or other item or service
                    that a person knows or should know is not
                    medically necessary; or
              (2) knowlingly presents or causes to be presented to
            any person a request for payment which is in violation
            of the terms of (A) an assignment under section
            1842(b)(3)(B)(ii), or (B) an agreement with a State
            agency (or other requirement of a State plan under
            title XIX) not to charge a person for an item or
            service in excess of the amount permitted to be
            charged, or (c) an agreement to be a participating
            physician or supplier under section 1842(h)(1), or (D)
            an agreement pursuant to section 1866(a)(1)(G), [or];
              (3) [gives] knowingly gives or causes to be given to
            any person, with respect to coverage under title XVIII
            of inpatient hospital services subject to the
            provisions of section 1886, information that he knows
            or should know is false or misleading, and that could
            reasonably be expected to influence the decision when
            to discharge such person or another individual from the
            hospital[;];
              (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;
                    or
              (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);
    shall be subject, in addition to any other penalties that may
    be prescribed by law, to a civil money penalty of not more than
    [$2,000] $10,000 for each item or service (or, in cases under
    paragraph (3) $15,000 for each individual with respect to whom
    false or misleading information was given; in cases under
    paragraph (4), $10,000 for each day the prohibited relationship
    occurs). In addition, such a person shall be subject to an
    assessment of not more than [twice the amount] 3 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. In addition the Secretary may make a determination
    in the same proceeding to exclude the person from participation
    in the [programs under title XVIII] Federal health care
    programs (as defined in section 1128B(f)(1)) and to direct the
    appropriate State agency to exclude the person from
    participation in any State health care program.
        (b)(1) * * *
              * * * * * * *
        (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.
        (f) Civil money penalties and assessments imposed under
    this section may be compromised by the Secretary and may be
    recovered in a civil action in the name of the United States
    brought in United States district court for the district where
    the claim was presented, or where the claimant resides, as
    determined by the Secretary. Amounts recovered under this
    section shall be paid to the Secretary and disposed of as
    follows:
            (1) * * *
              * * * * * * *
              (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
            Coverage Availability and Affordability 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)] (4) The remainder of the amounts recovered
            shall be deposited as miscellaneous receipts of the
            Treasury of the United States.
    The amount of such penalty or assessment, when finally
    determined, or the amount agreed upon in compromise, may be
    deducted from any sum then or later owing by the United States
    or a State agency to the person against whom the penalty or
    assessment has been assessed.
              * * * * * * *
        (i) For the purposes of this section:
              (1) The term ``State agency'' means the agency
            established or designated to administer or supervise
            the administration of the State plan under title XIX of
            this Act or designed to administer the State's program
            under title V or XX of this Act.
              (2) The term ``claim'' means an application for
            payments for items and services under [title V, XVIII,
            XIX, or XX of this Act] a Federal health care program
            (as defined in section 1128B(f)).
              * * * * * * *
              (4) The term ``agency of the United States'' includes
            any contractor acting as a fiscal intermediary,
            carrier, or fiscal agent or any other claims processing
            agent for [a health insurance or medical services
            program under title XVIII or XIX of this Act] a Federal
            health care program (as so defined).
              (5) The term ``beneficiary'' means an individual who
            is eligible to receive items or services for which
            payment may be made under [title V, XVIII, XIX, or XX]
            but does not include a provider, supplier, or
            practitioner.
              (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--
                                      (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 Coverage Availability
                    and Affordability 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.
              (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.
              * * * * * * *
        (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 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.

     criminal penalties for acts involving [medicare or state health care
                     programs] federal health care programs

        Sec. 1128B. (a) Whoever--
              (1) knowingly and willfully makes or causes to be
            made any false statement or representation of a
            material fact in any application for any benefit or
            payment under [a program under title XVIII or a State
            health care program (as defined in section 1128(h))] a
            Federal health care program,
                (4) having made application to receive any such
            benefit or payment for the use and benefit of another
            and having received it, knowingly and willfully
            converts such benefit or payment or any part thereof to
            a use other than for the use and benefit of such other
            person, [or]
                (5) presents or causes to be presented a claim for
            a physician's service for which payment may be made
            under [a program under title XVIII or a State health
            care program] and knows that the individual who
            furnished the service was not licensed as a physician,
            or a Federal health care program,]
                (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),
    shall (i) in the case of such a statement, representation,
    concealment, failure, or conversion by any person in connection
    with the furnishing (by that person) of items or services for
    which payment is or may be made under the program, be guilty of
    a felony and upon conviction thereof fined not more than
    $25,000 or imprisoned for not more than five years or both, or
    (ii) in the case of such a statement, representation,
    concealment, failure, or conversion by any other person, be
    guilty of a misdemeanor and upon conviction thereof fined not
    more than $10,000 or imprisoned for not more than one year, or
    both. In addition, in any case where an individual who is
    otherwise eligible for assistance under [a State plan approved
    under title XIX] a Federal health care program is convicted of
    an offense under the preceding provisions of this subsection,
    [the State may at its option (notwithstanding any other
    provision of that title or of such plan)] the administrator of
    such program may at its option (notwithstanding any other
    provision of such program) limit, restrict or suspend the
    eligibility of that individual for such period (not exceeding
    one year) as it deems appropriate; but the imposition of a
    limitation, restriction, or suspension with respect to the
    eligibility of any individual under this sentence shall not
    affect the eligibility of any other person for assistance under
    the plan, regardless of the relationship between that
    individual and such other person.
        (b)(1) Whoever knowingly and willfully solicits or receives
    any remuneration (including any kickback, bribe, or rebate)
    directly or indirectly, overtly or covertly, in cash or in
    kind--
              (A) in return for referring an individual to a person
            for the furnishing or arranging for the furnishing of
            any item or service for which payment may be made in
            whole or in part under title XVIII or a State health
            care program, or
              (B) in return for purchasing, leasing, ordering, or
            arranging for or recommending purchasing, leasing, or
            ordering any good, facility, service, or item for which
            payment may be made in whole or in part under [title
            XVIII or a State health care program] a Federal health
            care program,
    shall be guilty of a felony and upon conviction thereof, shall
    be fined not more than $25,000 or imprisoned for not more than
    five years, or both.
        (2) Whoever knowingly and willfully offers or pays any
    remuneration (including any kickback, bribe, or rebate)
    directly or indirectly, overtly or covertly, in cash or in kind
    to any person to induce such person--
              (A) to refer an individual to a person for the
            furnishing or arranging for the furnishing of any item
            or service for which payment may be made in whole or in
            part under [title XVIII or a State health care program]
            a Federal health care program, or
              (B) to purchase, lease, order, or arrange for or
            recommend purchasing, leasing, or ordering any good,
            facility, service, or item for which payment may be
            made in whole or in part under [title XVIII or a State
            health care program] a Federal health care program,
    shall be guilty of a felony and upon conviction thereof, shall
    be fined not more than $25,000 or imprisoned for not more than
    five years, or both.
        (3) Paragraphs (1) and (2) shall not apply to--
              (A) a discount or other reduction in price obtained
            by a provider of services or other entity under [title
            XVIII or a State health care program] a Federal 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
            [title XVIII or a State health care program] a Federal
            health care program;
              * * * * * * *
              (C) 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 who are furnishing
            services reimbursed under [title XVIII or a State
            health care program] a Federal health care program if--
                      (i) * * *
              * * * * * * *
              (D) a waiver of any coinsurance under part B of title
            XVIII 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]
              (E) any payment practice specified by the Secretary
            in regulations promulgated pursuant to section 14(a) of
            the Medicare and Medicaid Patient and Program
            Protection Act of 1987[.]; and
              (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 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, whether through a withhold,
            capitation, incentive pool, per diem payment, or any
            other similar risk arrangement which places the
            individual or entity at substantial financial risk.
        (c) Whoever knowingly and willfully makes or causes to be
    made, or induces or seeks to induce the making of, any false
    statement or representation of a material fact with respect to
    the conditions or operation of any institution, facility, or
    entity in order that such institution, facility, or entity may
    qualify (either upon initial certification or upon
    recertification) as a hospital, rural primary care hospital,
    skilled nursing facility, nursing facility, intermediate care
    facility for the mentally retarded, or other entity (including
    an eligible organization under section 1876(b)) for which
    certification is required under title XVIII or a State health
    care program (as defined in section 1128(h)), or with respect
    to information required to be provided under section 1124A,
    shall be guilty of a felony and upon conviction thereof shall
    be fined not more than $25,000 or imprisoned for not more than
    five years, or both.
              * * * * * * *
        (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).

