[Federal Register Volume 60, Number 169 (Thursday, August 31, 1995)]
[Rules and Regulations]
[Pages 45344-45372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21265]



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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 400 and 411

[BPD-482-FC]
RIN 0938-AD73


Medicare Program; Medicare Secondary Payer for Individuals 
Entitled to Medicare and Also Covered Under Group Health Plans

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule with comment period.

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SUMMARY: These regulations establish limits on Medicare payment for 
services furnished to individuals who are entitled to Medicare on the 
basis of disability and who are covered under large group health plans 
(LGHPs) by virtue of their own or a family member's current employment 
status with an employer; and prohibit LGHPs from taking into account 
that those individuals are entitled to Medicare on the basis of 
disability.
    They also implement certain other provisions of section 1862(b) of 
the Social Security Act, as amended by the Omnibus Budget 
Reconciliation Acts of 1986, 1989, 1990, and 1993 and the Social 
Security Act Amendments of 1994. Those amendments affect the Medicare 
secondary payer rules for individuals who are entitled to Medicare on 
the basis of age or who are eligible or entitled on the basis of end 
stage renal disease and who are also covered under group health plans 
(GHPs). The provisions that apply to all three groups include--
     The rules under which HCFA determines that a GHP or LGHP 
is not in conformance with the requirements and prohibitions of the 
statute;
     The appeals procedures respecting GHPs and LGHPs that HCFA 
finds to be nonconforming.
     The referral of nonconforming plans to the Internal 
Revenue Service; and
     The rules for recovery of conditional or mistaken Medicare 
payments made by HCFA.
    The intent of the MSP provisions is to ensure that Medicare does 
not pay primary benefits for services for which a GHP or LGHP is the 
proper primary payer and that beneficiaries covered under these plans 
are not disadvantaged vis-a-vis other individuals who are covered under 
the plan but are not entitled to Medicare.

DATES: Effective Dates: These regulations are effective on October 2, 
1995.
    Comment Date: We will consider comments that we receive no later 
than 5 p.m. on October 30, 1995.

ADDRESSES: Mail an original and 3 copies of written comments to the 
following address:

Health Care Financing Administration, Department of Health and Human 
Services, Attention: BPD-482-FC, P.O. Box 26676, Baltimore, MD 21207.

    If you prefer, you may deliver original and 3 copies of your 
written comments to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or
Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code BPD-482-FC. Comments received timely will be available for 
public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 309-G of 
the Department's offices at 200 Independence Avenue, SW., Washington, 
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m. 
(phone: (202) 690-7890).
    For comments that relate to information collection requirements, 
mail a copy of comments to:

Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Bldg., Washington, D.C. 30503, 
Attention: Allison Herron Eydt, Desk Officer for HCFA

    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
the Superintendent of Documents, or enclose your Visa or Master Card 
number and expiration date. Credit card orders can also be placed by 
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
2250. The cost for each copy is $8. As an alternative, you can view and 
photocopy the Federal Register document at most libraries designated as 
Federal Depository Libraries and at many other public and academic 
libraries throughout the country that receive the Federal Register.

FOR FURTHER INFORMATION CONTACT: Herbert Pollock, (410) 786-4474.

[[Page 45345]]


SUPPLEMENTARY INFORMATION:

I. Background

    During the first 15 years of the Medicare program, Medicare was the 
primary payer for all Medicare-covered services with the sole exception 
of services covered under workers' compensation as provided in section 
1862 of the Act. Beginning in 1980, the Congress passed a series of 
amendments to section 1862 of the Act to make Medicare the secondary 
payer for services covered by other types of insurance. In general, 
Medicare is now secondary to all of the following:
    1. All forms of liability insurance.
    2. Automobile and non-automobile no-fault insurance.
    3. Group health plans (GHPs) that cover end-stage renal disease 
(ESRD) patients (during the first 18 months of Medicare eligibility or 
entitlement).
    4. GHPs that cover aged individuals who have current employment 
status with an employer and aged spouses of individuals of any age who 
have current employment status with an employer.
    5. Large group health plans (LGHPs) that cover disabled individuals 
if the individual or a member of the individual's family has current 
employment status with an employer.

(Current employment status is sometimes referred to as ``current 
employment.'')

II. Statutory Amendments

A. Overview

    1. Section 9319 of the OBRA '86 (Pub. L. 99-509) added a new 
section 1862(b)(4), which made Medicare secondary to benefits payable 
by ``large group health plans'' for services furnished to ``active 
individuals,'' who are entitled to Medicare based on disability.
    2. Section 6202(b) of OBRA '89 (Pub. L. 101-239) reorganized and 
clarified the Medicare secondary payer (MSP) provisions and transferred 
the provisions applicable to the disabled to section 1862(b)(1)(B) of 
the Act.
    3. Section 4204(g) of OBRA '90 (Pub. L. 101-508) added a new 
section 1862(b)(3)(C), which prohibits employers and other entities 
from offering Medicare beneficiaries incentives not to enroll or to 
terminate enrollment in a GHP that would otherwise be primary to 
Medicare. Section 1862(b)(3)(C) of the Act provides for a civil money 
penalty of up to $5,000 for each violation.
    Section 4203(c)(1) of OBRA '90 redefined the 12-month ESRD MSP 
coordination period, during which GHPs are required to pay primary to 
Medicare, and extended that redefined period from 12 to 18 months. A 
final rule with comment period addressing the section 4203(c)(1) 
changes was published in the Federal Register on August 12, 1992 (57 FR 
36006-36016).
    4. Section 13561(e) of OBRA '93 (Pub. L. 103-66), effective August 
10, 1993, changed the MSP provisions for the disabled to make Medicare 
the secondary payer for individuals who have LGHP coverage by virtue of 
the individual's own or a family member's ``current employment status 
with an employer''. An individual has current employment status with an 
employer if the individual is an employee, is the employer (including a 
self-employed person), or is associated with the employer in a business 
relationship. In general, this means that the individual is on the 
employment rolls of the employer. Before this change in the law, 
Medicare was also secondary payer for certain nonworking disabled 
individuals who were considered to have employee status based on their 
relationship with the employer, even though they may not have been on 
the employment rolls.
    5. Sections 151(c) and 157(b) of the Social Security Act Amendments 
of 1994 (SSAA '94) (Pub. L. 103-432) made miscellaneous and technical 
corrections to OBRA '89, OBRA '90, and OBRA '93. Section 151(b)(3) 
added express authority to assess interest if a conditional Medicare 
payment is not refunded within 60 days.

B. OBRA '86 Amendments--Active Individuals Entitled to Medicare on the 
Basis of Disability

    These amendments--
    1. Defined the term ``active individual'' as ``an employee (as may 
be defined in regulations), the employer, an individual associated with 
the employer in a business relationship, or a member of the family of 
any of such persons.''
    2. Defined ``large group health plan'' by reference to section 
5000(b) of the Internal Revenue Code (IRC) of 1986, which defined the 
term as ``a plan of, or contributed to by, an employer or employee 
organization (including a self-insured plan), 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, that covers employees of at 
least one employer that normally employed at least 100 employees on a 
typical business day during the previous calendar year.'' (We have 
interpreted the phrase ``normally employed at least 100 employees on a 
typical business day'' to mean that the employer employed at least 100 
full-time or part-time employees during 50 percent or more of the 
employer's business days during the previous calendar year.)
    3. Provided that Medicare may not pay for services furnished to an 
active individual on or after January 1, 1987, and before January 1, 
1992, to the extent that payment has been made or can reasonably be 
expected to be made by an LGHP. (Section 4203(b) of OBRA '90 changed 
the sunset provision from January 1, 1992, to October 1, 1995, and 
section 13561(b) of OBRA '93 changed that date to October 1, 1998.)
    4. Expanded HCFA's recovery rights under previous amendments to the 
Medicare statute by providing that HCFA may bring an action against any 
entity that fails to pay primary benefits for services furnished to 
active individuals entitled on the basis of disability, as required 
under section 1862(b) of the Act, and may collect double damages.
    5. Created a private cause of action under which any claimant may 
seek double damages from any entity responsible for payment that fails 
to pay primary benefits as required by the statute.
    6. Provided that an LGHP ``may not take into account that an active 
individual is eligible for or receives'' Medicare benefits on the basis 
of disability. The effect of this prohibition was to--
     Make Medicare secondary payer for active individuals who 
were entitled to Medicare on the basis of disability and whose LGHP 
coverage was linked to their status as active individuals; for example, 
individuals who had LGHP coverage because they were employees or 
spouses of employees; and
     Require the LGHP to treat such active individuals the same 
way it treated similarly situated individuals.

C. OBRA '89 Amendments

    The OBRA '89 amendments--
    1. Revised the definition of ``active individual'' to include the 
phrase ``self-employed individual (such as the employer)'';
    2. Extended to individuals with ESRD and to the aged the 
prohibition against taking into account Medicare entitlement.
    3. Required that GHPs--
     Furnish to aged employees and spouses the same benefits, 
under the same conditions, that they furnish to employees and spouses 
under 65; and
     Not differentiate in the benefits they provide between 
individuals with ESRD and other plan enrollees, on the basis of 

[[Page 45346]]
the existence of ESRD, the need for dialysis, or in any other manner.
    4. Extended to the MSP provisions for the aged and for those with 
ESRD, the Federal Government's right to recover double damages; and
    5. Exempted from the MSP provisions services performed for a 
religious order by members of the order who take a vow of poverty; and
    6. Provided a single formula for determining Medicare secondary 
payment amounts under all MSP provisions.

D. OBRA '90 Amendments

    These amendments made the following changes:
    1. Added a new section 1862(b)(3)(C) to the Act, which prohibited 
employers or other entities from offering to an individual entitled to 
Medicare any financial or other incentive not to enroll, or to 
terminate enrollment, in a GHP that would be primary to Medicare, 
unless the incentive was also offered to all individuals who are 
eligible for coverage under the plan. That section also provided for a 
penalty of up to $5,000 for each violation, which was to be applied in 
accordance with provisions of section 1128A of the Act.
    2. Redefined and extended the ESRD MSP coordination period. The 12-
month ESRD coordination period was redefined to begin with the first 
month of ESRD-based eligibility or entitlement, and that redefined 
period was extended to 18 months. (Previously, the ESRD coordination 
period was a 12-month period that began with the first month of 
dialysis rather than with the first month of ESRD-based eligibility or 
entitlement, which generally occurs as of the fourth month of 
dialysis.) On August 12, 1992, we published a final rule with comment 
period (57 FR 36006-36016) that incorporated this change. We received 
one comment on this particular aspect, but made no change in the 
confirming final rule published on November 2, 1993 (58 FR 58502-
58504).

E. OBRA '93--Amendments Treatment of Individuals Entitled to Medicare 
on the Basis of Disability Who Have LGHP Coverage by Virtue of Their 
Own or a Family Member's Current Employment Status

    The OBRA '93 amendments made the following changes, effective 
August 10, 1993:
    1. Eliminated the concept ``active individual'' and provided 
instead that the MSP disability provision applies only if the 
individual, or a family member, is covered under an LGHP ``by virtue of 
the individual's current employment status with an employer''.
    2. Provided that an individual has ``current employment status'' if 
the individual is an employee, the employer (including a self-employed 
person), or is associated with the employer in a business relationship.
    3. Required use of the IRS aggregation rules for determining 
employer size under the working aged and disability provisions.
    4. Modified the MSP provisions for individuals who are eligible for 
or entitled to Medicare on the basis of ESRD and also entitled on the 
basis of age or disability.
    5. Clarified that GHPs and LGHPs of governmental entities are 
subject to the MSP provisions (although governmental entities are 
exempt from the excise tax applicable to employers that participate in 
nonconforming plans.)

F. The Social Security Act Amendments of 1994 (SSAA '94)

    The SSAA '94 made the following miscellaneous and technical 
corrections:
    1. Effective as if included in the enactment of OBRA '93--
    A. Clarified that plans must offer the same benefits under the same 
conditions to the age 65 or older spouse of any employee; that is, 
without regard to the employee's age. (With regard to spouses, the 
wording of OBRA '93 could have been misconstrued as applying the 
working aged provision only to age 65 or older spouses of employees age 
65 or older.) (Section 151(c)(1).)
    B. Clarified that GHPs and LGHPs of governmental entities have 
always been subject to the MSP provisions. (OBRA '93 could have been 
misconstrued as providing that plans of governmental entities are 
subject to the MSP provisions only as of August 10, 1993, the date of 
enactment of OBRA '93, whereas governmental entities have always been 
subject to the MSP provisions, with the exception of the excise tax 
applicable to employers that participate in the nonconforming plans.) 
(Sections 151(c) (9) and (10).)
    2. Effective as if included in the enactment of OBRA '90--
    A. Clarified that employers and other entities are prohibited from 
offering to an individual entitled to Medicare any financial or other 
incentive not to enroll in, or to terminate enrollment in, a GHP that 
would be primary to Medicare, irrespective of whether the incentive is 
also offered to all other individuals who are eligible for coverage 
under the plan. (Section 157(b)(7). Refer to section VIII-K of this 
preamble.)
    B. Clarified the extent to which section 1128A of the Act applies 
to the civil money penalty of section 1862(b)(3)(C) of the Act. 
(Section 157(b)(7). Refer to section VIII-K of this preamble.)
    3. Effective as if included in the enactment of OBRA '89--Clarified 
that under section 1862(b)(1)(C) plans may pay benefits secondary to 
Medicare after the 18-month period during which the plan is prohibited 
from taking into account ESRD-based eligibility or entitlement but may 
not otherwise differentiate in benefits provided vis-a-vis other plan 
enrollees. The OBRA '89 language could have been misconstrued as 
permitting plans to discriminate against enrollees who had ESRD after 
the 18-month coordination period. That is, OBRA '89 broadly stated that 
plans were not prohibited from ``taking into account'' ESRD-based 
eligibility or entitlement after the 18-month coordination period; the 
SSAA '94 corrected that language to narrowly state that plans are not 
prohibited from paying benefits secondary to Medicare after the 18-
month coordination period. (Section 151(c)(5). Refer to section VIII-D 
of this preamble.)
    The SSAA '94 also added express authority to assess interest if a 
conditional Medicare primary payment is not refunded within 60 days. As 
authorized under common law, and in accordance with HHS regulations, 
consistent with the Federal Claims Collection Act (31 U.S.C. 3711), 
HCFA may charge interest on amounts that any responsible party does not 
refund timely. Section 151(b)(3) amended section 1862(b)(2)(B)(i) of 
the Act to make explicit that the Secretary may charge interest when 
timely reimbursement is not made. This self-implementing statutory 
clarification is effective for items and services furnished on or after 
the date of enactment, October 31, 1994. The rate of interest provided 
in section 1862(b)(2)(B)(i) of the Act is the same as in sections 
1815(d) and 1833(j), which is reflected in regulations at 42 CFR 
405.376(d). We will include detailed policies regarding the statutory 
provision in a future regulation. (Refer to section VIII-L of this 
preamble.)

III. Study by the Comptroller General

    OBRA '86 required the Comptroller General to conduct a study to 
determine the impact of the MSP provisions for the disabled on the 
access that disabled individuals and members of their families have to 
employment and health insurance. In the April 10, 1991, report entitled 
Medicare: Millions in Disabled Beneficiary Expenditures Shifted to 

[[Page 45347]]
Employers, the Comptroller General concluded that ``The OBRA '86 
secondary payer provision has met its objective of shifting 
considerable Medicare expenditures to LGHPs apparently without 
significant adverse effect'' on the access of disabled beneficiaries 
and their families to employment and health services. The report 
further stated: ``In addition to suffering little adverse effect from 
the provision, the disabled are safeguarded by regulations proposed by 
HCFA. These rules discourage employers from taking many of the actions 
they were considering that would discriminate against disabled 
beneficiaries and their families in regard to health insurance.'' The 
report also recommended that HCFA change its policy to remove the 
``indicators'' that, prior to the changes made by OBRA '93, were used 
to determine whether an individual who is not actively working for an 
employer is considered an employee. That recommendation echoes those 
made by many of the commenters in their responses to the proposed rules 
published on March 8, 1990 at 55 FR 8491.

IV. Related Statutes

A. Internal Revenue Code (IRC)

    1. OBRA '86 also amended the IRC to--
     Define ``nonconforming group health plan'' as a large 
group health plan that at any time during a calendar year takes into 
account that an active individual is eligible for or is receiving 
Medicare benefits based on entitlement to Social Security disability 
benefits; and
     Impose, on any employer or employee organization (other 
than a governmental entity) that contributes to a nonconforming LGHP, a 
tax equal to 25 percent of the expenses the employer or employee 
organization incurred during the calendar year for each LGHP to which 
the employer or employee organization contributes.
    2. OBRA '89 further amended the IRC to--
     Substitute the following definition of ``nonconforming 
group health plan'' to replace the OBRA '86 definition.

    ``For purposes of this section, the term nonconforming group 
health plan means a group health plan or large group health plan 
that at any time during a calendar year does not comply with the 
requirements of subparagraphs (A) and (C) or subparagraph (B), 
respectively, of section 1862(b)(1) of the Social Security Act.''

     Provide that the tax imposed by OBRA '86 on employers and 
employee organizations that contribute to or sponsor LGHPs that do not 
comply with the MSP provisions for the disabled also applies with 
respect to such sponsors or contributors that do not comply with the 
MSP provisions for the working aged or the MSP provisions for ESRD 
beneficiaries.
     OBRA '93 expanded the definition of ``nonconforming group 
health plan'' to include a group health plan or LGHP that fails to 
refund to HCFA conditional primary Medicare payments.
    Under these IRC amendments, HCFA reports to the IRS GHPs and LGHPs 
that do not comply with any of the following:
     The prohibition against taking into account Medicare 
entitlement when Medicare is the secondary payer for aged, ESRD, or 
disabled beneficiaries.
     The requirement that employees and spouses age 65 or older 
be given equal benefits under the same conditions as those under 65.
     The prohibition against differentiating, in the services 
covered and payments made, between persons having ESRD and other 
individuals covered by the plan.
     The requirement that GHPs and LGHPs refund conditional 
primary Medicare payments.

B. Americans With Disabilities Act

    The Americans with Disabilities Act of 1990, Pub. L. 101-336 (42 
U.S.C. 12101 et seq.) is related to the aims of this rule with respect 
to the MSP provision for the disabled. Section 102 of that statute 
prohibits discrimination against the physically or mentally disabled in 
private places of employment. This Act is administered by the Equal 
Employment Opportunity Commission.

C. COBRA Continuation Coverage Amendments
    Title X of the Consolidated Omnibus Budget Reconciliation Act of 
1985 (Pub. L. 99-272, commonly referred to as COBRA) amended the 
following statutes:
     Section 4980B of the IRC (26 U.S.C. 4980B).
     Part 6 of title I, subtitle B of the Employee Retirement 
Income Security Act (ERISA) (29 U.S.C. 1161-1168).
     Title XXII of the Public Health Service Act (42 U.S.C. 
300bb-1 et seq.)
    Under the COBRA amendments, certain GHPs must offer employees (and 
their dependents), who would otherwise lose coverage under the plan as 
a result of any of five specified ``qualifying events'', an opportunity 
to elect continuation of the coverage they had immediately before the 
qualifying event. ``Qualifying events'' include termination of 
employment (other than for gross misconduct) and reduction in hours of 
work. Continuation coverage must extend at least from the date of the 
qualifying event to the earliest of a list of terminating events. 
Terminating events include entitlement to Medicare and expiration of 
the maximum period of continued coverage specified for a particular 
qualifying event. For termination of employment or reduction of hours 
of work, the maximum coverage period is 18 months. This is extended to 
29 months in the case of a qualified beneficiary who is determined to 
have been disabled at the time of the qualifying event. For other 
qualifying events the maximum is generally 36 months.
    GHP COBRA continuation coverage is generally exempt from the 
Medicare secondary payer provisions. Part VII-E of this preamble 
contains a detailed discussion of the MSP provisions vis-a-vis the 
COBRA provisions.

V. Provisions of the Proposed Rule

    The March 8, 1990, notice of proposed rulemaking proposed to add a 
new subpart G to part 411--Exclusions from Medicare and Limitations on 
Medicare Payment.
    At that time, subpart B of part 411 set forth general rules and 
definitions applicable to all of the Medicare secondary payer 
provisions. Included were rules on recovery and waiver of recovery, 
Medicare secondary payments, and the effect of third-party payments on 
benefit utilization and deductibles. Accordingly, proposed subpart G 
included only those rules that apply exclusively to LGHPs or that 
differed to some extent from similar rules applicable to other third 
party payers.
    A. In Section 411.82, Definitions, we proposed to--
    1. Interpret ``typical business day'' as 50 percent or more of the 
employer's regular business days during the previous calendar year; and
    2. Define ``employee'' as an individual who is actively working or 
whose relationship to an employer shows that he or she has employee 
status within the ordinary understanding of the term ``employee.'' In 
Sec. 411.83, Determination of Employee Status, we proposed that 
employee status be established if the individual met any of the 
following conditions:
     Received from an employer payments that are subject to 
taxes under the Federal Insurance Contributions Act (FICA) or would be 
subject to such taxes except for the fact that the payment is exempt 
from those taxes under the IRC. 

