Federal Register, Volume 62 Issue 245 (Monday, December 22, 1997)

[Federal Register Volume 62, Number 245 (Monday, December 22, 1997)]
[Rules and Regulations]
[Pages 66932-66966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33262]

[[Page 66931]]

_______________________________________________________________________

Part V

Department of the Treasury
Internal Revenue Service

26 CFR Part 54

Department of Labor
Pension Welfare Benefits Administration

29 CFR Part 2590

Department of Health and Human Services
Health Care Financing Administration

45 CFR Part 146

_______________________________________________________________________

Mental Health Parity; Interim Rules

HIPAA Mental Health Parity Act; Proposed Rule

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 /
Rules and Regulations

[[Page 66932]]

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[T.D. 8741]
RIN 1545-AV53

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2590

RIN 1210-AA62

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

45 CFR Part 146

RIN 0938-AI05

Interim Rules for Mental Health Parity

AGENCIES: Internal Revenue Service, Department of the Treasury; Pension
and Welfare Benefits Administration, Department of Labor; Health Care
Financing Administration, Department of Health and Human Services.

ACTION: Interim rules with request for comments.

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SUMMARY: This document contains interim rules governing parity between
medical/surgical benefits and mental health benefits in group health
plans and health insurance coverage offered by issuers in connection
with a group health plan. The rules contained in this document
implement changes made to certain provisions of the Internal Revenue
Code of 1986 (Code), the Employee Retirement Income Security Act of
1974 (ERISA or Act), and the Public Health Service Act (PHS Act)
enacted as part of the Mental Health Parity Act of 1996 (MHPA) and the
Taxpayer Relief Act of 1997. Interested persons are invited to submit
comments on the interim rules for consideration by the Department of
the Treasury, the Department of Labor, and the Department of Health and
Human Services (Departments) in developing final rules. The rules
contained in this document are being adopted on an interim basis to
ensure that sponsors and administrators of group health plans,
participants and beneficiaries, States, and issuers of group health
insurance coverage have timely guidance concerning compliance with the
requirements of MHPA.

DATES: Effective date. The interim rules are effective January 1, 1998.
Applicability dates. The requirements of MHPA and the interim rules
apply to group health plans and health insurance issuers offering
health insurance coverage in connection with a group health plan for
plan years beginning on or after January 1, 1998. MHPA includes a
sunset provision under which the MHPA requirements do not apply to
benefits for services furnished on or after September 30, 2001.
Information collection. Affected parties are not required to comply
with the information collection requirements in these interim rules
until the Departments publish in the Federal Register the control
numbers assigned to these information collection requirements by the
Office of Management and Budget (OMB). Publication of the control
numbers notifies the public that OMB has approved these information
collection requirements under the Paperwork Reduction Act of 1995. The
Departments have submitted a copy of this rule to OMB for its review of
the information collections. Interested persons are invited to send
comments regarding these burdens or any other aspect of these
collections of information on or before February 20, 1998.
Comments. Written comments on these interim rules are invited and
must be received by the Departments on or before March 23, 1998.

ADDRESSES: Comments on the information collection requirements should
be sent directly to:

Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 10235, New Executive Office Building, Washington, DC
20503, Attention: HCFA Desk Officer.
Health Care Financing Administration, Office of Financial and Human
Resources, Management Planning and Analysis Staff, Room C2-26-17, 7500
Security Boulevard, Baltimore, MD 21244-1850; Attention: John Burke

Written comments on other aspects of the interim rules should be
submitted with a signed original and three copies (except for
electronic submissions sent to the Internal Revenue Service (IRS)) to
any of the addresses specified below. For convenience, comments may be
addressed to any of the Departments. Comments addressed to any
Department will be shared with the other Departments.
Comments to the IRS can be addressed to: CC:DOM:CORP:R (REG-109704-
97), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin
Station, Washington, DC 20044.
In the alternative, comments may be hand-delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-109704-97), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,
Washington, DC 20224.
Alternatively, taxpayers may transmit comments electronically via
the IRS Internet site at: http://www.irs.ustreas.gov/prod/tax__regs/
comments.html.
Comments to the Department of Labor can be addressed to: U.S.
Department of Labor, Pension and Welfare Benefits Administration, 200
Constitution Avenue, NW., Room N-5669, Washington, DC 20210; Attention:
MHPA Comments.
Alternatively, comments may be hand-delivered between the hours of
9 a.m. and 5 p.m. to the same address.
Comments to the Department of Health and Human Services can be
addressed to: Health Care Financing Administration, Department of
Health and Human Services, Attention: HCFA-2891-IFC, P.O. Box 26688,
Baltimore, MD 21207.
In the alternative, comments may be hand-delivered between the
hours of 8:30 a.m. and 5:00 p.m. to either:

Room 309-G, Hubert Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201

Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850

All submissions to the Internal Revenue Service will be open to
public inspection and copying in Room 1621, 1111 Constitution Avenue,
NW, Washington, DC from 9:00 a.m. to 4:00 p.m.
All submissions to the Department of Labor will be open to public
inspection and copying in the Public Documents Room, Pension and
Welfare Benefits Administration, U.S. Department of Labor, Room N-5638,
200 Constitution Avenue, NW, Washington, DC from 8:30 a.m. to 5:30 p.m.
All submissions to the Department of Health and Human Services will
be open to public inspection and copying in Room 309-G of the
Department of Health and Human Services offices at 200 Independence
Avenue, SW, Washington, DC from 8:30 a.m. to 5:00 p.m.

FOR FURTHER INFORMATION CONTACT: Terese Klitenic, Health Care Financing
Administration, Department of Health and Human Services, at (410) 786-
1565; Mark Connor, Pension and Welfare Benefits Administration,
Department of Labor, at (202) 219-4377; or Russ

[[Page 66933]]

Weinheimer, Internal Revenue Service, Department of the Treasury, at
(202) 622-4695.
Customer service information. Individuals interested in obtaining a
copy of the Department of Labor's booklet entitled ``Questions and
Answers: Recent Changes in Health Care Law,'' which includes
information on MHPA, may call the following toll-free number: 1-800-
998-7542.

SUPPLEMENTARY INFORMATION:

A. Background

The Mental Health Parity Act of 1996 (MHPA) was enacted on
September 26, 1996 (Pub. L. 104-204, 110 Stat. 2944). MHPA amended the
Employee Retirement Income Security Act of 1974 (ERISA) and the Public
Health Service Act (PHS Act) to provide for parity in the application
of certain dollar limits on mental health benefits with dollar limits
on medical/surgical benefits. Provisions implementing MHPA were later
added to the Internal Revenue Code of 1986 (Code) under the Taxpayer
Relief Act of 1997 (Pub. L. 105-34).

1. Regulatory Responsibility

The provisions of MHPA are set forth in Chapter 100 of Subtitle K
of the Code, Part 7 of Subtitle B of Title I of ERISA, and Title XXVII
of the PHS Act.\1\ The Secretaries of the Treasury, Labor, and Health
and Human Services share jurisdiction over the MHPA provisions. These
provisions are substantially similar, except as follows:
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\1\ Chapter 100 of Subtitle K of the Code, Part 7 of Subtitle B
of Title I of ERISA, and Title XXVII of the PHS Act were added by
the Health Insurance Portability and Accountability Act of 1996
(HIPAA), Pub. L. 104-191.
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The MHPA provisions in the Code generally apply to all
group health plans other than governmental plans, but they do not apply
to health insurance issuers. A taxpayer that fails to comply with these
provisions may be subject to an excise tax under section 4980D of the
Code.
The MHPA provisions in ERISA generally apply to all group
health plans other than governmental plans, church plans, and certain
other plans. These provisions also apply to health insurance issuers
that offer health insurance coverage in connection with such group
health plans. Generally, the Secretary of Labor enforces the MHPA
provisions in ERISA, except that no enforcement action may be taken by
the Secretary against issuers. However, individuals may generally
pursue actions against issuers under ERISA and, in some circumstances,
under State law.
The MHPA provisions in the PHS Act generally apply to
health insurance issuers that offer health insurance coverage in
connection with group health plans and to certain State and local
governmental plans. States, in the first instance, enforce the PHS Act
with respect to issuers. Only if a State does not substantially enforce
any provisions under its insurance laws will the Department of Health
and Human Services enforce the provisions, through the imposition of
civil money penalties. Moreover, no enforcement action may be taken by
the Secretary of Health and Human Services against any group health
plan except certain State and local governmental plans.
The interim rules being issued today by the Secretaries of the
Treasury, Labor, and Health and Human Services have been developed on a
coordinated basis by the Departments. In addition, these interim rules
take into account comments received by the Departments in response to
the request for public comments on MHPA published in the Federal
Register on June 26, 1997 (62 FR 34604). Except to the extent needed to
reflect the statutory differences described above, the interim rules of
each Department are substantively identical. However, there are certain
non-substantive differences. The interim rules reflect certain
stylistic differences in language and structure to conform to
conventions used by a particular Department. These differences have
been minimized and any differences in wording are not intended to
create any substantive difference.

2. Preemption of State Laws

The McCarran-Ferguson Act of 1945 (Pub. L. 79-15) exempts the
business of insurance from federal antitrust regulation to the extent
that it is regulated by the States and indicates that no federal law
should be interpreted as overriding State insurance regulation unless
it does so explicitly. Section 514(a) of ERISA preempts State laws
relating to employee benefit plans (including group health plans).
Section 731 of ERISA and section 2723 of the PHS Act provide that Part
7 of Subtitle B of Title I of ERISA and Part A of Title XXVII of the
PHS Act (including the MHPA provisions) do not in any way affect or
modify section 514 of ERISA with respect to group health plans.
Section 514(b)(2) of ERISA saves from preemption any State law that
regulates insurance. However, section 731(a) of ERISA and section
2723(a) of the PHS Act preempt State insurance laws relating to health
insurance issuers in connection with group health insurance coverage to
the extent such laws ``prevent the application of'' Part 7 of Subtitle
B of Title I of ERISA or Part A of Title XXVII of the PHS Act,
including the MHPA provisions. (There is no corresponding provision in
the Code.) In this regard, the conference report to HIPAA states that
the conferees generally intended the narrowest preemption of State laws
with regard to health insurance issuers (not group health plans) with
respect to the provisions of Part 7 of Subtitle B of Title I of ERISA
and Part A of Title XXVII of the PHS Act.\2\ Consequently, the
conference report to HIPAA states that State laws with regard to health
insurance issuers that are broader than federal requirements in certain
areas would not ``prevent the application of'' the provisions of Part 7
of Subtitle B of Title I of ERISA or Part A of Title XXVII of the PHS
Act. Further, the conference report to MHPA states that the application
of these preemption provisions should permit the operation of any State
law or provision that requires more favorable treatment of mental
health benefits under health insurance coverage than that required
under the MHPA provisions.
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\2\ However, the preemption is broader for the statutory
requirements of section 701 of ERISA and section 2701 of the PHS Act
that limit the application of preexisting condition exclusions.
Under these broader provisions, State laws cannot ``differ'' from
the preexisting condition exclusion requirements of section 701 of
ERISA or section 2701 of the PHS Act except as specifically
permitted by section 731(b)(2) of ERISA and section 2723(b)(2) of
the PHS Act. These provisions permit a State to impose on health
insurance issuers certain stricter limitations relating to
preexisting condition exclusions.
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Thus, generally, a State law that requires more favorable treatment
of mental health benefits under health insurance coverage offered by
issuers would not be preempted by the provisions of MHPA and the
interim rules.

B. Overview of MHPA and the Interim Rules

The MHPA provisions are set forth in section 9812 of the Code,
section 712 of ERISA, and section 2705 of the PHS Act. MHPA and the
interim rules apply to a group health plan (or health insurance
coverage offered by issuers in connection with a group health plan)
that provides both medical/surgical benefits and mental health
benefits.
The MHPA provisions provide for parity in the application of
aggregate lifetime dollar limits, and annual dollar limits, between
mental health benefits and medical/surgical benefits. If a group health
plan offers two or more benefit packages under the plan, the

[[Page 66934]]

requirements of MHPA and the interim rules apply separately to each
package. The interim rules make clear that the MHPA requirements apply
regardless of whether the mental health benefits are administered
separately under the plan. In addition, the interim rules make clear
that the MHPA requirements in ERISA and the PHS Act apply both to group
health plans and to health insurance issuers offering coverage in
connection with a group health plan.
MHPA and the interim rules do not require a group health plan (or
health insurance coverage offered in connection with a group health
plan) to provide mental health benefits. In addition, MHPA and the
interim rules do not affect the terms and conditions (including cost
sharing, limits on the number of visits or days of coverage,
requirements relating to medical necessity, requirements that patients
or providers obtain prior authorization for treatment, and requirements
relating to primary care physicians' referrals for treatment) relating
to the amount, duration, or scope of mental health benefits under a
plan (or coverage) except as specifically provided in regard to parity
of aggregate lifetime dollar limits and annual dollar
limits.³
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\3\ In response to the Departments' request for public comments
on MHPA published in the Federal Register (62 FR 34604), the Equal
Employment Opportunity Commission (EEOC) noted that the Americans
with Disabilities Act (ADA) prohibits disability-based distinctions
(including such distinctions relating to the provision of mental
health benefits) in employer-provided health insurance plans unless
the plan otherwise falls within the protections of section 501(c) of
the ADA. The ADA is within the regulatory jurisdiction of the EEOC.
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1. Aggregate Lifetime Limits and Annual Limits

Under MHPA and the interim rules, a group health plan (or health
insurance coverage offered in connection with a group health plan)
providing both medical/surgical benefits and mental health benefits may
comply with the MHPA parity requirements in any of the following
general ways:
The plan (or coverage) may comply by not including any
aggregate lifetime dollar limit or annual dollar limit on mental health
benefits.
The plan (or coverage) may comply by imposing a single
aggregate lifetime or annual dollar limit on both medical/surgical
benefits and mental health benefits in a way that does not distinguish
between the two.
The plan (or coverage) may comply by imposing an aggregate
lifetime dollar limit or annual dollar limit on mental health benefits
that is not less than the aggregate lifetime dollar limit or annual
dollar limit on medical/surgical benefits.
In the case of a plan (or coverage) under which aggregate
lifetime dollar limits or annual dollar limits differ for categories of
medical/surgical benefits, the plan (or coverage) may comply by
calculating a weighted average aggregate lifetime dollar limit or
weighted average annual dollar limit for mental health benefits. The
weighted average must be based on a formula in the interim rules that
takes into account the limits on different categories of medical/
surgical benefits.
In addition, under MHPA and the interim rules, benefits for
treatment of substance abuse or chemical dependency may not be counted
in applying an aggregate lifetime or annual dollar limit that applies
separately to mental health benefits.

2. Exemptions from the Requirements of MHPA

(a) Small Employer Exemption
The parity requirements under MHPA and the interim rules do not
apply to any group health plan (or health insurance coverage offered in
connection with a group health plan) for any plan year of a small
employer. The term ``small employer'' is defined as an employer who
employed an average of at least 2 but not more than 50 employees on
business days during the preceding calendar year and who employs at
least 2 employees on the first day of the plan year.⁴
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\4\ Section 9831(a) of the Code, section 732(a) of ERISA, and
section 2721(a) of the PHS Act provide an exception that applies
under the MHPA provisions as well as under provisions added by HIPAA
and the Newborns' and Mothers' Health Protection Act of 1996. The
exception applies to any group health plan (and health insurance
coverage offered in connection with a group health plan) for any
plan year if, on the first day of the plan year, the plan has fewer
than 2 participants who are current employees.
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For purposes of the small employer exemption, all persons treated
as a single employer under subsections (b), (c), (m), and (o) of
section 414 of the Code (26 U.S.C. 414) are treated as one employer. In
addition, if an employer was not in existence throughout the preceding
calendar year, whether the employer is a small employer is determined
on the average number of employees the employer reasonably expects to
employ on business days during the current calendar year. Finally, any
reference to an employer in the small employer exemption includes a
reference to a predecessor of the employer.
(b) Increased Cost Exemption
The second exemption from the MHPA requirements applies to group
health plans (or health insurance coverage offered in connection with a
group health plan) if the application of the MHPA parity requirements
described in paragraph (b)(1)(i) ⁵ results in an increase in
the cost under the plan (or coverage) of at least one percent. This
exemption is available only if the requirements of paragraph (f) are
met. If a plan offers more than one benefit package, the exemption is
applied separately to each benefit package. Except as provided in the
transition period described in paragraph (h), a plan must implement the
parity requirements for the first plan year beginning on or after
January 1, 1998, and must continue to comply with the parity
requirements until September 30, 2001 (the sunset date in paragraph
(i)) unless the plan satisfies the exemption described in paragraph
(f). However, the exemption is not effective until 30 days after the
notice requirements in paragraph (f)(3) are satisfied.
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\5\ Any reference to a particular paragraph in this preamble to
the interim rules is a reference to the corresponding paragraphs in
each of the Departments' interim rules.
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The interim rules, in paragraph (f)(2), describe the ratio of two
terms used to determine if a plan (or coverage) has experienced a cost
increase of one percent or more. The first term is the total cost
incurred under parity (including both mental health costs and medical/
surgical costs). The second term is the total cost incurred under
parity reduced by the costs required solely to comply with parity.
Costs required solely to comply with parity include mental health
claims that would have been denied absent amendments required to comply
with parity, the administrative costs related to those claims, and
other administrative costs attributable to complying with the parity
requirements. Premium payments are not considered in this calculation.
The ratio is expressed by the following formula:
[GRAPHIC] [TIFF OMITTED] TR22DE97.000

IE represents the incurred expenditures during the base period. CE
represents the claims incurred during the base period that would have
been denied under the terms of the plan absent plan amendments required
to comply with the parity requirements of paragraph (b)(1)(i). AE
represents administrative costs related to claims in CE and other
administrative costs attributable to

[[Page 66935]]

complying with the parity requirements of paragraph (b)(1)(i).
Examples illustrate how the rule is applied in the case of a self-
funded plan, a fully insured plan, and a partially insured plan.
Moreover, in the case of a partially insured plan in which the
partially insured portion is pooled for rating purposes, the costs of
the pool should be allocated proportionally among the pool members by
reasonable methods, including proportional enrollment. Additional
provisions in paragraph (f) describe the baseline for determining those
costs that are attributable solely to compliance with the parity
requirements, the base period used to calculate whether a plan may
claim the exemption, and how long the exemption applies once it is
claimed. The base period must begin on the first day in any plan year
that the plan complies with the requirements of paragraph (b)(1)(i) of
this section and must extend for a period of at least six consecutive
calendar months. However, in no event may the base period begin prior
to September 26, 1996 (the date of enactment of the Mental Health
Parity Act (Pub. L. 104-204, 110 Stat. 2944)).
Before a group health plan may claim the one-percent increased cost
exemption, it must furnish participants and beneficiaries with a notice
of the plan's exemption from the parity requirements that includes the
information described in paragraph (f)(3)(i). A plan may satisfy this
requirement by providing participants and beneficiaries with a summary
of material reductions in covered services or benefits, under 29 CFR
2520.104b-3(d), if it includes all the information required by
paragraph (f)(3)(i). However, this exemption under MHPA is not
effective until at least 30 days after the notice is sent to the
participants and beneficiaries and the appropriate federal agency even
if the notice is incorporated into a summary of material reductions in
covered services or benefits.
A group health plan that is not subject to Part 7 of Subtitle B of
Title I of ERISA, and a plan subject to Part 7 of Subtitle B of Title I
of ERISA that chooses not to incorporate the information in paragraph
(f)(3)(i) into a summary of material reductions in covered services or
benefits (which must be furnished to participants and beneficiaries and
the appropriate federal agency), may use the following model to satisfy
the notice requirement under paragraph (f)(3) of the interim rules:

BILLING CODE 4830-01-P; 4510-29-P; 4120-01-P

[[Page 66936]]

[GRAPHIC] [TIFF OMITTED] TR22DE97.001

BILLING CODE 4830-01-C; 4510-29-C; 4120-01-C

[[Page 66937]]

To claim the one-percent increased cost exemption, a group health
plan that is a church plan (as defined in section 414(e) of the Code)
also must furnish to the Department of the Treasury a copy of the
notice sent to participants and beneficiaries that satisfies the
requirements of paragraph (f)(3)(i). To claim the one percent increased
cost exemption, a group health plan subject to Part 7 of Subtitle B of
Title I of ERISA also must furnish to the Department of Labor a copy of
the notice sent to participants and beneficiaries that satisfies the
requirements of paragraph (f)(3)(i). To claim the one percent increased
cost exemption, a group health plan that is a nonfederal governmental
plan also must furnish to the Department of Health and Human Services a
copy of the notice sent to participants and beneficiaries that
satisfies the requirements of paragraph (f)(3)(i). In all cases, the
exemption is not effective until 30 days after notice has been sent
both to participants and beneficiaries and to the appropriate federal
agency. Any notice submitted to the Department of Labor or Health and
Human Services will be available for public inspection.
The Secretaries have designated the following addresses for
delivery of these notices:
For notices to the Department of the Treasury, church plans should
mail the notice to: Office of the Assistant Commissioner, Examination,
Examination Programs CP:EX:E, 1111 Constitution Avenue, NW.,
Washington, DC 20224; Attention: MHPA one-percent cost exemption
notice.
For notices to the Department of Labor, plans should mail the
notice to: Public Documents Room, Pension and Welfare Benefits
Administration, U.S. Department of Labor, Room N-5638, 200 Constitution
Avenue, NW., Washington, DC 20210; Attention: MHPA one-percent cost
exemption notice.
For notices to the Department of Health and Human Services, plans
should mail the notice to: Health Care Financing Administration, 7500
Security Boulevard, Baltimore, MD 21244-1850; Attention: Insurance
Standards: Exemptions.
Finally, to claim the one percent increased cost exemption, a plan
(or issuer) must make available to participants and beneficiaries (or
their representatives), on request and at no charge, a summary of the
information described in paragraph (f)(4). An individual who is not a
participant or beneficiary and who presents a notice described in
paragraph (f)(3)(i) is considered to be a representative. For this
purpose, individually identifiable information in the notice may be
redacted. The summary of information must include the incurred
expenditures, the base period, the dollar amount of claims incurred
during the base period that would have been denied under the terms of
the plan absent amendments required to comply with parity, and the
administrative expenses attributable to complying with the parity
requirements. In no event should a summary of information include
individually identifiable information.
Civil money penalties as described in regulations at 45 CFR
146.184(d) apply to an issuer or nonfederal governmental plan that
fails to satisfy the requirements of paragraph (f).