                        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.

    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
            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 or
                    title XXI 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 respond to a party requesting an
                            advisory opinion by not later than 30
                            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.
      (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
                    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.

              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).
      (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 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 respecting
            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 this database
            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 this 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) 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.
                              (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).''.
              * * * * * * *

       PART B--PEER REVIEW OF THE UTILIZATION AND QUALITY OF HEALTH CARE
                                    SERVICES

              * * * * * * *

     obligations of health care practitioners and providers of health care
             services; sanctions and penalties; hearings and review

        Sec. 1156. (a) * * *
        (b)(1) If after reasonable notice and opportunity for
    discussion with the practitioner or person concerned, and, if
    appropriate, after the practitioner or person has been given a
    reasonable opportunity to enter into and complete a corrective
    action plan (which may include remedial education) agreed to by
    the organization, and has failed successfully to complete such
    plan, any organization having a contract with the Secretary
    under this part determines that such practitioner or person
    has--
              (A) failed in a substantial number of cases
            substantially to comply with any obligation imposed on
            him under subsection (a), or
              (B) grossly and flagrantly violated any such
            obligation in one or more instances,
    such organization shall submit a report and recommendations to
    the Secretary. If the Secretary agrees with such determination,
    [and determines that such practitioner or person, in providing
    health care services over which such organization has review
    responsibility and for which payment (in whole or in part) may
    be made under this Act, has demonstrated an unwillingness or a
    lack of ability substantially to comply with such obligations,]
    the Secretary (in addition to any other sanction provided under
    law) may exclude (permanently or for such period as the
    Secretary [may prescribe)] may prescribe, except that such
    period may not be less than 1 year) such practitioner or person
    from eligibility to provide services under this Act on a
    reimbursable basis. [In determining whether a practitioner or
    person has demonstrated an unwillingness or lack of ability
    substantially to comply with such obligations, the Secretary
    shall consider the practitioner's or person's willingness or
    lack of ability, during the period before the organization
    submits its report and recommendations, to enter into and
    successfully complete a corrective action plan.] If the
    Secretary fails to act upon the recommendations submitted to
    him by such organization within 120 days after such submission,
    such practitioner or person shall be excluded from eligibility
    to provide services on a reimbursable basis until such time as
    the Secretary determines otherwise.
        (2) A determination made by the Secretary under this
    subsection to exclude a practitioner or person shall be
    effective on the same date and in the same manner as an
    exclusion from participation under the programs under this Act
    becomes effective under section 1128(c), and [shall remain]
    shall (subject to the minimum period specified in the second
    sentence of paragraph (1)) remain in effect until the Secretary
    finds and gives reasonable notice to the public that the basis
    for such determination has been removed and that there is
    reasonable assurance that it will not recur.
        (3) In lieu of the sanction authorized by paragraph (1),
    the Secretary may require that (as a condition to the continued
    eligibility of such practitioner or person to provide such
    health care services on a reimbursable basis) such practitioner
    or person pays to the United States, in case such acts or
    conduct involved the provision or ordering by such practitioner
    or person of health care services which were medically improper
    or unnecessary, an amount not in excess of [the actual or
    estimated cost] up to $10,000 for each instance of the
    medically improper or unnecessary services so provided. Such
    amount may be deducted from any sums owing by the United States
    (or any instrumentality thereof) to the practitioner or person
    from whom such amount is claimed.
              * * * * * * *

                     PART C--ADMINISTRATIVE SIMPLIFICATION

    ``SEC. 1171. DEFINITIONS.