[[Page 45348]]

     Was termed an employee under a Federal or State law or in 
accordance with a court decision.
     Was designated as an employee in the employer's records; 
that is, had not had his or her employee status terminated. We proposed 
that termination from payroll, in and of itself, not be considered 
termination from employee status.
    We also gave examples of other commonly accepted indicators of 
employment status, examples that we developed in consultation with 
other government agencies, including the Department of Labor and the 
IRS.
    We considered adding the following indicators to the list that 
appeared in proposed Sec. 411.83(b):
     Accrues years of service credits for pension purposes 
(that is, the individual's age-based pension rights continue to 
increase); and
     May become vested under the employer's retirement plan, 
even though he or she was not vested at the time the disability was 
established.
    We specifically requested comments on whether to include these two 
indicators in the final rule.
    B. In Section 411.88, Basis for Medicare primary payments, we 
proposed that failure to furnish information necessary for HCFA to 
determine whether an LGHP was primary to Medicare could lead to denial 
of payment of Medicare primary benefits.
    The proposed rule also--
    1. Defined three key terms as follows:
     ``Disabled active individual'', as an active individual 
who has been determined to be ``under a disability'' under section 223 
of the Act, as evidenced by issuance of an SSA notification to that 
effect, and who is not, and could not upon filing an application 
become, entitled to Medicare on the basis of ESRD.
     ``Nonconforming LGHP'', as an LGHP that, at any time 
during a calendar year, discriminates against a disabled active 
individual who is eligible for, or receives, Medicare benefits on the 
basis of disability.
     ``Family member'', as any person whose relationship to the 
active individual is the basis for coverage under an LGHP; for example, 
the relationship of a divorced or common law spouse or that of an 
adopted, foster, natural or step-child, parent, or sibling.
    2. Specified that a disabled active individual could accept or 
reject the LGHP coverage offered by the employer, and that, if the 
individual refuses the LGHP, the employer may not offer a plan that 
pays benefits secondary to Medicare.
    3. Provided examples of LGHP actions that would be considered 
discriminatory.
    4. Indicated the kinds of information that HCFA might require to 
document an LGHP's compliance with the nondiscrimination rule.
    5. Specified that HCFA would refer to the IRS any LGHP that it 
finds to be a nonconforming LGHP.
    6. Specified that the IRS imposes, on employers or employee 
organizations that contribute to a nonconforming LGHP, the tax provided 
for under section 5000 of the IRC of 1986.

VI. Reorganization of the Rules and Conforming Changes

    Because of the statutory changes discussed above, we needed a new 
subpart for the provisions that now apply generally to all GHP MSP 
situations. We also needed to make room for incorporating in logical 
order any additional regulations that may be required by future 
amendments to the Act. Accordingly, this final rule--
     Redesignates subparts E and F as F and G, respectively;
     Establishes a new subpart E for the general provisions, 
including appeals provisions that were not in the NPRM; and
     Designates the special provisions for the disabled under a 
new subpart H.
    New subpart E includes--
     Most of the definitions that were previously scattered 
among several subparts (Sec. 411.101).
     A statement of the basic prohibitions under the ESRD, 
working aged, and disability MSP provisions (Sec. 411.102).
     A statement of the prohibition against employers offering 
incentives to encourage Medicare beneficiaries not to enroll in or to 
terminate enrollment in a GHP that would be primary to Medicare 
(Sec. 411.103).
     An explanation of the terms ``current employment status'' 
and ``coverage by virtue of current employment status'' (Sec. 411.104).
     The method for determining employer size (Sec. 411.106).
     Examples of actions that constitute ``taking into 
account'' Medicare entitlement and of permissible actions 
(Sec. 411.108).
     Basis for determination of nonconformance (Sec. 411.110).
     Documentation of conformance (Sec. 411.112).
     Determination of nonconformance and notice of that 
determination (Secs. 411.114 and 411.115).
     Appeals procedures (Secs. 411.120 through 411.126).
     Referral to IRS (Sec. 411.130).
    The following table shows how the section numbers in the final rule 
differ from the numbers in the NPRM. The revised designations reflect 
the reorganization of the text required by the addition of rules that 
now apply to all three groups of beneficiaries (aged, disabled, and 
ESRD) and the new rules on appeals procedures.

----------------------------------------------------------------------------------------------------------------
                                                            Proposed rule designation     Final rule designation
             Heading as shown in final rule                          section                     section        
----------------------------------------------------------------------------------------------------------------
Basis and scope........................................  411.80........................                  411.100
Definitions............................................  411.82........................         411.101; 411.201
Current employment status..............................  411.83........................                  411.104
Medicare benefits secondary to LGHP benefits...........  411.85........................                  411.204
Basis for Medicare primary payments and limits on        411.88........................                  411.206
 secondary payments.                                                                                            
Recovery of conditional Medicare payments..............  411.92........................                   411.24
Basic prohibitions and requirements....................  411.94(b).....................                  411.102
Taking into account entitlement to Medicare............  411.94(d).....................                  411.108
Basis for determination of nonconformance..............  411.94(c).....................                  411.110
Documentation of conformance...........................  411.94(e)&(f).................                  411.112
Determination of nonconformance........................  411.94(d).....................                  411.114
Referral to the Internal Revenue Service (IRS).........  411.94(g).....................                  411.130
----------------------------------------------------------------------------------------------------------------

    Note: The headings are those used in the final rule. In 
referring to the proposed rule in the preamble discussion, we use 
the column 1 designations. In referring to the final rule, we use 
the column 2 designations.


[[Page 45349]]

    The statutory changes, the reorganization of the regulations text, 
and other changes that have occurred since these rules were published 
required the following conforming changes in subpart B:
    1. Revise Sec. 411.20 (Basis and scope) to--
     Transfer to the new subpart E the statutory basis for the 
rules that apply to GHP coverage.
     Reflect this change in the ``Scope'' paragraph of the 
section.
     Expand references (in this section and in Sec. 411.21) to 
include the new subpart H.
    2. Revise Sec. 411.24 (Amount of recovery) as follows:
    a. In paragraph (c), to--
     Reflect the fact that OBRA '89 extended to all MSP 
situations the right (previously limited to MSP for the disabled) to 
recover double the amount of damages if it is necessary for HCFA to 
take legal action in order to recover;
     Remove the parenthetical reference to the double damages 
provision and expressly state the circumstances under which HCFA can 
recover double damages; and
     Specify that responsible parties include both third party 
payers and individuals or entities that have received third party 
payments that must be refunded.
    b. In paragraph (e), to make clear that third parties against which 
HCFA may take action are those that are ``required to make'', as well 
as those who are ``responsible for making'', primary payments. This 
change is necessary to conform to a language change made by OBRA '89.
    c. To add a new paragraph (m) (Interest charges) to specify the 
explicit authority provided by the Social Security Act Amendments of 
1994, which is in addition to the long-standing authority provided by 
common law and by HHS regulations (45 CFR 30.13) that are consistent 
with the Federal Claims Collection Act (31 U.S.C. 3711), for HCFA to 
charge interest on amounts that any responsible party does not refund 
timely.
    3. Amend Sec. 411.33 (Amount of Medicare secondary payment) to make 
clear that Medicare payment may now be based on fee schedules (as well 
as reasonable charge) and to remove paragraphs (c) and (d), which set 
forth a special formula for computing Medicare secondary payments under 
the MSP provisions for ESRD. (OBRA '89 provided a single formula for 
all MSP situations.)

VII. Comments on the NPRM of March 8, 1990 and Responses to Those 
Comments

    We received 36 timely letters of comment from employers, insurance 
companies, law firms, actuarial firms, individuals, associations (two 
business and one medical), and beneficiary rights organizations. 
Following is a discussion of those comments and our responses to them.
    Thirty-three of the comments dealt with the term ``active 
individual,'' including the statutory definition of that term. Since 
the term ``active individual'' was deleted from the law by OBRA '93, 
effective August 10, 1993, we are not responding to those comments, 
except for the comment in A. below.
A. Definitions--(Section 411.82)

    The law prior to OBRA '93 defined the term ``active individual'' as 
``an employee (as may be defined in regulations), the employer, self-
employed individual (such as the employer), an individual associated 
with the employer in a business relationship, or a member of the family 
of any of such persons.'' We received a comment about one of the 
categories under this definition; that is, ``individual associated with 
the employer in a business relationship.''
    Comment: The commenter suggested that the rules define the term 
``individual associated with the employer in a business relationship.'' 
The commenter went on to propose that individuals who are receiving 
health care coverage through an employer are associated with the 
employer in a business relationship regardless of whether they are 
employees. The commenter suggested that such a definition would be 
appropriate because employers provide such benefits as part of a quid 
pro quo for services.
    Response: We do not agree that a definition of the term 
``individual associated with the employer in a business relationship'' 
is necessary in the regulations. Any individual who qualifies for LGHP 
coverage because of a business relationship with the employer (for 
example, suppliers and contractors who do business with the employer) 
is included within the term. We also do not agree with the commenter's 
proposed definition of the term. Defining the term in the manner 
proposed would bring many former employees, including retirees, who 
receive benefits from an employer within the scope of the MSP provision 
for the disabled. The Congress clearly did not intend the MSP provision 
for the disabled to extend to retirees and other former employees, 
since the term ``former employee under age 65'' was specifically 
deleted from an early draft of legislation on MSP for the disabled 
legislation (Senate Report 99-348 July 31, 1986).
    Comment: One commenter objected to the inclusion of ``divorced 
spouse'' in the definition of ``family member''. The commenter 
contended that the inclusion of that term exceeded HCFA's authority, 
since a ``former family member'' is not a ``family member''.
    Response: We disagree. As used in new subpart H, ``family member'' 
means anyone who has LGHP coverage on the basis of another person's 
enrollment. Spouses, children, parents, and siblings are merely 
examples. Any individual to whom a LGHP grants coverage because of such 
an enrollment is a family member for purposes of subpart H.
    Comment: One commenter asked why the term ``spouse who was married 
to an active individual'' was not included in the definition of 
``family member.'' The commenter also requested clarification of the 
status of an ex-spouse who is eligible to receive or is receiving 
health care benefits under the continuation of coverage provisions of 
COBRA and what is the LGHP's obligation to such an individual.
    Response: We have revised the definition of ``family member'' to 
include the term ``spouse''. The matter of an ex-spouse is discussed in 
response to the previous comment. The rules that apply to disabled 
individuals who have LGHP benefits as a result of the COBRA 
continuation provisions are discussed under Part VII-E of this 
preamble.
    Comment: One commenter objected to inclusion of an ``employee-pay-
all'' plan in the definition of LGHP in the proposed rule 
(Sec. 411.82(4)(ii)) on the basis that these plans are generally 
``franchise arrangements'' in which the contracts are individually 
underwritten and the employer merely performs the ministerial role of 
collecting the premiums but not enrolling the participants.
    Response: We have considered the status of ``employee-pay-all 
plans'' in the past and addressed the issue in the preamble to the 
Medicare regulations published on October 11, 1985 (50 FR 41503), and 
in Sec. 411.70(d) of the Medicare regulations published on October 11, 
1989 (54 FR 41745). Those regulations apply to the working aged and 
make clear that ``employee-pay-all'' plans may satisfy the statutory 
definition of GHP. We apply the same principles in the MSP rules for 
the disabled. (See 52 FR 35966, September 24, 1987.) 

[[Page 45350]]

    Medicare is secondary to ``employee-pay-all'' plans if they meet 
the statutory definition of LGHP; that is, plans that are under the 
auspices of, or contributed to, by an employer or employee organization 
and that cover at least one employer of 100 or more employees.
    Comment: One commenter requested that the term ``Medicare payment'' 
in Sec. 411.92, Recovery, should be defined to eliminate confusion with 
another term, ``gross amount payable'', used in Medicare contractor 
manuals.
    Response: The term, ``gross amount payable'', is defined at 42 CFR 
411.33(e)(1) as ``* * * the amount payable without considering the 
effect of the Medicare deductible and coinsurance or the payment by the 
third party payer * * *.''
    We have revised proposed Sec. 411.92 (now Sec. 411.24) to specify 
that HCFA recovers the Medicare primary payment amount.
    Comment: A commenter objected to the definition of LGHP, because it 
casts too broad a net and captures many employers who have fewer than 
100 employees, but who are required to provide primary coverage to 
disabled active individuals because these ``small employers'' 
participate in a plan that has at least one employer of 100 or more 
employees.
    Response: The term ``large group health plan'' is defined in the 
IRC of 1986 as ``a plan of, or contributed to by, an employer or 
employee organization (including a self-insured plan) 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, that covers employees of at 
least one employer that normally employed at least 100 employees on a 
typical business day during the previous calendar year.'' HCFA has no 
discretion to exempt from the Medicare secondary payer provision for 
the disabled employees of employers of fewer than 100 employees if they 
belong to a multi-employer plan that meets the above definition. In the 
MSP statute, as revised by OBRA '89, the Congress could have provided 
an exception for small employers that participate in multi-employer or 
multiple employer plans, similar to the exception that is specifically 
provided in the statute with respect to the working aged. Since the 
Congress chose to provide the exception only under the working aged 
provision, we conclude that it was not the Congress' intent to allow a 
similar exception under the MSP provision for the disabled.

B. Indicators of Employee Status

    We received 30 comments on Sec. 411.83, which proposed to 
incorporate into the regulations the policy that some disabled 
individuals who are not working are considered to be employees for MSP 
purposes if certain indicators of ``employee status'' are present. Only 
one commenter supported the policy without reservation. The other 
commenters expressed either opposition to the policy as a whole or to 
one or more of the indicators used to establish whether a non-working 
disabled person has employee status. We are not addressing these 
comments because we have deleted the policy on indicators of employee 
status, to reflect changes made by OBRA '93, effective August 10, 1993. 
In the legislative history that preceded enactment of OBRA '93 
(Conference Report of the House Committee on the Budget to accompany 
H.R. 2264, H.R. Rep. No. 213, 103rd Cong. 1st Sess. (1993)), the 
Congress provided explicit direction on how it expected us to construe 
the new law. It made clear on page 805 that the term ``current 
employment status with an employer'' should be implemented ``consistent 
with the provision that applies to aged beneficiaries (working aged)'' 
and, on page 806, that ``the definition of active employee for disabled 
beneficiaries (should) conform with the definition for working aged 
beneficiaries.''

C. Prohibition of Discrimination

    Several commenters addressed the provisions of proposed 
Sec. 411.94, which dealt with the prohibition of discrimination by 
LGHPs against disabled active individuals on the basis of Medicare 
entitlement.
    Comment: One commenter requested that HCFA discard all of the rules 
on nondiscrimination on the grounds that ``they represent an 
unjustified and unsupported foray into the role of the Congress.'' In 
the event that HCFA decides to promulgate the proposed 
nondiscrimination rules, the commenter requested that HCFA conduct 
public hearings to gauge the effect of the rules.
    Response: Under the law in effect before August 10, 1993, section 
1862(b)(1)(B)(i) of the Act prohibited LGHPs from ``taking into 
account'' that an active individual is entitled to Medicare on the 
basis of disability. As amended by OBRA '93, the law prohibits LGHPs 
from taking into account the entitlement to Medicare on the basis of 
disability of an individual who has LGHP coverage by virtue of the 
individual's own or a family member's current employment status. This 
provision simultaneously makes Medicare benefits secondary to LGHP 
coverage for these individuals and prohibits LGHPs from taking into 
account that these individuals are entitled to Medicare on the basis of 
disability. For example, without this prohibition LGHPs could deny, 
reduce, or restrict coverage or access to coverage for these 
individuals and thereby shift to the Medicare program the primary 
responsibility for payment of their medical expenses. This would defeat 
the purpose of the MSP provision for the disabled.
    The public has had ample opportunity to comment on the proposed 
nondiscrimination rules during the public comment period that followed 
the publication of the notice of proposed rulemaking. We received a 
number of substantive comments regarding the proposed nondiscrimination 
rules, and we discuss these comments below. We therefore do not believe 
that there is need for public hearings on the final rules.
    Comment: Several commenters objected that the criteria for 
prohibited discrimination in proposed Sec. 411.94(d) exceed the 
statutory requirement. These commenters contended that while the 
statute prohibits LGHPs only from denying coverage to disabled active 
individuals on account of their Medicare entitlement, the criteria in 
proposed Sec. 411.94(d) appear to prohibit LGHPs from terminating 
disabled individuals on grounds other than Medicare entitlement. One 
commenter expressed concern that an employer would be unable to 
terminate a disabled active individual's coverage for any reason after 
the individual becomes entitled to Medicare. Another commenter 
recommended that the final rule specify that prohibited discrimination 
occurs only when a plan treats disabled active individuals differently 
from ``similarly situated'' individuals not entitled to Medicare.
    Response: The statute, as amended by OBRA '86, prohibited an LGHP 
from taking into account that an active individual is entitled to 
Medicare on the basis of disability. As amended by OBRA '93, the 
statute prohibits LGHPs from taking into account entitlement to 
Medicare on the basis of disability of an individual who has LGHP 
coverage by virtue of the individual's own or a family member's current 
employment status. The basic rule is that, with regard to individuals 
entitled to Medicare on the basis of disability who (1) have current 
employment status or (2) are family members of individuals with current 
employment status, LGHPs must offer the same enrollment opportunities 

[[Page 45351]]
and the same coverage under the same conditions as they offer to 
similarly situated individuals. In the case of employees, all other 
employees enrolled or seeking to enroll in the plan are considered to 
be similarly situated. In the case of each of the other categories of 
individuals who have current employment status (such as business 
associates or family members), all other persons in those categories 
are considered to be similarly situated.
    An LGHP may refuse to provide coverage, terminate enrollment, or 
limit coverage (for individuals who are entitled to Medicare on the 
basis of disability) only on grounds that apply to all similarly 
situated individuals enrolled, or seeking to enroll, in the plan, 
including individuals not entitled to Medicare. Plan provisions that 
have the effect of denying, restricting, or terminating benefits for 
disabled beneficiaries who have LGHP coverage by virtue of current 
employment status, but not for similarly situated individuals, are 
prohibited. An LGHP may make benefit distinctions among various 
categories of similarly situated individuals, distinctions based, for 
example, on length of time employed, employment status, or marital 
status but not on disability. If the LGHP makes such distinctions, it 
may also make them among disabled beneficiaries who have LGHP coverage 
by virtue of current employment status.
    Comment: Several commenters objected that proposed Sec. 411.94(d) 
appeared to force employers to decide, before an employee who has 
become disabled is determined to be ``under a disability'' within the 
meaning of section 223 of the Social Security Act, whether to cease 
covering the individual under the LGHP or to continue providing 
benefits for as long as benefits are provided to active employees. One 
commenter contended that the Congress clearly did not intend to impose 
such a choice upon employers. Another commenter noted that the proposed 
policy would only encourage employers to cut off health benefits to 
injured workers before the individual receives a determination of 
disability from the Social Security Administration.
    Response: In the NPRM, we proposed to compare what an LGHP offers 
or provides at or after the point of disability determination with what 
it offered or provided at or after the point of Medicare entitlement. 
The idea was to prevent employers from avoiding the obligation of 
providing primary benefits by terminating coverage during the 29 month 
waiting period between the onset of disability and Medicare 
entitlement.
    We agree that the proposed policy could be interpreted as 
encouraging employers to terminate coverage of injured or sick workers 
prior to the determination of disability. In addition, the proposed 
policy could lead to an anomalous situation in which an LGHP's changing 
or termination of a disabled individual's coverage would be permissible 
or impermissible, depending on the variable timing of disability 
determinations.
    We are, therefore, not including the proposed policy in the final 
regulation. The prohibition against taking Medicare entitlement into 
account does not compel LGHPs to make an irrevocable choice, before the 
determination of disability, between discontinuing coverage of disabled 
individuals and providing coverage indefinitely. Rather, as discussed 
earlier in this preamble, LGHPs are prohibited from treating 
individuals entitled to Medicare on the basis of disability and covered 
by virtue of their own or a family member's current employment status 
differently from similarly situated individuals (that is, individuals 
of the same category such as spouse, child, or employee) who are 
enrolled or seeking to enroll in the plan. No change, restriction, or 
termination of coverage may be imposed because individuals are entitled 
to Medicare on the basis of disability. Also prohibited are changes, 
restrictions, or terminations of coverage that have the effect of 
treating those individuals differently from similarly situated 
individuals.
    Comment: Several commenters raised questions about the application 
of the nondiscrimination rules to various employer health plan 
provisions.
     Proposed Sec. 411.94(d) appears to prohibit employers from 
terminating or amending their health benefits plans, if doing so would 
have the effect of reducing or terminating benefits provided under an 
LGHP to a disabled active individual.
     Proposed Sec. 411.94(d)(6) (denial or termination of 
coverage of a disabled active individual on the basis of disability) 
would prevent employers from offering employees who become disabled, 
coverage under an LGHP for a limited period of time and then 
terminating the coverage once the designated period has expired. This 
could be interpreted to prohibit employers who voluntarily provide 
extended coverage to disabled individuals from terminating the extended 
coverage once the individual becomes entitled to Medicare benefits.
     The rules prohibiting discrimination should not prevent an 
employer from changing the status of a disabled individual in a way 
that disqualifies the individual for coverage under the employer's 
LGHP. For example, an employer should not be considered to be 
discriminating if he removes a disabled individual from the roster of 
employees, thus disqualifying the individual from coverage under the 
employer's plan.
     Proposed Sec. 411.94(d)(3) appears to provide that an LGHP 
is discriminatory if it has a policy of offering ``disabling condition-
only'' coverage to employees who become disabled, since such coverage 
is less comprehensive than coverage provided to other individuals under 
the plan.
    Response: An employer is not prohibited from adopting any of the 
provisions described above, provided that those provisions (1) apply to 
all enrollees and potential enrollees, without regard to whether they 
are entitled to Medicare on the basis of disability; and (2) do not 
have the effect of treating disabled Medicare beneficiaries who have 
LGHP coverage by virtue of current employment status differently from 
similarly situated individuals.
    Thus, a ``disabling condition-only'' provision is prohibited if it 
has the effect of restricting coverage for individuals entitled to 
Medicare on the basis of disability but not for similarly situated 
individuals who are not so entitled. The regulation does not allow an 
employer to terminate the LGHP coverage of those disabled individuals 
unless the employer also terminates coverage for similarly situated 
individuals not entitled to Medicare on the basis of disability.
    If an employer voluntarily provides LGHP coverage to an individual 
who is entitled to Medicare on the basis of disability and who has LGHP 
coverage by virtue of current employment status, that coverage is 
primary to Medicare.
    We do not believe that the statute prohibits employers from 
terminating a benefit that they voluntarily provide to those disabled 
individuals above the coverage given to similarly situated individuals 
who are not entitled to Medicare on the basis of disability (see item 
b. of comment).
    Section 411.108 of this final rule makes clear that an LGHP may 
not, for example, deny or terminate coverage, offer less comprehensive 
coverage, or charge increased premiums for individuals entitled to 
Medicare on the basis of disability and covered by virtue of current 
employment status unless it takes the same actions for similarly 
situated individuals who are not so entitled. However, as stated above, 
employers are not required to continue indefinitely LGHP coverage that 
they 