3. MHPA's Effective Date and Sunset Provision

The MHPA provisions are generally effective for group health plans
(and health insurance issuers offering health insurance coverage in
connection with a group health plan) for plan years beginning on or
after January 1, 1998. MHPA includes a sunset provision under which the
MHPA requirements do not apply to benefits for services furnished on or
after September 30, 2001.
However, for requirements of this section other than the one-
percent increased cost exemption, the interim rules provide a
limitation on enforcement actions in paragraph (h)(2). Under that
paragraph, no enforcement action can be taken by any of the Secretaries
against a group health plan (or issuer) that has sought to comply in
good faith with the requirements of section 9812 of the Code, section
712 of ERISA, and section 2705 of the PHS Act with respect to a
violation that occurs before the earlier of the first day of the first
plan year beginning on or after April 1, 1998, or January 1, 1999.
Compliance with the requirements of the interim rules is deemed to be
good faith compliance with the requirements of section 9812 of the
Code, section 712 of ERISA, and section 2705 of the PHS Act.
With respect to the increased cost exemption, the interim rules
provide in paragraph (h)(3) a transition period for compliance with the
requirements of paragraph (f). Under paragraph (h)(3), no enforcement
action will be taken against a group health plan (or issuer) that is
subject to the MHPA requirements prior to April 1, 1998 solely because
the plan has claimed the increased cost exemption under section
9812(c)(2) of the Code, section 712(c)(2) of ERISA, or section
2705(c)(2) of the PHS Act based on assumptions inconsistent with the
rules under paragraph (f) of the interim rules, provided that the plan
is amended to comply with the parity requirements no later than March
31, 1998 and the plan complies with the notice requirements in
paragraph (h)(3)(ii).
A group health plan satisfies this transition period notice
requirement only if the plan provides notice to the applicable federal
agency and posts such notice at the location(s) where documents must be
made available for examination under section 104(b)(2) of ERISA and the
regulations thereunder (Sec. 2520.104b-1(b)(3)). The notice must
indicate the plan's intent to use the transition period by 30 days
after the first day of the plan year beginning on or after January 1,
1998, but in no event later than March 31, 1998. For a group health
plan that is a church plan, the applicable federal agency is the
Department of the Treasury. For a group health plan that is subject to
Part 7 of Subtitle B of Title I of ERISA, the applicable federal agency
is the Department of Labor. For a group health plan that is a
nonfederal governmental plan, the applicable federal agency is the
Department of Health and Human Services. In all cases, the notice must
include the date; the name of the plan and the plan number; the name,
address, and telephone number of the plan sponsor or plan
administrator; the employer identification number (in the case of
single-employer plans only); the individual to contact for further
information; the signature of the plan administrator; and the date
signed. In addition, the notice must be provided at no charge to
participants and beneficiaries (or their representatives) within 15
days after receipt of a written or oral request for such notification,
but in no event does the notice have to be provided before it has been
sent to the applicable federal agency. For this purpose, plans may use
the following model:

BILLING CODE 4830-01-P; 4510-29-P; 4210-01-P

[[Page 66938]]

[GRAPHIC] [TIFF OMITTED] TR22DE97.002

BILLING CODE 4830-01-C; 4510-29-C; 4120-01-C

[[Page 66939]]

The Secretaries have designated the following addresses for
delivery of the notices: For notices to the Department of the Treasury,
plans should mail the notice to: Office of the Assistant Commissioner,
Examination, Examination Programs CP:EX:E, 1111 Constitution Avenue,
NW., Washington, DC 20224; Attention: MHPA transition period notice.
For notices to the Department of Labor, plans should mail the
notice to: Public Documents Room, Pension and Welfare Benefits
Administration, U.S. Department of Labor, Room N-5638, 200 Constitution
Avenue, NW., Washington, DC 20210; Attention: MHPA transition period
notice.
For notices to the Department of Health and Human Services, plans
should mail the notice to: Health Care Financing Administration, 7500
Security Boulevard, Baltimore, MD 21244-1850; Attention: Insurance
Standards: Exemptions.

C. Interim Rules and Request for Comments

Section 9833 of the Code (formerly section 9806), section 734 of
ERISA (formerly section 707), and section 2792 of the PHS Act provide,
in part, that the Secretaries of the Treasury, Labor, and Health and
Human Services may promulgate any interim final rules as they determine
are appropriate to carry out the provisions of Chapter 100 of Subtitle
K of the Code, Part 7 of Subtitle B of Title I of ERISA, and Part A of
Title XXVII of the PHS Act, including the MHPA provisions.
Under Section 553(b) of the Administrative Procedure Act (5 U.S.C.
551 et seq.) a general notice of proposed rulemaking is not required
when an agency, for good cause, finds that notice and public comment
thereon are impracticable, unnecessary, or contrary to the public
interest.
These rules are being adopted on an interim final basis because the
Secretaries have determined that without prompt guidance some members
of the regulated community may not know what steps to take to comply
with the MHPA requirements, which may result in an adverse impact on
participants and beneficiaries with regard to their mental health
benefits under group health plans and the protections provided under
MHPA. Moreover, MHPA's requirements will affect the regulated community
in the immediate future.
MHPA's requirements are effective for all group health plans and
for health insurance issuers offering coverage in connection with such
plans for plan years beginning on or after January 1, 1998. Plan
administrators and sponsors, issuers, and participants and
beneficiaries, will need guidance on the new statutory provisions
before MHPA's effective date. As noted earlier, these interim rules
take into account comments received by the Departments in response to
the request for public comments on MHPA published in the Federal
Register on June 26, 1997 (62 FR 34604). For the foregoing reasons, the
Departments find that the publication of a proposed regulation, for the
purpose of notice and public comment thereon, would be impracticable,
unnecessary, and contrary to the public interest.

D. Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et. seq.) (RFA)
requires an agency to publish a regulatory flexibility analysis
describing the impact of a proposed rule which the agency determines
would have a significant impact on a substantial number of small
entities. The RFA requires that the agency present an initial
regulatory flexibility analysis and seek public comment on its analysis
when the agency publishes a general notice of proposed rulemaking
(NPRM) under section 553 of the Administrative Procedures Act (5 U.S.C.
553 et seq.) (APA). Under the RFA, small entities include small
businesses, non-profit organizations and governmental agencies. For our
purposes, under the RFA, States and individuals are not considered
small entities. However, small employers and small group health plans
are considered small entities.
Since these rules are issued as interim final rules, and not as an
NPRM, a formal regulatory flexibility analysis has not been prepared.
Nonetheless, in the discussion below on the rule's impact on the
regulated community, the Departments present an analysis addressing
many of the same issues otherwise required by the RFA, including the
likely impact of the interim rule on small entities, and a discussion
of regulatory alternatives considered in crafting the rule. The
Departments invite interested persons to submit comments for
consideration in the development of the final rules implementing the
MHPA. Consistent with the RFA, the Departments encourage the public to
submit comments that accomplish the stated purpose of the MHPA and
minimize the impact on small entities. Specifically, we welcome
comments addressing the impact of the MHPA's 1 percent cost exemption
for plans and issuers that can demonstrate that implementation of the
parity rules would raise their expenditures by more than one percent.
We also welcome comments addressing the operation of the MHPA provision
requiring that plans using differential aggregate lifetime or annual
limits for various categories of benefits use a weighted average of
such differential limits to calculate the overall aggregate lifetime
and annual limits for the plan.

E. Executive Order 12866--Departments of Labor and Health and Human
Services

The Office of Management and Budget has determined this rule to be
a major rule, as well as an economically significant regulatory action
under Section 3(f) of Executive Order 12866. The following analysis
fulfills the requirement under the Executive Order to assess the
economic impact of major and economically significant regulatory
actions.
Executive Order 12866 requires agencies to assess the costs and
benefits of available regulatory alternatives, and when regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects; distributive impacts; and equity). Section 3(f) of the
Executive Order 12866 requires agencies to prepare a regulatory impact
analysis for any rule which is deemed a ``significant regulatory
action'' according to specified criteria, including whether the rule
may have an annual effect on the economy of $100 million or more or
certain other specified effects; or whether the rules raise novel legal
or policy issues arising out of the President's priorities.
This analysis was conducted by the Departments of Labor and Health
and Human Services. It discusses the economic impact of the MHPA, which
this rule implements, with special emphasis on the one percent cost
exemption. It quantifies the number of plans and individuals who might
be affected by the exemption rule, illustrating the exemption's effect
in the context of other statutory MHPA provisions. It separately
considers the impact of regulatory discretion exercised by the
Departments in connection with this rule.

a. Overall Impact of the MHPA

In general, the MHPA may have both direct and indirect effects on
group health plans, plan sponsors, and plan participants. Direct
effects may include broader coverage of mental health treatments and
associated increases in mental health benefit payments. Indirect
effects may include the steps employers who sponsor plans may take to
reduce

[[Page 66940]]

or offset their expenditures attributable to compliance with the MHPA,
such as amending, curtailing or dropping mental health benefits or
other components of compensation, as well as participants' responses to
any expenditure increases that are passed to them.
Direct Effects
The most direct effect of the MHPA is broader health insurance
coverage for mental health treatment. In many health plans, mental
health coverage is more restrictive than medical/surgical coverage due
to lower annual and/or lifetime dollar limits, more restrictive limits
on visits and stays, and other plan provisions. For example, a recent
survey of employee benefit plans by Hay/Huggins illustrates the
differences in plan terms and lower dollar limits of mental health
services and medical/surgical services. The survey reported that
indemnity plans typically impose a lifetime limit of $50,000 for mental
health benefits. On the other hand, medical/surgical benefits of a
typical indemnity plan provide a lifetime limit of $1,000,000.
Requiring fuller coverage of mental health treatment will increase
mental health benefit payments and associated plan expenditures. Some
of this increase will be paid by plan sponsors, and some will be paid
by participants in the form of increased premiums and/or reductions in
other compensation. Aside from any increased administrative costs
involved, these plan expenditure increases generally represent one side
of transfer payments rather than erosion in overall social welfare. In
other words, additional plan expenditures arising from the MHPA are
balanced by additional benefits paid for mental health services. One
result will be that some money that would have been spent on other
goods or services will be spent instead on mental health services.
The direct effects of the MHPA will in turn cause other effects due
to subsequent responses by affected employers (in their capacity as
plans sponsors) and participants.
Indirect Effects of the MHPA
There are numerous ways in which plan sponsors affected by the MHPA
might react. Some might take no action other than to remove or increase
dollar limits on mental health benefits. Others might make other
changes to their mental health benefits in order to reduce or offset
expenditure increases from compliance with MHPA. The statute explicitly
preserves plan sponsors' right to provide no mental health benefits, or
to set the ``terms and conditions (including cost sharing, limits on
numbers of visits or days of coverage, and requirements relating to
medical necessity) relating to the amount, duration, or scope of mental
health benefits,'' except with respect to annual or lifetime dollar
limits. Some plan design options would be associated with lower plan
expenditure increases from compliance with the MHPA. The statute also
provides an ``increased cost exemption'' under which the statute
``shall not apply'' if its application ``results in an increase in the
cost . . . of at least 1 percent'' (ERISA Section 712(c)(2)). Plan
sponsors' responses to the MHPA may lessen their expenditures
associated with compliance; that is, their responses may reduce the
amount of transfers arising from the MHPA.
For example, many mental health plans currently have non-dollar
limits. According to the U.S. Bureau of Labor Statistics, among full-
time participants at private establishments with 100 or more employees
in 1993, 55 percent were subject to separate day limits for inpatient
mental health treatment, and 43 percent were subject to separate visit
limits for outpatient mental health treatment (U.S. Bureau of Labor
Statistics, Employee Benefits in Medium and Large Private
Establishments, 1993). Plans that impose non-dollar limits on mental
health benefits may face smaller expenditures increases from the MHPA.
Many plans currently subject mental health benefits to separate
cost sharing provisions. Among full-time participants in medium and
large private establishments in 1993, 15 percent were subject to
separate coinsurance rates and 4 percent were subject to separate
copayment rates for inpatient mental health care, while 53 percent and
18 percent were respectively subject to separate coinsurance and
copayment rates for outpatient mental health care. Cost sharing
generally affects plan expenditures in two ways. First, by shifting
some payments for services to participants, cost sharing directly
reduces the expenditures borne by plans. Second, by increasing the
price of services faced by participants, cost sharing reduces the
quantity of services that participants demand. Because of both of these
mechanisms, plans that have more cost sharing for mental health
benefits will not be impacted as much by the MHPA as plans that have
parity in cost sharing.
Many plans use HMO-style management techniques to control mental
health benefit expenditures. Plans that have HMO-style mental health
``carve-outs'' but no mental health limits are likely to pay less for
mental health benefits than fee-for-service plans with low dollar
limits that are impermissible under the MHPA. For example, a FFS plan
with utilization review and an annual mental health limit of $10,000
averages $6.51 per member per month, while an unlimited ``carve out''
plan pays $6.12, according to a Price Waterhouse LLP actuarial model
developed for the Departments based on the same data as above.
There are a number of reasons why the permissible plan designs
outlined here should have little negative effect on existing mental
health coverage. First, the modest expenditure increases necessitated
by the MHPA would be unlikely to prompt many major design changes. As
noted below, approximately 10 percent of affected plans will face
increased expenditures under the MHPA of at least one percent,
according to the Price Waterhouse, LLP analysis conducted for the
Departments. Only 4 percent of affected plans are expected to be faced
with increases from the MHPA of 1.5 percent or more, according to the
same analysis. Second, the largest expenditure increases and therefore
the most aggressive responses will be associated with plans that have
the tightest dollar caps today--that is, with plans that would have
provided the most restrictive coverage anyway.
Other effects resulting from the MHPA may include plan sponsors
dropping mental health coverage altogether, or dropping or curtailing
other health benefits or components of compensation. Such curtailments
could include shifting some of the cost of benefits to employees, for
example in the form of increased participant premium contributions for
health benefits. Participants, in turn, might respond to premium
increases by dropping their health benefits or electing less expensive
plans. As with plan sponsor amendments to mental health benefits, such
responses by plan sponsors and participants are expected to be modest
and/or rare, given the generally small direct effects of the MHPA on
plan expenditures.

b. Review of Quantitative Estimates

The Congressional Budget Office (CBO) estimated that the MHPA's
direct effect would be to increase health plan expenditures by 0.4
percent on aggregate. (See Congressional Budget Office, ``CBOs
Estimates of the Mental Health Parity Amendments to the VA/HUD
Appropriation Bill, as Passed in the Senate,'' September 10, 1996.)
This assumes that plan sponsors make no changes to their plans other
than to raise or eliminate dollar limits on mental

[[Page 66941]]

health benefits consistent with the MHPA's parity requirements.
However, some plan sponsors may make other changes to their plans in
order to reduce or offset the impact of the MHPA on their expenditures.
For example, some plan sponsors might amend, curtail, or drop mental
health benefits or health benefits in general. Taking into account the
likely incidence of such plan sponsor responses to the MHPA, CBO
estimated that the true aggregate increase in health plan expenditures
attributable to the MHPA would only be 0.16 percent.
Combining these figures with those from an earlier CBO analysis,
the Departments calculate that, in dollar terms, the total annual
direct impact of the MHPA would be to increase aggregate health plan
expenditures by $1.16 billion, not accounting for plan sponsor
responses to reduce that impact. Accounting for those responses, the
actual increase in annual aggregate health plan expenditures would be
$464 million. It should be noted that these figures do not account for
the MHPA's increased cost exemption, its exemption of firms with 50 or
fewer employees, the incidence of managed care plans whose added cost
under the MHPA would be smaller than those of managed fee for service
plans, or for plans that are separately subject to state requirements
equal or greater than the MHPA's. The Departments' estimates, reported
below, incorporate these adjustments.
CBO also reports the Joint Committee on Taxation's estimate that
the MHPA will reduce federal revenues by $560 million over six years.
CBO explains that most of the 0.16 percent increase in plan
expenditures would be shifted back to employees as lower pay, thus
eroding the income and payroll tax bases. On an annual basis, the MHPA
would increase expenditures for federal annuitants' health benefits by
$30 million, CBO reports. Finally, the MHPA's impact on nonfederal
governmental entities would amount to $50 million, while its impact on
the private sector would probably exceed $100 million, according to
CBO.
The CBO estimates were based on a typical fee-for-service indemnity
plan with customary management techniques to control expenditures, and
not on plans with other types of delivery systems, such as Health
Maintenance Organizations (HMOs), Preferred Provider Organizations
(PPOs), or Point-of-Service (POS) plans. In fact, plans using different
delivery systems will face different expenditure increases under the
MHPA. For example, HMOs, which typically contract with health care
providers at discounted rates and tightly manage utilization, will face
smaller increases under the MHPA.
Coopers & Lybrand (C&L) also estimated the impact of the MHPA
(Ronald E. Bachman, ``An Actuarial Analysis of S. 2031, The Mental
Health Parity Act of 1996,'' prepared for the American Psychological
Association. Coopers & Lybrand LLP, September 1996). C&L estimated that
the MHPA would increase plan expenditures by 0.12 percent per plan on
average before taking into account any responses by plan sponsors.
Taking plans sponsors' responses into account and using the same
response assumption as CBO, C&L estimated that plan expenditures would
increase by less than 0.05 percent. In dollar terms, these increases
would amount to $348 million and $139 million respectively.
Unlike CBO, C&L considered four different delivery systems: fee-
for-service with standard utilization review on typical medical
services, fee-for-service with specialized mental health utilization
review, PPO and POS plans with specialized mental health utilization
review, and HMO and carve-out mental health plans. Under each delivery
system, C&L also considered a variety of annual dollar limits ranging
from $10,000 to unlimited amounts, rather than assuming that all plans
in the delivery system provided the same level of benefits.
The Departments performed additional quantitative analysis,
generally analogous to CBO's, in the course of assessing the impact of
the regulatory discretion reflected in this rule. The additional
analysis suggests that the direct impact of the MHPA, not accounting
for plan sponsors' responses, would be to increase annual aggregate
health plans expenditures by 0.29 percent or $653 million. Under CBO's
assumption regarding plan sponsor responses to reduce the added
expenditure, actual added expenditures would amount to $261 million.
The Departments did not attempt to independently quantify such
responses. However, the Departments estimate that if all plans eligible
for the one percent cost exemption exercise it, the increase in plan
expenditures would be reduced from 0.29 percent to 0.14 percent or $310
million. The Departments' analysis is detailed below.