        For purposes of this part:
              ``(1) Clearinghouse.--The term ``clearinghouse''
            means a public or private entity that--
                      (A) processes or facilitates the processing
                    of nonstandard data elements of health
                    information into standard data elements; or
                      (B) provides the means by which persons may
                    meet the requirements of this part.
              (2) 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.
              (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 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 a
            plan which provides, or pays the cost of, health
            benefits. Such term includes the following, or any
            combination thereof:
                      (A) Part A or part B of the medicare program
                    under title XVIII.
                      (B) The medicaid program under title XIX.
                      (C) A medicare supplemental policy (as
                    defined in section 1882(g)(1)).
                      (D) Coverage issued as a supplement to
                    liability insurance.
                      (E) General liability insurance.
                      (F) Worker's compensation or similar
                    insurance.
                      (G) Automobile or automobile medical-payment
                    insurance.
                      (H) 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).
                      (I) A hospital or fixed indemnity income-
                    protection policy.
                      (J) An employee welfare benefit plan, as
                    defined in section 3(1) of the Employee
                    Retirement Income Security Act of 1974 (29
                    U.S.C. 1002(1)), but only to the extent the
                    plan is established or maintained for the
                    purpose of providing health benefits and has 50
                    or more participants (as defined in section
                    3(7) of such Act).
                      (K) 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.
                      (L) The health care program for active
                    military personnel under title 10, United
                    States Code.
                      (M) The veterans health care program under
                    chapter 17 of title 38, United States Code.
                      (N) The Civilian Health and Medical Program
                    of the Uniformed Services (CHAMPUS), as defined
                    in section 1073(4) of title 10, United States
                    Code.
                      (O) The Indian health service program under
                    the Indian Health Care Improvement Act (25
                    U.S.C. 1601 et seq.).
                      (P) The Federal Employees Health Benefit Plan
                    under chapter 89 of title 5, United States
                    Code.
                      (Q) Such other plan or arrangement as the
                    Secretary determines is a health plan.
              (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
                    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 and
            1173.
              (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.

    SEC. 1172. GENERAL REQUIREMENTS FOR ADOPTION OF STANDARDS.

      (a) Applicability.--Any standard or modification of a
    standard adopted under this part shall apply to the following
    persons:
              (1) A health plan.
              (2) A 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 or modification of a
    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 or modification of a standard adopted
            under this part shall be developed or modified by a
            standard setting organization.
              (2) Special rules.--
                      (A) Different standards.--The Secretary may
                    adopt a standard or modification of a standard
                    that is different from any standard developed
                    or modified by a standard setting organization,
                    if--
                              (i) the different standard or
                            modification will substantially reduce
                            administrative costs to health care
                            providers and health plans compared to
                            the alternatives; and
                              (ii) the standard or modification 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 adopted or modified any
                    standard relating to a standard, or a
                    modification of 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.
        (d) Implementation Specifications.--The Secretary shall
    establish specifications for implementing each of the standards
    and modifications adopted under this part.
        (e) Protection of Trade Secrets.--Except as otherwise
    required by law, a standard or modification of 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 Health Information Advisory Committee
    established under section 1179 and shall consult with
    appropriate Federal and State agencies and private
    organizations. The Secretary shall publish in the Federal
    Register the recommendations of the Health Information Advisory
    Committee regarding the adoption of a standard or modification
    of a standard under this part.

    SEC. 1173. STANDARDS FOR INFORMATION TRANSACTIONS AND DATA ELEMENTS.

        (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--
                      (A) appropriate for the financial and
                    administrative transactions described in
                    paragraph (2); and
                      (B) related to 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 the following:
                      (A) Claims (including coordination of
                    benefits) or equivalent encounter information.
                      (B) Claims attachments.
                      (C) Enrollment and disenrollment.
                      (D) Eligibility.
                      (E) Health care payment and remittance
                    advice.
                      (F) Premium payments.
                      (G) First report of injury.
                      (H) Claims 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 clearinghouse, if it is
                    part of a larger organization, has policies and
                    security procedures which isolate the
                    activities of the 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) Privacy Standards for Health Information.--The
    Secretary shall adopt standards with respect to the privacy of
    individually identifiable health information. Such standards
    shall include standards concerning at least the following:
              (1) The rights of an individual who is a subject of
            such information.
              (2) The procedures to be established for the exercise
            of such rights.
              (3) The uses and disclosures of such information that
            are authorized or required.
        (f) Electronic Signature.--
              (1) In general.--The Secretary, in coordination with
            the Secretary of Commerce, shall adopt standards
            specifying procedures for the electronic transmission
            and authentication of signatures, compliance with which
            shall be deemed to satisfy Federal and State statutory
            requirements for written signatures with respect to the
            transactions referred to in subsection (a)(1).
              (2) Payments for services and premiums.--Nothing in
            this part shall be construed to prohibit payment for
            health care services or health plan premiums by debit,
            credit, payment card or numbers, or other electronic
            means.
        (g) Transfer of Information Between Health Plans.--The
    Secretary shall adopt standards for transferring among health
    plans 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.

    SEC. 1174. TIMETABLES FOR ADOPTION OF STANDARDS.

        (a) Initial Standards.--The Secretary shall carry out
    section 1173 not later than 18 months after the date of the
    enactment of this part, 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 additional or modified
            standards, as determined appropriate, but not more
            frequently than once every 6 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.

    SEC. 1175. REQUIREMENTS.

        (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 health 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
                    clearinghouse for processing into standard data
                    elements and transmission by the clearinghouse,
                    and receiving standard data elements through
                    the 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 and
            1173 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.

    SEC. 1176. GENERAL PENALTY FOR FAILURE TO COMPLY WITH REQUIREMENTS AND
                        STANDARDS.

        (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.

    SEC. 1177. WRONGFUL DISCLOSURE OF INDIVIDUALLY IDENTIFIABLE HEALTH
                        INFORMATION.

        (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.

    SEC. 1178. EFFECT ON STATE LAW.

        (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 and 1173, 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 and 1173, shall not supersede a contrary provision
            of State law, if the provision of State law--
                      (A) imposes requirements, standards, or
                    implementation specifications that are more
                    stringent than the requirements, standards, or
                    implementation specifications under this part
                    with respect to the privacy of individually
                    identifiable health information; or
                      (B) is a provision the Secretary determines--
                              (i) is necessary to prevent fraud and
                            abuse, or for other purposes; or
                              (ii) addresses controlled substances.
        (b) Public Health Reporting.--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.

    SEC. 1179. HEALTH INFORMATION ADVISORY COMMITTEE.