[[Page 45352]]
have voluntarily provided to those disabled individuals.
    Comment: One commenter objected that the nondiscrimination criteria 
of proposed Sec. 411.94(d) failed to prohibit cost avoidance techniques 
used by LGHPs and employers to reduce their exposure. One such tactic 
is to ``churn'' insurance contracts in order to reimpose waiting 
periods and pre-existing condition exclusions on ``high-exposure'' 
employees and their dependents. Another tactic is to pay ``high 
exposure'' individuals an amount equivalent to the per capita premium 
of the plan so that they can purchase health insurance on an individual 
basis. The commenter recommended that the criteria in proposed 
Sec. 411.94(d) specifically prohibit ``the payment of wages which are 
to be dedicated toward the purchase of an individual contract for the 
disabled active individual.''
    Response: The Medicare law does not prohibit LGHPs from engaging in 
cost-avoidance practices and from imposing cost-avoidance provisions 
such as waiting periods and pre-existing condition exclusions, provided 
that such practices and provisions apply equally to all enrollees and 
potential enrollees and do not have the effect of treating individuals 
entitled to Medicare on the basis of disability who have LGHP coverage 
by virtue of current employment status differently from similarly 
situated individuals. (However, other State or Federal laws should be 
consulted for any effect they may have on this situation.)
    Comment: One commenter asked for guidance about what constitutes 
adequate notification to active individuals of the consequences of 
rejecting LGHP coverage, as required under proposed Sec. 411.94(d)(8). 
The commenter specifically suggested that the rules include a provision 
that a statement in a Summary Plan Description satisfies this 
requirement.
    Response: Beneficiaries need to understand the consequences of 
rejecting LGHP coverage; that is, that Medicare will be the primary 
payer and the employer will not be permitted to pay secondary benefits 
for Medicare-covered services. In recognition of this, we have 
provided, in Sec. 411.108, that a plan would be taking into account 
Medicare entitlement if it gave individuals information on their right 
to accept or reject the employer plan but failed to inform them of the 
consequences of rejection.
    Comment: One commenter recommended that proposed Sec. 411.94 
provide examples of ``taking into account.'' The commenter offered 
several examples of ``taking into account'' for inclusion in the final 
regulation.
    Response: The criteria of proposed Sec. 411.94(d), clarified and 
expanded on the basis of the commenter's suggestions, appear in the 
final rule as examples of ``taking into account'' (Sec. 411.108).
    Comment: One commenter recommended that the Sec. 411.94 criteria 
for determining that an LGHP is discriminating explicitly apply to 
employees' spouses and dependents, if the LGHP covers them. The 
commenter also recommended that an LGHP be considered nonconforming if 
it requires that an active individual receive health care benefits from 
a prescribed provider, while other covered individuals are not mandated 
to receive services from that provider.
    Response: The criteria in proposed Sec. 411.94 and the final rules' 
examples of ``taking into account'' clearly apply to employees' spouses 
and dependents covered by an LGHP, since those persons are included 
within the meaning of the term ``family member.'' Therefore, it is not 
necessary to state explicitly in Sec. 411.110 that the criteria that 
define a nonconforming GHP apply to LGHP coverage of employees' spouses 
and dependents. An LGHP that required disabled beneficiaries covered by 
virtue of current employment status, but not similarly situated 
individuals, to receive services from a preferred provider would 
clearly be considered nonconforming under the criteria in Sec. 411.110 
of the final rule.

D. Referral to the Internal Revenue Service (Section 411.94(g))

    Comment: One commenter expressed concern that proposed 
Sec. 411.94(g), dealing with the reporting of nonconforming LGHPs to 
the IRS, would not achieve the goal of ensuring nondiscriminatory 
treatment of active individuals by LGHPs. The commenter recommended 
that sanctions be incorporated into the rules to provide incentives for 
LGHPs to meet the nondiscrimination requirements.
    Response: HCFA reports nonconforming GHPs and LGHPs to the IRS 
because the IRS administers section 5000 of the IRC, which imposes a 
tax on employers and employee organizations that contribute to a 
nonconforming GHP. This provision indicates the Congress' intent that 
employers and employee organizations be ultimately held responsible for 
the actions of their health plans. We believe that this tax provides an 
incentive for employers and employee organizations to ensure that the 
plans they create, participate in, or contribute to, comply with the 
prohibition against taking into account Medicare entitlement. We expect 
that employers and employee organizations will pursue available 
remedies under contract or insurance law, if necessary, to assure that 
their plans comply with the requirements of the statute and thus avoid 
imposition of the tax. The tax and the requirement to report 
nonconforming LGHPs were imposed for the disabled by OBRA '86 and 
extended to all GHP situations by OBRA '89.
    Comment: One commenter recommended that insurers of LGHPs be 
reported to the IRS to provide an incentive for them to conform to the 
requirements of a nondiscriminatory LGHP.
    Response: See our response to the previous comment. Under section 
5000 of the IRC, the tax is imposed only on employers and employee 
organizations that contribute to nonconforming GHPs. This should 
discourage employers and employee organizations from doing business 
with an underwriting insurer that does not conform to the prohibition 
against taking into account the Medicare entitlement of individuals who 
are entitled on the basis of age, ESRD, or disability. It should 
encourage employers and employee organizations to enforce their 
insurance contracts to ensure that both the promise and the performance 
under the contract conform to the MSP requirements. Insurers thus 
should have an incentive to conform with MSP requirements.
    Additional incentives for compliance are provided by the following 
statutory provisions:
     The law provides for a private right of legal action to 
collect double damages from any entity (including insurers, and 
employers) that fails to provide primary coverage when required by law.
     The Federal Government has the right to take legal action 
to collect double damages from those entities if they fail to provide 
primary benefits.

E. Relation to COBRA Continuation Coverage Provisions

    Under the COBRA continuation coverage provisions, an individual (or 
the individual's dependents) who would otherwise lose coverage under an 
employer's GHP because of specified circumstances that include 
termination and reduction in hours of employment must be offered 
continued coverage at his or her own expense for a designated period of 
time. Under a 1989 amendment to the COBRA continuation of coverage 
provisions, the period of continued coverage is up to 29 months for 
individuals who were disabled (as determined under the Social Security 

[[Page 45353]]
Act) at the time of their termination of employment or reduction of 
hours of work. The COBRA provisions permit termination of continuation 
coverage at the point of Medicare entitlement, which, for a disabled 
person, begins 29 months after the onset of disability if the 
individual has been entitled to monthly social security disability 
benefits for 24 months. Several commenters raised the following issues:
     The effect of the proposed regulations on coverage 
provided to active individuals under the COBRA continuation coverage 
provisions was not clear.
     Section 411.94(d)(6) of the proposed regulations--
    + Appears to have the effect of extending COBRA's limited period of 
continuation coverage to an unlimited period while an active individual 
receives Social Security benefits. (That result would be directly 
contrary to the intent of the Congress).
    + Appears to prohibit LGHPs from terminating continuation coverage 
of active individuals who become entitled to Medicare benefits, even 
though COBRA specifically permits this.
    + Could be interpreted to forbid employers who voluntarily provide 
extended coverage beyond the maximum period mandated by COBRA from 
terminating that coverage once the individual becomes entitled to 
Medicare.
     HCFA should include in the final regulation a specific 
rule to the effect that the operation of an LGHP in any manner 
permitted under the COBRA continuation coverage provision will not be 
considered discriminatory.
     The proposed regulations create a ``very basic conflict'' 
with COBRA. COBRA mandates coverage for individuals who were disabled 
at the time of a COBRA ``qualifying event'' for 29 months (which is 
generally the length of the waiting period for Medicare entitlement 
based on receipt of Social Security disability benefits) but permits a 
plan to terminate coverage at the end of the 29 months, or at the point 
of Medicare entitlement. The proposed regulations, however, do not 
require coverage during the Medicare waiting period but appear to 
mandate coverage thereafter.
     Proposed Sec. 411.94(d)(7) appears to prohibit charging 
active individuals who are also COBRA beneficiaries the higher premiums 
(up to 150 percent of the applicable premium) permitted under COBRA.
    Response: When the proposed regulation was published, it was HCFA's 
position that there was no real conflict between the MSP for the 
disabled provision and the COBRA continuation of coverage provision, 
since COBRA permits but does not mandate termination of coverage at the 
time of Medicare entitlement. The statutes amended by COBRA state that 
continuation coverage may be terminated upon entitlement to Medicare. 
The Medicare statute stated that the LGHP may not take into account 
entitlement to Medicare based on disability. It was HCFA's policy that 
the MSP for the disabled provision prohibited termination of COBRA 
continuation coverage of an active individual entitled to Medicare on 
the basis of disability if the termination was based on that 
entitlement. Since some people who have COBRA continuation coverage 
because they have stopped working would be considered to be employees 
under the indicators of employee status, the result would be that the 
proposed regulation would have prohibited what the COBRA law permitted.
    Blue Cross and Blue Shield of Texas filed a lawsuit challenging 
HCFA's same policy with respect to COBRA continuation coverage in ESRD 
MSP cases (Blue Cross and Blue Shield of Texas v. Sullivan, case No. 3-
91 2760-H (N.D. Tex.)). On April 7, 1992, the District Court for the 
Northern District of Texas ruled against the government. The government 
appealed that ruling to the Fifth Circuit Court of Appeals. On July 13, 
1993, the appeals court held that the MSP statute ``does not require 
health plans to provide continuation coverage to individuals who become 
entitled to Medicare benefits because they have ESRD.'' Blue Cross and 
Blue Shield of Texas v. Shalala, 995 F.2d 70, 74 (5th Cir. 1993). The 
court held that the ESRD MSP provision did not modify, nor did it 
preclude, acts specifically authorized under COBRA.
    The issue raised in the Texas case with respect to ESRD was never 
raised with respect to the MSP provisions for the aged and the 
disabled. Under previous law the issue might have been raised with 
respect to the disabled because the MSP provision for them did not 
require (as it did for the aged) that GHP coverage be based on 
``current employment''.
    Under the OBRA '93 amendments, which were effective one month after 
the appeals court decision, there is no issue for either group 
because--
     The MSP provisions for both the aged and the disabled 
apply only when GHP coverage is ``by virtue of current employment 
status''; and
     COBRA continuation coverage is based on termination of 
employment or on reduction of work hours to the point where the 
individual no longer qualifies for coverage based on employment.
    This final rule provides (in Sec. 411.161(a)(3)) that a GHP may 
terminate COBRA continuation coverage if the individual becomes 
entitled to Medicare on the basis of ESRD, notwithstanding the general 
prohibition against taking into account eligibility for, or entitlement 
to, Medicare benefits. Section 411.162(a)(3) makes clear that Medicare 
is secondary when the plan is required by COBRA to keep the 
continuation coverage in effect after Medicare entitlement or does so 
voluntarily. (Changes to the regulation are discussed under part VIII-I 
of this preamble.)

F. Miscellaneous Comments

    Comment: One commenter asked that the final rules address the 
situation in which the LGHP paid primary benefits for services provided 
to an active individual and later learned that the LGHP was not primary 
payer for the individual because, for example, the individual entitled 
to Medicare on the basis of disability also has end-stage-renal 
disease. In that case, the law provides that Medicare is primary payer. 
The commenter believed that the final rule should provide for HCFA to 
reimburse the LGHP directly in the same manner that an LGHP must pay 
HCFA when it failed to make correct primary payments.
    Response: Under current law, HCFA has an explicit right to recover 
conditional primary payments from an LGHP. There is no equivalent 
statutory provision for an LGHP seeking to recover its mistaken 
payments. HCFA and its intermediaries and carriers do not have 
authority to pay insurers and other third party payers. Sections 
1815(c) and 1842(b)(6) of the Act, respectively, generally preclude 
payment for provider services to anyone but the provider and preclude 
payment for services of physicians and other suppliers to anyone other 
than the supplier or the beneficiary. The limited exceptions allowed do 
not include payment to LGHPs. Section 3491.15 of the Medicare 
Intermediary Manual and section 3336.16 of the Medicare Carrier Manual 
contain instructions for dealing with situations in which third party 
payers have made mistaken primary payments. The person or entity that 
receives HCFA's primary Medicare payment would make the refund to the 
LGHP. If no Medicare claim was originally filed, the provider, supplier 
or beneficiary may file one, within the time limits specified in 
Secs. 424.44 and 424.45 of the regulations. We note that the situation 
cited by the commenter 

[[Page 45354]]
(Medicare is primary payer because the individual is entitled on the 
basis of disability and also has ESRD) has a different outcome under 
OBRA '93. For such a dually entitled beneficiary, Medicare is now 
ordinarily secondary for the first 18 months of ESRD-based eligibility 
or entitlement.
    Comment: Two commenters expressed concern that the proposed rules 
give HCFA the right to recover twice the amount payable by the LGHP as 
primary payer if HCFA has made conditional primary payments and the 
LGHP is later determined to have been the primary payer. One of the 
commenters stated that the proposed rule did not take into account the 
possibility that the disabled employee may have never filed a claim 
with the LGHP and only with Medicare. The commenter suggested that 
LGHP's be exempt from the double damages provision, since the LGHP 
would be unaware of the existence of a claim for primary benefits. 
Medicare should instruct beneficiaries to file claims first with the 
LGHP.
    Response: The MSP statute provides no authority for us to exempt 
LGHPs from the double damages provision. However, we have the right to 
recover double damages only if the LGHP refuses to make appropriate 
reimbursement. Before instituting legal action to recover our 
conditional payments, we make every attempt to inform the LGHP of its 
obligations under the law and of the consequences of failure to comply. 
We also provide ample time for the LGHP to reimburse the Medicare 
payments.
    We routinely remind beneficiaries and providers and suppliers to 
file claims first with other insurance and then with Medicare. Medicare 
intermediaries and carriers deny payment on claims when they have 
reason to believe that there is another payer responsible for primary 
payment and instruct the claimant to seek payment from that other 
source before filing claims under Medicare. Since claims are often 
filed by the provider or physician or other supplier, we also remind 
them of their responsibility to determine whether their claims should 
be filed with entities other than HCFA. In addition, we encourage GHPs 
and other insurers who are obligated to pay primary to Medicare to 
inform their Medicare-eligible participants that claims should first be 
submitted to the responsible primary plan.
    Comment: One commenter suggested that the employer or other entity 
not be subject to double damages or to referral to the IRS as a 
nonconforming GHP if--
     The facts and circumstances show that any noncompliance 
with the law or regulations was unintentional; or
     The employer relied in good faith on third party 
administrators, insurers, or other entities to administer or provide 
health benefits.
    Another commenter recommended that, until the final regulations 
become effective, an employer or plan administrator be protected if he 
or she acted on the basis of a reasonable good faith interpretation of 
the statute.
    Response: There is no provision in the law to extend protection to 
employers or plan administrators, who act on the basis of a reasonable 
good faith (albeit erroneous) interpretation of the law, if the GHP or 
LGHP is found to be a nonconforming GHP. The individuals involved could 
have sought advice directly from the Medicare contractors or from HCFA. 
We have in place a comprehensive program to inform the public of its 
obligations under the MSP provisions. Since the passage of the MSP 
statute, we have made available to interested parties a variety of 
informational materials to assist them in complying with this 
provision. The Medicare intermediaries and carriers and the HCFA 
regional offices are available to answer questions about the 
responsibility of employers, insurers, and other entities subject to 
the MSP provisions.
    Comment: One commenter noted that Medicare currently makes 
conditional payments when parties fail to respond to information 
requests on disabled beneficiaries. The commenter supports continuation 
of this policy.
    Response: The basic rule, as set forth in Secs. 411.165, 411.175, 
and 411.206, is that if a provider, supplier, beneficiary, or other 
party fails to provide information necessary to process a claim, HCFA 
may deny the claim. However, in order not to disadvantage a beneficiary 
who may not be responsible for providing the needed information, HCFA 
considers the specific circumstances of each failure to provide 
information. Depending on those circumstances, HCFA has in the past 
made, and may continue to make, conditional payments in some cases for 
which information is not submitted in response to HCFA's request.
    Comment: One commenter recommended that provision for an expedited 
compliance procedure be added to proposed Secs. 411.92(a) and 411.94(g) 
in order to reduce the administrative burden and expense of 
enforcement. The commenter specifically mentioned the expedited 
compliance procedure established in HCFA Program Memorandum AB-88-9 
(August 1988). That procedure was designed for LGHPs that wish to 
expedite payments to reimburse HCFA for Medicare conditional primary 
payments.
    Response: The expedited compliance procedure established by Program 
Memorandum AB-88-9 was based specifically on the concept of ``active 
individual''. Since OBRA '93 abolished this concept, the procedure is 
obsolete. LGHPs that identify mistaken Medicare primary payments should 
send their repayments to the Medicare contractor that made the mistaken 
payment.
    Comment: One commenter expressed concern that if an active 
individual is covered as a dependent by his spouse's LGHP, and his 
employer is not large enough for the employer's GHP to be considered an 
LGHP and the employer does not participate in a multi-employer LGHP, 
then the order of payment based on the MSP regulations would be the 
spouse's LGHP as primary payer, Medicare second, and the health plan of 
the disabled person's employer last. The commenter pointed out that the 
proposed rule is not in accordance with the normal ``coordination of 
benefits'' rules. Under those rules, if the disabled person is still 
actively employed, his own health plan would be primary and the 
spouse's health plan would be secondary. The commenter recommended that 
the MSP rules determine only whether Medicare, or the plan covering the 
disabled person as an employee, should be primary. In any event, the 
plan covering the individual as a dependent should be secondary to 
Medicare. Employers should not be penalized for extending health 
coverage to dependents.
    Response: Section 1862(b) of the Act, and the regulations, alter 
State and private coordination of benefit rules so that GHPs and LGHPs 
are made primary to Medicare under certain circumstances, regardless of 
whether the individual is employed or is a dependent. When the health 
plan of a family member is primary payer under the MSP law, that payer 
must pay before Medicare even if the coordination of benefits rules 
established under State law or private contract call for a different 
order of payment. The Group Coordination of Benefits Model Regulation 
adopted by the National Association of Insurance Commissioners (NAIC) 
specifically recognizes that the usual order of payment for dependent 
and nondependent coverage is reversed under the circumstances described 
by the commenter. This means that, in the situation described above, 
the spouse's LGHP pays first if the spouse has coverage by virtue of 
current 

[[Page 45355]]
employment status, Medicare second, and the disabled person's employer 
plan last. However, when the disabled person's health plan coordinates 
payment with the spouse's LGHP in the way described in the comment, 
that is, where the disabled person's plan pays primary to the spouse's 
LGHP, the combined payments of both plans constitute the primary 
payment to which Medicare payment is secondary. (Further information 
regarding the model regulation may be obtained by writing to the NAIC, 
120 W. 12th St., Kansas City, MO 64105; phone (816) 842-3600.)
    Comment: One commenter suggested that HCFA should apply the 
nondiscrimination rules on a prospective basis after the date they are 
adopted in final form and that HCFA should refrain from initiating any 
nondiscrimination provision compliance requests until after adoption of 
the final rules. Another commenter recommended that the final 
regulations be made effective with plan years that begin at least six 
months after the date of publication.
    Response: HCFA does not have the authority to delay enforcement of 
the nondiscrimination provisions. Section 9319 of OBRA '86, which 
included the nondiscrimination provision, was effective for items and 
services furnished on or after January 1, 1987. As indicated in the 
general notice we published on September 24, 1987 (52 FR 35966), this 
provision was self-implementing. It did not provide any waiver under 
which we could delay the effective date.
    We will enforce these provisions in accordance with our statutory 
responsibility. If it is alleged that an LGHP took into account 
Medicare entitlement on the basis of disability before the effective 
date of this final rule, we will base our decision on the statute. This 
final rule will be effective 30 days after publication in accordance 
with the usual rulemaking procedures.
    Comment: One commenter suggested that provisions be added to the 
final regulation to ensure a formal review and appeals procedure before 
HCFA takes any action adverse to an employer.
    Response: Sections 411.120 through 411.126 of the new subpart E set 
forth appeals procedures with respect to any GHP that HCFA has 
determined to be nonconforming. These sections specify the parties and 
explain the various steps in the appeals process and the rights of the 
plans and of the employers and employee organizations that contribute 
to the plans, including the following:
     How to request a hearing (Sec. 411.120).
     Provision for on-the-record review or oral hearing (at the 
request of a party or on the hearing officer's own motion) and the 
procedures that the hearing officer follows at an oral hearing with 
respect to notice, prehearing discovery, evidence, subpoenas, etc., and 
record of the hearing (Sec. 411.121).
     Timing, content, distribution, and effect of the hearing 
officer's decision (Sec. 411.122).
     Administrator's review of the hearing decision, including 
basis for decision to review, basis for remand, and finality of the 
review or remand decision (Sec. 411.124).
     Reopening of determinations or decisions (Sec. 411.126).
    These procedures are very similar to those in effect for other 
determinations that adversely affect providers or suppliers of Medicare 
services. We believe that, by making them available before referral to 
the IRS, we ensure due process.
    Comment: One commenter encouraged HCFA to adopt a policy of 
applying ``Alternative Dispute Resolution (ADR)'' techniques in MSP 
cases before proceeding with litigation or referrals to the IRS. The 
commenter contended that such techniques could lead to fairer and more 
effective implementation of the MSP law than protracted and expensive 
litigation.
    Response: The commenter did not identify specifically the 
techniques of dispute resolution to which he was referring. As 
indicated above, this final rule provides appeal rights if HCFA 
determines that a GHP is a nonconforming GHP.