c. Exercise of Regulatory Discretion

One Percent Cost Exemption
The main area in which the agencies exercised regulatory discretion
is in connection with the one percent cost increase exemption.
Alternative regulatory interpretations can impact the outcome of the
number of plans, firms, policyholders, and covered lives that would be
exempted from the MHPA.
The Departments considered options concerning the interpretation of
the one-percent cost exemption and how it should be implemented. In
general, they considered (1) whether the eligibility for the exemption
should be determined retrospectively or prospectively, and what, if
any, rules should be established with respect to how eligibility should
be determined, (2) whether eligibility should be contingent on
affirmative approval from an enforcement agency or simply subject to
possible review by such an agency, and (3) whether plan sponsors
electing exemptions should be required to notify participants and/or
enforcement agencies of this action and/or to disclose to these parties
evidence documenting eligibility for the exemption. They also
considered the administrability of each option, seeking to balance the
costs and benefits to plans and participants, as well as the benefits
and burdens of the regulatory scheme on the federal government.
Retro/prospective Determination
The options considered ranged from a purely retrospective
interpretation to a purely prospective one, and included intermediate
interpretations that blend these two approaches.
Under a purely retrospective interpretation, the one percent
increased cost exemption would be based on actually incurred
expenditures increases, measured retrospectively after implementation
of the statute. In other words, all plans must comply and provide
parity of annual and/or lifetime dollar limits of mental health and
medical services for the first year beginning with the start of a plan
year on or after January 1, 1998. If during the first year, a plan
experiences increases in expenditures equal to one percent or more as a
result of complying with the statute, that plan would then be eligible
to exercise an exemption from the MHPA for subsequent plan years.
The calculation for determining the percent increase would be based
on the ratio of the increase in plan expenditures to the total plan
expenditures, that is, both medical and mental health expenditures. For
self-insured plans, the numerator would be the actual value of mental
health claims paid in excess of the previous plan limits. For example,
if the annual mental health limit were $10,000 and the medical/surgical
were $1,000,000, then the sum of all mental health claims paid in
excess of $10,000 would be included in the numerator of the ratio

[[Page 66942]]

used for that plan in calculations related to the one percent
exemption. The denominator for self-insured plans would be the total
value of medical and mental health claims excluding mental health
claims in excess of $10,000. If the result is an increase of one or
more percent, the plan would be exempt from complying with the statute
in any other year until the statute sunsets in 2001. Because there is a
lag between the time that claims are incurred and the time they are
reported, complete data needed for the calculation might not be
available until three or six months after the end of the first plan
year under the MHPA. With respect to fully insured plans, the
calculation would be slightly different. To the extent that different
plans' experiences are pooled for purposes of setting premiums, their
eligibility for the exemption would depend on their pooled experience
under MHPA, rather than on each plan's individual experience.
The purely retrospective interpretation would minimize the
availability of the exemption, and therefore might result in both the
greatest incidence of parity in lifetime and annual dollar limits and
the greatest incidence of other plan actions to reduce or offset the
increase in expenditures arising from the MHPA. It would also assure
that all plan elections to exercise the one percent increased cost
exemption are based on actual experience under the MHPA's parity
requirements and not on projections or estimates of such experience.
Under a purely prospective interpretation, a plan would be eligible
for the exemption prospectively if its expected additional expenditures
from the MHPA act equaled or exceeded one percent of its expected total
expenditures absent the MHPA. A self-insured plan would project these
figures, relying on available data and actuarial projection methods. A
fully insured plan would compare legitimate premium quotes with and
without the exemption to determine if the difference equals or exceeds
one percent. The purely prospective interpretation would maximize the
availability of the exemption, and therefore might result in both the
least incidence of parity in lifetime and annual dollar limits and the
least incidence of other plan actions to reduce or offset expenditure
increases arising from the MHPA.
Other interpretations were also considered, some closer to a purely
retrospective interpretation and others closer to a purely prospective
one. For example, one interpretation might allow plans to prospectively
determine their eligibility and exercise the exemption, but only based
upon a narrowly constrained analysis of their own prior experience,
taking into account only the potential added expenditure from the MHPA
associated with participants whose past mental health claims reached or
nearly reached MHPA-prohibited dollar limits. Interpretations closer to
the purely retrospective view would lessen the availability of the
exemption, and therefore might result in both greater incidence of
parity in lifetime and annual dollar limits and lesser incidence of
other plan actions to reduce or offset expenditure increases arising
from the MHPA; those closer to the purely prospective view would do the
opposite.
The approach adopted under this rule, referenced above, can be
characterized as modified retrospective approach, based on a relatively
brief base period. It is intended to assure the accurate measurement of
increased costs while minimizing the burden on plan sponsors who wish
to exercise the exemption as soon as accurate measurements can be made.
It also assures that all plan elections to exercise the one percent
increased cost exemption are based on actual experience under the
MHPA's parity requirements and not on projections or estimates of such
experience. The rule eases compliance burdens by providing a transition
period under which certain plans whose plan years begin during the
first quarter of 1998 can exercise the exemption until April 1, 1998.
Exemption Authority
This rule provides that plans may determine their own eligibility
for the exemption and, if eligible, exercise the exemption, without
affirmative approval from any enforcement agency.
Notification and Disclosure
The Departments also exercised discretion in requiring notice and
disclosure in connection with the one percent increased cost exemption.
The rule requires plans exercising the one percent increased cost
exemption during all or part of the first quarter of 1998 under the
rule's transition provisions to notify the federal government, and to
post a copy of this notice at the workplace. It further requires plans
otherwise exercising the exemption to notify participants and the
federal government, and to disclose on request to these parties summary
documentation of the plans' eligibility for the exemption.
Notifications and disclosures will be of benefit to participants.
They will help assure plans' compliance with the MHPA, and will promote
participants' understanding of their and their plans' status under the
MHPA. Moreover, by promoting participants' understanding, notifications
and disclosures will inform participants' choices among plans and their
feedback to plan sponsors, thereby fostering more vigorous competition
among plan sponsors and issuers to provide benefits attractive to
participants at competitive prices. The cost of these notifications and
disclosures is outlined below.
Weighted Average Limits
The Departments also exercised discretion in developing rules that
specify when plans may impose separate dollar limits on mental health
benefits equal to the weighted average of limits imposed on other
benefit categories, and in how this weighted average may be calculated.
In general, the rules provide that such mental health limits may be
imposed if the benefit categories to which separate limits apply
account for at least one-third of total plan expenditures and are
comparable in scope to mental health benefits. The average is
calculated by weighting each applicable limit to reflect its share of
total plan expenditures. Any unlimited categories are figured into the
average by using in place of a limit a reasonable estimate of the
maximum plan expenditure that could possibly be incurred in connection
with all such categories, and weighting this estimate to reflect the
proportion of total plan expenditures attributable to all such
categories.
Alternative rules might have permitted more, fewer, or different
plans to impose such limits on mental health benefits, and/or resulted
in calculated averages that were higher or lower. For example, if
unlimited categories were treated as having infinite limits, then the
weighted average of category limits would equal infinity and the option
of imposing a weighted average limit on mental health benefits
effectively would be foreclosed. In contrast, if limits applicable to
benefit categories narrower in scope than mental health benefits could
be averaged to arrive at the permissible mental health limit, plans
might be able to impose very low limits on very narrow benefit
categories, with little effect on coverage of these categories but with
the result of a lower permissible mental health benefit limit.

d. Impact of Regulatory Discretion

Because the Departments exercised regulatory discretion in
connection with the one percent cost exemption, it is necessary to
quantify the number of plans eligible for the exemption. This

[[Page 66943]]

requires both estimates of the affected universe and estimates of the
distribution of impacts within that universe. CBO reported universe
estimates but did not estimate the distribution of impacts. C&L
provided a distribution but not universe estimates. Thus, neither
source provides the necessary basis for estimating the reach of the one
percent cost exemption. To address this gap, the Departments, assisted
by Price Waterhouse LLP, combined the CBO and C&L analyses with other
data to produce relevant national estimates, as follows.
First, the Departments estimated the relevant universe at 3.0
million plans sponsored by 2.8 million employers covering 145 million
individuals. To derive these estimates, we tallied the number of group
health plan policyholders and dependents by firm size from the Census
Bureau's March 1996 Current Population Survey. Census enterprise data
provided average firm sizes in each size category, allowing us to
estimate the number of employers covering these individuals. KPMG Peat
Marwick's 1997 survey provided the average number of plans per firm in
each size group, supporting estimates of the number of plans. Data from
the Bureau of Labor Statistics' Employee Benefits Survey and the Health
and Retirement Study provided a proportionate breakdown of plans and
individuals in each firm size group across plan types (HMO, PPO, and
fee for service). Likewise, data from KPMG and Foster Higgins surveys
were used to divide insured from self-insured plans.
Second, the Departments narrowed the focus to plans affected by the
MHPA. Approximately 296,000 plans, sponsored by 136,000 employers and
covering 113 million individuals, would be directly affected by the
MHPA. This excludes firms with fewer than 50 employees (which are
exempt under ERISA Section 712 (c)(1)), plans already covered by state
mandates to provide parity in annual and lifetime dollar limits (based
on C&L and Hay Huggins reports of the incidence of differential
limits--roughly 29,000 plans were excluded here), and insured plans in
13 states that, independent of the MHPA, as of January 1, 1998 will
require parity equivalent to or surpassing that required by the MHPA.
(Those 13 states are: Indiana, Maryland, Minnesota, Montana, Arkansas,
Colorado, Connecticut, Maine, Missouri, New Hampshire, North Carolina,
Rhode Island, and Texas.) Some of the plans identified here as affected
may not be affected. The MHPA permits self-insured nonfederal
governmental plans to opt out of compliance. This includes roughly
22,000 plans covering about 18 million individuals. It also exempts
plans whose costs increase by one percent or more, as enumerated below.
Third, the Departments estimated the overall impact of the MHPA as
follows: affected plans' potential increases in mental health
expenditures under the MHPA equal $653 million, or 0.29 percent of
affected plans' $226 billion in total expenditures. (The 0.29 percent
figure is benchmarked to CBO's estimate that the average cost increase
for indemnity plans would be 0.4 percent, but it is adjusted to reflect
C&L's assessment of the relative magnitude of cost increases for
different plan types. The $226 billion figure is benchmarked to CBO's
$290 billion universe, but reduced proportionately to reflect the
Department's estimate of the proportion of the total universe that is
affected by the MHPA.) Under CBO's assumption regarding plan sponsor
actions to reduce the added expenditure, actual added expenditures
would amount to $261 million. Expenditures could be smaller still as a
result of self-insured nonfederal governmental plans' right to opt out
of compliance and the MHPA's one percent increased cost exemption,
which are not accounted for in the foregoing estimates. Recall also
that these expenditures represent transfer payments and not social
costs.
One Percent Cost Exemption
The effect of this rule will be to prohibit all covered plans from
imposing annual or lifetime dollar limits on mental health benefits
that are lower than limits imposed on medical and surgical benefits
during at least seven months of the first plan year beginning on or
after January 1, 1998. Specifically, after six months, the rule permits
plans to exercise an exemption as soon as they document a cost increase
of one percent or more and provide 30 days notice to participants and
the federal government.
Exactly when a given plan will become eligible to elect the one
percent increased cost exemption will depend on the timing of its
increased costs and its documentation of those costs. In many cases,
plans' increased costs under the MHPA will not equal or exceed one
percent until more than the initial six months have elapsed. For
example, added costs from the MHPA's provision restricting the use of
annual dollar limits on mental health benefits would likely be
concentrated late in the plans year, when some participants would
otherwise have reached these limits. In addition, plans that utilize
this rule' transition period may not be affected by the MHPA's
provisions until after the first three months of the plan year have
elapsed. Therefore, these may be less likely to incur added costs of
one percent or more until later in the plan year, or until a subsequent
plan year (in which they would be affected by the MHPA beginning on the
first day of the plan year).
Whether eligible plans wishing to reduce the direct impact of the
MHPA will opt to pursue the exemption or opt for alternative responses
will depend on each plan's particular circumstances and priorities.
The Departments estimated the number of affected plans with
potential increases of at least one percent. Roughly 30,000 plans, or
about 10 percent of a plans affected by MHPA, potentially would be
eligible for the one-percent increased cost exemption. That is, all
else being equal, complying with the MHPA would increase 30,000 plans'
expenditures by at least one percent. These plans cover about 5 million
policyholders and 11 million individuals. This is the universe
potentially affected by the provisions of this rule that address the
one percent increased cost exemption.
In assessing the impact of this rule, the Departments considered
the economic consequences of its provisions implementing the one
percent cost exemption. Several factors are likely to affect the
magnitude of those consequences.
First, under any interpretation, only 10 percent of MHPA-affected
plans (or 30,000 plans) could become eligible for the exemption, and
only some of those would elect to exercise it. The estimated 30,000
plans that would become eligible for the one-percent cost exemption
represents the upper limit of the number of plans that would actually
exercise the exemption. Many of the potentially eligible plans are
likely to forego the exemption in favor of other permitted actions. A
survey of 300 large firms conducted by William M. Mercer, Inc., found
that fewer than 2 percent intended to pursue the one percent increased
cost exemption. Extrapolated to the Departments' estimated plan
universe, this suggests that 6,000 plans, or 22 percent of the 30,000
that are potentially eligible, would pursue the exemption.
Second, expenditure increases from the MHPA will generally be
modest, even for plans potentially eligible for the one percent cost
exemption. Their potential expenditure increase would be $332 million
on a base of $23 billion in total expenditures, or 1.47 percent
overall.

[[Page 66944]]

Third, as noted above, plans can be designed in ways that lessen
these expenditure increases.
Fourth, the 2,215 self-insured nonfederal governmental plans that
might become eligible for the one percent cost exemption are separately
permitted to opt out of the MHPA entirely, thereby exercising an
alternative exemption with equivalent effect. These plans cover 1.8
million individuals, or 16 percent of individuals in potentially
eligible plans.
Fifth, the estimates presented in this analysis are conservative;
actual expenditures arising from compliance with the MHPA are likely to
be less than reported here. In particular, the estimates may understate
the reach and cost-effectiveness of managed mental health programs that
will exist during the years that the MHPA is in effect (See Roland
Sturm, ``How Expensive is Unlimited Mental Health Care Coverage Under
Managed Care?'' JAMA, Nov. 12, 1997--Vol. 278 No. 18).
Sixth, because plan expenditure increases under the MHPA (aside
from increases in administrative expenses) are transfers, the
availability and use of the exemption does not change aggregate social
welfare. However, the availability and use of the exemption does affect
the size and incidence of transfers across affected parties.
Finally, this rule preserves the availability of most of this
savings under the one percent exemption--certain eligible plans are
permitted to exercise the exemption after seven months, thereby
operating under the exemption for up to 38 of the 45 months during
which the MHPA is in effect.
This rule also requires certain notices and disclosures by plans
exercising the one percent increased cost exemption. The Departments
undertook to estimate the paperwork burdens associated with these
provisions, as well as the burden associated with determining whether a
plan is eligible for the exemption. These estimates are summarized
below.
The estimates reported immediately below are for all plans affected
by the notice and disclosure provisions of this rule. The Paperwork
Reduction Act (PRA) analysis that follows is presented separately for
affected private-sector plans and for plans sponsored by nonfederal
governmental employers, which are under the jurisdictions of the
Departments of Labor and of Health and Human Services, respectively.
With respect to the notice to participants and beneficiaries and to
the federal government by plans exercising the one percent cost
exemption, the maximum possible number of such notices is approximately
5.0 million (reflecting all plans potentially eligible to elect the
exemption), while a more likely figure is 1.1 million (reflecting the
Mercer survey cited above). Assuming each notice requires 2 minutes of
labor at $11 per hour, plus $0.50 for postage and materials, total
costs would amount to up to $4.3 million or more probably $931,000.
(These assumptions reflect plans' ability to satisfy this notice
requirement through the provisions of a separately required summary of
material modifications, as well as availability of a model notice to
the government, which together essentially eliminate separate
preparation burdens under this requirement and help minimize ongoing
burdens.)
With respect to requirement for group health plans to notify the
federal government of use of the transition period, and to post these
notices in the workplace, only those plans whose plan years begin
during the first three months on 1998 and who are potentially eligible
for the one percent cost exemption are potentially affected by this
provision. These notices would be filed and posted within 30 days or
less of the beginning of the plan year, so all would be filed in 1998.
Based on annual reports filed with the Department of Labor, the
Departments estimate that 60 percent of all eligible plans, accounting
for 72 percent of participants in such plans, begin their plan years
during these months. This amounts to 18,000 plans, representing the
maximum number of notices that would be filed. Extrapolating from the
Mercer survey cited above, about 4,000 of these plans might intend to
pursue the exemption, representing a more probable number of notices to
be filed. Applying the same per unit cost assumptions as above to the
filing and posting of these notices, the cost of these notices would be
no more than $8,000 and more likely $2,000. These assumptions reflect
the availability of a model notice, the use of which eliminates
preparation costs and helps minimize ongoing burdens.
With respect to the requirement for plans to disclose on request
summary information documenting the plan's eligibility for the one
percent increased cost exemption, the number of such disclosures will
depend on the volume of requests. One might expect requests to arise
most commonly when participants are at or near plans' dollar limits.
Hay Huggins estimates for the Congressional Research Service (See
Roland Sturm, ``How Expensive is Unlimited Mental Health Care Coverage
Under Managed Care?'' JAMA, Nov. 12, 1997--Vol. 278 No. 18) suggest
that 0.73 percent of participants on average incur mental health claims
of more than $10,000--a typical annual limit--in a given year. The
Departments adjusted this figure to reflect the estimated relationship
between increased expenditures under the MHPA for plans eligible for
the one percent increased cost exemption and increased expenditures
under the MHPA for all affected plans, concluding that 3.74 percent of
participants in plans eligible for the one percent increased cost
exemption incur claims of more than $10,000 in a given year. Assuming
that this proportion of participants in plans electing the exemption
request disclosures, the maximum number of such disclosure requests
would be 186,000, while a more probable figure would be 40,000. Given
the same per unit cost assumptions as above, the associated costs would
be $161,000 and $35,000, respectively.
Finally, with respect to plan determinations of eligibility for the
one percent increased cost exemption, the Departments expect that plans
wishing to exercise the one percent increased cost exemption or their
service providers will revise their automated claim record systems to
facilitate calculation of the plans' increased costs attributable to
the MHPA. The number of plans performing such functions in-house that
might wish to exercise the exemption is estimated to be no more than
5,346 and more probably 1,142. The number of service providers
(including health insurance issuers and third party administrators)
that will perform this function for plans that wish to exercise the
exemption is estimated to be 1,770 (including 400 third party
administrators, 650 health insurers, 645 HMOs, and 75 Blue Cross Blue
Shield organizations). Assuming a start up cost of $5,000 per affected
entity, the total start-up cost associated with determining plans'
eligibility to exercise the exemption amounts to $14.6 million to $35.6
million, to be amortized over 10 years beginning in 1998.
The estimates of the numbers and costs of notices, disclosures and
calculations reported above, and below in connection with the Paperwork
Reduction Act, may be high with respect to nonfederal governmental
plans. An estimated 2,215 self-insured nonfederal governmental plans
might become eligible for the one percent cost exemption. These plans
are separately permitted to opt out of the MHPA entirely, thereby
exercising an alternative exemption with equivalent effect, and without
becoming subject to the calculation, notice, and disclosure
requirements. These plans cover 1.8

[[Page 66945]]

million individuals, or 16 percent of individuals in potentially
eligible plans.

