[House Report 104-736]
[From the U.S. Government Publishing Office]



104th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2d Session                                                     104-736
_______________________________________________________________________


 
      HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

                                _______
                                

                 July 31, 1996.--Ordered to be printed

_______________________________________________________________________


 Mr. Hastert, from the committee of conference, submitted the following

                           CONFERENCE REPORT

                        [To accompany H.R. 3103]

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

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

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

Sec. 1. Short title; table of contents.

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

                     Subtitle A--Group Market Rules

       Part 1--Portability, Access, and Renewability Requirements

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

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

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

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

                     ``Part A--Group Market Reforms

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

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

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

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

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

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

             ``Part C--Definitions; Miscellaneous Provisions

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

                   Subtitle B--Individual Market Rules

Sec. 111. Amendment to Public Health Service Act.

                    ``Part B--Individual Market Rules

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

            Subtitle C--General and Miscellaneous Provisions

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

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

Sec. 200. References in title.

               Subtitle A--Fraud and Abuse Control Program

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

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

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

                       Subtitle C--Data Collection

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

                  Subtitle D--Civil Monetary Penalties

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

                  Subtitle E--Revisions to Criminal Law

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

                Subtitle F--Administrative Simplification

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

                 ``Part C--Administrative Simplification

    ``Sec. 1171. Definitions.
    ``Sec. 1172. General requirements for adoption of standards.
    ``Sec. 1173. Standards for information transactions and data 
              elements.
    ``Sec. 1174. Timetables for adoption of standards.
    ``Sec. 1175. Requirements.
    ``Sec. 1176. General penalty for failure to comply with requirements 
              and standards.
    ``Sec. 1177. Wrongful disclosure of individually identifiable health 
              information.
    ``Sec. 1178. Effect on State law.
    ``Sec. 1179. Processing payment transactions.
Sec. 263. Changes in membership and duties of National Committee on 
          Vital and Health Statistics.
Sec. 264. Recommendations with respect to privacy of certain health 
          information.

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

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

                      Subtitle H--Patent Extension

Sec. 281. Patent extension.

                TITLE III--TAX-RELATED HEALTH PROVISIONS

Sec. 300. Amendment of 1986 Code.

                  Subtitle A--Medical Savings Accounts

Sec. 301. Medical savings accounts.

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

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

            Subtitle C--Long-Term Care Services and Contracts

                       Part I--General Provisions

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

                 Part II--Consumer Protection Provisions

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

           Subtitle D--Treatment of Accelerated Death Benefits

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

                    Subtitle E--State Insurance Pools

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

            Subtitle F--Organizations Subject to Section 833

Sec. 351. Organizations subject to section 833.

             Subtitle G--IRA Distributions to the Unemployed

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

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

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

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

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

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

 Subtitle B--Clarification of Certain Continuation Coverage Requirements

Sec. 421. COBRA clarifications.

                        TITLE V--REVENUE OFFSETS

Sec. 500. Amendment of 1986 Code.

                Subtitle A--Company-Owned Life Insurance

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

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

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

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

Sec. 521. Repeal of financial institution transition rule to interest 
          allocation rules.

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

                     Subtitle A--Group Market Rules

       Part 1--Portability, Access, and Renewability Requirements

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

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

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

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

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

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

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

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

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

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

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

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

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

``SEC. 706. DEFINITIONS.

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

``SEC. 707. REGULATIONS.

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

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

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

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

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

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

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

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

SEC. 102. THROUGH THE PUBLIC HEALTH SERVICE ACT.

    (a) In General.--The Public Health Service Act is amended 
by adding at the end the following new title:

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

                     ``Part A--Group Market Reforms

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

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

    ``(a) Limitation on Preexisting Condition Exclusion Period; 
Crediting for Periods of Previous Coverage.--Subject to 
subsection (d), a group health plan, and a health insurance 
issuer offering group health insurance coverage, may, with 
respect to a participant or beneficiary, impose a preexisting 
condition exclusion only if--
            ``(1) such exclusion relates to a condition 
        (whether physical or mental), regardless of the cause 
        of the condition, for which medical advice, diagnosis, 
        care, or treatment was recommended or received within 
        the 6-month period ending on the enrollment date;
            ``(2) such exclusion extends for a period of not 
        more than 12 months (or 18 months in the case of a late 
        enrollee) after the enrollment date; and
            ``(3) the period of any such preexisting condition 
        exclusion is reduced by the aggregate of the periods of 
        creditable coverage (if any, as defined in subsection 
        (c)(1)) applicable to the participant or beneficiary as 
        of the enrollment date.
    ``(b) Definitions.--For purposes of this part--
            ``(1) Preexisting condition exclusion.--
                    ``(A) In general.--The term `preexisting 
                condition exclusion' means, with respect to 
                coverage, a limitation or exclusion of benefits 
                relating to a condition based on the fact that 
                the condition was present before the date of 
                enrollment for such coverage, whether or not 
                any medical advice, diagnosis, care, or 
                treatment was recommended or received before 
                such date.
                    ``(B) Treatment of genetic information.--
                Genetic information shall not be treated as a 
                condition described in subsection (a)(1) in the 
                absence of a diagnosis of the condition related 
                to such information.
            ``(2) Enrollment date.--The term `enrollment date' 
        means, with respect to an individual covered under a 
        group health plan or health insurance coverage, the 
        date of enrollment of the individual in the plan or 
        coverage or, if earlier, the first day of the waiting 
        period for such enrollment.
            ``(3) Late enrollee.--The term `late enrollee' 
        means, with respect to coverage under a group health 
        plan, a participant or beneficiary who enrolls under 
        the plan other than during--
                    ``(A) the first period in which the 
                individual is eligible to enroll under the 
                plan, or
                    ``(B) a special enrollment period under 
                subsection (f).
            ``(4) Waiting period.--The term `waiting period' 
        means, with respect to a group health plan and an 
        individual who is a potential participant or 
        beneficiary in the plan, the period that must pass with 
        respect to the individual before the individual is 
        eligible to be covered for benefits under the terms of 
        the plan.
    ``(c) Rules Relating to Crediting Previous Coverage.--
            ``(1) Creditable coverage defined.--For purposes of 
        this title, the term `creditable coverage' means, with 
        respect to an individual, coverage of the individual 
        under any of the following:
                    ``(A) A group health plan.
                    ``(B) Health insurance coverage.
                    ``(C) Part A or part B of title XVIII of 
                the Social Security Act.
                    ``(D) Title XIX of the Social Security Act, 
                other than coverage consisting solely of 
                benefits under section 1928.
                    ``(E) Chapter 55 of title 10, United States 
                Code.
                    ``(F) A medical care program of the Indian 
                Health Service or of a tribal organization.
                    ``(G) A State health benefits risk pool.
                    ``(H) A health plan offered under chapter 
                89 of title 5, United States Code.
                    ``(I) A public health plan (as defined in 
                regulations).
                    ``(J) A health benefit plan under section 
                5(e) of the Peace Corps Act (22 U.S.C. 
                2504(e)).
        Such term does not include coverage consisting solely 
        of coverage of excepted benefits (as defined in section 
        2791(c)).
            ``(2) Not counting periods before significant 
        breaks in coverage.--
                    ``(A) In general.--A period of creditable 
                coverage shall not be counted, with respect to 
                enrollment of an individual under a group 
                health plan, if, after such period and before 
                the enrollment date, there was a 63-day period 
                during all of which the individual was not 
                covered under any creditable coverage.
                    ``(B) Waiting period not treated as a break 
                in coverage.--For purposes of subparagraph (A) 
                and subsection (d)(4), any period that an 
                individual is in a waiting period for any 
                coverage under a group health plan (or for 
                group health insurance coverage) or is in an 
                affiliation period (as defined in subsection 
                (g)(2)) shall not be taken into account in 
                determining the continuous period under 
                subparagraph (A).
            ``(3) Method of crediting coverage.--
                    ``(A) Standard method.--Except as otherwise 
                provided under subparagraph (B), for purposes 
                of applying subsection (a)(3), a group health 
                plan, and a health insurance issuer offering 
                group health insurance coverage, shall count a 
                period of creditable coverage without regard to 
                the specific benefits covered during the 
                period.
                    ``(B) Election of alternative method.--A 
                group health plan, or a health insurance issuer 
                offering group health insurance, may elect to 
                apply subsection (a)(3) based on coverage of 
                benefits within each of several classes or 
                categories of benefits specified in regulations 
                rather than as provided under subparagraph (A). 
                Such election shall be made on a uniform basis 
                for all participants and beneficiaries. Under 
                such election a group health plan or issuer 
                shall count a period of creditable coverage 
                with respect to any class or category of 
                benefits if any level of benefits is covered 
                within such class or category.
                    ``(C) Plan notice.--In the case of an 
                election with respect to a group health plan 
                under subparagraph (B) (whether or not health 
                insurance coverage is provided in connection 
                with such plan), the plan shall--
                            ``(i) prominently state in any 
                        disclosure statements concerning the 
                        plan, and state to each enrollee at the 
                        time of enrollment under the plan, that 
                        the plan has made such election, and
                            ``(ii) include in such statements a 
                        description of the effect of this 
                        election.
                    ``(D) Issuer notice.--In the case of an 
                election under subparagraph (B) with respect to 
                health insurance coverage offered by an issuer 
                in the small or large group market, the 
                issuer--
                            ``(i) shall prominently state in 
                        any disclosure statements concerning 
                        the coverage, and to each employer at 
                        the time of the offer or sale of the 
                        coverage, that the issuer has made such 
                        election, and
                            ``(ii) shall include in such 
                        statements a description of the effect 
                        of such election.
            ``(4) Establishment of period.--Periods of 
        creditable coverage with respect to an individual shall 
        be established through presentation of certifications 
        described in subsection (e) or in such other manner as 
        may be specified in regulations.
    ``(d) Exceptions.--
            ``(1) Exclusion not applicable to certain 
        newborns.--Subject to paragraph (4), a group health 
        plan, and a health insurance issuer offering group 
        health insurance coverage, may not impose any 
        preexisting condition exclusion in the case of an 
        individual who, as of the last day of the 30-day period 
        beginning with the date of birth, is covered under 
        creditable coverage.
            ``(2) Exclusion not applicable to certain adopted 
        children.--Subject to paragraph (4), a group health 
        plan, and a health insurance issuer offering group 
        health insurance coverage, may not impose any 
        preexisting condition exclusion in the case of a child 
        who is adopted or placed for adoption before attaining 
        18 years of age and who, as of the last day of the 30-
        day period beginning on the date of the adoption or 
        placement for adoption, is covered under creditable 
        coverage. The previous sentence shall not apply to 
        coverage before the date of such adoption or placement 
        for adoption.
            ``(3) Exclusion not applicable to pregnancy.--A 
        group health plan, and health insurance issuer offering 
        group health insurance coverage, may not impose any 
        preexisting condition exclusion relating to pregnancy 
        as a preexisting condition.
            ``(4) Loss if break in coverage.--Paragraphs (1) 
        and (2) shall no longer apply to an individual after 
        the end of the first 63-day period during all of which 
        the individual was not covered under any creditable 
        coverage.
    ``(e) Certifications and Disclosure of Coverage.--
            ``(1) Requirement for certification of period of 
        creditable coverage.--
                    ``(A) In general.--A group health plan, and 
                a health insurance issuer offering group health 
                insurance coverage, shall provide the 
                certification described in subparagraph (B)--
                            ``(i) at the time an individual 
                        ceases to be covered under the plan or 
                        otherwise becomes covered under a COBRA 
                        continuation provision,
                            ``(ii) in the case of an individual 
                        becoming covered under such a 
                        provision, at the time the individual 
                        ceases to be covered under such 
                        provision, and
                            ``(iii) on the request on behalf of 
                        an individual made not later than 24 
                        months after the date of cessation of 
                        the coverage described in clause (i) or 
                        (ii), whichever is later.

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

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

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

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

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

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

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

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

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

``SEC. 2713. DISCLOSURE OF INFORMATION.

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

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

``SEC. 2721. EXCLUSION OF CERTAIN PLANS.

    ``(a) Exception for Certain Small Group Health Plans.--The 
requirements of subparts 1 and 2 shall not apply to any group 
health plan (and health insurance coverage offered in 
connection with a group health plan) for any plan year if, on 
the first day of such plan year, such plan has less than 2 
participants who are current employees.
    ``(b) Limitation on Application of Provisions Relating to 
Group Health Plans.--
            ``(1) In general.--The requirements of subparts 1 
        and 2 shall apply with respect to group health plans 
        only--
                    ``(A) subject to paragraph (2), in the case 
                of a plan that is a nonfederal governmental 
                plan, and
                    ``(B) with respect to health insurance 
                coverage offered in connection with a group 
                health plan (including such a plan that is a 
                church plan or a governmental plan).
            ``(2) Treatment of nonfederal governmental plans.--
                    ``(A) Election to be excluded.--If the plan 
                sponsor of a nonfederal governmental plan which 
                is a group health plan to which the provisions 
                of subparts 1 and 2 otherwise apply makes an 
                election under this subparagraph (in such form 
                and manner as the Secretary may by regulations 
                prescribe), then the requirements of such 
                subparts insofar as they apply directly to 
                group health plans (and not merely to group 
                health insurance coverage) shall not apply to 
                such governmental plans for such period except 
                as provided in this paragraph.
                    ``(B) Period of election.--An election 
                under subparagraph (A) shall apply--
                            ``(i) for a single specified plan 
                        year, or
                            ``(ii) in the case of a plan 
                        provided pursuant to a collective 
                        bargaining agreement, for the term of 
                        such agreement.
                An election under clause (i) may be extended 
                through subsequent elections under this 
                paragraph.
                    ``(C) Notice to enrollees.--Under such an 
                election, the plan shall provide for--
                            ``(i) notice to enrollees (on an 
                        annual basis and at the time of 
                        enrollment under the plan) of the fact 
                        and consequences of such election, and
                            ``(ii) certification and disclosure 
                        of creditable coverage under the plan 
                        with respect to enrollees in accordance 
                        with section 2701(e).
    ``(c) Exception for Certain Benefits.--The requirements of 
subparts 1 and 2 shall not apply to any group health plan (or 
group health insurance coverage) in relation to its provision 
of excepted benefits described in section 2791(c)(1).
    ``(d) Exception for Certain Benefits If Certain Conditions 
Met.--
            ``(1) Limited, excepted benefits.--The requirements 
        of subparts 1 and 2 shall not apply to any group health 
        plan (and group health insurance coverage offered in 
        connection with a group health plan) in relation to its 
        provision of excepted benefits described in section 
        2791(c)(2) if the benefits--
                    ``(A) are provided under a separate policy, 
                certificate, or contract of insurance; or
                    ``(B) are otherwise not an integral part of 
                the plan.
            ``(2) Noncoordinated, excepted benefits.--The 
        requirements of subparts 1 and 2 shall not apply to any 
        group health plan (and group health insurance coverage 
        offered in connection with a group health plan) in 
        relation to its provision of excepted benefits 
        described in section 2791(c)(3) if all of the following 
        conditions are met:
                    ``(A) The benefits are provided under a 
                separate policy, certificate, or contract of 
                insurance.
                    ``(B) There is no coordination between the 
                provision of such benefits and any exclusion of 
                benefits under any group health plan maintained 
                by the same plan sponsor.
                    ``(C) Such benefits are paid with respect 
                to an event without regard to whether benefits 
                are provided with respect to such an event 
                under any group health plan maintained by the 
                same plan sponsor.
            ``(3) Supplemental excepted benefits.--The 
        requirements of this part shall not apply to any group 
        health plan (and group health insurance coverage) in 
        relation to its provision of excepted benefits 
        described in section 27971(c)(4) if the benefits are 
        provided under a separate policy, certificate, or 
        contract of insurance.
    ``(e) Treatment of Partnerships.--For purposes of this 
part--
            ``(1) Treatment as a group health plan.--Any plan, 
        fund, or program which would not be (but for this 
        subsection) an employee welfare benefit plan and which 
        is established or maintained by a partnership, to the 
        extent that such plan, fund, or program provides 
        medical care (including items and services paid for as 
        medical care) to present or former partners in the 
        partnership or to their dependents (as defined under 
        the terms of the plan, fund, or program), directly or 
        through insurance, reimbursement, or otherwise, shall 
        be treated (subject to paragraph (2)) as an employee 
        welfare benefit plan which is a group health plan.
            ``(2) Employer.--In the case of a group health 
        plan, the term `employer' also includes the partnership 
        in relation to any partner.
            ``(3) Participants of group health plans.--In the 
        case of a group health plan, the term `participant' 
        also includes--
                    ``(A) in connection with a group health 
                plan maintained by a partnership, an individual 
                who is a partner in relation to the 
                partnership, or
                    ``(B) in connection with a group health 
                plan maintained by a self-employed individual 
                (under which one or more employees are 
                participants), the self-employed individual,

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

``SEC. 2722. ENFORCEMENT.

    ``(a) State Enforcement.--
            ``(1) State authority.--Subject to section 2723, 
        each State may require that health insurance issuers 
        that issue, sell, renew, or offer health insurance 
        coverage in the State in the small or large group 
        markets meet the requirements of this part with respect 
        to such issuers.
            ``(2) Failure to implement provisions.--In the case 
        of a determination by the Secretary that a State has 
        failed to substantially enforce a provision (or 
        provisions) in this part with respect to health 
        insurance issuers in the State, the Secretary shall 
        enforce such provision (or provisions) under subsection 
        (b) insofar as they relate to the issuance, sale, 
        renewal, and offering of health insurance coverage in 
        connection with group health plans in such State.
    ``(b) Secretarial Enforcement Authority.--
            ``(1) Limitation.--The provisions of this 
        subsection shall apply to enforcement of a provision 
        (or provisions) of this part only--
                    ``(A) as provided under subsection (a)(2); 
                and
                    ``(B) with respect to group health plans 
                that are nonfederal governmental plans.
            ``(2) Imposition of penalties.--In the cases 
        described in paragraph (1)--
                    ``(A) In general.--Subject to the 
                succeeding provisions of this subsection, any 
                nonfederal governmental plan that is a group 
                health plan and any health insurance issuer 
                that fails to meet a provision of this part 
                applicable to such plan or issuer is subject to 
                a civil money penalty under this subsection.
                    ``(B) Liability for penalty.--In the case 
                of a failure by--
                            ``(i) a health insurance issuer, 
                        the issuer is liable for such penalty, 
                        or
                            ``(ii) a group health plan that is 
                        a nonfederal governmental plan which 
                        is--
                                    ``(I) sponsored by 2 or 
                                more employers, the plan is 
                                liable for such penalty, or
                                    ``(II) not so sponsored, 
                                the employer is liable for such 
                                penalty.
                    ``(C) Amount of penalty.--
                            ``(i) In general.--The maximum 
                        amount of penalty imposed under this 
                        paragraph is $100 for each day for each 
                        individual with respect to which such a 
                        failure occurs.
                            ``(ii) Considerations in 
                        imposition.--In determining the amount 
                        of any penalty to be assessed under 
                        this paragraph, the Secretary shall 
                        take into account the previous record 
                        of compliance of the entity being 
                        assessed with the applicable provisions 
                        of this part and the gravity of the 
                        violation.
                            ``(iii) Limitations.--
                                    ``(I) Penalty not to apply 
                                where failure not discovered 
                                exercising reasonable 
                                diligence.--No civil money 
                                penalty shall be imposed under 
                                this paragraph on any failure 
                                during any period for which it 
                                is established to the 
                                satisfaction of the Secretary 
                                that none of the entities 
                                against whom the penalty would 
                                be imposed knew, or exercising 
                                reasonable diligence would have 
                                known, that such failure 
                                existed.
                                    ``(II) Penalty not to apply 
                                to failures corrected within 30 
                                days.--No civil money penalty 
                                shall be imposed under this 
                                paragraph on any failure if 
                                such failure was due to 
                                reasonable cause and not to 
                                willful neglect, and such 
                                failure is corrected during the 
                                30-day period beginning on the 
                                first day any of the entities 
                                against whom the penalty would 
                                be imposed knew, or exercising 
                                reasonable diligence would have 
                                known, that such failure 
                                existed.
                    ``(D) Administrative review.--
                            ``(i) Opportunity for hearing.--The 
                        entity assessed shall be afforded an 
                        opportunity for hearing by the 
                        Secretary upon request made within 30 
                        days after the date of the issuance of 
                        a notice of assessment. In such hearing 
                        the decision shall be made on the 
                        record pursuant to section 554 of title 
                        5, United States Code. If no hearing is 
                        requested, the assessment shall 
                        constitute a final and unappealable 
                        order.
                            ``(ii) Hearing procedure.--If a 
                        hearing is requested, the initial 
                        agency decision shall be made by an 
                        administrative law judge, and such 
                        decision shall become the final order 
                        unless the Secretary modifies or 
                        vacates the decision. Notice of intent 
                        to modify or vacate the decision of the 
                        administrative law judge shall be 
                        issued to the parties within 30 days 
                        after the date of the decision of the 
                        judge. A final order which takes effect 
                        under this paragraph shall be subject 
                        to review only as provided under 
                        subparagraph (E).
                    ``(E) Judicial review.--
                            ``(i) Filing of action for 
                        review.--Any entity against whom an 
                        order imposing a civil money penalty 
                        has been entered after an agency 
                        hearing under this paragraph may obtain 
                        review by the United States district 
                        court for any district in which such 
                        entity is located or the United States 
                        District Court for the District of 
                        Columbia by filing a notice of appeal 
                        in such court within 30 days from the 
                        date of such order, and simultaneously 
                        sending a copy of such notice by 
                        registered mail to the Secretary.
                            ``(ii) Certification of 
                        administrative record.--The Secretary 
                        shall promptly certify and file in such 
                        court the record upon which the penalty 
                        was imposed.
                            ``(iii) Standard for review.--The 
                        findings of the Secretary shall be set 
                        aside only if found to be unsupported 
                        by substantial evidence as provided by 
                        section 706(2)(E) of title 5, United 
                        States Code.
                            ``(iv) Appeal.--Any final decision, 
                        order, or judgment of the district 
                        court concerning such review shall be 
                        subject to appeal as provided in 
                        chapter 83 of title 28 of such Code.
                    ``(F) Failure to pay assessment; 
                maintenance of action.--
                            ``(i) Failure to pay assessment.--
                        If any entity fails to pay an 
                        assessment after it has become a final 
                        and unappealable order, or after the 
                        court has entered final judgment in 
                        favor of the Secretary, the Secretary 
                        shall refer the matter to the Attorney 
                        General who shall recover the amount 
                        assessed by action in the appropriate 
                        United States district court.
                            ``(ii) Nonreviewability.--In such 
                        action the validity and appropriateness 
                        of the final order imposing the penalty 
                        shall not be subject to review.
                    ``(G) Payment of penalties.--Except as 
                otherwise provided, penalties collected under 
                this paragraph shall be paid to the Secretary 
                (or other officer) imposing the penalty and 
                shall be available without appropriation and 
                until expended for the purpose of enforcing the 
                provisions with respect to which the penalty 
                was imposed.

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

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

            ``Part C--Definitions; Miscellaneous Provisions

``SEC. 2791. DEFINITIONS.

    ``(a) Group Health Plan.--
            ``(1) Definition.--The term `group health plan' 
        means an employee welfare benefit plan (as defined in 
        section 3(1) of the Employee Retirement Income Security 
        Act of 1974) to the extent that the plan provides 
        medical care (as defined in paragraph (2)) and 
        including items and services paid for as medical care) 
        to employees or their dependents (as defined under the 
        terms of the plan) directly or through insurance, 
        reimbursement, or otherwise.
            ``(2) Medical care.--The term `medical care' means 
        amounts paid for--
                    ``(A) the diagnosis, cure, mitigation, 
                treatment, or prevention of disease, or amounts 
                paid for the purpose of affecting any structure 
                or function of the body,
                    ``(B) amounts paid for transportation 
                primarily for and essential to medical care 
                referred to in subparagraph (A), and
                    ``(C) amounts paid for insurance covering 
                medical care referred to in subparagraphs (A) 
                and (B).
            ``(3) Treatment of certain plans as group health 
        plan for notice provision.--A program under which 
        creditable coverage described in subparagraph (C), (D), 
        (E), or (F) of section 2701(c)(1) is provided shall be 
        treated as a group health plan for purposes of applying 
        section 2701(e).
    ``(b) Definitions Relating to Health Insurance.--
            ``(1) Health insurance coverage.--The term `health 
        insurance coverage' means benefits consisting of 
        medical care (provided directly, through insurance or 
        reimbursement, or otherwise and including items and 
        services paid for as medical care) under any hospital 
        or medical service policy or certificate, hospital or 
        medical service plan contract, or health maintenance 
        organization contract offered by a health insurance 
        issuer.
            ``(2) Health insurance issuer.--The term `health 
        insurance issuer' means an insurance company, insurance 
        service, or insurance organization (including a health 
        maintenance organization, as defined in paragraph (3)) 
        which is licensed to engage in the business of 
        insurance in a State and which is subject to State law 
        which regulates insurance (within the meaning of 
        section 514(b)(2) of the Employee Retirement Income 
        Security Act of 1974). Such term does not include a 
        group health plan.
            ``(3) Health maintenance organization.--The term 
        `health maintenance organization' means--
                    ``(A) a Federally qualified health 
                maintenance organization (as defined in section 
                1301(a)),
                    ``(B) an organization recognized under 
                State law as a health maintenance organization, 
                or
                    ``(C) a similar organization regulated 
                under State law for solvency in the same manner 
                and to the same extent as such a health 
                maintenance organization.
            ``(4) Group health insurance coverage.--The term 
        `group health insurance coverage' means, in connection 
        with a group health plan, health insurance coverage 
        offered in connection with such plan.
            ``(5) Individual health insurance coverage.--The 
        term `individual health insurance coverage' means 
        health insurance coverage offered to individuals in the 
        individual market, but does not include short-term 
        limited duration insurance.
    ``(c) Excepted Benefits.--For purposes of this title, the 
term `excepted benefits' means benefits under one or more (or 
any combination thereof) of the following:
            ``(1) Benefits not subject to requirements.--
                    ``(A) Coverage only for accident, or 
                disability income insurance, or any combination 
                thereof.
                    ``(B) Coverage issued as a supplement to 
                liability insurance.
                    ``(C) Liability insurance, including 
                general liability insurance and automobile 
                liability insurance.
                    ``(D) Workers' compensation or similar 
                insurance.
                    ``(E) Automobile medical payment insurance.
                    ``(F) Credit-only insurance.
                    ``(G) Coverage for on-site medical clinics.
                    ``(H) Other similar insurance coverage, 
                specified in regulations, under which benefits 
                for medical care are secondary or incidental to 
                other insurance benefits.
            ``(2) Benefits not subject to requirements if 
        offered separately.--
                    ``(A) Limited scope dental or vision 
                benefits.
                    ``(B) Benefits for long-term care, nursing 
                home care, home health care, community-based 
                care, or any combination thereof.
                    ``(C) Such other similar, limited benefits 
                as are specified in regulations.
            ``(3) Benefits not subject to requirements if 
        offered as independent, noncoordinated benefits.--
                    ``(A) Coverage only for a specified disease 
                or illness.
                    ``(B) Hospital indemnity or other fixed 
                indemnity insurance.
            ``(4) Benefits not subject to requirements if 
        offered as separate insurance policy.--Medicare 
        supplemental health insurance (as defined under section 
        1882(g)(1) of the Social Security Act), coverage 
        supplemental to the coverage provided under chapter 55 
        of title 10, United States Code, and similar 
        supplemental coverage provided to coverage under a 
        group health plan.
    ``(d) Other Definitions.--
            ``(1) Applicable state authority.--The term 
        `applicable State authority' means, with respect to a 
        health insurance issuer in a State, the State insurance 
        commissioner or official or officials designated by the 
        State to enforce the requirements of this title for the 
        State involved with respect to such issuer.
            ``(2) Beneficiary.--The term `beneficiary' has the 
        meaning given such term under section 3(8) of the 
        Employee Retirement Income Security Act of 1974.
            ``(3) Bona fide association.--The term `bona fide 
        association' means, with respect to health insurance 
        coverage offered in a State, an association which--
                    ``(A) has been actively in existence for at 
                least 5 years;
                    ``(B) has been formed and maintained in 
                good faith for purposes other than obtaining 
                insurance;
                    ``(C) does not condition membership in the 
                association on any health status-related factor 
                relating to an individual (including an 
                employee of an employer or a dependent of an 
                employee);
                    ``(D) makes health insurance coverage 
                offered through the association available to 
                all members regardless of any health status-
                related factor relating to such members (or 
                individuals eligible for coverage through a 
                member);
                    ``(E) does not make health insurance 
                coverage offered through the association 
                available other than in connection with a 
                member of the association; and
                    ``(F) meets such additional requirements as 
                may be imposed under State law.
            ``(4) COBRA continuation provision.--The term 
        `COBRA continuation provision' means any of the 
        following:
                    ``(A) Section 4980B of the Internal Revenue 
                Code of 1986, other than subsection (f)(1) of 
                such section insofar as it relates to pediatric 
                vaccines.
                    ``(B) Part 6 of subtitle B of title I of 
                the Employee Retirement Income Security Act of 
                1974, other than section 609 of such Act.
                    ``(C) Title XXII of this Act.
            ``(5) Employee.--The term `employee' has the 
        meaning given such term under section 3(6) of the 
        Employee Retirement Income Security Act of 1974.
            ``(6) Employer.--The term `employer' has the 
        meaning given such term under section 3(5) of the 
        Employee Retirement Income Security Act of 1974, except 
        that such term shall include only employers of two or 
        more employees.
            ``(7) Church plan.--The term `church plan' has the 
        meaning given such term under section 3(33) of the 
        Employee Retirement Income Security Act of 1974.
            ``(8) Governmental plan.--(A) The term 
        `governmental plan' has the meaning given such term 
        under section 3(32) of the Employee Retirement Income 
        Security Act of 1974 and any Federal governmental plan.
            ``(B) Federal governmental plan.--The term `Federal 
        governmental plan' means a governmental plan 
        established or maintained for its employees by the 
        Government of the United States or by any agency or 
        instrumentality of such Government.
            ``(C) Nonfederal governmental plan.--The term 
        `nonfederal governmental plan' means a governmental 
        plan that is not a Federal governmental plan.
            ``(9) Health status-related factor.--The term 
        `health status-related factor' means any of the factors 
        described in section 2702(a)(1).
            ``(10) Network plan.--The term `network plan' means 
        health insurance coverage of a health insurance issuer 
        under which the financing and delivery of medical care 
        (including items and services paid for as medical care) 
        are provided, in whole or in part, through a defined 
        set of providers under contract with the issuer.
            ``(11) Participant.--The term `participant' has the 
        meaning given such term under section 3(7) of the 
        Employee Retirement Income Security Act of 1974.
            ``(12) Placed for adoption defined.--The term 
        `placement', or being `placed', for adoption, in 
        connection with any placement for adoption of a child 
        with any person, means the assumption and retention by 
        such person of a legal obligation for total or partial 
        support of such child in anticipation of adoption of 
        such child. The child's placement with such person 
        terminates upon the termination of such legal 
        obligation.
            ``(13) Plan sponsor.--The term `plan sponsor' has 
        the meaning given such term under section 3(16)(B) of 
        the Employee Retirement Income Security Act of 1974.
            ``(14) State.--The term `State' means each of the 
        several States, the District of Columbia, Puerto Rico, 
        the Virgin Islands, Guam, American Samoa, and the 
        Northern Mariana Islands.
    ``(e) Definitions Relating to Markets and Small 
Employers.--For purposes of this title:
            ``(1) Individual market.--
                    ``(A) In general.--The term `individual 
                market' means the market for health insurance 
                coverage offered to individuals other than in 
                connection with a group health plan.
                    ``(B) Treatment of very small groups.--
                            ``(i) In general.--Subject to 
                        clause (ii), such terms includes 
                        coverage offered in connection with a 
                        group health plan that has fewer than 
                        two participants as current employees 
                        on the first day of the plan year.
                            ``(ii) State exception.--Clause (i) 
                        shall not apply in the case of a State 
                        that elects to regulate the coverage 
                        described in such clause as coverage in 
                        the small group market.
            ``(2) Large employer.--The term `large employer' 
        means, in connection with a group health plan with 
        respect to a calendar year and a plan year, an employer 
        who employed an average of at least 51 employees on 
        business days during the preceding calendar year and 
        who employs at least 2 employees on the first day of 
        the plan year.
            ``(3) Large group market.--The term `large group 
        market' means the health insurance market under which 
        individuals obtain health insurance coverage (directly 
        or through any arrangement) on behalf of themselves 
        (and their dependents) through a group health plan 
        maintained by a large employer.
            ``(4) Small employer.--The term `small employer' 
        means, in connection with a group health plan with 
        respect to a calendar year and a plan year, an employer 
        who employed an average of at least 2 but not more than 
        50 employees on business days during the preceding 
        calendar year and who employs at least 2 employees on 
        the first day of the plan year.
            ``(5) Small group market.--The term `small group 
        market' means the health insurance market under which 
        individuals obtain health insurance coverage (directly 
        or through any arrangement) on behalf of themselves 
        (and their dependents) through a group health plan 
        maintained by a small employer.
            ``(6) Application of certain rules in determination 
        of employer size.--For purposes of this subsection--
                    ``(A) Application of aggregation rule for 
                employers.--all persons treated as a single 
                employer under subsection (b), (c), (m), or (o) 
                of section 414 of the Internal Revenue Code of 
                1986 shall be treated as 1 employer.
                    ``(B) Employers not in existence in 
                preceding year.--In the case of an employer 
                which was not in existence throughout the 
                preceding calendar year, the determination of 
                whether such employer is a small or large 
                employer shall be based on the average number 
                of employees that it is reasonably expected 
                such employer will employ on business days in 
                the current calendar year.
                    ``(C) Predecessors.--Any reference in this 
                subsection to an employer shall include a 
                reference to any predecessor of such employer.

``SEC. 2792. REGULATIONS.

    ``The Secretary, consistent with section 104 of the Health 
Care Portability and Accountability Act of 1996, may promulgate 
such regulations as may be necessary or appropriate to carry 
out the provisions of this title. The Secretary may promulgate 
any interim final rules as the Secretary determines are 
appropriate to carry out this title.''.
    (b) Application of Rules by Certain Health Maintenance 
Organizations.--Section 1301 of such Act (42 U.S.C. 300e) is 
amended by adding at the end the following new subsection:
    ``(d) An organization that offers health benefits coverage 
shall not be considered as failing to meet the requirements of 
this section notwithstanding that it provides, with respect to 
coverage offered in connection with a group health plan in the 
small or large group market (as defined in section 2791(e)), an 
affiliation period consistent with the provisions of section 
2701(g).''.
    (c) Effective Date.--
            (1) In general.--Except as provided in this 
        subsection, part A of title XXVII of the Public Health 
        Service Act (as added by subsection (a)) shall apply 
        with respect to group health plans, and health 
        insurance coverage offered in connection with group 
        health plans, for plan years beginning after June 30, 
        1997.
            (2) Determination of creditable coverage.--
                    (A) Period of coverage.--
                            (i) In general.--Subject to clause 
                        (ii), no period before July 1, 1996, 
                        shall be taken into account under part 
                        A of title XXVII of the Public Health 
                        Service Act (as added by this section) 
                        in determining creditable coverage.
                            (ii) Special rule for certain 
                        periods.--The Secretary of Health and 
                        Human Services, consistent with section 
                        104, shall provide for a process 
                        whereby individuals who need to 
                        establish creditable coverage for 
                        periods before July 1, 1996, and who 
                        would have such coverage credited but 
                        for clause (i) may be given credit for 
                        creditable coverage for such periods 
                        through the presentation of documents 
                        or other means.
                    (B) Certifications, etc.--
                            (i) In general.--Subject to clauses 
                        (ii) and (iii), subsection (e) of 
                        section 2701 of the Public Health 
                        Service Act (as added by this section) 
                        shall apply to events occurring after 
                        June 30, 1996.
                            (ii) No certification required to 
                        be provided before june 1, 1997.--In no 
                        case is a certification required to be 
                        provided under such subsection before 
                        June 1, 1997.
                            (iii) Certification only on written 
                        request for events occurring before 
                        october 1, 1996.--In the case of an 
                        event occurring after June 30, 1996, 
                        and before October 1, 1996, a 
                        certification is not required to be 
                        provided under such subsection unless 
                        an individual (with respect to whom the 
                        certification is otherwise required to 
                        be made) requests such certification in 
                        writing.
                    (C) Transitional rule.--In the case of an 
                individual who seeks to establish creditable 
                coverage for any period for which certification 
                is not required because it relates to an event 
                occurring before June 30, 1996--
                            (i) the individual may present 
                        other credible evidence of such 
                        coverage in order to establish the 
                        period of creditable coverage; and
                            (ii) a group health plan and a 
                        health insurance issuer shall not be 
                        subject to any penalty or enforcement 
                        action with respect to the plan's or 
                        issuer's crediting (or not crediting) 
                        such coverage if the plan or issuer has 
                        sought to comply in good faith with the 
                        applicable requirements under the 
                        amendments made by this section.
            (3) Special rule for collective bargaining 
        agreements.--Except as provided in paragraph (2)(B), in 
        the case of a group health plan maintained pursuant to 
        1 or more collective bargaining agreements between 
        employee representatives and one or more employers 
        ratified before the date of the enactment of this Act, 
        part A of title XXVII of the Public Health Service Act 
        (other than section 2701(e) thereof) shall not apply to 
        plan years beginning before the later of--
                    (A) the date on which the last of the 
                collective bargaining agreements relating to 
                the plan terminates (determined without regard 
                to any extension thereof agreed to after the 
                date of the enactment of this Act), or
                    (B) July 1, 1997.
        For purposes of subparagraph (A), any plan amendment 
        made pursuant to a collective bargaining agreement 
        relating to the plan which amends the plan solely to 
        conform to any requirement of such part shall not be 
        treated as a termination of such collective bargaining 
        agreement.
            (4) Timely regulations.--The Secretary of Health 
        and Human Services, consistent with section 104, shall 
        first issue by not later than April 1, 1997, such 
        regulations as may be necessary to carry out the 
        amendments made by this section and section 111.
            (5) Limitation on actions.--No enforcement action 
        shall be taken, pursuant to the amendments made by this 
        section, against a group health plan or health 
        insurance issuer with respect to a violation of a 
        requirement imposed by such amendments before January 
        1, 1998, or, if later, the date of issuance of 
        regulations referred to in paragraph (4), if the plan 
        or issuer has sought to comply in good faith with such 
        requirements.
    (d) Miscellaneous Correction.--Section 2208(1) of the 
Public Health Service Act (42 U.S.C. 300bb-8(1)) is amended by 
striking ``section 162(i)(2)'' and inserting ``5000(b)''.

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

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

SEC. 104. ASSURING COORDINATION.

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

                  Subtitle B--Individual Market Rules

SEC. 111. AMENDMENT TO PUBLIC HEALTH SERVICE ACT.

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

                   ``Part B--Individual Market Rules

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

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

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

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

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

``SEC. 2743. CERTIFICATION OF COVERAGE.

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

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

    ``(a) Waiver of Requirements Where Implementation of 
Acceptable Alternative Mechanism.--
            ``(1) In general.--The requirements of section 2741 
        shall not apply with respect to health insurance 
        coverage offered in the individual market in the State 
        so long as a State is found to be implementing, in 
        accordance with this section and consistent with 
        section 2746(b), an alternative mechanism (in this 
        section referred to as an `acceptable alternative 
        mechanism')--
                    ``(A) under which all eligible individuals 
                are provided a choice of health insurance 
                coverage;
                    ``(B) under which such coverage does not 
                impose any preexisting condition exclusion with 
                respect to such coverage;
                    ``(C) under which such choice of coverage 
                includes at least one policy form of coverage 
                that is comparable to comprehensive health 
                insurance coverage offered in the individual 
                market in such State or that is comparable to a 
                standard option of coverage available under the 
                group or individual health insurance laws of 
                such State; and
                    ``(D) in a State which is implementing--
                            ``(i) a model act described in 
                        subsection (c)(1),
                            ``(ii) a qualified high risk pool 
                        described in subsection (c)(2), or
                            ``(iii) a mechanism described in 
                        subsection (c)(3).
            ``(2) Permissible forms of mechanisms.--A private 
        or public individual health insurance mechanism (such 
        as a health insurance coverage pool or programs, 
        mandatory group conversion policies, guaranteed issue 
        of one or more plans of individual health insurance 
        coverage, or open enrollment by one or more health 
        insurance issuers), or combination of such mechanisms, 
        that is designed to provide access to health benefits 
        for individuals in the individual market in the State 
        in accordance with this section may constitute an 
        acceptable alternative mechanism.
    ``(b) Application of Acceptable Alternative Mechanisms.--
            ``(1) Presumption.--
                    ``(A) In general.--Subject to the 
                succeeding provisions of this subsection, a 
                State is presumed to be implementing an 
                acceptable alternative mechanism in accordance 
                with this section as of July 1, 1997, if, by 
                not later than April 1, 1997, the chief 
                executive officer of a State--
                            ``(i) notifies the Secretary that 
                        the State has enacted or intends to 
                        enact (by not later than January 1, 
                        1998, or July 1, 1998, in the case of a 
                        State described in subparagraph 
                        (B)(ii)) any necessary legislation to 
                        provide for the implementation of a 
                        mechanism reasonably designed to be an 
                        acceptable alternative mechanism as of 
                        January 1, 1998 (or, in the case of a 
                        State described in subparagraph 
                        (B)(ii), July 1, 1998); and
                            ``(ii) provides the Secretary with 
                        such information as the Secretary may 
                        require to review the mechanism and its 
                        implementation (or proposed 
                        implementation) under this subsection.
                    ``(B) Delay permitted for certain states.--
                            ``(i) Effect of delay.--In the case 
                        of a State described in clause (ii) 
                        that provides notice under subparagraph 
                        (A)(i), for the presumption to continue 
                        on and after July 1, 1998, the chief 
                        executive officer of the State by April 
                        1, 1998--
                                    ``(I) must notify the 
                                Secretary that the State has 
                                enacted any necessary 
                                legislation to provide for the 
                                implementation of a mechanism 
                                reasonably designed to be an 
                                acceptable alternative 
                                mechanism as of July 1, 1998; 
                                and
                                    ``(II) must provide the 
                                Secretary with such information 
                                as the Secretary may require to 
                                review the mechanism and its 
                                implementation (or proposed 
                                implementation) under this 
                                subsection.
                            ``(ii) States described.--A State 
                        described in this clause is a State 
                        that has a legislature that does not 
                        meet within the 12-month period 
                        beginning on the date of enactment of 
                        this Act.
                    ``(C) Continued application.--In order for 
                a mechanism to continue to be presumed to be an 
                acceptable alternative mechanism, the State 
                shall provide the Secretary every 3 years with 
                information described in subparagraph (A)(ii) 
                or (B)(i)(II) (as the case may be).
            ``(2) Notice.--If the Secretary finds, after review 
        of information provided under paragraph (1) and in 
        consultation with the chief executive officer of the 
        State and the insurance commissioner or chief insurance 
        regulatory official of the State, that such a mechanism 
        is not an acceptable alternative mechanism or is not 
        (or no longer) being implemented, the Secretary--
                    ``(A) shall notify the State of--
                            ``(i) such preliminary 
                        determination, and
                            ``(ii) the consequences under 
                        paragraph (3) of a failure to implement 
                        such a mechanism; and
                    ``(B) shall permit the State a reasonable 
                opportunity in which to modify the mechanism 
                (or to adopt another mechanism) in a manner so 
                that may be an acceptable alternative mechanism 
                or to provide for implementation of such a 
                mechanism.
            ``(3) Final determination.--If, after providing 
        notice and opportunity under paragraph (2), the 
        Secretary finds that the mechanism is not an acceptable 
        alternative mechanism or the State is not implementing 
        such a mechanism, the Secretary shall notify the State 
        that the State is no longer considered to be 
        implementing an acceptable alternative mechanism and 
        that the requirements of section 2741 shall apply to 
        health insurance coverage offered in the individual 
        market in the State, effective as of a date specified 
        in the notice.
            ``(4) Limitation on secretarial authority.--The 
        Secretary shall not make a determination under 
        paragraph (2) or (3) on any basis other than the basis 
        that a mechanism is not an acceptable alternative 
        mechanism or is not being implemented.
            ``(5) Future adoption of mechanisms.--If a State, 
        after January 1, 1997, submits the notice and 
        information described in paragraph (1), unless the 
        Secretary makes a finding described in paragraph (3) 
        within the 90-day period beginning on the date of 
        submission of the notice and information, the mechanism 
        shall be considered to be an acceptable alternative 
        mechanism for purposes of this section, effective 90 
        days after the end of such period, subject to the 
        second sentence of paragraph (1).
    ``(c) Provision Related to Risk.--
            ``(1) Adoption of naic models.--The model act 
        referred to in subsection (a)(1)(D)(i) is the Small 
        Employer and Individual Health Insurance Availability 
        Model Act (adopted by the National Association of 
        Insurance Commissioners on June 3, 1996) insofar as it 
        applies to individual health insurance coverage or the 
        Individual Health Insurance Portability Model Act (also 
        adopted by such Association on such date).
            ``(2) Qualified high risk pool.--For purposes of 
        subsection (a)(1)(D)(ii), a `qualified high risk pool' 
        described in this paragraph is a high risk pool that--
                    ``(A) provides to all eligible individuals 
                health insurance coverage (or comparable 
                coverage) that does not impose any preexisting 
                condition exclusion with respect to such 
                coverage for all eligible individuals, and
                    ``(B) provides for premium rates and 
                covered benefits for such coverage consistent 
                with standards included in the NAIC Model 
                Health Plan for Uninsurable Individuals Act (as 
                in effect as of the date of the enactment of 
                this title).
            ``(3) Other mechanisms.--For purposes of subsection 
        (a)(1)(D)(iii), a mechanism described in this 
        paragraph--
                    ``(A) provides for risk adjustment, risk 
                spreading, or a risk spreading mechanism (among 
                issuers or policies of an issuer) or otherwise 
                provides for some financial subsidization for 
                eligible individuals, including through 
                assistance to participating issuers; or
                    ``(B) is a mechanism under which each 
                eligible individual is provided a choice of all 
                individual health insurance coverage otherwise 
                available.

``SEC. 2745. ENFORCEMENT.

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

``SEC. 2746. PREEMPTION.

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

``SEC. 2747. GENERAL EXCEPTIONS.

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

            Subtitle C--General and Miscellaneous Provisions

SEC. 191. HEALTH COVERAGE AVAILABILITY STUDIES.

    (a) Studies.--
            (1) Study on effectiveness of reforms.--The 
        Secretary of Health and Human Services shall provide 
        for a study on the effectiveness of the provisions of 
        this title and the various State laws, in ensuring the 
        availability of reasonably priced health coverage to 
        employers purchasing group coverage and individuals 
        purchasing coverage on a non-group basis.
            (2) Study on access and choice.--The Secretary also 
        shall provide for a study on--
                    (A) the extent to which patients have 
                direct access to, and choice of, health care 
                providers, including specialty providers, 
                within a network plan, as well as the 
                opportunity to utilize providers outside of the 
                network plan, under the various types of 
                coverage offered under the provisions of this 
                title; and
                    (B) the cost and cost-effectiveness to 
                health insurance issuers of providing access to 
                out-of-network providers, and the potential 
                impact of providing such access on the cost and 
                quality of health insurance coverage offered 
                under provisions of this title.
            (3) Consultation.--The studies under this 
        subsection shall be conducted in consultation with the 
        Secretary of Labor, representatives of State officials, 
        consumers, and other representatives of individuals and 
        entities that have expertise in health insurance and 
        employee benefits.
    (b) Reports.--Not later than January 1, 2000, the Secretary 
shall submit to the appropriate committees of Congress a report 
on each of the studies under subsection (a).

SEC. 192. REPORT ON MEDICARE REIMBURSEMENT OF TELEMEDICINE.

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

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

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

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

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

SEC. 195. FINDINGS; SEVERABILITY.

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

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

SEC. 200. REFERENCES IN TITLE.

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

              Subtitle A--Fraud and Abuse Control Program

SEC. 201. FRAUD AND ABUSE CONTROL PROGRAM.