VIII. Final Rule Provisions that Implement or Reflect Statutory 
Amendments

A. Medicare Secondary to GHPs

    Redesignated Secs. 411.162 and 411.172 and new Sec. 411.204 specify 
that Medicare benefits are secondary to GHP benefits under specific 
circumstances that vary depending on the basis for Medicare eligibility 
or entitlement.
    1. Under Sec. 411.172, aged individuals and spouses (entitled on 
the basis of age), the MSP provision applies--
     For plans of employers of at least 20 employees; and
     For individuals covered ``by virtue of current employment 
status''.
    2. Under Sec. 411.204, individuals entitled on the basis of 
disability, the MSP provision applies--
     For plans of employers of at least 100 employees; and
     For individuals covered ``by virtue of current employment 
status''.
    3. Under Sec. 411.162, individuals eligible or entitled on the 
basis of ESRD, the MSP provision applies to employer plans, including 
retirement plans, regardless of employer size and the individual's 
employment status.
    We note that OBRA '93 changed the coordination of benefits rules 
for ESRD beneficiaries who are also entitled to Medicare on the basis 
of age or disability. This change is discussed under section VIII-G of 
this preamble.

B. Current Employment Status

    New Sec. 411.104 explains the term and sets forth general and 
special rules.
    Under the general rule, an individual is considered to have current 
employment status if he or she (1) is actively working or (2) is not 
actively working but meets all of the following conditions:
     Retains employment rights in the industry;
     Has not had his or her employment terminated by the 
employer, if the employer provides the coverage, or has not had his or 
her membership in the employee organization terminated, if the employee 
organization provides the coverage.
     Is not receiving disability payments from an employer for 
more than 6 months;
     Is not receiving social security disability benefits; and
     Has employment-based GHP coverage that is not COBRA 
continuation coverage.
    Examples of individuals who fall in the second group are teachers, 
employees who are on furlough or sick leave, and active union members 
between jobs. Also, self-employed persons are considered to have 
current employment status only if their annual earnings related to the 
employer that offers the GHP coverage equal at least the specified 
statutory amount in section 211(b)(2) of the Act (currently that amount 
is $400).
    Members of a religious order who have taken a vow of poverty are 
not considered to have current employment status if the services they 
perform as members of the order are considered employment solely 
because the order has elected (under section 3121(r) of the IRC) to 
have those services considered as employment for social security 
purposes.1

    \1\  This exemption, enacted by OBRA '89 and effective October 
1, 1989, was extended by OBRA '93 to cover services furnished before 
October 1, 1989. Section 3121(r) of the IRC limits election to 
orders that require their members to take a vow of poverty.
---------------------------------------------------------------------------

    Members of religious orders who have not taken a vow of poverty are 
considered to have current employment status with the religious order 
if (1) the 

[[Page 45356]]
religious order pays FICA taxes on behalf of that member, or (2) the 
individual is receiving from the religious order cash remuneration for 
services rendered.
    Members of the clergy are considered to have current employment 
status with a church or other religious organization if the individual 
is receiving from the church or other religious organization cash 
remuneration for services rendered.
     Receipt of delayed compensation for work performed in 
previous time periods does not confer ``current employment status'' on 
an individual who is not working.
    The new Sec. 411.104 is consistent with Congressional direction 
regarding the manner in which coverage ``by virtue of current 
employment status'' is to be construed.
    The first time Congress used the term ``current employment'' with 
respect to working aged individuals was in section 2338 of the Deficit 
Reduction Act of 1984 (DEFRA), Pub. L. 98-369. DEFRA established in the 
Act a new section 1837(i), which provided for a special Part B 
enrollment period for individuals ``enrolled in a group health plan * * 
* by reason of the individual's (or the individual's spouse's) current 
employment * * * *'' Section 1837(i) expressly referred to individuals 
who meet ``the conditions described in clauses (i) and (iii) of section 
1862(b)(3)(A);'' that is, working aged individuals and their spouses. 
In the legislative report that accompanied the DEFRA, the Congress 
explained what it meant by the term ``by reason of current employment:

    The use of the phrase ``by reason of current employment'' was 
meant to distinguish those persons who are receiving health benefits 
based on employment and are actually employed from those persons who 
are receiving benefits based on employment, but who are now retired. 
(Supplemental Report of the Committee on Ways and Means, U.S. House 
of Representatives on H.R. 4170, Rept. 98-432 Part 2, March 5, 1984, 
1662, emphasis added.)

    This explanation encompassed individuals for whom Medicare was 
secondary payer at that time under section 1862(b)(3)(A); that is, 
individuals who were ``employed at the time (the) item or service is 
furnished.''
    By distinguishing in the DEFRA legislative report between ``persons 
who are receiving health benefits based on employment'' and individuals 
who are ``retired,'' the Congress demonstrated that it is not concerned 
about fine distinctions regarding ``when'' employment-based coverage 
was earned; that is, whether, for instance, present coverage of an 
employed individual is based on a certain number of hours worked, or a 
certain level of commissions earned, during the preceding months, 
quarters, or years of employment. Rather, the Congress is only 
interested in the broad distinction between plan coverage of 
individuals who have coverage based on ``current employment'' and plan 
coverage of those who are retired.
    In OBRA '89, the Congress conformed the language of the secondary 
payer provision to that of the special Part B enrollment provision for 
working aged individuals. The phrase ``by reason of the current 
employment of the individual (or the individual's spouse)'' replaced 
the phrase ``employed at the time (the) item or service is furnished.'' 
By eliminating the provision that the individual actually be working 
when the services were furnished, the Congress made clear its intent 
that Medicare be secondary payer to employment based coverage in all 
circumstances except retirement.
    The OBRA '93 amendments that substituted ``by virtue of current 
employment status'' for ``by reason of current employment,'' and 
defined the term ``current employment status,'' reinforced 
Congressional intent in this regard. OBRA '93 (section 13561(e)(1)(H)) 
added a new section 1862(b)(1)(E)(ii) to the Medicare law, which 
expressly defines the term ``current employment status'':
    (ii) CURRENT EMPLOYMENT STATUS DEFINED.--An individual has 
``current employment status'' with an employer if the individual is an 
employee, is the employer, or is associated with the employer in a 
business relationship.
    The inclusion of individuals ``associated with the employer in a 
business relationship'' (that is, individuals whose relationship to the 
employer is based on business rather than on work) demonstrates that 
the Congress intended that the term ``current employment status'' be 
given the broadest possible application. It encompasses not only 
individuals who are actively working but also individuals under 
contract with the employer whether or not they actually perform 
services for the employer, such as attorneys on retainer, tradesmen and 
insurance agents. Also, an independent insurance agent who is licensed 
to sell insurance for a particular insurance company has ``current 
employment status'' with that company by virtue of his ``business 
relationship.'' If an agent age 65 or older has plan coverage through 
that company based on this ``current employment status'', the coverage 
is primary to Medicare (unless specific statutory exceptions apply, 
such as the 20 employee rule) without regard to the extent to which the 
agent is presently selling policies on behalf of the company. Only when 
the agent retires (that is, no longer is authorized to sell policies on 
behalf of the company) would the ``business relationship'' with the 
employer be severed. However, Medicare would be the primary payer, if 
the company imposes earnings thresholds or other requirements for 
qualifying for health benefits that the agent does not meet based on 
this ``current employment status''.
    (As provided by OBRA '93, the ``current employment status'' 
criterion also applies to the disability MSP provision.)

C. Prohibition against Taking into Account Medicare Entitlement

    This prohibition was imposed by OBRA '86 for the disabled, and 
extended to ESRD and the aged by OBRA '89. On January 11, 1991, we 
published a Federal Register notice explaining the import of these 
self-executing provisions.
    1. New Sec. 411.102 and redesignated Sec. 411.161 specify that a 
GHP may not take into account an individual's ESRD-based Medicare 
eligibility or entitlement during the 18-month coordination of benefits 
period, which coincides with the first 18 months of eligibility or 
entitlement.
    2. New Sec. 411.102 and redesignated Sec. 411.170 specify that a 
GHP of an employer of 20 or more employees may not take into account 
age-based Medicare entitlement of an individual or spouse age 65 or 
older who is covered (or seeks to be covered) under the plan by virtue 
of the individual's current employment status with an employer.
    3. New Secs. 411.102 and 411.200 specify that an LGHP (a plan that 
includes at least one employer of 100 or more employees) may not take 
into account the disability-based Medicare entitlement of an individual 
who is covered (or seeks to be covered) under the plan by virtue of the 
individual's or a family member's current employment status with an 
employer.

D. Nondifferentiation in Providing Benefits

    New Sec. 411.102 and redesignated Sec. 411.161 specify that, in 
providing benefits to individuals with ESRD and those who do not have 
ESRD, a GHP may not differentiate on the basis of the existence of 
ESRD, or the need for dialysis, or in any other manner. These sections 
further provide that plans may 

[[Page 45357]]
pay benefits secondary to Medicare after the 18-month coordination of 
benefits period.

E. Equal Benefits

    New Sec. 411.102 and redesignated Sec. 411.170 specify that, 
regardless of whether they are entitled to Medicare, individuals and 
spouses age 65 or older, who are covered under the plan by virtue of 
current employment status, are entitled to the same plan benefits, 
under the same conditions, as individuals and spouses under 65. (These 
limitations, imposed by OBRA '89, were also described in the January 
1991 notice referred to above. OBRA '93 imposed the added requirement 
of plan coverage based on current employment status.)
F. Definitions

    In Sec. 411.101--
    1. The definition of ``group health plan'' is revised to reflect 
that plans of governmental employers are included within the meaning of 
the term. This has always been so but was clarified by OBRA '93. The 
definition also expressly clarifies that union plans and employee 
health and welfare fund plans are included as employee organization 
plans.
    2. The definition of ``employer'' now includes self-employed 
persons.
    3. The definition of ``employee'' eliminates the ``indicator'' 
concept and references the special rules for the self-employed, for 
members of religious orders, and for delayed compensation, already 
noted under section VIII-B.

G. Coordination of Benefits: Dual Eligibility/Entitlement

    New Sec. 411.163 implements the OBRA '93 amendments (sections 
13561(c)(2) and (c)(3)) that established special rules for the 18-month 
coordination of benefits period. These apply to beneficiaries who are 
eligible for, or entitled to Medicare on the basis of ESRD, and are 
also entitled on the basis of age or disability.
    We consider the OBRA '93 changes to be self-implementing and 
therefore effective August 10, 1993, the date of enactment. However, a 
lawsuit was filed in United States District Court for the District of 
Columbia on May 5, 1995 (National Medical Care, Inc. v. Shalala, Civil 
Action No. 95-0860), challenging implementation of one aspect of these 
provisions with respect to group health plan retirement coverage.
    In what we describe below as the ``fourth rule,'' under OBRA '93, 
Medicare remains the primary payer if a group health plan was already 
secondary payer for an individual entitled on the basis of age or 
disability when the individual becomes eligible on the basis of end-
stage renal disease. Section 411.163(b)(4) reflects this rule. At first 
HCFA believed, in error, that OBRA '93 required a private plan to 
become primary payer under these circumstances, but HCFA later 
corrected its construction of the statute, and issued guidance on April 
24, 1995, stating that Medicare remains the primary payer.
    On June 6, 1995, the court issued a preliminary injunction order 
precluding HCFA from implementing its corrected construction for items 
and services furnished between August 10, 1993 and April 24, 1995, 
pending the court's decision on the merits. HCFA will modify the rules, 
if required, based on the final ruling by the court.
    Before enactment of OBRA '93, the ESRD MSP provision applied only 
when the individual was entitled solely on the basis of ESRD. For 
example, if an individual, who retired at age 58 and was covered under 
a retirement plan through the former employer, developed ESRD at age 
60, the retirement plan was primary to Medicare during the first 18 
months of ESRD-based eligibility or entitlement. However, if the 
individual attained age 65 before the end of the 18-month period, the 
ESRD MSP provision ceased to apply, and Medicare became the primary 
payer because, upon attaining age 65, the individual became entitled 
also on the basis of age and no longer met the ``solely'' requirement.
    Similarly, the working aged and disability MSP provisions did not 
apply to anyone who was eligible for or entitled to Medicare based on 
ESRD. Therefore, those provisions ceased to apply, and Medicare became 
the primary payer when an aged or disabled individual became eligible 
for Medicare based on ESRD. The OBRA '93 amendments rectified these 
situations. Section 13561(c)(2) provides that the ESRD MSP provision 
applies in lieu of the working aged and disability MSP provisions when 
an aged or disabled individual subject to those provisions becomes 
eligible for Medicare based on ESRD. Thus, the plan must continue to 
pay primary to Medicare throughout an 18-month ESRD MSP coordination 
period. Section 13561(c)(3), which removed the word ``solely'' from the 
ESRD MSP provision, provides that the ESRD MSP provision remains in 
effect for the full 18-month period, even if an individual becomes 
entitled to Medicare based on age or disability during that period. The 
specific rules, which are set forth in Sec. 411.163 and referenced in 
Sec. 411.172(g) (for the aged) and Sec. 411.204(b) (for the disabled), 
are summarized below.
    The first rule in Sec. 411.163, governed exclusively by previous 
law, is that, if the 18-month period ended before August 1993, Medicare 
is primary payer from the first month of dual eligibility/entitlement.
    The second rule, for situations governed partly by previous law and 
partly by the OBRA '93 amendment, is that if the first month of ESRD-
based eligibility or entitlement and the first month of dual 
eligibility/entitlement both fall after February 1992 and before August 
10, 1993, Medicare is--
     Primary payer from the first month of dual eligibility/
entitlement through August 9, 1993;
     Secondary payer from August 10, 1993 through the 18th 
month of ESRD-based eligibility or entitlement; and
     Primary payer again after the 18th month of ESRD-based 
eligibility or entitlement.
    The third rule, for situations governed exclusively by the OBRA '93 
amendment, is that, if the first month of ESRD-based eligibility or 
entitlement is after February 1992, and the first month of dual 
eligibility or entitlement is after August 9, 1993, Medicare is--
     Secondary during the first 18 months of ESRD-based 
eligibility or entitlement; and
     Primary after the 18th month of ESRD-based eligibility or 
entitlement.
    The fourth rule pertains to dual entitlement situations in which--
     Age-based or disability-based entitlement precedes ESRD-
based eligibility; and
     The GHP was not precluded from taking into account 
Medicare entitlement based on age or disability (because the individual 
was not covered under the plan ``by virtue of current employment 
status'' or because the employer had fewer than 20 or 100 employees, in 
the case of the aged and disabled, respectively) and was paying 
benefits secondary to Medicare.
    Medicare eligibility based on ESRD occurs automatically as of the 
fourth calendar month of dialysis, and earlier under certain 
circumstances, without regard to whether an individual is already 
entitled to Medicare based on age or disability.
    Under prior law, Medicare benefits were secondary to GHP benefits 
for a period of 18 months for an individual eligible for or entitled to 
Medicare based ``solely'' on ESRD. If that individual also became 
entitled to Medicare based on age or disability during the 18-month 
coordination period, Medicare became the primary payer because the ESRD 
MSP provision did not apply; that is, plans were permitted to take into 
account ESRD-based entitlement that 

[[Page 45358]]
was not the sole basis of Medicare entitlement.
    Also under prior law, Medicare benefits were secondary to plan 
benefits for certain individuals entitled to Medicare based on age or 
disability when their plan coverage was based on active employment 
status, including the employment of a spouse in the case of aged 
beneficiaries, or the employment of a family member in the case of 
disabled beneficiaries. If the aged or disabled beneficiary 
subsequently became eligible for Medicare based on ESRD, Medicare 
became the primary payer because the working aged and disability MSP 
provisions stipulated that they did not apply to anyone with ESRD-based 
eligibility.
    The OBRA '93 amendments rectify these situations. However, they do 
not affect benefit coordination where Medicare is primary and a GHP 
secondary for reasons wholly unrelated to ESRD. The ESRD MSP provision, 
as amended by OBRA '93, expressly prohibits plans during the first 18 
months of ESRD-based eligibility or entitlement from taking into 
account Medicare eligibility or entitlement ``under section 226A'' of 
the Social Security Act; that is, on the basis of ESRD. Thus, the plain 
language of the statute permits a plan to pay secondary to Medicare for 
reasons unrelated to ESRD.
    In other words, if prior to the occurrence of ESRD-based 
eligibility a plan was legitimately secondary to Medicare, the plan 
clearly was not taking into account ESRD-based eligibility, because a 
plan could not have taken into account eligibility that did not exist. 
Merely continuing such authorized action, when an individual becomes 
eligible based on ESRD, obviously does not take into account the later 
eligibility or violate the MSP provisions. In sum, the subsequent 
occurrence of ESRD-based eligibility, in and of itself, does not 
establish that a GHP is taking that eligibility or entitlement into 
account.
    In contrast, a plan that is paying primary benefits takes into 
account ESRD-based eligibility if it attempts to shift that primary 
payment responsibility to Medicare when an individual becomes eligible 
for Medicare based on ESRD, or when an individual is always eligible 
for Medicare based on ESRD but has not completed of the 18-month 
coordination period. (It goes without saying that cessation of plan 
benefits for reasons that would apply to any plan enrollee, such as an 
individual's failure to pay plan premiums, would not be construed as 
taking into account ESRD-based eligibility.)
    In arriving at this synergistic construction of the whole Medicare 
statute we were mindful that nothing in the legislative history of OBRA 
'93 indicates that Congress intended the dual entitlement amendments to 
reverse the order of payment where plans already are permissibly paying 
benefits secondary to Medicare at the time ESRD-based eligibility or 
entitlement occurs. In addition, the court in Blue Cross Blue Shield of 
Texas v. Shalala, 995 F.2d 70 (5th Cir. 1993), construed the ESRD MSP 
provision as not modifying other provisions of law that authorize plan 
actions. HCFA's construction is consistent with this court decision.
    Read together, the OBRA '93 changes require GHPs that are already 
paying primary to Medicare under the working aged or disability MSP 
provisions to continue to pay primary to Medicare for a full 18-month 
coordination period when an aged or disabled individual also becomes 
eligible for or entitled to Medicare based on ESRD. Similarly, when an 
individual's ESRD-based eligibility or entitlement is not preceded by 
age or disability-based entitlement, the plan, including a retirement 
plan, is obligated to pay primary to Medicare throughout the entire 18-
month coordination period.
    With respect to retirement plans, the applicability of the ESRD MSP 
provision has never been limited to plan coverage based on active 
employment. The OBRA '93 amendments made no change in this regard. 
Accordingly, when a retirement plan is a primary payer prior to the 
occurrence of ESRD-based eligibility, the plan must pay primary to 
Medicare during an 18-month coordination period, even if the individual 
also becomes entitled to Medicare based on age or disability during 
that period.
    However, as we have stated, when a plan has already permissibly 
taken into account age or disability-based Medicare entitlement, and 
does nothing more, the plan is not taking into account subsequently 
acquired ESRD-based eligibility. Therefore, Medicare remains primary 
for an aged or disabled individual who subsequently acquired ESRD-based 
eligibility when Medicare is paying primary because the individual is 
not covered by virtue of current employment status, or an MSP exemption 
applies, such as when an employer employs fewer than 20 or 100 
employees (in the case of the aged and disabled, respectively).