Weighted Average

The economic impact of the Departments' exercise of discretion in
the weighted average rule is also expected to be modest.
First, separate limits for benefit categories other than mental
health are not very common. For example, among full-time employees at
establishments with 100 or more employees participating in non-HMO
group health plans in 1993, only a fraction were subject to separate
limits for many major benefit categories. For example, just 14 percent
were subject to separate limits for inpatient surgery, just 13 percent
were subject to such limits for outpatient surgery, and only about one
in four were subject to separate limits for both inpatient and office
physician visits (U.S. Bureau of Labor Statistics, Employee Benefits in
Medium and Large Private Establishments, 1993). ``Separate limits'' in
this context include not only dollar limits, but also non-dollar
limits, such as inpatient day or outpatient visit limits, as well as
differential coinsurance rates, copayments, or deductibles. Therefore,
the proportion with separate dollar limits that would permit imposition
of a weighted average limit on mental health benefits would be even
smaller. In addition, such separate limits are even less common in
HMOs.
Second, discretion exercised in the weighted average rule affects
plans' ability to impose weighted average limits on mental health
benefits only at the margin. In other words, compared with the approach
set forth in the rule, alternative approaches would have increased or
decreased the proportion of plans that are able to impose weighted
average limits and the dollar level of calculated averages by only a
small amount.
Third, not all plans that are permitted to impose weighted average
limits on mental health benefits will elect to do so.
Fourth, some plans that under the rule are not permitted to impose
weighted average limits on mental health benefits, under an alternative
approach, might have been permitted to impose only a relatively high
limit. As such, their expenditure increases from the MHPA might have
been nearly the same with a weighted average limit on mental health
benefits as with no separate limit on such benefits. Consider a plan
with a $500,000 annual cap on all inpatient care and a $250,000 annual
cap on all outpatient care, and a $25,000 annual cap on mental health
benefits. Under the interim rules, such a plan could not impose a
weighted average limit on mental health benefits. Any separate limit on
mental health care would have to be at least $750,000, or at least
$500,000 for inpatient care and at least $250,000 for outpatient care.
Had the plan been permitted to impose a weighted average cap, however,
it still would have been required to increase its mental health cap
from $25,000 to some amount between $250,000 and $500,000, depending on
the weights.
Finally, as with the one percent cost exemption and with the MHPA
generally, the impact of regulatory discretion in the weighted average
rule will be reduced because self-insured nonfederal governmental plans
can opt out, the MHPA's added expenditure is modest, plans can be
designed in ways that lessen the MHPA's added expenditure, and the
estimates presented here are conservative.

F. Unfunded Mandates Reform Act of 1995

The Unfunded Mandates Reform Act of 1995 (P.L. 104-4) requires
agencies to prepare several analytic statements before proposing any
rules that may result in annual expenditures of $100 million by state,
local and tribal governments or the private sector. These rules are not
subject to the Unfunded Mandates Reform Act because they are interim
final rules. However, consistent with the policy embodied in the
Unfunded Mandates Reform Act, the regulation has been designed to be
the least burdensome alternative for state, local and tribal
governments, and the private sector, while achieving the objectives of
the MHPA.

G. Small Business Regulatory Enforcement and Fairness Act of 1995

The Administrator of the Office of Information and Regulatory
Affairs of the Office of Management and Budget has determined that this
is a major rule for purposes of the Small Business Regulatory
Enforcement Fairness Act of 1996 (5 U.S.C. Section 801 et. seq.)
(SBREFA).
The Secretaries have determined that the effective date of these
interim final rules is January 1, 1998. Pursuant to Section 808(2) of
SBREFA, the Secretaries find, for good cause, that notice and public
procedure thereon are impracticable, unnecessary and contrary to the
public interest.
These rules are adopted on an interim final basis because the
Secretaries have determined that without prompt guidance some members
of the regulated community may have difficulty complying with the MHPA
requirements, which may result in an adverse impact on participants and
beneficiaries with regard to their mental health benefits under group
health plans and the protections provided under MHPA. Moreover, MHPA's
requirements will affect the regulated community in the immediate
future.
MHPA's requirements are effective for all group health plans, and
for health insurance issuers offering coverage in connection with such
plans for plan years beginning on or after January 1, 1998. Plan
administrators and sponsors, issuers and participants and beneficiaries
will need guidance on the new statutory provisions before MHPA's
effective date. As noted earlier, these interim rules take into account
comments received by the Departments, in response to the request for
public comments on MHPA published in the Federal Register on June 26,
1997. 62 FR 34604. For the foregoing reasons, the Departments find that
notice and public comment would be impracticable, unnecessary and
contrary to the public interest.

H. Paperwork Reduction Act--The Department of Labor and the
Department of the Treasury

The Department of Labor and the Department of the Treasury have
submitted this emergency processing public information collection
request (ICR), consisting of three distinct ICRs to the Office of
Management and Budget (OMB) for review and clearance under the
Paperwork Reduction Act of 1995 (Pub. L. 104-13, 44 U.S.C. Chapter 35).
The Departments have asked for OMB clearance as soon as possible, and
OMB approval is anticipated by the applicable effective date.
These regulations contain three distinct ICRs. The first ICR is a
notice to participants and beneficiaries and to the federal government
of the plan's election of the exemption from the MHPA's provisions due
to an increase in cost under the plan of at least one percent
attributable to compliance with these provisions. A plan may satisfy
this requirement by providing participants and beneficiaries with a
notice of material reductions in covered service or benefits, under the
Department of Labor's regulations at 29 CFR section 2520.104b-3(d),
that includes the information in paragraph (f)(3)(i) of this interim
final rule regarding issuing a notice to participants and beneficiaries
of the plan's exemption from these parity requirements. Before the one
percent increased cost exemption is effective, the plan must also
notify the federal government. For this purpose, the group health plan
may either send

[[Page 66946]]

the Department of Labor a copy of the summary of material reductions in
covered services or benefits sent to participants and beneficiaries,
containing the plan number and the plan sponsor's employer
identification number, or the plan (or coverage) may use the
Departments' model notice in this interim final rule which has been
developed for this purpose.
The second ICR is a summary of the information used to calculate
the plan's increased costs under the MHPA for purposes of electing the
one percent increased cost exemption, which the plan must make
available to participants and beneficiaries, on request at no charge.
The third ICR is a notice of a group health plan's use of the
transition period. The rule requires plans exercising the one percent
increased cost exemption during all or part of the first quarter of
1998 under the rule's transition provisions to notify the federal
government, and to post a copy of this notice at the workplace.

1. Notice to Participants and Beneficiaries and the Federal Government
of Electing One Percent Increased Cost Exemption

i. Department of Labor
The Department of Labor, as part of its continuing effort to reduce
paperwork and respondent burden, conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and/or continuing collections of
information in accordance with the Paperwork Reduction Act of 1995
(Pub. L. 104-13, 44 U.S.C. Chapter 35) and 5 CFR 1320.11. This program
helps to ensure that requested data can be provided in the desired
format, reporting burden (time and financial resources) is minimized,
collection instruments are clearly understood, and the impact of
collection requirements on respondents can be properly assessed.
Currently, the Pension and Welfare Benefits Administration is
soliciting comments concerning the proposed collection of information,
Notice to Participants and Beneficiaries and the Federal Government of
Electing One Percent Increased Cost Exemption. A copy of the proposed
ICR can be obtained by contacting the employee listed below in the
contact section of the notice.
Information collection: affected parties are not required to comply
with the ICRs in these rules until the Department of Labor publishes in
the Federal Register the control numbers assigned to these ICRs by OMB.
The publication of the control numbers notifies the public that OMB has
approved these ICRs under the Paperwork Reduction Act of 1995. The
Department has asked for OMB clearance as soon as possible, and OMB
approval is anticipated by the applicable effective date.
Dates: Written comments must be submitted to the office listed in
the addressee section below on or before February 20, 1998. The
Department of Labor is particularly interested in comments which:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submissions of responses.
Addressee: Gerald B. Lindrew, Office of Policy and Research, U.S.
Department of Labor, Pension and Welfare Benefits Administration, 200
Constitution Avenue, Room N-5647, Washington, D.C. 20210. Telephone:
202-219-4782 (this is not a toll-free number). Fax: 202-219-4745.
ii. Department of the Treasury
The collection of information is in 54.9812-1T. This information is
required by the interim final rules so that participants will be
informed about their rights under MHPA, and so that participants and
beneficiaries, and the federal government, will receive notice of a
plan's election of the one percent increased cost exemption. The likely
respondents are business or other for-profit institutions, non-profit
institutions, small businesses or organizations, and Taft-Hartley
trusts. Responses to this collection of information are required to
obtain the benefit of the exemption.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224.
Comments on the collection of information should be received on or
before February 20, 1998. In light of the request for OMB clearance by
the effective date of the MHPA, submission of comments within the first
30 days is encouraged to ensure their consideration. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How to enhance the quality, utility, and clarity of the information
to be collected;
How to minimize the burden of complying with the proposed
collection of information, including the application of automated
collection techniques or other forms of information technology; and
Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.

I. Background

MHPA generally requires that group health plans provide parity in
the application of dollar limits to mental health and medical/surgical
benefits. The statute exempts plans from this requirement if its
application results in an increase in the cost under the plan or
coverage of at least one percent. This regulation requires a plan
electing this exemption to notify participants and beneficiaries and
the federal government of the plan's election of the exemption. This
ICR covers this notification requirement.

II. Current Actions

Under 29 CFR 2590.712(f)(3) (i) and (ii), and 26 CFR 54.9812-1T a
group health plan electing the one percent exemption is obligated to
provide a written notice of that election to participants and
beneficiaries and to the federal government of the plan's election of
the exemption. A plan may satisfy this requirement by providing

[[Page 66947]]

participants and beneficiaries with a notice of material reductions in
covered service or benefits, under the Department of Labor's
regulations at 29 CFR section 2520.104b-3(d), that includes the
information in paragraph (f)(3)(i) of this interim final rule regarding
issuing a notice to participants and beneficiaries of the plan's
exemption from these parity requirements. To satisfy the requirement to
notify the federal government, a group health plan may either send the
Department a copy of the summary of material reductions in covered
services or benefits sent to participants and beneficiaries, containing
the plan number and the plan sponsor's employer identification number,
or the plan may use the Department's model notice in this interim final
rule which has been developed for this purpose. Based on past
experience, the staff believes that most of the materials required to
be issued under this notice procedure will be prepared by contract
service providers such as insurance companies and third-party
administrators.
Type of Review: New.
Agencies: U.S. Department of Labor, Pension and Welfare Benefits
Administration; U.S. Department of the Treasury, Internal Revenue
Service.
Title: Notice to Participants and Beneficiaries and the Federal
Government of Electing One Percent Increased Cost Exemption.
OMB Number: XXXXXXX
Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions; Group health plans.
Frequency: On occasion.
Burden:

----------------------------------------------------------------------------------------------------------------
Average time
Total Total responses per response Burden hours
Year respondents (range) (range) (range) Cost (range)
(range) (minutes)
----------------------------------------------------------------------------------------------------------------
1998.......................... ............... ............... .............. .............. ..............
1999.......................... 5,612 to 25,446 813,505 to 2............. 6,324 to $705,037 to
3.8MM. 29,605. $3.3MM
2000.......................... ............... ............... .............. .............. ..............
---------------------------------------------------------------------------------
Totals........................ 5,612 to 25,446 813,505 to 2............. 6,324 to $705,037 to
3.8MM. 29,605. $3.3MM
----------------------------------------------------------------------------------------------------------------

Comments submitted in response to this notice will be summarized
and/or included in the request for OMB approval of the ICRs; they will
also become a matter of public record.

2. Calculation and Disclosure of Documentation of Eligibility for
Exemption

[[Page 66948]]

retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224.
Comments on the collection of information should be received on or
before February 20, 1998. In light of the request for OMB clearance by
the effective date of the MHPA, submission of comments within the first
30 days is encouraged to ensure their consideration. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How to enhance the quality, utility, and clarity of the information
to be collected;
How to minimize the burden of complying with the proposed
collection of information, including the application of automated
collection techniques or other forms of information technology; and
Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.

I. Background

MHPA generally requires that group health plans provide parity in
the application of dollar limits to mental health and medical/surgical
benefits. The statute exempts plans from this requirement if its
application results in an increase in the cost under the plan or
coverage of at least one percent. This regulation requires plans
wishing to elect this exemption to calculate their increased costs
according to certain rules. It further requires plans electing this
exemption to disclose to participants and beneficiaries (or their
representatives), on request, and at no charge, a summary of the
information upon which the exemption was based. This ICR covers this
disclosure requirement.

II. Current Actions:

Under 29 CFR 2590.712(f)(2) and 26 CFR 54.9812-1T, a group health
plan wishing to elect the one percent exemption must calculate their
increased costs according to certain rules. Under 29 CFR 2590.712(f)(4)
and 26 CFR 54.9812-1T, a group health plan electing the one percent
exemption is obligated to disclose to participants and beneficiaries
(or their representatives), on request and at no charge, a summary of
the information on which the exemption was based.
Type of Review: New.
Agencies: U.S. Department of Labor, Pension and Welfare Benefits
Administration; U.S. Department of the Treasury, Internal Revenue
Service.
Title: Calculation and Disclosure of Documentation of Eligibility
for Exemption.
OMB Number: XXXXXXX.
Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions; Group Health Plans.
Frequency: On occasion.
Calculation burden: It is expected that plans wishing to exercise
the one percent increased cost exemption or their service providers
will revise their automated claim record systems to facilitate
calculation of the plans' increased costs attributable to the MHPA. The
number of plans performing such functions in-house that might wish to
exercise the exemption is estimated to be no more than 4,489 and
probably 958. The number of service providers (including health
insurance issuers and third party administrators) that will perform
this function for plans using service providers that wish to exercise
the exemption is estimated to be 1,770. Assuming a cost of $5,000 per
affected entity, the total cost associated with determining plans'
eligibility to exercise the exemption amounts to $12.5 million to $30.1
million, to be amortized over 10 years beginning in 1998.
Disclosure burden: In addition to the calculation burden, plans
wishing to elect the one percent increased cost exemption will incur a
burden in connection with disclosure requests from participants, as
detailed below.

----------------------------------------------------------------------------------------------------------------
Total Total Average time
Year respondents responses per response Burden hours Cost (range)
(range) (range) (minutes) (range)
----------------------------------------------------------------------------------------------------------------
1998......................... .............. ............. ............. ............. ....................
1999......................... 5,612 to 30,188 to 2............ 235 to 1,101. $26,163 to $121,690
25,466. 140,412.
2000......................... 5,612 to 30,188 to 2............ 235 to 1,101. $26,163 to $121,690
25,466. 140,412.
----------------------------------------------------------------------------------
Totals....................... 5,612 to 60,377 to 2............ 470 to 2,201. $52,326 to $243,381
25,466. 280.824.
----------------------------------------------------------------------------------------------------------------

Comments submitted in response to this notice will be summarized
and/or included in the request for OMB approval of the ICRs; they will
also become a matter of public record.

3. Notice of Group Health Plan's Use of Transition Period, and Posting
Thereof

[[Page 66949]]

of the proposed ICR can be obtained by contacting the employee listed
below in the contact section of the notice.
Information collection: affected parties are not required to comply
with the ICRs in these rules until the Department of Labor publishes in
the Federal Register the control numbers assigned to these ICRs by OMB.
The publication of the control numbers notifies the public that OMB has
approved these ICRs under the Paperwork Reduction Act of 1995. The
Department has asked for OMB clearance as soon as possible, and OMB
approval is anticipated by the applicable effective date.
Dates: Written comments must be submitted to the office listed in
the addressee section below on or before February 20, 1998. The
Department of Labor is particularly interested in comments which:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submissions of responses.
Addressee: Gerald B. Lindrew, Office of Policy and Research, U.S.
Department of Labor, Pension and Welfare Benefits Administration, 200
Constitution Avenue, Room N-5647, Washington, D.C. 20210. Telephone:
202-219-4782 (this is not a toll-free number). Fax: 202-219-4745.
ii. Department of the Treasury
The collection of information is in Section 54.9812-1T. This
information is required by the interim final rules so that participants
will be informed about their rights under MHPA, and so that plans
electing the one percent increased cost exemption during all or part of
the first quarter of 1998 under the rules' transition provisions will
notify the federal government and post the notice in the workplace. The
likely respondents are business or other for-profit institutions, non-
profit institutions, small businesses or organizations, and Taft-
Hartley trusts. Responses to this collection of information are
required to obtain the benefit of the exemption.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224.
Comments on the collection of information should be received on or
before February 20, 1998. In light of the request for OMB clearance by
the effective date of the MHPA, submission of comments within the first
30 days is encouraged to ensure their consideration. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How to enhance the quality, utility, and clarity of the information
to be collected;
How to minimize the burden of complying with the proposed
collection of information, including the application of automated
collection techniques or other forms of information technology; and
Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.

I. Background

MHPA generally requires that group health plans provide parity in
the application of dollar limits to mental health and medical/surgical
benefits. The statute exempts plans from this requirement if its
application results in an increase in the cost under the plan or
coverage of at least one percent. This regulation requires a notice of
group health plan's use of transition period, under which plans
electing the one percent increased cost exemption during all or part of
the first quarter of 1998 under the rule's transition provisions must
notify the federal government and to post a copy of the notice in the
workplace. This ICR covers this notification requirement.

II. Current Actions

Under 29 CFR 2590.712(h)(3)(ii) and 26 CFR 54.9812-1T, group health
plans electing the one percent increased cost exemption during all or
part of the first quarter of 1998 under the rule's transition
provisions must notify the federal government. Based on past
experience, the staff believes that most of the materials required to
be issued under this notice procedure will be prepared by contract
service providers such as insurance companies and third-party
administrators.
Type of Review: New.
Agencies: U.S. Department of Labor, Pension and Welfare Benefits
Administration; U.S. Department of the Treasury, Internal Revenue
Service.
Title: Notice of Group Health Plan's Use of Transition Period.
OMB Number:
Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions; Group Health Plans.
Frequency: On occasion.
Burden:

----------------------------------------------------------------------------------------------------------------
Total Average time
Year respondents Total responses per response Burden hours Cost (range)
(range) (range) (minutes) (range)
----------------------------------------------------------------------------------------------------------------
1998.......................... 3,348 to 15,193 3,348 to 15,193 2............. 19 to 89...... $1,514 to
$6,910
1999.......................... ............... ............... .............. .............. ..............
2000.......................... ............... ............... .............. .............. ..............
---------------------------------------------------------------------------------

[[Page 66950]]

Totals.................... 3,348 to 15,193 3,348 to 15,193 2............. 19 to 89...... $1,514 to
$6,910
----------------------------------------------------------------------------------------------------------------

Comments submitted in response to this notice will be summarized
and/or included in the request for OMB approval of the ICRs; they will
also become a matter of public record.