        (a) Establishment.--There is established a committee to be
    known as the Health Information Advisory Committee (in this
    section referred to as the ``committee'').
        (b) Duties.--The committee shall--
              (1) provide assistance to the Secretary in complying
            with the requirements imposed on the Secretary under
            this part;
              (2) study the issues related to the adoption of
            uniform data standards for patient medical record
            information and the electronic exchange of such
            information;
              (3) report to the Secretary not later than 4 years
            after the date of the enactment of this part
            recommendations and legislative proposals for such
            standards and electronic exchange; and
              (4) generally be responsible for advising the
            Secretary and the Congress on the status of the
            implementation of this part.
        (c) Membership.--
              (1) In general.--The committee shall consist of 15
            members of whom--
                      (A) 3 shall be appointed by the President;
                      (B) 6 shall be appointed by the Speaker of
                    the House of Representatives after consultation
                    with the minority leader of the House of
                    Representatives; and
                      (C) 6 shall be appointed by the President pro
                    tempore of the Senate after consultation with
                    the minority leader of the Senate.
            The appointments of the members shall be made not later
            than 60 days after the date of the enactment of this
            part. The President shall designate 1 member as the
            Chair.
              (2) Expertise.--The membership of the committee shall
            consist of individuals who are of recognized standing
            and distinction in the areas of information systems,
            information networking and integration, consumer
            health, health care financial management, or privacy,
            and who possess the demonstrated capacity to discharge
            the duties imposed on the committee.
              (3) Terms.--Each member of the committee shall be
            appointed for a term of 5 years, except that the
            members first appointed shall serve staggered terms
            such that the terms of not more than 3 members expire
            at one time.
              (4) Initial meeting.--Not later than 30 days after
            the date on which a majority of the members have been
            appointed, the committee shall hold its first meeting.
        (d) Reports.--Not later than 1 year after the date of the
    enactment of this part, and annually thereafter, the committee
    shall submit to the Congress, and make public, a report
    regarding--
              (1) the extent to which persons required to comply
            with this part are cooperating in implementing the
            standards adopted under this part;
              (2) the extent to which such entities are meeting the
            privacy and security standards adopted under this part
            and the types of penalties assessed for noncompliance
            with such standards;
              (3) whether the Federal and State Governments are
            receiving information of sufficient quality to meet
            their responsibilities under this part;
              (4) any problems that exist with respect to
            implementation of this part; and
              (5) the extent to which timetables under this part
            are being met.
              * * * * * * *

            TITLE XVIII--HEALTH INSURANCE FOR THE AGED AND DISABLED

              * * * * * * *

         Part A--Hospital Insurance Benefits for the Aged and Disabled

              * * * * * * *

     USE OF PUBLIC AGENCIES OR PRIVATE ORGANIZATIONS TO FACILITATE PAYMENT
                            TO PROVIDERS OF SERVICES

        Sec. 1816. (a) * * *
              * * * * * * *
        (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.

                     FEDERAL HOSPITAL INSURANCE TRUST FUND

        Sec. 1817. (a) * * *
              * * * * * * *
        (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 Coverage Availability and
                            Affordability 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).
              (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.
                      (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.--The Secretary and the Attorney
            General shall submit jointly an annual report to
            Congress on the amount of revenue which is generated
            and disbursed, and the justification for such
            disbursements, by the Account in each fiscal year.
              * * * * * * *

       Part B--Supplementary Medical Insurance Benefits for the Aged and
                                    Disabled

              * * * * * * *

                 use of carriers for administration of benefits

        Sec. 1842. (a) * * *
              * * * * * * *
        (c)(1) * * *
              * * * * * * *
        (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)).
              * * * * * * *
        (r) The Secretary shall establish a system which provides
    for a unique identifier for each physician who furnishes
    services for which payment may be made under this title. 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.
              * * * * * * *

                        Part C--Miscellaneous Provisions

              * * * * * * *

                     agreements with providers of services

        Sec. 1866. (a)(1) Any provider of services (except a fund
    designated for purposes of section 1814(g) and section 1835(e))
    shall be qualified to participate under this title and shall be
    eligible for payments under this title if it files with the
    Secretary an agreement--
              (A) * * *
              * * * * * * *
              (P) in the case of home health agencies which provide
            home health services to individuals entitled to
            benefits under this title who require catheters,
            catheter supplies, ostomy bags, and supplies related to
            ostomy car (described in section 1861(m)(5)), to offer
            to furnish such supplies to such an individual as part
            of their furnishing of home health services, [and]
              (Q) in the case of hospitals, skilled nursing
            facilities, home health agencies, and hospice programs,
            to comply with the requirement of subsection (f)
            (relating to maintaining written policies and
            procedures respecting advance directives)[.]; and
              (R) to contract only with a clearinghouse (as defined
            in section 1171) that meets each standard and
            implementation specification adopted or established
            under sections 1172 and 1173 on or after the date on
            which the clearinghouse is required to comply with the
            standard or specification.
    In the case of a hospital which has an agreement in effect with
    an organization described in subparagraph (F), which
    organization's contract with the Secretary under part B of
    title XI is terminated on or after October 1, 1984, the
    hospital shall not be determined to be out of compliance with
    the requirement of such subparagraph during the six month
    period beginning on the date of the termination of that
    contract.
              * * * * * * *

     payments to health maintenance organizations and competitive medical
                                     plans

