[Federal Register Volume 63, Number 174 (Wednesday, September 9, 1998)]
[Proposed Rules]
[Pages 48390-48409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23730]



[[Page 48389]]

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Part IV





Department of Labor





_______________________________________________________________________



Pension and Welfare Benefits Administration



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29 CFR Part 2560



Employee Retirement Income Security Act of 1974; Rules and Regulations 
for Administration and Enforcement; Claims Procedure; Proposed Rule

  Federal Register / Vol. 63, No. 174 / Wednesday, September 9, 1998 / 
Proposed Rules  

[[Page 48390]]



DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2560

RIN 1210--AA61


Employee Retirement Income Security Act of 1974; Rules and 
Regulations for Administration and Enforcement; Claims Procedure

AGENCY: Pension and Welfare Benefits Administration, Department of 
Labor.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains a proposed regulation revising the 
minimum requirements for benefit claims procedures of employee benefit 
plans covered by Title I of the Employee Retirement Income Security Act 
of 1974 (ERISA or the Act). This proposed regulation would establish 
new standards for the processing of group health disability, pension, 
and other employee benefit plan claims filed by participants and 
beneficiaries. In the case of group health plans, as well as certain 
plans providing disability benefits, the new standards are intended to 
ensure more timely benefit determinations, improved access to 
information on which a benefit determination is made, and greater 
assurance that participants and beneficiaries will be afforded a full 
and fair review of denied claims. If adopted as final, the proposed 
regulation would affect participants and beneficiaries of employee 
benefit plans, plan fiduciaries, and others who assist in the provision 
of plan benefits, such as third-party benefits administrators and 
health service providers or health maintenance organizations that 
provide benefits to participants and beneficiaries of employee benefit 
plans.

DATES: Written comments (preferably at least three copies) concerning 
the proposed regulation must be received by the Department of Labor on 
or before November 9, 1998.

ADDRESSES: Interested persons are invited to submit written comments 
(preferably at least three copies) concerning the proposed rule to: 
Pension and Welfare Benefits Administration, Office of Regulations and 
Interpretations, Room N-5669, 200 Constitution Ave., N.W., Washington, 
DC 20210. Attention: ``Benefit Claims Regulation.''
    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.

FOR FURTHER INFORMATION CONTACT: Jeffrey J. Turner or Susan G. Lahne, 
Office of Regulations and Interpretations, Pension and Welfare Benefits 
Administration, Department of Labor, 200 Constitution Avenue N.W., 
Washington, D.C. 20210, telephone (202) 219-7461. This is not a toll-
free number.

SUPPLEMENTARY INFORMATION:

A. Background

    Section 503 of Employee Retirement Income Security Act of 1974 
(ERISA or the Act), 29 U.S.C. 1133, provides that every employee 
benefit plan shall, in accordance with regulations of the Department of 
Labor (the Department) ``provide adequate notice in writing to every 
participant or beneficiary whose claim for benefits under the plan has 
been denied, setting forth the specific reasons for such denial, 
written in a manner calculated to be understood by the participant'' 
and shall also ``afford a reasonable opportunity to any participant 
whose claim for benefits has been denied for a full and fair review by 
the appropriate named fiduciary of the decision denying the claim.'' In 
1977, the Department published a regulation pursuant to section 503, 
establishing minimum requirements for benefit claims procedures for 
employee benefit plans. That regulation, 29 CFR 2560.503-1 (the current 
regulation) sets procedural standards that apply without distinction to 
all employee benefit plans covered under Title I of ERISA, including 
employee pension benefit plans and employee welfare benefit plans. The 
current regulation was drafted in response to concerns that predated 
enactment of ERISA, in particular the lack of any uniform procedural 
standards for benefit claims resolution and participants' lack of 
information about claims procedures generally. In order to establish 
procedural safeguards for individuals promised benefits under ERISA, 
the current regulation set minimum requirements for the procedures that 
plans must provide regarding the treatment of benefit claims. The 
standards applicable under the current regulation are described below.
    On September 8, 1997, the Department published in the Federal 
Register (62 FR 47262) a Request for Information (RFI), seeking the 
views of the public on the advisability of amending the current 
regulation. The reasons prompting issuance of the RFI were set forth in 
that document. The RFI articulated a series of questions focusing 
principally on standards and practices for benefit claim procedures 
utilized with respect to group health plans, although the RFI also 
requested information and views on claims procedures more generally. 
The Department received over 90 comment letters in response to the RFI. 
The comment letters came from several distinct groups of interested 
parties: (1) Plan sponsors (employers) and law firms or interest groups 
representing plan sponsors; (2) plan administrators and benefit 
provider networks (including insurance companies, ``managed care'' 
(health benefit provider) networks, third-party administrators, and 
claim processors) and interest groups representing those parties; (3) 
benefit claimants and law firms or interest groups representing benefit 
claimants; and (4) health services providers and interest groups 
representing them. The National Association of Insurance Commissioners 
(NAIC) also submitted a comment referring to the model acts that the 
NAIC has developed for use by states in setting procedural standards 
for claims and grievances under ``managed care'' arrangements. These 
comments presented a broad spectrum of opinion on the diverse questions 
posed in the RFI. The majority of commenters representing employers and 
benefit administrators argued that no change in the current regulation 
is needed, especially as the procedural practices currently in use 
provide substantial protections to claimants in excess of what the 
current regulation requires. The majority of commenters representing 
claimants, however, strongly supported procedural reforms that would 
bring the current regulation more in line with the standards set by the 
NAIC model acts and by the Health Care Financing Administration (HCFA) 
with respect to Medicare beneficiaries who receive managed care 
benefits. The Department believes that the responses represent a fair 
cross-section of public opinion on the issues of whether and in what 
fashion the current regulation should be amended. The Department has 
carefully considered these comments in formulating the proposal. The 
substance of the comments is summarized below as relevant to specific 
changes contained in the proposed regulation.
    The Department's review of the comments received in response to the 
RFI has led the Department to conclude that the procedural standards 
set in the current regulation are no longer adequate to protect 
participants and

[[Page 48391]]