    Note: A suit was filed in United States District Court for the 
District of Columbia on May 5, 1995 (National Medical Care, Inc. v. 
Shalala, Civil Action No. 95-0860), challenging the application of 
Sec. 411.63 with respect to group health plan retirement coverage. 
Absent further action by Congress, the court will resolve the 
matter. HCFA will publish a notice in the Federal Register regarding 
the court's ruling, and will make changes to Sec. 411.63 if required 
by the court.

    New Sec. 411.163 replaces Sec. 411.62(e), Effect of changed basis 
for Medicare entitlement, which was rendered obsolete by OBRA '93.

H. Basis for Primary Payments

    New Sec. 411.206 specifies that with respect to the disabled, 
Medicare is primary payer for services that are not covered under the 
plan for the disabled or for similarly situated individuals or, 
although covered under the plan, are not available to particular 
disabled individuals because they have exhausted their benefits under 
the plan. (Similar rules for ESRD and aged were already in effect.)

I. Interface With COBRA Continuation Coverage Provisions

    As a result of the ``current employment status'' concept 
established by OBRA '93 for the aged and the disabled and the court 
rulings in the ESRD case discussed under parts VII-E and VIII-G of this 
preamble--
    1. New Sec. 411.161(a)(3) and redesignated Sec. 411.162(a)(3) 
specify, respectively, that for ESRD beneficiaries--
     A plan may terminate COBRA continuation coverage of an 
enrollee who becomes entitled to Medicare if expressly permitted under 
the COBRA provisions; and
     Medicare benefits are secondary to COBRA continuation 
benefits only when the plan--
    + Is required (under COBRA) to continue COBRA coverage after 
Medicare entitlement (applicable to retirees who retired before the 
employer effectively terminates regular plan coverage by filing for 
bankruptcy); or
    + Continues coverage voluntarily even though not required to do so 
under the COBRA provisions.
    2. Redesignated Sec. 411.175 and new Sec. 411.206 specify that HCFA 
makes Medicare primary payments for services furnished to aged 
individuals and disabled individuals whose benefits are terminated 
under the COBRA provisions that permit termination upon Medicare 
entitlement and when benefits are maintained under the COBRA 
provisions, notwithstanding an individual's Medicare entitlement. (An 
individual who is eligible for COBRA 

[[Page 45359]]
continuation coverage because his working hours have been reduced below 
the minimum necessary to qualify for regular plan coverage has 
``current employment status''. However, Medicare is the primary payer 
because the plan coverage is not ``by virtue of'' that status.)

J. Aggregation Rules

    New Sec. 411.106 sets forth the rules established by OBRA '93 for 
determining the number and size of employers, as required by the ``at 
least 20 employees'' provision for the aged and the ``at least 100 
employees'' provision for the disabled.
    These rules provide for--
     Treating as a single employer all employers that are so 
treated under section 53 of the IRC of 1986;
     Treating as employed by a single employer all employees of 
an affiliated service group, as defined in section 414(m) of the IRC; 
and
     Treating leased employees as employees of the person for 
whom they perform services, to the extent provided in section 414(n) of 
the IRC.

K. Prohibitions Against Incentives

    New Sec. 411.103 reflects the provisions of OBRA' 90 (section 
4203(g)) and the changes made by section 157(b)(7) (C) and (D) of the 
SSAA '94 with respect to prohibition of incentives and imposition of 
civil money penalties for violation. Amended section 1862(b)(3)(C) 
provides that it is unlawful for an employer or other entity such as an 
insurer to offer Medicare beneficiaries financial or other benefits as 
incentives not to enroll in, or to terminate enrollment in, a GHP that 
is, or would be, primary to Medicare, even if the payments or benefits 
are offered to all other individuals who are eligible for coverage 
under the plan. This prohibition precludes offering to Medicare 
beneficiaries an alternative to the employer's primary plan (for 
example, coverage of prescription drugs) unless the beneficiary has 
primary coverage other than Medicare. An example would be primary plan 
coverage through his own or a spouse's employer. An entity that 
violates this prohibition is subject to a civil money penalty of up to 
$5000 for each violation. Certain provisions of section 1128A of the 
Act would apply to the civil money penalty.

L. Assessment of Interest

    New paragraph (m) of Sec. 411.24 reflects the additional authority 
to assess interest provided by SSA '94 and states the rules applicable 
to interest charges. HCFA has long been authorized under common law and 
Departmental regulations (45 CFR 30.13), consistent with the Federal 
Claims Collection Act (31 U.S.C. 3711), to charge interest on amounts 
that any responsible party does not timely refund to HCFA. The SSAA '94 
(section 151(b)(3) revised the Medicare law to state specifically that 
HCFA may charge interest if the responsible party does not refund HCFA 
within 60 days of the date HCFA receives notice or other information 
that reimbursement is owed to HCFA. Amended section 1862(b)(2)(B)(i) 
provides that we may charge interest beginning with the date of that 
notice or other information. The rate of interest provided in section 
1862(b)(2)(B)(i) is the same as in sections 1815(d) and (1833), which 
is reflected in regulations at 42 CFR 405.376(d). This is also the rate 
that is charged when HCFA exercises its common law authority.

M. Plan Secondary Payments After 18-Month Coordination of Benefits 
Period

    Section 411.102(a)(2) reflects the change made by 151(c)(5) of the 
Social Security Act Amendments of 1994 to limit what a plan may do 
after the end of the coordination period.

IX. Technical Amendments

A. Nomenclature Changes

    The following are in addition to those described in section VI of 
this preamble:
    1. To conform to the statutory language, ``employer plan'' and 
``employer group health plan'' are changed to ``group health plan''.
    2. To conform to the new rules that apply in dual eligibility/
entitlement situations, the word ``solely'' is removed from the phrase 
``entitled solely on the basis of ESRD''.

B. Date and Duration Changes

    Various dates cited in paragraphs (c) and (d) of redesignated 
Sec. 411.162 have been revised to conform to the OBRA '93 amendment 
that changed to October 1, 1998, the date on which the 18-month ESRD 
coordination of benefits period is scheduled to revert to a 12-month 
period.

X. Waiver of Proposed Rulemaking

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register and invite prior public comment on proposed rules. The 
notice of proposed rulemaking includes a reference to the legal 
authority under which the rule is proposed and the terms and substance 
of the proposed rule or a description of the subjects and issues 
involved. This procedure can be waived, however, if an agency finds 
good cause that a notice-and-public comment procedure is impractible, 
unnecessary, or contrary to the public interest and incorporates a 
statement of the finding and its reasons in the rule issued.
    The proposed rule of March 1990 dealt only with the provisions of 
OBRA '86 which pertain to the disabled and to LGHPs that cover them. 
Under that rule, certain nonworking disabled persons would have been 
considered employees for Medicare secondary payer purposes. Most of the 
public comments we received (discussed in section VII of this preamble) 
objected to that policy.
    Under the OBRA '93 amendments discussed in Section IV of this 
preamble, the MSP provision for the disabled applies only to persons 
whose health care coverage is based on their own current employment 
status or the current employment status of a family member. Since the 
law and the accompanying legislative history made clear that an 
individual must have ``current employment status'' for purposes of the 
MSP provisions, the proposed policy is not included in the final rule.
    This final rule also implements the MSP provisions of OBRA '89. The 
OBRA '89 amendments (discussed under section II-C)--
     Prohibited GHPs from taking into account Medicare 
entitlement of aged Medicare beneficiaries and the eligibility or 
entitlement of beneficiaries with ESRD. (Previously, the prohibition 
against taking into account Medicare entitlement applied only to 
disabled individuals.)
     Required GHPs of employers of 20 or more employees to 
provide to employees and spouses age 65 or over the same benefits under 
the same conditions as they provide to employees and spouses under age 
65;
     Prohibited GHPs from differentiating, in the benefits they 
provide, between individuals with ESRD and other individuals covered 
under the plan;
     Exempted from the MSP provisions services which members of 
a religious order who have taken a vow of poverty perform as members of 
the order; and
     Extended to all MSP situations the Federal Government's 
rights to take legal action and recover double damages from any entity 
that is required or responsible to pay primary benefits.
    These OBRA '89 amendments were self-implementing and as such were 
reflected in a notice published on January 11, 1991 (at 56 FR 1200-
1202). The notice explained the new requirements and stated that they 
could be put into effect without issuing regulations because the 
statutory amendments and the Congressional 

[[Page 45360]]
intent were clear. Most of the changes were applicable to services 
furnished on or after December 20, 1989 and are, thus, already in 
effect.
    This final rule includes appeals procedures that were not in the 
March 1990 proposal for appealing determinations of nonconformance. 
These provisions, which have been added as a result of comments on the 
proposed rule and apply to all three MSP situations, include the 
following:
     The rules under which HCFA determines that a plan is not 
in conformance.
     The appeals procedures for plans found to be 
nonconforming.
     Referral to the IRS.
     Rules for recovery of conditional or mistaken payments.
    Although notice and comment on the portions of this rule that 
reflect the self-implementing statutory changes are being waived, we 
will consider timely comments from anyone who believes that in issuing 
these regulations we have gone beyond what the statute requires or 
permits. We also welcome comments on the appeals procedures.
    Since the public has already had opportunity to comment on the OBRA 
'86 amendments, the OBRA '89 amendments were self-executing and went 
into effect several years ago, and the OBRA '90 and the OBRA '93 
amendments and the Social Security Act Amendments of 1994 addressed in 
these regulations are self-implementing and clear on their face as to 
Congressional intent, we find that notice and opportunity for comment 
(except as provided in the preceding paragraph) are unnecessary and 
that there is good cause to waive notice of proposed rulemaking.
XI. Public Comments

    Although this is a final rule, we will consider comments that we 
receive by the date and time specified in the DATES section of this 
preamble. Because of the large number of letters of comment that we 
generally receive, we cannot respond to them individually. However, if 
we revise these rules as a result of comments, we will discuss all 
timely comments in the preamble to the revised rules.

XII. Paperwork Reduction Act

    Sections 411.112 and 411.115 of this rule contain information 
collection requirements that are subject to review by the Office of 
Management and Budget under the Paperwork Reduction Act of 1980. Under 
Sec. 411.112, HCFA may require a GHP to demonstrate that it has 
complied with the MSP provisions and to submit documentation showing 
that it has not taken into account that any of its enrollees is 
entitled to Medicare on the basis of age or disability or eligible or 
entitled on the basis of ESRD. The estimated burden is 10 hours per 
response. Under Sec. 411.115, a plan that has been determined to be 
nonconforming is required to provide to HCFA the names and addresses of 
all employers and employee organizations that contributed to the plan 
during the year for which it was nonconforming. Since this merely 
requires copies of existing data, the time required is considered 
negligible.

XIII. Regulatory Impact Statement

A. Executive Order 12866

    These changes are already in place, and became effective on the 
statutory dates indicated in the preamble of this rule. The 
discretionary portions of this regulation will not affect these changes 
by more than a few million dollars at the margin. Therefore, while the 
statutory changes will have economic effects in excess of $100 million, 
this final rule with comment period is not an economically significant 
rule under E.O. 12866. In order for the public to understand the 
magnitude of the statutory changes we have prepared the following 
voluntary analysis of the effects of these changes on program costs.
1. Current Employment Status
    Section 13561(e) of OBRA '93 deletes the concept of ``active 
individual'' and applies the MSP disability provision only to 
individuals who are covered under a large group health plan by reason 
of their current employment status or that of a family member.
    Since disabled persons generally are not working (and therefore do 
not have current employment status), fewer individuals will be subject 
to the MSP provisions and Medicare will be primary payer for more 
disabled beneficiaries. We estimate that the Medicare program will have 
the following costs as a result of this change.

    Medicare Program Costs Resulting From No Longer Treating Certain    
                      Disabled Persons As Employees                     
                         [In million of dollars]                        
                                                                        
                                                                        
Fiscal year:                                                            
  1995..............................................................   3
  1996..............................................................   3
  1997..............................................................   2
  1998..............................................................   1
  1999..............................................................   0

2. Dual Eligibility/Entitlement
    Before enactment of OBRA '93, if an individual was eligible for or 
entitled to Medicare on the basis of ESRD and was also entitled on the 
basis of age or disability, Medicare was the primary payer. This is 
because the ESRD MSP provision only applied with respect to individuals 
who were eligible for or entitled to Medicare solely on the basis of 
ESRD. However, section 13561(c) (2) and (3) of OBRA '93 provides that 
there will be an 18-month coordination period during which employer 
sponsored insurance plans must pay primary benefits even if an 
individual who is eligible for or entitled to Medicare based on ESRD is 
also entitled to Medicare on another basis.
    We estimate that the following savings will accrue to the Medicare 
program as a result of this change.

Medicare Program Savings Resulting From ESRD Dual Eligibility Provisions
                        [In millions of dollars]                        
                                                                        
                                                                        
Fiscal year:                                                            
    1995.........................................................     71
    1996.........................................................     83
    1997.........................................................     97
    1998.........................................................    114
    1999.........................................................     98

3. IRS Aggregation Rules
    The MSP provisions for the working aged apply to employers with 20 
or more employees. The MSP provisions for the disabled apply to GHPs 
contributed to by at least one employer with 100 or more employees. 
Large employers have been able to avoid having the MSP rules apply to 
them by simply organizing themselves into small firms. Section 13561(d) 
of OBRA '93 requires the use of IRS aggregation rules to determine 
employer size for MSP purposes. Employers treated as single employers 
under section 52 (a) or (b) of the IRC of 1986 are treated as single 
employers for purposes of MSP. All employees of the members of an 
affiliated service group are treated as employed by a single employer. 
Leased employees (as defined in section 414(m) of the IRC) are treated 
as employees of the person for whom they perform services to the same 
extent as they are treated under section 414(n) of the IRC.
    We estimate that the following savings will accrue to the Medicare 
program as a result of this change.

                                                                        

[[Page 45361]]
 Medicare Program Savings Resulting From Use Of IRS Aggregation Rules To
                           Determine Firm Size                          
                         [in million of dollars]                        
                                                                        
                                                                        
Fiscal year:                                                            
    1995.........................................................     80
    1996.........................................................    100
    1997.........................................................    115
    1998.........................................................    125
    1999.........................................................     80



    In accordance with the provisions of Executive Order 12866, this 
final rule with comment period was not reviewed by the Office of 
Management and Budget.

B. Regulatory Flexibility Analysis

    Consistent with the Regulatory Flexibility Act (RFA) and section 
1102(b) of the Social Security Act, we prepare a regulatory flexibility 
analysis for each rule, unless the Secretary certifies that the 
particular rule will not have a significant economic impact on a 
substantial number of small entities or a significant impact on the 
operation of a substantial number of small rural hospitals.
    The RFA defines ``small entity'' as a small business, a nonprofit 
enterprise, or a governmental jurisdiction (such as a county, city, or 
township) with a population of less than 50,000. We also consider all 
providers and suppliers of services to be small entities. For purposes 
of section 102(b) of the Act, we define small rural hospital as a 
hospital that has fewer than 50 beds and is located anywhere but in a 
metropolitan statistical area.
    As noted earlier, this rule incorporates changes enacted by various 
statutes that already are effective. Discretionary portions of the rule 
are minimal and, of themselves, have no more than an incidental effect. 
Therefore, we have not prepared a regulatory flexibility analysis 
because we have determined, and we certify, that these rules will not 
have a significant economic impact on a substantial number of small 
entities or a significant impact on the operation of a substantial 
number of small rural hospitals.
List of Subjects

42 CFR Part 400

    Grant programs--health, Health facilities, Health maintenance 
organizations (HMO), Medicaid, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 411

    Exclusions from Medicare, Limitations on Medicare payments, 
Medicare, Recovery against third parties. Reporting and recordkeeping 
requirements.
    42 CFR Chapter IV is amended as set forth below.
PART 400--INTRODUCTION; DEFINITIONS
    A. The authority citation for part 400 continues to read as 
follows:
    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh) and 44 U.S.C. Chapter 35.


Sec. 400.310  [Amended]

    B. In Sec. 400.310, in the table, ``411.65'' is revised to read 
``411.165''.
PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE 
PAYMENT
    A. The authority citation for part 411 is revised to read as 
follows:
    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).
    B. Subpart A is amended as set forth below.
Subpart A--General Exclusions and Exclusion of Particular Services
    1. Section 411.1 is amended by adding the following sentence at the 
end of paragraph (a):


Sec. 411.1  Basis and scope.

    (a) Statutory basis. * * * Sections 1842(l) and 1879 of the Act 
provide for refund to, or indemnification of, a beneficiary who has 
paid a provider or supplier for certain services that the provider or 
supplier knew were excluded from Medicare coverage.
* * * * *
    C. Subpart B is amended as follows:
Subpart B--Insurance Coverage That Limits Medicare Payment: General 
Provisions
    1. Section 411.20 is revised to read as follows:


Sec. 411.20  Basis and scope.

    (a) Statutory basis--(1) Section 1862(b)(2)(A)(i) of the Act 
precludes Medicare payment for services to the extent that payment has 
been made or can reasonably be expected to be made under a group health 
plan with respect to--
    (i) A beneficiary entitled to Medicare on the basis of ESRD during 
the first 18 months of that entitlement;
    (ii) A beneficiary who is age 65 or over, entitled to Medicare on 
the basis of age, and covered under the plan by virtue of his or her 
current employment status or the current employment status of a spouse 
of any age; or
    (iii) A beneficiary who is under age 65, entitled to Medicare on 
the basis of disability, and covered under the plan by virtue of his or 
her current employment status or the current employment status of a 
family member.
    (2) Section 1862(b)(2)(A)(ii) of the Act precludes Medicare payment 
for services to the extent that payment has been made or can reasonably 
be expected to be made promptly under any of the following:
    (i) Workers' compensation.
    (ii) Liability insurance.
    (iii) No-fault insurance.
    (b) Scope. This subpart sets forth general rules that apply to the 
types of insurance specified in paragraph (a) of this section. Other 
general rules that apply to group health plans are set forth in subpart 
E of this part.


Sec. 411.21  [Amended]

    2. In Sec. 411.21, the following changes are made:
    (a) The introductory text is revised and a definition of ``monthly 
capitation payment'' is added, to read as set forth below.
    (b) In the definition of ``conditional payment'', ``for which 
another insurer is primary payer'' is revised to read ``for which 
another payer is responsible'', and ``subparts C through G'' is revised 
to read ``subparts C through H''.


Sec. 411.21  Definitions.

    In this subpart B and in subparts C through H of this part, unless 
the context indicates otherwise--
* * * * *
    Monthly capitation payment means a comprehensive monthly payment 
that covers all physician services associated with the continuing 
medical management of a maintenance dialysis patient who dialyses at 
home or as an outpatient in an approved ESRD facility.
* * * * *
    3. Section 411.24 is amended to revise paragraph (c) to read as 
follows:


Sec. 411.24  Recovery of conditional payments.

* * * * *
    (c) Amount of recovery--(1) If it is not necessary for HCFA to take 
legal action to recover, HCFA recovers the lesser of the following:
    (i) The amount of the Medicare primary payment.
    (ii) The full primary payment amount that the primary payer is 
obligated to pay under this part without regard to any payment, other 
than a full primary payment that the primary payer has paid or will 
make, or, in the case of a 

[[Page 45362]]
third party payment recipient, the amount of the third party payment.
    (2) If it is necessary for HCFA to take legal action to recover 
from the primary payer, HCFA may recover twice the amount specified in 
paragraph (c)(1)(i) of this section.
* * * * *
    4. Section 411.24 is amended by adding a new paragraph (m) to read 
as follows:
 * * * * *
    (m) Interest charges.(1) With respect to recovery of payments for 
items and services furnished before October 31, 1994, HCFA charges 
interest, exercising common law authority in accordance with 45 CFR 
30.13, consistent with the Federal Claims Collection Act (31 U.S.C. 
3711).
    (2) In addition to its common law authority with respect to 
recovery of payments for items and services furnished on or after 
October 31, 1994, HCFA charges interest in accordance with section 
1862(b)(2)(B)(i) of the Act. Under that provision--
    (i) HCFA may charge interest if reimbursement is not made to the 
appropriate trust fund before the expiration of the 60-day period that 
begins on the date on which notice or other information is received by 
HCFA that payment has been or could be made under a primary plan;
    (ii) Interest may accrue from the date when that notice or other 
information is received by HCFA and is charged until reimbursement is 
made; and
    (iii) The rate of interest is that provided at 42 CFR 405.376(d).