        Sec. 1876. (a) * * *
              * * * * * * *
        (i)(1) Each contract under this section shall be for a term
    of at least one year, as determined by the Secretary, and may
    be made automatically renewable from term to term in the
    absence of notice by either party of intention to terminate at
    the end of the current term; except that [the Secretary may
    terminate any such contract at any time (after such reasonable
    notice and opportunity for hearing to the eligible organization
    involved as he may provide in regulations), if he finds that
    the organization--
              [(A) has failed substantially to carry out the
            contract,
              [(B) is carrying out the contract in a manner
            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).] 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).
              * * * * * * *
        (6)(A) * * *
        (B) The remedies described in this subparagraph are--
              (i) civil money penalties of not more than $25,000
            for each determination under subparagraph (A) or, with
            respect to a determination under clause (iv) or (v)(I)
            of such subparagraph, of not more than $100,000 for
            each such determination, plus, with respect to a
            determination under subparagraph (A)(ii), double the
            excess amount charged in violation of such subparagraph
            (and the excess amount charged shall be deducted from
            the penalty and returned to the individual concerned),
            and plus, with respect to a determination under
            subparagraph (A)(iv), $15,000 for each individual not
            enrolled as a result of the practice involved,
              (ii) suspension of enrollment of individuals under
            this section after the date the Secretary notifies the
            organization of a determination under subparagraph (A)
            and until the Secretary is satisfied that the basis for
            such determination has been corrected and is not likely
            to recur, or
              (iii) suspension of payment to the organization under
            this section for individuals enrolled after the date
            the Secretary notifies the organization of a
            determination under subparagraph (A) and until the
            Secretary is satisfied that the basis for such
            determination has been corrected and is not likely to
            recur.
    [The provisions of section 1128A (other than subsections (a)
    and (b)) shall apply to a civil money penalty under clause (i)
    in the same manner as they apply to a civil money penalty or
    proceeding under section 1128A(a).]
        (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.
        (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).
        (7)(A) Each risk-sharing contract with an eligible
    organization under this section shall provide that the
    organization will maintain [an agreement] a written agreement
    with a utilization and quality control peer review organization
    (which has a contract with the Secretary under part B of title
    XI for the area in which the eligible organization is located)
    or with an entity selected by the Secretary under section
    1154(a)(4)(C) under which the review organization will perform
    functions under section 1154(a)(4)(B) and section 1154(a)(14)
    (other than those performed under contracts described in
    section 1866(a)(1)(F)) with respect to services, furnished by
    the eligible organization, for which payment may be made under
    this title.
              * * * * * * *
        (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.
              * * * * * * *

        certification of medicare supplemental health insurance policies

    Sec. 1882. (a) * * *

              * * * * * * *
        (d)(1) * * *
              * * * * * * *
        (3)(A)[(i) It is unlawful for a person to sell or issue to
    an individual entitled to benefits under part A or enrolled
    under part B of this title--
              [(I) a health insurance policy with knowledge that
            the policy duplicates health benefits to which the
            individual is otherwise entitled under this title or
            title XIX,
              [(II) a medicare supplemental policy with knowledge
            that the individual is entitled to benefits under
            another medicare supplemental policy, or
              [(III) a health insurance policy (other than a
            medicare supplemental policy) with knowledge that the
            policy duplicates health benefits to which the
            individual is otherwise entitled, other than benefits
            to which the individual is entitled under a requirement
            of State or Federal law.] (i) It is unlawful for a
            person to sell or issue to an individual entitled to
            benefits under part A or enrolled under part B of this
            title--
              (I) a health insurance policy with knowledge that the
            policy duplicates health benefits to which the
            individual is otherwise entitled under this title or
            title XIX,
              (II) a medicare supplemental policy with knowledge
            that the individual is entitled to benefits under
            another medicare supplemental policy, or
              (III) a health insurance policy (other than a
            medicare supplemental policy) with knowledge that the
            policy duplicates health benefits to which the
            individual is otherwise entitled, other than benefits
            to which the individual is entitled under a requirement
            of State or Federal law.
    Subclause (I) or (III) shall not apply with respect to the sale
    or issuance of a health insurance policy or plan under which
    all the benefits are fully payable directly to or on behalf of
    the individual without regard to other health benefit coverage
    of the individual.
        (ii) Whoever violates clause (i) 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 prohibited act.
        (iii) A seller (who is not the issuer of a health insurance
    policy) shall not be considered to violate clause (i)(II) with
    respect to the sale of a medicare supplemental policy if the
    policy is sold in compliance with subparagraph (B).
        (iv) For purposes of this subparagraph, a health insurance
    policy shall be considered to ``duplicate'' benefits only when,
    under its terms, the policy provides specific reimbursement for
    identical items and services to the extent paid for under other
    coverage of such individual, and a health insurance 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.
        (v) For purposes of this subparagraph, a health insurance
    policy (or a rider to an insurance contract which is not a
    health insurance policy), providing benefits for long-term
    care, nursing home care, home health care, or community-based
    care, or a contract with a health maintenance organization that
    provides comprehensive health benefits, and that coordinates
    against or excludes items and services available or paid for
    under this title and (for policies other than contracts with
    health maintenance organizations sold or issued on or after 90
    days after the date of enactment of this provision) that
    discloses such coordination or exclusion in the policy's
    outline of coverage, is not considered to ``duplicate'' health
    benefits under this title. For purposes of this clause, the
    terms ``coordinates'' and ``coordination'' mean, with respect
    to a policy in relation to health benefits under this title,
    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.
        (vi) Notwithstanding any other provision of law, no
    criminal or civil penalty may be imposed at any time under this
    subparagraph and no legal action may be brought or continued at
    any time in any Federal or State court if the penalty or action
    is based on an act or omission that occurred after November 5,
    1991, and before the date of the enactment of this clause, and
    relates to the sale, issuance, or renewal of any health
    insurance policy or rider during such period, if such policy or
    rider meets the nonduplication requirements of clause (iv) or
    (v).
        (vii) A State may not impose, in the case of the sale,
    issuance, or renewal of a health insurance policy (other than a
    medicare supplemental policy) or rider to an insurance contract
    which is not a health insurance policy, that meets the
    nonduplication requirements of this section pursuant to clause
    (iv) or (v) to an individual entitled to benefits under part A
    or enrolled under part B, any requirement with respect to the
    duplication or nonduplication of health benefits to which the
    individual is otherwise entitled to under this title.
              * * * * * * *
        (C) Subparagraph (A) shall not apply [with respect to (i)]
    with respect to the sale or issuance of a group policy or plan
    of one or more employers or labor organizations, or of the
    trustees of a fund established by one or more employers or
    labor organizations (or combination thereof), for employees or
    former employees (or combination thereof) or for members or
    former members (or combination thereof) of the labor
    organizations[, (ii) the sale or issuance of a policy or plan
    described in subparagraph (A)(i)(I) (other than a medicare
    supplemental policy to an individual entitled to any medical
    assistance under title XIX) under which all the benefits are
    fully payable directly to or on behalf of the individual
    without regard to other health benefit coverage of the
    individual but only if (for policies sold or issued more than
    60 days after the date the statements are published or
    promulgated under subparagraph (D)) there is disclosed in a
    prominent manner as part of (or together with) the application
    the applicable statement (specified under subparagraph (D)) of
    the extent to which benefits payable under the policy or plan
    duplicate benefits under this title, or (iii) the sale or
    issuance of a policy or plan described in subparagraph
    (A)(i)(III) under which all the benefits are fully payable
    directly to or on behalf of the individual without regard to
    other health benefit coverage of the individual].
        [(D)(i) If--
              [(I) within the 90-day period beginning on the date
            of the enactment of this subparagraph, the National
            Association of Insurance Commissioners develops (after
            consultation with consumer and insurance industry
            representatives) and submits to the Secretary a
            statement for each of the types of health insurance
            policies (other than medicare supplemental policies and
            including, but not limited to, as separate types of
            policies, policies paying directly to the beneficiary
            fixed, cash benefits, and policies that limit benefit
            payments to specific diseases) which are sold or issued
            to persons entitled to health benefits under this
            title, of the extent to which benefits payable under
            the policy or plan duplicate benefits under this title,
            and
              [(II) the Secretary approves all the statements
            submitted as meeting the requirements of subclause (I),
    each such statement shall be (for purposes of subparagraph (C))
    the statement specified under this subparagraph for the type of
    policy involved. The Secretary shall review and approve (or
    disapprove) all the statements submitted under subclause (I)
    within 30 days after the date of their submittal. Upon approval
    of such statements, the Secretary shall publish such
    statements.
        [(ii) If the Secretary does not approve the statements
    under clause (i) or the statements are not submitted within the
    90-day period specified in such clause, the Secretary shall
    promulgate (after consultation with consumer and insurance
    industry representatives and not later than 90 days after the
    date of disapproval or the end of such 90-day period (as the
    case may be)) a statement for each of the types of health
    insurance policies (other than medicare supplemental policies
    and including, but not limited to, as separate types of
    policies, policies paying directly to the beneficiary fixed,
    cash benefits, and policies that limit benefit payments to
    specific diseases) which are sold or issued to persons entitled
    to health benefits under this title, of the extent to which
    benefits payable under the policy or plan duplicate benefits
    under this title, and each such statement shall be (for
    purposes of subparagraph (C)) the statement specified under
    this subparagraph for the type of policy involved.]
              * * * * * * *