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


                   ``fraud and abuse control program


    ``Sec. 1128C. (a) Establishment of Program.--
            ``(1) In general.--Not later than January 1, 1997, 
        the Secretary, acting through the Office of the 
        Inspector General of the Department of Health and Human 
        Services, and the Attorney General shall establish a 
        program--
                    ``(A) to coordinate Federal, State, and 
                local law enforcement programs to control fraud 
                and abuse with respect to health plans,
                    ``(B) to conduct investigations, audits, 
                evaluations, and inspections relating to the 
                delivery of and payment for health care in the 
                United States,
                    ``(C) to facilitate the enforcement of the 
                provisions of sections 1128, 1128A, and 1128B 
                and other statutes applicable to health care 
                fraud and abuse,
                    ``(D) to provide for the modification and 
                establishment of safe harbors and to issue 
                advisory opinions and special fraud alerts 
                pursuant to section 1128D, and
                    ``(E) to provide for the reporting and 
                disclosure of certain final adverse actions 
                against health care providers, suppliers, or 
                practitioners pursuant to the data collection 
                system established under section 1128E.
            ``(2) Coordination with health plans.--In carrying 
        out the program established under paragraph (1), the 
        Secretary and the Attorney General shall consult with, 
        and arrange for the sharing of data with 
        representatives of health plans.
            ``(3) Guidelines.--
                    ``(A) In general.--The Secretary and the 
                Attorney General shall issue guidelines to 
                carry out the program under paragraph (1). The 
                provisions of sections 553, 556, and 557 of 
                title 5, United States Code, shall not apply in 
                the issuance of such guidelines.
                    ``(B) Information guidelines.--
                            ``(i) In general.--Such guidelines 
                        shall include guidelines relating to 
                        the furnishing of information by health 
                        plans, providers, and others to enable 
                        the Secretary and the Attorney General 
                        to carry out the program (including 
                        coordination with health plans under 
                        paragraph (2)).
                            ``(ii) Confidentiality.--Such 
                        guidelines shall include procedures to 
                        assure that such information is 
                        provided and utilized in a manner that 
                        appropriately protects the 
                        confidentiality of the information and 
                        the privacy of individuals receiving 
                        health care services and items.
                            ``(iii) Qualified immunity for 
                        providing information.--The provisions 
                        of section 1157(a) (relating to 
                        limitation on liability) shall apply to 
                        a person providing information to the 
                        Secretary or the Attorney General in 
                        conjunction with their performance of 
                        duties under this section.
            ``(4) Ensuring access to documentation.--The 
        Inspector General of the Department of Health and Human 
        Services is authorized to exercise such authority 
        described in paragraphs (3) through (9) of section 6 of 
        the Inspector General Act of 1978 (5 U.S.C. App.) as 
        necessary with respect to the activities under the 
        fraud and abuse control program established under this 
        subsection.
            ``(5) Authority of inspector general.--Nothing in 
        this Act shall be construed to diminish the authority 
        of any Inspector General, including such authority as 
        provided in the Inspector General Act of 1978 (5 U.S.C. 
        App.).
    ``(b) Additional Use of Funds by Inspector General.--
            ``(1) Reimbursements for investigations.--The 
        Inspector General of the Department of Health and Human 
        Services is authorized to receive and retain for 
        current use reimbursement for the costs of conducting 
        investigations and audits and for monitoring compliance 
        plans when such costs are ordered by a court, 
        voluntarily agreed to by the payor, or otherwise.
            ``(2) Crediting.--Funds received by the Inspector 
        General under paragraph (1) as reimbursement for costs 
        of conducting investigations shall be deposited to the 
        credit of the appropriation from which initially paid, 
        or to appropriations for similar purposes currently 
        available at the time of deposit, and shall remain 
        available for obligation for 1 year from the date of 
        the deposit of such funds.
    ``(c) Health Plan Defined.--For purposes of this section, 
the term `health plan' means a plan or program that provides 
health benefits, whether directly, through insurance, or 
otherwise, and includes--
            ``(1) a policy of health insurance;
            ``(2) a contract of a service benefit organization; 
        and
            ``(3) a membership agreement with a health 
        maintenance organization or other prepaid health 
        plan.''.
    (b) Establishment of Health Care Fraud and Abuse Control 
Account in Federal Hospital Insurance Trust Fund.--Section 1817 
(42 U.S.C. 1395i) is amended by adding at the end the following 
new subsection:
    ``(k) Health Care Fraud and Abuse Control Account.--
            ``(1) Establishment.--There is hereby established 
        in the Trust Fund an expenditure account to be known as 
        the `Health Care Fraud and Abuse Control Account' (in 
        this subsection referred to as the `Account').
            ``(2) Appropriated amounts to trust fund.--
                    ``(A) In general.--There are hereby 
                appropriated to the Trust Fund--
                            ``(i) such gifts and bequests as 
                        may be made as provided in subparagraph 
                        (B);
                            ``(ii) such amounts as may be 
                        deposited in the Trust Fund as provided 
                        in sections 242(b) and 249(c) of the 
                        Health Insurance Portability and 
                        Accountability Act of 1996, and title 
                        XI; and
                            ``(iii) such amounts as are 
                        transferred to the Trust Fund under 
                        subparagraph (C).
                    ``(B) Authorization to accept gifts.--The 
                Trust Fund is authorized to accept on behalf of 
                the United States money gifts and bequests made 
                unconditionally to the Trust Fund, for the 
                benefit of the Account or any activity financed 
                through the Account.
                    ``(C) Transfer of amounts.--The Managing 
                Trustee shall transfer to the Trust Fund, under 
                rules similar to the rules in section 9601 of 
                the Internal Revenue Code of 1986, an amount 
                equal to the sum of the following:
                            ``(i) Criminal fines recovered in 
                        cases involving a Federal health care 
                        offense (as defined in section 
                        982(a)(6)(B) of title 18, United States 
                        Code).
                            ``(ii) Civil monetary penalties and 
                        assessments imposed in health care 
                        cases, including amounts recovered 
                        under titles XI, XVIII, and XIX, and 
                        chapter 38 of title 31, United States 
                        Code (except as otherwise provided by 
                        law).
                            ``(iii) Amounts resulting from the 
                        forfeiture of property by reason of a 
                        Federal health care offense.
                            ``(iv) Penalties and damages 
                        obtained and otherwise creditable to 
                        miscellaneous receipts of the general 
                        fund of the Treasury obtained under 
                        sections 3729 through 3733 of title 31, 
                        United States Code (known as the False 
                        Claims Act), in cases involving claims 
                        related to the provision of health care 
                        items and services (other than funds 
                        awarded to a relator, for restitution 
                        or otherwise authorized by law).
                    ``(D) Application.--Nothing in subparagraph 
                (C)(iii) shall be construed to limit the 
                availability of recoveries and forfeitures 
                obtained under title I of the Employee 
                Retirement Income Security Act of 1974 for the 
                purpose of providing equitable or remedial 
                relief for employee welfare benefit plans, and 
                for participants and beneficiaries under such 
                plans, as authorized under such title.
            ``(3) Appropriated amounts to account for fraud and 
        abuse control program, etc.--
                    ``(A) Departments of health and human 
                services and justice.--
                            ``(i) In general.--There are hereby 
                        appropriated to the Account from the 
                        Trust Fund such sums as the Secretary 
                        and the Attorney General certify are 
                        necessary to carry out the purposes 
                        described in subparagraph (C), to be 
                        available without further 
                        appropriation, in an amount not to 
                        exceed--
                                    ``(I) for fiscal year 1997, 
                                $104,000,000,
                                    ``(II) for each of the 
                                fiscal years 1998 through 2003, 
                                the limit for the preceding 
                                fiscal year, increased by 15 
                                percent; and
                                    ``(III) for each fiscal 
                                year after fiscal year 2003, 
                                the limit for fiscal year 2003.
                            ``(ii) Medicare and medicaid 
                        activities.--For each fiscal year, of 
                        the amount appropriated in clause (i), 
                        the following amounts shall be 
                        available only for the purposes of the 
                        activities of the Office of the 
                        Inspector General of the Department of 
                        Health and Human Services with respect 
                        to the medicare and medicaid programs--
                                    ``(I) for fiscal year 1997, 
                                not less than $60,000,000 and 
                                not more than $70,000,000;
                                    ``(II) for fiscal year 
                                1998, not less than $80,000,000 
                                and not more than $90,000,000;
                                    ``(III) for fiscal year 
                                1999, not less than $90,000,000 
                                and not more than $100,000,000;
                                    ``(IV) for fiscal year 
                                2000, not less than 
                                $110,000,000 and not more than 
                                $120,000,000;
                                    ``(V) for fiscal year 2001, 
                                not less than $120,000,000 and 
                                not more than $130,000,000;
                                    ``(VI) for fiscal year 
                                2002, not less than 
                                $140,000,000 and not more than 
                                $150,000,000; and
                                    ``(VII) for each fiscal 
                                year after fiscal year 2002, 
                                not less than $150,000,000 and 
                                not more than $160,000,000.
                    ``(B) Federal bureau of investigation.--
                There are hereby appropriated from the general 
                fund of the United States Treasury and hereby 
                appropriated to the Account for transfer to the 
                Federal Bureau of Investigation to carry out 
                the purposes described in subparagraph (C), to 
                be available without further appropriation--
                            ``(i) for fiscal year 1997, 
                        $47,000,000;
                            ``(ii) for fiscal year 1998, 
                        $56,000,000;
                            ``(iii) for fiscal year 1999, 
                        $66,000,000;
                            ``(iv) for fiscal year 2000, 
                        $76,000,000;
                            ``(v) for fiscal year 2001, 
                        $88,000,000;
                            ``(vi) for fiscal year 2002, 
                        $101,000,000; and
                            ``(vii) for each fiscal year after 
                        fiscal year 2002, $114,000,000.
                    ``(C) Use of funds.--The purposes described 
                in this subparagraph are to cover the costs 
                (including equipment, salaries and benefits, 
                and travel and training) of the administration 
                and operation of the health care fraud and 
                abuse control program established under section 
                1128C(a), including the costs of--
                            ``(i) prosecuting health care 
                        matters (through criminal, civil, and 
                        administrative proceedings);
                            ``(ii) investigations;
                            ``(iii) financial and performance 
                        audits of health care programs and 
                        operations;
                            ``(iv) inspections and other 
                        evaluations; and
                            ``(v) provider and consumer 
                        education regarding compliance with the 
                        provisions of title XI.
            ``(4) Appropriated amounts to account for medicare 
        integrity program.--
                    ``(A) In general.--There are hereby 
                appropriated to the Account from the Trust Fund 
                for each fiscal year such amounts as are 
                necessary to carry out the Medicare Integrity 
                Program under section 1893, subject to 
                subparagraph (B) and to be available without 
                further appropriation.
                    ``(B) Amounts specified.--The amount 
                appropriated under subparagraph (A) for a 
                fiscal year is as follows:
                            ``(i) For fiscal year 1997, such 
                        amount shall be not less than 
                        $430,000,000 and not more than 
                        $440,000,000.
                            ``(ii) For fiscal year 1998, such 
                        amount shall be not less than 
                        $490,000,000 and not more than 
                        $500,000,000.
                            ``(iii) For fiscal year 1999, such 
                        amount shall be not less than 
                        $550,000,000 and not more than 
                        $560,000,000.
                            ``(iv) For fiscal year 2000, such 
                        amount shall be not less than 
                        $620,000,000 and not more than 
                        $630,000,000.
                            ``(v) For fiscal year 2001, such 
                        amount shall be not less than 
                        $670,000,000 and not more than 
                        $680,000,000.
                            ``(vi) For fiscal year 2002, such 
                        amount shall be not less than 
                        $690,000,000 and not more than 
                        $700,000,000.
                            ``(vii) For each fiscal year after 
                        fiscal year 2002, such amount shall be 
                        not less than $710,000,000 and not more 
                        than $720,000,000.
            ``(5) Annual report.--Not later than January 1, the 
        Secretary and the Attorney General shall submit jointly 
        a report to Congress which identifies--
                    ``(A) the amounts appropriated to the Trust 
                Fund for the previous fiscal year under 
                paragraph (2)(A) and the source of such 
                amounts; and
                    ``(B) the amounts appropriated from the 
                Trust Fund for such year under paragraph (3) 
                and the justification for the expenditure of 
                such amounts.
            ``(6) GAO report.--Not later than January 1 of 
        2000, 2002, and 2004, the Comptroller General of the 
        United States shall submit a report to Congress which--
                    ``(A) identifies--
                            ``(i) the amounts appropriated to 
                        the Trust Fund for the previous two 
                        fiscal years under paragraph (2)(A) and 
                        the source of such amounts; and
                            ``(ii) the amounts appropriated 
                        from the Trust Fund for such fiscal 
                        years under paragraph (3) and the 
                        justification for the expenditure of 
                        such amounts;
                    ``(B) identifies any expenditures from the 
                Trust Fund with respect to activities not 
                involving the Medicare program under title 
                XVIII;
                    ``(C) identifies any savings to the Trust 
                Fund, and any other savings, resulting from 
                expenditures from the Trust Fund; and
                    ``(D) analyzes such other aspects of the 
                operation of the Trust Fund as the Comptroller 
                General of the United States considers 
                appropriate.''.

SEC. 202. MEDICARE INTEGRITY PROGRAM.

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


                      ``medicare integrity program


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

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

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

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

SEC. 203. BENEFICIARY INCENTIVE PROGRAMS.

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

    (a) In General.--Section 1128B(b)(3) (42 U.S.C. 1320a-
7b(b)(3)) is amended--
            (1) by striking ``and'' at the end of subparagraph 
        (D);
            (2) by striking the period at the end of 
        subparagraph (E) and inserting ``; and''; and
            (3) by adding at the end the following new 
        subparagraph:
            ``(F) any remuneration between an organization and 
        an individual or entity providing items or services, or 
        a combination thereof, pursuant to a written agreement 
        between the organization and the individual or entity 
        if the organization is an eligible organization under 
        section 1876 or if the written agreement, through a 
        risk-sharing arrangement, places the individual or 
        entity at substantial financial risk for the cost or 
        utilization of the items or services, or a combination 
        thereof, which the individual or entity is obligated to 
        provide.''.
    (b) Negotiated Rulemaking for Risk-Sharing Exception.--
            (1) Establishment.--
                    (A) In general.--The Secretary of Health 
                and Human Services (in this subsection referred 
                to as the ``Secretary'') shall establish, on an 
                expedited basis and using a negotiated 
                rulemaking process under subchapter 3 of 
                chapter 5 of title 5, United States Code, 
                standards relating to the exception for risk-
                sharing arrangements to the anti-kickback 
                penalties described in section 1128B(b)(3)(F) 
                of the Social Security Act, as added by 
                subsection (a).
                    (B) Factors to consider.--In establishing 
                standards relating to the exception for risk-
                sharing arrangements to the anti-kickback 
                penalties under subparagraph (A), the 
                Secretary--
                            (i) shall consult with the Attorney 
                        General and representatives of the 
                        hospital, physician, other health 
                        practitioner, and health plan 
                        communities, and other interested 
                        parties; and
                            (ii) shall take into account--
                                    (I) the level of risk 
                                appropriate to the size and 
                                type of arrangement;
                                    (II) the frequency of 
                                assessment and distribution of 
                                incentives;
                                    (III) the level of capital 
                                contribution; and
                                    (IV) the extent to which 
                                the risk-sharing arrangement 
                                provides incentives to control 
                                the cost and quality of health 
                                care services.
            (2) Publication of notice.--In carrying out the 
        rulemaking process under this subsection, the Secretary 
        shall publish the notice provided for under section 
        564(a) of title 5, United States Code, by not later 
        than 45 days after the date of the enactment of this 
        Act.
            (3) Target date for publication of rule.--As part 
        of the notice under paragraph (2), and for purposes of 
        this subsection, the `target date for publication' 
        (referred to in section 564(a)(5) of such title) shall 
        be January 1, 1997.
            (4) Abbreviated period for submission of 
        comments.--In applying section 564(c) of such title 
        under this subsection, `15 days' shall be substituted 
        for `30 days'.
            (5) Appointment of negotiated rulemaking committee 
        and facilitator.--The Secretary shall provide for--
                    (A) the appointment of a negotiated 
                rulemaking committee under section 565(a) of 
                such title by not later than 30 days after the 
                end of the comment period provided for under 
                section 564(c) of such title (as shortened 
                under paragraph (4)), and
                    (B) the nomination of a facilitator under 
                section 566(c) of such title by not later than 
                10 days after the date of appointment of the 
                committee.
            (6) Preliminary committee report.--The negotiated 
        rulemaking committee appointed under paragraph (5) 
        shall report to the Secretary, by not later than 
        October 1, 1996, regarding the committee's progress on 
        achieving a consensus with regard to the rulemaking 
        proceeding and whether such consensus is likely to 
        occur before one month before the target date for 
        publication of the rule. If the committee reports that 
        the committee has failed to make significant progress 
        towards such consensus or is unlikely to reach such 
        consensus by the target date, the Secretary may 
        terminate such process and provide for the publication 
        of a rule under this subsection through such other 
        methods as the Secretary may provide.
            (7) Final committee report.--If the committee is 
        not terminated under paragraph (6), the rulemaking 
        committee shall submit a report containing a proposed 
        rule by not later than one month before the target 
        publication date.
            (8) Interim, final effect.--The Secretary shall 
        publish a rule under this subsection in the Federal 
        Register by not later than the target publication date. 
        Such rule shall be effective and final immediately on 
        an interim basis, but is subject to change and revision 
        after public notice and opportunity for a period (of 
        not less than 60 days) for public comment. In 
        connection with such rule, the Secretary shall specify 
        the process for the timely review and approval of 
        applications of entities to be certified as provider-
        sponsored organizations pursuant to such rules and 
        consistent with this subsection.
            (9) Publication of rule after public comment.--The 
        Secretary shall provide for consideration of such 
        comments and republication of such rule by not later 
        than 1 year after the target publication date.
    (c) Effective Date.--The amendments made by subsection (a) 
shall apply to written agreements entered into on or after 
January 1, 1997, without regard to whether regulations have 
been issued to implement such amendments.

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

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

SEC. 218. EFFECTIVE DATE.

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

                      Subtitle C--Data Collection

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

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


         ``health care fraud and abuse data collection program


    ``Sec. 1128E. (a) General Purpose.--Not later than January 
1, 1997, the Secretary shall establish a national health care 
fraud and abuse data collection program for the reporting of 
final adverse actions (not including settlements in which no 
findings of liability have been made) against health care 
providers, suppliers, or practitioners as required by 
subsection (b), with access as set forth in subsection (c), and 
shall maintain a database of the information collected under 
this section.
    ``(b) Reporting of Information.--
            ``(1) In general.--Each Government agency and 
        health plan shall report any final adverse action (not 
        including settlements in which no findings of liability 
        have been made) taken against a health care provider, 
        supplier, or practitioner.
            ``(2) Information to be reported.--The information 
        to be reported under paragraph (1) includes:
                    ``(A) The name and TIN (as defined in 
                section 7701(a)(41) of the Internal Revenue 
                Code of 1986) of any health care provider, 
                supplier, or practitioner who is the subject of 
                a final adverse action.
                    ``(B) The name (if known) of any health 
                care entity with which a health care provider, 
                supplier, or practitioner, who is the subject 
                of a final adverse action, is affiliated or 
                associated.
                    ``(C) The nature of the final adverse 
                action and whether such action is on appeal.
                    ``(D) A description of the acts or 
                omissions and injuries upon which the final 
                adverse action was based, and such other 
                information as the Secretary determines by 
                regulation is required for appropriate 
                interpretation of information reported under 
                this section.
            ``(3) Confidentiality.--In determining what 
        information is required, the Secretary shall include 
        procedures to assure that the privacy of individuals 
        receiving health care services is appropriately 
        protected.
            ``(4) Timing and form of reporting.--The 
        information required to be reported under this 
        subsection shall be reported regularly (but not less 
        often than monthly) and in such form and manner as the 
        Secretary prescribes. Such information shall first be 
        required to be reported on a date specified by the 
        Secretary.
            ``(5) To whom reported.--The information required 
        to be reported under this subsection shall be reported 
        to the Secretary.
    ``(c) Disclosure and Correction of Information.--
            ``(1) Disclosure.--With respect to the information 
        about final adverse actions (not including settlements 
        in which no findings of liability have been made) 
        reported to the Secretary under this section with 
        respect to a health care provider, supplier, or 
        practitioner, the Secretary shall, by regulation, 
        provide for--
                    ``(A) disclosure of the information, upon 
                request, to the health care provider, supplier, 
                or licensed practitioner, and
                    ``(B) procedures in the case of disputed 
                accuracy of the information.
            ``(2) Corrections.--Each Government agency and 
        health plan shall report corrections of information 
        already reported about any final adverse action taken 
        against a health care provider, supplier, or 
        practitioner, in such form and manner that the 
        Secretary prescribes by regulation.
    ``(d) Access to Reported Information.--
            ``(1) Availability.--The information in the 
        database maintained under this section shall be 
        available to Federal and State government agencies and 
        health plans pursuant to procedures that the Secretary 
        shall provide by regulation.
            ``(2) Fees for disclosure.--The Secretary may 
        establish or approve reasonable fees for the disclosure 
        of information in such database (other than with 
        respect to requests by Federal agencies). The amount of 
        such a fee shall be sufficient to recover the full 
        costs of operating the database. Such fees shall be 
        available to the Secretary or, in the Secretary's 
        discretion to the agency designated under this section 
        to cover such costs.
    ``(e) Protection From Liability for Reporting.--No person 
or entity, including the agency designated by the Secretary in 
subsection (b)(5) shall be held liable in any civil action with 
respect to any report made as required by this section, without 
knowledge of the falsity of the information contained in the 
report.
    ``(f) Coordination With National Practitioner Data Bank.--
The Secretary shall implement this section in such a manner as 
to avoid duplication with the reporting requirements 
established for the National Practitioner Data Bank under the 
Health Care Quality Improvement Act of 1986 (42 U.S.C. 11101 et 
seq.).
    ``(g) Definitions and Special Rules.--For purposes of this 
section:
            ``(1) Final adverse action.--
                    ``(A) In general.--The term `final adverse 
                action' includes:
                            ``(i) Civil judgments against a 
                        health care provider, supplier, or 
                        practitioner in Federal or State court 
                        related to the delivery of a health 
                        care item or service.
                            ``(ii) Federal or State criminal 
                        convictions related to the delivery of 
                        a health care item or service.
                            ``(iii) Actions by Federal or State 
                        agencies responsible for the licensing 
                        and certification of health care 
                        providers, suppliers, and licensed 
                        health care practitioners, including--
                                    ``(I) formal or official 
                                actions, such as revocation or 
                                suspension of a license (and 
                                the length of any such 
                                suspension), reprimand, censure 
                                or probation,
                                    ``(II) any other loss of 
                                license or the right to apply 
                                for, or renew, a license of the 
                                provider, supplier, or 
                                practitioner, whether by 
                                operation of law, voluntary 
                                surrender, non-renewability, or 
                                otherwise, or
                                    ``(III) any other negative 
                                action or finding by such 
                                Federal or State agency that is 
                                publicly available information.
                            ``(iv) Exclusion from participation 
                        in Federal or State health care 
                        programs (as defined in sections 
                        1128B(f) and 1128(h), respectively).
                            ``(v) Any other adjudicated actions 
                        or decisions that the Secretary shall 
                        establish by regulation.
                    ``(B) Exception.--The term does not include 
                any action with respect to a malpractice claim.
            ``(2) Practitioner.--The terms `licensed health 
        care practitioner', `licensed practitioner', and 
        `practitioner' mean, with respect to a State, an 
        individual who is licensed or otherwise authorized by 
        the State to provide health care services (or any 
        individual who, without authority holds himself or 
        herself out to be so licensed or authorized).
            ``(3) Government agency.--The term `Government 
        agency' shall include:
                    ``(A) The Department of Justice.
                    ``(B) The Department of Health and Human 
                Services.
                    ``(C) Any other Federal agency that either 
                administers or provides payment for the 
                delivery of health care services, including, 
                but not limited to the Department of Defense 
                and the Veterans' Administration.
                    ``(D) State law enforcement agencies.
                    ``(E) State medicaid fraud control units.
                    ``(F) Federal or State agencies responsible 
                for the licensing and certification of health 
                care providers and licensed health care 
                practitioners.
            ``(4) Health plan.--The term `health plan' has the 
        meaning given such term by section 1128C(c).
            ``(5) Determination of conviction.--For purposes of 
        paragraph (1), the existence of a conviction shall be 
        determined under paragraph (4) of section 1128(i).''.
    (b) Improved Prevention in Issuance of Medicare Provider 
Numbers.--Section 1842(r) (42 U.S.C. 1395u(r)) is amended by 
adding at the end the following new sentence: ``Under such 
system, the Secretary may impose appropriate fees on such 
physicians to cover the costs of investigation and 
recertification activities with respect to the issuance of the 
identifiers.''.

                  Subtitle D--Civil Monetary Penalties

SEC. 231. SOCIAL SECURITY ACT CIVIL MONETARY PENALTIES.

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

        and no proof of specific intent to defraud is 
        required.''.
    (e) Claim for Item or Service Based on Incorrect Coding or 
Medically Unnecessary Services.--Section 1128A(a)(1) (42 U.S.C. 
1320a-7a(a)(1)), as amended by subsection (b), is amended--
            (1) in subparagraph (A) by striking ``claimed,'' 
        and inserting ``claimed, including any person who 
        engages in a pattern or practice of presenting or 
        causing to be presented a claim for an item or service 
        that is based on a code that the person knows or should 
        know will result in a greater payment to the person 
        than the code the person knows or should know is 
        applicable to the item or service actually provided,'';
            (2) in subparagraph (C), by striking ``or'' at the 
        end;
            (3) in subparagraph (D), by striking the semicolon 
        and inserting ``, or''; and
            (4) by inserting after subparagraph (D) the 
        following new subparagraph:
                    ``(E) is for a pattern of medical or other 
                items or services that a person knows or should 
                know are not medically necessary;''.
    (f) Sanctions Against Practitioners and Persons for Failure 
To Comply With Statutory Obligations.--Section 1156(b)(3) (42 
U.S.C. 1320c-5(b)(3)) is amended by striking ``the actual or 
estimated cost'' and inserting ``up to $10,000 for each 
instance''.
    (g) Procedural Provisions.--Section 1876(i)(6) (42 U.S.C. 
1395mm(i)(6)), as amended by section 215(a)(2), is amended by 
adding at the end the following new subparagraph:
    ``(D) The provisions of section 1128A (other than 
subsections (a) and (b)) shall apply to a civil money penalty 
under subparagraph (B)(i) or (C)(i) in the same manner as such 
provisions apply to a civil money penalty or proceeding under 
section 1128A(a).''.
    (h) Prohibition Against Offering Inducements to Individuals 
Enrolled Under Programs or Plans.--
            (1) Offer of remuneration.--Section 1128A(a) (42 
        U.S.C. 1320a-7a(a)), as amended by subsection (b), is 
        amended--
                    (A) by striking ``or'' at the end of 
                paragraph (3);
                    (B) by striking the semicolon at the end of 
                paragraph (4) and inserting ``; or''; and
                    (D) by inserting after paragraph (4) the 
                following new paragraph:
            ``(5) offers to or transfers remuneration to any 
        individual eligible for benefits under title XVIII of 
        this Act, or under a State health care program (as 
        defined in section 1128(h)) that such person knows or 
        should know is likely to influence such individual to 
        order or receive from a particular provider, 
        practitioner, or supplier any item or service for which 
        payment may be made, in whole or in part, under title 
        XVIII, or a State health care program (as so 
        defined);''.
            (2) Remuneration defined.--Section 1128A(i) (42 
        U.S.C. 1320a-7a(i)) is amended by adding at the end the 
        following new paragraph:
            ``(6) The term `remuneration' includes the waiver 
        of coinsurance and deductible amounts (or any part 
        thereof), and transfers of items or services for free 
        or for other than fair market value. The term 
        `remuneration' does not include--
                    ``(A) the waiver of coinsurance and 
                deductible amounts by a person, if--
                            ``(i) the waiver is not offered as 
                        part of any advertisement or 
                        solicitation;
                            ``(ii) the person does not 
                        routinely waive coinsurance or 
                        deductible amounts; and
                            ``(iii) the person--
                                    ``(I) waives the 
                                coinsurance and deductible 
                                amounts after determining in 
                                good faith that the individual 
                                is in financial need;
                                    ``(II) fails to collect 
                                coinsurance or deductible 
                                amounts after making reasonable 
                                collection efforts; or
                                    ``(III) provides for any 
                                permissible waiver as specified 
                                in section 1128B(b)(3) or in 
                                regulations issued by the 
                                Secretary;
                    ``(B) differentials in coinsurance and 
                deductible amounts as part of a benefit plan 
                design as long as the differentials have been 
                disclosed in writing to all beneficiaries, 
                third party payers, and providers, to whom 
                claims are presented and as long as the 
                differentials meet the standards as defined in 
                regulations promulgated by the Secretary not 
                later than 180 days after the date of the 
                enactment of the Health Insurance Portability 
                and Accountability Act of 1996; or
                    ``(C) incentives given to individuals to 
                promote the delivery of preventive care as 
                determined by the Secretary in regulations so 
                promulgated.''.
    (i) Effective Date.--The amendments made by this section 
shall apply to acts or omissions occurring on or after January 
1, 1997.

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

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

                 Subtitle E--Revisions to Criminal Law

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

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

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

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

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

SEC. 242. HEALTH CARE FRAUD.

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

``Sec. 1347. Health care fraud

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

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

SEC. 243. THEFT OR EMBEZZLEMENT.

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

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

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

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

SEC. 244. FALSE STATEMENTS.

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

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

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

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

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

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

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

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

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

SEC. 246. LAUNDERING OF MONETARY INSTRUMENTS.

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

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

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

SEC. 248. AUTHORIZED INVESTIGATIVE DEMAND PROCEDURES.

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

``Sec. 3486. Authorized investigative demand procedures

    ``(a) Authorization.--(1) In any investigation relating to 
any act or activity involving a Federal health care offense, 
the Attorney General or the Attorney General's designee may 
issue in writing and cause to be served a subpoena--
            ``(A) requiring the production of any records 
        (including any books, papers, documents, electronic 
        media, or other objects or tangible things), which may 
        be relevant to an authorized law enforcement inquiry, 
        that a person or legal entity may possess or have care, 
        custody, or control; or
            ``(B) requiring a custodian of records to give 
        testimony concerning the production and authentication 
        of such records.
    ``(2) A subpoena under this subsection shall describe the 
objects required to be produced and prescribe a return date 
within a reasonable period of time within which the objects can 
be assembled and made available.
    ``(3) The production of records shall not be required under 
this section at any place more than 500 miles distant from the 
place where the subpoena for the production of such records is 
served.
    ``(4) Witnesses summoned under this section shall be paid 
the same fees and mileage that are paid witnesses in the courts 
of the United States.
    ``(b) Service.--A subpoena issued under this section may be 
served by any person who is at least 18 years of age and is 
designated in the subpoena to serve it. Service upon a natural 
person may be made by personal delivery of the subpoena to him. 
Service may be made upon a domestic or foreign corporation or 
upon a partnership or other unincorporated association which is 
subject to suit under a common name, by delivering the subpoena 
to an officer, to a managing or general agent, or to any other 
agent authorized by appointment or by law to receive service of 
process. The affidavit of the person serving the subpoena 
entered on a true copy thereof by the person serving it shall 
be proof of service.
    ``(c) Enforcement.--In the case of contumacy by or refusal 
to obey a subpoena issued to any person, the Attorney General 
may invoke the aid of any court of the United States within the 
jurisdiction of which the investigation is carried on or of 
which the subpoenaed person is an inhabitant, or in which he 
carries on business or may be found, to compel compliance with 
the subpoena. The court may issue an order requiring the 
subpoenaed person to appear before the Attorney General to 
produce records, if so ordered, or to give testimony concerning 
the production and authentication of such records. Any failure 
to obey the order of the court may be punished by the court as 
a contempt thereof. All process in any such case may be served 
in any judicial district in which such person may be found.
    ``(d) Immunity From Civil Liability.--Notwithstanding any 
Federal, State, or local law, any person, including officers, 
agents, and employees, receiving a summons under this section, 
who complies in good faith with the summons and thus produces 
the materials sought, shall not be liable in any court of any 
State or the United States to any customer or other person for 
such production or for nondisclosure of that production to the 
customer.
    ``(e) Limitation on Use.--(1) Health information about an 
individual that is disclosed under this section may not be used 
in, or disclosed to any person for use in, any administrative, 
civil, or criminal action or investigation directed against the 
individual who is the subject of the information unless the 
action or investigation arises out of and is directly related 
to receipt of health care or payment for health care or action 
involving a fraudulent claim related to health; or if 
authorized by an appropriate order of a court of competent 
jurisdiction, granted after application showing good cause 
therefor.
    ``(2) In assessing good cause, the court shall weigh the 
public interest and the need for disclosure against the injury 
to the patient, to the physician-patient relationship, and to 
the treatment services.
    ``(3) Upon the granting of such order, the court, in 
determining the extent to which any disclosure of all or any 
part of any record is necessary, shall impose appropriate 
safeguards against unauthorized disclosure.''.
    (b) Clerical Amendment.--The table of sections at the 
beginning of chapter 223 of title 18, United States Code, is 
amended by inserting after the item relating to section 3485 
the following new item:

``3486. Authorized investigative demand procedures.''.

    (c) Conforming Amendment.--Section 1510(b)(3)(B) of title 
18, United States Code, is amended by inserting ``or a 
Department of Justice subpoena (issued under section 3486 of 
title 18),'' after ``subpoena''.

SEC. 249. FORFEITURES FOR FEDERAL HEALTH CARE OFFENSES.

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

SEC. 250. RELATION TO ERISA AUTHORITY.

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

               Subtitle F--Administrative Simplification

SEC. 261. PURPOSE.

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

SEC. 262. ADMINISTRATIVE SIMPLIFICATION.

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

                ``Part C--Administrative Simplification


                             ``definitions


    ``Sec. 1171. For purposes of this part:
            ``(1) Code set.--The term `code set' means any set 
        of codes used for encoding data elements, such as 
        tables of terms, medical concepts, medical diagnostic 
        codes, or medical procedure codes.
            ``(2) Health care clearinghouse.--The term `health 
        care clearinghouse' means a public or private entity 
        that processes or facilitates the processing of 
        nonstandard data elements of health information into 
        standard data elements.
            ``(3) Health care provider.--The term `health care 
        provider' includes a provider of services (as defined 
        in section 1861(u)), a provider of medical or other 
        health services (as defined in section 1861(s)), and 
        any other person furnishing health care services or 
        supplies.
            ``(4) Health information.--The term `health 
        information' means any information, whether oral or 
        recorded in any form or medium, that--
                    ``(A) is created or received by a health 
                care provider, health plan, public health 
                authority, employer, life insurer, school or 
                university, or health care clearinghouse; and
                    ``(B) relates to the past, present, or 
                future physical or mental health or condition 
                of an individual, the provision of health care 
                to an individual, or the past, present, or 
                future payment for the provision of health care 
                to an individual.
            ``(5) Health plan.--The term `health plan' means an 
        individual or group plan that provides, or pays the 
        cost of, medical care (as such term is defined in 
        section 2791 of the Public Health Service Act). Such 
        term includes the following, and any combination 
        thereof:
                    ``(A) A group health plan (as defined in 
                section 2791(a) of the Public Health Service 
                Act), but only if the plan--
                            ``(i) has 50 or more participants 
                        (as defined in section 3(7) of the 
                        Employee Retirement Income Security Act 
                        of 1974); or
                            ``(ii) is administered by an entity 
                        other than the employer who established 
                        and maintains the plan.
                    ``(B) A health insurance issuer (as defined 
                in section 2791(b) of the Public Health Service 
                Act).
                    ``(C) A health maintenance organization (as 
                defined in section 2791(b) of the Public Health 
                Service Act).
                    ``(D) Part A or part B of the medicare 
                program under title XVIII.
                    ``(E) The medicaid program under title XIX.
                    ``(F) A medicare supplemental policy (as 
                defined in section 1882(g)(1)).
                    ``(G) A long-term care policy, including a 
                nursing home fixed indemnity policy (unless the 
                Secretary determines that such a policy does 
                not provide sufficiently comprehensive coverage 
                of a benefit so that the policy should be 
                treated as a health plan).
                    ``(H) An employee welfare benefit plan or 
                any other arrangement which is established or 
                maintained for the purpose of offering or 
                providing health benefits to the employees of 2 
                or more employers.
                    ``(I) The health care program for active 
                military personnel under title 10, United 
                States Code.
                    ``(J) The veterans health care program 
                under chapter 17 of title 38, United States 
                Code.
                    ``(K) The Civilian Health and Medical 
                Program of the Uniformed Services (CHAMPUS), as 
                defined in section 1072(4) of title 10, United 
                States Code.
                    ``(L) The Indian health service program 
                under the Indian Health Care Improvement Act 
                (25 U.S.C. 1601 et seq.).
                    ``(M) The Federal Employees Health Benefit 
                Plan under chapter 89 of title 5, United States 
                Code.
            ``(6) Individually identifiable health 
        information.--The term `individually identifiable 
        health information' means any information, including 
        demographic information collected from an individual, 
        that--
                    ``(A) is created or received by a health 
                care provider, health plan, employer, or health 
                care clearinghouse; and
                    ``(B) relates to the past, present, or 
                future physical or mental health or condition 
                of an individual, the provision of health care 
                to an individual, or the past, present, or 
                future payment for the provision of health care 
                to an individual, and--
                            ``(i) identifies the individual; or
                            ``(ii) with respect to which there 
                        is a reasonable basis to believe that 
                        the information can be used to identify 
                        the individual.
            ``(7) Standard.--The term `standard', when used 
        with reference to a data element of health information 
        or a transaction referred to in section 1173(a)(1), 
        means any such data element or transaction that meets 
        each of the standards and implementation specifications 
        adopted or established by the Secretary with respect to 
        the data element or transaction under sections 1172 
        through 1174.
            ``(8) Standard setting organization.--The term 
        `standard setting organization' means a standard 
        setting organization accredited by the American 
        National Standards Institute, including the National 
        Council for Prescription Drug Programs, that develops 
        standards for information transactions, data elements, 
        or any other standard that is necessary to, or will 
        facilitate, the implementation of this part.


            ``general requirements for adoption of standards


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


       ``standards for information transactions and data elements


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


                 ``timetables for adoption of standards


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


                             ``requirements


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


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


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


 ``wrongful disclosure of individually identifiable health information


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


                         ``effect on state law


    ``Sec. 1178. (a) General Effect.--
            ``(1) General rule.--Except as provided in 
        paragraph (2), a provision or requirement under this 
        part, or a standard or implementation specification 
        adopted or established under sections 1172 through 
        1174, shall supersede any contrary provision of State 
        law, including a provision of State law that requires 
        medical or health plan records (including billing 
        information) to be maintained or transmitted in written 
        rather than electronic form.
            ``(2) Exceptions.--A provision or requirement under 
        this part, or a standard or implementation 
        specification adopted or established under sections 
        1172 through 1174, shall not supersede a contrary 
        provision of State law, if the provision of State law--
                    ``(A) is a provision the Secretary 
                determines--
                            ``(i) is necessary--
                                    ``(I) to prevent fraud and 
                                abuse;
                                    ``(II) to ensure 
                                appropriate State regulation of 
                                insurance and health plans;
                                    ``(III) for State reporting 
                                on health care delivery or 
                                costs; or
                                    ``(IV) for other purposes; 
                                or
                            ``(ii) addresses controlled 
                        substances; or
                    ``(B) subject to section 264(c)(2) of the 
                Health Insurance Portability and Accountability 
                Act of 1996, relates to the privacy of 
                individually identifiable health information.
    ``(b) Public Health.--Nothing in this part shall be 
construed to invalidate or limit the authority, power, or 
procedures established under any law providing for the 
reporting of disease or injury, child abuse, birth, or death, 
public health surveillance, or public health investigation or 
intervention.
    ``(c) State Regulatory Reporting.--Nothing in this part 
shall limit the ability of a State to require a health plan to 
report, or to provide access to, information for management 
audits, financial audits, program monitoring and evaluation, 
facility licensure or certification, or individual licensure or 
certification.


      ``processing payment transactions by financial institutions


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

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

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

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

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

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

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

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

    (a) Treatment of Certain Health Insurance Policies as 
Nonduplicative.--Section 1882(d)(3)(A) (42 U.S.C. 
1395ss(d)(3)(A)) is amended--
            (1) in clause (iii), by striking ``clause (i)'' and 
        inserting ``clause (i)(II)''; and
            (2) by adding at the end the following:
    ``(iv) For purposes of this subparagraph, a health 
insurance policy (other than a medicare supplemental policy) 
providing for benefits which are payable to or on behalf of an 
individual without regard to other health benefit coverage of 
such individual is not considered to `duplicate' any health 
benefits under this title, under title XIX, or under a health 
insurance policy, and subclauses (I) and (III) of clause (i) do 
not apply to such a policy.
    ``(v) For purposes of this subparagraph, a health insurance 
policy (or a rider to an insurance contract which is not a 
health insurance policy) is not considered to `duplicate' 
health benefits under this title or under another health 
insurance policy if it--
            ``(I) provides health care benefits only for long-
        term care, nursing home care, home health care, or 
        community-based care, or any combination thereof,
            ``(II) coordinates against or excludes items and 
        services available or paid for under this title or 
        under another health insurance policy, and
            ``(III) for policies sold or issued on or after the 
        end of the 90-day period beginning on the date of 
        enactment of the Health Insurance Portability and 
        Accountability Act of 1996) discloses such coordination 
        or exclusion in the policy's outline of coverage.
For purposes of this clause, the terms `coordinates' and 
`coordination' mean, with respect to a policy in relation to 
health benefits under this title or under another health 
insurance policy, that the policy under its terms is secondary 
to, or excludes from payment, items and services to the extent 
available or paid for under this title or under another health 
insurance policy.
    ``(vi)(I) An individual entitled to benefits under part A 
or enrolled under part B of this title who is applying for a 
health insurance policy (other than a policy described in 
subclause (III)) shall be furnished a disclosure statement 
described in clause (vii) for the type of policy being applied 
for. Such statement shall be furnished as a part of (or 
together with) the application for such policy.
    ``(II) Whoever issues or sells a health insurance policy 
(other than a policy described in subclause (III)) to an 
individual described in subclause (I) and fails to furnish the 
appropriate disclosure statement as required under such 
subclause shall be fined under title 18, United States Code, or 
imprisoned not more than 5 years, or both, and, in addition to 
or in lieu of such a criminal penalty, is subject to a civil 
money penalty of not to exceed $25,000 (or $15,000 in the case 
of a person other than the issuer of the policy) for each such 
violation.
    ``(III) A policy described in this subclause (to which 
subclauses (I) and (II) do not apply) is a medicare 
supplemental policy or a health insurance policy identified 
under 60 Federal Register 30880 (June 12, 1995) as a policy not 
required to have a disclosure statement.
    ``(IV) Any reference in this section to the revised NAIC 
model regulation (referred to in subsection (m)(1)(A)) is 
deemed a reference to such regulation as revised by section 
171(m)(2) of the Social Security Act Amendments of 1994 (Public 
Law 103-432) and as modified by substituting, for the 
disclosure required under section 16D(2), disclosure under 
subclause (I) of an appropriate disclosure statement under 
clause (vii).
    ``(vii) The disclosure statement described in this clause 
for a type of policy is the statement specified under 
subparagraph (D) of this paragraph (as in effect before the 
date of the enactment of the Health Insurance Portability and 
Accountability Act of 1996) for that type of policy, as revised 
as follows:
            ``(I) In each statement, amend the second line to 
        read as follows:

              `THIS IS NOT MEDICARE SUPPLEMENT INSURANCE'.

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

                      Subtitle H--Patent Extension

SEC. 281. PATENT EXTENSION.

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

                TITLE III--TAX-RELATED HEALTH PROVISIONS

SEC. 300. AMENDMENT OF 1986 CODE.

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

                  Subtitle A--Medical Savings Accounts

SEC. 301. MEDICAL SAVINGS ACCOUNTS.

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

``SEC. 220. MEDICAL SAVINGS ACCOUNTS.

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

          ``For limitations on number of taxpayers who are eligible to 
        have medical savings accounts, see subsection (i).

