[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.
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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.
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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.
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Definition of long-term care insurance contract
A long-term care insurance contract is defined as any
insurance contract that provides only coverage of qualified
long-term care services and that meets other requirements. The
other requirements are that (1) the contract is guaranteed
renewable, (2) the contract does not provide for a cash
surrender value or other money that can be paid, assigned,
pledged or borrowed, (3) refunds (other than refunds on the
death of the insured or complete surrender or cancellation of
the contract) and dividends under the contract may be used only
to reduce future premiums or increase future benefits, and (4)
the contract generally does not pay or reimburse expenses
reimbursable under Medicare (except where Medicare is a
secondary payor, or the contract makes per diem or other
periodic payments without regard to expenses).
A contract does not fail to be treated as a long-term care
insurance contract solely because it provides for payments on a
per diem or other periodic basis without regard to expenses
incurred during the period.
Medicare duplication rules
The bill provides that no provision of law shall be
construed or applied so as to prohibit the offering of a long-
term care insurance contract on the basis that the contract
coordinates its benefits with those provided under Medicare.
Thus, long-term care insurance contracts are not subject to the
rules requiring duplication of Medicare benefits.
Definition of qualified long-term care services
Qualified long-term care services means necessary
diagnostic, preventive, therapeutic, curing, treating,
mitigating and rehabilitative services, and maintenance or
personal care services that are required by a chronically ill
individual and that are provided pursuant to a plan of care
prescribed by a licensed health care practitioner.
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.
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It is intended that an individual who is physically able
but has a cognitive impairment such as Alzheimer's disease or
another form of irreversible loss of mental capacity be treated
similarly to an individual who is unable to perform (without
substantial assistance) at least 2 activities of daily living.
Because of the concern that eligibility for the medical expense
deduction not be diagnosis-driven, the provision requires the
cognitive impairment to be severe. It is intended that severe
cognitive impairment mean a deterioration or loss in
intellectual capacity that is measured by clinical evidence and
standardized tests which reliably measure impairment in: (1)
short- or long-term memory; (2) orientation to people, places
or time; and (3) deductive or abstract reasoning. In addition,
it is intended that such deterioration or loss place the
individual in jeopardy of harming self or others and therefore
require substantial supervision by another individual.
A licensed health care practitioner is a physician (as
defined in sec. 1861(r)(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.
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Long-term care insurance premiums treated as medical expenses
Long-term care insurance premiums that do not exceed
specified dollar limits are treated as medical expenses for
purposes of the itemized deduction for medical expenses.\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.
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This $175 per day limit is indexed for inflation after 1997
for increases in the medical care component of the consumer
price index. The Treasury Secretary, in consultation with the
Secretary of Health and Human Services, is directed to develop
a more appropriate index, to be applied in lieu of the
foregoing. Such an alternative might appropriately be based on
increases in skilled nursing facility and home health care
costs. It is intended that the Treasury Secretary annually
publish the indexed amount of the limit as early in the year as
it can be calculated.
A payor of long-term care benefits (defined for this
purpose to include any amount paid under a product advertised,
marketed or offered as long-term care insurance) is required to
report to the IRS the aggregate amount of such benefits paid to
any individual during any calendar year, and the name, address
and 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).
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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).
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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.
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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.
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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
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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).
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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.
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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).
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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.
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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).
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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.
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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).
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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.
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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.
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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.
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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).
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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).
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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.
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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)
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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.
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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.
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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.
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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).
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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).
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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.
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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.
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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).
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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.