                           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 private
    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 of the United States, 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 demonstrates to the Secretary that the
            entity's financial holdings, interests, or
            relationships will not interfere with its ability to
            perform the functions to be required by the contract in
            an effective and impartial manner; 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) The Secretary shall determine the appropriate
            number of separate contracts which are necessary to
            carry out the Program and the appropriate times at
            which the Secretary shall enter into such contracts.
              (2)(A) Except as provided in subparagraph (B), the
            provisions of section 1153(e)(1) shall apply to
            contracts and contracting authority under this section.
              (B) Competitive procedures must be used when entering
            into new contracts under this section, or at any other
            time considered appropriate by the Secretary, except
            that the Secretary may 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) 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.
        (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.
              * * * * * * *
                                  ----------

                          TITLE 18, UNITED STATES CODE

                         CHAPTER 1--GENERAL PROVISIONS

    Sec.
    1. Repealed.
    2. Principals.
         * * * * * * *
    24. Definition of Federal health care offense.
         * * * * * * *

    Sec. 24. Definition of 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, or 1347 of this title; or
              (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'' has the meaning given such term in section 1347(b) of
    this title.
              * * * * * * *

                       CHAPTER 31--EMBEZZLEMENT AND THEFT

    Sec.
    641. Public money, property or records
         * * * * * * *
    669. Theft or embezzlement in connection with health care.
         * * * * * * *

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

        (a) Whoever embezzles, steals, or otherwise without
    authority willfully and unlawfully 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.
              * * * * * * *

                             CHAPTER 46--FORFEITURE

              * * * * * * *

    Sec. 982. Criminal forfeiture

        (a)(1) The court, in imposing sentence on a person
    convicted of an offense in violation of section 5313(a), 5316,
    or 5324 of title 31, or of section 1956, 1957, or 1960 of this
    title, shall order that the person forfeit to the United States
    any property, real or personal, involved in such offense, or
    any property traceable to such property. However, no property
    shall be seized or forfeited in the case of a violation of
    section 5313(a) of title 31 by a domestic financial institution
    examined by a Federal bank supervisory agency or a financial
    institution regulated by the Securities and Exchange Commission
    or a partner, director, or employee thereof.
              * * * * * * *
        (6) The court, in imposing sentence on a person convicted
    of a Federal health car 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)(1) Property subject to forfeiture under this section,
    any seizure and disposition thereof, and any administrative or
    judicial proceeding in relation thereto, shall be governed--
              (A) in the case of a forfeiture under subsection
            (a)(1) or (a)(6) of this section, by subsections (c)
            and (e) through (p) of section 413 of the Comprehensive
            Drug Abuse Prevention and Control Act of 1970 (21
            U.S.C. 853); and
              * * * * * * *

                     CHAPTER 47--FRAUD AND FALSE STATEMENTS

    Sec.
    1001.  Statements or entries generally.
         * * * * * * *
    1035.  False statements relating to health care matters.
         * * * * * * *

    Sec. 1035. False statements relating to health care matters

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

                             CHAPTER 63--MAIL FRAUD

    Sec.
    1341.  Frauds and swindles.
         * * * * * * *
    1347.  Health care fraud.
         * * * * * * *

    Sec. 1345. Injunctions against fraud

        (a)(1) If a person is--
              (A) violating or about to violate this chapter or
            section 287, 371 (insofar as such violation involves a
            conspiracy to defraud the United States or any agency
            thereof), or 1001 of this title; [or]
              (B) committing or about to commit a banking law
            violation (as defined in section 3322(d) of this
            title), or
              (C) committing or about to commit a Federal health
            care offense.
    the Attorney General may commence a civil action in any Federal
    court to enjoin such violation.
        (2) If a person is alienating or disposing of property, or
    intends to alienate or dispose of property, obtained as a
    result of a banking law violation (as defined in section
    3322(d) of this title) or a Federal health care offense or
    property which is traceable to such violation, the Attorney
    General may commence a civil action in any Federal court--
              (A) a enjoin such alienation or disposition of
            property; or
              (B) for a restraining order to--
                      (i) prohibit any person from withdrawing,
                    transferring, removing, dissipating, or
                    disposing of any such property or property of
                    equivalent value; and
                      (ii) appoint a temporary receiver to
                    administer such restraining order.
              * * * * * * *

    Sec. 1347. Health care fraud

        (a) Whoever knowingly 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.
        (b) As used in this section, 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.
              * * * * * * *