I. Paperwork Reduction Act--Department of Health and Human Services

Under the Paperwork Reduction Act of 1995 (PRA), agencies are
required to provide a 60-day notice in the Federal Register and solicit
public comment before a collection of information requirement is
submitted to the Office of Management and Budget (OMB) for review and
approval. In order to fairly evaluate whether an information collection
should be approved by OMB, section 3506(c)(2)(A) of the PRA requires
that we solicit comment on the following issues:
Whether the information collection is necessary and useful
to carry out the proper functions of the agency;
The accuracy of the agency's estimate of the information
collection burden;
The quality, utility, and clarity of the information to be
collected; and
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
Therefore, we are soliciting public comment on each of these issues for
the information collection requirements discussed below.
Section 146.136 of this document contains three distinct
information collection requirements, as summarized below:
Type of Information Request: New collection.
Title of Information Collection: Mental Health Parity Act of 1996;
Information Collection Requirements Contained in 45 CFR 146.136; HCFA-
2891-IFC.
Form Number: HCFA-R-223 (OMB approval #: 0938-XXXX).
Use: The information collection requirements contained in this
interim final rule will help ensure that sponsors and administrators of
group health plans notify the required individuals/entities of a plan's
exemption from the MHPA parity requirements and make the data used to
calculate the exemption available to affected individuals and entities.
Frequency: On occasion.
Affected Public: States, businesses or other for profit, not-for-
profit institutions, Federal Government, individuals or households.
Notification Requirements: Nonfederal governmental plans, not
exempt from the parity requirements by reason of an opt out under
regulations at 45 CFR 146.180, must furnish participants and
beneficiaries with a notice of the plan's exemption from the parity
requirements based on increased costs. A plan may satisfy this
requirement by providing participants and beneficiaries with a notice
of material reductions in covered services or benefits, under 29 CFR
2520.104b-3(d), that includes the information in paragraph (f)(3)(i).
Even though a plan generally is not required to furnish a material
reduction in covered services or benefits for 60 days, in no case will
the exemption be effective until 30 days after the notice is sent to
participants and beneficiaries. For this purpose, a plan that does not
furnish the summary of material reductions in covered services or
benefits may satisfy its notice requirements by using the model
exemption notice described above in this preamble.
In addition, the nonfederal governmental plan (or issuer providing
coverage to such a plan) must also furnish to the Department of Health
and Human Services a notice similar to the notice sent to participants
and beneficiaries before the exemption is effective. For this purpose,
the plan may either send the Department the summary of material
reductions in covered services or benefits sent to participants and
beneficiaries, or the plan (or issuer) may use the model described
above. In all cases, the exemption is not effective until 30 days after
notice has been sent.
Burden:

----------------------------------------------------------------------------------------------------------------
Average time
Total Total responses per response Burden hours
Year respondents (range) range (range) Cost (range)
(range) (minutes)
----------------------------------------------------------------------------------------------------------------
1998.......................... ............... ............... .............. .............. ..............
1999.......................... 890 to 4,092... 261,000 to 1.2 2............. 2,133 to 9,975 $226,000 to
MM. $1.1 MM
2000.......................... ............... ............... .............. .............. ..............
---------------------------------------------------------------------------------
Total..................... 890 to 4,092... 261,000 to 1.2 2............. 2,133 to 9,975 $226,000 to
MM. $1.1 MM
----------------------------------------------------------------------------------------------------------------

Availability of documentation: Nonfederal governmental plans that
take the exemption, or issuers that provide coverage for such plans,
must make available to participants and beneficiaries, on request and
at no charge, a summary of the data used to calculate the exemption of
this section. The summary of data must include the incurred
expenditures (including identification of the portion of the total
representing claims and the portion of the total representing
administrative expenses), the base period, the claims incurred during
the base period that would have been denied under the terms of the plan
absent amendments required to comply with parity, and the

[[Page 66951]]

administrative expenses attributable to complying with the parity
requirements.
Burden:

----------------------------------------------------------------------------------------------------------------
Average time
Total Total responses per response Burden hours
Year respondents (range) (range) (range) Cost (range)
(range) (minutes)
----------------------------------------------------------------------------------------------------------------
1998.......................... ............... ............... .............. .............. ..............
1999.......................... 890 to 4,092... 9,700 to 45,300 2............. 79 to 372..... $8,400 to
$39,300
2000.......................... 890 to 4,092... 9,700 to 45,300 2............. 79 to 372..... $8,400 to
$39,300
---------------------------------------------------------------------------------
Total..................... 890 to 4,092... 19,400 to 2............. 158 to 744.... $16,800 to
90,600. $78,600
----------------------------------------------------------------------------------------------------------------

Plans that take the exemption will incur start up costs for
preparing to issue the information they must disclose. We estimate the
start up costs for nonfederal governmental plans that take this
exemption to range from $2.1 million to $5.5 million.
Notice of Use of Transition Period: With respect to the increased
cost exemption, the interim rules provide in paragraph (g)(3) a
transition period for compliance with the requirements of paragraph
(f). Under paragraph (g)(3), no enforcement action shall be taken
against a nonfederal governmental plan that is subject to the MHPA
requirements prior to April 1, 1998 solely because the plan claims the
increased cost exemption under section 2705(c)(2) of the PHS Act based
on assumptions inconsistent with the rules under paragraph (f),
provided that the plan is amended to comply with the parity
requirements no later than March 31, 1998 and the plan complies with
certain notice requirements. A nonfederal governmental plan satisfies
the notice requirements only if such plan provides notice to the
Department of Health and Human Services of the plan's intent to use the
transition period by 30 days after the first day of the plan year
beginning on or after January 1, 1998, but in no event can the notice
be provided later than March 31, 1998. Such notice shall include the
name of the plan; the name, address, and telephone number of the plan
sponsor or plan administrator; the employer identification number; and
the plan number. In addition, such notice must be provided at no charge
to participants within 30 days after receipt of a written request for
such notification.
Burden:

----------------------------------------------------------------------------------------------------------------
Average time
Total Total responses per response Burden hours
Year respondents (range) (range) (range) Cost (range)
(range) (minutes)
----------------------------------------------------------------------------------------------------------------
1998.......................... 531 to 2,441... 531 to 2,441... 2............. 4 to 17....... $250 to $1,151
1999.......................... --............. --............. --............ --............ --
2000.......................... --............. --............. --............ --............ --
---------------------------------------------------------------------------------
Total..................... 531 to 2,441... 531 to 2,441... 2............. 4 to 17....... $250 to $1,151
----------------------------------------------------------------------------------------------------------------

We have submitted a copy of this proposed rule to OMB for its
review of the information collection requirements in Sec. 146.136.
These requirements are not effective until they have been approved by
OMB.
If you comment on any of these information collection and
recordkeeping requirements, please mail copies directly to the
following: Health Care Financing Administration, Office of Information
Services, information Technology Investment Management Group, Division
of HCFA Enterprise Standards, Room C2-26-17, 7500 Security Boulevard,
Baltimore, MD 21244-1850. ATTN: John Burke HCFA-2891-IFC.
We have submitted a copy of this rule to OMB for its review of
these information collections. A notice will be published in the
Federal Register when approval is obtained. Interested persons are
invited to send comments regarding this burden or any other aspect of
these collections of information. If you comment on these information
collection and recordkeeping requirements, please mail copies directly
to the following addresses:

Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 10235, New Executive Office Building, Washington, DC
20530, Attn: Allison Herron Eydt, HCFA Desk Officer. DATED:
Gerald B. Lindrew, Deputy Director, Pension and Welfare Benefits
Administration, Office of Policy and Research

Statutory Authority

The Department of the Treasury temporary rule is adopted pursuant
to the authority contained in sections 7805 and 9833 of the Code (26
U.S.C. 7805, 9833), as amended by HIPAA (Pub. L. 104-191, 110 Stat.
1936) and the Taxpayer Relief Act of 1997 (Pub. L. 105-34, 111 Stat.
788).
The Department of Labor interim final rule is adopted pursuant to
the authority contained in sections 107, 209, 505, 701-703, 711, 712,
and 731-734 of ERISA (29 U.S.C. 1027, 1059, 1135, 1171-1173, 1181,
1182, and 1191-1194), as amended by HIPAA (Pub. L. 104-191, 110 Stat.
1936) and MHPA (Pub. L. 104-204, 110 Stat. 2944), and Secretary of
Labor's Order No. 1-87, 52 FR 13139, April 21, 1987.

[[Page 66952]]

The Department of Health and Human Services interim final rule is
adopted pursuant to the authority contained in sections 2701, 2702,
2705, 2711, 2712, 2713, 2721, 2722, 2723, and 2792 of the PHS Act (42
U.S.C. 300gg, 300gg-1, 300gg-5, 300gg-11, 300gg-12, 300gg-13, 300gg-21,
300gg-22, 300gg-23, and 300gg-92), as established by HIPAA (Pub. L.
104-191, 110 Stat. 1936) and MHPA (Pub. L. 104-204, 110 Stat. 2944).

List of Subjects

26 CFR Part 54

Excise taxes, Health insurance, Pensions, Reporting and
recordkeeping requirements.

29 CFR Part 2590

Employee benefit plans, Employee Retirement Income Security Act,
Health care, Health insurance, Reporting and recordkeeping
requirements.

45 CFR Part 146

Health care, Health insurance, Reporting and recordkeeping
requirements, State regulation of health insurance.

Adoption of Amendments to the Regulations

Internal Revenue Service

26 CFR Chapter I
Accordingly, 26 CFR Part 54 is amended as follows:

PART 54--PENSION EXCISE TAXES

Paragraph 1. The authority citation for part 54 is amended by
revising the entries for sections 54.9801-1T through 54.9801-6T and
54.9802-1T, by removing the entries for sections 54.9804-1T, and
54.9806-1T, and by adding entries for sections 54.9812-1T, 54.9831-1T,
and 54.9833-1T to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Section 54.9801-1T also issued under 26 U.S.C. 9833.
Section 54.9801-2T also issued under 26 U.S.C. 9833.
Section 54.9801-3T also issued under 26 U.S.C. 9833.
Section 54.9801-4T also issued under 26 U.S.C. 9833.
Section 54.9801-5T also issued under 26 U.S.C. 9801(c)(4),
9801(e)(3), and 9833.
Section 54.9801-6T also issued under 26 U.S.C. 9833.
Section 54.9802-1T also issued under 26 U.S.C. 9833.
Section 54.9812-1T also issued under 26 U.S.C. 9833.
Section 54.9831-1T also issued under 26 U.S.C. 9833.
Section 54.9833-1T also issued under 26 U.S.C. 9833.

Par. 2. In Sec. 54.9801-1T, paragraph (a) is revised to read as
follows:

Sec. 54.9801-1T Basis and scope (temporary).

(a) Statutory basis. Sections 54.9801-1T through 54.9801-6T,
54.9802-1T, 54.9812-1T, 54.9831-1T and 54.9833-1T (portability
sections) implement Chapter 100 of Subtitle K of the Internal Revenue
Code of 1986.
* * * * *
Par. 3. Section 54.9801-2T is amended by:
1. Revising the introductory text.
2. Revising the definition of excepted benefits.
3. Revising the definition of health insurance coverage.
The revisions read as follows:

Sec. 54.9801-2T Definitions (temporary).

Unless otherwise provided, the definitions in this section govern
in applying the provisions of Secs. 54.9801-1T through 54.9801-6T,
54.9802-1T, 54.9812-1T, 54.9831-1T, and 54.9833-1T.
* * * * *
Excepted benefits means the benefits described as excepted in
Sec. 54.9831-1T(b).
* * * * *
Health insurance coverage means benefits consisting of medical care
(provided directly, through insurance or reimbursement, or otherwise)
under any hospital or medical service policy or certificate, hospital
or medical service plan contract, or HMO contract offered by a health
insurance issuer. However, benefits described in Sec. 54.9831-1T(b)(2)
are not treated as benefits consisting of medical care.
* * * * *
Par. 4. In Sec. 54.9801-4T, paragraph (a)(2) is revised to read as
follows:

Sec. 54.9801-4T Rules relating to creditable coverage (temporary).

(a) * * *
(2) Excluded coverage. Creditable coverage does not include
coverage consisting solely of coverage of excepted benefits (described
in Sec. 54.9831-1T).
* * * * *
Par. 5. In Sec. 54.9801-5T, the first sentence of paragraph
(a)(3)(vi) is revised to read as follows:

Sec. 54.9801-5T Certification and disclosure of previous coverage
(temporary).

(a) * * *
(3) * * *
(vi) Excepted benefits; categories of benefits. No certificate is
required to be furnished with respect to excepted benefits described in
Sec. 54.9831-1T. * * *
* * * * *

Sec. 54.9804-1T [Redesignated as Sec. 54.9831-1T]

Par. 6. Section 54.9804-1T is redesignated as Sec. 54.9831-1T and
amended by revising paragraph (b)(1) to read as follows:

Sec. 54.9831-1T Special rules relating to group health plans
(temporary).

* * * * *
(b) Excepted benefits--(1) In general. The requirements of
Secs. 54.9801-1T through 54.9801-6T, 54.9802-1T, and 54.9812-1T do not
apply to any group health plan in relation to its provision of the
benefits described in paragraph (b) (2), (3), (4), or (5) of this
section (or any combination of these benefits).
* * * * *

Sec. 54.9806-1T [Redesignated as Sec. 54.9833-1T]

Par. 7. Section 54.9806-1T is redesignated as Sec. 54.9833-1T and
amended by:
1. Revising paragraph (a)(1).
2. Revising the first sentence of paragraph (a)(2).
The revisions read as follows:

Sec. 54.9833-1T Effective dates (temporary).

(a) General effective dates--(1) Non-collectively-bargained plans.
Except as otherwise provided in this section, Chapter 100 of Subtitle K
and Secs. 54.9801-1T through 54.9806-1T, 54.9802-1T, and 54.9831-1T
apply with respect to group health plans for plan years beginning after
June 30, 1997.
(2) Collectively bargained plans. Except as otherwise provided in
this section (other than paragraph (a)(1) of this section), in the case
of a group health plan maintained pursuant to one or more collective
bargaining agreements between employee representatives and one or more
employers ratified before August 21, 1996, Chapter 100 of Subtitle K
and Secs. 54.9801-1T through 54.9801-6T, 54.9802-1T, and 54.9831-1T do
not apply to plan years beginning before the later of July 1, 1997, or
the date on which the last of the collective bargaining agreements
relating to the plan terminates (determined without regard to any
extension thereof agreed to after August 21, 1996).* * *
* * * * *
Par. 8. Section 54.9812-1T is added to read as follows:

[[Page 66953]]

Sec. 54.9812-1T Parity in the application of certain limits to mental
health benefits (temporary).

(a) Definitions. For purposes of this section, except where the
context clearly indicates otherwise, the following definitions apply:
Aggregate lifetime limit means a dollar limitation on the total
amount of specified benefits that may be paid under a group health plan
for an individual (or for a group of individuals considered a single
unit in applying this dollar limitation, such as a family or an
employee plus spouse).
Annual limit means a dollar limitation on the total amount of
specified benefits that may be paid in a 12-month period under a plan
for an individual (or for a group of individuals considered a single
unit in applying this dollar limitation, such as a family or an
employee plus spouse).
Medical/surgical benefits means benefits for medical or surgical
services, as defined under the terms of the plan, but does not include
mental health benefits.
Mental health benefits means benefits for mental health services,
as defined under the terms of the plan, but does not include benefits
for treatment of substance abuse or chemical dependency.
(b) Requirements regarding limits on benefits--(1) In general--(i)
General parity requirement. A group health plan that provides both
medical/surgical benefits and mental health benefits must comply with
paragraph (b) (2), (3), or (6) of this section.
(ii) Exception. The rule in paragraph (b)(1)(i) of this section
does not apply if a plan satisfies the requirements of paragraph (e) or
(f) of this section.
(2) Plan with no limit or limits on less than one-third of all
medical/surgical benefits. If a plan does not include an aggregate
lifetime or annual limit on any medical/surgical benefits or includes
aggregate lifetime or annual limits that apply to less than one-third
of all medical/surgical benefits, it may not impose an aggregate
lifetime or annual limit, respectively, on mental health benefits.
(3) Plan with a limit on at least two-thirds of all medical/
surgical benefits. If a plan includes an aggregate lifetime or annual
limit on at least two-thirds of all medical/surgical benefits, it must
either--
(i) Apply the aggregate lifetime or annual limit both to the
medical/surgical benefits to which the limit would otherwise apply and
to mental health benefits in a manner that does not distinguish between
the medical/surgical and mental health benefits; or
(ii) Not include an aggregate lifetime or annual limit on mental
health benefits that is less than the aggregate lifetime or annual
limit, respectively, on the medical/surgical benefits.
(4) Examples. The rules of paragraphs (b)(2) and (3) of this
section are illustrated by the following examples:

Example 1. (i) Prior to the effective date of the mental health
parity provisions, a group health plan had no annual limit on
medical/surgical benefits and had a $10,000 annual limit on mental
health benefits. To comply with the parity requirements of this
paragraph (b), the plan sponsor is considering each of the following
options:
(A) Eliminating the plan's annual limit on mental health
benefits;
(B) Replacing the plan's previous annual limit on mental health
benefits with a $500,000 annual limit on all benefits (including
medical/surgical and mental health benefits); and
(C) Replacing the plan's previous annual limit on mental health
benefits with a $250,000 annual limit on medical/surgical benefits
and a $250,000 annual limit on mental health benefits.
(ii) In this Example 1, each of the three options being
considered by the plan sponsor would comply with the requirements of
this section because they offer parity in the dollar limits placed
on medical/surgical and mental health benefits.
Example 2. (i) Prior to the effective date of the mental health
parity provisions, a group health plan had a $100,000 annual limit
on medical/surgical inpatient benefits, a $50,000 annual limit on
medical/surgical outpatient benefits, and a $100,000 annual limit on
all mental health benefits. To comply with the parity requirements
of this paragraph (b), the plan sponsor is considering each of the
following options:
(A) Replacing the plan's previous annual limit on mental health
benefits with a $150,000 annual limit on mental health benefits; and
(B) Replacing the plan's previous annual limit on mental health
benefits with a $100,000 annual limit on mental health inpatient
benefits and a $50,000 annual limit on mental health outpatient
benefits.
(ii) In this Example 2, each option under consideration by the
plan sponsor would comply with the requirements of this section
because they offer parity in the dollar limits placed on medical/
surgical and mental health benefits.
Example 3. (i) A group health plan that is subject to the
requirements of this section has no aggregate lifetime or annual
limit for either medical/surgical benefits or mental health
benefits. While the plan provides medical/surgical benefits with
respect to both network and out-of-network providers, it does not
provide mental health benefits with respect to out-of-network
providers.
(ii) In this Example 3, the plan complies with the requirements
of this section because they offer parity in the dollar limits
placed on medical/surgical and mental health benefits.
Example 4. (i) Prior to the effective date of the mental health
parity provisions, a group health plan had an annual limit on
medical/surgical benefits and a separate but identical annual limit
on mental health benefits. The plan included benefits for treatment
of substance abuse and chemical dependency in its definition of
mental health benefits. Accordingly, claims paid for treatment of
substance abuse and chemical dependency were counted in applying the
annual limit on mental health benefits. To comply with the parity
requirements of this paragraph (b), the plan sponsor is considering
each of the following options:
(A) Making no change in the plan so that claims paid for
treatment of substance abuse and chemical dependency continue to
count in applying the annual limit on mental health benefits;
(B) Amending the plan to count claims paid for treatment of
substance abuse and chemical dependency in applying the annual limit
on medical/surgical benefits (rather than counting those claims in
applying the annual limit on mental health benefits);
(C) Amending the plan to provide a new category of benefits for
treatment of chemical dependency and substance abuse that is subject
to a separate, lower limit and under which claims paid for treatment
of substance abuse and chemical dependency are counted only in
applying the annual limit on this separate category; and
(D) Amending the plan to eliminate distinctions between medical/
surgical benefits and mental health benefits and establishing an
overall limit on benefits offered under the plan under which claims
paid for treatment of substance abuse and chemical dependency are
counted with medical/surgical benefits and mental health benefits in
applying the overall limit.
(ii) In this Example 4, the group health plan is described in
paragraph (b)(3) of this section. Because mental health benefits are
defined in paragraph (a) of this section as excluding benefits for
treatment of substance abuse and chemical dependency, the inclusion
of benefits for treatment of substance abuse and chemical dependency
in applying an aggregate lifetime limit or annual limit on mental
health benefits under option (A) of this Example 4 would not comply
with the requirements of paragraph (b)(3) of this section. However,
options (B), (C), and (D) of this Example 4 would comply with the
requirements of paragraph (b)(3) of this section because they offer
parity in the dollar limits placed on medical/surgical and mental
health benefits.