            ``(2) High deductible health plan.--
                    ``(A) In general.--The term `high 
                deductible health plan' means a health plan--
                            ``(i) in the case of self-only 
                        coverage, which has an annual 
                        deductible which is not less than 
                        $1,500 and not more than $2,250,
                            ``(ii) in the case of family 
                        coverage, which has an annual 
                        deductible which is not less than 
                        $3,000 and not more than $4,500, and
                            ``(iii) the annual out-of-pocket 
                        expenses required to be paid under the 
                        plan (other than for premiums) for 
                        covered benefits does not exceed--
                                    ``(I) $3,000 for self-only 
                                coverage, and
                                    ``(II) $5,500 for family 
                                coverage.
                    ``(B) Special rules.--
                            ``(i) Exclusion of certain plans.--
                        Such term does not include a health 
                        plan if substantially all of its 
                        coverage is coverage described in 
                        paragraph (1)(B).
                            ``(ii) Safe harbor for absence of 
                        preventive care deductible.--A plan 
                        shall not fail to be treated as a high 
                        deductible health plan by reason of 
                        failing to have a deductible for 
                        preventive care if the absence of a 
                        deductible for such care is required by 
                        State law.
            ``(3) Permitted insurance.--The term `permitted 
        insurance' means--
                    ``(A) Medicare supplemental insurance,
                    ``(B) insurance if substantially all of the 
                coverage provided under such insurance relates 
                to--
                            ``(i) liabilities incurred under 
                        workers' compensation laws,
                            ``(ii) tort liabilities,
                            ``(iii) liabilities relating to 
                        ownership or use of property, or
                            ``(iv) such other similar 
                        liabilities as the Secretary may 
                        specify by regulations,
                    ``(C) insurance for a specified disease or 
                illness, and
                    ``(D) insurance paying a fixed amount per 
                day (or other period) of hospitalization.
            ``(4) Small employer.--
                    ``(A) In general.--The term `small 
                employer' means, with respect to any calendar 
                year, any employer if such employer employed an 
                average of 50 or fewer employees on business 
                days during either of the 2 preceding calendar 
                years. For purposes of the preceding sentence, 
                a preceding calendar year may be taken into 
                account only if the employer was in existence 
                throughout such year.
                    ``(B) Employers not in existence in 
                preceding year.--In the case of an employer 
                which was not in existence throughout the 1st 
                preceding calendar year, the determination 
                under subparagraph (A) shall be based on the 
                average number of employees that it is 
                reasonably expected such employer will employ 
                on business days in the current calendar year.
                    ``(C) Certain growing employers retain 
                treatment as small employer.--The term `small 
                employer' includes, with respect to any 
                calendar year, any employer if--
                            ``(i) such employer met the 
                        requirement of subparagraph (A) 
                        (determined without regard to 
                        subparagraph (B)) for any preceding 
                        calendar year after 1996,
                            ``(ii) any amount was contributed 
                        to the medical savings account of any 
                        employee of such employer with respect 
                        to coverage of such employee under a 
                        high deductible health plan of such 
                        employer during such preceding calendar 
                        year and such amount was excludable 
                        from gross income under section 106(b) 
                        or allowable as a deduction under this 
                        section, and
                            ``(iii) such employer employed an 
                        average of 200 or fewer employees on 
                        business days during each preceding 
                        calendar year after 1996.
                    ``(D) Special rules.--
                            ``(i) Controlled groups.--For 
                        purposes of this paragraph, all persons 
                        treated as a single employer under 
                        subsection (b), (c), (m), or (o) of 
                        section 414 shall be treated as 1 
                        employer.
                            ``(ii) Predecessors.--Any reference 
                        in this paragraph to an employer shall 
                        include a reference to any predecessor 
                        of such employer.
                    ``(5) Family coverage.--The term `family 
                coverage' means any coverage other than self-
                only coverage.
    ``(d) Medical Savings Account.--For purposes of this 
section--
            ``(1) Medical savings account.--The term `medical 
        savings account' means a trust created or organized in 
        the United States exclusively for the purpose of paying 
        the qualified medical expenses of the account holder, 
        but only if the written governing instrument creating 
        the trust meets the following requirements:
                    ``(A) Except in the case of a rollover 
                contribution described in subsection (f)(5), no 
                contribution will be accepted--
                            ``(i) unless it is in cash, or
                            ``(ii) to the extent such 
                        contribution, when added to previous 
                        contributions to the trust for the 
                        calendar year, exceeds 75 percent of 
                        the highest annual limit deductible 
                        permitted under subsection 
                        (c)(2)(A)(ii) for such calendar year.
                    ``(B) The trustee is a bank (as defined in 
                section 408(n)), an insurance company (as 
                defined in section 816), or another person who 
                demonstrates to the satisfaction of the 
                Secretary that the manner in which such person 
                will administer the trust will be consistent 
                with the requirements of this section.
                    ``(C) No part of the trust assets will be 
                invested in life insurance contracts.
                    ``(D) The assets of the trust will not be 
                commingled with other property except in a 
                common trust fund or common investment fund.
                    ``(E) The interest of an individual in the 
                balance in his account is nonforfeitable.
            ``(2) Qualified medical expenses.--
                    ``(A) In general.--The term `qualified 
                medical expenses' means, with respect to an 
                account holder, amounts paid by such holder for 
                medical care (as defined in section 213(d)) for 
                such individual, the spouse of such individual, 
                and any dependent (as defined in section 152) 
                of such individual, but only to the extent such 
                amounts are not compensated for by insurance or 
                otherwise.
                    ``(B) Health insurance may not be purchased 
                from account.--
                            ``(i) In general.--Subparagraph (A) 
                        shall not apply to any payment for 
                        insurance.
                            ``(ii) Exceptions.--Clause (i) 
                        shall not apply to any expense for 
                        coverage under--
                                    ``(I) a health plan during 
                                any period of continuation 
                                coverage required under any 
                                Federal law,
                                    ``(II) a qualified long-
                                term care insurance contract 
                                (as defined in section 
                                7702B(b)), or
                                    ``(III) a health plan 
                                during a period in which the 
                                individual is receiving 
                                unemployment compensation under 
                                any Federal or State law.
                    ``(C) Medical expenses of individuals who 
                are not eligible individuals.--Subparagraph (A) 
                shall apply to an amount paid by an account 
                holder for medical care of an individual who is 
                not an eligible individual for the month in 
                which the expense for such care is incurred 
                only if no amount is contributed (other than a 
                rollover contribution) to any medical savings 
                account of such account holder for the taxable 
                year which includes such month. This 
                subparagraph shall not apply to any expense for 
                coverage described in subclause (I) or (III) of 
                subparagraph (B)(ii).
            ``(3) Account holder.--The term `account holder' 
        means the individual on whose behalf the medical 
        savings account was established.
            ``(4) Certain rules to apply.--Rules similar to the 
        following rules shall apply for purposes of this 
        section:
                    ``(A) Section 219(d)(2) (relating to no 
                deduction for rollovers).
                    ``(B) Section 219(f)(3) (relating to time 
                when contributions deemed made).
                    ``(C) Except as provided in section 106(b), 
                section 219(f)(5) (relating to employer 
                payments).
                    ``(D) Section 408(g) (relating to community 
                property laws).
                    ``(E) Section 408(h) (relating to custodial 
                accounts).
    ``(e) Tax Treatment of Accounts.--
            ``(1) In general.--A medical savings account is 
        exempt from taxation under this subtitle unless such 
        account has ceased to be a medical savings account. 
        Notwithstanding the preceding sentence, any such 
        account is subject to the taxes imposed by section 511 
        (relating to imposition of tax on unrelated business 
        income of charitable, etc. organizations).
            ``(2) Account terminations.--Rules similar to the 
        rules of paragraphs (2) and (4) of section 408(e) shall 
        apply to medical savings accounts, and any amount 
        treated as distributed under such rules shall be 
        treated as not used to pay qualified medical expenses.
    ``(f) Tax Treatment of Distributions.--
            ``(1) Amounts used for qualified medical 
        expenses.--Any amount paid or distributed out of a 
        medical savings account which is used exclusively to 
        pay qualified medical expenses of any account holder 
        shall not be includible in gross income.
            ``(2) Inclusion of amounts not used for qualified 
        medical expenses.--Any amount paid or distributed out 
        of a medical savings account which is not used 
        exclusively to pay the qualified medical expenses of 
        the account holder shall be included in the gross 
        income of such holder.
            ``(3) Excess contributions returned before due date 
        of return.--
                    ``(A) In general.--If any excess 
                contribution is contributed for a taxable year 
                to any medical savings account of an 
                individual, paragraph (2) shall not apply to 
                distributions from the medical savings accounts 
                of such individual (to the extent such 
                distributions do not exceed the aggregate 
                excess contributions to all such accounts of 
                such individual for such year) if--
                            ``(i) such distribution is received 
                        by the individual on or before the last 
                        day prescribed by law (including 
                        extensions of time) for filing such 
                        individual's return for such taxable 
                        year, and
                            ``(ii) such distribution is 
                        accompanied by the amount of net income 
                        attributable to such excess 
                        contribution.
                Any net income described in clause (ii) shall 
                be included in the gross income of the 
                individual for the taxable year in which it is 
                received.
                    ``(B) Excess contribution.--For purposes of 
                subparagraph (A), the term `excess 
                contribution' means any contribution (other 
                than a rollover contribution) which is neither 
                excludable from gross income under section 
                106(b) nor deductible under this section.
            ``(4) Additional tax on distributions not used for 
        qualified medical expenses.--
                    ``(A) In general.--The tax imposed by this 
                chapter on the account holder for any taxable 
                year in which there is a payment or 
                distribution from a medical savings account of 
                such holder which is includible in gross income 
                under paragraph (2) shall be increased by 15 
                percent of the amount which is so includible.
                    ``(B) Exception for disability or death.--
                Subparagraph (A) shall not apply if the payment 
                or distribution is made after the account 
                holder becomes disabled within the meaning of 
                section 72(m)(7) or dies.
                    ``(C) Exception for distributions after 
                medicare eligibility.--Subparagraph (A) shall 
                not apply to any payment or distribution after 
                the date on which the account holder attains 
                the age specified in section 1811 of the Social 
                Security Act.
            ``(5) Rollover contribution.--An amount is 
        described in this paragraph as a rollover contribution 
        if it meets the requirements of subparagraphs (A) and 
        (B).
                    ``(A) In general.--Paragraph (2) shall not 
                apply to any amount paid or distributed from a 
                medical savings account to the account holder 
                to the extent the amount received is paid into 
                a medical savings account for the benefit of 
                such holder not later than the 60th day after 
                the day on which the holder receives the 
                payment or distribution.
                    ``(B) Limitation.--This paragraph shall not 
                apply to any amount described in subparagraph 
                (A) received by an individual from a medical 
                savings account if, at any time during the 1-
                year period ending on the day of such receipt, 
                such individual received any other amount 
                described in subparagraph (A) from a medical 
                savings account which was not includible in the 
                individual's gross income because of the 
                application of this paragraph.
            ``(6) Coordination with medical expense 
        deduction.--For purposes of determining the amount of 
        the deduction under section 213, any payment or 
        distribution out of a medical savings account for 
        qualified medical expenses shall not be treated as an 
        expense paid for medical care.
            ``(7) Transfer of account incident to divorce.--The 
        transfer of an individual's interest in a medical 
        savings account to an individual's spouse or former 
        spouse under a divorce or separation instrument 
        described in subparagraph (A) of section 71(b)(2) shall 
        not be considered a taxable transfer made by such 
        individual notwithstanding any other provision of this 
        subtitle, and such interest shall, after such transfer, 
        be treated as a medical savings account with respect to 
        which such spouse is the account holder.
            ``(8) Treatment after death of account holder.--
                    ``(A) Treatment if designated beneficiary 
                is spouse.--If the account holder's surviving 
                spouse acquires such holder's interest in a 
                medical savings account by reason of being the 
                designated beneficiary of such account at the 
                death of the account holder, such medical 
                savings account shall be treated as if the 
                spouse were the account holder.
                    ``(B) Other cases.--
                            ``(i) In general.--If, by reason of 
                        the death of the account holder, any 
                        person acquires the account holder's 
                        interest in a medical savings account 
                        in a case to which subparagraph (A) 
                        does not apply--
                                    ``(I) such account shall 
                                cease to be a medical savings 
                                account as of the date of 
                                death, and
                                    ``(II) an amount equal to 
                                the fair market value of the 
                                assets in such account on such 
                                date shall be includible if 
                                such person is not the estate 
                                of such holder, in such 
                                person's gross income for the 
                                taxable year which includes 
                                such date, or if such person is 
                                the estate of such holder, in 
                                such holder's gross income for 
                                the last taxable year of such 
                                holder.
                            ``(ii) Special rules.--
                                    ``(I) Reduction of 
                                inclusion for pre-death 
                                expenses.--The amount 
                                includible in gross income 
                                under clause (i) by any person 
                                (other than the estate) shall 
                                be reduced by the amount of 
                                qualified medical expenses 
                                which were incurred by the 
                                decedent before the date of the 
                                decedent's death and paid by 
                                such person within 1 year after 
                                such date.
                                    ``(II) Deduction for estate 
                                taxes.--An appropriate 
                                deduction shall be allowed 
                                under section 691(c) to any 
                                person (other than the decedent 
                                or the decedent's spouse) with 
                                respect to amounts included in 
                                gross income under clause (i) 
                                by such person.
    ``(g) Cost-of-Living Adjustment.--In the case of any 
taxable year beginning in a calendar year after 1998, each 
dollar amount in subsection (c)(2) shall be increased by an 
amount equal to--
            ``(1) such dollar amount, multiplied by
            ``(2) the cost-of-living adjustment determined 
        under section 1(f)(3) for the calendar year in which 
        such taxable year begins by substituting `calendar year 
        1997' for `calendar year 1992' in subparagraph (B) 
        thereof.
If any increase under the preceding sentence is not a multiple 
of $50, such increase shall be rounded to the nearest multiple 
of $50.
    ``(h) Reports.--The Secretary may require the trustee of a 
medical savings account to make such reports regarding such 
account to the Secretary and to the account holder with respect 
to contributions, distributions, and such other matters as the 
Secretary determines appropriate. The reports required by this 
subsection shall be filed at such time and in such manner and 
furnished to such individuals at such time and in such manner 
as may be required by the Secretary.
    ``(i) Limitation on Number of Taxpayers Having Medical 
Savings Accounts.--
            ``(1) In general.--Except as provided in paragraph 
        (5), no individual shall be treated as an eligible 
        individual for any taxable year beginning after the 
        cut-off year unless--
                    ``(A) such individual was an active MSA 
                participant for any taxable year ending on or 
                before the close of the cut-off year, or
                    ``(B) such individual first became an 
                active MSA participant for a taxable year 
                ending after the cut-off year by reason of 
                coverage under a high deductible health plan of 
                an MSA-participating employer.
            ``(2) Cut-off year.--For purposes of paragraph (1), 
        the term `cut-off year' means the earlier of--
                    ``(A) calendar year 2000, or
                    ``(B) the first calendar year before 2000 
                for which the Secretary determines under 
                subsection (j) that the numerical limitation 
                for such year has been exceeded.
            ``(3) Active msa participant.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `active MSA 
                participant' means, with respect to any taxable 
                year, any individual who is the account holder 
                of any medical savings account into which any 
                contribution was made which was excludable from 
                gross income under section 106(b), or allowable 
                as a deduction under this section, for such 
                taxable year.
                    ``(B) Special rule for cut-off years before 
                2000.--In the case of a cut-off year before 
                2000--
                            ``(i) an individual shall not be 
                        treated as an eligible individual for 
                        any month of such year or an active MSA 
                        participant under paragraph (1)(A) 
                        unless such individual is, on or before 
                        the cut-off date, covered under a high 
                        deductible health plan, and
                            ``(ii) an employer shall not be 
                        treated as an MSA-participating 
                        employer unless the employer, on or 
                        before the cut-off date, offered 
                        coverage under a high deductible health 
                        plan to any employee.
                    ``(C) Cut-off date.--For purposes of 
                subparagraph (B)--
                            ``(i) In general.--Except as 
                        otherwise provided in this 
                        subparagraph, the cut-off date is 
                        October 1 of the cut-off year.
                            ``(ii) Employees with enrollment 
                        periods after october 1.--In the case 
                        of an individual described in subclause 
                        (I) of subsection (c)(1)(A)(iii), if 
                        the regularly scheduled enrollment 
                        period for health plans of the 
                        individual's employer occurs during the 
                        last 3 months of the cut-off year, the 
                        cut-off date is December 31 of the cut-
                        off year.
                            ``(iii) Self-employed 
                        individuals.--In the case of an 
                        individual described in subclause (II) 
                        of subsection (c)(1)(A)(iii), the cut-
                        off date is November 1 of the cut-off 
                        year.
                            ``(iv) Special rules for 1997.--If 
                        1997 is a cut-off year by reason of 
                        subsection (j)(1)(A)--
                                    ``(I) each of the cut-off 
                                dates under clauses (i) and 
                                (iii) shall be 1 month earlier 
                                than the date determined 
                                without regard to this clause, 
                                and
                                    ``(II) clause (ii) shall be 
                                applied by substituting `4 
                                months' for `3 months'.
            ``(4) MSA-participating employer.--For purposes of 
        this subsection, the term `MSA-participating employer' 
        means any small employer if--
                    ``(A) such employer made any contribution 
                to the medical savings account of any employee 
                during the cut-off year or any preceding 
                calendar year which was excludable from gross 
                income under section 106(b), or
                    ``(B) at least 20 percent of the employees 
                of such employer who are eligible individuals 
                for any month of the cut-off year by reason of 
                coverage under a high deductible health plan of 
                such employer each made a contribution of at 
                least $100 to their medical savings accounts 
                for any taxable year ending with or within the 
                cut-off year which was allowable as a deduction 
                under this section.
            ``(5) Additional eligibility after cut-off year.--
        If the Secretary determines under subsection (j)(2)(A) 
        that the numerical limit for the calendar year 
        following a cut-off year described in paragraph (2)(B) 
        has not been exceeded--
                    ``(A) this subsection shall not apply to 
                any otherwise eligible individual who is 
                covered under a high deductible health plan 
                during the first 6 months of the second 
                calendar year following the cut-off year (and 
                such individual shall be treated as an active 
                MSA participant for purposes of this subsection 
                if a contribution is made to any medical 
                savings account with respect to such coverage), 
                and
                    ``(B) any employer who offers coverage 
                under a high deductible health plan to any 
                employee during such 6-month period shall be 
                treated as an MSA-participating employer for 
                purposes of this subsection if the requirements 
                of paragraph (4) are met with respect to such 
                coverage.
        For purposes of this paragraph, subsection (j)(2)(A) 
        shall be applied for 1998 by substituting `750,000' for 
        `600,000'.
    ``(j) Determination of Whether Numerical Limits Are 
Exceeded.--
            ``(1) Determination of whether limit exceeded for 
        1997.--The numerical limitation for 1997 is exceeded 
        if, based on the reports required under paragraph (4), 
        the number of medical savings accounts established as 
        of--
                    ``(A) April 30, 1997, exceeds 375,000, or
                    ``(B) June 30, 1997, exceeds 525,000.
            ``(2) Determination of whether limit exceeded for 
        1998 or 1999.--
                    ``(A) In general.--The numerical limitation 
                for 1998 or 1999 is exceeded if the sum of--
                            ``(i) the number of MSA returns 
                        filed on or before April 15 of such 
                        calendar year for taxable years ending 
                        with or within the preceding calendar 
                        year, plus
                            ``(ii) the Secretary's estimate 
                        (determined on the basis of the returns 
                        described in clause (i)) of the number 
                        of MSA returns for such taxable years 
                        which will be filed after such date,
                exceeds 600,000 (750,000 in the case of 1999). 
                For purposes of the preceding sentence, the 
                term `MSA return' means any return on which any 
                exclusion is claimed under section 106(b) or 
                any deduction is claimed under this section.
                    ``(B) Alternative computation of 
                limitation.--The numerical limitation for 1998 
                or 1999 is also exceeded if the sum of--
                            ``(i) 90 percent of the sum 
                        determined under subparagraph (A) for 
                        such calendar year, plus
                            ``(ii) the product of 2.5 and the 
                        number of medical savings accounts 
                        established during the portion of such 
                        year preceding July 1 (based on the 
                        reports required under paragraph (4)) 
                        for taxable years beginning in such 
                        year,
                exceeds 750,000.
            ``(3) Previously uninsured individuals not included 
        in determination.--
                    ``(A) In general.--The determination of 
                whether any calendar year is a cut-off year 
                shall be made by not counting the medical 
                savings account of any previously uninsured 
                individual.
                    ``(B) Previously uninsured individual.--For 
                purposes of this subsection, the term 
                `previously uninsured individual' means, with 
                respect to any medical savings account, any 
                individual who had no health plan coverage 
                (other than coverage referred to in subsection 
                (c)(1)(B)) at any time during the 6-month 
                period before the date such individual's 
                coverage under the high deductible health plan 
                commences.
            ``(4) Reporting by msa trustees.--
                    ``(A) In general.--Not later than August 1 
                of 1997, 1998, and 1999, each person who is the 
                trustee of a medical savings account 
                established before July 1 of such calendar year 
                shall make a report to the Secretary (in such 
                form and manner as the Secretary shall specify) 
                which specifies--
                            ``(i) the number of medical savings 
                        accounts established before such July 1 
                        (for taxable years beginning in such 
                        calendar year) of which such person is 
                        the trustee,
                            ``(ii) the name and TIN of the 
                        account holder of each such account, 
                        and
                            ``(iii) the number of such accounts 
                        which are accounts of previously 
                        uninsured individuals.
                    ``(B) Additional report for 1997.--Not 
                later than June 1, 1997, each person who is the 
                trustee of a medical savings account 
                established before May 1, 1997, shall make an 
                additional report described in subparagraph (A) 
                but only with respect to accounts established 
                before May 1, 1997.
                    ``(C) Penalty for failure to file report.--
                The penalty provided in section 6693(a) shall 
                apply to any report required by this paragraph, 
                except that--
                            ``(i) such section shall be applied 
                        by substituting `$25' for `$50', and
                            ``(ii) the maximum penalty imposed 
                        on any trustee shall not exceed $5,000.
                    ``(D) Aggregation of accounts.--To the 
                extent practical, in determining the number of 
                medical savings accounts on the basis of the 
                reports under this paragraph, all medical 
                savings accounts of an individual shall be 
                treated as 1 account and all accounts of 
                individuals who are married to each other shall 
                be treated as 1 account.
            ``(5) Date of making determinations.--Any 
        determination under this subsection that a calendar 
        year is a cut-off year shall be made by the Secretary 
        and shall be published not later than October 1 of such 
        year.
    (b) Deduction Allowed Whether or Not Individual Itemizes 
Other Deductions.--Subsection (a) of section 62 is amended by 
inserting after paragraph (15) the following new paragraph:
            ``(16) Medical savings accounts.--The deduction 
        allowed by section 220.''
    (c) Exclusions for Employer Contributions to Medical 
Savings Accounts.--
            (1) Exclusion from income tax.--The text of section 
        106 (relating to contributions by employer to accident 
        and health plans) is amended to read as follows:
    ``(a) General Rule.--Except as otherwise provided in this 
section, gross income of an employee does not include employer-
provided coverage under an accident or health plan.
    ``(b) Contributions to Medical Savings Accounts.--
            ``(1) In general.--In the case of an employee who 
        is an eligible individual, amounts contributed by such 
        employee's employer to any medical savings account of 
        such employee shall be treated as employer-provided 
        coverage for medical expenses under an accident or 
        health plan to the extent such amounts do not exceed 
        the limitation under section 220(b)(1) (determined 
        without regard to this subsection) which is applicable 
        to such employee for such taxable year.
            ``(2) No constructive receipt.--No amount shall be 
        included in the gross income of any employee solely 
        because the employee may choose between the 
        contributions referred to in paragraph (1) and employer 
        contributions to another health plan of the employer.
            ``(3) Special rule for deduction of employer 
        contributions.--Any employer contribution to a medical 
        savings account, if otherwise allowable as a deduction 
        under this chapter, shall be allowed only for the 
        taxable year in which paid.
            ``(4) Employer msa contributions required to be 
        shown on return.--Every individual required to file a 
        return under section 6012 for the taxable year shall 
        include on such return the aggregate amount contributed 
        by employers to the medical savings accounts of such 
        individual or such individual's spouse for such taxable 
        year.
            ``(5) MSA contributions not part of cobra 
        coverage.--Paragraph (1) shall not apply for purposes 
        of section 4980B.
            ``(6) Definitions.--For purposes of this 
        subsection, the terms `eligible individual' and 
        `medical savings account' have the respective meanings 
        given to such terms by section 220.
            ``(7) Cross reference.--

          ``For penalty on failure by employer to make comparable 
        contributions to the medical savings accounts of comparable 
        employees, see section 4980E.''.

            (2) Exclusion from employment taxes.--
                    (A) Railroad retirement tax.--Subsection 
                (e) of section 3231 is amended by adding at the 
                end the following new paragraph:
            ``(10) Medical savings account contributions.--The 
        term `compensation' shall not include any payment made 
        to or for the benefit of an employee if at the time of 
        such payment it is reasonable to believe that the 
        employee will be able to exclude such payment from 
        income under section 106(b).''
                    (B) Unemployment tax.--Subsection (b) of 
                section 3306 is amended by striking ``or'' at 
                the end of paragraph (15), by striking the 
                period at the end of paragraph (16) and 
                inserting ``; or'', and by inserting after 
                paragraph (16) the following new paragraph:
            ``(17) any payment made to or for the benefit of an 
        employee if at the time of such payment it is 
        reasonable to believe that the employee will be able to 
        exclude such payment from income under section 
        106(b).''
                    (C) Withholding tax.--Subsection (a) of 
                section 3401 is amended by striking ``or'' at 
                the end of paragraph (19), by striking the 
                period at the end of paragraph (20) and 
                inserting ``; or'', and by inserting after 
                paragraph (20) the following new paragraph:
            ``(21) any payment made to or for the benefit of an 
        employee if at the time of such payment it is 
        reasonable to believe that the employee will be able to 
        exclude such payment from income under section 
        106(b).''
            (3) Employer contributions required to be shown on 
        w-2.--Subsection (a) of section 6051 is amended by 
        striking ``and'' at the end of paragraph (9), by 
        striking the period at the end of paragraph (10) and 
        inserting ``, and'', and by inserting after paragraph 
        (10) the following new paragraph:
            ``(11) the amount contributed to any medical 
        savings account (as defined in section 220(d)) of such 
        employee or such employee's spouse.''
            (4) Penalty for failure of employer to make 
        comparable msa contributions.--
                    (A) In general.--Chapter 43 is amended by 
                adding after section 4980D the following new 
                section:

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

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

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

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

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

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

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

    (j) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1996.
    (k) Monitoring of Participation in Medical Savings 
Accounts.--The Secretary of the Treasury or his delegate 
shall--
            (1) during 1997, 1998, 1999, and 2000, regularly 
        evaluate the number of individuals who are maintaining 
        medical savings accounts and the reduction in revenues 
        to the United States by reason of such accounts, and
            (2) provide such reports of such evaluations to 
        Congress as such Secretary determines appropriate.
    (l) Study of Effects of Medical Savings Accounts on Small 
Group Market.--The Comptroller General of the United States 
shall enter into a contract with an organization with expertise 
in health economics, health insurance markets, and actuarial 
science to conduct a comprehensive study regarding the effects 
of medical savings accounts in the small group market on--
            (1) selection, including adverse selection,
            (2) health costs, including any impact on premiums 
        of individuals with comprehensive coverage,
            (3) use of preventive care,
            (4) consumer choice,
            (5) the scope of coverage of high deductible plans 
        purchased in conjunction with such accounts, and
            (6) other relevant items.
A report on the results of the study conducted under this 
subsection shall be submitted to the Congress no later than 
January 1, 1999.

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

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

    (a) In General.--Paragraph (1) of section 162(l) is amended 
to read as follows:
            ``(1) Allowance of deduction.--
                    ``(A) In general.--In the case of an 
                individual who is an employee within the 
                meaning of section 401(c)(1), there shall be 
                allowed as a deduction under this section an 
                amount equal to the applicable percentage of 
                the amount paid during the taxable year for 
                insurance which constitutes medical care for 
                the taxpayer, his spouse, and dependents.
                    ``(B) Applicable percentage.--For purposes 
                of subparagraph (A), the applicable percentage 
                shall be determined under the following table:

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

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

           Subtitle C--Long-Term Care Services and Contracts

                       PART I--GENERAL PROVISIONS

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

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

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

    ``(a) In General.--For purposes of this title--
            ``(1) a qualified long-term care insurance contract 
        shall be treated as an accident and health insurance 
        contract,
            ``(2) amounts (other than policyholder dividends, 
        as defined in section 808, or premium refunds) received 
        under a qualified long-term care insurance contract 
        shall be treated as amounts received for personal 
        injuries and sickness and shall be treated as 
        reimbursement for expenses actually incurred for 
        medical care (as defined in section 213(d)),
            ``(3) any plan of an employer providing coverage 
        under a qualified long-term care insurance contract 
        shall be treated as an accident and health plan with 
        respect to such coverage,
            ``(4) except as provided in subsection (e)(3), 
        amounts paid for a qualified long-term care insurance 
        contract providing the benefits described in subsection 
        (b)(2)(A) shall be treated as payments made for 
        insurance for purposes of section 213(d)(1)(D), and
            ``(5) a qualified long-term care insurance contract 
        shall be treated as a guaranteed renewable contract 
        subject to the rules of section 816(e).
    ``(b) Qualified Long-Term Care Insurance Contract.--For 
purposes of this title--
            ``(1) In general.--The term `qualified long-term 
        care insurance contract' means any insurance contract 
        if--
                    ``(A) the only insurance protection 
                provided under such contract is coverage of 
                qualified long-term care services,
                    ``(B) such contract does not pay or 
                reimburse expenses incurred for services or 
                items to the extent that such expenses are 
                reimbursable under title XVIII of the Social 
                Security Act or would be so reimbursable but 
                for the application of a deductible or 
                coinsurance amount,
                    ``(C) such contract is guaranteed 
                renewable,
                    ``(D) such contract does not provide for a 
                cash surrender value or other money that can 
                be--
                            ``(i) paid, assigned, or pledged as 
                        collateral for a loan, or
                            ``(ii) borrowed,
                other than as provided in subparagraph (E) or 
                paragraph (2)(C),
                    ``(E) all refunds of premiums, and all 
                policyholder dividends or similar amounts, 
                under such contract are to be applied as a 
                reduction in future premiums or to increase 
                future benefits, and
                    ``(F) such contract meets the requirements 
                of subsection (g).
            ``(2) Special rules.--
                    ``(A) Per diem, etc. payments permitted.--A 
                contract shall not fail to be described in 
                subparagraph (A) or (B) of paragraph (1) by 
                reason of payments being made on a per diem or 
                other periodic basis without regard to the 
                expenses incurred during the period to which 
                the payments relate.
                    ``(B) Special rules relating to medicare.--
                            ``(i) Paragraph (1)(B) shall not 
                        apply to expenses which are 
                        reimbursable under title XVIII of the 
                        Social Security Act only as a secondary 
                        payor.
                            ``(ii) No provision of law shall be 
                        construed or applied so as to prohibit 
                        the offering of a qualified long-term 
                        care insurance contract on the basis 
                        that the contract coordinates its 
                        benefits with those provided under such 
                        title.
                    ``(C) Refunds of premiums.--Paragraph 
                (1)(E) shall not apply to any refund on the 
                death of the insured, or on a complete 
                surrender or cancellation of the contract, 
                which cannot exceed the aggregate premiums paid 
                under the contract. Any refund on a complete 
                surrender or cancellation of the contract shall 
                be includible in gross income to the extent 
                that any deduction or exclusion was allowable 
                with respect to the premiums.
    ``(c) Qualified Long-Term Care Services.--For purposes of 
this section--
            ``(1) In general.--The term `qualified long-term 
        care services' means necessary diagnostic, preventive, 
        therapeutic, curing, treating, mitigating, and 
        rehabilitative services, and maintenance or personal 
        care services, which--
                    ``(A) are required by a chronically ill 
                individual, and
                    ``(B) are provided pursuant to a plan of 
                care prescribed by a licensed health care 
                practitioner.
            ``(2) Chronically ill individual.--
                    ``(A) In general.--The term `chronically 
                ill individual' means any individual who has 
                been certified by a licensed health care 
                practitioner as--
                            ``(i) being unable to perform 
                        (without substantial assistance from 
                        another individual) at least 2 
                        activities of daily living for a period 
                        of at least 90 days due to a loss of 
                        functional capacity,
                            ``(ii) having a level of disability 
                        similar (as determined under 
                        regulations prescribed by the Secretary 
                        in consultation with the Secretary of 
                        Health and Human Services) to the level 
                        of disability described in clause (i), 
                        or
                            ``(iii) requiring substantial 
                        supervision to protect such individual 
                        from threats to health and safety due 
                        to severe cognitive impairment.
                Such term shall not include any individual 
                otherwise meeting the requirements of the 
                preceding sentence unless within the preceding 
                12-month period a licensed health care 
                practitioner has certified that such individual 
                meets such requirements.
                    ``(B) Activities of daily living.--For 
                purposes of subparagraph (A), each of the 
                following is an activity of daily living:
                            ``(i) Eating.
                            ``(ii) Toileting.
                            ``(iii) Transferring.
                            ``(iv) Bathing.
                            ``(v) Dressing.
                            ``(vi) Continence.
                A contract shall not be treated as a qualified 
                long-term care insurance contract unless the 
                determination of whether an individual is a 
                chronically ill individual takes into account 
                at least 5 of such activities.
            ``(3) Maintenance or personal care services.--The 
        term `maintenance or personal care services' means any 
        care the primary purpose of which is the provision of 
        needed assistance with any of the disabilities as a 
        result of which the individual is a chronically ill 
        individual (including the protection from threats to 
        health and safety due to severe cognitive impairment).
            ``(4) Licensed health care practitioner.--The term 
        `licensed health care practitioner' means any physician 
        (as defined in section 1861(r)(1) of the Social 
        Security Act) and any registered professional nurse, 
        licensed social worker, or other individual who meets 
        such requirements as may be prescribed by the 
        Secretary.
    ``(d) Aggregate Payments in Excess of Limits.--
            ``(1) In general.--If the aggregate of--
                    ``(A) the periodic payments received for 
                any period under all qualified long-term care 
                insurance contracts which are treated as made 
                for qualified long-term care services for an 
                insured, and
                    ``(B) the periodic payments received for 
                such period which are treated under section 
                101(g) as paid by reason of the death of such 
                insured,
        exceeds the per diem limitation for such period, such 
        excess shall be includible in gross income without 
        regard to section 72. A payment shall not be taken into 
        account under subparagraph (B) if the insured is a 
        terminally ill individual (as defined in section 
        101(g)) at the time the payment is received.
            ``(2) Per diem limitation.--For purposes of 
        paragraph (1), the per diem limitation for any period 
        is an amount equal to the excess (if any) of--
                    ``(A) the greater of--
                            ``(i) the dollar amount in effect 
                        for such period under paragraph (4), or
                            ``(ii) the costs incurred for 
                        qualified long-term care services 
                        provided for the insured for such 
                        period, over
                    ``(B) the aggregate payments received as 
                reimbursements (through insurance or otherwise) 
                for qualified long-term care services provided 
                for the insured during such period.
            ``(3) Aggregation rules.--For purposes of this 
        subsection--
                    ``(A) all persons receiving periodic 
                payments described in paragraph (1) with 
                respect to the same insured shall be treated as 
                1 person, and
                    ``(B) the per diem limitation determined 
                under paragraph (2) shall be allocated first to 
                the insured and any remaining limitation shall 
                be allocated among the other such persons in 
                such manner as the Secretary shall prescribe.
            ``(4) Dollar amount.--The dollar amount in effect 
        under this subsection shall be $175 per day (or the 
        equivalent amount in the case of payments on another 
        periodic basis).
            ``(5) Inflation adjustment.--In the case of a 
        calendar year after 1997, the dollar amount contained 
        in paragraph (4) shall be increased at the same time 
        and in the same manner as amounts are increased 
        pursuant to section 213(d)(10).
            ``(6) Periodic payments.--For purposes of this 
        subsection, the term `periodic payment' means any 
        payment (whether on a periodic basis or otherwise) made 
        without regard to the extent of the costs incurred by 
        the payee for qualified long-term care services.
    ``(e) Treatment of Coverage Provided as Part of a Life 
Insurance Contract.--Except as otherwise provided in 
regulations prescribed by the Secretary, in the case of any 
long-term care insurance coverage (whether or not qualified) 
provided by a rider on or as part of a life insurance 
contract--
            ``(1) In general.--This section shall apply as if 
        the portion of the contract providing such coverage is 
        a separate contract.
            ``(2) Application of 7702.--Section 7702(c)(2) 
        (relating to the guideline premium limitation) shall be 
        applied by increasing the guideline premium limitation 
        with respect to a life insurance contract, as of any 
        date--
                    ``(A) by the sum of any charges (but not 
                premium payments) against the life insurance 
                contract's cash surrender value (within the 
                meaning of section 7702(f)(2)(A)) for such 
                coverage made to that date under the contract, 
                less
                    ``(B) any such charges the imposition of 
                which reduces the premiums paid for the 
                contract (within the meaning of section 
                7702(f)(1)).
            ``(3) Application of section 213.--No deduction 
        shall be allowed under section 213(a) for charges 
        against the life insurance contract's cash surrender 
        value described in paragraph (2), unless such charges 
        are includible in income as a result of the application 
        of section 72(e)(10) and the rider is a qualified long-
        term care insurance contract under subsection (b).
            ``(4) Portion defined.--For purposes of this 
        subsection, the term `portion' means only the terms and 
        benefits under a life insurance contract that are in 
        addition to the terms and benefits under the contract 
        without regard to long-term care insurance coverage.
    ``(f) Treatment of Certain State-Maintained Plans.--
            ``(1) In general.--If--
                    ``(A) an individual receives coverage for 
                qualified long-term care services under a State 
                long-term care plan, and
                    ``(B) the terms of such plan would satisfy 
                the requirements of subsection (b) were such 
                plan an insurance contract,
        such plan shall be treated as a qualified long-term 
        care insurance contract for purposes of this title.
            ``(2) State long-term care plan.--For purposes of 
        paragraph (1), the term `State long-term care plan' 
        means any plan--
                    ``(A) which is established and maintained 
                by a State or an instrumentality of a State,
                    ``(B) which provides coverage only for 
                qualified long-term care services, and
                    ``(C) under which such coverage is provided 
                only to--
                            ``(i) employees and former 
                        employees of a State (or any political 
                        subdivision or instrumentality of a 
                        State),
                            ``(ii) the spouses of such 
                        employees, and
                            ``(iii) individuals bearing a 
                        relationship to such employees or 
                        spouses which is described in any of 
                        paragraphs (1) through (8) of section 
                        152(a).''
    (b) Reserve Method.--Clause (iii) of section 807(d)(3)(A) 
is amended by inserting ``(other than a qualified long-term 
care insurance contract, as defined in section 7702B(b))'' 
after ``insurance contract''.
    (c) Long-Term Care Insurance Not Permitted Under Cafeteria 
Plans or Flexible Spending Arrangements.--
            (1) Cafeteria plans.--Section 125(f) is amended by 
        adding at the end the following new sentence: ``Such 
        term shall not include any product which is advertised, 
        marketed, or offered as long-term care insurance.''
            (2) Flexible spending arrangements.--Section 106 
        (relating to contributions by employer to accident and 
        health plans), as amended by section 301(c), is amended 
        by adding at the end the following new subsection:
    ``(c) Inclusion of Long-Term Care Benefits Provided Through 
Flexible Spending Arrangements.--
            ``(1) In general.--Effective on and after January 
        1, 1997, gross income of an employee shall include 
        employer-provided coverage for qualified long-term care 
        services (as defined in section 7702B(c)) to the extent 
        that such coverage is provided through a flexible 
        spending or similar arrangement.
            ``(2) Flexible spending arrangement.--For purposes 
        of this subsection, a flexible spending arrangement is 
        a benefit program which provides employees with 
        coverage under which--
                    ``(A) specified incurred expenses may be 
                reimbursed (subject to reimbursement maximums 
                and other reasonable conditions), and
                    ``(B) the maximum amount of reimbursement 
                which is reasonably available to a participant 
                for such coverage is less than 500 percent of 
                the value of such coverage.
        In the case of an insured plan, the maximum amount 
        reasonably available shall be determined on the basis 
        of the underlying coverage.''
    (d) Continuation Coverage Rules Not To Apply.--
            (1) Paragraph (2) of section 4980B(g) is amended by 
        adding at the end the following new sentence: ``Such 
        term shall not include any plan substantially all of 
        the coverage under which is for qualified long-term 
        care services (as defined in section 7702B(c)).''
            (2) Paragraph (1) of section 607 of the Employee 
        Retirement Income Security Act of 1974 is amended by 
        adding at the end the following new sentence: ``Such 
        term shall not include any plan substantially all of 
        the coverage under which is for qualified long-term 
        care services (as defined in section 7702B(c) of such 
        Code).''
            (3) Paragraph (1) of section 2208 of the Public 
        Health Service Act is amended by adding at the end the 
        following new sentence: ``Such term shall not include 
        any plan substantially all of the coverage under which 
        is for qualified long-term care services (as defined in 
        section 7702B(c) of such Code).''
    (e) Clerical Amendment.--The table of sections for chapter 
79 is amended by inserting after the item relating to section 
7702A the following new item:

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

    (f) Effective Dates.--
            (1) General effective date.--
                    (A) In general.--Except as provided in 
                subparagraph (B), the amendments made by this 
                section shall apply to contracts issued after 
                December 31, 1996.
                    (B) Reserve method.--The amendment made by 
                subsection (b) shall apply to contracts issued 
                after December 31, 1997.
            (2) Continuation of existing policies.--In the case 
        of any contract issued before January 1, 1997, which 
        met the long-term care insurance requirements of the 
        State in which the contract was sitused at the time the 
        contract was issued--
                    (A) such contract shall be treated for 
                purposes of the Internal Revenue Code of 1986 
                as a qualified long-term care insurance 
                contract (as defined in section 7702B(b) of 
                such Code), and
                    (B) services provided under, or reimbursed 
                by, such contract shall be treated for such 
                purposes as qualified long-term care services 
                (as defined in section 7702B(c) of such Code).
        In the case of an individual who is covered on December 
        31, 1996, under a State long-term care plan (as defined 
        in section 7702B(f)(2) of such Code), the terms of such 
        plan on such date shall be treated for purposes of the 
        preceding sentence as a contract issued on such date 
        which met the long-term care insurance requirements of 
        such State.
            (3) Exchanges of existing policies.--If, after the 
        date of enactment of this Act and before January 1, 
        1998, a contract providing for long-term care insurance 
        coverage is exchanged solely for a qualified long-term 
        care insurance contract (as defined in section 7702B(b) 
        of such Code), no gain or loss shall be recognized on 
        the exchange. If, in addition to a qualified long-term 
        care insurance contract, money or other property is 
        received in the exchange, then any gain shall be 
        recognized to the extent of the sum of the money and 
        the fair market value of the other property received. 
        For purposes of this paragraph, the cancellation of a 
        contract providing for long-term care insurance 
        coverage and reinvestment of the cancellation proceeds 
        in a qualified long-term care insurance contract within 
        60 days thereafter shall be treated as an exchange.
            (4) Issuance of certain riders permitted.--For 
        purposes of applying sections 101(f), 7702, and 7702A 
        of the Internal Revenue Code of 1986 to any contract--
                    (A) the issuance of a rider which is 
                treated as a qualified long-term care insurance 
                contract under section 7702B, and
                    (B) the addition of any provision required 
                to conform any other long-term care rider to be 
                so treated,
        shall not be treated as a modification or material 
        change of such contract.
            (5) Application of per diem limitation to existing 
        contracts.--The amount of per diem payments made under 
        a contract issued on or before July 31, 1996, with 
        respect to an insured which are excludable from gross 
        income by reason of section 7702B of the Internal 
        Revenue Code of 1986 (as added by this section) shall 
        not be reduced under subsection (d)(2)(B) thereof by 
        reason of reimbursements received under a contract 
        issued on or before such date. The preceding sentence 
        shall cease to apply as of the date (after July 31, 
        1996) such contract is exchanged or there is any 
        contract modification which results in an increase in 
        the amount of such per diem payments or the amount of 
        such reimbursements.
    (g) Long-Term Care Study Request.--The Chairman of the 
Committee on Ways and Means of the House of Representatives and 
the Chairman of the Committee on Finance of the Senate shall 
jointly request the National Association of Insurance 
Commissioners, in consultation with representatives of the 
insurance industry and consumer organizations, to formulate, 
develop, and conduct a study to determine the marketing and 
other effects of per diem limits on certain types of long-term 
care policies. If the National Association of Insurance 
Commissioners agrees to the study request, the National 
Association of Insurance Commissioners shall report the results 
of its study to such committees not later than 2 years after 
accepting the request.

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

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

``In the case of an individual with an attained age before the close of 
    the taxable year of:                              The limitation is:
              40 or less................................         $200   
              More than 40 but not more than 50.........          375   
              More than 50 but not more than 60.........          750   
              More than 60 but not more than 70.........        2,000   
              More than 70..............................        2,500.  

                    ``(B) Indexing.--
                            ``(i) In general.--In the case of 
                        any taxable year beginning in a 
                        calendar year after 1997, each dollar 
                        amount contained in subparagraph (A) 
                        shall be increased by the medical care 
                        cost adjustment of such amount for such 
                        calendar year. If any increase 
                        determined under the preceding sentence 
                        is not a multiple of $10, such increase 
                        shall be rounded to the nearest 
                        multiple of $10.
                            ``(ii) Medical care cost 
                        adjustment.--For purposes of clause 
                        (i), the medical care cost adjustment 
                        for any calendar year is the percentage 
                        (if any) by which--
                                    ``(I) the medical care 
                                component of the Consumer Price 
                                Index (as defined in section 
                                1(f)(5)) for August of the 
                                preceding calendar year, 
                                exceeds
                                    ``(II) such component for 
                                August of 1996.
                        The Secretary shall, in consultation 
                        with the Secretary of Health and Human 
                        Services, prescribe an adjustment which 
                        the Secretary determines is more 
                        appropriate for purposes of this 
                        paragraph than the adjustment described 
                        in the preceding sentence, and the 
                        adjustment so prescribed shall apply in 
                        lieu of the adjustment described in the 
                        preceding sentence.
            ``(11) Certain payments to relatives treated as not 
        paid for medical care.--An amount paid for a qualified 
        long-term care service (as defined in section 7702B(c)) 
        provided to an individual shall be treated as not paid 
        for medical care if such service is provided--
                    ``(A) by the spouse of the individual or by 
                a relative (directly or through a partnership, 
                corporation, or other entity) unless the 
                service is provided by a licensed professional 
                with respect to such service, or
                    ``(B) by a corporation or partnership which 
                is related (within the meaning of section 
                267(b) or 707(b)) to the individual.
        For purposes of this paragraph, the term `relative' 
        means an individual bearing a relationship to the 
        individual which is described in any of paragraphs (1) 
        through (8) of section 152(a). This paragraph shall not 
        apply for purposes of section 105(b) with respect to 
        reimbursements through insurance.'' .
            (3) Paragraph (6) of section 213(d) is amended--
                    (A) by striking ``subparagraphs (A) and 
                (B)'' and inserting ``subparagraphs (A), (B), 
                and (C)'', and
                    (B) by striking ``paragraph (1)(C)'' in 
                subparagraph (A) and inserting ``paragraph 
                (1)(D)''.
            (4) Paragraph (7) of section 213(d) is amended by 
        striking ``subparagraphs (A) and (B)'' and inserting 
        ``subparagraphs (A), (B), and (C)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1996.

SEC. 323. REPORTING REQUIREMENTS.

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

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

    ``(a) Requirement of Reporting.--Any person who pays long-
term care benefits shall make a return, according to the forms 
or regulations prescribed by the Secretary, setting forth--
            ``(1) the aggregate amount of such benefits paid by 
        such person to any individual during any calendar year,
            ``(2) whether or not such benefits are paid in 
        whole or in part on a per diem or other periodic basis 
        without regard to the expenses incurred during the 
        period to which the payments relate,
            ``(3) the name, address, and TIN of such 
        individual, and
            ``(4) the name, address, and TIN of the chronically 
        ill or terminally ill individual on account of whose 
        condition such benefits are paid.
    ``(b) Statements To Be Furnished to Persons With Respect to 
Whom Information Is Required.--Every person required to make a 
return under subsection (a) shall furnish to each individual 
whose name is required to be set forth in such return a written 
statement showing--
            ``(1) the name of the person making the payments, 
        and
            ``(2) the aggregate amount of long-term care 
        benefits paid to the individual which are required to 
        be shown on such return.
The written statement required under the preceding sentence 
shall be furnished to the individual on or before January 31 of 
the year following the calendar year for which the return under 
subsection (a) was required to be made.
    ``(c) Long-Term Care Benefits.--For purposes of this 
section, the term `long-term care benefit' means--
            ``(1) any payment under a product which is 
        advertised, marketed, or offered as long-term care 
        insurance, and
            ``(2) any payment which is excludable from gross 
        income by reason of section 101(g).''.
    (b) Penalties.--
            (1) Subparagraph (B) of section 6724(d)(1) is 
        amended by redesignating clauses (ix) through (xiv) as 
        clauses (x) through (xv), respectively, and by 
        inserting after clause (viii) the following new clause:
                            ``(ix) section 6050Q (relating to 
                        certain long-term care benefits),''.
            (2) Paragraph (2) of section 6724(d) is amended by 
        redesignating subparagraphs (Q) through (T) as 
        subparagraphs (R) through (U), respectively, and by 
        inserting after subparagraph (P) the following new 
        subparagraph:
                    ``(Q) section 6050Q(b) (relating to certain 
                long-term care benefits),''.
    (c) Clerical Amendment.--The table of sections for subpart 
B of part III of subchapter A of chapter 61 is amended by 
adding at the end the following new item:

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

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

                PART II--CONSUMER PROTECTION PROVISIONS

SEC. 325. POLICY REQUIREMENTS.

    Section 7702B (as added by section 321) is amended by 
adding at the end the following new subsection:
    ``(g) Consumer Protection Provisions.--
            ``(1) In general.--The requirements of this 
        subsection are met with respect to any contract if the 
        contract meets--
                    ``(A) the requirements of the model 
                regulation and model Act described in paragraph 
                (2),
                    ``(B) the disclosure requirement of 
                paragraph (3), and
                    ``(C) the requirements relating to 
                nonforfeitability under paragraph (4).
            ``(2) Requirements of model regulation and act.--
                    ``(A) In general.--The requirements of this 
                paragraph are met with respect to any contract 
                if such contract meets--
                            ``(i) Model regulation.--The 
                        following requirements of the model 
                        regulation:
                                    ``(I) Section 7A (relating 
                                to guaranteed renewal or 
                                noncancellability), and the 
                                requirements of section 6B of 
                                the model Act relating to such 
                                section 7A.
                                    ``(II) Section 7B (relating 
                                to prohibitions on limitations 
                                and exclusions).
                                    ``(III) Section 7C 
                                (relating to extension of 
                                benefits).
                                    ``(IV) Section 7D (relating 
                                to continuation or conversion 
                                of coverage).
                                    ``(V) Section 7E (relating 
                                to discontinuance and 
                                replacement of policies).
                                    ``(VI) Section 8 (relating 
                                to unintentional lapse).
                                    ``(VII) Section 9 (relating 
                                to disclosure), other than 
                                section 9F thereof.
                                    ``(VIII) Section 10 
                                (relating to prohibitions 
                                against post-claims 
                                underwriting).
                                    ``(IX) Section 11 (relating 
                                to minimum standards).
                                    ``(X) Section 12 (relating 
                                to requirement to offer 
                                inflation protection), except 
                                that any requirement for a 
                                signature on a rejection of 
                                inflation protection shall 
                                permit the signature to be on 
                                an application or on a separate 
                                form.
                                    ``(XI) Section 23 (relating 
                                to prohibition against 
                                preexisting conditions and 
                                probationary periods in 
                                replacement policies or 
                                certificates).
                            ``(ii) Model act.--The following 
                        requirements of the model Act:
                                    ``(I) Section 6C (relating 
                                to preexisting conditions).
                                    ``(II) Section 6D (relating 
                                to prior hospitalization).
                    ``(B) Definitions.--For purposes of this 
                paragraph--
                            ``(i) Model provisions.--The terms 
                        `model regulation' and `model Act' mean 
                        the long-term care insurance model 
                        regulation, and the long-term care 
                        insurance model Act, respectively, 
                        promulgated by the National Association 
                        of Insurance Commissioners (as adopted 
                        as of January 1993).
                            ``(ii) Coordination.--Any provision 
                        of the model regulation or model Act 
                        listed under clause (i) or (ii) of 
                        subparagraph (A) shall be treated as 
                        including any other provision of such 
                        regulation or Act necessary to 
                        implement the provision.
                            ``(iii) Determination.--For 
                        purposes of this section and section 
                        4980C, the determination of whether any 
                        requirement of a model regulation or 
                        the model Act has been met shall be 
                        made by the Secretary.
            ``(3) Disclosure requirement.--The requirement of 
        this paragraph is met with respect to any contract if 
        such contract meets the requirements of section 
        4980C(d).
            ``(4) Nonforfeiture requirements.--
                    ``(A) In general.--The requirements of this 
                paragraph are met with respect to any level 
                premium contract, if the issuer of such 
                contract offers to the policyholder, including 
                any group policyholder, a nonforfeiture 
                provision meeting the requirements of 
                subparagraph (B).
                    ``(B) Requirements of provision.--The 
                nonforfeiture provision required under 
                subparagraph (A) shall meet the following 
                requirements:
                            ``(i) The nonforfeiture provision 
                        shall be appropriately captioned.
                            ``(ii) The nonforfeiture provision 
                        shall provide for a benefit available 
                        in the event of a default in the 
                        payment of any premiums and the amount 
                        of the benefit may be adjusted 
                        subsequent to being initially granted 
                        only as necessary to reflect changes in 
                        claims, persistency, and interest as 
                        reflected in changes in rates for 
                        premium paying contracts approved by 
                        the Secretary for the same contract 
                        form.
                            ``(iii) The nonforfeiture provision 
                        shall provide at least one of the 
                        following:
                                    ``(I) Reduced paid-up 
                                insurance.
                                    ``(II) Extended term 
                                insurance.
                                    ``(III) Shortened benefit 
                                period.
                                    ``(IV) Other similar 
                                offerings approved by the 
                                Secretary.
            ``(5) Cross reference.--

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

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

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

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

    ``(a) General Rule.--There is hereby imposed on any person 
failing to meet the requirements of subsection (c) or (d) a tax 
in the amount determined under subsection (b).
    ``(b) Amount.--
            ``(1) In general.--The amount of the tax imposed by 
        subsection (a) shall be $100 per insured for each day 
        any requirement of subsection (c) or (d) is not met 
        with respect to each qualified long-term care insurance 
        contract.
            ``(2) Waiver.--In the case of a failure which is 
        due to reasonable cause and not to willful neglect, the 
        Secretary may waive part or all of the tax imposed by 
        subsection (a) to the extent that payment of the tax 
        would be excessive relative to the failure involved.
    ``(c) Responsibilities.--The requirements of this 
subsection are as follows:
            ``(1) Requirements of model provisions.--
                    ``(A) Model regulation.--The following 
                requirements of the model regulation must be 
                met:
                            ``(i) Section 13 (relating to 
                        application forms and replacement 
                        coverage).
                            ``(ii) Section 14 (relating to 
                        reporting requirements), except that 
                        the issuer shall also report at least 
                        annually the number of claims denied 
                        during the reporting period for each 
                        class of business (expressed as a 
                        percentage of claims denied), other 
                        than claims denied for failure to meet 
                        the waiting period or because of any 
                        applicable preexisting condition.
                            ``(iii) Section 20 (relating to 
                        filing requirements for marketing).
                            ``(iv) Section 21 (relating to 
                        standards for marketing), including 
                        inaccurate completion of medical 
                        histories, other than sections 21C(1) 
                        and 21C(6) thereof, except that--
                                    ``(I) in addition to such 
                                requirements, no person shall, 
                                in selling or offering to sell 
                                a qualified long-term care 
                                insurance contract, 
                                misrepresent a material fact; 
                                and
                                    ``(II) no such requirements 
                                shall include a requirement to 
                                inquire or identify whether a 
                                prospective applicant or 
                                enrollee for long-term care 
                                insurance has accident and 
                                sickness insurance.
                            ``(v) Section 22 (relating to 
                        appropriateness of recommended 
                        purchase).
                            ``(vi) Section 24 (relating to 
                        standard format outline of coverage).
                            ``(vii) Section 25 (relating to 
                        requirement to deliver shopper's 
                        guide).
                    ``(B) Model act.--The following 
                requirements of the model Act must be met:
                            ``(i) Section 6F (relating to right 
                        to return), except that such section 
                        shall also apply to denials of 
                        applications and any refund shall be 
                        made within 30 days of the return or 
                        denial.
                            ``(ii) Section 6G (relating to 
                        outline of coverage).
                            ``(iii) Section 6H (relating to 
                        requirements for certificates under 
                        group plans).
                            ``(iv) Section 6I (relating to 
                        policy summary).
                            ``(v) Section 6J (relating to 
                        monthly reports on accelerated death 
                        benefits).
                            ``(vi) Section 7 (relating to 
                        incontestability period).
                    ``(C) Definitions.--For purposes of this 
                paragraph, the terms `model regulation' and 
                `model Act' have the meanings given such terms 
                by section 7702B(g)(2)(B).
            ``(2) Delivery of policy.--If an application for a 
        qualified long-term care insurance contract (or for a 
        certificate under such a contract for a group) is 
        approved, the issuer shall deliver to the applicant (or 
        policyholder or certificateholder) the contract (or 
        certificate) of insurance not later than 30 days after 
        the date of the approval.
            ``(3) Information on denials of claims.--If a claim 
        under a qualified long-term care insurance contract is 
        denied, the issuer shall, within 60 days of the date of 
        a written request by the policyholder or 
        certificateholder (or representative)--
                    ``(A) provide a written explanation of the 
                reasons for the denial, and
                    ``(B) make available all information 
                directly relating to such denial.
    ``(d) Disclosure.--The requirements of this subsection are 
met if the issuer of a long-term care insurance policy 
discloses in such policy and in the outline of coverage 
required under subsection (c)(1)(B)(ii) that the policy is 
intended to be a qualified long-term care insurance contract 
under section 7702B(b).
    ``(e) Qualified Long-Term Care Insurance Contract 
Defined.--For purposes of this section, the term `qualified 
long-term care insurance contract' has the meaning given such 
term by section 7702B.
    ``(f) Coordination With State Requirements.--If a State 
imposes any requirement which is more stringent than the 
analogous requirement imposed by this section or section 
7702B(g), the requirement imposed by this section or section 
7702B(g) shall be treated as met if the more stringent State 
requirement is met.''.
    (b) Conforming Amendment.--The table of sections for 
chapter 43 is amended by adding at the end the following new 
item:

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

SEC. 327. EFFECTIVE DATES.