                       CHAPTER 73--OBSTRUCTION OF JUSTICE

    Sec.
    1501.  Assault in process server.
         * * * * * * *
    1518.  Obstruction of criminal investigations of health care offenses.
         * * * * * * *

    Sec. 1510.  Obstruction of criminal investigations

        (a) * * *
        (b)(1) Whoever, being an officer of a financial
    institution, with the intent to obstruct a judicial proceeding,
    directly or indirectly notifies any other person about the
    existence or contents of a subpoena for records of that
    financial institution, or information that has been furnished
    to the grand jury in response to that subpoena, shall be fined
    under this title or imprisoned not more than 5 years, or both.
              * * * * * * *
        (3) As used in this subsection--
              (A) the term ``an officer of a financial
            institution'' means an officer, director, partner,
            employee, agent, or attorney of or for a financial
            institution; and
              (B) the term ``subpoena for records'' means a Federal
            grand jury subpoena or a Department of Justice subpoena
            (issued under section 3486 of title 18), for customer
            records that has been served relating to a violation
            of, or a conspiracy to violate--
                      (i) section 215, 656, 657, 1005, 1006, 1007,
                    1014, 1344, 1956, 1957, or chapter 53 of title
                    31; or
                      (ii) section 1341 or 1343 affecting a
                    financial institution.
              * * * * * * *

    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.
              * * * * * * *

                            CHAPTER 95--RACKETEERING

              * * * * * * *

    Sec. 1956. Laundering of monetary instruments

        (a) * * *
              * * * * * * *
        (c) As used in this section--
              (1) * * *
              * * * * * * *
              (7) the term ``specified unlawful activity'' means--
                      (A) * * *
              * * * * * * *
                      (F) Any act or activity constituting an
                    offense involving a Federal health care
                    offense.
              * * * * * * *

                      CHAPTER 223--WITNESSES AND EVIDENCE

    Sec.
    3481. Competency of accused.
         * * * * * * *
    3486. Authorized investigative demand procedures.
         * * * * * * *

    Sec. 3486. Authorized investigative demand procedures

        (a) Authorization.--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 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. A subpoena 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.
        (b) Service.--A subpoena issued under this section may be
    served by any person 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 touching
    the matter under investigation. 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.
              * * * * * * *
                             VII. DISSENTING VIEWS

     DISSENTING VIEWS OF 12 WAYS AND MEANS DEMOCRATS TO REPUBLICAN HEALTH
                                 INSURANCE BILL

        This bill should be called ``The Sink the Good Ship
    Kassebaum-Kennedy bill.'' It seems designed in every way to
    torpedo the passage of the modest, helpful provisions of
    Kassebaum-Kennedy-Roukema (``KKR'').
        The bill, as reported by the Committee on Ways and Means,
    is not health insurance reform. It includes only a weakened
    version of the group non-discrimination provisions of KKR. In
    the Republican bill, there is no protection for individuals in
    a group plan against extra charges because of their health
    status. There would be in KKR.
        We have been told that this bill will be added to health
    insurance-related provisions from two other Committees, but the
    sum of the parts still will not equal KKR. The combined
    language still will not achieve the protections that Congress
    should enact--the protections in KKR. Unlike KKR, the
    Republican health bill that is being assembled fails to require
    insurance companies to make available insurance plans to groups
    of more than 50 (so-called guaranteed issue); guarantee an
    individual the right to purchase any individual policy offered
    for sale in a State. Instead individuals will only be
    guaranteed the chance to by a new type of policy (as yet
    undeveloped) equal to the average value policy sold in the
    State or by a company in the State.
        The Ways and Means Democrats were unanimous in their
    support of clean, pure KKR substitute for the full text of the
    Republican bill. Unfortunately that effort failed on a party
    line vote.
        The Republican sabotage lies in the extra, controversial
    provisions added to the basic bill.
        The Republicans included many good Medicare anti-fraud
    provisions, but also three controversial provisions that law
    enforcement agencies say will weaken our fight against Medicare
    and health care fraud and corruption. As the Department of
    Health and Human Services Inspector General wrote us,

            there are three provisions which would significantly
            impede the efforts to control Medicare fraud: (a)
            making the civil monetary penalties law for false
            claims more lenient, (b) creating an easily-abused
            exception under the anti-kickback statute for certain
            managed care arrangements, and (c) creating an
            unprecedented advisory opinion mechanism for criminal
            and certain other intent-based statutes.

        The Congressional Budget Office estimates that the cost of
    the advisory opinion provision alone will be $390 million over
    six years, as precious crime-fighting resources are pulled away
    from the already understaffed Office of Inspector General.
        In three separate votes, the Republicans rejected our
    efforts to strike these expensive, pro-fraud provisions. With
    most experts saying that waste, fraud and abuse equals about
    10% of the health budget, it is unconscionable that the
    Republicans would include these provisions, which will only
    make the current situation worse.
        The bill also includes $1.8 billion in spending between
    1996 and 2002 for Medical Savings Accounts. Most independent
    experts agree that MSAs will be used mostly by the healthier
    and wealthier in our society, and that they will segment the
    insurance pool, causing insurance costs for most people to rise
    and in turn, causing the number of uninsured to rise. The
    attached Washington Post editorial of March 18, 1996, makes the
    argument against MSAs very well.
        We are also disappointed that the Republicans on this
    Committee continue to be unwilling to adopt meaningful reforms
    to prevent tax avoidance by expatriation. We do not intend to
    again list the many reasons why the proposal include by the
    Committee in this bill is ineffectual. These reasons were set
    forth at some length in our dissenting views on H.R. 1812. At
    this time, however, we wish to emphasize that the Republicans
    on this Committee and their Republican colleagues in the House
    are the only ones opposing meaningful reforms in this area.
        On an overwhelmingly bipartisan basis, the Senate adopted,
    as part of its reconciliation bill, a provision which would
    effectively eliminate the potential for tax avoidance through
    expatriation. We support that provision and the Administration
    also supports that provision. The House Republicans are the
    only ones that refuse to support the Senate provision. The
    puzzling questing is, why.
        Finally, this bill signals, loud and clear, that the
    Republicans do not really support efforts to balance the budget
    or to save the Medicare Part A Trust Fund. Casually, in a four
    hour mark-up, the Committee Republicans decided to spend over
    $6.7 billion on new tax breaks. Some of these tax breaks are
    very popular and worth supporting, but what are our priorities?
    Should deficit reduction come first--as the Republicans keep
    talking about? Should extending the life of the Medicare Part A
    Trust Fund come first--as the Republicans have spent the last
    year claiming they want to do? Their votes on this bill show
    that they talk the talk, but don't walk the walk.
        The Republicans paid for their potpourri of tax breaks by
    (1) taking $2.6 billion in Medicare anti-fraud savings and (2)
    $4.3 billion in most non-controversial tax changes left in the
    cupboard. They have taken the ``easy money'' and spent it on
    new and complicated tax changes, and prevented its use for
    deficit reduction and extending the life of Medicare.
        This Congress should pass the useful insurance reforms of
    KKR. Those reforms will help millions of people, by ending job
    lock and discrimination against those most in need of
    insurance. We urge the House to reject efforts to encumber this
    reform effort with a laundry list of good, half-baked, and just
    plain bad add-ons.