[[Page 66954]]

determine whether the dollar amounts expected to be paid under the plan
will constitute one-third or two-thirds of the dollar amount of all
plan payments for medical/surgical benefits.
(6) Plan not described in paragraph (b)(2) or (3) of this section--
(i) In general. A group health plan that is not described in paragraph
(b)(2) or (3) of this section, must either--
(A) Impose no aggregate lifetime or annual limit, as appropriate,
on mental health benefits; or
(B) Impose an aggregate lifetime or annual limit on mental health
benefits that is no less than an average limit for medical/surgical
benefits calculated in the following manner. The average limit is
calculated by taking into account the weighted average of the aggregate
lifetime or annual limits, as appropriate, that are applicable to the
categories of medical/surgical benefits. Limits based on delivery
systems, such as inpatient/outpatient treatment or normal treatment of
common, low-cost conditions (such as treatment of normal births), do
not constitute categories for purposes of this paragraph (b)(6)(i)(B).
In addition, for purposes of determining weighted averages, any
benefits that are not within a category that is subject to a
separately-designated limit under the plan are taken into account as a
single separate category by using an estimate of the upper limit on the
dollar amount that a plan may reasonably be expected to incur with
respect to such benefits, taking into account any other applicable
restrictions under the plan.
(ii) Weighting. For purposes of this paragraph (b)(6), the
weighting applicable to any category of medical/surgical benefits is
determined in the manner set forth in paragraph (b)(5) of this section
for determining one-third or two-thirds of all medical/surgical
benefits.
(iii) Example. The rules of this paragraph (b)(6) are illustrated
by the following example:

Example. (i) A group health plan that is subject to the
requirements of this section includes a $100,000 annual limit on
medical/surgical benefits related to cardio-pulmonary diseases. The
plan does not include an annual limit on any other category of
medical/surgical benefits. The plan determines that 40% of the
dollar amount of plan payments for medical/surgical benefits are
related to cardio-pulmonary diseases. The plan determines that
$1,000,000 is a reasonable estimate of the upper limit on the dollar
amount that the plan may incur with respect to the other 60% of
payments for medical/surgical benefits.
(ii) In this Example, the plan is not described in paragraph
(b)(3) of this section because there is not one annual limit that
applies to at least two-thirds of all medical/surgical benefits.
Further, the plan is not described in paragraph (b)(2) of this
section because more than one-third of all medical/surgical benefits
are subject to an annual limit. Under this paragraph (b)(6), the
plan sponsor can choose either to include no annual limit on mental
health benefits, or to include an annual limit on mental health
benefits that is not less than the weighted average of the annual
limits applicable to each category of medical/surgical benefits. In
this example, the minimum weighted average annual limit that can be
applied to mental health benefits is $640,000 (40% x $100,000 + 60%
x $1,000,000 = $640,000).

(c) Rule in the case of separate benefit packages. If a group
health plan offers two or more benefit packages, the requirements of
this section, including the exemption provisions in paragraph (f) of
this section, apply separately to each benefit package. Examples of a
group health plan that offers two or more benefit packages include a
group health plan that offers employees a choice between indemnity
coverage or HMO coverage, and a group health plan that provides one
benefit package for retirees and a different benefit package for
current employees.
(d) Applicability--(1) Group health plans. The requirements of this
section apply to a group health plan offering both medical/surgical
benefits and mental health benefits regardless of whether the mental
health benefits are administered separately under the plan.
(2) Health insurance issuers. See 29 CFR 2590.712(d)(2) and 45 CFR
146.136(d)(2), which provide that health insurance issuers offering
health insurance coverage for both medical/surgical benefits and mental
health benefits in connection with a group health plan are subject to
rules similar to those applicable to group health plans under this
section.
(3) Scope. This section does not--
(i) Require a group health plan to provide any mental health
benefits; or
(ii) Affect the terms and conditions (including cost sharing,
limits on the number of visits or days of coverage, requirements
relating to medical necessity, requiring prior authorization for
treatment, or requiring primary care physicians' referrals for
treatment) relating to the amount, duration, or scope of the mental
health benefits under the plan except as specifically provided in
paragraph (b) of this section.
(e) Small employer exemption--(1) In general. The requirements of
this section do not apply to a group health plan for a plan year of a
small employer. For purposes of this paragraph (e), the term small
employer means, in connection with a group health plan with respect to
a calendar year and a plan year, an employer who employed an average of
at least two but not more than 50 employees on business days during the
preceding calendar year and who employs at least two employees on the
first day of the plan year. See section 9831(a) and Sec. 54.9831-1T(a),
which provide that this section (and certain other sections) does not
apply to any group health plan for any plan year if, on the first day
of the plan year, the plan has fewer than two participants who are
current employees.
(2) Rules in determining employer size. For purposes of paragraph
(e)(1) of this section--
(i) All persons treated as a single employer under subsections (b),
(c), (m), and (o) of section 414 are treated as one employer;
(ii) If an employer was not in existence throughout the preceding
calendar year, whether it is a small employer is determined based on
the average number of employees the employer reasonably expects to
employ on business days during the current calendar year; and
(iii) Any reference to an employer for purposes of the small
employer exemption includes a reference to a predecessor of the
employer.
(f) Increased cost exemption--(1) In general. A group health plan
is not subject to the requirements of this section if the requirements
of this paragraph (f) are satisfied. If a plan offers more than one
benefit package, this paragraph (f) applies separately to each benefit
package. Except as provided in paragraph (h) of this section, a plan
must comply with the requirements of paragraph (b)(1)(i) of this
section for the first plan year beginning on or after January 1, 1998,
and must continue to comply with the requirements of paragraph
(b)(1)(i) of this section until the plan satisfies the requirements in
this paragraph (f). In no event is the exemption of this paragraph (f)
effective until 30 days after the notice requirements in paragraph
(f)(3) of this section are satisfied. If the requirements of this
paragraph (f) are satisfied with respect to a plan, the exemption
continues in effect (at the plan's discretion) until September 30,
2001, even if the plan subsequently purchases a different policy from
the same or a different issuer and regardless of any other changes to
the plan's benefit structure.
(2) Calculation of the one-percent increase--(i) Ratio. A group
health plan satisfies the requirements of this paragraph (f)(2) if the
application of paragraph (b)(1)(i) of this section to the plan results
in an increase in the cost under the plan of at least one percent.

[[Page 66955]]

The application of paragraph (b)(1)(i) of this section results in an
increased cost of at least one percent under a group health plan only
if the ratio below equals or exceeds 1.01000. The ratio is determined
as follows:
(A) The incurred expenditures during the base period, divided by,
(B) The incurred expenditures during the base period, reduced by--
--
(1) The claims incurred during the base period that would have been
denied under the terms of the plan absent plan amendments required to
comply with this section; and
(2) Administrative expenses attributable to complying with the
requirements of this section.
(ii) Formula. The ratio of paragraph (f)(2)(i) of this section is
expressed mathematically as follows:
[GRAPHIC] [TIFF OMITTED] TR22DE97.005

(A) IE means the incurred expenditures during the base period.
(B) CE means the claims incurred during the base period that would
have been denied under the terms of the plan absent plan amendments
required to comply with this section
(C) AE means administrative costs related to claims in CE and other
administrative costs attributable to complying with the requirements of
this section.
(iii) Incurred expenditures. Incurred expenditures means actual
claims incurred during the base period and reported within two months
following the base period, and administrative costs for all benefits
under the group health plan, including mental health benefits and
medical/surgical benefits, during the base period. Incurred
expenditures do not include premiums.
(iv) Base period. Base period means the period used to calculate
whether the plan may claim the one-percent increased cost exemption in
this paragraph (f). The base period must begin on the first day in any
plan year that the plan complies with the requirements of paragraph
(b)(1)(i) of this section and must extend for a period of at least six
consecutive calendar months. However, in no event may the base period
begin prior to September 26, 1996 (the date of enactment of the Mental
Health Parity Act (Pub. L. 104-204, 110 Stat. 2944)).
(v) Rating pools. For plans that are combined in a pool for rating
purposes, the calculation under this paragraph (f)(2) for each plan in
the pool for the base period is based on the incurred expenditures of
the pool, whether or not all the plans in the pool have participated in
the pool for the entire base period. (However, only the plans that have
complied with paragraph (b)(1)(i) of this section for at least six
months as a member of the pool satisfy the requirements of this
paragraph (f)(2).) Otherwise, the calculation under this paragraph
(f)(2) for each plan is calculated by the plan administrator based on
the incurred expenditures of the plan.
(vi) Examples. The rules of this paragraph (f)(2) are illustrated
by the following examples:

Example 1. (i) A group health plan has a plan year that is the
calendar year. The plan satisfies the requirements of paragraph
(b)(1)(i) of this section as of January 1, 1998. On September 15,
1998, the plan determines that $1,000,000 in claims have been
incurred during the period between January 1, 1998 and June 30, 1998
and reported by August 30, 1998. The plan also determines that
$100,000 in administrative costs have been incurred for all benefits
under the group health plan, including mental health benefits. Thus,
the plan determines that its incurred expenditures for the base
period are $1,100,000. The plan also determines that the claims
incurred during the base period that would have been denied under
the terms of the plan absent plan amendments required to comply with
this section are $40,000 and that administrative expenses
attributable to complying with the requirements of this section are
$10,000. Thus, the total amount of expenditures for the base period
had the plan not been amended to comply with the requirements of
paragraph (b)(1)(i) of this section are $1,050,000 ($1,100,000--
($40,000 + $10,000) = $1,050,000).
(ii) In this Example 1, the plan satisfies the requirements of
this paragraph (f)(2) because the application of this section
results in an increased cost of at least one percent under the terms
of the plan ($1,100,000/$1,050,000 = 1.04762).
Example 2. (i) A health insurance issuer sells a group health
insurance policy that is rated on a pooled basis and is sold to 30
group health plans. One of the group health plans inquires whether
it qualifies for the one-percent increased cost exemption. The
issuer performs the calculation for the pool as a whole and
determines that the application of this section results in an
increased cost of 0.500 percent (for a ratio under this paragraph
(f)(2) of 1.00500) for the pool. The issuer informs the requesting
plan and the other plans in the pool of the calculation.
(ii) In this Example 2, none of the plans satisfy the
requirements of this paragraph (f)(2) and a plan that purchases a
policy not complying with the requirements of paragraph (b)(1)(i) of
this section violates the requirements of this section.
Example 3. (i) A partially insured plan is collecting the
information to determine whether it qualifies for the exemption. The
plan administrator determines the incurred expenses for the base
period for the self-funded portion of the plan to be $2,000,000 and
the administrative expenses for the base period for the self-funded
portion to be $200,000. For the insured portion of the plan, the
plan administrator requests data from the insurer. For the insured
portion of the plan, the plan's own incurred expenses for the base
period are $1,000,000 and the administrative expenses for the base
period are $100,000. The plan administrator determines that under
the self-funded portion of the plan, the claims incurred for the
base period that would have been denied under the terms of the plan
absent the amendment are $0 because the self-funded portion does not
cover mental health benefits and the plan's administrative costs
attributable to complying with the requirements of this section are
$1,000. The issuer determines that under the insured portion of the
plan, the claims incurred for the base period that would have been
denied under the terms of the plan absent the amendment are $25,000
and the administrative costs attributable to complying with the
requirements of this section are $1,000. Thus, the total incurred
expenditures for the plan for the base period are $3,300,000
($2,000,000 + $200,000 + $1,000,000 + $100,000 = $3,300,000) and the
total amount of expenditures for the base period had the plan not
been amended to comply with the requirements of paragraph (b)(1)(i)
of this section are $3,273,000 ($3,300,000-($0 + $1,000 + $25,000 +
$1,000) = $3,273,000).
(ii) In this Example 3, the plan does not satisfy the
requirements of this paragraph (f)(2) because the application of
this section does not result in an increased cost of at least one
percent under the terms of the plan ($3,300,000/$3,273,000 =
1.00825).

[[Page 66956]]

information required under paragraph (f)(4) of this section.
(B) Use of summary of material reductions in covered services or
benefits. A plan may satisfy the requirements of paragraph (f)(3)(i)(A)
of this section by providing participants and beneficiaries (in
accordance with paragraph (f)(3)(i)(C) of this section) with a summary
of material reductions in covered services or benefits required under
29 CFR 2520.104b-3(d) that also includes the information of this
paragraph (f)(3)(i). However, in all cases, the exemption is not
effective until 30 days after notice has been sent.
(C) Delivery. The notice described in this paragraph (f)(3)(i) is
required to be provided to all participants and beneficiaries. The
notice may be furnished by any method of delivery that satisfies the
requirements of section 104(b)(1) of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1024(b)(1)) (e.g., first-class mail).
If the notice is provided to the participant at the participant's last
known address, then the requirements of this paragraph (f)(3)(i) are
satisfied with respect to the participant and all beneficiaries
residing at that address. If a beneficiary's last known address is
different from the participant's last known address, a separate notice
is required to be provided to the beneficiary at the beneficiary's last
known address.
(D) Example. The rules of this paragraph (f)(3)(i) are illustrated
by the following example:

Example. (i) A group health plan has a plan year that is the
calendar year and has an open enrollment period every November 1
through November 30. The plan determines on September 15 that it
satisfies the requirements of paragraph (f)(2) of this section. As
part of its open enrollment materials, the plan mails, on October
15, to all participants and beneficiaries a notice satisfying the
requirements of this paragraph (f)(3)(i).
(ii) In this Example, the plan has sent the notice in a manner
that complies with this paragraph (f)(3)(i).

(ii) Federal agencies. A group health plan that is a church plan
(as defined in section 414(e)) claiming the exemption of this paragraph
(f) for any benefit package must provide notice in accordance with the
requirement of this paragraph (f)(3)(ii). This requirement is satisfied
if the plan sends a copy, to the address designated by the Secretary in
generally applicable guidance, of the notice described in paragraph
(f)(3)(i) of this section identifying the benefit package to which the
exemption applies. For any other group health plan, see 29 CFR
2590.712(f)(3)(ii)(B).
(4) Availability of documentation. The plan must make available to
participants and beneficiaries (or their representatives), on request
and at no charge, a summary of the information on which the exemption
was based. An individual who is not a participant or beneficiary and
who presents a notice described in paragraph (f)(3)(i) of this section
is considered to be a representative. A representative may request the
summary of information by providing the plan a copy of the notice
provided to the participant under paragraph (f)(3)(i) of this section
with any individually identifiable information redacted. The summary of
information must include the incurred expenditures, the base period,
the dollar amount of claims incurred during the base period that would
have been denied under the terms of the plan absent amendments required
to comply with paragraph (b)(1)(i) of this section, the administrative
costs related to those claims, and other administrative costs
attributable to complying with the requirements of this section. In no
event should the summary of information include any individually
identifiable information.
(g) Special rules for group health insurance coverage--(1) Sale of
nonparity policies. See 29 CFR 2590.712(g)(1) and 45 CFR 146.136(g)(1)
for rules limiting the right of an issuer to sell a policy without
parity (as described in 29 CFR 2590.712(b) and 45 CFR 146.136(b)) to a
plan that meets the requirements of 29 CFR 2590.712 (e) or (f) and 45
CFR 146.136 (e) or (f)).
(2) Duration of exemption. After a plan meets the requirements of
paragraph (f) of this section, the plan may change issuers without
having to meet the requirements of paragraph (f) of this section again
before September 30, 2001.
(h) Effective dates--(1) In general. The requirements of this
section are applicable for plan years beginning on or after January 1,
1998.
(2) Limitation on actions. (i) Except as provided in paragraph
(h)(3) of this section, no enforcement action is to be taken by the
Secretary against a group health plan that has sought to comply in good
faith with the requirements of section 9812, with respect to a
violation that occurs before the earlier of--
(A) The first day of the first plan year beginning on or after
April 1, 1998; or
(B) January 1, 1999.
(ii) Compliance with the requirements of this section is deemed to
be good faith compliance with the requirements of section 9812.
(iii) The rules of this paragraph (h)(2) are illustrated by the
following examples:

Example 1. (i) A group health plan has a plan year that is the
calendar year. The plan complies with section 9812 in good faith
using assumptions inconsistent with paragraph (b)(6) of this section
relating to weighted averages for categories of benefits.
(ii) In this Example 1, no enforcement action may be taken
against the plan with respect to a violation resulting solely from
those assumptions and occurring before January 1, 1999.
Example 2. (i) A group health plan has a plan year that is the
calendar year. For the entire 1998 plan year, the plan applies a
$1,000,000 annual limit on medical/surgical benefits and a $100,000
annual limit on mental health benefits.
(ii) In this Example 2, the plan has not sought to comply with
the requirements of section 9812 in good faith, and this paragraph
(h)(2) does not apply.

[[Page 66957]]

(2) The name, address, and telephone number of the plan
administrator;
(3) For single-employer plans, the name, address, and telephone
number of the plan sponsor (if different from the plan administrator)
and the plan sponsor's employer identification number (EIN);
(4) The name and telephone number of the individual to contact for
further information; and
(5) The signature of the plan administrator and the date of the
signature.
(B) The notice must be provided at no charge to participants or
their representative within 15 days after receipt of a written or oral
request for such notification, but in no event before the notice has
been sent to the applicable federal agency.
(i) Sunset. This section does not apply to benefits for services
furnished on or after September 30, 2001.

Dated: December 16, 1997.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: December 16, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.

Pension and Welfare Benefits Administration

29 CFR Chapter XXV

29 CFR Part 2590 is amended as follows:

PART 2590--RULES AND REGULATIONS FOR HEALTH INSURANCE PORTABILITY
AND RENEWABILITY FOR GROUP HEALTH PLANS

1. The authority citation for Part 2590 is revised to read as
follows:

Authority: Secs. 107, 209, 505, 701-703, 711, 712, and 731-734
of ERISA (29 U.S.C. 1027, 1059, 1135, 1171-1173, 1181, 1182, and
1191-1194), as amended by Pub. L. 104-191, 110 Stat. 1936 and Pub.
L. 104-204, 110 Stat. 2944; and Secretary of Labor's Order No. 1-87,
52 FR 13139, April 21, 1987.

Subpart B--Other Requirements

2. Section 2590.712 is revised to read as follows:

Sec. 2590.712 Parity in the application of certain limits to mental
health benefits.

(a) Definitions. For purposes of this section, except where the
context clearly indicates otherwise, the following definitions apply:
Aggregate lifetime limit means a dollar limitation on the total
amount of specified benefits that may be paid under a group health plan
(or group health insurance coverage offered in connection with such a
plan) for an individual (or for a group of individuals considered a
single unit in applying this dollar limitation, such as a family or an
employee plus spouse).
Annual limit means a dollar limitation on the total amount of
specified benefits that may be paid in a 12-month period under a plan
(or group health insurance coverage offered in connection with such a
plan) for an individual (or for a group of individuals considered a
single unit in applying this dollar limitation, such as a family or an
employee plus spouse).
Medical/surgical benefits means benefits for medical or surgical
services, as defined under the terms of the plan or group health
insurance coverage, but does not include mental health benefits.
Mental health benefits means benefits for mental health services,
as defined under the terms of the plan or group health insurance
coverage, but does not include benefits for treatment of substance
abuse or chemical dependency.
(b) Requirements regarding limits on benefits--(1)--general--(i)
General parity requirement. A group health plan (or health insurance
coverage offered by an issuer in connection with a group health plan)
that provides both medical/surgical benefits and mental health benefits
must comply with paragraph (b)(2), (3), or (6) of this section.
(ii) Exception. The rule in paragraph (b)(1)(i) of this section
does not apply if a plan, or coverage, satisfies the requirements of
paragraph (e) or (f) of this section.
(2) Plan with no limit or limits on less than one-third of all
medical/surgical benefits. If a plan (or group health insurance
coverage) does not include an aggregate lifetime or annual limit on any
medical/surgical benefits or includes aggregate lifetime or annual
limits that apply to less than one-third of all medical/surgical
benefits, it may not impose an aggregate lifetime or annual limit,
respectively, on mental health benefits.
(3) Plan with a limit on at least two-thirds of all medical/
surgical benefits. If a plan (or group health insurance coverage)
includes an aggregate lifetime or annual limit on at least two-thirds
of all medical/surgical benefits, it must either--
(i) Apply the aggregate lifetime or annual limit both to the
medical/surgical benefits to which the limit would otherwise apply and
to mental health benefits in a manner that does not distinguish between
the medical/surgical and mental health benefits; or
(ii) Not include an aggregate lifetime or annual limit on mental
health benefits that is less than the aggregate lifetime or annual
limit, respectively, on the medical/surgical benefits.
(4) Examples. The rules of paragraphs (b)(2) and (3) of this
section are illustrated by the following examples:

[[Page 66958]]

annual limit on mental health benefits. The plan included benefits
for treatment of substance abuse and chemical dependency in its
definition of mental health benefits. Accordingly, claims paid for
treatment of substance abuse and chemical dependency were counted in
applying the annual limit on mental health benefits. To comply with
the parity requirements of this paragraph (b), the plan sponsor is
considering each of the following options:
(A) Making no change in the plan so that claims paid for
treatment of substance abuse and chemical dependency continue to
count in applying the annual limit on mental health benefits;
(B) Amending the plan to count claims paid for treatment of
substance abuse and chemical dependency in applying the annual limit
on medical/surgical benefits (rather than counting those claims in
applying the annual limit on mental health benefits);
(C) Amending the plan to provide a new category of benefits for
treatment of chemical dependency and substance abuse that is subject
to a separate, lower limit and under which claims paid for treatment
of substance abuse and chemical dependency are counted only in
applying the annual limit on this separate category; and
(D) Amending the plan to eliminate distinctions between medical/
surgical benefits and mental health benefits and establishing an
overall limit on benefits offered under the plan under which claims
paid for treatment of substance abuse and chemical dependency are
counted with medical/surgical benefits and mental health benefits in
applying the overall limit.
(ii) In this Example 4, the group health plan is described in
paragraph (b)(3) of this section. Because mental health benefits are
defined in paragraph (a) of this section as excluding benefits for
treatment of substance abuse and chemical dependency, the inclusion
of benefits for treatment of substance abuse and chemical dependency
in applying an aggregate lifetime limit or annual limit on mental
health benefits under option (A) of this Example 4 would not comply
with the requirements of paragraph (b)(3) of this section. However,
options (B), (C), and (D) of this Example 4 would comply with the
requirements of paragraph (b)(3) of this section because they offer
parity in the dollar limits placed on medical/surgical and mental
health benefits.