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

          Subtitle D--Treatment of Accelerated Death Benefits

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

    (a) In General.--Section 101 (relating to certain death 
benefits) is amended by adding at the end the following new 
subsection:
    ``(g) Treatment of Certain Accelerated Death Benefits.--
            ``(1) In general.--For purposes of this section, 
        the following amounts shall be treated as an amount 
        paid by reason of the death of an insured:
                    ``(A) Any amount received under a life 
                insurance contract on the life of an insured 
                who is a terminally ill individual.
                    ``(B) Any amount received under a life 
                insurance contract on the life of an insured 
                who is a chronically ill individual.
            ``(2) Treatment of viatical settlements.--
                    ``(A) In general.--If any portion of the 
                death benefit under a life insurance contract 
                on the life of an insured described in 
                paragraph (1) is sold or assigned to a viatical 
                settlement provider, the amount paid for the 
                sale or assignment of such portion shall be 
                treated as an amount paid under the life 
                insurance contract by reason of the death of 
                such insured.
                    ``(B) Viatical settlement provider.--
                            ``(i) In general.--The term 
                        `viatical settlement provider' means 
                        any person regularly engaged in the 
                        trade or business of purchasing, or 
                        taking assignments of, life insurance 
                        contracts on the lives of insureds 
                        described in paragraph (1) if--
                                    ``(I) such person is 
                                licensed for such purposes 
                                (with respect to insureds 
                                described in the same 
                                subparagraph of paragraph (1) 
                                as the insured) in the State in 
                                which the insured resides, or
                                    ``(II) in the case of an 
                                insured who resides in a State 
                                not requiring the licensing of 
                                such persons for such purposes 
                                with respect to such insured, 
                                such person meets the 
                                requirements of clause (ii) or 
                                (iii), whichever applies to 
                                such insured.
                            ``(ii) Terminally ill insureds.--A 
                        person meets the requirements of this 
                        clause with respect to an insured who 
                        is a terminally ill individual if such 
                        person--
                                    ``(I) meets the 
                                requirements of sections 8 and 
                                9 of the Viatical Settlements 
                                Model Act of the National 
                                Association of Insurance 
                                Commissioners, and
                                    ``(II) meets the 
                                requirements of the Model 
                                Regulations of the National 
                                Association of Insurance 
                                Commissioners (relating to 
                                standards for evaluation of 
                                reasonable payments) in 
                                determining amounts paid by 
                                such person in connection with 
                                such purchases or assignments.
                            ``(iii) Chronically ill insureds.--
                        A person meets the requirements of this 
                        clause with respect to an insured who 
                        is a chronically ill individual if such 
                        person--
                                    ``(I) meets requirements 
                                similar to the requirements 
                                referred to in clause (ii)(I), 
                                and
                                    ``(II) meets the standards 
                                (if any) of the National 
                                Association of Insurance 
                                Commissioners for evaluating 
                                the reasonableness of amounts 
                                paid by such person in 
                                connection with such purchases 
                                or assignments with respect to 
                                chronically ill individuals.
            ``(3) Special rules for chronically ill insureds.--
        In the case of an insured who is a chronically ill 
        individual--
                    ``(A) In general.--Paragraphs (1) and (2) 
                shall not apply to any payment received for any 
                period unless--
                            ``(i) such payment is for costs 
                        incurred by the payee (not compensated 
                        for by insurance or otherwise) for 
                        qualified long-term care services 
                        provided for the insured for such 
                        period, and
                            ``(ii) the terms of the contract 
                        giving rise to such payment satisfy--
                                    ``(I) the requirements of 
                                section 7702B(b)(1)(B), and
                                    ``(II) the requirements (if 
                                any) applicable under 
                                subparagraph (B).
                For purposes of the preceding sentence, the 
                rule of section 7702B(b)(2)(B) shall apply.
                    ``(B) Other requirements.--The requirements 
                applicable under this subparagraph are--
                            ``(i) those requirements of section 
                        7702B(g) and section 4980C which the 
                        Secretary specifies as applying to such 
                        a purchase, assignment, or other 
                        arrangement,
                            ``(ii) standards adopted by the 
                        National Association of Insurance 
                        Commissioners which specifically apply 
                        to chronically ill individuals (and, if 
                        such standards are adopted, the 
                        analogous requirements specified under 
                        clause (i) shall cease to apply), and
                            ``(iii) standards adopted by the 
                        State in which the policyholder resides 
                        (and if such standards are adopted, the 
                        analogous requirements specified under 
                        clause (i) and (subject to section 
                        4980C(f)) standards under clause (ii), 
                        shall cease to apply).
                    ``(C) Per diem payments.--A payment shall 
                not fail to be described in subparagraph (A) by 
                reason of being made on a per diem or other 
                periodic basis without regard to the expenses 
                incurred during the period to which the payment 
                relates.
                    ``(D) Limitation on exclusion for periodic 
                payments.--

          ``For limitation on amount of periodic payments which are 
        treated as described in paragraph (1), see section 7702B(d).''

            ``(4) Definitions.--For purposes of this 
        subsection--
                    ``(A) Terminally ill individual.--The term 
                `terminally ill individual' means an individual 
                who has been certified by a physician as having 
                an illness or physical condition which can 
                reasonably be expected to result in death in 24 
                months or less after the date of the 
                certification.
                    ``(B) Chronically ill individual.--The term 
                `chronically ill individual' has the meaning 
                given such term by section 7702B(c)(2); except 
                that such term shall not include a terminally 
                ill individual.
                    ``(C) Qualified long-term care services.--
                The term `qualified long-term care services' 
                has the meaning given such term by section 
                7702B(c).
                    ``(D) Physician.--The term `physician' has 
                the meaning given to such term by section 
                1861(r)(1) of the Social Security Act (42 
                U.S.C. 1395x(r)(1)).
            ``(5) Exception for business-related policies.--
        This subsection shall not apply in the case of any 
        amount paid to any taxpayer other than the insured if 
        such taxpayer has an insurable interest with respect to 
        the life of the insured by reason of the insured being 
        a director, officer, or employee of the taxpayer or by 
        reason of the insured being financially interested in 
        any trade or business carried on by the taxpayer.''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to amounts received after December 31, 1996.

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

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

                   Subtitle E--State Insurance Pools

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

    (a) In General.--Subsection (c) of section 501 (relating to 
list of exempt organizations) is amended by adding at the end 
the following new paragraph:
            ``(26) Any membership organization if--
                    ``(A) such organization is established by a 
                State exclusively to provide coverage for 
                medical care (as defined in section 213(d)) on 
                a not-for-profit basis to individuals described 
                in subparagraph (B) through--
                            ``(i) insurance issued by the 
                        organization, or
                            ``(ii) a health maintenance 
                        organization under an arrangement with 
                        the organization,
                    ``(B) the only individuals receiving such 
                coverage through the organization are 
                individuals--
                            ``(i) who are residents of such 
                        State, and
                            ``(ii) who, by reason of the 
                        existence or history of a medical 
                        condition--
                                    ``(I) are unable to acquire 
                                medical care coverage for such 
                                condition through insurance or 
                                from a health maintenance 
                                organization, or
                                    ``(II) are able to acquire 
                                such coverage only at a rate 
                                which is substantially in 
                                excess of the rate for such 
                                coverage through the membership 
                                organization,
                    ``(C) the composition of the membership in 
                such organization is specified by such State, 
                and
                    ``(D) no part of the net earnings of the 
                organization inures to the benefit of any 
                private shareholder or individual.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1996.

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

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

            Subtitle F--Organizations Subject to Section 833

SEC. 351. ORGANIZATIONS SUBJECT TO SECTION 833.

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

            Subtitle G--IRA Distributions to the Unemployed

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

    (a) In General.--Section 72(t)(3)(A) is amended by striking 
``(B),''.
    (b) Distributions for Payment of Health Insurance Premiums 
of Certain Unemployed Individuals.--Paragraph (2) of section 
72(t) is amended by adding at the end the following new 
subparagraph:
                    ``(D) Distributions to unemployed 
                individuals for health insurance premiums.--
                            ``(i) In general.--Distributions 
                        from an individual retirement plan to 
                        an individual after separation from 
                        employment--
                                    ``(I) if such individual 
                                has received unemployment 
                                compensation for 12 consecutive 
                                weeks under any Federal or 
                                State unemployment compensation 
                                law by reason of such 
                                separation,
                                    ``(II) if such 
                                distributions are made during 
                                any taxable year during which 
                                such unemployment compensation 
                                is paid or the succeeding 
                                taxable year, and
                                    ``(III) to the extent such 
                                distributions do not exceed the 
                                amount paid during the taxable 
                                year for insurance described in 
                                section 213(d)(1)(D) with 
                                respect to the individual and 
                                the individual's spouse and 
                                dependents (as defined in 
                                section 152).
                            ``(ii) Distributions after 
                        reemployment.--Clause (i) shall not 
                        apply to any distribution made after 
                        the individual has been employed for at 
                        least 60 days after the separation from 
                        employment to which clause (i) applies.
                            ``(iii) Self-employed 
                        individuals.--To the extent provided in 
                        regulations, a self-employed individual 
                        shall be treated as meeting the 
                        requirements of clause (i)(I) if, under 
                        Federal or State law, the individual 
                        would have received unemployment 
                        compensation but for the fact the 
                        individual was self-employed.''.
    (c) Conforming Amendment.--Subparagraph (B) of section 
72(t)(2) is amended by striking ``or (C)'' and inserting ``, 
(C), or (D)''.
    (d) Effective Date.--The amendments made by this section 
shall apply to distributions after December 31, 1996.

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

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

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

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

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

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

    (a) In General.--The Internal Revenue Code of 1986 is 
amended by adding at the end the following new subtitle:

 ``Subtitle K--Group Health Plan Portability, Access, and Renewability 
                              Requirements

        ``Chapter 100. Group health plan portability, access, and 
                  renewability requirements.

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

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

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

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

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

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

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

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

``SEC. 9804. GENERAL EXCEPTIONS.

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

``SEC. 9805. DEFINITIONS.

    ``(a) Group Health Plan.--For purposes of this chapter, the 
term `group health plan' has the meaning given to such term by 
section 5000(b)(1).
    ``(b) Definitions Relating to Health Insurance.--For 
purposes of this chapter--
            ``(1) Health insurance coverage.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `health insurance 
                coverage' means benefits consisting of medical 
                care (provided directly, through insurance or 
                reimbursement, or otherwise) under any hospital 
                or medical service policy or certificate, 
                hospital or medical service plan contract, or 
                health maintenance organization contract 
                offered by a health insurance issuer.
                    ``(B) No application to certain excepted 
                benefits.--In applying subparagraph (A), 
                excepted benefits described in subsection 
                (c)(1) shall not be treated as benefits 
                consisting of medical care.
            ``(2) Health insurance issuer.--The term `health 
        insurance issuer' means an insurance company, insurance 
        service, or insurance organization (including a health 
        maintenance organization, as defined in paragraph (3)) 
        which is licensed to engage in the business of 
        insurance in a State and which is subject to State law 
        which regulates insurance (within the meaning of 
        section 514(b)(2) of the Employee Retirement Income 
        Security Act of 1974, as in effect on the date of the 
        enactment of this section). Such term does not include 
        a group health plan.
            ``(3) Health maintenance organization.--The term 
        `health maintenance organization' means--
                    ``(A) a Federally qualified health 
                maintenance organization (as defined in section 
                1301(a) of the Public Health Service Act (42 
                U.S.C. 300e(a))),
                    ``(B) an organization recognized under 
                State law as a health maintenance organization, 
                or
                    ``(C) a similar organization regulated 
                under State law for solvency in the same manner 
                and to the same extent as such a health 
                maintenance organization.
    ``(c) Excepted Benefits.--For purposes of this chapter, the 
term `excepted benefits' means benefits under one or more (or 
any combination thereof) of the following:
            ``(1) Benefits not subject to requirements.--
                    ``(A) Coverage only for accident, or 
                disability income insurance, or any combination 
                thereof.
                    ``(B) Coverage issued as a supplement to 
                liability insurance.
                    ``(C) Liability insurance, including 
                general liability insurance and automobile 
                liability insurance.
                    ``(D) Workers' compensation or similar 
                insurance.
                    ``(E) Automobile medical payment insurance.
                    ``(F) Credit-only insurance.
                    ``(G) Coverage for on-site medical clinics.
                    ``(H) Other similar insurance coverage, 
                specified in regulations, under which benefits 
                for medical care are secondary or incidental to 
                other insurance benefits.
            ``(2) Benefits not subject to requirements if 
        offered separately.--
                    ``(A) Limited scope dental or vision 
                benefits.
                    ``(B) Benefits for long-term care, nursing 
                home care, home health care, community-based 
                care, or any combination thereof.
                    ``(C) Such other similar, limited benefits 
                as are specified in regulations.
            ``(3) Benefits not subject to requirements if 
        offered as independent, noncoordinated benefits.--
                    ``(A) Coverage only for a specified disease 
                or illness.
                    ``(B) Hospital indemnity or other fixed 
                indemnity insurance.
            ``(4) Benefits not subject to requirements if 
        offered as separate insurance policy.--Medicare 
        supplemental health insurance (as defined under section 
        1882(g)(1) of the Social Security Act), coverage 
        supplemental to the coverage provided under chapter 55 
        of title 10, United States Code, and similar 
        supplemental coverage provided to coverage under a 
        group health plan.
    ``(d) Other Definitions.--For purposes of this chapter--
            ``(1) COBRA continuation provision.--The term 
        `COBRA continuation provision' means any of the 
        following:
                    ``(A) Section 4980B, other than subsection 
                (f)(1) thereof insofar as it relates to 
                pediatric vaccines.
                    ``(B) Part 6 of subtitle B of title I of 
                the Employee Retirement Income Security Act of 
                1974 (29 U.S.C. 1161 et seq.), other than 
                section 609 of such Act.
                    ``(C) Title XXII of the Public Health 
                Service Act.
            ``(2) Governmental plan.--The term `governmental 
        plan' has the meaning given such term by section 
        414(d).
            ``(3) Medical care.--The term `medical care' has 
        the meaning given such term by section 213(d) 
        determined without regard to--
                    ``(A) paragraph (1)(C) thereof, and
                    ``(B) so much of paragraph (1)(D) thereof 
                as relates to qualified long-term care 
                insurance.
            ``(4) Network plan.--The term `network plan' means 
        health insurance coverage of a health insurance issuer 
        under which the financing and delivery of medical care 
        are provided, in whole or in part, through a defined 
        set of providers under contract with the issuer.
            ``(5) Placed for adoption defined.--The term 
        `placement', or being `placed', for adoption, in 
        connection with any placement for adoption of a child 
        with any person, means the assumption and retention by 
        such person of a legal obligation for total or partial 
        support of such child in anticipation of adoption of 
        such child. The child's placement with such person 
        terminates upon the termination of such legal 
        obligation.

``SEC. 9806. REGULATIONS.

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

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

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

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

    ``(a) General Rule.--There is hereby imposed a tax on any 
failure of a group health plan to meet the requirements of 
chapter 100 (relating to group health plan portability, access, 
and renewability requirements).
    ``(b) Amount of Tax.--
            ``(1) In general.--The amount of the tax imposed by 
        subsection (a) on any failure shall be $100 for each 
        day in the noncompliance period with respect to each 
        individual to whom such failure relates.
            ``(2) Noncompliance period.--For purposes of this 
        section, the term `noncompliance period' means, with 
        respect to any failure, the period--
                    ``(A) beginning on the date such failure 
                first occurs, and
                    ``(B) ending on the date such failure is 
                corrected.
            ``(3) Minimum tax for noncompliance period where 
        failure discovered after notice of examination.--
        Notwithstanding paragraphs (1) and (2) of subsection 
        (c)--
                    ``(A) In general.--In the case of 1 or more 
                failures with respect to an individual--
                            ``(i) which are not corrected 
                        before the date a notice of examination 
                        of income tax liability is sent to the 
                        employer, and
                            ``(ii) which occurred or continued 
                        during the period under examination,
                the amount of tax imposed by subsection (a) by 
                reason of such failures with respect to such 
                individual shall not be less than the lesser of 
                $2,500 or the amount of tax which would be 
                imposed by subsection (a) without regard to 
                such paragraphs.
                    ``(B) Higher minimum tax where violations 
                are more than de minimis.--To the extent 
                violations for which any person is liable under 
                subsection (e) for any year are more than de 
                minimis, subparagraph (A) shall be applied by 
                substituting `$15,000' for `$2,500' with 
                respect to such person.
                    ``(C) Exception for church plans.--This 
                paragraph shall not apply to any failure under 
                a church plan (as defined in section 414(e)).
    ``(c) Limitations on Amount of Tax.--
            ``(1) Tax not to apply where failure not discovered 
        exercising reasonable diligence.--No tax shall be 
        imposed by subsection (a) on any failure during any 
        period for which it is established to the satisfaction 
        of the Secretary that the person otherwise liable for 
        such tax did not know, and exercising reasonable 
        diligence would not have known, that such failure 
        existed.
            ``(2) Tax not to apply to failures corrected within 
        certain periods.--No tax shall be imposed by subsection 
        (a) on any failure if--
                    ``(A) such failure was due to reasonable 
                cause and not to willful neglect, and
                    ``(B)(i) in the case of a plan other than a 
                church plan (as defined in section 414(e)), 
                such failure is corrected during the 30-day 
                period beginning on the 1st date the person 
                otherwise liable for such tax knew, or 
                exercising reasonable diligence would have 
                known, that such failure existed, and
                    ``(ii) in the case of a church plan (as so 
                defined), such failure is corrected before the 
                close of the correction period (determined 
                under the rules of section 414(e)(4)(C)).
            ``(3) Overall limitation for unintentional 
        failures.--In the case of failures which are due to 
        reasonable cause and not to willful neglect--
                    ``(A) Single employer plans.--
                            ``(i) In general.--In the case of 
                        failures with respect to plans other 
                        than specified multiple employer health 
                        plans, the tax imposed by subsection 
                        (a) for failures during the taxable 
                        year of the employer shall not exceed 
                        the amount equal to the lesser of--
                                    ``(I) 10 percent of the 
                                aggregate amount paid or 
                                incurred by the employer (or 
                                predecessor employer) during 
                                the preceding taxable year for 
                                group health plans, or
                                    ``(II) $500,000.
                            ``(ii) Taxable years in the case of 
                        certain controlled groups.--For 
                        purposes of this subparagraph, if not 
                        all persons who are treated as a single 
                        employer for purposes of this section 
                        have the same taxable year, the taxable 
                        years taken into account shall be 
                        determined under principles similar to 
                        the principles of section 1561.
                    ``(B) Specified multiple employer health 
                plans.--
                            ``(i) In general.--In the case of 
                        failures with respect to a specified 
                        multiple employer health plan, the tax 
                        imposed by subsection (a) for failures 
                        during the taxable year of the trust 
                        forming part of such plan shall not 
                        exceed the amount equal to the lesser 
                        of--
                                    ``(I) 10 percent of the 
                                amount paid or incurred by such 
                                trust during such taxable year 
                                to provide medical care (as 
                                defined in section 9805(d)(3)) 
                                directly or through insurance, 
                                reimbursement, or otherwise, or
                                    ``(II) $500,000.
                        For purposes of the preceding sentence, 
                        all plans of which the same trust forms 
                        a part shall be treated as 1 plan.
                            ``(ii) Special rule for employers 
                        required to pay tax.--If an employer is 
                        assessed a tax imposed by subsection 
                        (a) by reason of a failure with respect 
                        to a specified multiple employer health 
                        plan, the limit shall be determined 
                        under subparagraph (A) (and not under 
                        this subparagraph) and as if such plan 
                        were not a specified multiple employer 
                        health plan.
            ``(4) Waiver by secretary.--In the case of a 
        failure which is due to reasonable cause and not to 
        willful neglect, the Secretary may waive part or all of 
        the tax imposed by subsection (a) to the extent that 
        the payment of such tax would be excessive relative to 
        the failure involved.
    ``(d) Tax Not To Apply to Certain Insured Small Employer 
Plans.--
            ``(1) In general.--In the case of a group health 
        plan of a small employer which provides health 
        insurance coverage solely through a contract with a 
        health insurance issuer, no tax shall be imposed by 
        this section on the employer on any failure which is 
        solely because of the health insurance coverage offered 
        by such issuer.
            ``(2) Small employer.--
                    ``(A) In general.--For purposes of 
                paragraph (1), the term `small employer' means, 
                with respect to a calendar year and a plan 
                year, an employer who employed an average of at 
                least 2 but not more than 50 employees on 
                business days during the preceding calendar 
                year and who employs at least 2 employees on 
                the first day of the plan year. For purposes of 
                the preceding sentence, all persons treated as 
                a single employer under subsection (b), (c), 
                (m), or (o) of section 414 shall be treated as 
                1 employer.
                    ``(B) Employers not in existence in 
                preceding year.--In the case of an employer 
                which was not in existence throughout the 
                preceding calendar year, the determination of 
                whether such employer is a small employer shall 
                be based on the average number of employees 
                that it is reasonably expected such employer 
                will employ on business days in the current 
                calendar year.
                    ``(C) Predecessors.--Any reference in this 
                paragraph to an employer shall include a 
                reference to any predecessor of such employer.
            ``(3) Health insurance coverage; health insurance 
        issuer.--For purposes of paragraph (1), the terms 
        `health insurance coverage' and `health insurance 
        issuer' have the respective meanings given such terms 
        by section 9805.
    ``(e) Liability for Tax.--The following shall be liable for 
the tax imposed by subsection (a) on a failure:
            ``(1) Except as otherwise provided in this 
        subsection, the employer.
            ``(2) In the case of a multiemployer plan, the 
        plan.
            ``(3) In the case of a failure under section 9803 
        (relating to guaranteed renewability) with respect to a 
        plan described in subsection (f)(2)(B), the plan.
    ``(f) Definitions.--For purposes of this section--
            ``(1) Group health plan.--The term `group health 
        plan' has the meaning given such term by section 
        9805(a).
            ``(2) Specified multiple employer health plan.--The 
        term `specified multiple employer health plan' means a 
        group health plan which is--
                    ``(A) any multiemployer plan, or
                    ``(B) any multiple employer welfare 
                arrangement (as defined in section 3(40) of the 
                Employee Retirement Income Secrurity Act of 
                1974, as in effect on the date of the enactment 
                of this section).
            ``(3) Correction.--A failure of a group health plan 
        shall be treated as corrected if--
                    ``(A) such failure is retroactively undone 
                to the extent possible, and
                    ``(B) the person to whom the failure 
                relates is placed in a financial position which 
                is as good as such person would have been in 
                had such failure not occurred.''
    (b) Clerical Amendment.--The table of sections for chapter 
43 of such Code is amended by adding after the item relating to 
section 4980C the following new item:

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

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

Subtitle B--Clarification of Certain Continuation Coverage Requirements

SEC. 421. COBRA CLARIFICATIONS.

    (a) Public Health Service Act.--
            (1) Period of coverage.--Section 2202(2) of the 
        Public Health Service Act (42 U.S.C. 300bb-2(2)) is 
        amended--
                    (A) in subparagraph (A)--
                            (i) by transferring the sentence 
                        immediately preceding clause (iv) so as 
                        to appear immediately following such 
                        clause (iv); and
                            (ii) in the last sentence (as so 
                        transferred)--
                                    (I) by striking ``an 
                                individual'' and inserting ``a 
                                qualified beneficiary'';
                                    (II) by striking ``at the 
                                time of a qualifying event 
                                described in section 2203(2)'' 
                                and inserting ``at any time 
                                during the first 60 days of 
                                continuation coverage under 
                                this title'';
                                    (III) by striking ``with 
                                respect to such event,''; and
                                    (IV) by inserting ``(with 
                                respect to all qualified 
                                beneficiaries)'' after ``29 
                                months'';
                    (B) in subparagraph (D)(i), by inserting 
                before ``, or'' the following: ``(other than 
                such an exclusion or limitation which does not 
                apply to (or is satisfied by) such beneficiary 
                by reason of chapter 100 of the Internal 
                Revenue Code of 1986, part 7 of subtitle B of 
                title I of the Employee Retirement Income 
                Security Act of 1974, or title XXVII of this 
                Act)''; and
                    (C) in subparagraph (E), by striking ``at 
                the time of a qualifying event described in 
                section 2203(2)'' and inserting ``at any time 
                during the first 60 days of continuation 
                coverage under this title''.
            (2) Notices.--Section 2206(3) of the Public Health 
        Service Act (42 U.S.C. 300bb-6(3)) is amended by 
        striking ``at the time of a qualifying event described 
        in section 2203(2)'' and inserting ``at any time during 
        the first 60 days of continuation coverage under this 
        title''.
            (3) Birth or adoption of a child.--Section 
        2208(3)(A) of the Public Health Service Act (42 U.S.C. 
        300bb-8(3)(A)) is amended by adding at the end thereof 
        the following new flush sentence:
        ``Such term shall also include a child who is born to 
        or placed for adoption with the covered employee during 
        the period of continuation coverage under this 
        title.''.
    (b) Employee Retirement Income Security Act of 1974.--
            (1) Period of coverage.--Section 602(2) of the 
        Employee Retirement Income Security Act of 1974 (29 
        U.S.C. 1162(2)) is amended--
                    (A) in the last sentence of subparagraph 
                (A)--
                            (i) by striking ``an individual'' 
                        and inserting ``a qualified 
                        beneficiary'';
                            (ii) by striking ``at the time of a 
                        qualifying event described in section 
                        603(2)'' and inserting ``at any time 
                        during the first 60 days of 
                        continuation coverage under this 
                        part'';
                            (iii) by striking ``with respect to 
                        such event''; and
                            (iv) by inserting ``(with respect 
                        to all qualified beneficiaries)'' after 
                        ``29 months'';
                    (B) in subparagraph (D)(i), by inserting 
                before ``, or'' the following: ``(other than 
                such an exclusion or limitation which does not 
                apply to (or is satisfied by) such beneficiary 
                by reason of chapter 100 of the Internal 
                Revenue Code of 1986, part 7 of this subtitle, 
                or title XXVII of the Public Health Service 
                Act)''; and
                    (C) in subparagraph (E), by striking ``at 
                the time of a qualifying event described in 
                section 603(2)'' and inserting ``at any time 
                during the first 60 days of continuation 
                coverage under this part''.
            (2) Notices.--Section 606(a)(3) of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C. 
        1166(a)(3)) is amended by striking ``at the time of a 
        qualifying event described in section 603(2)'' and 
        inserting ``at any time during the first 60 days of 
        continuation coverage under this part''.
            (3) Birth or adoption of a child.--Section 
        607(3)(A) of the Employee Retirement Income Security 
        Act of 1974 (29 U.S.C. 1167(3)) is amended by adding at 
        the end thereof the following new flush sentence:
        ``Such term shall also include a child who is born to 
        or placed for adoption with the covered employee during 
        the period of continuation coverage under this part.''.
    (c) Internal Revenue Code of 1986.--
            (1) Period of coverage.--Section 4980B(f)(2)(B) of 
        the Internal Revenue Code of 1986 is amended--
                    (A) in the last sentence of clause (i)--
                            (i) by striking ``at the time of a 
                        qualifying event described in paragraph 
                        (3)(B)'' and inserting ``at any time 
                        during the first 60 days of 
                        continuation coverage under this 
                        section'';
                            (ii) by striking ``with respect to 
                        such event''; and
                            (iii) by inserting ``(with respect 
                        to all qualified beneficiaries)'' after 
                        ``29 months'';
                    (B) in clause (iv)(I), by inserting before 
                ``, or'' the following: ``(other than such an 
                exclusion or limitation which does not apply to 
                (or is satisfied by) such beneficiary by reason 
                of chapter 100 of this title, part 7 of 
                subtitle B of title I of the Employee 
                Retirement Income Security Act of 1974, or 
                title XXVII of the Public Health Service 
                Act)''; and
                    (C) in clause (v), by striking ``at the 
                time of a qualifying event described in 
                paragraph (3)(B)'' and inserting ``at any time 
                during the first 60 days of continuation 
                coverage under this section''.
            (2) Notices.--Section 4980B(f)(6)(C) of the 
        Internal Revenue Code of 1986 is amended by striking 
        ``at the time of a qualifying event described in 
        paragraph (3)(B)'' and inserting ``at any time during 
        the first 60 days of continuation coverage under this 
        section''.
            (3) Birth or adoption of a child.--Section 
        4980B(g)(1)(A) of the Internal Revenue Code of 1986 is 
        amended by adding at the end thereof the following new 
        flush sentence:
                        ``Such term shall also include a child 
                        who is born to or placed for adoption 
                        with the covered employee during the 
                        period of continuation coverage under 
                        this section.''.
    (d) Effective Date.--The amendments made by this section 
shall become effective on January 1, 1997, regardless of 
whether the qualifying event occurred before, on, or after such 
date.
    (e) Notification of Changes.--Not later than November 1, 
1996, each group health plan (covered under title XXII of the 
Public Health Service Act, part 6 of subtitle B of title I of 
the Employee Retirement Income Security Act of 1974, and 
section 4980B(f) of the Internal Revenue Code of 1986) shall 
notify each qualified beneficiary who has elected continuation 
coverage under such title, part or section of the amendments 
made by this section.

                        TITLE V--REVENUE OFFSETS

SEC. 500. AMENDMENT OF 1986 CODE.

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

                Subtitle A--Company-Owned Life Insurance

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

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

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

                the amendments made by this section shall not 
                apply to qualified interest paid or accrued on 
                such indebtedness after October 13, 1995, and 
                before January 1, 1999.
                    (B) Qualified interest.--For purposes of 
                subparagraph (A), the qualified interest with 
                respect to any indebtedness for any month is 
                the amount of interest (otherwise deductible) 
                which would be paid or accrued for such month 
                on such indebtedness if--
                            (i) in the case of any interest 
                        paid or accrued after December 31, 
                        1995, indebtedness with respect to no 
                        more than 20,000 insured individuals 
                        were taken into account, and
                            (ii) the lesser of the following 
                        rates of interest were used for such 
                        month:
                                    (I) The rate of interest 
                                specified under the terms of 
                                the indebtedness as in effect 
                                on October 13, 1995 (and 
                                without regard to modification 
                                of such terms after such date).
                                    (II) The applicable 
                                percentage of the rate of 
                                interest described as Moody's 
                                Corporate Bond Yield Average-
                                Monthly Average Corporates as 
                                published by Moody's Investors 
                                Service, Inc., or any successor 
                                thereto, for such month.

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

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

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

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

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

    (a) In General.--Subsection (a) of section 877 is amended 
to read as follows:
    ``(a) Treatment of Expatriates.--
            ``(1) In general.--Every nonresident alien 
        individual who, within the 10-year period immediately 
        preceding the close of the taxable year, lost United 
        States citizenship, unless such loss did not have for 1 
        of its principal purposes the avoidance of taxes under 
        this subtitle or subtitle B, shall be taxable for such 
        taxable year in the manner provided in subsection (b) 
        if the tax imposed pursuant to such subsection exceeds 
        the tax which, without regard to this section, is 
        imposed pursuant to section 871.
            ``(2) Certain individuals treated as having tax 
        avoidance purpose.--For purposes of paragraph (1), an 
        individual shall be treated as having a principal 
        purpose to avoid such taxes if--
                    ``(A) the average annual net income tax (as 
                defined in section 38(c)(1)) of such individual 
                for the period of 5 taxable years ending before 
                the date of the loss of United States 
                citizenship is greater than $100,000, or
                    ``(B) the net worth of the individual as of 
                such date is $500,000 or more.

        In the case of the loss of United States citizenship in 
        any calendar year after 1996, such $100,000 and 
        $500,000 amounts shall be increased by an amount equal 
        to such dollar amount multiplied by the cost-of-living 
        adjustment determined under section 1(f)(3) for such 
        calendar year by substituting `1994' for `1992' in 
        subparagraph (B) thereof. Any increase under the 
        preceding sentence shall be rounded to the nearest 
        multiple of $1,000.''.
    (b) Exceptions.--
            (1) In general.--Section 877 is amended by striking 
        subsection (d), by redesignating subsection (c) as 
        subsection (d), and by inserting after subsection (b) 
        the following new subsection:
    ``(c) Tax Avoidance Not Presumed in Certain Cases.--
            ``(1) In general.--Subsection (a)(2) shall not 
        apply to an individual if--
                    ``(A) such individual is described in a 
                subparagraph of paragraph (2) of this 
                subsection, and
                    ``(B) within the 1-year period beginning on 
                the date of the loss of United States 
                citizenship, such individual submits a ruling 
                request for the Secretary's determination as to 
                whether such loss has for 1 of its principal 
                purposes the avoidance of taxes under this 
                subtitle or subtitle B.
            ``(2) Individuals described.--
                    ``(A) Dual citizenship, etc.--An individual 
                is described in this subparagraph if--
                            ``(i) the individual became at 
                        birth a citizen of the United States 
                        and a citizen of another country and 
                        continues to be a citizen of such other 
                        country, or
                            ``(ii) the individual becomes (not 
                        later than the close of a reasonable 
                        period after loss of United States 
                        citizenship) a citizen of the country 
                        in which--
                                    ``(I) such individual was 
                                born,
                                    ``(II) if such individual 
                                is married, such individual's 
                                spouse was born, or
                                    ``(III) either of such 
                                individual's parents were born.
                    ``(B) Long-term foreign residents.--An 
                individual is described in this subparagraph 
                if, for each year in the 10-year period ending 
                on the date of loss of United States 
                citizenship, the individual was present in the 
                United States for 30 days or less. The rule of 
                section 7701(b)(3)(D)(ii) shall apply for 
                purposes of this subparagraph.
                    ``(C) Renunciation upon reaching age of 
                majority.--An individual is described in this 
                subparagraph if the individual's loss of United 
                States citizenship occurs before such 
                individual attains age 18\1/2\.
                    ``(D) Individuals specified in 
                regulations.--An individual is described in 
                this subparagraph if the individual is 
                described in a category of individuals 
                prescribed by regulation by the Secretary.''
            (2) Technical amendment.--Paragraph (1) of section 
        877(b) of such Code is amended by striking ``subsection 
        (c)'' and inserting ``subsection (d)''.
    (c) Treatment of Property Disposed of in Nonrecognition 
Transactions; Treatment of Distributions From Certain 
Controlled Foreign Corporations.--Subsection (d) of section 
877, as redesignated by subsection (b), is amended to read as 
follows:
    ``(d) Special Rules for Source, Etc.--For purposes of 
subsection (b)--
            ``(1) Source rules.--The following items of gross 
        income shall be treated as income from sources within 
        the United States:
                    ``(A) Sale of property.--Gains on the sale 
                or exchange of property (other than stock or 
                debt obligations) located in the United States.
                    ``(B) Stock or debt obligations.--Gains on 
                the sale or exchange of stock issued by a 
                domestic corporation or debt obligations of 
                United States persons or of the United States, 
                a State or political subdivision thereof, or 
                the District of Columbia.
                    ``(C) Income or gain derived from 
                controlled foreign corporation.--Any income or 
                gain derived from stock in a foreign 
                corporation but only--
                            ``(i) if the individual losing 
                        United States citizenship owned (within 
                        the meaning of section 958(a)), or is 
                        considered as owning (by applying the 
                        ownership rules of section 958(b)), at 
                        any time during the 2-year period 
                        ending on the date of the loss of 
                        United States citizenship, more than 50 
                        percent of--
                                    ``(I) the total combined 
                                voting power of all classes of 
                                stock entitled to vote of such 
                                corporation, or
                                    ``(II) the total value of 
                                the stock of such corporation, 
                                and
                            ``(ii) to the extent such income or 
                        gain does not exceed the earnings and 
                        profits attributable to such stock 
                        which were earned or accumulated before 
                        the loss of citizenship and during 
                        periods that the ownership requirements 
                        of clause (i) are met.
            ``(2) Gain recognition on certain exchanges.--
                    ``(A) In general.--In the case of any 
                exchange of property to which this paragraph 
                applies, notwithstanding any other provision of 
                this title, such property shall be treated as 
                sold for its fair market value on the date of 
                such exchange, and any gain shall be recognized 
                for the taxable year which includes such date.
                    ``(B) Exchanges to which paragraph 
                applies.--This paragraph shall apply to any 
                exchange during the 10-year period described in 
                subsection (a) if--
                            ``(i) gain would not (but for this 
                        paragraph) be recognized on such 
                        exchange in whole or in part for 
                        purposes of this subtitle,
                            ``(ii) income derived from such 
                        property was from sources within the 
                        United States (or, if no income was so 
                        derived, would have been from such 
                        sources), and
                            ``(iii) income derived from the 
                        property acquired in the exchange would 
                        be from sources outside the United 
                        States.
                    ``(C) Exception.--Subparagraph (A) shall 
                not apply if the individual enters into an 
                agreement with the Secretary which specifies 
                that any income or gain derived from the 
                property acquired in the exchange (or any other 
                property which has a basis determined in whole 
                or part by reference to such property) during 
                such 10-year period shall be treated as from 
                sources within the United States. If the 
                property transferred in the exchange is 
                disposed of by the person acquiring such 
                property, such agreement shall terminate and 
                any gain which was not recognized by reason of 
                such agreement shall be recognized as of the 
                date of such disposition.
                    ``(D) Secretary may extend period.--To the 
                extent provided in regulations prescribed by 
                the Secretary, subparagraph (B) shall be 
                applied by substituting the 15-year period 
                beginning 5 years before the loss of United 
                States citizenship for the 10-year period 
                referred to therein.
                    ``(E) Secretary may require recognition of 
                gain in certain cases.--To the extent provided 
                in regulations prescribed by the Secretary--
                            ``(i) the removal of appreciated 
                        tangible personal property from the 
                        United States, and
                            ``(ii) any other occurrence which 
                        (without recognition of gain) results 
                        in a change in the source of the income 
                        or gain from property from sources 
                        within the United States to sources 
                        outside the United States,

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

                during the 10-year period referred to in 
                subsection (a), any income or gain on such 
                property (or any other property which has a 
                basis determined in whole or part by reference 
                to such property) received or accrued by the 
                corporation shall be treated as received or 
                accrued directly by such individual and not by 
                such corporation. The preceding sentence shall 
                not apply to the extent the property has been 
                treated under subparagraph (C) as having been 
                sold by such corporation.
                    ``(B) Corporation described.--A corporation 
                is described in this subparagraph with respect 
                to an individual if, were such individual a 
                United States citizen--
                            ``(i) such corporation would be a 
                        controlled foreign corporation (as 
                        defined in 957), and
                            ``(ii) such individual would be a 
                        United States shareholder (as defined 
                        in section 951(b)) with respect to such 
                        corporation.
                    ``(C) Disposition of stock in 
                corporation.--If stock in the corporation 
                referred to in subparagraph (A) (or any other 
                stock which has a basis determined in whole or 
                part by reference to such stock) is disposed of 
                during the 10-year period referred to in 
                subsection (a) and while the property referred 
                to in subparagraph (A) is held by such 
                corporation, a pro rata share of such property 
                (determined on the basis of the value of such 
                stock) shall be treated as sold by the 
                corporation immediately before such 
                disposition.
                    ``(D) Anti-abuse rules.--The Secretary 
                shall prescribe such regulations as may be 
                necessary to prevent the avoidance of the 
                purposes of this paragraph, including where--
                            ``(i) the property is sold to the 
                        corporation, and
                            ``(ii) the property taken into 
                        account under subparagraph (A) is sold 
                        by the corporation.
                    ``(E) Information reporting.--The Secretary 
                shall require such information reporting as is 
                necessary to carry out the purposes of this 
                paragraph.''
    (d) Credit for Foreign Taxes Imposed on United States 
Source Income.--
            (1) Subsection (b) of section 877 is amended by 
        adding at the end the following new sentence: ``The tax 
        imposed solely by reason of this section shall be 
        reduced (but not below zero) by the amount of any 
        income, war profits, and excess profits taxes (within 
        the meaning of section 903) paid to any foreign country 
        or possession of the United States on any income of the 
        taxpayer on which tax is imposed solely by reason of 
        this section.''
            (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 
        imposedon the transfer of the taxable estate, 
determined as provided in section 2106, of every decedent nonresident 
not a citizen of the United States if, within the 10-year period ending 
with the date of death, such decedent lost United States citizenship, 
unless such loss did not have for 1 of its principal purposes the 
avoidance of taxes under this subtitle or subtitle A.
            ``(2) Certain individuals treated as having tax 
        avoidance purpose.--
                    ``(A) In general.--For purposes of 
                paragraph (1), an individual shall be treated 
                as having a principal purpose to avoid such 
                taxes if such individual is so treated under 
                section 877(a)(2).
                    ``(B) Exception.--Subparagraph (A) shall 
                not apply to a decedent meeting the 
                requirements of section 877(c)(1).''.
                    (B) Credit for foreign death taxes.--
                Subsection (c) of section 2107 is amended by 
                redesignating paragraph (2) as paragraph (3) 
                and by inserting after paragraph (1) the 
                following new paragraph:
            ``(2) Credit for foreign death taxes.--
                    ``(A) In general.--The tax imposed by 
                subsection (a) shall be credited with the 
                amount of any estate, inheritance, legacy, or 
                succession taxes actually paid to any foreign 
                country in respect of any property which is 
                included in the gross estate solely by reason 
                of subsection (b).
                    ``(B) Limitation on credit.--The credit 
                allowed by subparagraph (A) for such taxes paid 
                to a foreign country shall not exceed the 
                lesser of--
                            ``(i) the amount which bears the 
                        same ratio to the amount of such taxes 
                        actually paid to such foreign country 
                        in respect of property included in the 
                        gross estate as the value of the 
                        property included in the gross estate 
                        solely by reason of subsection (b) 
                        bears to the value of all property 
                        subjected to such taxes by such foreign 
                        country, or
                            ``(ii) such property's 
                        proportionate share of the excess of--
                                    ``(I) the tax imposed by 
                                subsection (a), over
                                    ``(II) the tax which would 
                                be imposed by section 2101 but 
                                for this section.
                    ``(C) Proportionate share.--For purposes of 
                subparagraph (B), a property's proportionate 
                share is the percentage of the value of the 
                property which is included in the gross estate 
                solely by reason of subsection (b) bears to the 
                total value of the gross estate.''.
                    (C) Expansion of inclusion in gross estate 
                of stock of foreign corporations.--Paragraph 
                (2) of section 2107(b) is amended by striking 
                ``more than 50 percent of'' and all that 
                follows and inserting ``more than 50 percent 
                of--
                    ``(A) the total combined voting power of 
                all classes of stock entitled to vote of such 
                corporation, or
                    ``(B) the total value of the stock of such 
                corporation,''.
            (2) Gift tax.--
                    (A) In general.--Paragraph (3) of section 
                2501(a) is amended to read as follows:
            ``(3) Exception.--
                    ``(A) Certain individuals.--Paragraph (2) 
                shall not apply in the case of a donor who, 
                within the 10-year period ending with the date 
                of transfer, lost United States citizenship, 
                unless such loss did not have for 1 of its 
                principal purposes the avoidance of taxes under 
                this subtitle or subtitle A.
                    ``(B) Certain individuals treated as having 
                tax avoidance purpose.--For purposes of 
                subparagraph (A), an individual shall be 
                treated as having a principal purpose to avoid 
                such taxes if such individual is so treated 
                under section 877(a)(2).
                    ``(C) Exception for certain individuals.--
                Subparagraph (B) shall not apply to a decedent 
                meeting the requirements of section 877(c)(1).
                    ``(D) Credit for foreign gift taxes.--The 
                tax imposed by this section solely by reason of 
                this paragraph shall be credited with the 
                amount of any gift tax actually paid to any 
                foreign country in respect of any gift which is 
                taxable under this section solely by reason of 
                this paragraph.''.
    (f) Comparable Treatment of Lawful Permanent Residents Who 
Cease To Be Taxed as Residents.--
            (1) In general.--Section 877 is amended by 
        redesignating subsection (e) as subsection (f) and by 
        inserting after subsection (d) the following new 
        subsection:
    ``(e) Comparable Treatment of Lawful Permanent Residents 
Who Cease To Be Taxed as Residents.--
            ``(1) In general.--Any long-term resident of the 
        United States who--
                    ``(A) ceases to be a lawful permanent 
                resident of the United States (within the 
                meaning of section 7701(b)(6)), or
                    ``(B) commences to be treated as a resident 
                of a foreign country under the provisions of a 
                tax treaty between the United States and the 
                foreign country and who does not waive the 
                benefits of such treaty applicable to residents 
                of the foreign country,

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

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

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

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

    ``(a) In General.--Notwithstanding any other provision of 
law, any individual who loses United States citizenship (within 
the meaning of section 877(a)) shall provide a statement which 
includes the information described in subsection (b). Such 
statement shall be--
            ``(1) provided not later than the earliest date of 
        any act referred to in subsection (c), and
            ``(2) provided to the person or court referred to 
        in subsection (c) with respect to such act.
    ``(b) Information To Be Provided.--Information required 
under subsection (a) shall include--
            ``(1) the taxpayer's TIN,
            ``(2) the mailing address of such individual's 
        principal foreign residence,
            ``(3) the foreign country in which such individual 
        is residing,
            ``(4) the foreign country of which such individual 
        is a citizen,
            ``(5) in the case of an individual having a net 
        worth of at least the dollar amount applicable under 
        section 877(a)(2)(B), information detailing the assets 
        and liabilities of such individual, and
            ``(6) such other information as the Secretary may 
        prescribe.
    ``(c) Acts Described.--For purposes of this section, the 
acts referred to in this subsection are--
            ``(1) the individual's renunciation of his United 
        States nationality before a diplomatic or consular 
        officer of the United States pursuant to paragraph (5) 
        of section 349(a) of the Immigration and Nationality 
        Act (8 U.S.C. 1481(a)(5)),
            ``(2) the individual's furnishing to the United 
        States Department of State a signed statement of 
        voluntary relinquishment of United States nationality 
        confirming the performance of an act of expatriation 
        specified in paragraph (1), (2), (3), or (4) of section 
        349(a) of the Immigration and Nationality Act (8 U.S.C. 
        1481(a)(1)-(4)),
            ``(3) the issuance by the United States Department 
        of State of a certificate of loss of nationality to the 
        individual, or
            ``(4) the cancellation by a court of the United 
        States of a naturalized citizen's certificate of 
        naturalization.
    ``(d) Penalty.--Any individual failing to provide a 
statement required under subsection (a) shall be subject to a 
penalty for each year (of the 10-year period beginning on the 
date of loss of United States citizenship) during any portion 
of which such failure continues in an amount equal to the 
greater of--
            ``(1) 5 percent of the tax required to be paid 
        under section 877 for the taxable year ending during 
        such year, or
            ``(2) $1,000,

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

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

        ``Sec. 6039F. Information on individuals losing United States 
                  citizenship.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to--
            (1) individuals losing United States citizenship 
        (within the meaning of section 877 of the Internal 
        Revenue Code of 1986) on or after February 6, 1995, and
            (2) long-term residents of the United States with 
        respect to whom an event described in subparagraph (A) 
        or (B) of section 877(e)(1) of such Code occurs on or 
        after such date.

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

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

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

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

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

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

                                   Bill Roth,
                                   Nancy Landon Kassebaum,
                                   Trent Lott,
                                   Ted Kennedy,
                                Managers on the Part of the Senate.
       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

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

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

                              I. Structure

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

         II. Availability and Portability of Group Health Plans

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

                             a. definitions

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

     b. portability of coverage for previously covered individuals

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

         1. Method for establishing qualified coverage periods

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

                   2. Certification of prior coverage

Current law
      No provision.
House bill
      The House bill would require the plan administrator of a 
group health plan, or the insurer or HMO offering health 
insurance coverage to a group plan, on request made on behalf 
of an individual covered or previously covered within the past 
18 months under the plan or coverage, to provide for a 
certification of the period of coverage of the individual under 
the plan and of the waiting period (if any) imposed.
Senate amendment
      The Senate Amendment would require an employee health 
plan to provide documentation of coverage to participants and 
beneficiaries whose coverage was terminated under the plan. As 
specified by regulation, the duty of an employee health benefit 
plan to verify previous qualifying coverage would be discharged 
when such plan provided documentation to the participant or 
beneficiary including the following information: (1) the dates 
that the person was covered under the plan; and (2) the 
benefits and cost-sharing arrangement available to the person 
under the plan.
Conference agreement
      The conference agreement requires the group health plan, 
and health insurance issuer offering group health insurance 
coverage, to provide a certification of the period of 
creditable coverage under the plan, the coverage under any 
applicable COBRA continuation provision, and waiting period (if 
any) (and affiliation period if applicable) imposed on the 
individual. This certification would have to be provided when 
the individual ceases to be covered under the plan or otherwise 
becomes covered under a COBRA continuation provision, after any 
COBRA continuation coverage ceases, and on the request of an 
individual not later than 24 months after coverage ceased. The 
certification may be provided, to the extent practicable, at a 
time consistent with notices required under any applicable 
COBRA continuation provision. A group health plan offering 
medical care through health insurance coverage would not be 
required to provide certification if the health insurance 
issuer provides certification.
      If a group health plan or health insurance issuer elects 
the alternative method of crediting coverage, the plan or 
issuer would request, from prior entities providing coverage, 
information on coverage of classes and categories of benefits 
available under the previous plan or coverage. The entity 
providing the certification could charge the reasonable cost 
for providing such information to the requesting plan or 
insurer. The Secretary is required to establish rules to 
prevent an entity's failure to provide information on health 
benefits under previous coverage from adversely affecting any 
subsequent coverage under another group health plan or health 
insurance coverage.

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

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

                 1. Definition of preexisting condition

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

                  2. Restrictions on limitation period

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

       d. prohibiting exclusions based on health status (access)

Current law
      Under section 510 of ERISA, an employee benefit plan may 
not discriminate against a particular beneficiary for 
exercising any right to which he or she is entitled under the 
provisions of an employee benefit plan. Section 105(h) of the 
IRC prohibits discrimination in favor of highly compensated 
individuals by self-insured employer health plans.
House bill
      Except as specified below, a group health plan, and an 
insurer or HMO offering coverage in connection with a plan, 
cannot exclude an employee or his or her beneficiary from being 
(or continuing to be enrolled) as a participant or beneficiary 
under the plan based on health status. Health status includes, 
with respect to an individual, medical condition, claims 
experience, receipt of health care, medical history, genetic 
information, evidence of insurability (including conditions 
arising out of domestic violence), or disability. A group 
health plan and an insurer or HMO offering coverage in 
connection with a group health plan cannot require a premium or 
contribution which is greater than such premium or contribution 
for a similarly situated participant or beneficiary solely on 
the basis of health status. It can, however, vary the premium 
or contribution based on factors that are not directly related 
to health status (such as scope of benefits, geographic area of 
resident, or wage levels).
      The House bill provides that nothing is intended to 
affect the premium rates an insurer or HMO could charge an 
employer for health insurance coverage provided in connection 
with a group health plan.
      A group health plan (or insurer or HMO providing coverage 
in connection to a group plan) could establish premium 
discounts or modify otherwise applicable copayments or 
deductibles in return for adherence to programs of health 
promotion and disease prevention.
Senate amendment
      Except as specified below, a health plan issuer offering 
a group health plan may not decline to offer whole group 
coverage to a group purchaser desiring to purchase the 
coverage. An employee health benefit plan or a health plan 
issuer offering a group health plan could not condition 
eligibility, enrollment, or premium contribution requirements 
based on health status, medical condition, claims experience, 
receipt of health care, medical history, evidence of 
insurability (including conditions arising out of domestic 
violence), genetic information, or disability.
      The bill does not include a specific rule of construction 
relating to premium rates charged to group health plans other 
than a prohibition of premium contribution requirements based 
on health status.
      A group health plan (or insurer of HMO providing coverage 
in connection to a group plan) could establish premium 
discounts or modify otherwise applicable copayments or 
deductibles in return for adherence to programs of health 
promotion and disease prevention.
Conference agreement
      Except as specified below, a group health plan, and a 
health insurance issuer offering group health insurance 
coverage, cannot establish rules for eligibility (including 
continued eligibility) of an individual to enroll under the 
terms of the plan based on any of the following health-related 
factors in relation to the individual or a dependent of the 
individual: health status, medical condition (including both 
physical and mental illness), claims experience, receipt of 
health care, medical history, genetic information, evidence of 
insurability (including conditions arising out of domestic 
violence), or disability.
      The inclusion of evidence of insurability in the 
definition of health status is intended to ensure, among other 
things, that individuals are not excluded from health care 
coverage due to their participation in activities such as 
motorcycling, snowmobiling, all-terrain vehicle riding, 
horseback riding, skiing and other similar activities.
      It is the intent of the conferees that a plan cannot 
knowingly be designed to exclude individuals and their 
dependents on the basis of health status. However, generally 
applicable terms of the plan may have a disparate impact on 
individual enrollees. For example, a plan may exclude all 
coverage of a specific condition, or may include a lifetime cap 
on all benefits, or a lifetime cap on specific benefits. 
Although individuals with the specific condition would be 
adversely affected by an exclusion of coverage for that 
condition, and individuals with serious illnesses may be 
adversely affected by a lifetime cap on all or specific 
benefits, such plan characteristics would be permitted as long 
as they are not directed at individual sick employees or 
dependents.
      The Conference agreement does not require a group health 
plan or health insurance coverage to provide particular 
benefits other than those provided under the terms of the plan 
or coverage. Nor does it prevent any plan or coverage from 
establishing limitations or restrictions on the amount, level, 
extent, or nature of the benefits or coverage for similarly 
situated individuals enrolled in the plan or coverage. Rules 
defining any applicable waiting periods for enrollment may not 
be established based on health status related factors.
      It is the intent of the conferees that a plan or coverage 
cannot single out an individual based on the health status or 
health status related factors of that individual for denial of 
a benefit otherwise provided other individuals covered under 
the plan or coverage. For example, the plan or coverage may not 
deny coverage for prescription drugs to a particular 
beneficiary or dependent if such coverage is available to other 
similarly situated individual covered under the plan or 
coverage. However, the plan or coverage could deny coverage for 
prescription drugs to all beneficiaries and dependents. The 
term ``similarly situated'' means that a plan or coverage would 
be permitted to vary benefits available to different groups of 
employees, such as full-time versus part-time employees or 
employees in different geographic locations. In addition, a 
plan or coverage could have different benefit schedules for 
different collective bargaining units.
      The conference agreement provides that a group health 
plan and an issuer offering group coverage cannot require a 
premium or contribution which is greater than such premium or 
contribution for a similarly situated individual enrolled in 
the plan on the basis of any health status-related factor 
relating to the individual or to any individual enrolled under 
the plan as a dependent of the individual. It does not restrict 
the amount that an employer may be charged for coverage under a 
group health plan. The group health plan and health insurance 
issuer may establish premium discounts or rebates, or modify 
otherwise applicable copayments or deductibles in return for 
adherence to programs of health promotion and disease 
prevention.
      The conferees intend that these provisions preclude 
insurance companies from denying coverage to employers based on 
health status and related factors that they have traditionally 
used. In addition, this provision is meant to prohibit insurers 
or employers from excluding employees in a group from coverage 
or charging them higher premiums based on their health status 
and other related factors that could lead to higher health 
costs. This does not mean that an entire group cannot be 
charged more. But it does preclude health plans from singling 
out individuals in the group for higher premiums or dropping 
them from coverage altogether.