Sec. 411.33  [Amended]

    5. In Sec. 411.33, the following changes are made:
    a. The heading and introductory text of paragraph (a) are revised 
to read as set forth below.
    b. In paragraph (a)(1), ``(or the amount the supplier is obligated 
to accept as payment in full if that is less than the charges)'' is 
inserted immediately after ``the supplier''.
    c. In paragraph (a)(3), ``Medicare fee schedule,'' is inserted 
before ``Medicare reasonable charge'' and a comma is inserted after 
``reasonable charge''.
    d. In paragraph (b) introductory text and paragraph (b)(3), 
``reasonable charge'' is revised to read ``fee schedule''.
    e. Paragraphs (c) and (d) are removed and reserved.
    f. In the heading of paragraph (e), ``fee schedule,'' is inserted 
before ``reasonable charge'', and a comma is inserted after 
``reasonable charge''.


Sec. Sec. 411.33  Amount of Medicare secondary payment.

    (a) Services for which HCFA pays on a Medicare fee schedule or 
reasonable charge basis. The Medicare secondary payment is the lowest 
of the following:
 * * * * *
    (c) [Reserved]
    (d) [Reserved]
 * * * * *
    D. Subparts E and F are redesignated as subparts F and G, 
respectively, in accordance with the redesignation tables set forth 
below, and throughout part 411, internal cross references are revised 
to reflect these changes.

Old section (subpart E):                                     New section
                                                             (subpart F)
    411.60.................................................      411.160
    411.62.................................................      411.162
    411.65.................................................      411.165
Old section (subpart F):                                     New section
                                                             (subpart G)
    411.70.................................................      411.170
    411.72.................................................      411.172
    411.75.................................................      411.175
                                                                        

    E. A new subpart E is added, to read as follows:
Subpart E--Limitations on Payment for Services Covered Under Group 
Health Plans: General Provisions
Sec.
411.100  Basis and scope.
411.101  Definitions.
411.102  Basic prohibitions and requirements.
411.103  Prohibition against financial and other incentives.
411.104  Current employment status.
411.106  Aggregation rules.
411.108  Taking into account entitlement to Medicare.
411.110  Basis for determination of nonconformance.
411.112  Documentation of conformance.
411.114  Determination of nonconformance.
411.115  Notice of determination of nonconformance.
411.120  Appeals.
411.121  Hearing procedures.
411.122  Hearing officer's decision.
411.124  Administrator's review of hearing decision.
411.126  Reopening of determinations and decisions.
411.130  Referral to Internal Revenue Service (IRS).

Subpart E--Limitations on Payment for Services Covered Under Group 
Health Plans: General Provisions


Sec. 411.100  Basis and scope.

    (a) Statutory basis.--(1) Section 1862(b) of the Act provides in 
part that Medicare is secondary payer, under specified conditions, for 
services covered under any of the following:
    (i) Group health plans of employers that employ at least 20 
employees and that cover Medicare beneficiaries age 65 or older who are 
covered under the plan by virtue of the individual's current employment 
status with an employer or the current employment status of a spouse of 
any age. (Section 1862(b)(1)(A))
    (ii) Group health plans (without regard to the number of 
individuals employed and irrespective of current employment status) 
that cover individuals who have ESRD. Except as provided in 
Sec. 411.163, group health plans are always primary payers throughout 
the first 18 months of ESRD-based Medicare eligibility or entitlement. 
(Section 1862(b)(1)(C))
    (iii) Large group health plans (that is, plans of employers that 
employ at least 100 employees) and that cover Medicare beneficiaries 
who are under age 65, entitled to Medicare on the basis of disability, 
and covered under the plan by virtue of the individual's or a family 
member's current employment status with an employer. (Section 
1862(b)(1)(B))
    (2) Sections 1862(b)(1) (A), (B), and (C) of the Act provide that 
group health plans and large group health plans may not take into 
account that the individuals described in paragraph (a)(1) of this 
section are entitled to Medicare on the basis of age or disability, or 
eligible for, or entitled to Medicare on the basis of ESRD.
    (3) Section 1862(b)(1)(A)(i)(II) of the Act provides that group 
health plans of employers of 20 or more employees must provide to any 
employee or spouse age 65 or older the same benefits, under the same 
conditions, that it provides to employees and spouses under 65. The 
requirement applies regardless of whether the individual or spouse 65 
or older is entitled to Medicare.
    (4) Section 1862(b)(1)(C)(ii) of the Act provides that group health 
plans may not differentiate in the benefits they provide between 
individuals who have ESRD and other individuals covered under the plan 
on the basis of the existence of ESRD, the need for renal dialysis, or 
in any other manner. Actions that constitute ``differentiating'' are 
listed in Sec. 411.161(b).
    (b) Scope. This subpart sets forth general rules pertinent to--
    (1) Medicare payment for services that are covered under a group 
health plan and are furnished to certain beneficiaries who are entitled 
on the basis of ESRD, age, or disability.
    (2) The prohibition against taking into account Medicare 
entitlement based on age or disability, or Medicare eligibility or 
entitlement based on ESRD.
    (3) The prohibition against differentiation in benefits between 

[[Page 45363]]
    individuals who have ESRD and other individuals covered under the plan.
    (4) The requirement to provide to those 65 or over the same 
benefits under the same conditions as are provided to those under 65.
    (5) The appeals procedures for group health plans that HCFA 
determines are nonconforming plans.


Sec. 411.101  Definitions.

    As used in this subpart and in subparts F through H of this part--
    COBRA stands for Consolidated Omnibus Budget Reconciliation Act of 
1985.
    Days means calendar days.
    Employee (subject to the special rules in Sec. 411.104) means an 
individual who--
    (1) Is working for an employer; or
    (2) Is not working for an employer but is receiving payments that 
are subject to FICA taxes, or would be subject to FICA taxes except 
that the employer is exempt from those taxes under the Internal Revenue 
Code.
    Employer means, in addition to individuals (including self-employed 
persons) and organizations engaged in a trade or business, other 
entities exempt from income tax such as religious, charitable, and 
educational institutions, the governments of the United States, the 
individual States, Puerto Rico, the Virgin Islands, Guam, American 
Samoa, the Northern Mariana Islands, and the District of Columbia, and 
the agencies, instrumentalities, and political subdivisions of these 
governments.
    FICA stands for the Federal Insurance Contributions Act, the law 
that imposes social security taxes on employers and employees under 
section 21 of the Internal Revenue Code.
    Group health plan (GHP) means any arrangement made by one or more 
employers or employee organizations to provide health care directly or 
through other methods such as insurance or reimbursement, to current or 
former employees, the employer, others associated or formerly 
associated with the employer in a business relationship, or their 
families, that--
    (1) Is of, or contributed to by, one or more employers or employee 
organizations.
    (2) If it involves more than one employer or employee organization, 
provides for common administration.
    (3) Provides substantially the same benefits or the same benefit 
options to all those enrolled under the arrangement.
    The term includes self-insured plans, plans of governmental 
entities (Federal, State and local), and employee organization plans; 
that is, union plans, employee health and welfare funds or other 
employee organization plans. The term also includes employee-pay-all 
plans, which are plans under the auspices of one or more employers or 
employee organizations but which receive no financial contributions 
from them. The term does not include a plan that is unavailable to 
employees; for example, a plan only for self-employed persons.
    IRC stands for Internal Revenue Code.
    IRS stands for Internal Revenue Service.
    Large group health plan (LGHP) means a GHP that covers employees of 
either--
    (1) A single employer or employee organization that employed at 
least 100 full-time or part-time employees on 50 percent or more of its 
regular business days during the previous calendar year; or
    (2) Two or more employers, or employee organizations, at least one 
of which employed at least 100 full-time or part-time employees on 50 
percent or more of its regular business days during the previous 
calendar year.
    MSP stands for Medicare secondary payer.
    Multi-employer plan means a plan that is sponsored jointly by two 
or more employers (sometimes called a multiple-employer plan) or by 
employers and unions (sometimes under the Taft-Hartley law).
    Self-employed person encompasses consultants, owners of businesses, 
and directors of corporations, and members of the clergy and religious 
orders who are paid for their services by a religious body or other 
entity.
    Similarly situated individual means--
    (1) In the case of employees, other employees enrolled or seeking 
to enroll in the plan; and
    (2) In the case of other categories of individuals, other persons 
in any of those categories who are enrolled or seeking to enroll in the 
plan.


Sec. 411.102  Basic prohibitions and requirements.

    (a) ESRD--(1) A group health plan of any size--(i) May not take 
into account the ESRD-based Medicare eligibility or entitlement of any 
individual who is covered or seeks to be covered under the plan; and
    (ii) May not differentiate in the benefits it provides between 
individuals with ESRD and other individuals covered under the plan, on 
the basis of the existence of ESRD, or the need for dialysis, or in any 
other manner.
    (2) The prohibitions of paragraph (a) of this section do not 
prohibit a plan from paying benefits secondary to Medicare after the 
first 18 months of ESRD-based eligibility or entitlement.
    (b) Age. A GHP of an employer or employee organization of at least 
20 employees--
    (1) May not take into account the age-based Medicare entitlement of 
an individual or spouse age 65 or older who is covered (or seeks to be 
covered) under the plan by virtue of current employment status; and
    (2) Must provide, to employees age 65 or older and to spouses age 
65 or older of employees of any age, the same benefits under the same 
conditions as it provides to employees and spouses under age 65.
    (c) Disability. A GHP of an employer or employee organization of at 
least 100 employees may not take into account the disability-based 
Medicare entitlement of any individual who is covered (or seeks to be 
covered) under the plan by virtue of current employment status.


Sec. 411.103  Prohibition against financial and other incentives.

    (a) General rule. An employer or other entity (for example, an 
insurer) is prohibited from offering Medicare beneficiaries financial 
or other benefits as incentives not to enroll in, or to terminate 
enrollment in, a GHP that is, or would be, primary to Medicare. This 
prohibition precludes offering to Medicare beneficiaries an alternative 
to the employer primary plan (for example, coverage of prescription 
drugs) unless the beneficiary has primary coverage other than Medicare. 
An example would be primary coverage through his own or a spouse's 
employer.
    (b) Penalty for violation.--(1) Any entity that violates the 
prohibition of paragraph (a) of this section is subject to a civil 
money penalty of up to $5,000 for each violation; and
    (2) The provisions of section 1128A of the Act (other than 
subsections (a) and (b)) apply to the civil money penalty of up to 
$5,000 in the same manner as the provisions apply to a penalty or 
proceeding under section 1128A(a).


Sec. 411.104  Current employment status.

    (a) General rule. An individual has current employment status if--
    (1) The individual is actively working as an employee, is the 
employer (including a self-employed person), or is associated with the 
employer in a business relationship; or
    (2) The individual is not actively working and--
    (i) Is receiving disability benefits from an employer for up to 6 
months (the first 6 months of employer disability benefits are subject 
to FICA taxes); or 

[[Page 45364]]

    (ii) Retains employment rights in the industry and has not had his 
employment terminated by the employer, if the employer provides the 
coverage (or has not had his membership in the employee organization 
terminated, if the employee organization provides the coverage), is not 
receiving disability benefits from an employer for more than 6 months, 
is not receiving disability benefits from Social Security, and has GHP 
coverage that is not pursuant to COBRA continuation coverage (26 U.S.C. 
4980B; 29 U.S.C. 1161-1168; 42 U.S.C. 300bb-1 et seq.). Whether or not 
the individual is receiving pay during the period of nonwork is not a 
factor.
    (b) Persons who retain employment rights. For purposes of paragraph 
(a)(2) of this section, persons who retain employment rights include 
but are not limited to--
    (1) Persons who are furloughed, temporarily laid off, or who are on 
sick leave;
    (2) Teachers and seasonal workers who normally do not work 
throughout the year; and
    (3) Persons who have health coverage that extends beyond or between 
active employment periods; for example, based on an hours bank 
arrangement. (Active union members often have hours bank coverage.)
    (c) Coverage by virtue of current employment status. An individual 
has coverage by virtue of current employment status with an employer 
if--
    (1) the individual has GHP or LGHP coverage based on employment, 
including coverage based on a certain number of hours worked for that 
employer or a certain level of commissions earned from work for that 
employer at any time; and
    (2) the individual has current employment status with that 
employer, as defined in paragraph (a) of this section.
    (d) Special rule: Self-employed person. A self-employed individual 
is considered to have GHP or LGHP coverage by virtue of current 
employment status during a particular tax year only if, during the 
preceding tax year, the individual's net earnings, from work in that 
year related to the employer that offers the group health coverage, are 
at least equal to the amount specified in section 211(b)(2) of the Act, 
which defines ``self-employment income'' for social security purposes.
    (e) Special Rule: members of religious orders and members of 
clergy--(1) Members of religious orders who have not taken a vow of 
poverty. A member of a religious order who has not taken a vow of 
poverty is considered to have current employment status with the 
religious order if--
    (a) The religious order pays FICA taxes on behalf of that member; 
or
    (b) The individual is receiving cash remuneration from the 
religious order.
    (2) Members of religious orders who have taken a vow of poverty. A 
member of a religious order whose members are required to take a vow of 
poverty is not considered to be employed by the order if the services 
he or she performs as a member of the order are considered employment 
only because the order elects social security coverage under section 
3121(r) of the IRC. This exemption applies retroactively to services 
performed as a member of the order, beginning with the effective dates 
of the MSP provisions for the aged and the disabled, respectively. The 
exemption does not apply to services performed for employers outside of 
the order.
    (3) Members of the clergy. A member of the clergy is considered to 
have current employment status with a church or other religious 
organization if the individual is receiving cash remuneration from the 
church or other religious organization for services rendered.
    (f) Special rule: Delayed compensation subject to FICA taxes. An 
individual who is not working is not considered an employee solely on 
the basis of receiving delayed compensation payments for previous 
periods of work even if those payments are subject to FICA taxes (or 
would be subject to FICA taxes if the employer were not exempt from 
paying those taxes). For example, an individual who is not working in 
1993 and receives payments subject to FICA taxes for work performed in 
1992 is not considered to be an employee in 1993 solely on the basis of 
receiving those payments.


Sec. 411.106  Aggregation rules.

    The following rules apply in determining the number and size of 
employers, as required by the MSP provisions for the aged and disabled:
    (a) All employers that are treated as a single employer under 
subsection (a) or (b) of section 52 of the Internal Revenue Code (IRC) 
of 1986 (26 U.S.C. 52 (a) and (b)) are treated as a single employer.
    (b) All employees of the members of an affiliated service group (as 
defined in section 414(m) of the IRC (26 U.S.C. 414m)) are treated as 
employed by a single employer.
    (c) Leased employees (as defined in section 414(n)(2) of the IRC 
(26 U.S.C. 414(n)(2)) are treated as employees of the person for whom 
they perform services to the same extent as they are treated under 
section 414(n) of the IRC.
    (d) In applying the IRC provisions identified in this section, HCFA 
relies upon regulations and decisions of the Secretary of the Treasury 
respecting those provisions.


Sec. 411.108  Taking into account entitlement to Medicare.

    (a) Examples of actions that constitute ``taking into account''. 
Actions by GHPs or LGHPs that constitute taking into account that an 
individual is entitled to Medicare on the basis of ESRD, age, or 
disability (or eligible on the basis of ESRD) include, but are not 
limited to, the following:
    (1) Failure to pay primary benefits as required by subparts F, G, 
and H of this part 411.
    (2) Offering coverage that is secondary to Medicare to individuals 
entitled to Medicare.
    (3) Terminating coverage because the individual has become entitled 
to Medicare, except as permitted under COBRA continuation coverage 
provisions (26 U.S.C. 4980B(f)(2)(B)(iv); 29 U.S.C. 1162.(2)(D); and 42 
U.S.C. 300bb-2.(2)(D)).
    (4) In the case of a LGHP, denying or terminating coverage because 
an individual is entitled to Medicare on the basis of disability 
without denying or terminating coverage for similarly situated 
individuals who are not entitled to Medicare on the basis of 
disability.
    (5) Imposing limitations on benefits for a Medicare entitled 
individual that do not apply to others enrolled in the plan, such as 
providing less comprehensive health care coverage, excluding benefits, 
reducing benefits, charging higher deductibles or coinsurance, 
providing for lower annual or lifetime benefit limits, or more 
restrictive pre-existing illness limitations.
    (6) Charging a Medicare entitled individual higher premiums.
    (7) Requiring a Medicare entitled individual to wait longer for 
coverage to begin.
    (8) Paying providers and suppliers no more than the Medicare 
payment rate for services furnished to a Medicare beneficiary but 
making payments at a higher rate for the same services to an enrollee 
who is not entitled to Medicare.
    (9) Providing misleading or incomplete information that would have 
the effect of inducing a Medicare entitled individual to reject the 
employer plan, thereby making Medicare the primary payer. An example of 
this would be informing the 

[[Page 45365]]
beneficiary of the right to accept or reject the employer plan but 
failing to inform the individual that, if he or she rejects the plan, 
the plan will not be permitted to provide or pay for secondary 
benefits.
    (10) Including in its health insurance cards, claims forms, or 
brochures distributed to beneficiaries, providers, and suppliers, 
instructions to bill Medicare first for services furnished to Medicare 
beneficiaries without stipulating that such action may be taken only 
when Medicare is the primary payer.
    (11) Refusing to enroll an individual for whom Medicare would be 
secondary payer, when enrollment is available to similarly situated 
individuals for whom Medicare would not be secondary payer.
    (b) Permissible actions--(1) If a GHP or LGHP makes benefit 
distinctions among various categories of individuals (distinctions 
unrelated to the fact that the individual is disabled, based, for 
instance, on length of time employed, occupation, or marital status), 
the GHP or LGHP may make the same distinctions among the same 
categories of individuals entitled to Medicare whose plan coverage is 
based on current employment status. For example, if a GHP or LGHP does 
not offer coverage to employees who have worked less than one year and 
who are not entitled to Medicare on the basis of disability or age, the 
GHP or LGHP is not required to offer coverage to employees who have 
worked less than one year and who are entitled to Medicare on the basis 
of disability or age.
    (2) A GHP or LGHP may pay benefits secondary to Medicare for an 
aged or disabled beneficiary who has current employment status if the 
plan coverage is COBRA continuation coverage because of reduced hours 
of work. Medicare is primary payer for this beneficiary because, 
although he or she has current employment status, the GHP coverage is 
by virtue of the COBRA law rather than by virtue of the current 
employment status.
    (3) A GHP may terminate COBRA continuation coverage of an 
individual who becomes entitled to Medicare on the basis of ESRD, when 
permitted under the COBRA provisions.


Sec. 411.110  Basis for determination of nonconformance.

    (a) A ``determination of nonconformance'' is a HCFA determination 
that a GHP or LGHP is a nonconforming plan as provided in this section.
    (b) HCFA makes a determination of nonconformance for a GHP or LGHP 
that, at any time during a calendar year, fails to comply with any of 
the following statutory provisions:
    (1) The prohibition against taking into account that a beneficiary 
who is covered or seeks to be covered under the plan is entitled to 
Medicare on the basis of ESRD, age, or disability, or eligible on the 
basis of ESRD.
    (2) The nondifferentiation clause for individuals with ESRD.
    (3) The equal benefits clause for the working aged.
    (4) The obligation to refund conditional Medicare primary payments.
    (c) HCFA may make a determination of nonconformance for a GHP or 
LGHP that fails to respond to a request for information, or to provide 
correct information, either voluntarily or in response to a HCFA 
request, on the plan's primary payment obligation with respect to a 
given beneficiary, if that failure contributes to either or both of the 
following:
    (1) Medicare erroneously making a primary payment.
    (2) A delay or foreclosure of HCFA's ability to recover an 
erroneous primary payment.


Sec. 411.112  Documentation of conformance.

    (a) Acceptable documentation. HCFA may require a GHP or LGHP to 
demonstrate that it has complied with the Medicare secondary payer 
provisions and to submit supporting documentation by an official 
authorized to act on behalf of the entity, under penalty of perjury. 
The following are examples of documentation that may be acceptable:
    (1) A copy of the employer's plan or policy that specifies the 
services covered, conditions of coverage, benefit levels and 
limitations with respect to persons entitled to Medicare on the basis 
of ESRD, age, or disability as compared to the provisions applicable to 
other enrollees and potential enrollees.
    (2) An explanation of the plan's allegation that it does not owe 
HCFA any amount HCFA claims the plan owes as repayment for conditional 
or mistaken Medicare primary payments.
    (b) Lack of acceptable documentation. If a GHP or LGHP fails to 
provide acceptable evidence or documentation that it has complied with 
the MSP prohibitions and requirements set forth in Sec. 411.110, HCFA 
may make a determination of nonconformance for both the year in which 
the services were furnished and the year in which the request for 
information was made.