(5) Determining one-third and two-thirds of all medical/surgical
benefits. For purposes of this paragraph (b), the determination of
whether the portion of medical/surgical benefits subject to a limit
represents one-third or two-thirds of all medical/surgical benefits is
based on the dollar amount of all plan payments for medical/surgical
benefits expected to be paid under the plan for the plan year (or for
the portion of the plan year after a change in plan benefits that
affects the applicability of the aggregate lifetime or annual limits).
Any reasonable method may be used to determine whether the dollar
amounts expected to be paid under the plan will constitute one-third or
two-thirds of the dollar amount of all plan payments for medical/
surgical benefits.
(6) Plan not described in paragraph (b)(2) or (3) of this section--
(i) In general. A group health plan (or group health insurance
coverage) that is not described in paragraph (b)(2) or (3) of this
section, must either--
(A) Impose no aggregate lifetime or annual limit, as appropriate,
on mental health benefits; or
(B) Impose an aggregate lifetime or annual limit on mental health
benefits that is no less than an average limit calculated for medical/
surgical benefits in the following manner. The average limit is
calculated by taking into account the weighted average of the aggregate
lifetime or annual limits, as appropriate, that are applicable to the
categories of medical/surgical benefits. Limits based on delivery
systems, such as inpatient/outpatient treatment or normal treatment of
common, low-cost conditions (such as treatment of normal births), do
not constitute categories for purposes of this paragraph (b)(6)(i)(B).
In addition, for purposes of determining weighted averages, any
benefits that are not within a category that is subject to a
separately-designated limit under the plan are taken into account as a
single separate category by using an estimate of the upper limit on the
dollar amount that a plan may reasonably be expected to incur with
respect to such benefits, taking into account any other applicable
restrictions under the plan.
(ii) Weighting. For purposes of this paragraph (b)(6), the
weighting applicable to any category of medical/surgical benefits is
determined in the manner set forth in paragraph (b)(5) of this section
for determining one-third or two-thirds of all medical/surgical
benefits.
(iii) Example. The rules of this paragraph (b)(6) are illustrated
by the following example:

[[Page 66959]]

health plan with respect to a calendar year and a plan year, an
employer who employed an average of at least two but not more than 50
employees on business days during the preceding calendar year and who
employs at least two employees on the first day of the plan year. See
section 732(a) of the Act and Sec. 2590.732(a), which provide that this
section (and certain other sections) does not apply to any group health
plan (and health insurance issuer offering coverage in connection with
a group health plan) for any plan year if, on the first day of the plan
year, the plan has fewer than two participants who are current
employees.
(2) Rules in determining employer size. For purposes of paragraph
(e)(1) of this section--
(i) All persons treated as a single employer under subsections (b),
(c), (m), and (o) of section 414 of the Internal Revenue Code of 1986
(26 U.S.C. 414) are treated as one employer;
(ii) If an employer was not in existence throughout the preceding
calendar year, whether it is a small employer is determined based on
the average number of employees the employer reasonably expects to
employ on business days during the current calendar year; and
(iii) Any reference to an employer for purposes of the small
employer exemption includes a reference to a predecessor of the
employer.
(f) Increased cost exemption--(1) In general. A group health plan
(or health insurance coverage offered in connection with a group health
plan) is not subject to the requirements of this section if the
requirements of this paragraph (f) are satisfied. If a plan offers more
than one benefit package, this paragraph (f) applies separately to each
benefit package. Except as provided in paragraph (h) of this section, a
plan must comply with the requirements of paragraph (b)(1)(i) of this
section for the first plan year beginning on or after January 1, 1998,
and must continue to comply with the requirements of paragraph
(b)(1)(i) of this section until the plan satisfies the requirements in
this paragraph (f). In no event is the exemption of this paragraph (f)
effective until 30 days after the notice requirements in paragraph
(f)(3) of this section are satisfied. If the requirements of this
paragraph (f) are satisfied with respect to a plan, the exemption
continues in effect (at the plan's discretion) until September 30,
2001, even if the plan subsequently purchases a different policy from
the same or a different issuer and regardless of any other changes to
the plan's benefit structure.
(2) Calculation of the one-percent increase--(i) Ratio. A group
health plan (or group health insurance coverage) satisfies the
requirements of this paragraph (f)(2) if the application of paragraph
(b)(1)(i) of this section to the plan (or to such coverage) results in
an increase in the cost under the plan (or for such coverage) of at
least one percent. The application of paragraph (b)(1)(i) of this
section results in an increased cost of at least one percent under a
group health plan (or for such coverage) only if the ratio below equals
or exceeds 1.01000. The ratio is determined as follows:
(A) The incurred expenditures during the base period, divided by,
(B) The incurred expenditures during the base period, reduced by--
(1) The claims incurred during the base period that would have been
denied under the terms of the plan absent plan amendments required to
comply with this section; and
(2) Administrative expenses attributable to complying with the
requirements of this section.
(ii) Formula. The ratio of paragraph (f)(2)(i) of this section is
expressed mathematically as follows:
[GRAPHIC] [TIFF OMITTED] TR22DE97.003

(A) IE means the incurred expenditures during the base period.
(B) CE means the claims incurred during the base period that would
have been denied under the terms of the plan absent plan amendments
required to comply with this section
(C) AE means administrative costs related to claims in CE and other
administrative costs attributable to complying with the requirements of
this section.
(iii) Incurred expenditures. Incurred expenditures means actual
claims incurred during the base period and reported within two months
following the base period, and administrative costs for all benefits
under the group health plan, including mental health benefits and
medical/surgical benefits, during the base period. Incurred
expenditures do not include premiums.
(iv) Base period. Base period means the period used to calculate
whether the plan may claim the one-percent increased cost exemption in
this paragraph (f). The base period must begin on the first day in any
plan year that the plan complies with the requirements of paragraph
(b)(1)(i) of this section and must extend for a period of at least six
consecutive calendar months. However, in no event may the base period
begin prior to September 26, 1996 (the date of enactment of the Mental
Health Parity Act (Pub. L. 104-204, 110 Stat. 2944)).
(v) Rating pools. For plans that are combined in a pool for rating
purposes, the calculation under this paragraph (f)(2) for each plan in
the pool for the base period is based on the incurred expenditures of
the pool, whether or not all the plans in the pool have participated in
the pool for the entire base period. (However, only the plans that have
complied with paragraph (b)(1)(i) of this section for at least six
months as a member of the pool satisfy the requirements of this
paragraph (f)(2).) Otherwise, the calculation under this paragraph
(f)(2) for each plan is calculated by the plan administrator (or
issuer) based on the incurred expenditures of the plan.
(vi) Examples. The rules of this paragraph (f)(2) are illustrated
by the following examples:

[[Page 66960]]

(f)(2) and a plan that purchases a policy not complying with the
requirements of paragraph (b)(1)(i) of this section violates the
requirements of this section. In addition, an issuer that issues to
any of the plans in the pool a policy not complying with the
requirements of paragraph (b)(1)(i) of this section violates the
requirements of this section.
Example 3. (i) A partially insured plan is collecting the
information to determine whether it qualifies for the exemption. The
plan administrator determines the incurred expenses for the base
period for the self-funded portion of the plan to be $2,000,000 and
the administrative expenses for the base period for the self-funded
portion to be $200,000. For the insured portion of the plan, the
plan administrator requests data from the insurer. For the insured
portion of the plan, the plan's own incurred expenses for the base
period are $1,000,000 and the administrative expenses for the base
period are $100,000. The plan administrator determines that under
the self-funded portion of the plan, the claims incurred for the
base period that would have been denied under the terms of the plan
absent the amendment are $0 because the self-funded portion does not
cover mental health benefits and the plan's administrative costs
attributable to complying with the requirements of this section are
$1,000. The issuer determines that under the insured portion of the
plan, the claims incurred for the base period that would have been
denied under the terms of the plan absent the amendment are $25,000
and the administrative costs attributable to complying with the
requirements of this section are $1,000. Thus, the total incurred
expenditures for the plan for the base period are $3,300,000
($2,000,000 + $200,000 + $1,000,000 + $100,000 = $3,300,000) and the
total amount of expenditures for the base period had the plan not
been amended to comply with the requirements of paragraph (b)(1)(i)
of this section are $3,273,000 ($3,300,000-($0 + $1,000 + $25,000 +
$1,000) = $3,273,000).
(ii) In this Example 3, the plan does not satisfy the
requirements of this paragraph (f)(2) because the application of
this section does not result in an increased cost of at least one
percent under the terms of the plan ($3,300,000/$3,273,000 =
1.00825).

(3) Notice of exemption--(i) Participants and beneficiaries--(A) In
general. A group health plan must notify participants and beneficiaries
of the plan's decision to claim the one-percent increased cost
exemption. The notice must include the following information:
(1) A statement that the plan is exempt from the requirements of
this section and a description of the basis for the exemption;
(2) The name and telephone number of the individual to contact for
further information;
(3) The plan name and plan number (PN);
(4) The plan administrator's name, address, and telephone number;
(5) For single-employer plans, the plan sponsor's name, address,
and telephone number (if different from paragraph (f)(3)(i)(A)(3) of
this section) and the plan sponsor's employer identification number
(EIN);
(6) The effective date of the exemption;
(7) The ability of participants and beneficiaries to contact the
plan administrator to see how benefits may be affected as a result of
the plan's claim of the exemption; and
(8) The availability, upon request and free of charge, of a summary
of the information required under paragraph (f)(4) of this section.
(B) Use of summary of material reductions in covered services or
benefits. A plan may satisfy the requirements of paragraph (f)(3)(i)(A)
of this section by providing participants and beneficiaries (in
accordance with paragraph (f)(3)(i)(C) of this section) with a summary
of material reductions in covered services or benefits required under
Sec. 2520.104b-3(d) that also includes the information of this
paragraph (f)(3)(i). However, in all cases, the exemption is not
effective until 30 days after notice has been sent.
(C) Delivery. The notice described in this paragraph (f)(3)(i) is
required to be provided to all participants and beneficiaries. The
notice may be furnished by any method of delivery that satisfies the
requirements of section 104(b)(1) of ERISA (e.g., first-class mail). If
the notice is provided to the participant at the participant's last
known address, then the requirements of this paragraph (f)(3)(i) are
satisfied with respect to the participant and all beneficiaries
residing at that address. If a beneficiary's last known address is
different from the participant's last known address, a separate notice
is required to be provided to the beneficiary at the beneficiary's last
known address.
(D) Example. The rules of this paragraph (f)(3)(i) are illustrated
by the following example:

[[Page 66961]]

include any individually identifiable information.
(g) Special rules for group health insurance coverage--(1) Sale of
nonparity policies. An issuer may sell a policy without parity (as
described in paragraph (b) of this section) only to a plan that meets
the requirements of paragraphs (e) or (f) of this section.
(2) Duration of exemption. After a plan meets the requirements of
paragraph (f) of this section, the plan may change issuers without
having to meet the requirements of paragraph (f) of this section again
before September 30, 2001.
(h) Effective dates--(1) In general. The requirements of this
section are applicable for plan years beginning on or after January 1,
1998.
(2) Limitation on actions. (i) Except as provided in paragraph
(h)(3) of this section, no enforcement action is to be taken by the
Secretary against a group health plan that has sought to comply in good
faith with the requirements of section 712 of the Act, with respect to
a violation that occurs before the earlier of--
(A) The first day of the first plan year beginning on or after
April 1, 1998; or
(B) January 1, 1999.
(ii) Compliance with the requirements of this section is deemed to
be good faith compliance with the requirements of section 712 of Part 7
of Subtitle B of Title I of ERISA.
(iii) The rules of this paragraph (h)(2) are illustrated by the
following examples:

Example 1. (i) A group health plan has a plan year that is the
calendar year. The plan complies with section 712 of Part 7 of
Subtitle B of Title I of ERISA in good faith using assumptions
inconsistent with paragraph (b)(6) of this section relating to
weighted averages for categories of benefits.
(ii) In this Example 1, no enforcement action may be taken
against the plan with respect to a violation resulting solely from
those assumptions and occurring before January 1, 1999.
Example 2. (i) A group health plan has a plan year that is the
calendar year. For the entire 1998 plan year, the plan applies a
$1,000,000 annual limit on medical/surgical benefits and a $100,000
annual limit on mental health benefits.
(ii) In this Example 2, the plan has not sought to comply with
the requirements of section 712 of the Act in good faith and this
paragraph (h)(2) does not apply.

(3) Transition period for increased cost exemption--(i) In general.
No enforcement action will be taken against a group health plan that is
subject to the requirements of this section based on a violation of
this section that occurs before April 1, 1998 solely because the plan
claims the increased cost exemption under section 712(c)(2) of Part 7
of Subtitle B of Title I of ERISA based on assumptions inconsistent
with the rules under paragraph (f) of this section, provided that a
plan amendment that complies with the requirements of paragraph
(b)(1)(i) of this section is adopted and effective no later than March
31, 1998 and the plan complies with the notice requirements in
paragraph (h)(3)(ii) of this section.
(ii) Notice of plan's use of transition period. (A) A group health
plan satisfies the requirements of this paragraph (h)(3)(ii) only if
the plan provides notice to the applicable federal agency and posts
such notice at the location(s) where documents must be made available
for examination by participants and beneficiaries under section
104(b)(2) of ERISA and the regulations thereunder (29 CFR 2520.104b-
1(b)(3)). The notice must indicate the plan's decision to use the
transition period in paragraph (h)(3)(i) of this section by 30 days
after the first day of the plan year beginning on or after January 1,
1998, but in no event later than March 31, 1998. For a group health
plan that is a church plan, the applicable federal agency is the
Department of the Treasury. For a group health plan that is subject to
Part 7 of Subtitle B of Title I of ERISA, the applicable federal agency
is the Department of Labor. For a group health plan that is a
nonfederal governmental plan, the applicable federal agency is the
Department of Health and Human Services. The notice must include--
(1) The name of the plan and the plan number (PN);
(2) The name, address, and telephone number of the plan
administrator;
(3) For single-employer plans, the name, address, and telephone
number of the plan sponsor (if different from the plan administrator)
and the plan sponsor's employer identification number (EIN);
(4) The name and telephone number of the individual to contact for
further information; and
(5) The signature of the plan administrator and the date of the
signature.
(B) The notice must be provided at no charge to participants or
their representative within 15 days after receipt of a written or oral
request for such notification, but in no event before the notice has
been sent to the applicable federal agency.
(i) Sunset. This section does not apply to benefits for services
furnished on or after September 30, 2001.

Signed at Washington, DC, this 16th day of December, 1997.
Olena Berg,
Assistant Secretary, Pension Welfare Benefits Administration, U.S.
Department of Labor.

Health Care Financing Administration

45 CFR Subtitle A, Subchapter B

45 CFR Part 146 is amended as follows:

PART 146--REQUIREMENTS FOR THE GROUP HEALTH INSURANCE MARKET

1. The authority citation for Part 146 is revised to read as
follows:

Authority: Secs. 2701 through 2763, 2791, and 2792 of the PHS
Act (42 U.S.C. 300gg through 300gg-63, 300gg-91, and 300gg-92).

2. A new Subpart C is added to Part 146 to read as follows:

Subpart C--Requirements Related to Benefits

Sec. 146.136 Parity in the application of certain limits to mental
health benefits.

[[Page 66962]]

health plan) that provides both medical/surgical benefits and mental
health benefits must comply with paragraph (b)(2), paragraph (b)(3), or
paragraph (b)(6) of this section.
(ii) Exception. The rule in paragraph (b)(1)(i) of this section
does not apply if a plan, or coverage, satisfies the requirements of
paragraph (e) or paragraph (f) of this section.
(2) Plan with no limit or limits on less than one-third of all
medical/surgical benefits. If a plan (or group health insurance
coverage) does not include an aggregate lifetime or annual limit on any
medical/surgical benefits or includes aggregate lifetime or annual
limits that apply to less than one-third of all medical/surgical
benefits, it may not impose an aggregate lifetime or annual limit,
respectively, on mental health benefits.
(3) Plan with a limit on at least two-thirds of all medical/
surgical benefits. If a plan (or group health insurance coverage)
includes an aggregate lifetime or annual limit on at least two-thirds
of all medical/surgical benefits, it must either--
(i) Apply the aggregate lifetime or annual limit both to the
medical/surgical benefits to which the limit would otherwise apply and
to mental health benefits in a manner that does not distinguish between
the medical/surgical and mental health benefits; or
(ii) Not include an aggregate lifetime or annual limit on mental
health benefits that is less than the aggregate lifetime or annual
limit, respectively, on the medical/surgical benefits.
(4) Examples. The rules of paragraphs (b) (2) and (3) of this
section are illustrated by the following examples:

Example 2. (i) Prior to the effective date of the mental health
parity provisions, a group health plan had a $100,000 annual limit
on medical/surgical inpatient benefits, a $50,000 annual limit on
medical/surgical outpatient benefits, and a $100,000 annual limit on
all mental health benefits. To comply with the parity requirements
of this paragraph (b), the plan sponsor is considering each of the
following options:
(A) Replacing the plan's previous annual limit on mental health
benefits with a $150,000 annual limit on mental health benefits; and
(B) Replacing the plan's previous annual limit on mental health
benefits with a $100,000 annual limit on mental health inpatient
benefits and a $50,000 annual limit on mental health outpatient
benefits.
(ii) In this Example 2, each option under consideration by the
plan sponsor would comply with the requirements of this section
because they offer parity in the dollar limits placed on medical/
surgical and mental health benefits.
Example 3. (i) A group health plan that is subject to the
requirements of this section has no aggregate lifetime or annual
limit for either medical/surgical benefits or mental health
benefits. While the plan provides medical/surgical benefits with
respect to both network and out-of-network providers, it does not
provide mental health benefits with respect to out-of-network
providers.
(ii) In this Example 3, the plan complies with the requirements
of this section because they offer parity in the dollar limits
placed on medical/surgical and mental health benefits.
Example 4. (i) Prior to the effective date of the mental health
parity provisions, a group health plan had an annual limit on
medical/surgical benefits and a separate but identical annual limit
on mental health benefits. The plan included benefits for treatment
of substance abuse and chemical dependency in its definition of
mental health benefits. Accordingly, claims paid for treatment of
substance abuse and chemical dependency were counted in applying the
annual limit on mental health benefits. To comply with the parity
requirements of this paragraph (b), the plan sponsor is considering
each of the following options:
(A) Making no change in the plan so that claims paid for
treatment of substance abuse and chemical dependency continue to
count in applying the annual limit on mental health benefits;
(B) Amending the plan to count claims paid for treatment of
substance abuse and chemical dependency in applying the annual limit
on medical/surgical benefits (rather than counting those claims in
applying the annual limit on mental health benefits);
(C) Amending the plan to provide a new category of benefits for
treatment of chemical dependency and substance abuse that is subject
to a separate, lower limit and under which claims paid for treatment
of substance abuse and chemical dependency are counted only in
applying the annual limit on this separate category; and
(D) Amending the plan to eliminate distinctions between medical/
surgical benefits and mental health benefits and establishing an
overall limit on benefits offered under the plan under which claims
paid for treatment of substance abuse and chemical dependency are
counted with medical/surgical benefits and mental health benefits in
applying the overall limit.
(ii) In this Example 4, the group health plan is described in
paragraph (b)(3) of this section. Because mental health benefits are
defined in paragraph (a) of this section as excluding benefits for
treatment of substance abuse and chemical dependency, the inclusion
of benefits for treatment of substance abuse and chemical dependency
in applying an aggregate lifetime limit or annual limit on mental
health benefits under option (A) of this Example 4 would not comply
with the requirements of paragraph (b)(3) of this section. However,
options (B), (C), and (D) of this Example 4 would comply with the
requirements of paragraph (b)(3) of this section because they offer
parity in the dollar limits placed on medical/surgical and mental
health benefits.