          1. Exceptions to the non-discrimination requirement

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

     e. enrollment of eligible individuals who lose other coverage

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

     F. Applicability of renewal requirements to multiple employer 
                              arrangements

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

            G. Enforcement of group health plan requirements

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

             1. Enforcement through COBRA provisions of IRC

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

                      2. Enforcement through ERISA

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

              3. Enforcement through civil money penalties

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

                   4. Coordination in administration

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

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

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

                             a. definitions

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

                 b. guaranteed availability of coverage

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

                        1. Scope of requirement

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

      2. Restrictions on preexisting condition limitation periods

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

                3. Exceptions to guaranteed availability

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

 4. Exceptions for failure to meet participation or contribution rules

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

                       c. guaranteed renewability

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

       1. Exceptions to guaranteed renewability of group coverage

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

          d. disclosure of information by health plan issuers

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

                          e. state flexibility

Current law
      The McCarran Ferguson Act of 1945 (P.L. 79-15) exempts 
the business of insurance from federal antitrust regulation to 
the extent that it is regulated by the states and indicates 
that no federal law should be interpreted as overriding state 
insurance regulation unless it does so explicitly. Section 514 
of ERISA leaves to the states the regulation of insurance. 
(Employee benefit plans are not insurance and are regulated by 
the federal government.)
House bill
      The House bill would provide that unless preempted by 
section 514 of ERISA, state laws would not be preempted that 
(1) related to matters not specifically addressed in subtitles 
A and B, or (2) that required insurers or HMOs to: (a) impose a 
limitation or exclusion of benefits relating to the treatment 
of a preexisting condition for periods shorter than specified 
in the bill, (b) allowed persons to be considered to be in a 
period of previous qualifying coverage if they experienced a 
lapse in coverage greater than 60 days, or (c) had a look-back 
provision shorter than 6 months.
Senate amendment
      The Senate Amendment does not include ``related to 
matters not specifically addressed in subtitles A and B.'' The 
Senate Amendment would provide that unless preempted by section 
514 of ERISA, state laws would not be preempted that (1) 
required health plan issuers to impose a limitation or 
exclusion of benefits relating to the treatment of a 
preexisting condition for periods that are shorter than 
specified in the bill; (2) allowed individuals, participants, 
and beneficiaries to be considered in a period of previous 
qualifying coverage if such person experienced a lapse in 
coverage that was greater than the 30-days provided under this 
bill; or (3) required issuers to have a lookback period shorter 
than provided for under this subtitle.
Conference agreement
      The conference agreement provides that any provision of 
state law which establishes, implements, or continues in effect 
any standard or requirement solely relating to health insurance 
issuers in connection with health insurance coverage would not 
be superseded unless the state standard or requirement prevents 
the application of a federal requirement of this part. Nothing 
in this part of the Act would affect or modify the provisions 
of section 514 of ERISA with respect to group health plans.
      The conferees intend the narrowest preemption. State laws 
which are broader than federal requirements would not prevent 
the application of federal requirements. For example, states 
may require guaranteed availability of coverage for groups of 
more than 50 employees, or for groups of 1.
      The conference agreement provides special rules in the 
case of portability requirements. State laws applicable to a 
preexisting condition exclusion which differ from the standards 
or requirements specified in this part would be superseded 
except if they: (1) shorten the lookback period in 
determination of a preexisting condition limitation (from 6 
months to any shorter period of time); (2) shorter the length 
of a preexisting condition limitation exclusion (from 12 
months, or 18 months for late enrollees, to any shorter 
period); (3) lengthen the break in coverage time from 63 days 
to any greater number; (4) lengthen the time for enrollment of 
newborns, or certain children adopted or placed for adoption, 
from 30 days to any greater number; (5) prohibit the imposition 
of any preexisting condition exclusions in cases not described, 
or expand the exclusions described; (6) require additional 
special enrollment periods; (7) reduce the maximum period 
permitted in an affiliation period.
      A group health plan or health insurance coverage is not 
required to provide specific benefits other than those provided 
under the terms of such plan or coverage.

                      IV. Individual Market Rules

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

   A. Guaranteed availability of individual health insurance coverage

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

                   B. Qualifying/eligible individuals

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

                         C. Qualifying coverage

Current law
      No provision.
House bill
      The House bill would require coverage with an actuarial 
value of benefits not less than the weighted average actuarial 
value of the benefits provided by all the individual health 
insurance coverage (excluding coverage issued under this 
section) during the previous year, issued by: (1) the insurer 
or HMO in the state; or (2) all insurers and HMOs in the state. 
Requires that the actuarial value of benefits be calculated 
based on a standardized population and a set of standardized 
utilization and cost factors.
Senate amendment
      No provision.
Conference agreement
      The conference agreement requires individual health 
insurance issuers to offer coverage to eligible individuals 
under all policy forms with exceptions. First, a health 
insurance issuer may not offer coverage under all policy forms 
if the state is implementing an acceptable alternative 
mechanism (see section IV(E) below). If a state is not 
implementing an acceptable alternative mechanism, the health 
insurance issuer may elect to limit the policy forms offered to 
eligible individuals so long as it offers at least two 
different policy forms of health insurance coverage both of 
which are designed for, made generally available and actively 
marketed to, and enroll both eligible and other individuals by 
the issuer. In addition, the 2 policy forms must meet one of 
the following: (1) the 2 policy forms have the largest and next 
to the largest premium volume; or (2) the 2 policy forms are 
representative of individual health insurance coverage by the 
issuer. An issuer must apply the election uniformly to all 
eligible individuals in the state for that issuer, and the 
election will be effective for policies offered for not less 
than 2 years.
      The 2 representative policy forms would include a lower 
and higher-level of coverage, each of which has benefits 
substantially similar to other individual health insurance 
coverage offered by the issuer in the state. The lower-level 
policy form would have benefits with an actuarial value at 
least 85 percent, but not greater than 100 percent of a 
weighted average benefit. The higher-level policy form would 
have benefits with an actuarial value: (1) at least 15 percent 
greater than the actuarial value of the lower-level policy 
form; and (2) between 100 and 120 percent of the weighted 
average benefit. Both products must include benefits 
substantially similar to other individual health insurance 
coverage offered by the issuer in the state. The weighted 
average may be either: (1) the average actuarial value of the 
benefits from individual coverage provided by the issuer; or 
(2) the average actuarial value of the benefits from individual 
coverage provided by all issuers in the state. The weighted 
average will be based on coverage provided during the previous 
year and exclude coverage of eligible individuals. Actuarial 
values will be calculated based on a standardized population 
and a set of standardized utilization and cost factors.
      Network plans may limit coverage to those who live, 
reside, or work within the service area for the network plan. 
Within the service area for the plan, the issuer may deny 
coverage to individuals if the issuer has demonstrated, if 
required, to the applicable state authority that it will not 
have the capacity to deliver services adequately to additional 
individual enrollees. Denial must be made uniformly to 
individuals without regard to any health status-related factor 
and without regard to whether the individuals are eligible 
individuals. Upon denial, the issuer may not offer coverage in 
the individual market within the service area for 180 days. 
Similar rules apply for financial capacity limits.

                         D. Guaranteed renewal

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

              E. OPTIONAL STATE PROGRAMS/STATE FLEXIBILITY

                             1. In general

Current law
      No provision.
House bill.
      The House bill would provide that a state may establish 
public or private mechanisms to meet the goals of guaranteed 
availability of coverage. The chief executive officer of the 
state must notify the Secretary of HHS if the state elects to 
use state mechanisms. Under a state mechanism, a state may 
define qualified coverage as coverage with benefits not less 
than the weighted average actuarial value of the benefits 
provided by all the individual health insurance coverage 
(excluding coverage issued under this section) during the 
previous year, issued by: the insurer or HMO in the state; or 
all insurers and HMOs in the state. The state may elect to 
establish qualified coverage for all insurers and HMOs in the 
state after it has established qualified coverage for each 
insurer or HMO.
      State mechanisms could include one or more, or a 
combination of: health insurance coverage pools or programs 
authorized or established by the state; mandatory group 
conversion policies; guaranteed issue of one or more plans; or 
open enrollment by one or more insurers or HMOs. This list is 
not exclusive.
      A state with a health insurance coverage pool or risk 
pool in effect on March 12, 1996, which offers qualified 
coverage, would automatically be considered to have met the 
Federal access objectives.
      In general, states would have until July 1, 1997 to 
implement a state program. States without a regular legislative 
session between January 1, 1997 and June 30, 1997 would have a 
deadline of July 1, 1998.
Senate amendment
      Similar. The Senate Amendment would provide that a state 
may adopt alternative public or private mechanisms to provide 
access to affordable health benefits for eligible individuals. 
The Governor of the state must notify the Secretary of Health 
and Human Services that the state has adopted an alternative 
mechanism which achieves the goals of portability and 
renewability, and that the state intends to implement this 
mechanism.
      State mechanisms could include guaranteed issue, open 
enrollment by one or more health plan issuers, high-risk pools, 
mandatory conversion policies, or any combination of these 
mechanisms. A state high risk pool would meet the portability 
and renewability requirements if it is: (a) open to eligible 
individuals; (b) limits preexisting condition waiting periods; 
and (c) is consistent with premium rates and covered benefits 
in the National Association of Insurance Commissioners (NAIC) 
Model Health Plan for Uninsurable Individuals Act. States which 
adopt a NAIC model act, including group to individual market 
portability provisions that meet the Federal portability and 
renewability goals, would not be subject to federal rules.
      A state may notify the Secretary, within 6 months after 
enactment of this Act, that state alternate mechanism(s) would 
meet portability and renewability goals. The Secretary would 
not determine if the state mechanism meets the goals until 12 
months after the initial state notification, or January 1, 
1998, whichever is later. The Secretary would not make a 
determination until January 1, 1999 for states without 
legislative sessions within the 12 months after enactment of 
this Act.
Conference agreement
      The conference agreement provides that a state may 
implement an acceptable alternative mechanism that is designed 
to provide access to health benefits for individuals. This 
mechanism must: (1) provide a choice of health insurance 
coverage to all eligible individuals; (2) not impose any 
preexisting condition exclusions; and (3) include at least one 
policy form of coverage that is comparable to either 
comprehensive health insurance coverage offered in the 
individual market in the state or a standard option of coverage 
available under the group or individual health insurance laws 
in the state. If a state elects to implement the following 
mechanisms, the state must also meet the preceding 
requirements. These mechanisms are: (1) the NAIC Small Employer 
and Individual Health Insurance Availability Model Act (as it 
applies to individual health insurance coverage) or the 
Individual Health Insurance Portability Model Act; (2) a 
qualified high risk pool that meets certain specified 
requirements; or (3) other mechanisms that provide for risk 
adjustment, risk spreading, or a risk spreading mechanism (by 
an issuer or among issuers or policies of an issuer), or 
otherwise provide some financial subsidies for participating 
insurers or eligible individuals, or, alternatively, a 
mechanism under which each eligible individual is provided a 
choice of all individual health insurance coverage otherwise 
available.
      Examples of potential alternative mechanisms include 
health insurance coverage pools or programs, mandatory group 
conversion policies, guaranteed issue of one or more plans of 
individual health insurance coverage, or open enrollment by one 
or more health insurance issuers, or a combination of such 
mechanisms.
      A state is presumed to be implementing an acceptable 
alternative mechanism as of January 1, 1998, by not later than 
July 1, 1997, the chief executive officer of the state notifies 
the Secretary that the state has enacted any necessary 
legislation as of January 1, 1998 and provides the Secretary 
with information needed to review the mechanism and its 
implementation, or proposed implementation. The state must 
provide this information to the Secretary every 3 years to 
continue to be presumed to have an acceptable alternative 
mechanism. If a state submits notice and information after July 
1, 1997, and the Secretary makes no determination within 90 
days, the mechanism will be considered acceptable after 90 
days.

                       f. construction/preemption

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

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

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

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

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

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

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

               V. Multiple Employer Pooling Arrangements

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

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

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

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

              2. Additional entities eligible to be MEHPs

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

                  3. Other requirements for exemption

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

                       4. Maintenance of reserves

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

            5. Notice requirements for voluntary termination

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

            6. Corrective actions and mandatory termination

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

                 7. Temporary application of state laws

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

               VI. State Authority Over Non-Exempt MEWAs

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

              VII. Additional MEWA and Related Provisions

     A. Clarification of treatment of single-employer arrangements

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

    b. clarification of treatment of certain collectively-bargained 
                              arrangements

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

                      c. treatment of church plans

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

              d. enforcement provisions relating to mewas

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

          e. cooperation between federal and state authorities

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

    f. filing and disclosure requirements for mewas offering health 
                                benefits

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

        g. single annual filing for all participating employers

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

                  h. effective dates/transition rules

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

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

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

                 a. definitions/nature of organization

Current law
      No provision.
House bill
      The House bill would define a voluntary health insurance 
association as a multiple employer welfare arrangement, 
maintained by a qualified association, under which all medical 
benefits are fully-insured, under which no employer is excluded 
as a participating employer (subject to minimum participation 
requirements of an insurer), under which the enrollment 
requirements of section 103 of the Act apply (see item II 
above), under which all health insurance coverage options are 
aggressively marketed, and under which the health insurance 
coverage is provided by an insurer or HMO to which the laws of 
the state in which it operates apply.
      A qualified association would be an association in which 
the sponsor of the association is, and has been (together with 
its immediate predecessor, if any) for a continuous period of 
not less than 5 years, organized and maintained in good faith, 
with a constitution and bylaws specifically stating its 
purpose, as a trade association, an industry association, a 
professional association, or a chamber of commerce (or similar 
business group), for substantial purposes other than that of 
obtaining or providing medical care, is established as a 
permanent entity which receives the active support of its 
members and meets at least annually, and collects dues without 
conditioning such dues on the basis of the health status or 
claims experience of plan participants or beneficiaries or on 
the basis of participation in a VHIA.
      A ``small employer'' would be defined as one who employs 
at least 2 but fewer than 51 employees on a typical business 
day in the year.
Senate amendment
      The Senate Amendment would define a ``health plan 
purchasing cooperative'' or HPPC to mean a group of employees 
or a group of individuals and employers that, on a voluntary 
basis and in accordance with this section, form a cooperative 
for the purpose of purchasing an individual health plan or 
group health plans offered by health plan issuers.
      An HPPC could not: (a) perform any activity relating to 
the licensing of health plan issuers; (b) assume financial risk 
directly or indirectly (that is, it would have to be fully-
insured); (c) establish eligibility, enrollment, or premium 
contribution requirements for individual participants or 
beneficiaries based on health status, medical condition, claims 
experience, receipt of health care, medical history, evidence 
of insurability, genetic information, or disability; (d) 
operate on a for-profit or other basis where the legal 
structure of the cooperative permits profits to be made and not 
returned to the members of the cooperative, or (e) perform any 
other activities that conflict or are inconsistent with the 
performance of its duties under this Act. A for-profit 
cooperative could be formed by a nonprofit organization or 
organizations in which: (1) membership in such organization is 
not based on health status, medical condition, claims 
experience, receipt of health care, medical history, evidence 
of insurability, genetic information, or disability and (2) 
that accepts as members all employers or individuals on a 
first-come, first-serve basis, subject to any established limit 
on the maximum size of an employer that may become a member.
Conference agreement
      The conference agreement does not include the House or 
Senate provision.

                            b. certification

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

           c. structure and responsibilities of organization

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

                      d. preemption of state laws

Current law
      Section 514(a) of ERISA preempts state laws relating to 
employee benefit plans. Section 514(b)(2) of ERISA provides 
that state laws apply in the case of the regulation of 
insurance.
House bill
      The House bill would amend section 514 of ERISA to 
preempt the following state laws: (1) laws that preclude an 
insurer or HMO from offering health insurance coverage under 
VHIAs; (2) laws that preclude an insurer or HMO from setting 
premium rates under a VHIA based on the claims experience of 
the VHIA (except the VHIA's premium rates could not vary on the 
basis of any particular employer's claims experience); (3) laws 
that require coverage in connection with a VHIA to include 
specific items or services of medical care or that require an 
insurer or HMO offering coverage in connection with a VHIA to 
include specific item or services consisting of medical care, 
except to the extent that such state laws prohibit an exclusion 
for a specific disease in such coverage. This preemption of 
mandated benefits would apply only with respect to those items 
and services specified in a list which would be prescribed in 
regulations by the Secretary of Labor.
      In general, states would be able to apply their laws if 
they had in place guaranteed access measures meeting certain 
conditions. A state which certified to the Secretary that it 
provided ``guaranteed access'' to health coverage could deny a 
VHIA the right to offer coverage in the small group market (or 
otherwise regulate such VHIA with respect to such coverage), 
except as described below. (The certification could not be in 
effect for more than 3 years.)
      A state would be considered to provide such guaranteed 
access, if (1) it certified that at least 90% of all state 
residents were covered by a group health plan or otherwise had 
health insurance coverage, or (2) that it had, in the small 
group market, provided for guaranteed issue of at least one 
option of coverage and for small group rating reforms designed 
to make health insurance coverage more affordable. However, an 
exception to this provision would apply for certain large, 
multi-state arrangements that demonstrated to the Secretary 
that it met the following criteria. In other words, state laws 
would not apply if: (1) the VHIA sponsor operates in a majority 
of the 50 states and in at least 2 of the regions of the 
country; (2) the arrangement covers or will cover (in the case 
of new VHIAs) at least 7,500 participants and beneficiaries; 
and (3) under the terms of the arrangement, either the 
qualified association does not exclude from membership any 
small employer in the state, or the arrangement accepts every 
small employer in the state that applies for coverage. In 
addition, state laws would not apply in a state in which a VHIA 
operated on March 6, 1996 and under the terms of the 
arrangement, either the qualified association does not exclude 
from membership any small employer in the state, or the 
arrangement accepts every small employer in the state that 
applies for coverage.
      The exemption from state laws for multistate plans and 
existing plans would not apply to any state which, as of 
January 1, 1996, either (1) had enacted a law providing for 
guaranteed issue of fully community rated individual health 
insurance coverage offered by insurers and HMOs, or (2) 
required insurers offering group health coverage to reimburse 
insurers offering individual coverage for losses resulting from 
their offering individual coverage on an open enrollment basis. 
In other words, such states could apply their insurance laws.
Senate amendment
      The Senate Amendment would provide that HPPCs that meet 
the requirements of this Act would be exempt from state 
fictitious group laws.
      A health plan issuer offering a group or individual 
health plan through a HPPC meeting the requirements of this Act 
would be required to comply with all otherwise applicable state 
rating requirements if the plan were to be offered outside the 
cooperative except a state would be required to permit an 
issuer to reduce its premiums negotiated with a HPPC to reflect 
savings derived from administrative costs, marketing costs, 
profit margins, economies of scale, or other factors. However, 
such premium reductions could not be based on the health 
status, demographic factors, industry type, duration, or other 
indicators of risk of HPPC members.
      Health plan issuers offering coverage through the HPPC 
would be required to comply with state mandated benefit laws. 
However, in states that have enacted laws authorizing 
alternative benefit plans for small employers, such issuers 
could offer such small employer plan through a HPPC.
Conference agreement
      The conference agreement does not include the House or 
Senate provision.

                        e. rules of construction

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

                      f. enforcement through erisa

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

              IX. Additional Definitions/Other Provisions

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

                           X. Effective Dates

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

                XI. Health Coverage Availability Studies

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

                   XII. Reimbursement of Telemedicine

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

             XIII. HMOs and Medical Savings Accounts (MSAs)

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

   XIV. Volunteer Services Provided by Health Professionals at Free 
                                Clinics

      See report language for Title II.

                       XV. Findings; Severability

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

                       XVI. COBRA Clarifications

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

            XVII. Sense of the Committee Regarding Medicare

Current law
      No provision.
House bill
      No provision.
Senate amendment
      The Committee on Labor and Human Resources notes that the 
Medicare trustees concluded in their 1995 report that: (i) the 
Medicare program is unsustainable in its present form; (ii) 
that the hospital insurance trust fund will only be able to pay 
for benefits for about 7 years and is severely out of financial 
balance in the long run; and (iii) the Public Trustees 
recommended that the problems be urgently addressed on a 
comprehensive basis including a review of the program's 
financing methods, benefit provisions, and delivery mechanisms. 
The provision expresses the sense of the Committee that the 
Senate should take up measures necessary to reform the Medicare 
program, to provide increased choice for seniors, and to 
respond to the findings of the Public Trustees by protecting 
the short term solvency and long-term sustainability of the 
Medicare program.
Conference agreement
      The conference agreement does not include the Senate 
provision.

                XVIII. Parity for Mental Health Services

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

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

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

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

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

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

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

        XXII. Sense of the Senate Regarding Available Treatments

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

                      XXIII. Rule of Construction

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

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

                   1. Fraud and abuse control program

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

                             I. In general

                   A. Fraud and Abuse Control Program

      (Section 201 of the House bill; section 501 of the Senate 
amendment.)
Current law
      Currently, the investigation and prosecution of fraud 
related to Federal health programs is the responsibility of the 
Department of Health and Human Services (DHHS), the FBI and the 
Department of Justice. The DHHS Office of Inspector General 
investigates Federal cases of fraud regarding Medicare, 
Medicaid, and the Maternal and Child Health Block Grant 
programs and is authorized by the Secretary to impose civil 
monetary penalties and program exclusions on fraudulent 
providers. The FBI can investigate both Federal and private 
payer cases of fraud but cannot impose sanctions. Both the 
Office of Inspector General and the FBI refer investigative 
findings to the Department of Justice which may prosecute 
persons for violations of federal criminal laws. State Medicaid 
fraud control units are responsible for the investigation, 
prosecution, or referral for prosecution, of fraudulent 
activities associated with State Medicaid programs.
House bill
      The Secretary of the Department of Health and Human 
Services (acting through the Office of the Inspector General) 
and the Attorney General would be required to jointly establish 
a national health care fraud and abuse control program to 
coordinate Federal, State and local law enforcement to combat 
fraud with respect to health plans. To facilitate the 
enforcement of this fraud and abuse control program the 
Secretary and Attorney General would be authorized to conduct 
investigations, audits, evaluations and inspections relating to 
the delivery of and payment for health care, and would be 
required to arrange for the sharing of data with 
representatives of public and private third party payers. This 
program, implemented by guidelines issued by the Secretary and 
the Attorney General, would also facilitate the enforcement of 
applicable Federal statutes relating to health care fraud and 
abuse, and would provide for the provision of guidance to 
health care providers through the issuance of safe harbors, 
advisory opinions and special fraud alerts.
      The Secretary and Attorney General would consult with and 
share data with representatives of health plans. Guidelines 
issued by the Secretary and Attorney General would ensure the 
confidentiality of information furnished by health plans, 
providers and others, as well as the privacy of individuals 
receiving health care services. The Inspector General would 
retain all current authorities.
      For purposes of this section the term ``health plan'' 
means a plan or program that provides health benefits through 
insurance or otherwise. Such plans include health insurance 
policies, contracts of service benefit organizations, and 
membership agreements with health maintenance organizations or 
other prepaid health plans.
      The Health Care Fraud and Abuse Control Account would be 
established as an expenditure account within the Federal 
Hospital Insurance (HI) Trust Fund. Amounts equal to monies 
derived from the coordinated health care anti-fraud and abuse 
programs from the imposition of civil money penalties, fines, 
forfeitures and damages assessed in criminal, civil or 
administrative health care cases, along with any gifts or 
bequests would be transferred into the Medicare HI trust fund 
from the U.S. Treasury. There are appropriated from the HI 
trust fund to the Account such sums as the Secretary and the 
Attorney General certify are necessary to carry out certain 
functions, subject to specified limits for each fiscal year 
beginning with 1997.
      There would be appropriated from the general fund of the 
U.S. Treasury to the Fraud and Abuse Account for transfer to 
the FBI certain funds, subject to fiscal year limitations, for 
specified functions. These functions include prosecuting health 
care matters, investigations, audits of health care programs 
and operations, inspections and other evaluations, and provider 
and consumer education regarding compliance with fraud and 
abuse provisions. Specified amounts in the Account would also 
be available to carry out the Medicare Integrity Program. The 
Secretary and the Attorney General would be required to submit 
a joint annual report to Congress on the revenues and 
expenditures, and the justification for such disbursements from 
the Health Care Fraud and Abuse Control Account.
Senate amendment
      Similar.
Conference agreement
      The conference agreement includes the House provision 
with an amendment adding a requirement that the Comptroller 
General submit to Congress a report for certain fiscal years 
regarding amounts deposited in the Hospital Insurance Trust 
Fund under this section. The conference agreement also includes 
a provision regarding the availability of recoveries and 
forfeitures for purposes of certain provisions of the Employee 
Retirement Income Security Act of 1974.

                     B. Medicare Integrity Program

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

                   c. beneficiary incentive programs

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

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

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

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

      (Section 205 of House bill, section 505 of Senate 
amendment.)
Current law
      The 1987 Medicare and Medicaid Patient and Program 
Protection Act specified various payment practices which, 
although potentially capable of including referrals of business 
under Medicare or State health care programs, are protected 
from criminal prosecution or civil sanction under the anti-
kickback provisions of the law. The 1987 law also established 
authority for the Secretary to promulgate regulations 
specifying additional payment practices, known as ``safe 
harbors,'' which will not be subject to sanctions under the 
fraud and abuse provisions.
House bill
      The Secretary would publish an annual notice in the 
Federal Register soliciting proposals for modifications to 
existing safe harbors and new safe harbors. After considering 
such proposals the Secretary, in consultation with the Attorney 
General, would issue final rules modifying existing safe 
harbors and establishing new safe harbors, as appropriate. The 
Inspector General would submit an annual report to Congress 
describing the proposals received, as well as the action taken 
regarding the proposals. The Secretary, in considering 
proposals, may consider a number of factors including the 
extent to which the proposals would affect access to health 
care services, quality of care services, patient freedom of 
choice among health care providers, competition among health 
care providers, ability of health care facilities to provide 
services in medically underserved areas or to medically 
underserved populations, and the like.
      The Secretary of Health and Human Services would publish 
the first notice in the Federal Register soliciting proposals 
for new or modified safe harbors no later than January 1, 1997.
      The Secretary would issue written advisory opinions 
regarding what constitutes prohibited remuneration under 
section 1128B(b), whether an arrangement or proposed 
arrangement satisfies the criteria for activities which do not 
result in prohibited remuneration, what constitutes an 
inducement to reduce or limit services to individuals entitled 
to benefits, and, whether an activity constitutes grounds for 
the imposition of civil or criminal sanctions under sections 
1128, 1128A or 1128B. Advisory opinions would be binding as to 
the Secretary and the party requesting the opinion.
      Any person would be able to request the Inspector General 
to issue a special fraud alert informing the public of 
practices which the Inspector General considers to be suspect 
or of particular concern under the Medicare program or a State 
health care program, as defined in section 1128(h) of the 
Social Security Act. After investigation of the subject matter 
of the request, and, if appropriate, the Inspector General 
would issue a special fraud alert in response to the request, 
published in the Federal Register.
Senate amendment
      Identical to the House bill provisions regarding the 
issuance of safe harbors and special fraud alerts. However, 
provides for the issuance of ``interpretative rulings'' instead 
of ``advisory opinions'' by the Secretary.
Conference agreement
      The conference agreement includes the House provision 
with modifications to the advisory opinion provisions. The 
Secretary will be required to issue to a party requesting an 
advisory opinion within 60 days and the advisory opinion 
provisions will apply to requests made for opinions on or after 
the date which is 6 months after the date of enactment of this 
section and before the date which is 4 years after such date of 
enactment.

         II. Revision to Current Sanctions for Fraud and Abuse

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

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

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

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

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

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

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

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

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

e. intermediate sanctions for medicare health maintenance organizations

      (Section 215 of the House bill; section 515 of the Senate 
amendment.)
Current law
      A contract between the Secretary and a Medicare Health 
Maintenance Organization (HMO) is generally for a 1 year term, 
with an option for automatic renewal. However, the Secretary 
may terminate any such contract at any time, after reasonable 
notice and an opportunity for a hearing, if the Medicare HMO 
has failed substantially to carry out the contract, or is 
carrying out the contract in a manner inconsistent with the 
efficient and effective administration of the requirements of 
section 1876 of the Social Security Act, or if the Medicare HMO 
no longer substantially meets the statutory requirements 
contained in Section 1876(b), (c), (e) and (f).
House bill
      Under this section the Secretary may terminate a contract 
with a Medicare Health Maintenance Organization (HMO) or may 
impose certain intermediate sanctions on the organization if 
the Secretary determines that the Medicare HMO has failed 
substantially to carry out the contract; is carrying out the 
contract in a manner substantially inconsistent with the 
efficient and effective administration of this section; or, if 
the Medicare HMO no longer substantially meets the statutory 
requirements contained in Section 1876(b), (c), (e) and (f) of 
the Social Security Act.
      If the basis for the determination by the Secretary that 
intermediate sanctions should be imposed on an eligible 
organization is other than that the organization has failed 
substantially to carry out its contract with the Secretary, 
then the Secretary may apply intermediate sanctions as follows: 
civil money penalties of not more than $25,000 for each 
determination if the deficiency that is the basis of the 
determination has directly adversely affected (or has the 
substantial likelihood of adversely affecting) an individual 
covered under the organization's contract; civil money 
penalties or not more than $10,000 for each week of a 
continuing violation; and suspension of enrollment of 
individuals until the Secretary is satisfied that the 
deficiency has been corrected and is not likely to recur.
      Whenever the Secretary seeks to either terminate a 
Medicare HMO contract or impose intermediate sanctions on such 
an organization, the Secretary must do so pursuant to a formal 
investigation and under compliance procedures which provide the 
organization with a reasonable opportunity to develop and 
implement a corrective action plan to correct the deficiencies 
that were the basis of the Secretary's adverse determination. 
In making a decision whether to impose sanctions the Secretary 
is required to consider aggravating factors such as whether an 
entity has a history of deficiencies or has not taken action to 
correct deficiencies the Secretary has brought to their 
attention. The Secretary's compliance procedures must also 
include notice and opportunity for a hearing (including the 
right to appeal an initial decision) before the Secretary 
imposes any sanction or terminates the contract of a Medicare 
HMO, and there must not be any unreasonable or unnecessary 
delay between the finding of a deficiency and the imposition of 
sanctions.
      Under this section each risk-sharing contract with a 
Medicare HMO must provide that the organization will maintain a 
written agreement with a utilization and quality control peer 
review organization or similar organization for quality review 
functions.
      The amendments made by this section would apply to 
contract years beginning on or after January 1, 1996.
Senate amendment
      Same as the House bill provision except specifies a 
different effective date, i.e., January 1, 1997.
Conference agreement
      The conference agreement includes the House provision, 
but with an effective date of January 1, 1997.

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

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

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

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

                          III. Data Collection

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

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

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

                      IV. Civil Monetary Penalties

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

            a. social security act civil monetary penalties

      (Section 231 of the House bill; section 531 of the Senate 
amendment.)
Current law
      Under Section 1128A of the Social Security Act civil 
monetary penalties may be imposed for false and fraudulent 
claims for reimbursement under the Medicare and State health 
care programs.
House bill
      The Medicare and Medicaid program provisions providing 
for civil monetary penalties for specified fraud and abuse 
violations would apply to similar violations involving other 
Federal health care programs. Federal health care programs 
would include any health insurance plans or programs funded, in 
whole or part, by the Federal government, such as CHAMPUS. 
Civil monetary penalties and assessments received by the 
Secretary would be deposited into the Health Care Fraud and 
Abuse Control Account established under this Act.
      Any person who has been excluded from participating in 
Medicare or a State health care program and who retains a 
direct or indirect ownership or control interest in an entity 
that is participating in a program under Medicare or a State 
health care program, and who knows or should know of the action 
constituting the basis for the exclusion, or who is an officer 
or managing employee of such an entity, would be subject to a 
civil monetary penalty of not more than $10,000 for each day 
the prohibited relationship occurs.
      Amends the civil monetary penalty provisions of Section 
1128A(a) by increasing the amount of a civil money penalty from 
$2,000 to $10,000 for each item or service involved. Also 
increases the assessment which a person may be subject to from 
``not more than twice the amount'' to ``not more than three 
times the amount'' claimed for each such item or service in 
lieu of damages sustained by the United States or a State 
agency because of such claim.
      Adds two practices to the list of prohibited practices 
for which civil money penalties may be assessed. The first 
occurs when a person engages in a pattern or practice of 
presenting a claim for an item or service based on a code that 
the person knows or should know will result in greater payments 
than appropriate. The second is the practice whereby a person 
submits a claim or claims that the person knows or should know 
is for a medical item or service which is not medically 
necessary.
      The sanction against practitioners and persons who fail 
to comply with certain statutory obligations is changed from an 
amount equal to ``the actual or estimated cost'' of the 
medically improper or unnecessary services provided, to ``up to 
$10,000 for each instance of medically improper or unnecessary 
services provided.
      The procedural provisions outlined in Section 1128A, such 
as notice, hearings, and judicial review rights, would apply to 
civil monetary penalties assessed against Medicare Health 
Maintenance Organizations in the same manner as they apply to 
civil monetary penalties assessed against health care providers 
generally.
      This provision also adds a new practice to the list of 
prohibited practices for which civil monetary penalties could 
be assessed. Any person who offers remuneration to an 
individual eligible for benefits under Medicare or a State 
health care program that such individual knows or should know 
is likely to influence such individual to order or received 
from a particular provider, practitioner or supplier any item 
or service reimbursable under Medicare or a State health care 
program would be subject to the various civil monetary 
penalties, assessments and exclusion provisions of section 
1128A of the Social Security Act.
      The term ``remuneration'' is defined to include the 
waiver of part or all of coinsurance and deductible amounts, as 
well as transfers of items or services for free, or for other 
than fair market value. There would be exceptions to this 
definition. The waiver of part or all of coinsurance and 
deductible amounts would not be considered remuneration under 
this section if the waiver is not offered as part of any 
advertisement or solicitation, the person does not routinely 
waive coinsurence or deductible amounts, and the person either 
waives the coinsurance and deductible amounts because the 
individual is in financial need, or fails to collect the 
amounts after reasonable collection efforts, or provides for a 
permissible waiver under regulations issued by the Secretary. 
In addition, the term remuneration would not include 
differentials in coinsurance and deductible amounts as part of 
a benefit plan design if the differentials have been disclosed 
in writing to all beneficiaries, third party payors, and 
providers, and if the differentials meeting the standards 
defined in the Secretary's regulations. Remuneration would also 
not include incentives given to individuals to promote the 
delivery of preventive care under the Secretary's regulations.
      The effective date of these provisions is January 1, 
1997.
Senate amendment
      Identical.
Conference agreement
      The conference agreement includes the House provision. 
The conferees do not intend that the language of section 231(d) 
create any new standard for coverage of a claim. The intent is 
to assure that a proper evaluation by a practitioner is 
completed and evidence of treatment need is established before 
services are delivered for which claims are submitted. The 
conferees recognize that under current law the reasonableness 
of a service provided by a non-medical practitioner, including 
a practitioner of alternative medicine, is judged by the 
application of principles particular to such non-medical health 
care professions. For example, the provision and reasonableness 
of chiropractic services under Medicare is judged by the 
application of chiropractic principles.
      There is significant concern regarding the impact of the 
anti-fraud provisions on the practice of complementary or 
alternative medicine and health care. The practice of 
complementary or alternative medical or health care practice 
itself would not constitute fraud.
      The conferees do not intend to penalize the exercise of 
medical judgment of health care treatment choices made in good 
faith and which are supported by significant evidence or held 
by a respectable minority of those providers who customarily 
provide similar methods of treatment. The Act is not intended 
to penalize providers simply because of a professional 
difference of opinion regarding diagnosis or treatment.
      A sanction is not intended for providers who submit 
claims they know will not be considered reimbursable as 
medically necessary services, but who are required to submit 
the claims because their patients need to document that 
Medicare will not reimburse the service. In submitting such 
claims, providers shall notify carriers that a claim is being 
submitted solely for purpose of seeking reimbursement from 
secondary payers.
      Moreover, the conferees intend that a penalty will be 
imposed on presentation of a claim that is false or fraudulent. 
No sanction is intended for providers who simply inform 
beneficiaries that a particular service is not covered by 
Medicare. Moreover, nothing in this section is intended to 
supersede the limitation on liability provisions established 
under Section 1879 of the Social Security Act.
      In addition, the conferees intend, with respect to 
allowable remuneration, that this provision not preclude the 
provision of items and services of nominal value, including, 
for example, refreshments, medical literature, complimentary 
local transportation services, or participation in free health 
fairs.

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

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

      c. penalty for false certification for home health services

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

                      V. Revisions to Criminal Law

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

         a. definitions relating to federal health care offense

      (Section 241 of the House bill; section 542 of the Senate 
amendment.)
Current law
      No provision.
House bill
      This provision defines the term ``Federal health care 
offense'' to include violations of, or criminal conspiracies to 
violate, section 669, 1035, 1347 or 1518 of Title 18 of the 
United States Code, or section 287, 371, 664, 666, 1001, 1027, 
1341, 1343, or 1954 of this title, if the violation or 
conspiracy relates to a health care benefit program. A ``health 
care benefit program'' is any public or private plan affecting 
commerce under which any medical benefit, item or service is 
provided to any individual, and includes any individual or 
entity providing such a medical benefit, item or service for 
which payment may be made under the plan.
Senate amendment
      The Senate amendment defines ``Federal health care 
offense'' as a violation of, or a criminal conspiracy to 
violate section 1128B of the Social Security Act, section 1347 
of this title, and sections 287, 371, 664, 666, 669, 1001, 
1027, 1341, 1343, or 1954 of this title if the violation or 
conspiracy relates to health care fraud.
Conference agreement
      The conference agreement includes the House provision.

                          b. health care fraud

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

                        c. theft or embezzlement

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

                          d. false statements

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

   e. obstruction of criminal investigations of health care offenses

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

                 f. laundering of monetary instruments

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

         g. injunctive relief relating to health care offenses

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

             h. authorized investigative demand procedures

      (Section 248 of the House bill; section 548 of the Senate 
amendment.)
Current law
      No provision.
House bill
      This provision would establish procedures for the 
Attorney General to make investigative demands in cases 
regarding health care fraud. Under this section, the Attorney 
General could issue a summons for records and/or a witness to 
authenticate the records.
      Administrative summons would be authorized for 
investigations of any scheme to defraud an health care benefit 
program in connection with the delivery of or payment for 
health care. This section would provide for service of a 
subpoena and enforcement of a subpoena in all United States 
courts, as well as a grant of immunity to persons responding to 
a subpoena from civil liability for disclosure of such 
information.
      The provision would also provide that health information 
about an individual that is disclosed under this section may 
not be used in, or disclosed to any person for use in any 
administrative, civil, or criminal action or investigation 
directed against the individual who is the subject of the 
information unless the action or investigation arises out of, 
and is directly related to, receipt of health care of payment 
for health care or action involving a fraudulent claim related 
to health, or if good cause is shown.
Senate amendment
      Contains additional language relating to testimony by a 
custodian of records, the production of records, witness fees, 
and administrative summons.
Conference agreement
      The conference agreement includes the House provision 
with an amendment to include Senate bill language relating to 
testimony by a custodian of records.

            I. Forfeitures for Federal Health Care Offenses

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

                     J. Relation to ERISA Authority

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

                    2. Administrative simplification

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

                             A. Definitions

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

           B. General requirements for adoption of standards

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

      C. Standards for information transactions and data elements

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

                D. Timetables for adoption of standards

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

                            e. requirements

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

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

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

 g. wrongful disclosure of individually identifiable health information

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

                         h. effect on state law

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

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

      (Section 253 of the House bill.)
Current law
      No provision.
House bill
      The bill would amend the membership and duties of the 
National Committee on Vital and Health Statistics, authorized 
under section 306(k) of the Public Health Service Act, as 
amended, by increasing the number of members to 18. The 
committee would be required to (1) provide assistance and 
advice to the Secretary on issues related to health statistical 
and health information; health with complying with the 
requirements of the bill; (2) study the issues related to the 
adoption of uniform data standards for patient medical record 
information and electronic exchange of such information; (3) 
report to the Secretary not later than 4 years after enactment 
of the Health Coverage Availability and Affordability Act of 
1996, and annually thereafter, recommendations and legislative 
proposals for such standards and electronic exchange; and (4) 
be generally 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 
meet their responsibilities; (4) any problems that exist with 
implementation of the network; and (5) the extent to which 
timetables established by under this part of the bill were 
being met.
Senate amendment
      No provision.
Conference agreement
      The conference agreement includes the House provision.
      The conference agreement also includes a requirement that 
the Secretary submit detailed recommendations on standards with 
respect to the privacy of individually identifiable health 
information not later than 12 months after enactment. The 
recommendations would be required to address at least: (1) the 
rights an individual should have relating to individually 
identifiable health information; (2) the procedures that should 
be established for the exercise of such rights; and (3) the 
uses and disclosures of such information that should be 
authorized or required. The Secretary would be required to 
consult with the Attorney General, and the National Committee 
on Vital and Health Statistics for carrying out this 
requirement. If Congress fails to enact privacy legislation, 
the Secretary is required to develop standards with respect to 
privacy of individually identifiable health information not 
later than 42 months from the date of enactment.
      The conferees recognize that industry experts are 
essential to the membership of the National Committee on Vital 
and Health Statistics. It is the conferees' intent that the 
Committee select representatives from the insurer, HMO, 
provider, employer, accreditation communities, and a 
representative from the Workgroup for Electronic Data 
Interchange (WEDI).
      The conferees recognize that technological innovation 
with respect to electronic transmission of health-care related 
transactions is progressing rapidly in the marketplace. The 
conferees do not intend to stifle innovation in this area. 
Therefore, the conferees intend that the Committee take into 
account private sector initiatives.

       3. Duplication and coordination of Medicare-related plans

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

       a. duplication and coordination of medicare-related plans

      (Section 281 of House bill.)
Current law
      Many Medicare beneficiaries purchase private health 
insurance to supplement their Medicare coverage. These 
individually purchased policies are known as Medigap policies. 
The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990, P.L. 
101-508) provided for a standardization of Medigap policies. 
OBRA also substantially modified the antiduplication provision 
contained in law. The intent of the OBRA 1990 anti-duplication 
provision was to prohibit sales of duplicative Medigap 
policies. However, the statutory language applied, with very 
limited exceptions, to all ``health insurance policies'' sold 
to Medicare beneficiaries. Observers noted that this provision 
could thus apply to a broad range of policies including 
hospital indemnity plans, dread disease policies, and long-term 
care insurance policies.
      The Social Security Amendments of 1994 (P.L. 103-432) 
included a number of technical modifications to the Medigap 
statute, including modifications to the anti-duplication 
provisions contained in section 1882(d)(3) of the Act. Under 
the revised language, it is illegal to sell or issue the 
following policies to Medicare beneficiaries: (i) a health 
insurance policy with knowledge that 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.
House bill
      The provision would modify the anti-duplication 
provisions. The requirement for obtaining a written application 
statement would be limited to the sale of Medigap policies to 
persons already having Medigap policies.
      Anti-duplicative provisions would specifically state that 
a policy which pays benefits to or on behalf of an individual 
without regard to other health benefit coverage would not be 
considered to duplicate any health benefits under Medicare, 
Medicaid, or a health insurance policy. Further, such policies 
would be excluded from the sales prohibitions.
      The provision would specifically state that a health 
insurance policy (or a rider to an insurance contract which is 
not a health policy) which provides benefits for long term 
care, nursing home care, home health care or community-based 
care and that coordinates or excludes against services covered 
under Medicare would not be considered duplicative, provided 
such coordination or exclusion was disclosed in the policy's 
outline of coverage.
      The provision would specify that a health insurance 
policy (which may be a contract with a health maintenance 
organization), provided to a disabled beneficiary, that is a 
replacement product for another policy that is being terminated 
by the insurer would not be considered duplicative if it 
coordinates with Medicare.
      The provision would prohibit the imposition of criminal 
or civil penalties, or taking of legal action, with respect to 
any actions which occurred between enactment of P.L. 103-432 
and enactment of this measure, provided the policies met the 
new requirements.
      The provision would prohibit States from imposing 
duplication requirements with respect to a policy (other than 
Medigap policy) or rider to an insurance contract which is not 
a health policy if the policy or rider pays benefits without 
regard to other benefits coverage or if it is a long-term care 
policy or policy sold to the disabled (as such policies are 
described above).
      The provision would also delete current language relating 
to required disclosure statements.
Senate amendment
      No provision.
Conference agreement
      The conference agreement includes the House provision 
with modifications. The agreement would clarify that policies 
offering only long-term care nursing home care, home health 
care, or community based care, or any combination thereof would 
be allowed to coordinate benefits with Medicare and not be 
considered duplicative, provided such coordination was 
disclosed. The conference agreement does not include the 
provision relating to replacement policies sold to disabled 
persons.
      The conference agreement would modify, rather than 
repeal, the current law requirement for disclosure statements 
for policies that pay regardless of other coverage. Disclosure 
statements, for the type of policy being applied for, would be 
furnished to a Medicare beneficiary applying for a health 
insurance policy. The statement would be furnished as a part of 
(or together with) the policy application.
      The conference agreement would specify that whoever 
issues or sells a health insurance policy to a Medicare 
beneficiary and fails to furnish the required disclosure 
statement would be fined under title 18 of the United States 
Code, or imprisoned not more than five years or both. In 
addition, or in lieu of the criminal penalty, a civil money 
penalty of $25,000 (or $15,000 in the case of someone who is 
not an issuer) could be imposed for each violation.
      The disclosure requirements would not apply to Medigap 
policies or health insurance policies identified in the July 
12, 1995 Federal Register notice (i.e. policies that do not 
duplicate Medicare (even incidentally), life insurance policies 
that contain long-term care riders or accelerated death 
benefits, disability insurance policies, property and casualty 
policies, employer and union group health plans, managed care 
organizations with Medicare contracts, and health care 
prepayment plans (HCPPs) that provide some or all of Part B 
benefits under an agreement with HCFA.)
      The conference agreement would modify existing disclosure 
statements to remove the wording that implies the policies 
duplicate Medicare coverage. New language would be substituted 
which states that: ``Some health care services paid for by 
Medicare may also trigger the payment of benefits under this 
policy''.
      The agreement would further modify the required statement 
for policies providing both nursing home and non-institutional 
coverage, nursing home benefits only, or home health care 
benefits only. The reference to Federal law would be modified 
to read: ``Federal law requires us to inform you that in 
certain situations this insurance may pay for some care also 
covered by Medicare''. All other policies would be required to 
include the following statement: ``This policy must pay 
benefits without regard to other health benefit coverage to 
which you may be entitled under Medicare or other insurance.''
      The conference agreement would further modify the 
language relating to State actions. The law would specifically 
state that nothing in the provision restricts or precludes a 
State's ability to regulate health insurance, including the 
policies subject to disclosure requirements. However, a State 
may not declare or specify, in statute, regulation, or 
otherwise, that a health insurance policy (other than a Medigap 
policy) or rider to an insurance contract which is not a health 
insurance policy that pays regardless of other coverage 
duplicates Medicare or Medigap benefits.
      The conference agreement further narrows the language 
relating to application of penalties and legal action with 
respect to non-duplication requirements during a transition 
period, defined as beginning on November 5, 1991 and ending on 
the date of enactment. No criminal or civil monetary penalty 
could be imposed for an act or omission that occurred during 
the transition period relating to policies that pay benefits 
without regard to other coverage or long-term care policies. No 
legal action could be brought or continued in any Federal or 
State court with respect to the sale of such policies insofar 
as such action includes a cause of action which arose or is 
based on action occurring during the transition period and 
relating to non-duplication requirements. This limitation on 
legal actions would be conditional on the existing disclosure 
requirements being met with respect to any policy sold during 
the period beginning on the effective date of the disclosure 
requirements required by the 1994 Act (i.e. August 11, 1995) 
and ending 30 days after enactment.
      The conference agreement further provides that the new 
disclosure rules only apply after enactment to health insurance 
policies that pay regardless of other coverage and 30-days 
after enactment to another health insurance policy.
      The conference agreement would further permit a seller or 
issuer of a health insurance policy to use current disclosure 
statements rather than the new disclosure statements.