Sec. 411.114  Determination of nonconformance.

    (a) Starting dates for determination of nonconformance. HCFA's 
authority to determine nonconformance of GHPs begins on the following 
dates:
    (1) On January 1, 1987 for MSP provisions that affect the disabled.
    (2) On December 20, 1989 for MSP provisions that affect ESRD 
beneficiaries and the working aged.
    (3) On August 10, 1993 for failure to refund mistaken Medicare 
primary payments.
    (b) Special rule for failure to repay. A GHP that fails to comply 
with Sec. 411.110 (a)(1), (a)(2), or (a)(3) in a particular year is 
nonconforming for that year. If, in a subsequent year, that plan fails 
to repay the resulting mistaken primary payments (in accordance with 
Sec. 411.110(a)(4)), the plan is also nonconforming for the subsequent 
year. For example, if a plan paid secondary for the working aged in 
1991, that plan was nonconforming for 1991. If in 1994 HCFA identifies 
mistaken primary payments attributable to the 1991 violation, and the 
plan refuses to repay, it is also nonconforming for 1994.


Sec. 411.115  Notice of determination of nonconformance.

    (a) Notice to the GHP or LGHP--(1) If HCFA determines that a GHP or 
an LGHP is nonconforming with respect to a particular calendar year, 
HCFA mails to the plan written notice of the following:
    (i) The determination.
    (ii) The basis for the determination.
    (iii) The right of the parties to request a hearing.
    (iv) An explanation of the procedure for requesting a hearing.
    (v) The tax that may be assessed by the IRS in accordance with 
section 5000 of the IRC.
    (vi) The fact that if none of the parties requests a hearing within 
65 days from the date of its notice, the determination is binding on 
all parties unless it is reopened in accordance with Sec. 411.126.
    (2) The notice also states that the plan must, within 30 days from 
the date on its notice, submit to HCFA the names and addresses of all 
employers and employee organizations that contributed to the plan 
during the calendar year for which HCFA has determined nonconformance.
    (b) Notice to contributing employers and employee organizations. 
HCFA mails written notice of the determination, including all the 
information specified in paragraph (a)(1) of this section, to all 
contributing employers and employee organizations already known to HCFA 
or identified by 

[[Page 45366]]
the plan in accordance with paragraph (a)(2) of this section. Employers 
and employee organizations have 65 days from the date of their notice 
to request a hearing.


Sec. 411.120  Appeals.

    (a) Parties to the determination. The parties to the determination 
are HCFA, the GHP or LGHP for which HCFA determined nonconformance, and 
any employers or employee organizations that contributed to the plan 
during the calendar year for which HCFA determined nonconformance.
    (b) Request for hearing.--(1) A party's request for hearing must be 
in writing (not in facsimile or other electronic medium) and in the 
manner stipulated in the notice of nonconformance; it must be filed 
within 65 days from the date on the notice.
    (2) The request may include rationale showing why the parties 
believe that HCFA's determination is incorrect and supporting 
documentation.
    (3) A request is considered filed on the date it is received by the 
appropriate office, as shown by the receipt date stamped on the 
request.


Sec. 411.121  Hearing procedures.

    (a) Nature of hearing.--(1) If any of the parties requests a 
hearing within 65 days from the date on the notice of the determination 
of nonconformance, the HCFA Administrator appoints a hearing officer.
    (2) If no party files a request within the 65-day period, the 
initial determination of nonconformance is binding upon all parties 
unless it is reopened in accordance with Sec. 411.126.
    (3) If more than one party requests a hearing the hearing officer 
conducts a single hearing in which all parties may participate.
    (4) On the record review. Ordinarily, the hearing officer makes a 
decision based upon review of the data and documents on which HCFA 
based its determination of nonconformance and any other documentation 
submitted by any of the parties within 65 days from the date on the 
notice.
    (5) Oral hearing. The hearing officer may provide for an oral 
hearing either on his or her own motion or in response to a party's 
request if the party demonstrates to the hearing officer's satisfaction 
that an oral hearing is necessary. Within 30 days of receipt of the 
request, the hearing officer gives all known parties written notice of 
the request and whether the request for oral hearing is granted.
    (b) Notice of time and place of oral hearing. If the hearing 
officer provides an oral hearing, he or she gives all known parties 
written notice of the time and place of the hearing at least 30 days 
before the scheduled date.
    (c) Prehearing discovery.--(1) The hearing officer may permit 
prehearing discovery if it is requested by a party at least 10 days 
before the scheduled date of the hearing.
    (2) If the hearing officer approves the request, he or she--
    (i) Provides a reasonable time for inspection and reproduction of 
documents; and
    (ii) In ruling on discovery matters, is guided by the Federal Rules 
of Civil Procedure. (28 U.S.C.A. Rules 26-37)
    (3) The hearing officer's orders on all discovery matters are 
final.
    (d) Conduct of hearing. The hearing officer determines the conduct 
of the hearing, including the order in which the evidence and the 
allegations are presented.
    (e) Evidence at hearing.--(1) The hearing officer inquires into the 
matters at issue and may receive from all parties documentary and other 
evidence that is pertinent and material, including the testimony of 
witnesses, and evidence that would be inadmissible in a court of law.
    (2) Evidence may be received at any time before the conclusion of 
the hearing.
    (3) The hearing officer gives the parties opportunity for 
submission and consideration of evidence and arguments and, in ruling 
on the admissibility of evidence, excludes irrelevant, immaterial, or 
unduly repetitious evidence.
    (4) The hearing officer's ruling on admissibility of evidence is 
final and not subject to further review.
    (f) Subpoenas.--(1) The hearing officer may, either on his or her 
own motion or upon the request of any party, issue subpoenas for either 
or both of the following if they are reasonably necessary for full 
presentation of the case:
    (i) The attendance and testimony of witnesses.
    (ii) The production of books, records, correspondence, papers, or 
other documents that are relevant and material to any matter at issue.
    (2) A party that wishes the issuance of a subpoena must, at least 
10 days before the date fixed for the hearing, file with the hearing 
officer a written request that identifies the witnesses or documents to 
be produced and describes the address or location in sufficient detail 
to permit the witnesses or documents to be found.
    (3) The request for a subpoena must state the pertinent facts that 
the party expects to establish by the witnesses or documents and 
whether those facts could be established by other evidence without the 
use of a subpoena.
    (4) The hearing officer issues the subpoenas at his or her 
discretion, and HCFA assumes the cost of the issuance and the fees and 
mileage of any subpoenaed witness, in accordance with section 205(d) of 
the Act (42 U.S.C. 405(d)).
    (g) Witnesses. Witnesses at the hearing testify under oath or 
affirmation, unless excused by the hearing officer for cause. The 
hearing officer may examine the witnesses and shall allow the parties 
to examine and cross-examine witnesses.
    (h) Record of hearing. A complete record of the proceedings at the 
hearing is made and transcribed in all cases. It is made available to 
the parties upon request. The record is not closed until a decision has 
been issued.
    (i) Sources of hearing officer's authority. In the conduct of the 
hearing, the hearing officer complies with all the provisions of title 
XVIII of the Act and implementing regulations, as well as with HCFA 
Rulings issued under Sec. 401.108 of this chapter. The hearing officer 
gives great weight to interpretive rules, general statements of policy, 
and rules of agency organization, procedure, or practice established by 
HCFA.


Sec. 411.122  Hearing officer's decision.

    (a) Timing.--(1) If the decision is based on a review of the 
record, the hearing officer mails the decision to all known parties 
within 120 days from the date of receipt of the request for hearing.
    (2) If the decision is based on an oral hearing, the hearing 
officer mails the decision to all known parties within 120 days from 
the conclusion of the hearing.
    (b) Basis, content, and distribution of hearing decision.--(1) The 
written decision is based on substantial evidence and contains findings 
of fact, a statement of reasons, and conclusions of law.
    (2) The hearing officer mails a copy of the decision to each of the 
parties, by certified mail, return receipt requested, and includes a 
notice that the administrator may review the hearing decision at the 
request of a party or on his or her own motion.
    (c) Effect of hearing decision. The hearing officer's decision is 
the final Departmental decision and is binding upon all parties unless 
the Administrator chooses to review that decision in accordance with 
Sec. 411.124 or it is reopened by the hearing officer in accordance 
with Sec. 411.126.


Sec. 411.124  Administrator's review of hearing decision.

    (a) Request for review. A party's request for review of a hearing 
officer's 

[[Page 45367]]
decision must be in writing (not in facsimile or other electronic 
medium) and must be received by the Administrator within 25 days from 
the date on the decision.
    (b) Office of the Attorney Advisor responsibility. The Office of 
the Attorney Advisor examines the hearing officer's decision, the 
requests made by any of the parties or HCFA, and any submission made in 
accordance with the provisions of this section in order to assist the 
Administrator in deciding whether to review the decision.
    (c) Administrator's discretion. The Administrator may--
    (1) Review or decline to review the hearing officer's decision;
    (2) Exercise this discretion on his or her own motion or in 
response to a request from any of the parties; and
    (3) Delegate review responsibility to the Deputy Administrator. (As 
used in this section, the term ``Administrator'' includes ``Deputy 
Administrator'' if review responsibility has been delegated.)
    (d) Basis for decision to review. In deciding whether to review a 
hearing officer's decision, the Administrator considers--
    (1) Whether the decision--
    (i) Is based on a correct interpretation of law, regulation, or 
HCFA Ruling;
    (ii) Is supported by substantial evidence;
    (iii) Presents a significant policy issue having a basis in law and 
regulations;
    (iv) Requires clarification, amplification, or an alternative legal 
basis for the decision; and
    (v) Is within the authority provided by statute, regulation, or 
HCFA Ruling; and
    (2) Whether review may lead to the issuance of a HCFA Ruling or 
other directive needed to clarify a statute or regulation.
    (e) Notice of decision to review or not to review. (1) The 
Administrator gives all parties prompt written notice of his or her 
decision to review or not to review.
    (2) The notice of a decision to review identifies the specific 
issues the Administrator will consider.
    (f) Response to notice of decision to review. (1) Within 20 days 
from the date on a notice of the Administrator's decision to review a 
hearing officer's decision, any of the parties may file with the 
Administrator any or all of the following:
    (i) Proposed findings and conclusions.
    (ii) Supporting views or exceptions to the hearing officer's 
decision.
    (iii) Supporting reasons for the proposed findings and exceptions.
    (iv) A rebuttal to another party's request for review or to other 
submissions already filed with the Administrator.
    (2) The submissions must be limited to the issues the Administrator 
has decided to review and confined to the record established by the 
hearing officer.
    (3) All communications from the parties concerning a hearing 
officer's decision being reviewed by the Administrator must be in 
writing (not in facsimile or other electronic medium) and must include 
a certification that copies have been sent to all other parties.
    (4) The Administrator does not consider any communication that does 
not meet the requirements of this paragraph.
    (g) Administrator's review decision. (1) The Administrator bases 
his or her decision on the following:
    (i) The entire record developed by the hearing officer.
    (ii) Any materials submitted in connection with the hearing or 
under paragraph (f) of this section.
    (iii) Generally known facts not subject to reasonable dispute.
    (2) The Administrator mails copies of the review decision to all 
parties within 120 days from the date of the hearing officer's 
decision.
    (3) The Administrator's review decision may affirm, reverse, or 
modify the hearing decision or may remand the case to the hearing 
officer.
    (h) Basis and effect of remand--(1) Basis. The bases for remand do 
not include the following:
    (i) Evidence that existed at the time of the hearing and that was 
known or could reasonably have been expected to be known.
    (ii) A court case that was either not available at the time of the 
hearing or was decided after the hearing.
    (iii) Change of the parties' representation.
    (iv) An alternative legal basis for an issue in dispute.
    (2) Effect of remand. (i) The Administrator may instruct the 
hearing officer to take further action with respect to the development 
of additional facts or new issues or to consider the applicability of 
laws or regulations other than those considered during the hearing.
    (ii) The hearing officer takes the action in accordance with the 
Administrator's instructions in the remand notice and again issues a 
decision.
    (iii) The Administrator may review or decline to review the hearing 
officer's remand decision in accordance with the procedures set forth 
in this section.
    (i) Finality of decision. The Administrator's review decision, or 
the hearing officer's decision following remand, is the final 
Departmental decision and is binding on all parties unless the 
Administrator chooses to review the decision in accordance with this 
section, or the decision is reopened in accordance with Sec. 411.126.


Sec. 411.126  Reopening of determinations and decisions.

    (a) A determination that a GHP or LGHP is a nonconforming GHP or 
the decision or revised decision of a hearing officer or of the HCFA 
Administrator may be reopened within 12 months from the date on the 
notice of determination or decision or revised decision, for any reason 
by the entity that issued the determination or decision.
    (b) The decision to reopen or not to reopen is not appealable.


Sec. 411.130  Referral to Internal Revenue Service (IRS).

    (a) HCFA responsibility. After HCFA determines that a plan has been 
a nonconforming GHP in a particular year, it refers its determination 
to the IRS, but only after the parties have exhausted all HCFA appeal 
rights with respect to the determination.
    (b) IRS responsibility. The IRS administers section 5000 of the 
IRC, which imposes a tax on employers (other than governmental 
entities) and employee organizations that contribute to a nonconforming 
GHP. The tax is equal to 25 percent of the employer's or employee 
organization's expenses, incurred during the calendar year in which the 
plan is a nonconforming GHP, for each GHP, both conforming and 
nonconforming, to which the employer or employee organization 
contributes.
    D. Newly designated subpart F is amended as set forth below.
    1. The heading, and Sec. 411.160 are revised to read as follows:

Subpart F--Special Rules: Individuals Eligible or Entitled on the 
Basis of ESRD, Who Are Also Covered Under Group Health Plans
Sec. 411.160  Scope.

    This subpart sets forth special rules that apply to individuals who 
are eligible for, or entitled to, Medicare on the basis of ESRD. 
(Section 406.13 of this chapter contains the rules for eligibility and 
entitlement based on ESRD.)
    2. A new Sec. 411.161 is added to read as follows: 

[[Page 45368]]



Sec. 411.161  Prohibition against taking into account Medicare 
eligibility or entitlement or differentiating benefits.

    (a) Taking into account--(1) Basic rule. A GHP may not take into 
account that an individual is eligible for or entitled to Medicare 
benefits on the basis of ESRD during the coordination period specified 
in Sec. 411.162 (b) and (c). Examples of actions that constitute taking 
into account Medicare entitlement are listed in Sec. 411.108(a).
    (2) Applicability. This prohibition applies for ESRD-based Medicare 
eligibility to the same extent as for ESRD-based Medicare entitlement. 
An individual who has ESRD but who has not filed an application for 
entitlement to Medicare on that basis is eligible for Medicare based on 
ESRD for purposes of paragraphs (b)(2) and (c)(2) through (c)(4) of 
Sec. 411.162 if the individual meets the other requirements of 
Sec. 406.13 of this chapter.
    (3) Relation to COBRA continuation coverage. This rule does not 
prohibit the termination of GHP coverage under title X of COBRA when 
termination of that coverage is expressly permitted, upon entitlement 
to Medicare, under 26 U.S.C. 4980B(f)(2)(B)(iv); 29 U.S.C. 1162.(2)(D); 
or 42 U.S.C. 300bb-2.(2)(D).2 (Situations in which Medicare is 
secondary to COBRA continuation coverage are set forth in 
Sec. 411.162(a)(3).)

    \2\ COBRA requires that certain group health plans offer 
continuation of plan coverage for 18 to 36 months after the 
occurrence of certain ``qualifying events,'' including loss of 
employment or reduction of employment hours. Those are events that 
otherwise would result in loss of group health plan coverage unless 
the individual is given the opportunity to elect, and does so elect, 
to continue plan coverage at his or her own expense. With one 
exception, the COBRA amendments expressly permit termination of 
continuation coverage upon entitlement to Medicare. The exception is 
that the plan may not terminate continuation coverage of an 
individual (and his or her qualified dependents) if the individual 
retires on or before the date the employer substantially eliminates 
regular plan coverage by filing for Chapter 11 bankruptcy (26 U.S.C. 
4980B(g)(1)(D) and 29 U.S.C. 1167.(3)(C)).
---------------------------------------------------------------------------

    (b) Nondifferentiation.--(1) A GHP may not differentiate in the 
benefits it provides between individuals who have ESRD and others 
enrolled in the plan, on the basis of the existence of ESRD, or the 
need for renal dialysis, or in any other manner.
    (2) GHP actions that constitute differentiation in plan benefits 
(and that may also constitute ``taking into account'' Medicare 
eligibility or entitlement) include, but are not limited to the 
following:
    (i) Terminating coverage of individuals with ESRD, when there is no 
basis for such termination unrelated to ESRD (such as failure to pay 
plan premiums) that would result in termination for individuals who do 
not have ESRD.
    (ii) Imposing on persons who have ESRD, but not on others enrolled 
in the plan, benefit limitations such as less comprehensive health plan 
coverage, reductions in benefits, exclusions of benefits, a higher 
deductible or coinsurance, a longer waiting period, a lower annual or 
lifetime benefit limit, or more restrictive preexisting illness 
limitations.
    (iii) Charging individuals with ESRD higher premiums.
    (iv) Paying providers and suppliers less for services furnished to 
individuals who have ESRD than for the same services furnished to those 
who do not have ESRD, such as paying 80 percent of the Medicare rate 
for renal dialysis on behalf of a plan enrollee who has ESRD and the 
usual, reasonable and customary charge for renal dialysis on behalf of 
an enrollee who does not have ESRD.
    (v) Failure to cover routine maintenance dialysis or kidney 
transplants, when a plan covers other dialysis services or other organ 
transplants.
    (c) Uniform Limitations on particular services permissible. A plan 
is not prohibited from limiting covered utilization of a particular 
service as long as the limitation applies uniformly to all plan 
enrollees. For instance, if a plan limits its coverage of renal 
dialysis sessions to 30 per year for all plan enrollees, the plan would 
not be differentiating in the benefits it provides between plan 
enrollees who have ESRD and those who do not.
    (d) Benefits secondary to Medicare. (1) The prohibition against 
differentiation of benefits does not preclude a plan from paying 
benefits secondary to Medicare after the expiration of the coordination 
period described in Sec. 411.162 (b) and (c), but a plan may not 
otherwise differentiate, as described in paragraph (b) of this section, 
in the benefits it provides.
    (2) Example--


    Mr. Smith works for employer A, and he and his wife are covered 
through employer A's GHP (Plan A). Neither is eligible for Medicare 
nor has ESRD. Mrs. Smith works for employer B, and is also covered 
by employer B's plan (Plan B). Plan A is more comprehensive than 
Plan B and covers certain items and services which Plan B does not 
cover, such as prescription drugs. If Mrs. Smith obtains a medical 
service, Plan B pays primary and Plan A pays secondary. That is, 
Plan A covers Plan B copayment amounts and items and services that 
Plan A covers but that Plan B does not.
    Mr. Jones also works for employer A, and he and his wife are 
covered by Plan A. Mrs. Jones does not have other GHP coverage. Mrs. 
Jones develops ESRD and becomes entitled to Medicare on that basis. 
Plan A pays primary to Medicare during the first 18 months of 
Medicare entitlement based on ESRD. When Medicare becomes the 
primary payer, the plan converts Mrs. Jones' coverage to a Medicare 
supplement policy. That policy pays Medicare deductible and 
coinsurance amounts but does not pay for items and services not 
covered by Medicare, which plan A would have covered. That 
conversion is impermissible because the plan is providing a lower 
level of coverage for Mrs. Jones, who has ESRD, than it provides for 
Mrs. Smith, who does not. In other words, if Plan A pays secondary 
to primary payers other than Medicare, it must provide the same 
level of secondary benefits when Medicare is primary in order to 
comply with the nondifferentiation provision.