(5) Determining one-third and two-thirds of all medical/surgical
benefits. For purposes of this paragraph (b), the determination of
whether the portion of medical/surgical benefits subject to a limit
represents one-third or two-thirds of all medical/surgical benefits is
based on the dollar amount of all plan payments for medical/surgical
benefits expected to be paid under the plan for the plan year (or for
the portion of the plan year after a change in plan benefits that
affects the applicability of the aggregate lifetime or annual limits).
Any reasonable method may be used to determine whether the dollar
amounts expected to be paid under the plan will constitute one-third or
two-thirds of the dollar amount of all plan payments for medical/
surgical benefits.
(6) Plan not described in paragraph (b)(2) or paragraph (b)(3) of
this section--(i) In general. A group health plan (or group health
insurance coverage) that is not described in paragraph (b)(2) or
paragraph (b)(3) of this section, must either impose--
(A) No aggregate lifetime or annual limit, as appropriate, on
mental health benefits; or
(B) An aggregate lifetime or annual limit on mental health benefits
that is no less than an average limit for medical/surgical benefits
calculated in the following manner. The average limit is calculated by
taking into account the weighted average of the aggregate lifetime or
annual limits, as appropriate, that are applicable to the categories of
medical/surgical benefits. Limits based on delivery systems, such as
inpatient/outpatient treatment, or normal treatment of common, low-cost
conditions (such as treatment of normal births), do not constitute
categories for purposes of this paragraph (b)(6)(i)(B). In addition,
for purposes of determining

[[Page 66963]]

weighted averages, any benefits that are not within a category that is
subject to a separately-designated limit under the plan are taken into
account as a single separate category by using an estimate of the upper
limit on the dollar amount that a plan may reasonably be expected to
incur with respect to such benefits, taking into account any other
applicable restrictions under the plan.
(ii) Weighting. For purposes of this paragraph (b)(6), the
weighting applicable to any category of medical/surgical benefits is
determined in the manner set forth in paragraph (b)(5) of this section
for determining one-third or two-thirds of all medical/surgical
benefits.
(iii) Examples. The rules of this paragraph (b)(6) are illustrated
by the following example:

(c) Rule in the case of separate benefit packages. If a group
health plan offers two or more benefit packages, the requirements of
this section, including the exemption provisions in paragraph (f) of
this section, apply separately to each benefit package. Examples of a
group health plan that offers two or more benefit packages include a
group health plan that offers employees a choice between indemnity
coverage or HMO coverage, and a group health plan that provides one
benefit package for retirees and a different benefit package for
current employees.
(d) Applicability--(1) Group health plans. The requirements of this
section apply to a group health plan offering both medical/surgical
benefits and mental health benefits regardless of whether the mental
health benefits are administered separately under the plan.
(2) Health insurance issuers. The requirements of this section
apply to a health insurance issuer offering health insurance coverage
for both medical/surgical benefits and mental health benefits in
connection with a group health plan.
(3) Scope. This section does not--
(i) Require a group health plan (or health insurance issuer
offering coverage in connection with a group health plan) to provide
any mental health benefits; or
(ii) Affect the terms and conditions (including cost sharing,
limits on the number of visits or days of coverage, requirements
relating to medical necessity, requiring prior authorization for
treatment, or requiring primary care physicians' referrals for
treatment) relating to the amount, duration, or scope of the mental
health benefits under the plan (or coverage) except as specifically
provided in paragraph (b) of this section.
(e) Small employer exemption--(1) In general. The requirements of
this section do not apply to a group health plan (or health insurance
issuer offering coverage in connection with a group health plan) for a
plan year of a small employer. For purposes of this paragraph (e), the
term small employer means, in connection with a group health plan with
respect to a calendar year and a plan year, an employer who employed an
average of at least two but not more than 50 employees on business days
during the preceding calendar year and who employs at least two
employees on the first day of the plan year. See regulations at
Sec. 146.145(a), which provide that this section (and certain other
sections) does not apply to any group health plan (and health insurance
issuer offering coverage in connection with a group health plan) for
any plan year if, on the first day of the plan year, the plan has fewer
than two participants who are current employees.
(2) Rules in determining employer size. For purposes of paragraph
(e)(1) of this section--
(i) All persons treated as a single employer under subsections (b),
(c), (m), and (o) of section 414 of the Internal Revenue Code of 1986
(26 U.S.C. 414) are treated as one employer;
(ii) If an employer was not in existence throughout the preceding
calendar year, whether it is a small employer is determined based on
the average number of employees the employer reasonably expects to
employ on business days during the current calendar year; and
(iii) Any reference to an employer for purposes of the small
employer exemption includes a reference to a predecessor of the
employer.
(f) Increased cost exemption--(1) In general. A group health plan
(or health insurance coverage offered in connection with a group health
plan) is not subject to the requirements of this section if the
requirements of this paragraph (f) are satisfied. If a plan offers more
than one benefit package, this paragraph (f) applies separately to each
benefit package. Except as provided in paragraph (h) of this section, a
plan must comply with the requirements of paragraph (b)(1)(i) of this
section for the first plan year beginning on or after January 1, 1998,
and must continue to comply with the requirements of paragraph
(b)(1)(i) of this section until the plan satisfies the requirements in
this paragraph (f). In no event is the exemption of this paragraph (f)
effective until 30 days after the notice requirements in paragraph
(f)(3) of this section are satisfied. If the requirements of this
paragraph (f) are satisfied with respect to a plan, the exemption
continues in effect (at the plan's discretion) until September 30,
2001, even if the plan subsequently purchases a different policy from
the same or a different issuer and regardless of any other changes to
the plan's benefit structure.
(2) Calculation of the one-percent increase--(i) Ratio. A group
health plan (or group health insurance coverage) satisfies the
requirements of this paragraph (f)(2) if the application of paragraph
(b)(1)(i) of this section to the plan (or to such coverage) results in
an increase in the cost under the plan (or for such coverage) of at
least one percent. The application of paragraph (b)(1)(i) of this
section results in an increased cost of at least one percent under a
group health plan (or for such coverage) only if the ratio below equals
or exceeds 1.01000. The ratio is determined as follows:
(A) The incurred expenditures during the base period, divided by,
(B) The incurred expenditures during the base period, reduced by--
(1) The claims incurred during the base period that would have been
denied under the terms of the plan absent plan amendments required to
comply with this section, and
(2) Administrative expenses attributable to complying with the
requirements of this section.
(ii) Formula. The ratio of paragraph (f)(2)(i) is expressed
mathematically as follows:

[[Page 66964]]

[GRAPHIC] [TIFF OMITTED] TR22DE97.004

(A) IE means the incurred expenditures during the base period.
(B) CE means the claims incurred during the base period that would
have been denied under the terms of the plan absent plan amendments
required to comply with this section.
(C) AE means administrative costs related to claims in CE and other
administrative costs attributable to complying with the requirements of
this section.
(iii) Incurred expenditures. Incurred expenditures means actual
claims incurred during the base period and reported within two months
following the base period, and administrative costs for all benefits
under the group health plan, including mental health benefits and
medical/surgical benefits, during the base period. Incurred
expenditures do not include premiums.
(iv) Base period. Base period means the period used to calculate
whether the plan may claim the one-percent increased cost exemption in
this paragraph (f). The base period must begin on the first day in any
plan year that the plan complies with the requirements of paragraph
(b)(1)(i) of this section and must extend for a period of at least six
consecutive calendar months. However, in no event may the base period
begin prior to September 26, 1996 (the date of enactment of the Mental
Health Parity Act (Pub. L. 104-204, 110 Stat. 2944)).
(v) Rating pools. For plans that are combined in a pool for rating
purposes, the calculation under this paragraph (f)(2) for each plan in
the pool for the base period is based on the incurred expenditures of
the pool, whether or not all the plans in the pool have participated in
the pool for the entire base period. (However, only the plans that have
complied with paragraph (b)(1)(i) of this section for at least six
months as a member of the pool satisfy the requirements of this
paragraph (f)(2).) Otherwise, the calculation under this paragraph
(f)(2) for each plan is calculated by the plan administrator (or
issuer) based on the incurred expenditures of the plan.
(vi) Examples. The rules of this paragraph (f)(2) are illustrated
by the following examples:

Example 1. (i) A group health plan has a plan year that is the
calendar year. The plan satisfies the requirements of paragraph
(b)(1)(i) of this section as of January 1, 1998. On September 15,
1998, the plan determines that $1,000,000 in claims have been
incurred during the period between January 1, 1998 and June 30, 1998
and reported by August 30, 1998. The plan also determines that
$100,000 in administrative costs have been incurred for all benefits
under the group health plan, including mental health benefits. Thus,
the plan determines that its incurred expenditures for the base
period are $1,100,000. The plan also determines that the claims
incurred during the base period that would have been denied under
the terms of the plan absent plan amendments required to comply with
this section are $40,000 and that administrative expenses
attributable to complying with the requirements of this section are
$10,000. Thus, the total amount of expenditures for the base period
had the plan not been amended to comply with the requirements of
paragraph (b)(1)(i) of this section are $1,050,000 ($1,100,000--
($40,000 + $10,000) = $1,050,000).
(ii) In this Example 1, the plan satisfies the requirements of
this paragraph (f)(2) because the application of this section
results in an increased cost of at least one percent under the terms
of the plan ($1,100,000/$1,050,000 = 1.04762).
Example 2. (i) A health insurance issuer sells a group health
insurance policy that is rated on a pooled-basis and is sold to 30
group health plans. One of the group health plans inquires whether
it qualifies for the one percent increased cost exemption. The
issuer performs the calculation for the pool as a whole and
determines that the application of this section results in an
increased cost of 0.500 percent (for a ratio under this paragraph
(f)(2) of 1.00500) for the pool. The issuer informs the requesting
plan and the other plans in the pool of the calculation.
(ii) In this Example 2, none of the plans satisfy the
requirements of this paragraph (f)(2) and a plan that purchases a
policy not complying with the requirements of paragraph (b)(1)(i) of
this section violates the requirements of this section. In addition,
an issuer that issues to any of the plans in the pool a policy not
complying with the requirements of paragraph (b)(1)(i) of this
section violates the requirements of this section.
Example 3. (i) A partially-insured plan is collecting the
information to determine whether it qualifies for the exemption. The
plan administrator determines the incurred expenses for the base
period for the self-funded portion of the plan to be $2,000,000 and
the administrative expenses for the base period for the self-funded
portion to be $200,000. For the insured portion of the plan, the
plan administrator requests data from the insurer. For the insured
portion of the plan, the plan's own incurred expenses for the base
period are $1,000,000 and the administrative expenses for the base
period are $100,000. The plan administrator determines that under
the self-funded portion of the plan, the claims incurred for the
base period that would have been denied under the terms of the plan
absent the amendment are $0 because the self-funded portion does not
cover mental health benefits and the plan's administrative costs
attributable to complying with the requirements of this section are
$1,000. The issuer determines that under the insured portion of the
plan, the claims incurred for the base period that would have been
denied under the terms of the plan absent the amendment are $25,000
and the administrative costs attributable to complying with the
requirements of this section are $1,000. Thus, the total incurred
expenditures for the plan for the base period are $3,300,000
($2,000,000 + $200,000 + $1,000,000 + $100,000 = $3,300,000) and the
total amount of expenditures for the base period had the plan not
been amended to comply with the requirements of paragraph (b)(1)(i)
of this section are $3,273,000 ($3,300,000 - ($0 + $1,000 + $25,000
+ $1,000) = $3,273,000).
(ii) In this Example 3, the plan does not satisfy the
requirements of this paragraph (f)(2) because the application of
this section does not result in an increased cost of at least one
percent under the terms of the plan ($3,300,000/$3,273,000 =
1.00825).

(3) Notice of exemption--(i) Participants and beneficiaries--(A) In
general. A group health plan must notify participants and beneficiaries
of the plan's decision to claim the one percent increased cost
exemption. The notice must include the following information:
(1) A statement that the plan is exempt from the requirements of
this section and a description of the basis for the exemption.
(2) The name and telephone number of the individual to contact for
further information.
(3) The plan name and plan number (PN).
(4) The plan administrator's name, address, and telephone number.
(5) For single-employer plans, the plan sponsor's name, address,
and telephone number (if different from paragraph (f)(3)(i)(A)(3) of
this section) and the plan sponsor's employer identification number
(EIN).
(6) The effective date of such exemption.
(7) The ability of participants and beneficiaries to contact the
plan administrator to see how benefits may be affected as a result of
the plan's election of the exemption.
(8) The availability, upon request and free of charge, of a summary
of the information required under paragraph (f)(4) of this section.
(B) Use of summary of material reductions in covered services or
benefits. A plan may satisfy the requirements of paragraph (f)(3)(i)(A)
by providing participants and beneficiaries (in accordance with
paragraph (f)(3)(i)(C)) with a summary of material reductions in
covered services or benefits consistent with Department of Labor
regulations at 29 CFR 2520.104b-3(d) that also includes the information
of this paragraph (f)(3)(i). However, in all cases, the exemption is
not effective until 30 days after notice has been sent.
(C) Delivery. The notice described in this paragraph (f)(3)(i) is
required to be

[[Page 66965]]

provided to all participants and beneficiaries. The notice may be
furnished by any method of delivery that satisfies the requirements of
section 104(b)(1) of ERISA (29 U.S.C. 1024(b)(1)) (e.g., first-class
mail). If the notice is provided to the participant at the
participant's last known address, then the requirements of this
paragraph (f)(3)(i) are satisfied with respect to the participant and
all beneficiaries residing at that address. If a beneficiary's last
known address is different from the participant's last known address, a
separate notice is required to be provided to the beneficiary at the
beneficiary's last known address.
(D) Example. The rules of this paragraph (f)(3)(i) are illustrated
by the following example:

(ii) Federal agencies--(A) Church plans. A church plan (as defined
in section 414(e) of the Internal Revenue Code) claiming the exemption
of this paragraph (f) for any benefit package must provide notice to
the Department of the Treasury. This requirement is satisfied if the
plan sends a copy, to the address designated by the Secretary in
generally applicable guidance, of the notice described in paragraph
(f)(3)(i) of this section identifying the benefit package to which the
exemption applies.
(B) Group health plans subject to Part 7 of Subtitle B of Title I
of ERISA. A group health plan subject to Part 7 of Subtitle B of Title
I of ERISA, and claiming the exemption of this paragraph (f) for any
benefit package, must provide notice to the Department of Labor. This
requirement is satisfied if the plan sends a copy, to the address
designated by the Secretary in generally applicable guidance, of the
notice described in paragraph (f)(3)(i) of this section identifying the
benefit package to which the exemption applies.
(C) Non-Federal governmental plans. A group health plan that is a
non-Federal governmental plan claiming the exemption of this paragraph
(f) for any benefit package must provide notice to the Department of
Health and Human Services (HHS). This requirement is satisfied if the
plan sends a copy, to the address designated by the Secretary in
generally applicable guidance, of the notice described in paragraph
(f)(3)(i) of this section identifying the benefit package to which the
exemption applies.
(4) Availability of documentation. The plan (or issuer) must make
available to participants and beneficiaries (or their representatives),
on request and at no charge, a summary of the information on which the
exemption was based. An individual who is not a participant or
beneficiary and who presents a notice described in paragraph (f)(3)(i)
of this section is considered to be a representative. A representative
may request the summary of information by providing the plan a copy of
the notice provided to the participant under paragraph (f)(3)(i) of
this section with any individually identifiable information redacted.
The summary of information must include the incurred expenditures, the
base period, the dollar amount of claims incurred during the base
period that would have been denied under the terms of the plan absent
amendments required to comply with paragraph (b)(1)(i) of this section,
the administrative costs related to those claims, and other
administrative costs attributable to complying with the requirements
for the exemption. In no event should the summary of information
include any individually identifiable information.
(g) Special rules for group health insurance coverage--(1) Sale of
nonparity policies. An issuer may sell a policy without parity (as
described in paragraph (b) of this section) only to a plan that meets
the requirements of paragraph (e) or paragraph (f) of this section.
(2) Duration of exemption. After a plan meets the requirements of
paragraph (f) of this section, the plan may change issuers without
having to meet the requirements of paragraph (f) of this section again
before September 30, 2001.
(h) Effective dates--(1) In general. The requirements of this
section are applicable for plan years beginning on or after January 1,
1998.
(2) Limitation on actions. (i) Except as provided in paragraph
(h)(3) of this section, no enforcement action is to be taken by the
Secretary against a group health plan that has sought to comply in good
faith with the requirements of section 2705 of the PHS Act, with
respect to a violation that occurs before the earlier of--
(A) The first day of the first plan year beginning on or after
April 1, 1998; or
(B) January 1, 1999.
(ii) Compliance with the requirements of this section is deemed to
be good faith compliance with the requirements of section 2705 of the
PHS Act.
(iii) The rules of this paragraph (h)(2) are illustrated by the
following examples:

Example 1. (i) A group health plan has a plan year that is the
calendar year. The plan complies with section 2705 of the PHS Act in
good faith using assumptions inconsistent with paragraph (b)(6) of
this section relating to weighted averages for categories of
benefits.
(ii) In this Example 1, no enforcement action may be taken
against the plan with respect to a violation resulting solely from
those assumptions and occurring before January 1, 1999.

Example 2. (i) A group health plan has a plan year that is the
calendar year. For the entire 1998 plan year, the plan applies a
$1,000,000 annual limit on medical/surgical benefits and a $100,000
annual limit on mental health benefits.
(ii) In this Example 2, the plan has not sought to comply with
the requirements of section 2705 of the PHS Act in good faith and
this paragraph (h)(2) does not apply.

[[Page 66966]]

health plan that is subject to Part 7 of Subtitle B of Title I of
ERISA, the applicable federal agency is the Department of Labor. For a
group health plan that is a nonfederal governmental plan, the
applicable federal agency is the Department of Health and Human
Services. The notice must include--
(1) The name of the plan and the plan number (PN);
(2) The name, address, and telephone number of the plan
administrator;
(3) For single-employer plans, the name, address, and telephone
number of the plan sponsor (if different from the plan administrator)
and the plan sponsor's employer identification number (EIN);
(4) The name and telephone number of the individual to contact for
further information; and
(5) The signature of the plan administrator and the date of the
signature.
(B) The notice must be provided at no charge to participants or
their representative within 15 days after receipt of a written or oral
request for such notification, but in no event before the notice has
been sent to the applicable federal agency.
(i) Sunset. This section does not apply to benefits for services
furnished on or after September 30, 2001.

Dated: December 16, 1997.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.
Dated: December 16, 1997.
Donna E. Shalala,
Secretary, Department of Health and Human Services.
[FR Doc. 97-33262 Filed 12-19-97; 8:45 am]
BILLING CODE 4830-01-P; 4510-29-P; 4120-01-P