                   [From the Washington Post, March 18, 1996]

                            Bad Move on Health Care

        Not too many weeks ago, it seemed as if Congress was about
    to pass, and the president to sign, a modest bill to help
    people keep their health insurance while between jobs. Not even
    the principal sponsors, Sens. Nancy Kassebaum and Edward
    Kennedy, describe the bill as more than a first step. It would
    not help people to afford the insurance, just require insurance
    companies to offer it to them. Still, it would be an advance.
        Now, however, House Republicans are threatening to add to
    the bill some amendments from their health care wish list that
    could derial it. If some of these amendments are added, the
    bill ought to be derailed. The worst is a proposal to begin to
    subsidize through the tax code what are know as medical savings
    accounts. The underlying bill seeks to strengthen the health
    insurance system, if not by making it seamless, at least by
    moving it in that direction. The savings accounts would tend to
    fragment and weaken the system instead. The Republicans in 1994
    accused the president of overreaching on health care reform, in
    part to satisfy assorted interest groups. He ended up with
    nothing to put before the voters on Election Day. They risk the
    same result.
        Under current law, if an employer helps buy health
    insurance for his employees, he can deduct the premiums or
    other costs, and they don't have to count the money as taxable
    income. Medical savings accounts would work the same way,
    except that only part of the employers' contribution would go
    to buy insurance, of the so-called catastrophic variety, that
    would only kick in after several thousand dollars of expenses.
    The rest would be put in a medical savings account in the
    employee's name, to accumulate if not spent. The employee would
    become a better shopper, because he would save what he didn't
    use, and he would be free to shop for care as he chose; no more
    pressure to join an HMO unless he wanted to.
        That's the theory, and it sounds pretty harmless, even
    sensible, except for one thing; It would split the insurance
    market. In conventional insurance you create a pool. The sums
    paid into the pool on behalf of the healthy in any given year
    are used to help support the sick, and when the healthy then
    get sick, they are supported in turn. If the healthy can opt
    out of the pool and build up their own savings accounts
    instead, you break up the system. The sick are left much more
    to fend for themselves--pay their own bills--which leaves them
    doubly afflicted.
        Supporters of the plan include insurers who would like to
    sell the catastrophic coverage, some physicians who think that
    it might save them form the trend toward managed care and a lot
    of other people simply drawn to the idea of maximizing private
    choice. But this is the last thing the government ought to be
    spending scare dollars on now. The long-run effect of creating
    separate systems for the healthy and sick would likely be to
    increase the number of people in the country who are finally
    forced to go without health insurance because they cannot
    afford it. If they put it on this bill, the president would be,
    not merely justified in vetoing it, but obliged to do so. They
    should leave it be.

                                       Sam Gibbons.
                                       Sander M. Levin.
                                       Richard E. Neal.
                                       Willian J. Coyne.
                                       Mike McNulty.
                                       Robert T. Matsui.
                                       Pete Stark.
                                       Harold Ford.
                                       C.B. Rangel.
                                       Barbara B. Kennelly.
                                       Jim McDermott.
                                       John Lewis.
           DISSENTING VIEWS OF HON. JIM McDERMOTT AND HON. PETE STARK

        Republican priorities are nowhere better revealed than in
    their proposal to increase the tax deduction for health
    insurance for the self-employed--and their opposition to making
    that same tax benefit available to the co-workers of the self-
    employed.
        The Republicans propose to raise the deduction for the
    expense of buying health insurance from 30% to 50% over eight
    years for the doctor, the lawyer, the small businessman, and
    other professionals. Yet they refuse to provide the same
    benefit to the receptionist, the sale clerk, the nurse, and the
    other co-workers of the self-employed.
        We fully recognize that most employees of small businessmen
    do not have the income to buy health insurance. But if they
    did, they should be afforded the same tax breaks as their
    bosses. Making the tax break available to workers would help
    make insurance affordable to some and thus help reduce the
    number of uninsured in our society.
        Refusing to allow workers the same tax break as their
    bosses is Republican class warfare. It would cost the self-
    employed nothing--absolutely nothing--to allow their clerks and
    receptionists to go out on their own and try to buy health
    insurance. Yet the Republicans mindlessly oppose it. This kind
    of policy is driving a wedge in our society between the haves
    and the have nots. This amendment widens the gap between the
    rich and the rest of society. It is a needless insult to the
    working people of America.
        Health care coverage is already unfair in corporate
    America. The New York Times of March 17, 1996 carried an
    article entitled, ``A Double Standard in Health Coverage:
    Executives are Cradled while Medical Benefits are Cut for Rank
    and File.''

              As companies herd their employees into managed care,
            limiting their choices to doctors and hospitals that
            have agreed to cut their charges, the chiefs of many of
            the nation's largest corporations--including Atlantic
            Richfield; Charles Schwab; RJR Nabisco; SBC
            Communications, the parent of Southwestern Bell, and
            Gannett--are leading more by precept than example.
              According to recent Securities and Exchange
            Commission filings and the companies themselves, the
            executives have medical coverage more bountiful than
            what their employees enjoyed even before their
            companies began economizing.

        The Republican refusal to consider tax help for workers
    equal to what is provided their self-employed bosses just
    reinforces the creation of two-tier health care in America.
    This division is not good for our society, and we oppose it.

                                       Jim McDermott.
                                       Pete Stark.