Sec. 411.162  [Amended]

    3. In newly designated Sec. 411.162, the following changes are 
made:
    a. The section heading and paragraph (a) are revised to read as set 
forth below.
    b. In the following paragraphs, ``solely'' is removed:
    Paragraphs (b)(2)(i), (b)(2)(ii), (c)(2)(iii), (c)(2)(iv), 
(c)(3)(i), (c)(3)(ii), (c)(4)(i), (c)(4)(ii), and (f).
    c. In the following paragraphs, ``employer plan'' and ``employer 
group health plan'' are revised to read ``group health plan'': The 
section heading and paragraphs (a)(1), (a)(2)(i)(A), (a)(2)(i)(B), 
(a)(2)(i)(C), (a)(2)(ii), (d)(7), (d)(8), and (d)(9).
    d. In paragraphs (c)(2)(iii) and (c)(2)(iv), ``January 1995'' is 
revised to read ``September 1997''.
    e. In paragraphs (c)(3)(i) and (c)(3)(ii), ``July 1994'' is revised 
to read ``April 1997''.
    f. In paragraph (c)(4), introductory text, ``January 1, 1996'' is 
revised to read ``September 30, 1998''.
    g. In paragraphs (c)(4)(i) and (c)(4)(ii), ``August 1994 through 
January 1, 1995'' is revised to read ``May 1997 through September 
1997''.
    h. In paragraph (d)(9), ``January 1, 1995'' is revised to read 
``December 1, 1997''; ``January 1, 1995 through January 1, 1996, a 
period of 12 months plus 1 day.'' is revised to read ``December 1, 1997 
through November 30, 1998, a period of 12 months.''; ``January 2, 
1996'' is revised to read ``December 1, 1998'' and ``on or before 
January 1, 1996'' is revised to read ``before October 1, 1998''.
    i. In paragraph (d)(10), ``September 1, 1995'' is revised to read 
``August 1, 1997''; ``September 1, 1995 through August 31, 1996'' is 
revised to read ``August 1, 1997 through September 30, 1998''; 
``September 1, 1996'' is revised to read October 1, 1998''; and ``12 
months'' is revised to read ``14 months''.
    j. Paragraph (e) is removed and reserved. 

[[Page 45369]]



Sec. 411.162  Medicare benefits secondary to group health plan 
benefits.

    (a) General provisions--(1) Basic rule. Except as provided in 
Sec. 411.163 (with respect to certain individuals who are also entitled 
on the basis of age or disability), Medicare is secondary to any GHP 
(including a retirement plan), with respect to benefits that are 
payable to an individual who is entitled to Medicare on the basis of 
ESRD, for services furnished during any coordination period determined 
in accordance with paragraphs (b) and (c) of this section. (No Medicare 
benefits are payable on behalf of an individual who is eligible but not 
yet entitled.)
    (2) Medicare benefits secondary without regard to size of employer 
and beneficiary's employment status. The size of employer and 
employment status requirements of the MSP provisions for the aged and 
disabled do not apply with respect to ESRD beneficiaries.
    (3) COBRA continuation coverage. Medicare is secondary payer for 
benefits that a GHP--
    (i) Is required to keep in effect under COBRA continuation 
requirements (as explained in the footnote to Sec. 411.161(a)(3)), even 
after the individual becomes entitled to Medicare; or
    (ii) Voluntarily keeps in effect after the individual becomes 
entitled to Medicare on the basis of ESRD, even though not obligated to 
do so under the COBRA provisions.
    (4) Medicare payments during the coordination period. During the 
coordination period, HCFA makes Medicare payments as follows:
    (i) Primary payments only for Medicare covered services that are--
    (A) Furnished to Medicare beneficiaries who have declined to enroll 
in the GHP;
    (B) Not covered under the plan; 3

    \3\  HCFA does not pay if noncoverage of services constitutes 
differentiation as prohibited by Sec. 411.161(b).
---------------------------------------------------------------------------

    (C) Covered under the plan but not available to particular 
enrollees because they have exhausted their benefits; or
    (D) Furnished to individuals whose COBRA continuation coverage has 
been terminated because of the individual's Medicare entitlement.
    (ii) Secondary payments, within the limits specified in 
Secs. 411.32 and 411.33, to supplement the amount paid by the GHP if 
that plan pays only a portion of the charge for the services.
* * * * *
    (e) [Reserved]
* * * * *
    4. A new Sec. 411.163 is added, to read as follows:


Sec. 411.163  Coordination of benefits: Dual entitlement situations.

    (a) Basic rule. Coordination of benefits is governed by this 
section if an individual is eligible for or entitled to Medicare on the 
basis of ESRD and also entitled on the basis of age or disability.
    (b) Specific rules 4--(1) Coordination period ended before 
August 1993. If the first 18 months of ESRD-based eligibility or 
entitlement ended before August 1993, Medicare was primary payer from 
the first month of dual eligibility or entitlement, regardless of when 
dual eligibility or entitlement began.

    \4\  A lawsuit was filed in United States District Court for the 
District of Columbia on May 5, 1995 (National Medical Care, Inc. v. 
Shalala, Civil Action No. 95-0860), challenging the implementation 
of one aspect of the OBRA '93 provisions with respect to group 
health plan retirement coverage. The court issued a preliminary 
injunction order on June 6, 1995, which enjoins the Secretary from 
applying the rule contained in Sec. 411.163(b)(4) for items and 
services furnished between August 10, 1993 and April 24, 1995, 
pending the court's decision on the merits. HCFA will modify the 
rules, if required, based on the final ruling by the court.
---------------------------------------------------------------------------

    (2) First month of ESRD-based eligibility or entitlement and first 
month of dual eligibility/entitlement after February 1992 and before 
August 10, 1993. If the first month of ESRD-based eligibility or 
entitlement and first month of dual eligibility/entitlement were after 
February 1992 and before August 10, 1993, Medicare--
    (i) Is primary payer from the first month of dual eligibility/
entitlement through August 9, 1993;
    (ii) Is secondary payer from August 10, 1993, through the 18th 
month of ESRD-based eligibility or entitlement; and
    (iii) Again becomes primary payer after the 18th month of ESRD-
based eligibility or entitlement.
    (3) First month of ESRD-based eligibility or entitlement after 
February 1992 and first month of dual eligibility/entitlement after 
August 9, 1993. If the first month of ESRD-based eligibility or 
entitlement is after February 1992, and the first month of dual 
eligibility/entitlement is after August 9, 1993, the rules of 
Sec. 411.162 (b) and (c) apply; that is, Medicare--
    (i) Is secondary payer during the first 18 months of ESRD-based 
eligibility or entitlement; and
    (ii) Becomes primary after the 18th month of ESRD-based eligibility 
or entitlement.
    (4) Medicare continues to be primary after an aged or disabled 
beneficiary becomes eligible on the basis of ESRD.--(i) Applicability 
of the rule. Medicare remains the primary payer when an individual 
becomes eligible for Medicare based on ESRD if all of the following 
conditions are met:
    (A) The individual is already entitled on the basis of age or 
disability when he or she becomes eligible on the basis of ESRD.
    (B) The MSP prohibition against ``taking into account'' age-based 
or disability-based entitlement does not apply because plan coverage 
was not ``by virtue of current employment status'' or the employer had 
fewer than 20 employees (in the case of the aged) or fewer than 100 
employees (in the case of the disabled).
    (C) The plan is paying secondary to Medicare because the plan had 
justifiably taken into account the age-based or disability-based 
entitlement.
    (ii) Effect of the rule. The plan may continue to pay benefits 
secondary to Medicare under paragraph (b)(4)(i) of this section. 
However, the plan may not differentiate in the services covered and the 
payments made between persons who have ESRD and those who do not.
    (c) Examples. (1) (Rule (b)(1).) Mr. A, who is covered by a GHP, 
became entitled to Medicare on the basis of ESRD in January 1992. On 
December 20, 1992, Mr. A attained age 65 and became entitled on the 
basis of age. Since prior law was still in effect (OBRA '93 amendment 
was effective in August 1993), Medicare became primary payer as of 
December 1992, when dual entitlement began.
    (2) (Rule (b)(2).) Miss B, who has GHP coverage, became entitled to 
Medicare on the basis of ESRD in July 1992, and also entitled on the 
basis of disability in June 1993. Medicare was primary payer from June 
1993 through August 9, 1993, because the plan permissibly took into 
account the ESRD-based entitlement (ESRD was not the ``sole'' basis of 
Medicare entitlement); secondary payer from August 10, 1993, through 
December 1993, the 18th month of ESRD-based entitlement (the plan is no 
longer permitted to take into account ESRD-based entitlement that is 
not the ``sole'' basis of Medicare entitlement); and again became 
primary payer beginning January 1994.
    (3) (Rule (b)(3).) Mr. C, who is 67 years old and entitled to 
Medicare on the basis of age, has GHP coverage by virtue of current 
employment status. Mr. C is diagnosed as having ESRD and begins a 
course of maintenance dialysis on June 27, 1993. Effective September 1, 
1993, Mr. C. is eligible for Medicare on the basis of ESRD. Medicare, 
which was secondary because Mr. C's GHP coverage was by virtue of 
current employment, continues to be secondary payer through February 
1995, the 18th month of ESRD-based eligibility, and 

[[Page 45370]]
becomes primary payer beginning March 1995.
    (4) (Rule (b)(3).) Mr. D retired at age 62 and maintained GHP 
coverage as a retiree. In January 1994, at the age of 64, Mr. D became 
entitled to Medicare based on ESRD. Seven months into the 18-month 
coordination period (July 1994) Mr. D turned age 65. The coordination 
period continues without regard to age-based entitlement, with the 
retirement plan continuing to pay primary benefits through June 1995, 
the 18th month of ESRD-based entitlement. Thereafter, Medicare becomes 
the primary payer.
    (5) (Rule (b)(3).) Mrs. E retired at age 62 and maintained GHP 
coverage as a retiree. In July 1994, she simultaneously became eligible 
for Medicare based on ESRD (maintenance dialysis began in April 1994) 
and entitled based on age. The retirement plan must pay benefits 
primary to Medicare from July 1994 through December 1995, the first 18 
months of ESRD-based eligibility. Thereafter, Medicare becomes the 
primary payer.
    (6) (Rule (b)(3).) Mr. F, who is 67 years of age, is working and 
has GHP coverage because of his employment status, subsequently 
develops ESRD, and begins a course of maintenance dialysis in October 
1994. He becomes eligible for Medicare based on ESRD effective January 
1, 1995. Under the working aged provision, the plan continues to pay 
primary to Medicare through December 1994. On January 1, 1995, the 
working aged provision ceases to apply and the ESRD MSP provision takes 
effect. In September 1995, Mr. F retires. The GHP must ignore Mr. F's 
retirement status and continue to pay primary to Medicare through June 
1996, the end of the 18-month coordination period.
    (7) (Rule (b)(4).) Mrs. G, who is 67 years of age, is retired. She 
has GHP retirement coverage through her former employer. Her plan 
permissibly took into account her age-based Medicare entitlement when 
she retired and is paying benefits secondary to Medicare. Mrs. G 
subsequently develops ESRD and begins a course of maintenance dialysis 
in October 1995. She automatically becomes eligible for Medicare based 
on ESRD effective January 1, 1996. The plan continues to be secondary 
on the basis of Mrs. G's age-based entitlement as long as the plan does 
not differentiate in the services it provides to Mrs. G and does not do 
anything else that would constitute ``taking into account'' her ESRD-
based eligibility.


Sec. 411.165  [Amended]

    5. In newly designated Sec. 411.165, the following changes are 
made:
    (a) In paragraph (a) the superscript in the heading and the 
corresponding footnote are removed.
    (b) In paragraphs (a)(1), (b)(1)(i), (b)(1)(ii) and (b)(2), 
``employer plan'' is revised to read ``group health plan''.
    E. Newly designated subpart G is amended as set forth below.
    1. The heading is revised to read as follows:

Subpart G--Special Rules: Aged Beneficiaries and Spouses Who Are 
Also Covered Under Group Health Plans

    2. Nomenclature changes.
    (a) In the following locations, ``an employer plan'' and ``an 
employer group health plan'' are revised to read ``a group health 
plan'':
    Sec. 411.172 section heading and paragraphs (c).
    Sec. 411.172(d) introductory text and (e).
    Sec. 411.175(b)(1), (c)(1)(i), (c)(1)(iii) and (c)(2).
    (b) In Sec. 411.172(d), introductory text, ``by reason of 
employment'' is revised to read ``by virtue of current employment''.
    3. Section 411.170 is amended to revise paragraph (a), remove and 
reserve paragraph (b), and remove paragraphs (d) through (f) to read as 
follows:


Sec. 411.170  General provisions.

    (a) Basis. (1) This subpart is based on certain provisions of 
section 1862(b) of the Act, which impose specific requirements and 
limitations with respect to--
    (i) Individuals who are entitled to Medicare on the basis of age; 
and
    (ii) GHPs of at least one employer of 20 or more employees that 
cover those individuals.
    (2) Under these provisions, the following rules apply:
    (i) An employer is considered to employ 20 or more employees if the 
employer has 20 or more employees for each working day in each of 20 or 
more calendar weeks in the current calendar year or the preceding 
calendar year.
    (ii) The plan may not take into account the Medicare entitlement 
of--
    (A) An individual age 65 or older who is covered or seeks to be 
covered under the plan by virtue of current employment status; or
    (B) The spouse, including divorced or common-law spouse age 65 or 
older of an individual (of any age) who is covered or seeks to be 
covered by virtue of current employment status. (Section 411.108 gives 
examples of actions that constitute ``taking into account.'')
    (iii) Regardless of whether entitled to Medicare, employees and 
spouses age 65 or older, including divorced or common-law spouses of 
employees of any age, are entitled to the same plan benefits under the 
same conditions as employees and spouses under age 65.
    (b) [Reserved]
* * * * *
    (d) through (e) [Removed]
    4. Newly designated 411.172 is amended to revise paragraphs (a), 
(b), and (d) and add a new paragraph (g) to read as follows:


Sec. 411.172  Medicare benefits secondary to group health plan 
benefits.

    (a) Conditions that the individual must meet. Medicare Part A and 
Part B benefits are secondary to benefits payable by a GHP for services 
furnished during any month in which the individual--
    (1) Is aged;
    (2) Is entitled to Medicare Part A benefits under Sec. 406.10 of 
this chapter; and
    (3) Meets one of the following conditions:
    (i) Is covered under a GHP of an employer that has at least 20 
employees (including a multi-employer plan in which at least one of the 
participating employers meets that condition), and coverage under the 
plan is by virtue of the individual's current employment status.
    (ii) Is the aged spouse (including a divorced or common-law spouse) 
of an individual (of any age) who is covered under a GHP described in 
paragraph (a)(3)(i) of this section by virtue of the individual's 
current employment status.
    (b) Special rule for multi-employer plans. The requirements and 
limitations of paragraph (a) of this section do not apply with respect 
to individuals enrolled in a multi-employer plan if--
    (1) The individuals are covered by virtue of current employment 
status with an employer that has fewer than 20 employees; and
    (2) The plan requests an exception and identifies the individuals 
for whom it requests the exception as meeting the conditions specified 
in paragraph (b)(1) of this section.
* * * * *
    (d) Reemployed retiree or annuitant. A reemployed retiree or 
annuitant who is covered by a GHP and who performs sufficient services 
to qualify for coverage on that basis (that is, other employees in the 
same category are provided health benefits) is considered covered ``by 
reason of current employment status'' even if:
    (1) The employer provides the same GHP coverage to retirees; or 

[[Page 45371]]

    (2) The premiums for the plan are paid from a retirement or pension 
fund.
* * * * *
    (g) Individuals entitled to Medicare on the basis of age who are 
also eligible for or entitled to Medicare on the basis of ESRD. If an 
aged individual is, or could upon filing an application become, 
entitled to Medicare on the basis of ESRD, the coordination of benefits 
rules of subpart F of this part apply.
    5. Newly designated Sec. 411.175 is amended to revise paragraph 
(a), the headings of paragraphs (b) and (c), and paragraph (c)(1)(iii) 
to read as follows:


Sec. 411.175  Basis for Medicare primary payments.

    (a) General rule. HCFA makes Medicare primary payments for covered 
services that are--
    (1) Furnished to Medicare beneficiaries who have declined to enroll 
in the GHP;
    (2) Not covered by the plan for any individuals or spouses who are 
enrolled by virtue of the individual's current employment status;
    (3) Covered under the plan but not available to particular 
individuals or spouses enrolled by virtue of current employment status 
because they have exhausted their benefits under the plan;
    (4) Furnished to individuals whose COBRA continuation coverage has 
been terminated because of the individual's Medicare entitlement; or
    (5) Covered under COBRA continuation coverage notwithstanding the 
individual's Medicare entitlement.
* * * * *
    (b) Conditional Medicare payments: Basic rule. * * *
    (c) Conditional primary payments: Exception. * * *
    (1) * * *
    (iii) The plan covers the services for individuals or spouses who 
are enrolled in the plan by virtue of current employment status and are 
under age 65 but not for individuals and spouses who are enrolled on 
the same basis but are age 65 or older.
* * * * *
    F. A new subpart H is added, to read as set forth below.
Subpart H--Special Rules: Disabled Beneficiaries Who Are Also Covered 
Under Large Group Health Plans
Sec.
411.200  Basis.
411.201  Definitions.
411.204  Medicare benefits secondary to LGHP benefits.
411.206  Basis for Medicare primary payments and limits on secondary 
payments.

Subpart H--Special Rules: Disabled Beneficiaries Who Are Also 
Covered Under Large Group Health Plans


Sec. 411.200  Basis.

    (a) This subpart is based on certain provisions of section 1862(b) 
of the Act, which impose specific requirements and limitations with 
respect to--
    (1) Individuals who are entitled to Medicare on the basis of 
disability; and
    (2) Large group health plans (LGHPs) that cover those individuals.
    (b) Under these provisions, the LGHP may not take into account the 
Medicare entitlement of a disabled individual who is covered (or seeks 
to be covered) under the plan by virtue of his or her own current 
employment status or that of a member of his or her family. 
(Sec. 411.108 gives examples of actions that constitute taking into 
account.)


Sec. 411.201  Definitions.

    As used in this subpart--
    Entitled to Medicare on the basis of disability means entitled or 
deemed entitled on the basis of entitlement to social security 
disability benefits or railroad retirement disability benefits. 
(Section 406.12 of this chapter explains the requirements an individual 
must meet in order to be entitled or deemed to be entitled to Medicare 
on the basis of disability.)
    Family member means a person who is enrolled in an LGHP based on 
another person's enrollment; for example, the enrollment of the named 
insured individual. Family members may include a spouse (including a 
divorced or common-law spouse), a natural, adopted, foster, or 
stepchild, a parent, or a sibling.


Sec. 411.204  Medicare benefits secondary to LGHP benefits.

    (a) Medicare benefits are secondary to benefits payable by an LGHP 
for services furnished during any month in which the individual--
    (1) Is entitled to Medicare Part A benefits under Sec. 406.12 of 
this chapter;
    (2) Is covered under an LGHP; and
    (3) Has LGHP coverage by virtue of his or her own or a family 
member's current employment status.
    (b) Individuals entitled to Medicare on the basis of disability who 
are also eligible for, or entitled to, Medicare on the basis of ESRD. 
If a disabled individual is, or could upon filing an application 
become, entitled to Medicare on the basis of ESRD, the coordination of 
benefits rules of subpart F of this part apply.


Sec. 411.206  Basis for Medicare primary payments and limits on 
secondary payments.

    (a) General rule. HCFA makes Medicare primary payments for services 
furnished to disabled beneficiaries covered under the LGHP by virtue of 
their own or a family member's current employment status if the 
services are--
    (1) Furnished to Medicare beneficiaries who have declined to enroll 
in the GHP;
    (2) Not covered under the plan for the disabled individual or 
similarly situated individuals;
    (3) Covered under the plan but not available to particular disabled 
individuals because they have exhausted their benefits under the plan;
    (4) Furnished to individuals whose COBRA continuation coverage has 
been terminated because of the individual's Medicare entitlement; or
    (5) Covered under COBRA continuation coverage notwithstanding the 
individual's Medicare entitlement.
    (b) Conditional primary payments: Basic rule. Except as provided in 
paragraph (c) of this section, HCFA may make a conditional Medicare 
primary payment for any of the following reasons:
    (1) The beneficiary, the provider, or the supplier that has 
accepted assignment has filed a proper claim with the LGHP and the LGHP 
has denied the claim in whole or in part.
    (2) The beneficiary, because of physical or mental incapacity, 
failed to file a proper claim.
    (c) Conditional primary payments: Exceptions. HCFA does not make 
conditional Medicare primary payments if--
    (1) The LGHP denies the claim in whole or in part for one of the 
following reasons:
    (i) It is alleged that the LGHP is secondary to Medicare.
    (ii) The LGHP limits its payments when the individual is entitled 
to Medicare.
    (iii) The LGHP does not provide the benefits to individuals who are 
entitled to Medicare on the basis of disability and covered under the 
plan by virtue of current employment status but does provide the 
benefits to other similarly situated individuals enrolled in the plan.
    (iv) The LGHP takes into account entitlement to Medicare in any 
other way.
    (v) There was failure to file a proper claim for any reason other 
than physical or mental incapacity of the beneficiary.
    (2) The LGHP, an employer or employee organization, or the 
beneficiary fails to furnish information 

[[Page 45372]]
that is requested by HCFA and that is necessary to determine whether 
the LGHP is primary to Medicare.
    (d) Limit on secondary payments. The provisions of Sec. 411.172(e) 
also apply to services furnished to the disabled under this subpart.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: July 12, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
[FR Doc. 95-21265 Filed 8-30-95; 8:45 am]
BILLING CODE 4120-01-P