                      4. Medical liability reform

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

                         I. General Provisions

           A. Federal reform of health care liability actions

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

                             b. definitions

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

                           c. effective date

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

        II. Uniform Standards for Health Care Liability Actions

                       a. statute of limitations

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

                 B. Calculation and payment of damages

      (Section 282 of House bill.)
Current bill
      No provision.
House bill
      1. Noneconomic Damages. The provision would limit 
noneconomic damages to $250,000 in a particular case. The limit 
would apply regardless of the number of persons against whom 
the action was brought or the number of actions brought.
      The provision would specify that a defendant would only 
be liable for the amount of noneconomic damages attributable to 
that defendant's proportionate share of the fault or 
responsibility for that claimant's injury.
      2. Punitive Damages. The provision would permit the award 
of punitive damages (to the extent allowed under State law) 
only if the claimant established by clear and convincing 
evidence either that the harm was the result of conduct that 
specifically intended to cause harm or the conduct manifested a 
conscious flagrant indifference to the rights or safety of 
others. The amount of punitive damages awarded could not exceed 
$250,000 or three times the amount of economic damages, 
whichever was greater. The determination of punitive damages 
would be determined by the court and not be disclosed to the 
jury. The provision would not create a cause of action for 
punitive damages. Further, it would not preempt or supersede 
any State or Federal law to the extent that such law would 
further limit punitive damage awards.
      The provision would permit either party to request a 
separate proceeding (bifurcation) on the issue of whether 
punitive damages should be awarded and in what amount. If a 
separate proceeding was requested, evidence related only to the 
claim of punitive damages would be inadmissible in any 
proceeding to determine whether actual damages should be 
awarded.
      The provision would prohibit the award of punitive 
damages in a case where the drug or device was subject to 
premarket approval by the Food and Drug Administration, unless 
there was misrepresentation or fraud. A manufacturer or product 
seller would not be held liable for punitive damages related to 
adequacy of required tamper resistant packaging unless the 
packaging or labeling was found by clear and convincing 
evidence to be substantially out of compliance with the 
regulations.
      3. Periodic Payments for Future Losses. The provision 
would permit the periodic (rather than lump sum) payment of 
future losses in excess of $50,000. The judgment of a court 
awarding periodic payments could not, in the absence of fraud, 
be reopened at any time to contest, amended, or modify the 
schedule or amount of payments. The provision would not 
preclude a lump sum settlement.
      4. Treatment of Collateral Source Payments. The provision 
would permit a defendant to introduce evidence of collateral 
source payments. Such payments are those which are any amounts 
paid or reasonably likely to be paid by health or accident 
insurance, disability coverage, workers compensation, or other 
third party sources. If such evidence was introduced, the 
claimant could introduce evidence of any amount paid or 
reasonably likely to be paid to secure the right to such 
collateral source payments. No provider of collateral source 
payments would be permitted to recover any amount against the 
claimant or against the claimant's recovery. The provision 
would apply to settlements as well as actions resolved by the 
courts.
Senate amendment
      No provision.
Conference agreement
      The conference agreement does not include the House 
provision.

                   C. Alternative dispute resolution

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

                        III. Medical Volunteers

      (Section 310 of Senate bill.)
Current law
      The Federally Supported Health Centers Assistance Act of 
1992 (P.L. 102-501) provides protection from legal liability 
for certain health professionals providing services under the 
Public Health Service Act P.L. 104-73 made the provision 
permanent.
House bill
      No provision.
Senate amendment
      Section 310 of the bill would be known as the Medical 
Volunteer Act. It would provide that under certain 
circumstances a health care professional would be regarded for 
purposes of a malpractice claim to be a Federal employee for 
purposes of the Federal tort claims provisions of title 28 of 
the U.S. Code. Specifically this would occur when such 
professional provided services to a medically underserved 
person without receiving compensation for such services. The 
professional would be deemed to have provided services without 
providing compensation only if prior to furnishing services the 
professional: (i) agreed to furnish services without charge to 
any person, including any health insurance plan or program 
under which the recipient is covered; and (ii) provided the 
recipient with adequate notice (as determined by the Secretary) 
of the limited liability of the professional. These provisions 
would preempt any State law to the extent such law was 
inconsistent; they would not preempt any State law that 
provided greater incentives or protections.
      A medically underserved person would be defined as a 
person residing in either: (I) a medically underserved area as 
defined for purposes of determining a medically underserved 
population under section 330 of the Public Health Service Act; 
or (ii) a health professional shortage area as defined in 
section 332 of that Act. Further the individual would have to 
receive care in a facility substantially comparable to any of 
those designated in the Federally-Supported Health Centers Act, 
as determined in regulations of the Secretary.
Conference agreement
      The conference agreement includes the Senate provision. 
This provision extends Federal Tort Claims Act coverage to 
certain medical volunteers in free clinics in order to expand 
access to health care services to low-income individuals in 
medically underserved areas. Such coverage is currently 
provided in the Public Health Service Act to certain community 
and other health centers under the Federally Supported Health 
Centers Assistance Act. The provision tracks to the extent 
possible the provisions of that Act with respect to the 
coverage provided, quality assurance, and the process by which 
a free clinic applies to have a free clinic health professional 
deemed an employee of the Public Health Service.
      Health professionals must meet certain conditions before 
they are deemed employees of the Public Health Service Act. 
They must be licensed or certified in accordance with 
applicable law and they must be volunteers; they may not 
receive compensation for the services in the form of salary, 
fees, or third-party payments. However, they may receive 
reimbursement from the clinic for reasonable expenses, such as 
costs of transportation and the cost of supplies they provide. 
Further, the free clinic may receive a voluntary donation from 
the individual served.
      Eligible health professionals must provide qualifying 
services (i.e., otherwise available for Medicaid reimbursement) 
at a free clinic or through programs or events conducted by the 
clinic. These programs or events may include the provision of 
health services in a clinic-owned or clinic-operated mobile van 
or at a booth in a health fair. They may not include the 
provision of health services in a private physician's office 
following a referral from the free clinic. The health care 
professional or the free clinic must provide prior written 
notice of the extent of the limited liability to the 
individual. This notice should include written disclosure, 
understandable to a reasonable person, given a reasonable 
amount of time prior to the provision of services. Separate 
notice need not be provided by each professional nor prior to 
each discrete service but adequate written notice must be 
received by each individual.
      The free clinic must be licensed or certified under 
applicable law and may not impose a charge on or accept 
reimbursement from any private or public third-party payor. The 
free clinic may, however, receive voluntary donations from 
individuals receiving health care services and is not precluded 
from receiving donations, grants, contracts, or awards from 
private or public sources for the general support of the 
clinic, or for specific purposes other than for payment or 
reimbursement for a health care service.
      A free clinic must apply, consistent with the provisions 
applicable to community health centers, to have each health 
care professional ``deemed'' an employee of the Public Health 
Service Act, and therefore eligible for coverage under the 
Federal Tort Claims Act. A free clinic may not be deemed such 
an employee under this provision.
      The Committee is aware that each of the 50 states have 
passed laws to limit the liability of volunteers in a variety 
of circumstances. This provision does not preempt those laws 
beyond the preemption provided in the Federal Tort Claims Act. 
Instead, the United States shall be liable in the same manner 
and to the same extent as a private individual in the same 
circumstances under State law.
      The provision applies only to causes of action filed 
against a health professional for acts or omissions occurring 
on or after the date on which the health professional is 
determined by the Secretary to be a ``free clinic health 
professional.''
      The provision establishes for free clinics funding and 
estimating mechanisms that match to the extent possible those 
for community health centers. No funds appropriated for 
purposes of community health centers will be available to free 
clinics.

                          4. Other provisions

          I. Extension of Medicare Secondary Payer Provisions

      (Sec. 621 of Senate Amendment.)
Current law
      Generally Medicare is the ``primary payer,'' that is, it 
pays health claims first, with an individual's private or other 
public insurance filling in some or all of Medicare's coverage 
gaps. However, in certain instances, the individual's other 
coverage pays first, while Medicare is the secondary payer. 
This phenomenon is referred to as the MSP program. A group 
health plan offered by an employer (with 20 or more employees 
is required to offer workers age 65 or over (and workers 
spouses age 65 or over) the same group health insurance 
coverage as is offered to younger workers. If the worker 
accepts the coverage, the employer is the primary payer, with 
Medicare becoming the secondary payer.
      Similarly, a group health plan offered by a large 
employer (100 or more employees) is the primary payer for 
employees or their dependents who are on the Medicare 
disability program. The provision applies only to persons 
covered under the group plan because the employee is in 
``current employment status'' (i.e. is an employee or is 
treated as an employee by the employer). The MSP provision for 
the disabled population expires October 1, 1998.
      The MSP provisions apply to end-stage renal (ESRD) 
beneficiaries with employer group health plans, regardless of 
employer size. The group health plan is the primary payer for 
18 months for persons who become eligible for Medicare ESRD 
benefits. The employer's role as primary payer is limited to a 
maximum of 21 months (18 months plus the usual 3-month waiting 
period for Medicare ESRD coverage). The 18-month MSP provisions 
for the ESRD population expire October 1, 1998; at that time 
the period would revert to 12 months.
      The law authorizes a data match program which is intended 
to identify potential secondary payer situations. Medicare 
beneficiaries are matched against data contained in Social 
Security Administration (SSA) and Internal Revenue Service 
(IRS) files to identify cases in which a working beneficiary 
(or working spouse) may have employer-based health insurance 
coverage. Cases of previous incorrect Medicare payments are 
identified and recoveries are attempted. The authority for the 
program extends through Sept. 30, 1998.
House bill
      No provision.
Senate Amendment
      The provision would make permanent the MSP provisions for 
the disabled and the 18-month period for the ESRD population. 
It would also make permanent the data match requirement.
Conference agreement
      The conference agreement does not include the Senate 
provision.

                Title III. Tax-Related Health Provisions

                      a. medical savings accounts

      (Sec. 301 of the House bill.)
Present law
      The tax treatment of health expenses depends on whether 
the individual is an employee or self employed, and whether the 
individual is covered under an employer-sponsored health plan. 
Employer contributions to a health plan for coverage for the 
employee and the employee's spouse and dependents is excludable 
from the employee's income and wages for social security tax 
purposes. Self-employed individuals are entitled to deduct 30 
percent of the amount paid for health insurance for a self-
employed individual and his or her spouse or dependents. Any 
individual who itemizes tax deductions may deduct unreimbursed 
medical expenses (including expenses for medical insurance) 
paid during the year to the extent that the total of such 
expenses exceeds 7.5 percent of the individual's adjusted gross 
income (``AGI''). Present law does not contain any special 
rules for medical savings accounts.
House bill
            In general
      Within limits, contributions to a medical savings account 
(``MSA'') are deductible if made by an eligible individual and 
are excludable from income (and wages for social security 
purposes) if made by the employer of an eligible individual. 
Earnings on amounts in an MSA are not currently taxable. 
Distributions from an MSA for medical expenses are not taxable.
            Eligible individuals
      An individual is eligible to make a deductible 
contribution to an MSA (or to have employer contributions made 
on his or her behalf) if the individual is covered under a high 
deductible health plan and is not covered under another health 
plan (other than a plan that provides certain permitted 
coverage). An individual with other coverage in addition to a 
high deductible plan is still eligible for an MSA if such other 
coverage is certain permitted insurance or is coverage (whether 
provided through insurance to otherwise) for accidents, 
disability, dental care, vision care, or long-term care. 
Permitted insurance is (1) Medicare supplemental insurance; (2) 
insurance if substantially all of the coverage provided under 
such insurance relates to (a) liabilities incurred under 
worker's compensation law, (b) tort liabilities, (c) 
liabilities relating to ownership or use of property (e.g., 
auto insurance), or (d) such other similar liabilities as the 
Secretary may prescribe by regulations, (3) insurance for a 
specified disease or illness, and (4) insurance that provides a 
fixed payment for hospitalization. An individual is not 
eligible to make deductible contributions to an MSA for a year 
if any employer contributions are made to an MSA on behalf of 
the individual for the year.
            Tax treatment of and limits on contributions
      Individuals contributions to an MSA are deductible 
(within limits) in determining AGI. Employer contributions are 
excludable (within the same limits) from gross income and wages 
for employment tax purposes, except that this exclusion does 
not apply to contributions made through a cafeteria plan. The 
maximum amount of contributions that can be deducted or 
excluded for a year is equal to the lesser of (1) the 
deductible under the high deductible health plan or (2) $2,000 
in the case of single coverage and $4,000 if the high 
deductible plan covers the individual and a spouse or 
dependent. The annual limit is the sum of the limits determined 
separately for each month, based on the individual's status as 
of the first day of the month. The maximum contribution limit 
to an MSA is determined separately for each spouse in a married 
couple. In no event can the maximum contribution limit exceed 
$4,000 for a family. The dollar limits are indexed for medical 
inflation and rounded to the nearest multiple of $50.
            Definition of high deductible health plan
      A high deductible health plan is a health plan with a 
deductible of at least $1,500 in the case of single coverage 
and $3,000 in the case of coverage of more than one individual. 
These dollar limits are indexed for medical inflation, rounded 
to the nearest multiple of $50.
            Tax treatment of MSAs
      Earnings on amounts in an MSA are not currently 
includible in income.
            Taxation of distributions
      Distributions from an MSA for the medical expenses of the 
individual and his or her spouse or dependents are excludable 
from income. For this purpose, medical expenses do not include 
expenses for insurance other than long-term care insurance, 
premiums for health care continuation coverage, and premiums 
for health care coverage while an individual is receiving 
unemployment compensation under Federal or State law.
      Distributions that are not for medical expenses are 
includible in income. Such distributions are also subject to an 
additional 10-percent tax unless made after age 59\1/2\, death 
or disability.
      Upon death, if the beneficiary is the individual's 
surviving spouse, the spouse may continue the MSA as his or her 
own. Otherwise, the beneficiary must include the MSA balance in 
income in the year of death. If there is no beneficiary, the 
MSA balance is includible on the final return of the decedent. 
In any case, no estate tax applies.
            Definition of MSA
      In general, an MSA is a trust or custodial account 
created exclusively for the benefit of the account holder and 
is subject to rules similar to those applicable to individual 
retirement arrangements.
            Effective date
      Taxable years beginning after December 31, 1996.
Senate amendment
      The Senate amendment does not contain provisions 
providing favorable tax treatment for MSAs. However, the Senate 
amendment amends the Public Health Services Act to permit 
health maintenance organizations to charge deductibles to 
individuals with an MSA. In addition, the Senate amendment 
provides that it is the sense of the Committee on Labor and 
Human Resources that the establishment of MSAs should be 
encouraged as part of any health insurance legislation passed 
by the Senate through the use of tax incentives relating to 
contributions to, the income growth of, and the qualified use 
of, MSAs. The Senate amendment also provides that it is the 
sense of the Senate that the Congress should take measures to 
further the purposes of the Senate amendment, including any 
necessary changes to the Internal Revenue Code to encourage 
groups and individuals to obtain health coverage, and to 
promote access, equity, portability, affordability, and 
security of health benefits.
Conference agreement
      The conference agreement follows the House bill, with 
modifications.
            In general
      Within limits, contributions to a medical savings account 
(``MSA'') are deductible if made by an eligible individual and 
are excludable if made by the employer of an eligible 
individual. Earnings on amounts in an MSA are not currently 
taxable. Distributions from an MSA for medical expenses are not 
taxable.
            Eligible individuals
      Beginning in 1997, MSAs are available to employees 
covered under an employer-sponsored high deductible plan of a 
small employer and self-employed individuals. An employer is a 
small employer if it employed, on average, no more than 50 
employees during either the preceding or the second preceding 
year.
      In determining whether an employer is a small employer, a 
preceding year is not taken into account unless the employer 
was in existence throughout such year. In the case of an 
employer that was not in existence through the first preceding 
year, the determination of whether the employer has no more 
than 50 employees is based on the average number of employees 
that the employer reasonably expects to employ in the current 
year. In determining the number of employees of an employer, 
employers under common control are treated as a single 
employer.
      In order for an employee of an eligible employer to be 
eligible to make MSA contributions (or to have employer 
contributions made on his or her behalf), the employee must be 
covered under an employer-sponsored high deductible health plan 
and must not be covered under any other health plan (other than 
a plan that provides certain permitted coverage). In the case 
of an employee, contributions can be made to an MSA either by 
the individual or by the individual's employer. However, an 
individual is not eligible to make contributions to an MSA for 
a year if any employer contributions are made to an MSA on 
behalf of the individual for the year.
      Similarly, in order to be eligible to make contributions 
to an MSA, a self-employed individual must be covered under a 
high deductible health plan and no other health plan (other 
than a plan that provides certain permitted coverage).
      An individual with other coverage in addition to a high 
deductible plan is still eligible for an MSA if such other 
coverage is certain permitted insurance or is coverage (whether 
provided through insurance to otherwise) for accidents, 
disability, dental care, vision care, or long-term care. 
Permitted insurance is: (1) Medicare supplemental insurance; 
(2) insurance if substantially all of the coverage provided 
under such insurance relates to (a) liabilities incurred under 
worker's compensation law, (b) tort liabilities, (c) 
liabilities relating to ownership or use of property (e.g., 
auto insurance), or (d) such other similar liabilities as the 
Secretary may prescribe by regulations, (3) insurance for a 
specified disease or illness, and (4) insurance that provides a 
fixed payment for hospitalization.
      If a small employer with an MSA plan (i.e., the employer 
or its employees made contributions to an MSA) ceases to become 
a small employer (i.e., exceeds the 50-employee limit), then 
the employer (and its employees) can continue to establish and 
make contributions to MSAs (including contributions for new 
employees and employees that did not previously have an MSA) 
until the year following the first year in which the employer 
has more than 200 employees. After that, those employees who 
had an MSA (to which individual or employer contributions were 
made in any year) can continue to make contributions (or have 
contributions made on their behalf) even if the employer has 
more than 200 employees. For example, suppose Employer A has 48 
employees in 1995 and 1996, and 205 employees in 1997 and 1998. 
A would be a small employer in 1997 and 1998 because it has 50 
or fewer employees in the preceding or the second preceding 
year. Employer A would still be considered a small employer in 
1999. However, in years after 1999, Employer A would not be 
considered a small employer (even if the number of employees 
fell to 50 or below), and in years after 1999, only employees 
who previously had MSA contributions could make new MSA 
contributions (or have employer contributions made on their 
behalf).
            Tax treatment of and limits on contributions
      Individual contributions to an MSA are deductible (within 
limits) in determining AGI (i.e., ``above the line''). In 
addition, employer contributions are excludable (within the 
same limits), except that this exclusion does not apply to 
contributions made through a cafeteria plan.
      In the case of a self-employed individual, the deduction 
cannot exceed the individual's earned income from the trade or 
business with respect to which the high deductible plan is 
established. In the case of an employee, the deduction cannot 
exceed the individual's compensation attributable to the 
employer sponsoring the high deductible plan in which the 
individual is enrolled.
      The maximum annual contribution that can be made to an 
MSA for a year is 65 percent of the deductible under the high 
deductible plan in the case of individual coverage and 75 
percent of the deductible in the case of family coverage. No 
other dollar limits on the maximum contribution apply. The 
annual contribution limit is the sum of the limits determined 
separately for each month, based on the individual's status and 
health plan coverage as of the first day of the month.
      Contributions for a year can be made until the due date 
for the individual's tax return for the year (determined 
without regard to extensions).
      In order to facilitate application of the cap on the 
number of MSA participants, described below, the employer is 
required to report employer MSA contributions, and the 
individual is required to report such employer MSA 
contributions on the individual's tax return.
            Comparability rule for employer contributions
      If an employer provides high deductible health plan 
coverage coupled with an MSA to employees and makes employer 
contributions to the MSAs, the employer must make available a 
comparable contribution on behalf of all employees with 
comparable coverage during the same period. Contributions are 
considered comparable if they are either of the same amount or 
the same percentage of the deductible under the high deductible 
plan. The comparability rule is applied separately to part-time 
employees (i.e., employees who are customarily employed for 
fewer than 30 hours per week). No restrictions are placed on 
the ability of the employer to offer different plans to 
different groups of employees.
      For example, suppose an employer maintains two high 
deductible plans, Plan A, with a deductible of $1,500 for 
individual coverage and $3,000 for family coverage, and Plan B, 
with a deductible of $2,000 for individual coverage and $4,000 
for family coverage. The employer offers an MSA contribution to 
full-time employees in Plan A of $500 for individual coverage 
and $750 for family coverage. In order to satisfy the 
comparability rule, the employer would have to offer full-time 
employees covered under Plan B one of the following MSA 
contributions: (1) $500 for employees with individual coverage 
and $750 for employees with family coverage or (2) $667 for 
employees with individual coverage and $1,000 for employees 
with family coverage. Different contributions (or no 
contributions) could be made for part-time employees covered 
under either high deductible plan.
      If employer contributions do not comply with the 
comparability rule during a period, then the employer is 
subject to an excise tax equal to 35 percent of the aggregate 
amount contributed by the employer to MSAs of the employer for 
that period. The excise tax is designed as a proxy for the 
denial of employer contributions. In the case of a failure to 
comply with the comparability rule which is due to reasonable 
cause and not to willful neglect, the Secretary may waive part 
of all of the tax imposed to the extent that the payment of the 
tax would be excessive relative to the failure involved.
      For purposes of the comparability rule, employers under 
common control are aggregated in the same manner as in 
determining whether the employer is a small employer. The 
comparability rule does not fail to be satisfied in a year if 
the employer is precluded from making contributions for all 
employees with high deductible plan coverage because the 
employer has more than 200 employees or due to operation of the 
cap during the initial 4-year period.
            Definition of high deductible plan
      A high deductible plan is a health plan with an annual 
deductible of at least $1,500 and no more than $2,250 in the 
case of individual coverage and at least $3,000 and no more 
than $4,500 in the case of family coverage. In addition, the 
maximum out-of-pocket expenses with respect to allowed costs 
(including the deductible) must be no more than $3,000 in the 
case of individual coverage and no more than $5,500 in the case 
of family coverage. Beginning after 1998, these dollar amounts 
are indexed for inflation in $50 dollar increments based on the 
consumer price index. A plan does not fail to qualify as a high 
deductible plan merely because it does not have a deductible 
for preventive care as required by State law.
      As under present law, State insurance commissions would 
have oversight over the issuance of high deductible plans 
issued in conjunction with MSAs and could impose additional 
consumer protections. It is intended that the National 
Association of Insurance Commissioners (``NAIC'') will develop 
model standards for high deductible plans that individual 
States could adopt.
            Tax treatment of MSAs
      Earnings on amounts in an MSA are not currently 
includible in income.
            Taxation of distributions
      Distributions from an MSA for the medical expenses of the 
individual and his or her spouse or dependents generally are 
excludable from income. However, in any year for which a 
contribution is made to an MSA, withdrawals from an MSA 
maintained by that individual are excludable from income only 
if the individual for whom the expenses were incurred was 
eligible to make an MSA contribution at the time the expenses 
were incurred. This rule is designed to ensure that MSAs are in 
fact used in conjunction with a high deductible plan, and that 
they are not primarily used by other individuals who have 
health plans that are not high deductible plans. For example, 
suppose that, in 1997, individual A is covered by a high 
deductible plan, and A's spouse (``B'') is covered by a health 
plan that is not a high deductible plan. A makes contributions 
to an MSA for 1997. Withdrawals from the MSA to pay B's medical 
expenses incurred in 1997 would be includible in income (and 
subject to the additional tax on nonmedical withdrawals) 
because B is not covered by a high deductible plan.
      For this purpose, medical expenses are defined as under 
the itemized deduction for medical expenses, except that 
medical expenses do not include expenses for insurance other 
than long-term care insurance, premiums for health care 
continuation coverage, and premiums for health care coverage 
while an individual is receiving unemployment compensation 
under Federal or State law.
      Distributions that are not for medical expenses are 
includible in income. Such distributions are also subject to an 
additional 15-percent tax unless made after age 65, death, or 
disability.
            Estate tax treatment
      Upon death, any balance remaining in the decedent's MSA 
is includible in his or her gross estate.
      If the account holder's surviving spouse is the named 
beneficiary of the MSA, then, after the death of the account 
holder, the MSA becomes the MSA of the surviving spouse and the 
amount of the MSA balance may be deducted in computing the 
decedent's taxable estate, pursuant to the estate tax marital 
deduction provided in Code section 2056. The MSA qualifies for 
the marital deduction because the account holder has sole 
control over disposition of the assets in the MSA. The 
surviving spouse is not required to include any amount in 
income as a result of the death; the general rules applicable 
to MSAs apply to the surviving spouse's MSA (e.g., the 
surviving spouse is subject to income tax only on distributions 
from the MSA for nonmedical purposes). The surviving spouse can 
exclude from income amounts withdrawn from the MSA for expenses 
incurred by the decedent prior to death, to the extent they 
otherwise are qualified medical expenses.
      If, upon death, the MSA passes to a named beneficiary 
other than the decedent's surviving spouse, the MSA ceases to 
be an MSA as of the date of the decedent's death, and the 
beneficiary is required to include the fair market value of MSA 
assets as of the date of death in gross income for the taxable 
year that includes the date of death. The amount includable in 
income is reduced by the amount in the MSA used, within one 
year of the death, to pay qualified medical expenses incurred 
prior to the death. As is the case with other MSA 
distributions, whether the expenses are qualified medical 
expenses is determined as of the time the expenses were 
incurred. In computing taxable income, the beneficiary may 
claim a deduction for that portion of the Federal estate tax on 
the decendent's estate that was attributable to the amount of 
the MSA balance (calculated in accordance with the present-law 
rules relating to income in respect of a decedent set forth in 
sec. 691(c)).
      If there is no named beneficiary for the decedent's MSA, 
the MSA ceases to be an MSA as of the date of death, and the 
fair market value of the assets in the MSA as of such date are 
includible in the decedent's gross income for the year of the 
death. This rule applies in all cases in which there is no 
named beneficiary, even if the surviving spouse ultimately 
obtains the right to MSA assets (e.g., if the surviving spouse 
is the sole beneficiary of the decedent's estate). Because of 
the significant tax consequences if a married individual fails 
to name his or her spouse as the MSA beneficiary, even if the 
rights to MSA assets are otherwise acquired by the surviving 
spouse, it is anticipated that the marketing materials 
describing other tax aspects of MSAs will explain the 
consequences of failure to name the spouse as the beneficiary.
            Cap on taxpayers utilizing MSAs
      In general.--The number of taxpayers benefiting annually 
from an MSA contribution is limited to a threshold level 
(generally 750,000 taxpayers). If it is determined in a year 
that the threshold level has been exceeded (called a ``cut-
off'' year) then, in general, for succeeding years during the 
4-year pilot period 1997-2000, only those individuals who (1) 
made an MSA contribution or had an employer MSA contribution 
for the year or a preceding year (i.e. are active MSA 
participants) or (2) are employed by a participating employer, 
would be eligible for an MSA contribution. In determining 
whether the threshold for any year has been exceeded, MSAs of 
individuals who were not covered under a health insurance plan 
for the six month period ending on the date on which coverage 
under a high deductible plan commences would not be taken into 
account.\1\ However, if the threshold level is exceeded in a 
year, previously uninsured individuals would be subject to the 
same restriction on contributions in succeeding years as other 
individuals. That is, they would not be eligible for an MSA 
contribution for a year following a cut-off-year unless they 
are an active MSA participant (i.e. had an MSA contribution for 
the year or a preceding year) or are employed by a 
participating employer.
---------------------------------------------------------------------------
    \1\ Permitted coverage, as described above, does not constitute 
coverage under a health insurance plan for this purpose.
---------------------------------------------------------------------------
      In a year after a cut-off year, employees of a 
participating employer can establish new MSAs and make new 
contributions (even if the employee is a new employee or did 
not previously have an MSA). An employer is a participating 
employer if (1) the employer made any MSA contributions on 
behalf of employees in any preceding year or (2) at least 20 
percent of the employees covered under a high deductible plan 
made an MSA contribution of at least $100 in the preceding 
year.
      In the case of a cut-off year before 2000, an individual 
is not an eligible individual or an active MSA participant 
unless the individual was first covered under a high deductible 
plan on or before the cut-off date. The cut-off date is 
generally October 1 of the cut-off year. However, if the 
individual was enrolled in a plan pursuant to a regularly 
scheduled enrollment period, then the cut-off date is December 
31. Similarly, an employer is not considered a participating 
employer if it first offered coverage after October 1 of a cut-
off year unless the high deductible plan is offered pursuant to 
a regularly scheduled enrollment period. In addition, a self-
employed individual is not considered an eligible individual or 
an active MSA participant unless the individual was covered 
under a high deductible plan on or before November 1 of a cut-
off year.
      These rules are designed to prevent high deductible plans 
from being first offered just before the limitation on MSAs is 
effective in order to avoid application of the cap. They are 
not, however, intended to preclude individuals who first enroll 
in an employer-sponsored high deductible health plan or 
employees of employers that adopt a high deductible plan in a 
cut-off year due to normal health plan operation from having 
MSAs. For example, suppose a small employer offers a high 
deductible plan that provides that new employees may be covered 
under the plan beginning the first day of the month after the 
month in which they are hired. New employee A (whose previous 
coverage was not high deductible coverage) is hired on October 
15, and is enrolled in the high deductible plan November 1 of 
that year. If the year is a cut-off year, Employee A is an 
eligible individual and, if he has an MSA contribution for the 
year, an active participant for the year because he was 
enrolled pursuant to a regularly scheduled enrollment period. 
Similarly, suppose that employer A is a small employer and does 
not currently offer health care coverage. In 1997, A decides to 
offer health plan coverage to its employees, including a high 
deductible plan coupled with an MSA. A takes steps to provide 
such coverage on or before October 1 of the year (e.g., making 
arrangements with insurance companies or distributing plan 
material to employees). The first enrollment period for the 
health plans begins September 1, and coverage under the plan 
will begin November 1. If the year is a cut-off year, the 
employer is a participating employer because the plan was 
established pursuant to a regularly scheduled enrollment 
period.
      Under certain circumstances, MSA participation may be 
reopened after a cut-off year so that MSAs are again available 
to all individuals in the qualifying group of self-employed 
individuals and employees of small employers.
      For the 1997 tax year, taxpayers are permitted to 
establish MSAs provided that they are in the qualifying group 
of self-employed individuals or employees working for small 
employers.
            Rules for 1997
      On or before June 1, 1997, each trustee or custodian of 
an MSA (e.g., insurance company or financial institution) is 
required to report to the Internal Revenue Service (``IRS'') 
the total number of MSAs established as of April 30, 1997, for 
which it acts as trustee or custodian, including the number of 
MSAs established for previously uninsured individuals.\2\ If, 
based on this reporting, the number of MSAs established (but 
excluding those established for previously uninsured 
individuals) as of April 30, 1997, exceeds 375,000 (50 percent 
of 750,000), on or before September 1, 1997, the IRS would 
publish guidance providing that only active MSA participants or 
employees of participating employers would be eligible for an 
MSA contribution for the 1998 tax year and thereafter. If this 
threshold is exceeded, an individual who is first covered by an 
employer-sponsored high deductible health plan after September 
1, 1997, is not an eligible individual or an active MSA 
participant (and therefore cannot have an MSA for 1997 or a 
subsequent year) unless the high deductible coverage is elected 
pursuant to a regularly scheduled enrollment period. Similarly, 
an employer is not considered a participating employer if it 
first offered a high deductible plan after September 1, 1997, 
unless the plan was offered pursuant to a regularly scheduled 
enrollment period. Also, a self-employed individual would not 
be an eligible individual or an active MSA participant unless 
the individual was first covered under a high deductible plan 
on or before October 1, 1997.
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    \2\ This report would include the name and social security number 
of taxpayers establishing an MSA. Failures to report are subject to a 
penalty of $25 for each MSA up to a maximum of $5,000. A trustee or 
custodian required to report could elect to do so on a company-wide or 
branch-by-branch basis.
---------------------------------------------------------------------------
      If the 375,000 cap is not exceeded, then another 
determination of MSA participation will be made, as follows. On 
or before August 1, 1997, each trustee or custodian of an MSA 
(e.g., insurance company or financial institution) is required 
to report to the Internal Revenue Service (``IRS'') the total 
number of MSAs established as of June 30, 1997, for which it 
acts as trustee or custodian, including the number of MSAs 
established for previously uninsured individuals. If, based on 
this reporting, the number of MSAs established (but excluding 
those established for previously uninsured individuals) exceeds 
the 1997 threshold level of 525,000 (70 percent of 750,000), on 
or before October 1, 1997, the IRS would publish guidance 
providing that only active MSA participants or employees of 
participating employers would be eligible for an MSA 
contribution for the 1998 tax year and thereafter. If the 1997 
threshold is exceeded, an individual who is first covered by an 
employer-sponsored high deductible health plan after October 1, 
1997, is not an eligible individual or an active MSA 
participant (and therefore cannot have an MSA for 1997 or a 
subsequent year) unless the high deductible coverage is elected 
pursuant to a regularly scheduled enrollment period. Similarly, 
an employer is not considered a participating employer if it 
first offered a high deductible plan after October 1, 1997, 
unless the plan was offered pursuant to a regularly scheduled 
enrollment period. Also, a self-employed individual would not 
be an eligible individual or an active MSA participant unless 
the individual was first covered under a high deductible plan 
on or before November 1, 1997.
      If the 1997 threshold level is not exceeded, all 
taxpayers in the qualifying eligible group (i.e., self-employed 
individuals and employees working for employers with 50 or 
fewer employees) would be permitted to have MSA contributions 
for the 1998 tax year.
            Rules for 1998 and succeeding years
      In general.--In 1998 and succeeding years, on or before 
August 1 of the year, each trustee or custodian of an MSA is 
required to report to the IRS the total number of MSAs 
established as of June 30 for the current year,\3\ including 
the number of such MSAs established for previously uninsured 
individuals. In addition, the IRS is directed to collect data 
with respect to the number of taxpayers showing an MSA 
contribution on their individual income tax returns for the 
prior year and the extent to which such taxpayers were 
previously uninsured.\4\ If, based on this information, the IRS 
determines as described below that the number of taxpayers 
anticipated to have MSA contributions (disregarding previously 
uninsured individuals) exceeds the applicable threshold level, 
the IRS is required to issue guidance to the public by no later 
than October 1. If this guidance is issued, then only taxpayers 
who are active MSA participants or who are employed by a 
participating employer would be entitled to MSA contributions 
in tax years following the year the guidance is issued.
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    \3\ That is, the report would not include MSAs to which 
contributions are made for the prior year.
    \4\ Each income tax return on which an MSA contribution is shown is 
treated as one taxpayer for purposes of the cap. It is anticipated that 
the IRS would adjust the actual return information to take into account 
MSAs that may have been established by late filers.
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      For 1998 and succeeding years, the threshold is exceeded 
if either of the following limits are exceeded. The numerical 
limit is exceeded if: (1) the number of MSA returns filed on or 
before April 1 of the year, plus the estimate of the number of 
MSA returns for such year that will be filed after such date 
exceeds the threshold, or (2) 90 percent of the amount 
determined under (1), plus 15/6ths of the MSAs established for 
the year before July 1 exceeds $750,000.
      1998.--In 1998, the IRS would analyze the return data 
from the filing of 1997 tax year returns and would determine, 
based on this data, the number of taxpayers with MSA 
contributions for 1997 and who were not previously uninsured. 
If the IRS determines that (1) MSA returns filed on or before 
April 15, 1998, plus the estimated number of MSA returns for 
1997 filed after such date exceeds 600,000, or (2) that 90 
percent of the MSA returns in (1), plus 15/6ths of the number 
of MSAs established for 1998 between January 1 and July 1, 
1998, the IRS would publish guidance on or before October 1, 
1998, advising taxpayers that only taxpayers who had previously 
had MSA contributions (i.e., for either the 1997 or 1998 tax 
year) or who are employed by a participating employer would be 
eligible for MSA contributions in succeeding tax years. If the 
1998 threshold is exceeded, an individual who is first covered 
by an employer-sponsored high deductible health plan after 
October 1, 1998, is not an eligible individual or an active MSA 
participant (and therefore cannot have an MSA for 1998 or a 
subsequent year) unless the high deductible coverage is elected 
pursuant to a regularly scheduled enrollment period. Similarly, 
an employer is not considered a participating employer if it 
first offered a high deductible plan after October 1, 1998, 
unless the plan was offered pursuant to a regularly scheduled 
enrollment period. Also, a self-employed individual would not 
be an eligible individual or an active MSA participant unless 
the individual was first covered under a high deductible plan 
on or before November 1, 1998.
      In the event that the threshold level had not been 
exceeded, all taxpayers in the qualifying eligible group would 
be permitted to establish MSAs during the 1999 tax year.
      1999.--In 1999, the IRS would analyze the return data 
from the filing of 1998 tax year returns and would determine, 
based on this data, the number of taxpayers with MSA 
contributions for 1998 and who were not previously uninsured. 
If the IRS determines that (1) MSA returns filed on or before 
April 15, 1999, plus the estimated number of MSA returns for 
1998 filed after such date exceeds 600,000, or (2) that 90 
percent of the MSA returns in (1), plus 1\5/6\ths of the number 
of MSAs established for 1998 between January 1 and July 1, 
1999, the IRS would publish guidance on or before October 1, 
1999, advising taxpayers that only taxpayers who had previously 
had MSA contributions (i.e., for the 1997, 1998, or 1999 tax 
year) or who are employed by a participating employer would be 
eligible for MSA contributions in succeeding tax years. If the 
1999 threshold is exceeded, an individual who is first covered 
by an employer-sponsored high deductible health plan after 
October 1, 1999, is not an eligible individual or an active MSA 
participant (and therefore cannot have an MSA for 1999 or a 
subsequent year) unless the high deductible coverage is elected 
pursuant to a regularly scheduled enrollment period. Similarly, 
an employer is not considered a participating employer if it 
first offered a high deductible plan after October 1, 1999, 
unless the plan was offered pursuant to a regularly scheduled 
enrollment period. Also, a self-employed individual would not 
be an eligible individual or an active MSA participant unless 
the individual was first covered under a high deductible plan 
on or before November 1, 1999.
      In the event that the threshold level had not been 
exceeded, all taxpayers in the qualifying eligible group would 
be permitted to establish MSAs during the 2000 tax year.
      Reopening of MSA participation.--If 1997 is a cut-off 
year, then in 1998, the IRS would (as described above) analyze 
the return data from the filing of 1997 tax year returns and 
would determine, based on this data, the number of taxpayers 
with MSA contributions for 1997 and who were not previously 
uninsured. If the IRS determines that MSA returns filed on or 
before April 15, 1998, plus the estimated number of MSA returns 
for 1997 filed after such date (disregarding MSAs of previously 
uninsured individuals) exceeds 750,000, then the IRS will 
announce by October 1, 1998, that MSAs will be available to all 
eligible individuals in the qualifying eligible group of self-
employed individuals and employees of small employers covered 
under a high deductible health plan during the first 6 months 
of 1999. Similarly, if 1998 is a cut-off year, then in 1999, 
MSA returns filed on or before April 15, 1999, plus the 
estimated number of MSA returns for 1998 filed after such date 
(disregarding MSAs of previously uninsured individuals) exceeds 
750,000, then IRS will announce by October 1, 1998, that MSAs 
will be available to all eligible individuals in the qualifying 
eligible group of self-employed individuals and employees of 
small employers with high deductible plan coverage during the 
first 6 months of 2000.
            End of pilot project
      After December 31, 2000, no new contributions may be made 
to MSAs except by or on behalf of individuals who previously 
had MSA contributions and employees who are employed by a 
participating employer. An employer is a participating employer 
if (1) the employer made any MSA contributions for any year to 
an MSA on behalf of employees or (2) at least 20 percent of the 
employees covered under a high deductible plan made MSA 
contributions of at least $100 in the year 2000.
      Self-employed individuals who made contributions to an 
MSA during the period 1997-2000 also may continue to make 
contributions after 2000.
            Measuring the effects of MSAs
      During 1997-2000, the Department of the Treasury will 
evaluate MSA participation and the reduction in Federal 
revenues due to such participation and make such reports of 
such evaluations to the Congress as the Secretary determines 
appropriate.
      The General Accounting Office is directed to contract 
with an organization with expertise in health economics, health 
insurance markets and actuarial science to conduct a study 
regarding the effects of MSAs in the small group market on (1) 
selection (including adverse selection), (2) health costs, 
including the impact on premiums of individuals with 
comprehensive coverage, (3) use of preventive care, (4) 
consumer choice, (5) the scope of coverage of high deductible 
plans purchased in conjunction with an MSA and (6) other 
relevant issues, to be submitted to the Congress by January 1, 
1999.
      The conferees intend that the study be broad in scope, 
gather sufficient data to fully evaluate the relevant issues, 
and be adequately funded. The conferees expect the study to 
utilize appropriate techniques to measure the impact of MSAs on 
the broader health care market, including in-depth analysis of 
local markets with high penetration. The conferees expect the 
study to evaluate the impact of MSAs on individuals and 
families experiencing high health care costs, especially low- 
and middle-income families.
            Definiton of MSA
      In general, an MSA is a trust or custodial account 
created exclusively for the benefit of the account holder and 
subject to rules similar to those applicable to individual 
retirement arrangements.
            Effective date
      The provisions are effective for taxable years beginning 
after December 31, 1996.

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

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

         c. treatment of long-term care insurance and services

      (Secs. 321-323 and 325-328 of the House bill and secs. 
411-415 and 421-424 of the Senate amendment.)
Present law
            In general
      Present law generally does not provide explicit rules 
relating to the tax treatment of long-term care insurance 
contracts or long-term care services. Thus, the treatment of 
long-term care contracts and services is unclear. Present law 
does provide rules relating to medical expenses and accident or 
health insurance.
            Itemized deduction for medical expenses
      In determining taxable income for Federal income tax 
purposes, a taxpayer is allowed an itemized deduction for 
unreimbursed expenses that are paid by the taxpayer during the 
taxable year for medical care of the taxpayer, the taxpayer's 
spouse, or a dependent of the taxpayer, to the extent that such 
expenses exceed 7.5 percent of the adjusted gross income of the 
taxpayer for such year (sec. 213). For this purpose, expenses 
paid for medical care generally are defined as amounts paid: 
(1) for the diagnosis, cure, mitigation, treatment, or 
prevention of disease (including prescription medicines or 
drugs and insulin), or for the purpose of affecting any 
structure or function of the body (other than cosmetic surgery 
not related to disease, deformity, or accident); (2) for 
transportation primarily for, and essential to, medical care 
referred to in (1); or (3) for insurance (including Part B 
Medicare premiums) covering medical care referred to in (1) and 
(2).
            Exclusion for amounts received under accident or health 
                    insurance
      Amounts received by a taxpayer under accident or health 
insurance for personal injuries or sickness generally are 
excluded from gross income to the extent that the amounts 
received are not attributable to medical expenses that were 
allowed as a deduction for a prior taxable year (sec. 104).
            Treatment of accident or health plans maintained by 
                    employers
      Contributions of an employer to an accident or health 
plan that provides compensation (through insurance or 
otherwise) to an employee for personal injuries or sickness of 
the employee, the employee's spouse, or a dependent of the 
employee, are excluded from the gross income of the employee 
(sec. 106). In addition, amounts received by an employee under 
such a plan generally are excluded from gross income to the 
extent that the amounts received are paid, directly or 
indirectly, to reimburse the employee for expenses for the 
medical care of the employee, the employee's spouse, or a 
dependent of the employee (sec. 105). for this purpose, 
expenses incurred for medical care are defined in the same 
manner as under the rules regarding the deduction for medical 
expenses.
      A cafeteria plan is an employer-sponsored arrangement 
under which employees can elect among cash and certain 
employer-provided qualified benefits. No amount is included in 
the gross income of a participant in a cafeteria plan merely 
because the participant has the opportunity to make such an 
election (sec. 125). Employer-provided accident or health 
coverage is one of the benefits that may be offered under a 
cafeteria plan.
      A flexible spending arrangement (``FSA'') is an 
arrangement under which an employee is reimbursed for medical 
expenses or other nontaxable employer-provided benefits, such 
as dependent care, and under which the maximum amount of 
reimbursement that is reasonably available to a participant for 
a period of coverage is not substantially in excess of the 
total premium (including both employee-paid and employer-paid 
portions of the premium) for such participant's coverage. Under 
proposed Treasury regulations, a maximum amount of 
reimbursement is not substantially in excess of the total 
premium if such maximum amount is less than 500 percent of the 
premium. An FSA may be part of a cafeteria plan or provided by 
an employer outside a cafeteria plan. FSAs are commonly used to 
reimburse employees for medical expenses not covered by 
insurance. If certain requirements are satisfied,\5\ amounts 
reimbursed for nontaxable benefits from an FSA are excludable 
from income.
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    \5\ These requirements include a requirement that a health FSA can 
only provide reimbursement for medical expenses (as defined in sec. 
213) and cannot provide reimbursement for premium payments for other 
health coverage and that the maximum amount of reimbursement under a 
health FSA must be available at all times during the period of 
coverage.
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            Health care continuation rules
      The health care continuation rules require that an 
employer must provide qualified beneficiaries the opportunity 
to continue to participate for a specified period in the 
employer's health plan after the occurrence of certain events 
(such as termination of employment) that would have terminated 
such participation (sec. 4980B). Individuals electing 
continuation coverage can be required to pay for such coverage.
House bill
            Tax treatment and definition of long-term care insurance 
                    contracts and qualified long-term care services
      Exclusion of long-term care proceeds.--A long-term care 
insurance contract generally is treated as an accident and 
health insurance contract. Amounts (other than policyholder 
dividends or premium refunds) received under a long-term care 
insurance contract generally are excludable as amounts received 
for personal injuries and sickness, subject to a cap of $175 
per day, or $63,875 annually, on per diem contracts only. If 
the aggregate amount of periodic payments under all qualified 
long-term care contracts exceeds the dollar cap for the period, 
then the amount of such excess payments is excludable only to 
the extent of the individual's costs (that are not otherwise 
compensated for by insurance or otherwise) for long-term care 
services during the period. The dollar cap is indexed by the 
medical care cost component of the consumer price index.
      Exclusion for employer-provided long-term care 
coverage.--A plan of an employer providing coverage under a 
long-term care insurance contract generally is treated as an 
accident and health plan. Employer-provided coverage under a 
long-term care insurance contract is not, however, excludable 
by an employee if provided through a cafeteria plan; similarly, 
expenses for long-term care services cannot be reimbursed under 
an FSA.\6\
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    \6\ The bill does not otherwise modify the requirements relating to 
FSAs. An FSA is defined as a benefit program providing employees with 
coverage under which specified incurred expenses may be reimbursed 
(subject to maximums and other reasonable conditions), and the maximum 
amount of reimbursement that is reasonably available to a participant 
is less than 500 percent of the value of the coverage.
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      Definition of long-term care insurance contract.--A long-
term care insurance contract is defined as any insurance 
contract that provides only coverage of qualified long-term 
care services and that meets other requirements. The other 
requirements are that (1) the contract is guaranteed renewable, 
(2) the contract does not provide for a cash surrender value or 
other money that can be paid, assigned, pledged or borrowed, 
(3) refunds (other than refunds on the death of the insured or 
complete surrender or cancellation of the contract) and 
dividends under the contract may be used only to reduce future 
premiums or increase future benefits, and (4) the contract 
generally does not pay or reimburse expenses reimbursable under 
Medicare (except where Medicare is a secondary payor, or the 
contract makes per diem or other periodic payments without 
regard to expenses).
      A contract does not fail to be treated as a long-term 
care insurance contract solely because it provides for payments 
on a per diem or other periodic basis without regard to 
expenses incurred during the period.
      Medicare duplication rules.--The bill provides that no 
provision of law shall be construed or applied so as to 
prohibit the offering of a long-term care insurance contract on 
the basis that the contract coordinates its benefits with those 
provided under Medicare. Thus, long-term care insurance 
contracts are not subject to the rules requiring duplication of 
Medicare benefits.
      Definition of qualified long-term care services.--
Qualified long-term care services means necessary diagnostic, 
preventive, therapeutic, curing, treating, mitigating and 
rehabilitative services, and maintenance or personal care 
services that are required by a chronically ill individual and 
that are provided pursuant to a plan of care prescribed by a 
licensed health care practitioner.
      Chronically ill individual.--A chronically ill individual 
is one who has been certified within the previous 12 months by 
a licensed health care practitioner as (1) being unable to 
perform (without substantial assistance) at least 2 activities 
of daily living for at least 90 days \7\ due to a loss of 
functional capacity, (2) having a similar level of disability 
as determined by the Secretary of the Treasury in consultation 
with the Secretary of Health and Human Services, or (3) 
requiring substantial supervision to protect such individual 
from threats to health and safety due to severe cognitive 
impairment. Activities of daily living are eating, toileting, 
transferring, bathing, dressing and continence.\8\
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    \7\ The 90-day period is not a waiting period. Thus, for example, 
an individual can be certified was chronically ill if the licensed 
health care practitioner certifies that the individual will be unable 
to perform at least 2 activities of daily living for at least 90 days.
    \8\ Nothing in the bill requires the contract to take into account 
all of the activities of daily living. For example, a contract could 
require that an individual be unable to perform (without substantial 
assistance) 2 out of any 5 such activities, or for another example, 3 
out of the 6 activities.
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      It is intended that an individual who is physically able 
but has a cognitive impairment such as Alzheimer's disease or 
another form of irreversible loss of mental capacity be treated 
similarly to an individual who is unable to perform (without 
substantial assistance) at least 2 activities of daily living. 
Because of the concern that eligibility for the medical expense 
deduction not be diagnosis-driven, the provision requires the 
cognitive impairment to be severe. It is intended that severe 
cognitive impairment mean a deterioration or loss in 
intellectual capacity that is measured by clinical evidence and 
standardized tests which reliably measure impairment in: (1) 
short- or long-term memory; (2) orientation to people, places 
or time; and (3) deductive or abstract reasoning. In addition, 
it is intended that such deterioration or loss place the 
individual in jeopardy of harming self or others and therefore 
require substantial supervision by another individual.
      A licensed health care practitioner is a physician (as 
defined in sec. 1861(r)(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 
dependents 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 of the deduction for medical expenses, 
qualified long-term care services do not include services 
provided to an individual by a relative or spouse (directly, or 
through a partnership, corporation, or other entity), unless 
the relative is a licensed professional with respect to such 
services, or by a related corporation (within the meaning of 
Code section 267(b) or 707(b)).\9\
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    \9\ The rule limiting such services provided by a relative or a 
related corporation does not apply for purposes of the exclusion for 
amounts received under a long-term care insurance contract, whether the 
contract is employer-provided or purchased by an individual. The 
limitation in unnecessary in such cases because it is anticipated that 
the insurer will monitor reimbursements to limit opportunities for 
fraud in connection with the performance of services by the taxpayer's 
relative or a related corporation.
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      Long-term care insurance premiums treated as medical 
expenses.--Long-term care insurance premiums that do not exceed 
specified dollar limits are treated as medical expenses for 
purposes of the itemized deduction for medical expenses.\10\ 
The limits are as follows:

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

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

      For taxable years beginning after 1997, these dollar 
limits are indexed for increases in the medical care component 
of the consumer price index. The Secretary of the Treasury, in 
consultation with the Secretary of Health and Human Services, 
is directed to develop a more appropriate index to be applied 
in lieu of the foregoing. Such an alternative might 
appropriately be based on increases in skilled nursing facility 
and home health care costs. It is intended that the Treasury 
Secretary annually publish the indexed amount of the limits as 
early in the year as they can be calculated.
      Deduction for long-term care insurance of self-employed 
individuals.--The present-law 30 percent deduction for health 
insurance expenses of self-employed individuals is phased up to 
50 percent under the bill. Because the bill treats payments of 
eligible long-term care insurance premiums in the same manner 
as medical insurance premiums, the self-employed health 
insurance deduction applies to eligible long-term care 
insurance premiums under the bill.
      Long-term care riders on life insurance contracts.--In 
the case of long-term care insurance coverage provided by a 
rider on or as part of a life insurance contract, the 
requirements applicable to long-term care insurance contracts 
apply as if the portion of the contract providing such coverage 
were a separate contract. The term ``portion'' means only the 
terms and benefits that are in addition to the terms and 
benefits under the life insurance contract without regard to 
long-term care coverage. As a result, if the applicable 
requirements are met by the long-term care portion of the 
contract, amounts received under the contract as provided by 
the rider are treated in the same manner as long-term care 
insurance benefits, whether or not the payment of such amounts 
causes a reduction in the contract's death benefit or cash 
surrender value. The guideline premium limitation applicable 
under section 7702(c)(2) is increased by the sum of charges 
(but not premium payments) against the life insurance 
contract's cash surrender value, the imposition of which 
reduces premiums paid for the contract (within the meaning of 
sec. 7702(f)(1)). In addition, it is anticipated that Treasury 
regulations will provide for appropriate reduction in premiums 
paid (within the meaning of sec. 7702(f)(1)) to reflect the 
payment of benefits under the rider that reduce the cash 
surrender value of the life insurance contract. A similar rule 
should apply in the case of a contract governed by section 
101(f) and in the case of the payments under a rider that are 
excludable under section 101(g) of the Code (as added by this 
bill).
      Health care continuation rules.--The health care 
continuation rules do not apply to coverage under a long-term 
care insurance contract.
            Inclusion of excess long-term care benefits
      In general, the bill provides that the maximum annual 
amount of long-term care benefits under a per diem type 
contract that is excludable from income with respect to an 
insured who is chronically ill (not including amounts received 
by reason of the individual being terminally ill) \11\ cannot 
exceed the equivalent of $175 per day for each day the 
individual is chronically ill. Thus, for per diem type 
contracts, the maximum annual exclusion for long-term care 
benefits with respect to any chronically ill individual (not 
including amounts received by reason of the individual being 
terminally ill) is $63,875 (for 1997). If payments under such 
contracts exceed the dollar limit, then the excess is 
excludable only to the extent the individual has incurred 
actual costs for long-term care services. If the insured is not 
the same as the holder of the contract, the insured may assign 
some or all of this limit to the contract holder at the time 
and manner prescribed by the Secretary.
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    \11\ Terminally ill is defined as under the provision of the bill 
relating to accelerated death benefits. In general, under that 
provision, an individual is considered to be terminally ill if he or 
she is certified as having an illness or physical condition that 
reasonably can be expected to result in death within 24 months of the 
date of the certification.
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      This $175 per day limit is indexed for inflation after 
1997 for increases in the medical care component of the 
consumer price index. The Treasury Secretary, in consultation 
with the Secretary of Health and Human Services, is directed to 
develop a more appropriate index, to be applied in lieu of the 
foregoing. Such an alternative might appropriately be based on 
increases in skilled nursing facility and home health care 
costs. It is intended that the Treasury Secretary annually 
publish the indexed amount of the limit as early in the year as 
it can be calculated.
      A payor of long-term care benefits (defined for this 
purpose to include any amount paid under a product advertised, 
marketed or offered as long-term care insurance) is required to 
report to the IRS the aggregate amount of such benefits paid to 
any individual during any calendar year, and the name, address 
and taxypayer identification number of such individual. A copy 
of the report must be provided to the payee by January 31 
following the year of payment, showing the name of the payor 
and the aggregate amount of benefits paid to the individual 
during the calendar year. Failure to file the report or provide 
the copy to the payee is subject to the generally applicable 
penalties for failure to file similar information reports.
            Consumer protection provisions
      Under the bill, long-term care insurance contracts, and 
issuers of contracts, are required to satisfy certain 
provisions of the long-term care insurance model Act and model 
regulations promulgated by the National Association of 
Insurance Commissioners (as adopted as of January 1993). The 
policy requirements relate to disclosure, nonforfeitability, 
guaranteed renewal or noncancellability, prohibitions on 
limitations and exclusions, extension of benefits, continuation 
or conversion of coverage, discontinuance and replacement of 
policies, unintentional lapse, post-claims underwriting, 
minimum standards, inflation protection, preexisting 
conditions, and prior hospitalization. The bill also provides 
disclosure and nonforfeiture requirements. The nonforfeiture 
provision gives consumers the option of selecting reduced paid-
up insurance, extended term insurance, or a shortened benefit 
period in the event a policyholder who elects a nonforfeiture 
provision is unable to continue to pay premiums. The 
requirements for issuers of long-term care insurance contracts 
relate to application forms, reporting requirements, marketing, 
appropriateness of purchase, format, delivering a shopper's 
guide, right to return, outline of coverage, group plans, 
policy summary, monthly reports on accelerated death benefits, 
and incontestability period. A tax is imposed equal to $100 per 
policy per day for failure to satisfy these requirements.
      Nothing in the bill prevents a State from establishing, 
implementing or continuing standards related to the protection 
of policyholders of long-term care insurance policies, if such 
standards are not inconsistent with standards established under 
the bill.
            Effective date
      The provisions defining long-term care insurance 
contracts and qualified long-term care services apply to 
contracts issued after December 31, 1996. Any contract issued 
before January 1, 1997, that met the long-term care insurance 
requirements in the State in which the policy was sitused at 
the time it was issued shall be treated as a long-term care 
insurance contract, and services provided under or reimbursed 
by the contract treated as qualified long-term care services.
      A contract providing for long-term care insurance may be 
exchanged for a long-term care insurance contract (or the 
former cancelled and the proceeds reinvested in the latter 
within 60 days) tax free between the date of enactment and 
January 1, 1998. Taxable gain would be recognized to the extent 
money or other property is received in the exchange.
      The issuance or conformance of a rider to a life 
insurance contract providing long-term care insurance coverage 
is not treated as a modification or a material change for 
purposes of applying sections 101(f), 7702, and 7702A of the 
Code.
      The provision relating to treatment of eligible long-term 
care premiums as a medical expense is effective for taxable 
years beginning after December 31, 1996. The provision treating 
amounts paid for long-term care services as a medical expense 
(for purposes of the medical expense deduction) is effective 
for services furnished in taxable years beginning after 
December 31, 1997.
      The provisions relating to the maximum exclusion for 
certain long-term care benefits and reporting are effective for 
taxable years beginning after December 31, 1996. Thus, the 
initial year in which reports will be filed with the IRS and 
copies provided to the payee will be 1998, with respect to 
long-term care benefits paid in 1997.
Senate amendment
      The Senate amendment is the same as the House bill, 
except as follows.
            Life insurance company reserves
      In determining reserves for insurance company tax 
purposes, the Senate amendment provides that the Federal income 
tax reserve method applicable for a long-term care insurance 
contract issued after December 31, 1996, is the method 
prescribed by the National Association of Insurance 
Commissioners (``NAIC'') (or, if no reserve method has been so 
prescribed, a method consistent with the tax reserve method for 
life insurance, annuity or noncancellable accident and health 
insurance contracts, whichever is most appropriate). The method 
currently prescribed by the NAIC for long-term care insurance 
contracts is the one-year full preliminary term method. As 
under present law, however, in no event may the tax reserve for 
a contract as of any time exceed the amount which would be 
taken into account with respect to the contract as of such time 
in determining statutory reserves.
            Exchanges of life insurance and other contracts for long-
                    term care insurance contracts
      The exchange of a life insurance contract or an endowment 
or annuity contract for a qualified long-term care insurance 
contract is not taxable under the Senate amendment.
            Distributions from IRAs and retirement plans for long-term 
                    care insurance
      The Senate amendment permits certain plans to make 
distributions to pay premiums for long-term care insurance for 
the individual or the individual's spouse and provides that the 
10-percent tax on early withdrawals does not apply to such 
distributions. The provision applies to distributions from 
individual retirement arrangements (``IRAs'') and distributions 
attributable to elective deferrals to qualified cash or 
deferred arrangements (sec. 401(k) plans), tax-sheltered 
annuities (sec. 403(b) plans), nonqualified deferred 
compensation plans of governmental or tax-exempt employers 
(sec. 457 plans), and section 501(c)(18) plans used to pay 
premiums for long-term care insurance for the individual or the 
individual's spouse. Such distributions are includable in 
income (as under present law).
            Effective dates
      The effective dates are the same as the House bill, 
except as follows.
      The provision treating long-term care services as a 
medical expense is effective for taxable years beginning after 
December 31, 1996.
      The change in treatment of reserves for long-term care 
insurance contracts is effective for contracts issued after 
December 31, 1996.
      The provision relating to tax-free exchanges of life 
insurance, endowment and annuity contracts for long-term care 
insurance contracts is effective for taxable years beginning 
after December 31, 1997.
      The provision relating to certain distributions from IRAs 
and elective deferrals used to pay long-term care insurance 
premiums is effective for payments and distributions after 
December 31, 1996.
Conference agreement
      The conference agreement generally follows the House 
bill, except as follows.
            Tax treatment and definition of long-term care insurance 
                    contracts and qualified long-term care services
      Chronically ill individual.--The conference agreement 
provides that, for purposes of determining whether an 
individual is chronically ill, the number of activities of 
daily living that are taken into account under the contract may 
not be less than five. For example, a contract could require 
that an individual be unable to perform (without substantial 
assistance) two out of any five of the activities listed in the 
bill. By contrast, a contract does not meet this requirement if 
it required that an individual be unable to perform two out of 
any four of the activities listed in the bill.
      In addition, the conference agreement modifies the second 
test for whether an individual is chronically ill (i.e., that 
the individual has a level of disability similar to an 
individual who is unable to perform (without substantial 
assistance) at least two activities of daily living). Under the 
conference agreement, this test is met if the individual has 
been certified within the previous 12 months by a licensed 
health care practitioner as having a similar level of 
disability, as determined under regulations prescribed by the 
Secretary in consultation with the Secretary of Health and 
Human Services.
      Health care continuation rules.--The health care 
continuation rules do not apply to coverage under a plan, 
substantially all of the coverage under which is for qualified 
long-term care services.
      State-maintained plans.--The conference agreement 
modifies the definition of a qualified long-term care insurance 
contract. Under the conference agreement, an arrangement is 
treated as a qualified long-term care insurance contract if an 
individual receives coverage for qualified long-term care 
services under a State long-term care plan, and the terms of 
the arrangement would satisfy the requirements for a long-term 
care insurance contract under the provision, were the 
arrangement an insurance contract. For this purpose, a State 
long-term care plan is any plan established and maintained by a 
State (or instrumentality of such State) under which only 
employees (and former employees, including retirees) of a State 
or of a political subdivision or instrumentality of the State, 
and their relatives, and their spouses and spouses' relatives, 
may receive coverage only for qualified long-term care 
services. Relative is defined as under section 152(a)(1)-(8). 
No inference is intended with respect to the tax consequences 
of such arrangements under present law.
            Inclusions of excess long-term care benefits
      The conference agreement modifies the calculation of the 
dollar cap applicable to aggregate payments under per diem type 
long-term care insurance contracts and amounts received with 
respect to a chronically ill individual pursuant to a life 
insurance contract.\12\ The amount of the dollar cap with 
respect to any one chronically ill individual (who is not 
terminally ill) is $175 per day ($63,875 annually, as indexed), 
reduced by the amount of reimbursements and payments received 
by anyone for the cost of qualified long-term care services for 
the chronically ill individual. If more than one payee receives 
payments with respect to any one chronically ill individual, 
then everyone receiving periodic payments with respect to the 
same insured is treated as one person for purposes of the 
dollar cap. The amount of the dollar cap is utilized first by 
the chronically ill person, and any remaining amount is 
allocated in accordance with Treasury regulations. If payments 
under such contracts exceed the dollar cap, then the excess is 
excludable only to the extent of actual costs (in excess of the 
dollar cap) incurred for long-term care services. Amounts in 
excess of the dollar cap, with respect to which no actual costs 
were incurred for long-term care services, are fully includable 
in income without regard to rules relating to return of basis 
under Code section 72.
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    \12\ See item D, below.
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      The managers of the bill wish to clarify that, although 
the legislation imposes a daily (or equivalent) dollar cap on 
the amount of excludable benefits under certain types of long-
term care insurance in certain circumstances, this limitation 
is not intended to suggest a preference or otherwise convey or 
facilitate a competitive advantage to one type of long-term 
care insurance compared to another type of long-term care 
insurance.
      The Chairmen of the House Committee on Ways and Means and 
the Senate Finance Committee shall jointly request that the 
NAIC, in consultation with representatives of the insurance 
industry and consumer organizations, develop and conduct a 
study to determine the marketing and other effects, if any, of 
the dollar limit on excludable long-term care benefits under 
certain types of long-term care insurance contracts under the 
bill. Such Chairmen are to request that the NAIC, if it agrees 
to such request, shall submit the results of its study to the 
such Committees by no later than two years after agreeing to 
the request.
      The conference agreement modifies the reporting 
requirement for payors of amounts excludable under the 
provision. Thus, in addition to the reporting requirements of 
the House bill, a payor is required to report the name, 
address, and taxpayer identification number of the chronically 
ill individual on account of whose condition such amounts are 
paid, and whether the contract under which the amount is paid 
is a per diem-type contract.
      A grandfather rule is provided under the conference 
agreement in the case of a per diem type contract issued to a 
policyholder on or before July 31, 1996. Under the grandfather 
rule, the amount of the dollar cap with respect to such a per 
diem contract is calculated without any reduction for 
reimbursements for qualified long-term care services under any 
other contract issued with respect to the same insured on or 
before July 31, 1996. The other provisions of the dollar cap 
are not affected by the grandfather rule. The grandfather rule 
ceases to apply as of the time that any of the contracts issued 
on or before July 31, 1996, with respect to the insured are 
exchanged, or benefits are increased.
            Life insurance company reserves
      The conference agreement includes the Senate amendment 
provision with respect to life insurance reserves. Thus, under 
the conference agreement, in determining reserves for insurance 
company tax purposes, the Senate amendment provides that the 
Federal income tax reserve method applicable for a long-term 
care insurance contract is the method prescribed by the NAIC 
(or, if no reserve method has been so prescribed, a method 
consistent with the tax reserve method for life insurance, 
annuity or noncancellable accident and health insurance 
contracts, whichever is most appropriate). As under present 
law, in no event may the tax reserve for a contract as of any 
time exceed the amount which would be taken into account with 
respect to the contract as of such time in determining 
statutory reserves.
            Consumer protection provisions
      The conference agreement clarifies and modifies the 
category of contracts to which the consumer protection 
provisions apply. The conference agreement clarifies that the 
consumer protection provisions that apply with respect to the 
terms of the contract apply only for purposes of determining 
whether a contract is a qualified long-term care insurance 
contract (within the meaning of the bill).
      The conference agreement provides that, for purposes of 
both the requirements as to contract terms and the requirements 
relating to issuers of contracts, the determination of whether 
any requirement of a model regulation or model Act has been met 
is made by the Secretary of the Treasury. It is not intended 
that the Secretary create a Federal standard, but rather, look 
to applicable or appropriate State standards or to those 
provided specifically in the model regulation or model Act.
      The conference agreement modifies the $100-per-day tax on 
failure to satisfy the requirements for issuers of contracts, 
to provide that the amount of the tax imposed is $100 per 
insured per day. The conference agreement provides that the 
consumer protection requirements for issuers of contracts apply 
with respect to contracts that are qualified long-term care 
insurance contracts (within the meaning of the bill).
      The conference agreement modifies the rule relating to 
State establishment of standards relating to contract terms or 
issuers of contracts. The conference agreement provides that an 
otherwise qualified long-term care insurance contract will not 
fail to be a qualified long-term care insurance contract, and 
will not be treated as failing to meet the analogous 
requirement under the conference agreement, solely because it 
satisfies a consumer protection standard imposed under 
applicable State law that is more stringent than the analogous 
standard provided in the bill. The conference agreement does 
not preclude States from enacting more stringent consumer 
protection provisions than the analogous standards under the 
bill.
            Effective date
      The conference agreement follows the Senate amendment 
with respect to the effective date of the provision treating 
long-term care services as a medical expense. Thus, under the 
conference agreement, this provision is effective for taxable 
years beginning after December 31, 1996.
      The conference agreement provides that the provision 
relating to life insurance company reserves is effective for 
contracts issued after December 31, 1997.

    d. treatment of accelerated death benefits under life insurance 
                               contracts

      (Secs. 331-332 of the House bill and secs. 431-432 of the 
Senate amendment).
Present law
            Treatment of amounts received under a life insurance 
                    contract
      If a contract meets the definition of a life insurance 
contract, gross income does not include insurance proceeds that 
are paid pursuant to the contract by reason of the death of the 
insured (sec. 101(a)). In addition, the undistributed 
investment income (``inside buildup'') earned on premiums 
credited under the contract is not subject to current taxation 
to the owner of the contract. The exclusion under section 101 
applies regardless of whether the death benefits are paid as a 
lump sum or otherwise.
      Amounts received under a life insurance contract (other 
than a modified endowment contract) prior to the death of the 
insured are 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 
\13\ under which certain ``qualified accelerated death 
benefits'' paid by reason of the terminal illness of an insured 
would be treated as paid by reason of the death of the insured 
and therefore qualify for exclusion under section 101. In 
addition, the proposed regulations would permit an insurance 
contract that includes a qualified accelerated death benefit 
rider to qualify as a life insurance contract under section 
7702. Thus, the proposed regulations provide that including 
this benefit would not cause an insurance contract to fail to 
meet the definition of a life insurance contract.
---------------------------------------------------------------------------
    \13\ Prop. Treas. Reg. Secs. 1.101-8, 1.7702-0, 1.7702-2, and 
1.7702A-1 (December 15, 1992).
---------------------------------------------------------------------------
      Under the proposed regulations, a benefit would qualify 
as a qualified accelerated death benefit only if it meets three 
requirements. First, the accelerated death benefit can be 
payable only if the insured becomes terminally ill. Second, the 
amount of the benefit must equal or exceed the present value of 
the reduction in the death benefit otherwise payable.\14\ 
Third, the cash surrender value and the death benefit payable 
under the policy must be reduced proportionately as a result of 
the accelerated death benefit.
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    \14\ For purposes of determining the present value under the 
proposed regulations, the maximum permissible discount rate would be 
the greater of (1) the applicable Federal rate that applies under the 
discounting rules for property and casualty insurance loss reserves, 
and (2) the interest rate applicable to policy loans under the 
contract. Also, the present value would be determined assuming that the 
death benefit would have been paid twelve months after payment of the 
accelerated death benefit.
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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 not apply to viatical settlements.
House bill
      The House bill provides an exclusion from gross income as 
an amount paid by reason of the death of an insured for (1) 
amounts received under a life insurance contract and (2) amount 
received for the sale or assignment of a life insurance 
contract to a qualified viatical settlement provider, provided 
that the insured under the life insurance contract is either 
terminally ill or chronically ill. The exclusion for amounts 
received under a life insurance contract on the life of an 
insured who is chronically ill applies if the amount is 
received under a rider or other provision of the contract that 
is treated as a long-term care insurance contract under section 
7702B (as added by the bill), and the amount is excludable as a 
payment for long-term care services under section 7702B 
(including under the dollar cap on per diem type payments ($175 
per day, or $63,875 annually, in 1997).
      The provision does not apply in the case of an amount 
paid to any taxpayer other than the insured, if such taxpayer 
has an insurable interest by reason of the insured being a 
director, officer or employee of the taxpayer, or by reason of 
the insured being financial interested in any trade or business 
carried on by the taxpayer.
      A terminally ill individual is defined as one who has 
been certified by a physician as having an illness or physical 
condition that reasonably can be expected to result in death 
within 24 months of the date of certification. A physician is 
defined for this purpose in the same manner as under the long-
term care insurance rules of the bill.\15\
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    \15\ A physician is defined for these purposes as in section 
1861(r)(1) of the Social Security Act, which provides that a physician 
means a doctor of medicine or osteopathy legally authorized to practice 
medicine and surgery by the State in which he performs such function or 
action (including a physician within the meaning of section 1101(a)(7) 
of that Act). Section 1101(a)(7) of that Act provides that the term 
physician includes osteopathic practitioners within the scope of their 
practice as defined by State law.
---------------------------------------------------------------------------
      A chronically ill individual is defined under the long-
term care provisions of the bill.\16\ In the case of amounts 
received with respect to a chronically ill individual (but not 
amounts received by reason of the individual being terminally 
ill), the $175 per day ($63,875 annual) limitation on 
excludable benefits that applies for per diem type long-term 
care insurance contracts also limits amounts that are 
excludable with respect to such contracts under this provision.
---------------------------------------------------------------------------
    \16\ Thus, a chronically ill individual is one who has been 
certified within the previous 12 months by a licensed health care 
practitioner as (1) being unable to perform (without substantial 
assistance) at least 2 activities of daily living for at least 90 days 
due to a loss of functional capacity, (2) having a similar level of 
disability as determined by the Secretary of the Treasury in 
consultation with the Secretary of Health and Human Services, or (3) 
requiring substantial supervision to protect such individual from 
threats to health and safety due to severe cognitive impairment. 
Activities of daily living are eating, toileting, transferring, 
bathing, dressing and continence. Nothing in the bill requires the 
contract to take into account all of the activities of daily living.
---------------------------------------------------------------------------
      The payor of a payment to which this provision applies is 
required to report to the IRS the aggregate amount of such 
benefits paid to any individual during any calendar year, and 
the name, address and taxpayer identification number of such 
individual. A copy of the report must be provided to the payee 
by January 31 following the year of payment, showing the name 
of the payer and the aggregate amount of such benefits paid to 
the individual during the calendar year. Failure to file the 
report or provide the copy to the payee is subject to the 
generally applicable penalties for failure to file similar 
information reports.
      A qualified viatical settlement provider is any person 
that regularly purchases or takes assignments of life insurance 
contracts on the lives of the terminally ill individuals and 
either (1) is licensed for such purposes in the State in which 
the insured resides; or (2) if the person is not required to be 
licensed by that State, menets the requirements of sections 8 
and 9 of the Viatical Settlements Model Act (issued by the 
National Association of Insurance Commissioners (NAIC)), and 
also meets the section of the NAIC Viatical Settlements Model 
Regulation relating to standards for evaluation of reasonable 
payments, including discount rates, in determining amounts paid 
by the viatical settlement provider.
      For life insurance company tax purposes, the bill 
provides that a life insurance contract is treated as including 
a reference to a qualified accelerated death benefit rider to a 
life insurance contract (except in the case of any rider that 
is treated as a long-term care insurance contract under section 
7702B, as added by the bill). A qualified accelerated death 
benefit rider is any rider on a life insurance contract that 
provides only for payments of a type that are excludable under 
this provision.
            Effective date
      The provision applies to amounts received after December 
31, 1996. The provision treating a qualified accelerated death 
benefit rider as life insurance for life insurance company tax 
purposes takes effect on January 1, 1997. The issuance of a 
qualified accelerated death benefit rider to a life insurance 
contract, or the addition of any provision required to conform 
an accelerated death benefit rider to these provisions, is not 
treated as a modification or material change to the contract 
(and is not intended to affect the issue date of any contract 
under section 101(f)).
Senate amendment
      The Senate amendment is the same as the House bill, 
except that, in the case of a chronically ill insured, while 
the Senate amendment does provide that the exclusion for 
amounts received under a life insurance contract applies if the 
amount is received under a rider or other provision of the 
contract that is treated as a long-term care insurance contract 
under section 7702B (as added by the bill), the Senate 
amendment does not include the explicit language of the House 
bill requiring that the amount be treated as a payment for 
long-term care services under section 7702B.
Conference agreement
      The conference agreement follows the House bill and the 
Senate amendment, with technical modifications and 
clarifications.
      The conference agreement provides that the amount paid 
for the sale or assignment of any portion of the death benefit 
under a life insurance contract on the life of a terminally or 
chronically ill individual to a viatical settlement provider is 
excludable by the recipient as an amount paid under the 
contract by reason of the death of the insured. For example, 
the sale or assignment of a life insurance contract that has a 
rider providing for long-term care insurance, payments under 
which rider are funded by and reduce the death benefit, is 
considered the sale or assignment of the death benefit. Sale or 
assignment of a stand-alone rider providing for long-term care 
insurance (where payments under the rider are not funded by 
reductions in the death benefit), however, is not considered 
the sale or assignment of the death benefit.
      The conference agreement provides that a viatical 
settlement provider is any person regularly engaged in the 
trade or business of purchasing or taking assignments of life 
insurance contracts on the lives of insured individuals who are 
terminally ill or chronically ill, so long as the viatical 
settlement provider meets certain requirements. The viatical 
settlement provider must either (1) be licensed, in the State 
where the insured resides, to engage in such transactions with 
terminally ill individuals (if the insured is terminally ill) 
or with chronically ill individuals (if the insured is 
chronically ill), or (2) if such licensing with respect to the 
insured individual is not required in the State, meet other 
requirements depending on whether the insured is terminally or 
chronically ill. If the insured is terminally ill, the viatical 
settlement provider must meet the requirements of sections 8 
and 9 of the Viatical Settlements Model Act, relating to 
disclosure and general rules (issued by the National 
Association of Insurance Commissioner (NAIC)), and also meet 
the section of the NAIC Viatical Settlements Model Regulation 
relating to standards for evaluation of reasonable payments, 
including discount rates, in determining amounts paid by the 
viatical settlement provider. If the insured is chronically 
ill, the viatical settlement provider must meet requirements 
similar to those of sections 8 and 9 of the NAIC Viatical 
Settlements Model Act, and also must meet the standards, if 
any, promulgated by the NAIC for evaluating the reasonableness 
of amounts paid in viatical settlement transactions with 
chronically ill individuals.
      The conference agreement clarifies the rules for 
chronically ill insureds so that the tax treatment of payments 
with respect to chronically ill individuals is reasonably 
similar under the long-term care rules of the bill and under 
this provision. In the case of a chronically ill individual, 
the exclusion under this provision with respect to amounts paid 
under a life insurance contract and amounts paid in a sale or 
assignment to a viatical settlement provider applies if the 
payment received is for costs incurred by the payee (not 
compensated by insurance or otherwise) for qualified long-term 
care services (as defined under the long-term care rules of the 
bill) for the insured person for the period, and two other 
requirements (similar to requirements applicable to long-term 
care insurance contracts under the bill) are met. The first 
requirement is that under the terms of the contract giving rise 
to the payment, the payment is not a payment or reimbursement 
of expenses reimbursable under Medicare (except where Medicare 
is a secondary payor under the arrangement, or the arrangement 
provides for per diem or other periodic payments without regard 
to expenses for qualified long-term care services). The 
conference agreement provides that no provision of law shall be 
construed or applied so as to prohibit the offering of such a 
contract giving rise to such a payment on the basis that the 
contract coordinates its payments with those provided under 
Medicare. The second requirement is that the arrangement 
complies with those consumer protection provisions applicable 
under the bill to long-term care insurance contracts and 
issuers that are specified in Treasury regulations. It is 
intended that such guidance incorporate rules similar to those 
of section 6F (relating to right to return, permitting the 
payee 30 days to rescind the arrangement) of the NAIC Long-Term 
Care Insurance Model Act, and section 13 (relating to 
requirements for application, requiring that the payee be asked 
if he or she already has long-term care insurance, Medicaid, or 
similar coverage) of the NAIC Long-Term Care Insurance Model 
Regulations. If the NAIC or the State in which the policyholder 
resides issues standards relating to chronically ill 
individuals, then the analogous requirements under Treasury 
regulations cease to apply.
      An individual who meets the definition of a terminally 
ill individual is not treated as chronically ill, for purposes 
of this provision.
      Payments made on a per diem or other periodic basis, 
without regard to expenses incurred for qualified long-term 
care services, are nevertheless excludable under this 
provision, subject to the dollar cap on excludable benefits 
that applies for amounts that are excludable under per diem 
type long-term care insurance contracts. The conference 
agreement modifies the calculation of the dollar cap applicable 
to aggregate payments under per diem type long-term care 
insurance contracts and amounts received with respect to a 
chronically ill individual pursuant to a life insurance 
contract.\17\ The amount of the dollar cap with respect to the 
aggregate amount received under per diem type long-term care 
insurance contracts and this provision with respect to any one 
chronically ill individual (who is not terminally ill) is $175 
per day ($63,875 annually) (indexed), reduced by the amount of 
reimbursements and payments received by anyone for the cost of 
qualified long-term care services for the chronically ill 
individual. If more than one payee receives payments with 
respect to any one chronically ill individual, the amount of 
the dollar cap is utilized first by the chronically ill person, 
and any remaining amount is allocated in accordance with 
Treasury regulations. If payments under such contracts exceed 
the dollar cap, then the excess is excludable only to the 
extent of actual costs incurred for long-term care services. 
Amounts in excess of the dollar cap, with respect to which no 
actual costs (in excess of the dollar cap) were incurred for 
long-term care services, are fully includable in income without 
regard to rules relating to return of basis under Code section 
72.
---------------------------------------------------------------------------
    \17\ See item C, above.
---------------------------------------------------------------------------
      The conference agreement modifies the reporting 
requirement for payors of amounts excludable under the 
provision. Thus, in addition to the reporting requirements of 
the House bill, a payor is required to report the name, 
address, and taxpayer identification number of the chronically 
ill individual on account of whose condition such amounts are 
paid, and whether the contract under which the amount is paid 
is a per diem-type contract.

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

      (Sec. 341 of the House bill and sec. 451 of the Senate 
amendment).
Present law
      In general, the Internal Revenue Service (``IRS'') takes 
the position that organizations that provide insurance for 
their members or other individuals are not considered to be 
engaged in a tax-exempt activity. The IRS maintains that such 
insurance activity is either (1) a regular business of a kind 
ordinarily carried on for profit, or (2) an economy or 
convenience in the conduct of members' businesses because it 
relieves the members from obtaining insurance on an individual 
basis.
      Certain insurance risk pools have qualified for tax 
exemption under Code section 501(c)(6). In general, these 
organizations (1) assign any insurance policies and 
administrative functions to their member organizations 
(although they may reimburse their members for amounts paid and 
expenses), (2) serve an important common business interest of 
their members, and (3) must be membership organizations 
financed, at least in part, by membership dues.
      State insurance risk pools may also qualify for tax-
exempt status under section 501(c)(4) as a social welfare 
organization 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.
House bill
            Health coverage for high-risk individuals
      The House bill provides tax-exempt status to any 
membership organization that is established by a State 
exclusively to provide coverage for medical care on a nonprofit 
basis to certain high-risk individuals, provided certain 
criteria are satisfied.\18\ The organization may provide 
coverage for medical care either by issuing insurance itself or 
by entering into an arrangement with a health maintenance 
organization (``HMO'').
---------------------------------------------------------------------------
    \18\ No inference is intended as to the tax treatment of other 
types of State-sponsored organizations.
---------------------------------------------------------------------------
      High-risk individuals eligible to receive medical care 
coverage from the organization must be residents of the State 
who, due to a pre-existing medical condition, are unable to 
obtain health coverage for such condition through insurance or 
an HMO, or are able to acquire such coverage only at a rate 
that is substantially higher than the rate charged for such 
coverage by the organization. The State must determine the 
composition of membership in the organization. For example, a 
State could mandate that all organizations that are subject to 
insurance regulation by the State must be members of the 
organization.
      The House bill further requires the State or members of 
the organization to fund the liabilities of the organization to 
the extent that premiums charged to eligible individuals are 
insufficient to cover such liabilities. Finally, no part of the 
net earnings of the organization can inure to the benefit of 
any private shareholder or individual.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 1996.
            Workers' compensation reinsurance organizations
      No provision.
Senate amendment
      The Senate amendment is the same as the House bill.
Conference agreement
            Health coverage for high-risk individuals
      The conference agreement follows the House bill and the 
Senate amendment.
            Workers' compensation reinsurance organizations
      The conference agreement provides tax-exempt status to 
any membership organization that is established by a State 
before June 1, 1996, exclusively to reimburse its members for 
workers' compensation insurance losses, and that satisfies 
certain other conditions. A State must require that the 
membership of the organization consist of all persons who issue 
insurance covering workers' compensation losses in such State, 
and all persons and governmental entities who self-insure 
against such losses. In addition, the organization must operate 
as a nonprofit organization by returning surplus income to 
members or to workers' compensation policyholders on a periodic 
basis and by reducing initial premiums in anticipation of 
investment income.
      Effective date.--The provision applies to taxable years 
ending after the date of enactment.

 f. health insurance organizations eligible for benefits of section 833

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

       g. penalty-free withdrawals from iras for medical expenses

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

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

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

Title IV. Application and Enforcement of Group Health Plan Requirements

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

      (Sec. 104(b) of the House bill).
Present Law
      Under present law, the health care continuation rules 
(referred to as ``COBRA'' rules, after the Consolidated Omnibus 
Budget Reconciliation Act of 1985 in which they were enacted) 
require that most employer-sponsored group health plans must 
offer certain employees and their dependents (``qualified 
beneficiaries'') the option of purchasing continued health 
coverage in the case of certain qualifying events. These 
qualifying events include: termination or reduction in hours of 
employment, death, divorce or legal separation, enrollment in 
Medicare, or the end of a child's dependency under a parent's 
health plan. In general, the maximum period of COBRA coverage 
is 18 months. An employer is permitted to charge qualified 
beneficiaries 102 percent of the applicable premium for COBRA 
coverage.
      A tax is imposed on the failure of a group health plan to 
satisfy the COBRA rules. The tax 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 generally equal to $100 per day 
for each day on which there is a violation. The tax applies 
separately with respect to each qualified beneficiary for whom 
a failure occurs. In general, a tax will not be imposed if the 
violation was unintentional and is corrected within 30 days. 
The maximum tax for unintentional violations that can be 
imposed for a taxable year generally is the lesser of (1) 10 
percent of the employer's payments under group health plans (or 
under the trust funding the plan in the case of a multiemployer 
plan), or (2) $500,000. If the tax is imposed on another person 
responsible for administering or providing benefits under the 
plan, the maximum penalty for failures during the year is $2 
million. The Secretary may waive all or part of the tax to the 
extent that payment of the tax would be excessive relative to 
the failure involved.
      Other than the COBRA rules, there are no other 
requirements in the Code which apply to group health plans (or 
insurers or health maintenance organizations (``HMOs'')) 
regarding portability through limitations on preexisting 
condition exclusions, prohibitions on excluding individuals 
from coverage based on health status, and guaranteed 
renewability of health plan coverage.
House bill
      Under the House bill, group health plans, insurers, and 
HMOs are subject to certain requirements regarding portability 
through limitations on preexisting condition exclusions and 
prohibitions on excluding individuals from coverage based on 
health status. The House bill generally extends the tax for 
failures to satisfy the COBRA rules to failures to comply with 
these requirements.
      No tax is imposed on an insurer or HMO that is governed 
under a State law that the Secretary of Health and Human 
Services has determined to provide enforcement of similar 
requirements. In addition, no tax may be imposed on a small 
employer (defined as an employer who employs at least 2, but 
fewer than 51 employees on a typical business day) that 
provides health care benefits through a contract with an 
insurer or HMO and the violation is solely because of the 
product offered by the insurer or HMO under such contract. In 
addition, no tax is imposed if there has been enforcement by 
the Secretary of Labor or the Secretary of Health and Human 
Services.
      Effective date.--The provision generally is effective 
with respect to plan years beginning on or after January 1, 
1998.
Senate amendment
      No provision. The requirements in the Senate amendment on 
group health plans, insurers, and HMOs regarding portability 
through limitations on preexisting condition exclusions and 
prohibitions on excluding individuals from coverage based on 
health status are not applied or enforced through the Code.
Conference agreement
      Under the conference agreement, group health plans are 
subject to certain requirements regarding portability through 
limitations on preexisting condition exclusions, prohibitions 
on excluding individuals from coverage based on health status, 
and guaranteed renewability of health insurance coverage.\19\ 
The conference agreement incorporates these requirements into 
the Code and generally imposes a tax with respect to any 
failure of a group health plan to comply with the requirements. 
The tax may generally be imposed on the employer sponsoring the 
plan. However, the tax may be imposed on the plan in the case 
of a multiemployer plan, and, with respect to violations of the 
requirements relating to guaranteed renewability, on the 
arrangement in the case of a multiple employer welfare 
arrangement.
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    \19\ These requirements are discussed earlier in greater detail.
---------------------------------------------------------------------------
      The group health plan requirements contained in the Code 
do not apply to governmental plans and plans which on the first 
day of the plan year cover less than 2 current employees. In 
addition, no tax may be imposed on a small employer (defined as 
an employer who employed an average of 50 or fewer employees on 
business days during the preceding calendar year) that provides 
health care benefits through a contract with an insurer or HMO 
and the violation is solely because of the coverage offered by 
the insurer or HMO.
      The amount of the tax is generally equal to $100 per day 
for each day during which a failure occurs until the failure is 
corrected. The tax applies separately with respect to each 
individual affected by the failure. In general, a tax will not 
be imposed if the violation was unintentional and is corrected 
within 30 days.\20\ The maximum tax for unintentional 
violations that can be imposed generally is the lesser of (1) 
10 percent of the employer's payments during the taxable year 
in which the failure occurred under group health plans (or 10 
percent of the amount paid by the multiemployer plan or 
multiple employer welfare arrangement during the plan year in 
which the failure occurred for medical care, if applicable), or 
(2) $500,000. The Secretary may waive all or part of the tax to 
the extent that payment of the tax would be excessive relative 
to the failure involved.
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    \20\ In the case of a church plan, this correction is generally 
extended to 270 days after the date of mailing by the Secretary of a 
notice of default with respect to a failure to comply with the group 
health plan requirements.
---------------------------------------------------------------------------
      Effective date.--The provision applies with respect to 
failures of group health plans to satisfy the requirements 
regarding portability through limitations on preexisting 
condition exclusions, prohibitions on excluding individuals 
from coverage based on health status, and guaranteed 
renewability of health insurance coverage.

b. clarification of certain cobra health care continuation requirements

      (Sec. 121 of the Senate amendment).
Present law
      Under present law, the health care continuation rules 
(referred to as ``COBRA'' rules, after the Consolidated Omnibus 
Budget Reconciliation Act of 1985 in which they were enacted) 
require that most employer-sponsored group health plans must 
offer certain employees and their dependents (``qualified 
beneficiaries'') the option of purchasing continued health 
coverage in the case of certain qualifying events. These 
qualifying events include; termination or reduction in hours of 
employment, death, divorce or legal separation, enrollment in 
Medicare, or the end of a child's dependency under a parent's 
health plan. In general, the maximum period of COBRA coverage 
is 18 months. An employer is permitted to charge qualified 
beneficiaries 102 percent of the applicable premium for COBRA 
coverage. A $100 per day tax generally may be assessed against 
employers (plans in the case of multiemployer plans) for 
failures to comply with the COBRA rules, subject to certain 
exceptions and limitations.
      The 18-month maximum COBRA coverage period is extended to 
29 months if the qualified beneficiary is determined under the 
Social Security Act to have been disabled at the time of the 
qualifying event and the qualified beneficiary provides notice 
of such determination to the employer before the end of the 18-
month period. A qualified beneficiary has 60 days to notify the 
employer of a disability determination. During the 11-month 
period of extended COBRA coverage, the qualified beneficiary 
may be charged 150 percent of the applicable premium.
      COBRA coverage may be terminated before the 18-month 
maximum coverage period in the case of certain events. These 
include: the employer ceases to maintain any group health plan, 
the qualified beneficiary fails to pay the premium, the 
qualified beneficiary becomes covered under another group 
health plan with no preexisting condition limitation or 
exclusion, or the qualified beneficiary becomes entitled to 
Medicare.
      Under present law, the term qualified beneficiary only 
includes individuals who were either the spouse or the 
dependent of the covered employee at the time of the qualifying 
event.
      A group health plan is required to notify each covered 
employee and the covered employee's spouse of their COBRA 
rights upon commencement of participation in the plan. Further, 
the group health plan administrator must notify each qualified 
beneficiary of their COBRA rights within 14 days after 
notification of the occurrence of a qualifying event.
House bill
      No provision. However, the House bill modifies the COBRA 
rules so that the penalties applicable to failures to comply 
with the COBRA rules generally apply to failures to comply with 
the requirements in the House bill on group health plans, 
insurers, and health maintenance organizations (``HMOs'') 
regarding portability through limitations on preexisting 
condition exclusions and prohibitions on excluding individuals 
from coverage based on health status.
Senate amendment
      The Senate amendment modifies the COBRA rules by 
clarifying that the extended maximum COBRA coverage period of 
29 months in cases of disability also applies to the disabled 
qualified beneficiary of the covered employee. In addition, the 
Senate amendment provides the extended COBRA coverage if the 
disability exists at any time during the initial 18-month COBRA 
coverage period as opposed to requiring the disability to exist 
at the time of the qualifying event. As under present law, the 
disability determination still has to be made, and the notice 
of the disability still has to be given, before the end of the 
initial COBRA coverage period.
      The Senate amendment coordinates the COBRA rules with the 
new requirements regarding preexisting condition exclusions so 
that COBRA coverage can be terminated if a qualified 
beneficiary becomes covered under another group health plan, 
even if such group health plan contains a preexisting condition 
limitation or exclusion, provided the preexisting condition 
limitation or exclusion does not apply to the qualified 
beneficiary by reason of the new requirements restricting the 
application of preexisting condition limitations and 
exclusions.
      The Senate amendment also modifies the definition of 
qualified beneficiary to include a child born to our placed for 
adoption with the covered employee during the period of COBRA 
coverage. Consequently, since the health care availability 
provisions in the Senate amendment require group health plans 
to allow participants to change their coverage status (i.e., to 
change from individual coverage to family coverage, or to add 
on the new child) upon the birth or adoption of a new child, 
COBRA participants would also be allowed to change their 
coverage status upon the birth or adoption of a new child.
      The Senate amendment requires a group health plan to 
notify each qualified beneficiary who has elected COBRA 
coverage of the changes to the COBRA rules contained in the 
Senate amendment no later than November 1, 1996.
      Effective date.--The provision applies to qualifying 
events occurring on or after the date of enactment for plan 
years beginning after December 31, 1997.
Conference agreement
      The conference agreement follows the Senate amendment, 
except the extended period of COBRA coverage in cases of 
disability applies if the disability exists at any time during 
the first 60 days of COBRA coverage.
      Effective date.--The provision is effective on January 1, 
1997, regardless of whether the qualifying event occurred 
before, on, or after such date.

                        TITLE V. REVENUE OFFSETS

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

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

                     B. Expatriation Tax Provisions

      (Secs. 421-423 of the House bill and secs. 471-473 of the 
Senate amendment.)
Present law
      Individuals who relinquish U.S. citizenship with a 
principal purpose of avoiding U.S. taxes are subject to special 
tax provisions for 10 years after expatriation. The 
determination of who is 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.
      An individual who relinquishes his U.S. citizenship with 
a principal purpose of avoiding U.S. taxes is subject to tax on 
his or her U.S. source income at the rates applicable to U.S. 
citizens, rather than the rates applicable to other non-
resident aliens, for 10 years after expatriation. In addition, 
the scope of items treated as U.S. source income for this 
purpose is broader than those items generally considered to be 
U.S. source income. For example, gains on the sale of personal 
property located in the United States and gains on the sale or 
exchange of stock or securities issued by U.S. persons are 
treated as U.S. source income. This alternative method of 
income taxation applies only if it results in higher U.S. tax 
liability.
       Rules applicable in the estate and gift tax contexts 
expand the categories of items that are subject to the gift and 
estate taxes in the case of a U.S. citizen who relinquished 
citizenship with a principal purpose of avoiding U.S. taxes 
within the 10-year period ending on the date of the transfer. 
For example, U.S. property held through a foreign corporation 
controlled by such individual and related persons is included 
in his or her estate and gifts of U.S.-situs intangible 
property by such individual are subject to the gift tax.
House bill
            Overview
      The House bill expands and substantially strengthens in 
several ways the present-law provisions that subject U.S. 
citizens who lose their citizenship for tax avoidance purposes 
to special tax rules for 10 years after such loss of 
citizenship (secs. 877, 2107, and 2501(a)(3)). First, the House 
bill extends the expatriation tax provisions to apply not only 
to U.S. citizens who lose their citizenship but also to certain 
long-term residents of the United States whose U.S. residency 
is terminated. Second, the House bill subjects certain 
individuals to the expatriation tax provisions without inquiry 
as to their motive for losing their U.S. citizenship or 
residency, but allows certain categories of citizens to show an 
absence of tax-avoidance motive if they request a ruling from 
the Secretary of the Treasury as to whether the loss of 
citizenship had a principal purpose of tax avoidance. Third, 
the House bill expands the categories of income and gains that 
are treated as U.S. source (and therefore subject to U.S. 
income tax under section 877) if earned by an individual who is 
subject to the expatriation tax provisions and includes 
provisions designed to eliminate the ability to engage in 
certain transactions that under current law partially or 
completely circumvent the 10-year reach of section 877. 
Further, the House bill provides relief from double taxation in 
circumstances where another country imposes tax on items that 
would be subject to U.S. tax under the expatriation tax 
provisions.
      The House bill also contains provisions to enhance 
compliance with the expatriation tax provisions. The House bill 
imposes information reporting obligations on U.S. citizens who 
lose their citizenship and long-term residents whose U.S. 
residency is terminated at the time of expatriation. In 
addition, the House bill directs the Treasury Department to 
undertake a study regarding compliance by individuals living 
abroad with their U.S. tax reporting obligations and to make 
recommendations with respect to improving such compliance.
            Individuals covered
      The present-law expatriation tax provisions apply only to 
certain U.S. citizens who lose their citizenship. The House 
bill extends these expatriation tax provisions to apply also to 
long-term residents of the United States whose U.S. residency 
is terminated. For this purpose, a long-term resident is any 
individual who was a lawful permanent resident of the United 
States for at least 8 out of the 15 taxable 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 provisions if 
the asset is sold within the 10-year period.
      Under present law, the expatriation tax provisions are 
applicable to a U.S. citizen who loses his or her citizenship 
unless such loss did not have as a principal purpose the 
avoidance of taxes. Under the House bill, U.S. citizens who 
lose their citizenship and long-term residents whose U.S. 
residency is terminated are generally treated as having lost 
such citizenship or terminated such residency with a principal 
purpose of the avoidance of taxes if either: (1) the 
individual's average annual U.S. Federal income tax liability 
for the 5 taxable years ending before the date of such loss or 
termination is greater than $100,000 (the ``tax liability 
test''), or (2) the individual's net worth as of the date of 
such loss or termination is $500,000 or more (the ``net worth 
test''). The dollar amount thresholds contained in the tax 
liability test and the net worth test are indexed for inflation 
in the case of a loss of citizenship or termination of 
residency occurring in any calendar year after 1996. An 
individual who falls below the thresholds specified in both the 
tax liability test and the net worth test is subject to the 
expatriation tax provisions unless the individual's loss of 
citizenship or termination of residency did not have as a 
principal purpose the avoidance of tax (as under present law in 
the case of U.S. citizens).
      A U.S. citizen, who loses his or her citizenship and who 
satisfies either the tax liability test or the net worth test, 
is not subject to the expatriation tax provisions if such 
individual can demonstrate that he or she did not have a 
principal purpose of tax avoidance and the individual is within 
one of the following categories: (1) the individual was born 
with dual citizenship and retains only the non-U.S. 
citizenship; (2) the individual becomes a citizen of the 
country in which the individual, the individual's spouse, or 
one of the individual's parents, was born; (3) the individual 
was present in the United States for no more than 30 days 
during any year in the 10-year period immediately preceding the 
date of his or her loss of citizenship; (4) the individual 
relinquishes his or her citizenship before reaching age 18\1/
2\; or (5) any other category of individuals prescribed by 
Treasury regulations. In all of these situations, the 
individual would have been subject to tax on his or her 
worldwide income (as are all U.S. citizens) until the time of 
expatriation. In order to qualify for one of these exceptions, 
the former U.S. citizen must, within one year from the date of 
loss of citizenship, submit a ruling request for a 
determination by the Secretary of the Treasury as to whether 
such loss had as one of its principal purposes the avoidance of 
taxes. A former U.S. citizen who submits such a ruling request 
is entitled to challenge an adverse determination by the 
Secretary of the Treasury. However, a former U.S. citizen who 
fails to submit a timely ruling request is not eligible for 
these exceptions. It is expected that in making a determination 
as to the presence of a principal purpose of tax avoidance, the 
Secretary of the Treasury will take into account factors such 
as the substantiality of the former citizen's ties to the 
United States (including ownership of U.S. assets) prior to 
expatriation, the retention of U.S. citizenship by the former 
citizen's spouse, and the extent to which the former citizen 
resides in a country that imposes little or no tax.
      The foregoing exceptions are not available to long-term 
residents whose U.S. residency is terminated. However, the 
House bill authorizes the Secretary of the Treasury to 
prescribe regulations to exempt certain categories of long-term 
residents from the House bill's provisions.
            Items subject to section 877
      Under section 877, an individual covered by the 
expatriation tax provisions is subject to tax on U.S. source 
income and gains for a 10-year period after expatriation at the 
graduated rates applicable to U.S. citizens.\24\ The tax under 
section 877 applies to U.S. source income and gains of the 
individual for the 10-year period, without regard to whether 
the property giving rise to such income or gains was acquired 
before or after the date the individual became subject to the 
expatriation tax provisions. For example, a U.S. citizen who 
inherits an appreciated asset immediately before losing 
citizenship and disposes of the asset immediately after such 
loss would not recognize any taxable gain on such disposition 
(because of the date of death fair market value basis accorded 
to inherited assets), but the individual would continue to be 
subject to tax under section 877 on the income or gain derived 
from any U.S. property acquired with the proceeds from such 
disposition.
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    \24\ Under present law, all nonresident aliens (including 
expatriates) are subject to U.S. income tax at graduated rates on 
certain types of income. Such income includes income effectively 
connected with a U.S. trade or business and gains from the disposition 
of interests in U.S. real property. For example, compensation 
(including deferred compensation) paid with respect to services 
performed in the United States is subject to such tax. Thus, under 
current law, a U.S. citizen who earns a stock option while employed in 
the United States and delays the exercise of such option until after 
such individual loses his or her citizenship is subject to U.S. tax on 
the compensation income recognized upon exercise of the stock option 
(even if the stock received upon the exercise is stock in a foreign 
corporation).
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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 House bill 
extends this recharacterization to income and gains derived 
from property obtained in certain transactions on which gain or 
loss is not recognized under present law. An individual covered 
by section 877 who exchanges property that would produce U.S. 
source income for property that would produce foreign source 
income is required to recognize immediately as U.S. source 
income any gain on such exchange (determined as if the property 
had been sold for its fair market value on such date). To the 
extent gain is recognized under this provision, the property 
would be accorded the step-up in basis provided under current 
law. This rule requiring immediate gain recognition does not 
apply if the individual enters into an agreement with the 
Secretary of the Treasury specifying that any income or gains 
derived from the property received in the exchange during the 
10-year period after the loss of citizenship (or termination of 
U.S. residency, as applicable) would be treated as U.S. source 
income. Such a gain recognition agreement terminates if the 
property transferred in the exchange is disposed of by the 
acquiror, and any gain that had not been recognized by reason 
of such agreement is recognized as U.S. source as of such date. 
It is expected that a gain recognition agreement would be 
entered into not later than the due date for the tax return for 
the year of the exchange. In this regard, the Secretary of the 
Treasury is authorized to issue regulations providing similar 
treatment for nonrecognition transactions that occur within 5 
years immediately prior to the date of loss of citizenship (or 
termination of U.S. residency, as applicable).
      The Secretary of Treasury is authorized to issue 
regulations to treat removal of tangible personal property from 
the United States, and other circumstances that result in a 
conversion of U.S. source income to foreign source income 
without recognition of any unrealized gain, as 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 House bill, if Ms. A does not enter into a gain recognition 
agreement with the Secretary of the Treasury, Ms. A would be 
deemed to have sold the USCo stock for $150,000 on the date of 
the transfer, and would be subject to U.S. tax in 1997 on the 
$50,000 of gain realized. Alternatively, if Ms. A enters into a 
gain recognition agreement, she would not be required to 
recognize for U.S. tax purposes in 1997 the $50,000 of gain 
realized upon the transfer of the USCo stock to FCo. However, 
under the gain recognition agreement, for the 10-year period 
ending on December 31, 2005, any income (e.g., dividends) or 
gain with respect to the FCo stock would be treated as U.S. 
source, and therefore Ms. A would be subject to tax on such 
income or gain under section 877. If FCo disposes of the USCo 
stock on January 1, 2002, Ms. A's gain recognition agreement 
would terminate on such date, and Ms. A would be required to 
recognize as U.S. source income at that time the $50,000 of 
gain that she previously deferred under the gain recognition 
agreement. (The amount of gain required to be recognized by Ms. 
A in this situation would not be affected by any changes in the 
value of the USCo stock since her June 30, 1997 transfer of 
such stock to FCo.)
      The House bill also extends the recharacterization rules 
of section 877 to treat as U.S. source any income and gains 
derived from stock in a foreign corporation if the individual 
losing citizenship or terminating residency owns, directly or 
indirectly, more than 50 percent of the vote or value of the 
stock of the corporation on the date of such loss or 
termination or at any time during the 2 years preceding such 
date. Such income and gains are recharacterized as U.S. source 
only to the extent of the amount of earnings and profits 
attributable to such stock earned or accumulated prior to the 
date of loss of citizenship (or termination of residency, as 
applicable) and while such ownership requirement is satisfied.
      The following example illustrates this rule: Mr. B loses 
his U.S. citizenship on July 1, 1996 and is subject to section 
877. Mr. B has owned all of the stock of a foreign corporation, 
FCo, since its incorporation in 1991. As of FCo's December 31, 
1995 year-end, FCo has accumulated earnings and profits of 
$500,000. FCo has earnings and profits of $100,000 for 1996 and 
does not have any subpart F income (as defined in sec. 952). 
FCo makes a $100,000 distribution to Mr. B in each of 1997 and 
1998. On January 1, 1999, Mr. B disposes of all his stock of 
FCo and realizes $400,000 of gain. Under present law, neither 
the distributions from FCo nor the gain on the disposition of 
the FCo stock would be subject to U.S. tax. Under the House 
bill, the distributions from FCo and the gain on the sale of 
the stock of FCo would be treated as U.S. source income and 
would be taxed to Mr. B under section 877, subject to the 
earnings and profits limitation. For this purpose, the amount 
of FCo's earnings and profits for 1996 is prorated based on the 
number of days during 1996 that Mr. B is a U.S. citizen. Thus, 
the amount of FCo's earnings and profits earned or accumulated 
before Mr. B's loss of citizenship is $550,000. Accordingly, 
the $100,000 distributions from FCo in 1997 and 1998 would be 
treated as U.S. source income taxable to Mr. B under section 
877 in such years. In addition, $350,000 of the gain realized 
from the sale of the stock of FCo in 1999 would be treated as 
U.S. source income taxable to Mr. B under section 877 in that 
year.
            Special rule for shift in risks of ownership
      Section 877 applies to income and gains for the 10-year 
period following the loss of citizenship (or termination of 
residency, as applicable). For purposes of applying section 
877, the House bill suspends this 10-year period for gains 
derived from a particular property during any period in which 
the individual's risk of loss with respect to such property is 
substantially diminished. For example, Ms. C loses her 
citizenship on January 1, 1996 and is subject to section 877. 
On that date Ms. C owns 10,000 shares of stock of a U.S. 
corporation, USCo, with a value of $1 million. On the same date 
Ms. C enters into an equity swap with respect to such USCo 
stock with a 5-year term. Under the transaction, Ms. C will 
transfer to the counter-party an amount equal to the dividends 
on the USCo stock and any increase in the value of the USCo 
stock for the 5-year period. The counter-party will transfer to 
Ms. C an amount equal to a market rate of interest on $1 
million and any decrease in the value of the USCo stock for the 
same period. Ms. C's risk of loss with respect to the USCo 
stock is substantially diminished during the 5-year period in 
which the equity swap is in effect, and therefore, under the 
House bill, the 10-year period under section 877 is suspended 
during such period. Accordingly, under the House bill, if Ms. C 
sells 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 House bill 
provides a credit against the U.S. tax imposed under such 
provisions for any foreign income, gift, estate or similar 
taxes paid with respect to the items subject to such taxation. 
This credit is available only against the tax imposed solely as 
a result of the expatriation tax provisions, and is not 
available to be used to offset any other U.S. tax liability. 
For example, Mr. D loses his citizenship on January 1, 1996 and 
is subject to section 877. Mr. D becomes a resident of Country 
X. During 1996, Mr. D recognizes a $100,000 gain upon the sale 
of stock of a U.S. corporation, USCo. Country X imposes $20,000 
tax on this capital gain. But for the double tax relief 
provision, Mr. D would be subject to tax of $28,000 on this 
gain under section 877. However, Mr. D's U.S. tax under section 
877 would be reduced by the $20,000 of foreign tax paid, and 
Mr. D's resulting U.S. tax on this gain would be $8,000.
            Effect on tax treaties
      While it is believed that the expatriation tax 
provisions, as amended by the House bill, are generally 
consistent with the underlying principles of income tax 
treaties to the extent the House bill provides a foreign tax 
credit for items taxed by another country, it is intended that 
the purpose of the expatriation tax provisions, as amended, not 
be defeated by any treaty provision. The Treasury Department is 
expected to review all outstanding treaties to determine 
whether the expatriation tax provisions, as revised, 
potentially conflict with treaty provisions and to eliminate 
any such potential conflicts through renegotiation of the 
affected treaties as necessary. Beginning on the tenth 
anniversary of the enactment of the House bill, any conflicting 
treaty provisions that remain in force would take precedence 
over the expatriation tax provisions as revised.
            Required information reporting and sharing
      Under the House bill, a U.S. citizen who loses his or her 
citizenship is required to provide a statement to the State 
Department (or other designated government entity) which 
includes the individual's social security number, forwarding 
foreign address, new country of residence and citizenship and, 
in the case of individuals with a net worth of at least 
$500,000, a balance sheet. The entity to which such statement 
is to be provided is required to provide the Secretary of the 
Treasury copies of all statements received and the names of 
individuals who refuse to provide such statements. A long-term 
resident whose U.S. residency is terminated is required to 
attach a similar statement to his or her U.S. income tax return 
for the year of such termination. An individual's failure to 
provide the required statement results in the imposition of a 
penalty for each year the failure continues equal to the 
greater of (1) 5 percent of the individual's expatriation tax 
liability for such year, or (2) $1,000.
      The House bill requires the State Department to provide 
the Secretary of the Treasury with a copy of each certificate 
of loss of nationality (CLN) approved by the State Department. 
Similarly, the House bill requires the agency administering the 
immigration laws to provide the Secretary of the Treasury with 
the name of each individual whose status as a lawful permanent 
resident has been revoked or has been determined to have been 
abandoned.
      Further, the House bill requires the Secretary of the 
Treasury to publish in the Federal Register the names of all 
former U.S. citizens from whom it receives the required 
statements or whose names it receives under the foregoing 
information-sharing provisions.
            Treasury report on tax compliance by U.S. citizens and 
                    residents living abroad
      The Treasury Department is directed to undertake a study 
on the tax compliance of U.S. citizens and green-card holders 
residing outside the United States and to make recommendations 
regarding the improvement of such compliance. The findings of 
such study and such recommendations are required to be reported 
to the House Committee on Ways and Means and the Senate 
Committee on Finance within 90 days of the date of enactment.
      During the course of the 1995 Joint Committee on Taxation 
staff study on expatriation (see Joint Committee on Taxation, 
Issues Presented by Proposals to Modify the Tax Treatment of 
Expatriation (JCS-17-95), June 1, 1995), a specific issue was 
identified regarding the difficulty in determining when a U.S. 
citizen has committed an expatriating act with the requisite 
intent, and thus no longer has the obligation to continue to 
pay U.S. taxes on his or her worldwide income due to the fact 
that the individual is no longer a U.S. citizen. Neither the 
Immigration and Nationality Act nor any other Federal law 
requires an individual to request a CLN within a specified 
amount of time after an expatriating act has been committed, 
even though the expatriating act terminates the status of the 
individual as a U.S. citizen for all purposes, including the 
status of being subject to U.S. tax on worldwide income. 
Accordingly, it is anticipated that the Treasury report, in 
evaluating whether improved coordination between executive 
branch agencies could improve compliance with the requirements 
of the Internal Revenue Code, will review the process through 
which the State Department determines when citizenship has been 
lost, and make recommendations regarding changes to such 
process to recognize the importance of such date for tax 
purposes. In particular, it is anticipated that the Treasury 
Department will explore ways of working with the State 
Department to insure that the State Department will not issue a 
CLN confirming the commission of an expatriating act with the 
requisite intent necessary to terminate citizenship in the 
absence of adequate evidence of both the occurrence of the 
expatriating act (e.g., the joining of a foreign army) and the 
existence of the requisite intent.
            Effective date
      The expatriation tax provisions as modified by the House 
bill generally apply to any individual who loses U.S. 
citizenship, and any long-term residents whose U.S. residency 
is terminated, on or after February 6, 1995. For citizens, the 
determination of the date of loss of citizenship remains the 
same as under present law (i.e., the date of loss of 
citizenship is the date of the expatriating act). However, a 
special transition rule applies to individuals who committed an 
expatriating act within one year prior to February 6, 1995, but 
had not applied for a CLN as of such date. Such an individual 
is subject to the expatriation tax provisions as amended by the 
House bill as of the date of application for the CLN, but is 
not retroactively liable for U.S. income taxes on his or her 
worldwide income. In order to qualify for the exceptions 
provided for individuals who fall within one of the specified 
categories, such individual is required to submit a ruling 
request within 1 year after the date of enactment of the House 
bill.
      The special transition rule is illustrated by the 
following example. Mr. E joined a foreign army on October 1, 
1994 with the intent to relinquish his U.S. citizenship, but 
Mr. E does not apply for a CLN until October 1, 1995. Mr. E 
would be subject to the expatriation tax provisions (as 
amended) for the 10-year period beginning on October 1, 1995. 
Moreover, if Mr. E falls within one of the specified categories 
(i.e., Mr. E is age 18 when he joins the foreign army), in 
order to qualify for the exception provided for such 
individuals, Mr. E would be required to submit his ruling 
request within 1 year after the date of enactment of the House 
bill. Mr. E would not, however, be liable for U.S. income taxes 
on his worldwide income for any period after October 1, 1994.
Senate amendment
            In general
      The Senate amendment replaces the present-law 
expatriation income tax rules with rules that generally subject 
certain U.S. citizens who relinquish their U.S. citizenship and 
certain long-term U.S. residents who relinquish their U.S. 
residency to tax on the net unrealized gain in their property 
as if such property were sold for fair market value on the 
expatriation date. The Senate amendment also imposes 
information reporting obligations on U.S. citizens who 
relinquish their citizenship and long-term residents whose U.S. 
residency is terminated.
            Individuals covered
      The Senate amendment applies the expatriation tax to 
certain U.S. citizens and long-term residents who terminate 
their U.S. citizenship or residency. For this purpose, a long-
term resident is any individual who was a lawful permanent 
resident of the United States for at least 8 out of the 15 
taxable years ending with the year in which the termination of 
residency occurs. In applying this 8-year test, an individual 
is not considered to be a lawful permanent resident of the 
United States for any year in which the individual is taxed as 
a resident of another country under a treaty tie-breaker rule. 
An individual's U.S. residency is considered to be terminated 
when either the individual ceases to be a lawful permanent 
resident pursuant to section 7701(b)(6) (i.e., the individual 
loses his or her green-card status) or the individual is 
treated as a resident of another country under a tie-breaker 
provision of a tax treaty (and the individual does not elect to 
waive the benefits of such treaty).
      The expatriation tax under the Senate amendment applies 
only to individuals whose average income tax liability or net 
worth exceeds specified levels. U.S. citizens who lose their 
citizenship and long-term residents who terminate U.S. 
residency are subject to the expatriation tax if they meet 
either of the following tests: (1) the individual's average 
annual U.S. Federal income tax liability for the 5 taxable 
years ending before the date of such loss or termination is 
greater than $100,000, or (2) the individual's net worth as of 
the date of such loss or termination is $500,000 or more. The 
dollar amount thresholds contained in these tests are indexed 
for inflation in the case of a loss of citizenship or 
termination of residency occurring in any calendar year after 
1996.
      Exceptions from the expatriation tax under the Senate 
amendment are provided for individuals in two situations. The 
first exception applies to an individual who was born with 
citizenship both in the United States and in another country, 
provided that (1) as of the date of relinquishment of U.S. 
citizenship the individual continues to be a citizen of, and is 
taxed as a resident of, such other country, and (2) the 
individual was a resident of the United States for no more than 
8 out of the 15 taxable years ending with the year in which the 
relinquishment of U.S. citizenship occurred. The second 
exception applies to a U.S. citizen who relinquishes 
citizenship before reaching age 18\1/2\, provided that the 
individual was a resident of the United States for no more than 
5 taxable years before such relinquishment.
            Deemed sale of property upon expatriation
      Under the Senate amendment, individuals who are subject 
to the expatriation tax generally are treated as having sold 
all of their property at fair market value immediately prior to 
the relinquishment of citizenship or termination of residency. 
Gain or loss from the deemed sale of property is recognized at 
that time, generally without regard to provisions of the Code 
that would otherwise provide nonrecognition treatment. The net 
gain, if any, on the deemed said of all such property is 
subject to U.S. tax at such time to the extent it exceeds 
$600,000 ($1.2 million in the case of married individuals 
filing a joint return, both of whom expatriate).
      The deemed sale rule of the Senate amendment generally 
applies to all property interests held by the individual on the 
date of relinquishment of citizenship or termination of 
residency, provided that the gain on such property interest 
would be includible in the individual's gross income if such 
property interest were sold for its fair market value on such 
date. Special rules apply in the case of trust interests (see 
``Interests in trusts,'' below). U.S. real property interests, 
which remain subject to U.S. taxing jurisdiction in the hands 
of nonresident aliens, generally are excepted from the Senate 
amendment. An exception also applies to interests in qualified 
retirement plans and, subject to a limit of $500,000, interests 
in certain foreign pension plans as prescribed by regulations. 
The Secretary of the Treasury is authorized to issue 
regulations exempting other property interests as appropriate. 
For example, an exclusion may be provided for an interest in a 
nonqualified compensation plan of a U.S. employer, where 
payments from such plan to the individual following 
expatriation would continue to be subject to U.S. withholding 
tax.
      Under the Senate amendment, an individual who is subject 
to the expatriation tax is required to pay a tentative tax 
equal to the amount of tax that would be due for a hypothetical 
short tax year ending on the date the individual relinquished 
citizenship or terminated residency. Thus, the tentative tax is 
based on all income, gain, deductions, loss and credits of the 
individual for the year through such date, including amounts 
realized from the deemed sale of property. The tentative tax is 
due on the 90th day after the date of relinquishment of 
citizenship or termination of residency.
            Deferral of payment of tax
      Under the Senate amendment, an individual is permitted to 
elect to defer payment of the expatriation tax with respect to 
the deemed sale of any property. Under this election, the 
expatriation tax with respect to a particular property, plus 
interest thereon, is due when the property is subsequently 
disposed of. For this purpose, except as provided in 
regulations, the disposition of property in a nonrecognition 
transaction constitutes a disposition. In addition, if an 
individual holds property until his or her death, the 
individual is treated as having disposed of the property 
immediately before death. In order to elect deferral of the 
expatriation tax, the individual is required to provide 
adequate security to ensure that the deferred expatriation tax 
and interest ultimately will be paid. A bond in the amount of 
the deferred tax and interest constitutes adequate security. 
Other security mechanisms are also permitted provided that the 
individual establishes to the satisfaction of the Security of 
the Treasury that the security is adequate. In the event that 
the security provided with respect to a particular property 
subsequently becomes inadequate and the individual fails to 
correct such situation, the deferred expatriation tax and 
interest with respect to such property will become due. As a 
further condition to making this election, the individual is 
required to consent to the waiver of any treaty rights that 
would preclude the collection of the expatriation tax.
            Interests in trusts
      In general.--Under the Senate amendment, special rules 
apply to trust interests held by the individual at the time of 
relinquishment of citizenship or termination of residency. The 
treatment of trust interests depends upon whether the trust is 
a qualified trust. For this purpose, a ``qualified trust'' is a 
trust that is organized under and governed by U.S. law and that 
is required by its instruments to have at least one U.S. 
trustee.
      Constructive ownership rules apply to a trust beneficiary 
that is a corporation, partnership, trust or estate. In such 
cases, the shareholders, partners or beneficiaries of the 
entity are deemed to be the direct beneficiaries of the trust 
for purposes of applying these provisions. In addition, an 
individual who holds (or who is treated as holding) a trust 
interest at the time of relinquishment of citizenship or 
termination of residency is required to disclose on his or her 
tax return the methodology used to determine his or her 
interest in the trust, and whether such individual knows (or 
has reason to know) that any other beneficiary of the trust 
uses a different method.
      Nonqualified trusts.--If an individual holds an interest 
in a trust that is not a qualified trust, a special rule 
applies for purposes of determining the amount of the 
expatriation tax due with respect to such trust interest. The 
individuals interest in the trust is treated as a separate 
trust consisting of the trust assets allocable to such 
interest. Such separate trust is treated as having sold its 
assets as of the date of relinquishment of citizenship or 
termination of residency and having distributed all proceeds to 
the individual, and the individual is treated as having 
recontributed such proceeds to the trust. The individual is 
subject to the expatriation tax with respect to any net income 
or gain arising from the deemed distribution from the trust. 
The election to defer payment is available for the expatriation 
tax attributable to a nonqualifed trust interest.
      A beneficiary's interest in a nonqualified trust is 
determined on the basis of all facts and circumstances. These 
include the terms of the trust instrument itself, any letter of 
wishes or similar document, historical patterns of trust 
distributions, and the role of any trust protector or similar 
advisor.
      Qualified trusts.--If the individual has an interest in a 
qualified trust, a different set of rules applies. Under these 
rules, the amount of unrealized gain allocable to the 
individual's trust interest is calculated at the time of 
expatriation. In determining this amount, all contingencies and 
discretionary interests are assumed to be resolved in the 
individual's favor (i.e., the individual is allocated the 
maximum amount that he or she potentially could receive under 
the terms of the trust instrument). The expatriation tax 
imposed on such gains generally is collected when the 
individual receives distributions from the trust, or, if 
earlier, upon the individual's death. Interest is charged for 
the period between the date of expatriation and the date on 
which the tax is paid.
      If an individual has an interest in a qualified trust, 
the individual is subject to expatriation tax upon the receipt 
of any distribution from the trust. Such distributions may also 
be subject to U.S. income tax. For any distribution from a 
qualified trust made to an individual after he or she has 
expatriated, expatriation tax is imposed in an amount equal to 
the amount of the distribution multiplied by the highest tax 
rate generally applicable to trusts and estates, but in no 
event will the tax imposed exceed the deferred tax amount with 
respect to such trust interest. The ``deferred tax amount'' 
would be equal to (1) the tax calculated with respect to the 
unrealized gain allocable to the trust interest at the time of 
expatriation, (2) increased by interest thereon, and (3) 
reduced by the tax imposed under this provision with respect to 
prior trust distributions to the individual.
      If an individual's interest in a trust is vested as of 
the expatriation date (e.g., if the individual's interest in 
the trust is non-contingent and non-discretionary), the gain 
allocable to the individual's trust interest is determined 
based on the truth assets allocable to his or her trust 
interest. If the individual's interest in the trust is not 
vested as of the expatriation date (e.g., if the individual's 
trust interest is a contingent or discretionary interest), the 
gain allocable to his or her trust interest is determined based 
on all of the trust assets that could be allocable to his or 
her trust interest, determined by resolving all contingencies 
and discretionary powers in the individual's favor. In the case 
where more than one trust beneficiary is subject to the 
expatriation tax with respect to trust interests that are not 
vested, the rules are intended to apply so that the same 
unrealized gain with respect to assets in the trust is not 
taxed to both individuals.
      If the individual disposes of his or her trust interest, 
the trust ceases to be a qualified trust, or the individual 
dies, expatriation tax is imposed as of such date. The amount 
of such tax equal to the lesser of (1) the tax calculated under 
the rules for nonqualified trust interests applied as of such 
date or (2) the deferred tax amount with respect to the trust 
interest as of such date.
      If the individual agrees to waive any treaty rights that 
would preclude collection of the tax, the tax is imposed under 
this provision with respect to distributions from a qualified 
trust to the individual deducted and withheld from 
distributions. If the individual does not agree to such a 
waiver of treaty rights, the tax with respect to distributions 
to the individual is imposed on the trust, the trustee is 
personally liable therefore, and any other beneficiary of the 
trust has a right of contribution against such individual with 
respect to such tax. Similarly, in the case of the tax imposed 
in connection with an individual's disposition of a trust 
interest, the individual's death while holding a trust interest 
or the individual's holding of an interest in a trust that 
ceases to be qualified, the tax is imposed on the trust, the 
trustee is personnaly liable therefor, and any other 
beneficiary of the trust has a right of contribution against 
such individual with respect to such tax.
            Election to be treated as a U.S. citizen
      Under the Senate amendment, an individual is permitted to 
make an irrevocable election to continue to be taxed as a U.S. 
citizen with respect to all property that otherwise is covered 
by the expatriation tax. This election is an ``all-or-nothing'' 
election; an individual is not permitted to elect this 
treatment for some property but not other property. The 
election, if made, applies to all property that would be 
subject to the expatriation tax and to any property the basis 
of which is determined by reference to such property. Under 
this election, the individual continues to pay U.S. income 
taxes at the rates applicable to U.S. citizens following 
expatriation on any income generated by the property and on any 
gain realized on the disposition of the property, as well as 
any excise tax imposed with respect to property (see, e.g., 
sec. 1491). In addition, the property continues to be subject 
to U.S. gift, estate, and generation-shipping taxes. However, 
the amount of any transfer tax so imposed is limited to the 
amount of income tax that would have been due if the property 
had been sold for its fair market value immediately before the 
transfer or death. The $600,000 exclusion provided with respect 
to the expatriation tax under the Senate amendment is available 
to reduce the tax imposed by reason of this election. In order 
to make this election, the taxpayer is required to waive any 
treaty rights that would preclude the collection of the tax. 
The individual is also required to provide security to ensure 
payment of the tax under this election in such form, manner, 
and amount as the Secretary of the Treasury requires.
            Date of relinquishment of citizenship
      Under the Senate amendment, as individual is treated as 
having relinquished U.S. citizenship on the date that the 
individual first makes known to U.S. government of consular 
officer his or her intention to relinquish U.S. citizenship. 
Thus, a U.S. citizen who relinquishes citizenship by formally 
renouncing his or her U.S. nationality before a diplomatic or 
consular officer for the United States is treated as having 
relinquished ciizenship on that date, provided that the 
renunciation is later confirmed by the issuance of a CLN. A 
U.S. citizen who furnishes to the State Department a signed 
statement of voluntary relinquishment of U.S. nationality 
confirming the performance of an expatriating act with the 
requisite interest to relinquish his or her citizenship is 
treated as having relinquished his or her citizenship on the 
date the statement is so furnished (regardless of when the 
expatriating act was performed), provided that the voluntary 
relinquishment is later confirmed by the issuance of a CLN. If 
neither of these circumstances exist, the individual is treated 
as having relinquished citizenship on the date a CLN is issued 
or a certificate of naturalization is cancelled. The date of 
relinquishment of citizenship determined under the Senate 
amendment applies for all purposes.
            Effect on present-law expatriation provisions
      Under the Senate amendment, the present-law income tax 
provisions with respect to U.S. citizens who expatriate with a 
principal purpose of avoiding tax (sec. 877) and certain aliens 
who have a break in residency status (sec. 7701(b)(10)) do 
applying to U.S. citizens who are treated as relinquishing 
their citizenship on or after February 6, 1995 or to long-term 
U.S. residents who terminate their residency on or after such 
date. The special estate and gift tax provisions with respect 
to individuals who expatriate with a principal purpose of 
avoiding tax (secs. 2107 and 2501(a)(3)), however, continue to 
apply; a credit against the tax imposed solely by reason of 
such special provisions is allowed for the expatriation tax 
imposed with respect to the same property.
            Treatment of gifts and inheritances from an expatriate
      Under the Senate amendment, the exclusion from income 
provided in section 102 does not apply to the value of any 
property received by gift or inheritance from an individual who 
was subject to the expatriation tax (i.e., an individual who 
relinquished citizenship or terminated residency and to whom 
the expatriation tax was applicable). Accordingly, a U.S. 
taxpayer who receives a gift or inheritance from such an 
individual is required to include the value of such gift or 
inheritance in gross income and is subject to U.S. income tax 
on such amount.
            Required information reporting and sharing
      Under the Senate amendment, an individual who 
relinquishes citizenship or terminates residency is required to 
provide a statement which includes the individual's social 
security number, forwarding foreign address, new country of 
residence and citizenship and, in the case of individuals with 
a net worth of at least $500,000, a balance sheet. In the case 
of a former citizen, such statement is due not later than the 
date the individual's citizenship is treated as relinquished 
and is to be provided to the State Department (or other 
government entity involved in the administration of such 
relinquishment). The entity to which the statement is to be 
provided by former citizens is required to provide to the 
Secretary of the Treasury copies of all statements received and 
the names of individuals who refuse to provide such statements. 
In the case of a former long-term resident, the statement is 
provided to the Secretary of the Treasury with the individual's 
tax return for the year in which the individual's U.S. 
residency is terminated. An individual's failure to provide the 
statement required under this provision results in the 
imposition of a penalty for each year the failure continues 
equal to the greater of (1) 5 percent of the individual's 
expatriation tax liability for such year or (2) $1,000.
      The Senate amendment requires the State Department to 
provide the Secretary of the Treasury with a copy of each CLN 
approved by the State Department. Similarly, the Senate 
amendment requires the agency administering the immigration 
laws to provide the Secretary of the Treasury with the name of 
each individual whose status as a lawful permanent resident has 
been revoked or has been determined to have been abandoned.
      Further, the Senate amendment requires the Secretary of 
the Treasury to publish in the Federal Register the names of 
all former U.S. citizens with respect to whom it receives the 
required statements or whose names it receives under the 
foregoing information-sharing provisions.
            Treasury report on tax compliance by U.S. citizens and 
                    residents living abroad
      The Treasury Department is directed to undertake a study 
on the tax compliance of U.S. citizens and green-card holders 
residing outside the United States and to make recommendations 
regarding the improvement of such compliance. The findings of 
such study and such recommendations are required to be reported 
to the House Committee on Ways and Means and the Senate 
Committee on Finance within 90 days of the date of enactment.
            Effective date
      The provision is effective for U.S. citizens whose date 
of relinquishment of citizenship (as determined under the 
Senate amendment, see ``Date of relinquishment of citizenship'' 
above) occurs on or after February 6, 1995. Similarly, the 
provision is effective for long-term residents who terminate 
their U.S. residency on or after February 6, 1995.
      U.S. citizens who committed an expatriating act with the 
requisite intent to relinquish their U.S. citizenship prior to 
February 6, 1995, but whose date of relinquishment of 
citizenship (as determined under the Senate amendment) does not 
occur until after such date, are subject to the expatriation 
tax under the Senate amendment as of date of relinquishment of 
citizenship. However, the individual is not subject 
retroactively to worldwide tax as a U.S. citizen for the period 
after he or she committed the expatriating act (and therefore 
ceased being a U.S. citizen for tax purposes under present 
law). Such an individual continues to be subject to the 
expatriation tax imposed by present-law section 877 until the 
individual's date of relinquishment of citizenship (at which 
time the individual would be subject to the expatriation tax of 
the Senate amendment). The rules described in this paragraph do 
not apply to an individual who committed an expatriating act 
prior to February 6, 1995, but did not do so with the requisite 
intent to relinquish his or her U.S. citizenship.
      The tentative tax is not required to be paid, and the 
reporting requirements would not be required to be met, until 
90 days after the date of enactment. Such provisions apply to 
all individuals whose date of relinquishment of U.S. 
citizenship or termination of U.S. residency occurs on or after 
February 6, 1995.
Conference agreement
      The conference agreement follows the House bill with 
modifications. Under the conference agreement, modified rules 
apply if an individual who is covered by section 877 
contributes property that would produce U.S. source income to a 
foreign corporation if (1) the individual, directly or 
indirectly, owns 10 percent or more (by vote) of the stock of 
such corporation and (2) the individual, directly, indirectly 
or constructively, owns more than 50 percent (by vote or by 
value) of the stock of such corporation. For purposes of 
determining indirect and constructive ownership, the rules of 
section 958 apply. Under the modified rules, for the ten-year 
period following expatriation the individual is treated as 
receiving or accruing directly the income or gains received or 
accrued by the foreign corporation with respect to the 
contributed property (or other property which has a basis 
determined by reference to the basis of such contributed 
property). Moreover, if the individual disposes of the stock of 
the foreign corporation, the individual is subject to U.S. tax 
on the gain that would have been recognized if the corporation 
had sold such property immediately before the disposition. If 
the individual disposes of less than all of his or her stock in 
the foreign corporation, such disposition is treated as a 
disposition of a pro rata share (determined based on value) of 
such contributed property (e.g., if the individual owns 100 
shares of the foreign corporation's stock and disposes of 10 of 
such shares, such disposition is treated as a disposition of 10 
percent of the property contributed to the foreign 
corporation). Regulatory authority is provided to prescribe 
regulations to prevent the avoidance of this rule. Information 
reporting will be required as necessary to carry out the 
purposes of this rule. In addition, under the conference 
agreement, in the case of any former U.S. citizen, a request 
for a ruling that such individual did not have the avoidance of 
U.S. tax as a principal purpose for such individual's loss of 
citizenship would be due not earlier than 90 days after date of 
enactment.

       c. treatment of bad debt deductions of thrift institutions

      (Sec. 401 of the House bill and and sec. 611 of the 
Senate amendment.)
Present law
      Generally, a taxpayer engaged in a trade or business may 
deduct the amount of any debt that becomes wholly or partially 
worthless during the year (the ``specific charge-off'' method 
of sec. 166). Certain thrift institutions (building and loan 
associations, mutual savings banks, or cooperative banks) are 
allowed deductions for bad debts under methods more favorable 
than those granted to other taxpayers (and more favorable than 
the rules applicable to other financial institutions). 
Qualified thrift institutions may compute deductions for bad 
debts using either the specific charge-off method or the 
reserve method of section 593.
      Under section 593, a thrift institution annually may 
elect to deduct bad debts under either (1) the ``percentage of 
taxable income'' method applicable only to thrift institutions, 
or (2) the ``experience'' method that also is available to 
small banks. Under the ``percentage of taxable income'' method, 
a thrift institution generally is allowed a deduction for an 
addition to its bad debt reserve equal to 8 percent of its 
taxable income (determined without regard to this deduction and 
with additional adjustments). Under the experience method, a 
thrift institution generally is allowed a deduction for an 
addition to its bad debt reserve equal to the greater of: (1) 
an amount based on its actual average experience for losses in 
the current and five preceding taxable years, or (2) an amount 
necessary to restore the reserve to its balance as of the close 
of the base year.
      If a thrift institution becomes ineligible to use the 
section 593 method, it is required to change its method of 
accounting for bad debts and, under proposed Treasury 
regulations, is required to recapture all or a portion of its 
bad debt reserve. In addition, a thrift institution eligible to 
use the section 593 method may be subject to a form of reserve 
recapture if the institution makes certain excessive 
distributions to its shareholders (sec. 593(e)).
House bill
            Repeal of section 593
      The House bill repeals the section 593 reserve method of 
accounting for bad debts by thrift institutions, effective for 
taxable years beginning after 1995. Thrift institutions that 
would be treated as small banks are allowed to utilize the 
experience method applicable to such institutions, while thrift 
institutions that are treated as large banks are required to 
use only the specific charge-off method. Thus, the percentage 
of taxable income method of accounting for bad debts is no 
longer available for any financial institution.
            Treatment of recapture of bad debt reserves
      A thrift institution required to change its method of 
computing reserves for bad debts will treat such change as a 
change in a method of accounting, initiated by the taxpayer, 
and having been made with the consent of the Secretary of the 
Treasury. Any section 481(a) adjustment required to be 
recaptured with respect to such change generally will be 
determined solely with respect to the ``applicable excess 
reserves'' of the taxpayer. The amount of applicable excess 
reserves will be taken into account ratably over a six-taxable 
year period, beginning with the first taxable year beginning 
after 1995, subject to the residential loan requirement 
described below. In the case of a thrift institution that 
becomes a large bank, the amount of the institution's 
applicable excess reserves generally is the excess of (1) the 
balances of its reserve for losses on qualifying real property 
loans and its reserve for losses on nonqualifying loans as of 
the close of its last taxable year beginning before January 1, 
1996, over (2) the balances of such reserves as of the close of 
its last taxable year beginning before January 1, 1988 (i.e., 
the ``pre-1988 reserves.'') Similar rules are provided for 
small banks that are allowed to use the experience method.
      For taxable years that begin after December 31, 1995, and 
before January 1, 1998, if the taxpayer continues to make a 
certain level of residential loans, the recapture of the 
applicable excess reserves otherwise required to be taken into 
account for such years will be suspended.
      The balance of the pre-1988 reserves is subject to the 
provisions of section 593(e), as modified by the House bill 
(requiring recapture in the case of certain excessive 
distributions to shareholders.)
      Other special recapture rules are provided if a thrift 
institution no longer qualifies as a bank or if a thrift 
institution becomes a credit union.
            Effective date
      The provision generally is effective for taxable years 
beginning after December 31, 1995.
Senate amendment
      The Senate amendment generally is the same as the House 
bill, with certain modifications.
Conference agreement
      The conference agreement does not include either the 
provision in the House bill or the provision in the Senate 
amendment.

                   d. earned income credit provisions

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

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


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

                 e. modify treatment of foreign trusts

      (Secs. 601-606 of the Senate amendment).
Present law
            Inbound grantor trusts with foreign grantors
      Under the grantor trust rules (secs. 671-679), a grantor 
that retains certain rights or powers generally is treated as 
the owner of the trust's assets without regard to whether the 
grantor is a domestic or foreign person. Under these rules, 
U.S. trust beneficiaries are not subject to U.S. tax on 
distributions from a trust where a foreign grantor is treated 
as owner of the trust, even though no tax may be imposed on the 
trust income by any jurisdiction. In addition, a special rule 
provides that if a U.S. beneficiary of an inbound grantor trust 
transfers property to the foreign grantor by gift, that U.S. 
beneficiary is treated as the grantor of the trust to the 
extent of the transfer.
            Foreign trusts that are not grantor trusts
      Under the accumulation distribution rules (which 
generally apply to distributions from a trust in excess of the 
trust's distributable net income for the taxable year), a 
distribution by a foreign nongrantor trust of previously 
accumulated income generally is taxed at the U.S. beneficiary's 
average marginal rate for the prior 5 years, plus interest 
(secs. 666 and 667). Interest is computed at a fixed annual 
rate of 6 percent, with no compounding (sec. 668). If adequate 
records of the trust are not available to determine the proper 
application of the rules relating to accumulation distributions 
to any distribution from a trust, the distribution is treated 
as an accumulation distribution out of income earned during the 
first year of the trust (sec. 666(d)).
      If a foreign nongrantor trust makes a loan to one of its 
beneficiaries, the principal of such a loan generally is not 
taxable as income to the beneficiary.
            Outbound foreign grantor trusts with U.S. grantors
      Under the grantor trust rules, a U.S. person that 
transfers property to a foreign trust generally is treated as 
the owner of the portion of the trust comprising that property 
for any taxable year in which there is a U.S. beneficiary of 
any portion of the trust (sec. 679(a)). This treatment 
generally does not apply, however, to transfers by reason of 
death, to transfers made before the transferor became a U.S. 
person, or to transfers that represent sales or exchanges of 
property at fair market value where gain is recognized to the 
transferor.
            Residence of trusts and estates
      An estate or trust is treated as foreign if it is not 
subject to U.S. income taxation on its income that is neither 
derived from U.S. sources nor effectively connected with the 
conduct of a U.S. trade or business. Thus, if a trust is taxed 
in a manner similar to a nonresident alien individual, it is 
considered to be a foreign trust. Any other trust is treated as 
domestic.
      Section 1491 generally imposes a 35-percent excise tax on 
a U.S. person that transfers appreciated property to certain 
foreign entities, including a foreign trust. In the case of a 
domestic trust that changes its situs and becomes a foreign 
trust, it is unclear whether property has been transferred from 
a U.S. person to a foreign entity and, thus, whether the 
transfer is subject to the excise tax.
            Information reporting and penalties related to foreign 
                    trusts
      Any U.S. person that creates a foreign trust or transfers 
money or property to a foreign trust is required to report that 
event to the Treasury Department without regard to whether the 
trust is a grantor trust or a nongrantor trust. Similarly, any 
U.S. person that transfers property to a foreign trust that has 
one or more U.S. beneficiaries is required to report annually 
to the Treasury Department. In addition, any U.S. person that 
makes a transfer described in section 1491 is required to 
report the transfer to the Treasury Department.
      Any person that fails to file a required report with 
respect to the creation of, or a transfer to, a foreign trust 
may be subject to a penalty of 5 percent of the amount 
transferred to the foreign trust. Similarly, any person that 
fails to file a required annual report with respect to a 
foreign trust with U.S. beneficiaries may be subject to a 
penalty of 5 percent of the value of the corpus of the trust at 
the close of the taxable year. The maximum amount of the 
penalty imposed under either case may not exceed $1,000. A 
reasonable cause exception is available.
            Reporting of foreign gifts
      There is no requirement to report gifts or bequests from 
foreign sources.
House bill
      No provision.
Senate amendment
            Inbound grantor trusts with foreign grantors
      The Senate amendment generally applies the grantor trust 
rules only to the extent that they result, directly or 
indirectly, in income or other amounts being currently taken 
into account in computing the income of a U.S. citizen or 
resident or a domestic corporation. Certain exceptions apply to 
this general rule. Under one exception, the grantor trust rules 
continue to apply to a revocable trust. Under another 
exception, the grantor trust rules continue to apply to a trust 
where the only amounts distributable during the lifetime of the 
grantor are to the grantor or the grantor's spouse. The general 
rule denying grantor trust status does not apply to trusts 
established to pay compensation, and certain trusts in 
existence as of September 19, 1995 provided that such trust is 
treated as owned by the grantor under section 676 or 677 (other 
than sec. 677(a)(3)).\26\ In addition, the grantor trust rules 
generally apply where the grantor is a controlled foreign 
corporation (as defined in sec. 957). Finally, the grantor 
trust rules continue to apply in determining whether a foreign 
corporation is characterized as a passive foreign investment 
company (``PFIC''). Thus, a foreign corporation cannot avoid 
PFIC status by transferring its assets to a grantor trust.
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    \26\ The exception does not apply to the portion of any such trust 
attributable to any transfers made after September 19, 1995.
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      If a U.S. beneficiary of an inbound grantor trust 
transfers property to the foreign grantor, such beneficiary 
generally is treated as a grantor of a portion of the trust to 
the extent of the transfer. This rule applies without regard to 
whether the foreign grantor is otherwise treated as the owner 
of any portion of such trust. However, this rule does not apply 
if the transfer is a gift that qualifies for the annual 
exclusion described in section 2503(b).
      The Senate amendment provides a special rule that allows 
the Secretary of the Treasury to recharacterize a transfer, 
directly or indirectly, from a partnership or foreign 
corporation which the transferee treats as a gift or bequest, 
to prevent the avoidance of the purpose of section 672(f). In a 
case where a foreign person (that would be treated as the owner 
of a trust but for the above rule) actually pays tax on the 
income of the trust to a foreign country, it is anticipated 
that Treasury regulations will provide that, for foreign tax 
credit purposes, U.S. beneficiaries that are subject to U.S. 
income tax on the same income will be treated as having paid 
the foreign taxes that are paid by the foreign grantor. Any 
resulting foreign tax credits will be subject to applicable 
foreign tax credit limitations.
      Effective date.--The provisions described in this part 
are effective on the date of enactment.
            Foreign trusts that are not grantor trusts
      The Senate amendment changes the interest rate applicable 
to accumulation distributions from foreign trusts from simple 
interest at a fixed rate of 6 percent to compound interest 
determined in the same manner as interest imposed on 
underpayments of tax under section 6621(a)(2). Simple interest 
is accrued at the rate of 6 percent through 1995. Beginning on 
January 1, 1996 compound interest based on the underpayment 
rate is imposed on tax amounts determined under the 
accumulation distribution rules and the total simple interest 
for pre-1996 periods, if any. For purposes of computing the 
interest charge, the accumulation distribution is allocated 
proportionately to prior trust years in which the trust has 
undistributed net income (and the beneficiary receiving the 
distribution was a U.S. citizen or resident), rather than to 
the earliest of such years. An accumulation distribution is 
treated as reducing proportionately the undistributed net 
income from prior years.
      In the case of a loan of cash or marketable securities by 
the foreign trust to a U.S. grantor or a U.S. beneficiary (or a 
U.S. person related to such grantor or beneficiary), except to 
the extent provided by Treasury regulations, the Senate 
amendment treats the full amount of the loan as distributed to 
the grantor or beneficiary. It is expected that the Treasury 
regulations will provide an exception from this treatment for 
loans with arm's-length terms. In applying this exception, it 
is further expected that consideration be given to whether 
there is a reasonable expectation that a loan will be repaid. 
In addition, any subsequent transaction between the trust and 
the original borrower regarding the principal of the loan 
(e.g., repayment) is disregarded for all purposes of the Code. 
This provision does not apply to loans made to persons that are 
exempt from U.S. income tax.
      Effective date.--The provision to modify the interest 
charge on accumulation distributions applies to distributions 
after the date of enactment. The provision with respect to 
loans to U.S. grantors, U.S. beneficiaries or a U.S. person 
related to such a grantor or beneficiary applies to loans made 
after September 19, 1995.
            Outbound foreign grantor trusts with U.S. grantors
      The Senate amendment makes several modifications to the 
general rule of section 679(a)(1) under which a U.S. person who 
transfers property to a foreign trust generally is treated as 
the owner of the portion of the trust comprising that property 
for any taxable year in which there is a U.S. beneficiary of 
the trust. The Senate amendment also conforms the definition of 
certain foreign corporations the income of which is deemed to 
be accumulated for the benefit of a U.S. beneficiary to the 
definition of controlled foreign corporations (as defined in 
sec. 957(a)).
      Sale or exchange at market value.--Present law contains 
several exceptions to grantor trust treatment under section 
679(a)(1) described above. Under one of the exceptions, grantor 
trust treatment does not result from a transfer of property by 
a U.S. person to a foreign trust in the form of a sale or 
exchange at fair market value where gain is recognized to the 
transferor. In determining whether the trust paid fair market 
value to the transferor, the Senator amendment provides that 
obligations issued (or, to the extent provided by regulations, 
guaranteed) by the trust, by any grantor or beneficiary of the 
trust, or by any person related to any grantor or beneficiary 
(referred to as ``trust obligations'') are not taken into 
account except as provided in Treasury regulations. It is 
expected that the Treasury regulations will provide an 
exception from this treatment for loans with arm's-length 
terms. In applying this exception, it is further expected that 
consideration be given to whether there is a reasonable 
expectation that a loan will be repaid. Principal payments by 
the trust on any such trust obligations generally will reduce 
the portion of the trust attributable to the property 
transferred (i.e., the portion of which the transferor is 
treated as the grantor).
      Other transfers.--The Senate amendment adds a new 
exception to the general rule of section 679(a)(1) described 
above. Under the Senate amendment, a transfer of property to 
certain charitable trusts is exempt from the application of the 
rules treating foreign trusts with U.S. grantors and U.S. 
beneficiaries as grantor trusts.
      Transferors or beneficiaries who become U.S. persons.--
The Senate amendment applies the rule of section 679(a)(1) to 
certain foreign persons who transfer property to a foreign 
trust and subsequently become U.S. persons. A nonresident alien 
individual who transfers property, directly or indirectly, to a 
foreign trust and then becomes a resident of the United States 
within 5 years after the transfer generally is treated as 
making a transfer to the foreign trust on the individual's U.S. 
residency starting date (as defined in sec. 7701(b)(2)(A)). The 
amount of the deemed transfer is the portion of the trust 
(including undistributed earnings) attributable to the property 
previously transferred. Consequently, the individual generally 
is treated under section 679(a)(1) as the owner of that portion 
of the trust in any taxable year in which the trust has U.S. 
beneficiaries.
      Outbound trust migrations.--The Senate amendment applies 
the rules of section 679(a)(1) to a U.S. person that 
transferred property to a domestic trust if the trust 
subsequently becomes a foreign trust while the transferor is 
still alive. Such a person is deemed to make a transfer to the 
foreign trust on the date of the migration. The amount of the 
deemed transfer is the portion of the trust (including 
undistributed earnings) attributable to the property previously 
transferred. Consequently, the individual generally is treated 
under the rules of section 679(a)(1) as the owner of that 
portion of the trust in any taxable year in which the trust has 
U.S. beneficiaries.
      Effective date.--The provisions to amend section 679 
apply to transfers of property after February 6, 1995.
            Anti-abuse regulatory authority
      The Senate amendment includes an anti-abuse rule which 
authorizes the Secretary of the Treasury to issue regulations, 
on or after the date of enactment, that may be necessary or 
appropriate to carry out the purposes of the rules applicable 
to estates, trusts and beneficiaries, including regulations to 
prevent the avoidance of those purposes.
      Effective date.--The provision is effective on the date 
of enactment.
            Residence of trusts and estates
      The Senate amendment establishes a two-part objective 
test for determining for tax purposes whether a trust is 
foreign or domestic. If both parts of the test are satisfied, 
the trust is treated as domestic. Only the first part of the 
test applies to estates. Under the first part of the test, if a 
U.S. court (i.e., Federal, State, or local) exercises primary 
supervision over the administration of a trust or estate, the 
trust or estate is treated as domestic. Under the second part 
of the test, in order for a trust to be treated as domestic, 
one or more U.S. fiduciaries must have the authority to control 
all substantial decisions of the trust.
      Under the Senate amendment, if a domestic trust changes 
its situs and becomes a foreign trust, the trust is treated as 
having made a transfer of its assets to a foreign trust and is 
subject to the 35-percent excise tax imposed by present-law 
section 1491 unless one of the exceptions to this excise tax is 
applicable.
      Effective date.--The provision to modify the treatment of 
a trust or estate as a U.S. person applies to taxable years 
beginning after December 31, 1996. In addition, if the trustee 
of a trust so elects, the provision would apply to taxable 
years ending after the date of enactment. The amendment to 
section 1491 is effective on the date of enactment.
            Information reporting and penalties relating to foreign 
                    trusts
      The Senate amendment generally requires the grantor, 
transferor or executor (i.e., the ``responsible party'') to 
notify the Treasury Department upon the occurrence of certain 
reportable events. The term ``reportable event'' means the 
creation of any foreign trust by a U.S. person, the direct and 
indirect transfer of any money or property to a foreign trust, 
including a transfer by reason of death, and the death of a 
U.S. citizen or resident if any portion of a foreign trust was 
included in the gross estate of the decedent. In addition, a 
U.S. owner of any portion of a foreign trust is required to 
ensure that the trust files an annual return to provide full 
accounting of all the trust activities for the taxable year. 
Finally, any U.S. person that relieves (directly or indirectly) 
any distribution from a foreign trust is required to file a 
return to report the aggregate amount of the distributions 
received during the year.
      The Senate amendment provides that if a U.S. owner of any 
portion of a foreign trust fails to appoint a limited U.S. 
agent to accept service of process with respect to any requests 
and summons by the Secretary of the Treasury in connection with 
the tax treatment of any items related to the trust, the 
Secretary of the Treasury may determine the tax consequences of 
amounts to be taken into account under the grantor trust rules. 
In cases where adequate records are not provided to the 
Secretary of Treasury to determine the proper treatment of any 
distributions from a foreign trust, the distribution is 
includible in the gross income of the U.S. distributee and is 
treated as an accumulation distribution from the middle year of 
a foreign trust (i.e., computed by taking the number of years 
that the trust has been in existence divided by 2) for purposes 
of computing the interest charge applicable to such 
distribution, unless the foreign trust elects to have a U.S. 
agent for the limited purpose of accepting service of process 
(as described above).
      Under the Senate amendment, a person that fails to 
provide the required notice or return in cases involving the 
transfer of property to a new or existing foreign trust, or a 
distribution by a foreign trust to a U.S. person, is subject to 
an initial penalty equal to 35 percent of the gross reportable 
amount (generally the value of the property involved in the 
transaction). A failure to provide an annual reporting of trust 
activities will result in an initial penalty equal to 5 percent 
of the gross reportable amount. An additional $10,000 penalty 
is imposed for continued failure for each 30-day period (or 
fraction thereof) beginning 90 days after the Treasury 
Department notifies the responsible party of such failure. Such 
penalties are subject to a reasonable cause exception. In no 
event will the total amount of penalties exceed the gross 
reportable amount.
      Effective date.--The reporting requirements and 
applicable penalties generally apply to reportable events 
occurring or distributions received after the date of 
enactment. The annual reporting requirement and penalties 
applicable to U.S. grantors apply to taxable years of such 
persons beginning after the date of enactment.
            Reporting of foreign gifts
      The Senate amendment generally requires any U.S. person 
(other than certain tax-exempt organizations) that receives 
purported gifts or bequests from foreign sources totaling more 
than $10,000 during the taxable year to report them to the 
Treasury Department. The threshold for this reporting 
requirement is indexed for inflation. The definition of a gift 
to a U.S. person for this purpose excludes amounts that are 
qualified tuition or medical payments made on behalf of the 
U.S. person, as defined for gift tax purposes (sec. 
2503(e)(2)). If the U.S. person fails, without reasonable 
cause, to report foreign gifts as required, the Treasury 
Secretary is authorized to determine, in his sole discretion, 
the tax treatment of the unreported gifts. In addition, the 
U.S. person is subject to a penalty equal to 5 percent of the 
amount of the gift for each month that the failure continues, 
with the total penalty not to exceed 25 percent of such amount.
      Effective date.--The provision applies to amounts 
received after the date of enactment.
Conference agreement
      The conference agreement does not include the Senate 
amendment.

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

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

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

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