beneficiaries of employee benefit plans. As the Department noted in the 
RFI, dramatic changes in the more than 20 years since adoption of the 
current regulation have altered the systems by which employee benefits 
are delivered and the nature of the benefits themselves. Technological 
advances have revolutionized systems of communications. Business 
relationships, including those involving pension and welfare benefits, 
have become more complex and sophisticated.
    The most dramatic changes have occurred in the health industry. The 
current regulation was adopted at a time when access to health services 
was controlled principally by the independent judgments of physicians 
and other health care professionals. Disputes over health benefits 
almost always took place after the health care services had been 
provided and concerned whether the group health plan or the individual 
patient would pay retrospectively for the care, not whether the plan 
would prospectively authorize coverage for the patient's care. Since 
that time, the growth of managed care delivery systems 1 has 
largely transformed the relationship between patient and health care 
provider. Employee benefit plans that provide health benefits are no 
longer predominantly indemnity-based, and even those that are 
indemnity-based generally require preapproval for expensive procedures 
or hospital admissions. While managed care delivery systems have been 
instrumental in controlling the rapid rise of health care costs and 
may, in many instances, provide valuable services in monitoring the 
quality of health care services provided within a managed care delivery 
system, they also heighten concern about the fair and expeditious 
resolution of benefit disputes. Within managed care delivery systems, 
the separation between medical decision making and decisions on 
coverage under health benefit plans has been substantially eroded, 
particularly since a decision to deny coverage for an expensive medical 
procedure in effect denies that procedure to a participant who cannot 
afford to pay for the procedure on their own. Access to health care 
services may be directly ``managed'' (and thereby controlled) by those 
in charge of coverage under a health benefit plan, rather than by the 
health care professional with whom an individual consults.
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    \1\ The term ``managed care delivery systems,'' as used here, is 
intended to include any measures taken by medical practitioners, 
groups of which medical practitioners are part, insurers, or group 
health plans to control costs by limiting access to medical 
services.
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    In addition to considering the comments received in response to the 
RFI, the Department also took into account, in developing this 
proposal, the recommendations of the President's Advisory Commission on 
Consumer Protection and Quality in the Health Care Industry (the 
Commission), as set forth in its November 20, 1997, report entitled 
``Consumer Bill of Rights and Responsibilities'' (the Consumer Bill of 
Rights). Among other things, the Consumer Bill of Rights articulates 
the right of all ``health care consumers'' (including participants and 
beneficiaries in group health plans covered by ERISA) ``to a fair and 
efficient process for resolving differences with their health plans, 
health care providers, and the institutions that serve them, including 
a rigorous system of internal review and an independent system of 
external review.'' In its Report to the President on February 19, 1998 
(the February 19 Report), the Department set forth specific steps that 
it had determined it could take towards implementation of the 
Commission's recommendations. The following describes the specific 
commitments with regard to health benefits that the Department made in 
the February 19 Report, together with references to the specific 
provisions in the proposal that carry out those commitments:
     The Report indicated that the Department could make clear 
that a denial includes adverse determinations under a utilization 
review program; denials of access to (or reimbursement for) medical 
services; denials of access to (or reimbursement for) specialists; and 
any decision that a service, treatment, drug, or other benefit is not 
medically necessary. The proposal provides at paragraph (j)(2) for a 
definition of ``adverse benefit determination'' that specifically 
includes these denials.2
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    \2\ The proposal adopts the concept of ``adverse benefit 
determination'' as a substitute for the less precise concept of 
``denial'' under the current regulation. This term is defined to 
include not only refusals to provide or make payment (in whole or in 
part) for a benefit, but also any terminations or reductions in 
providing or paying benefits. The term also expressly includes any 
such refusal that results from the application of a utilization 
review directed at cost containment, such as the common current 
requirement in ``managed care'' and many fee-for-service health 
arrangements for ``pre-certification'' or ``pre-authorization'' of 
coverage, and any failure to cover an item of service for which 
benefits are otherwise available on the basis that the item is 
``experimental,'' ``investigational,'' or ``not medically necessary 
or appropriate.'' Prop. Reg. Sec. 2560.503-1(j)(2). The Department 
solicits comments on this definition.
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     The Report indicated that the Department could require 
that benefit claims and appeals involving urgent care be processed 
within a time frame appropriate to the medical emergency, but not to 
exceed 72 hours. The proposal creates expedited time frames for 
``claims involving urgent care'' at paragraphs (d)(2)(i) and 
(g)(2)(ii).
     With respect to non-urgent benefit claims, the Report 
indicated that the Department could require that the plan either decide 
the claim or notify the claimant that the claim is incomplete within 15 
days of receipt of the claim; claimants would then be afforded not less 
than 45 days to provide any information that the plan has indicated is 
necessary to complete the claim; once the claim was complete, it would 
have to be decided within 15 days. The proposal so provides at 
paragraph (d)(2)(iii).
     The Report indicated that the Department could make clear 
that benefit denials must be accompanied by a clear statement of the 
claimant's right to appeal and of the appeal process. The proposal 
mandates this specific disclosure at paragraph (e)(1)(iv).
     The Report indicated that the Department could require 
that, if a non-urgent claim is denied in whole or in part, the claimant 
must be afforded at least 180 days to appeal the claim and a decision 
on the appealed claim must be made within 30 days of receipt of the 
appeal by the plan. The proposal establishes these requirements at 
paragraphs (f)(2)(i)(A) and (g)(2)(i).
     The Report indicated that the Department could require 
consultation with qualified medical professionals in deciding appeals 
involving medical judgments. The proposal imposes this obligation at 
paragraph (f)(2)(ii)(A).
     The Report indicated that the Department could require 
that appealed claims be reviewed de novo (that is, review may not be 
limited to information and documents considered in the initial claims 
denial) and be decided by a party other than the party who made the 
original claims determination. The proposal incorporates these 
requirements in paragraphs (f)(2)(i)(D) and (E).
    Following the Department's submission of its February 19 Report, 
the President issued a memorandum dated February 20, 1998, directing 
the Secretary of Labor to ``propose regulations to strengthen the 
internal appeals process for all Employee Retirement Income Security 
Act (ERISA) health plans to ensure that decisions regarding urgent care 
are resolved within not more than 72 hours and generally resolved 
within 15 days for

[[Page 48392]]

non-urgent care.'' 3 The proposal incorporates the 
ameliorative steps outlined in the Department's February 19 Report to 
the President and takes into account the President's directive. 
Consistent with the Department's commitment, the adoption of the 
amendments contained in the proposal will strengthen the internal 
claims and appeals process for all ERISA plans.
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    \3\ The President further directed the Department to ``propose 
regulations that require ERISA health plans to ensure the 
information they provide to plan participants is consistent with the 
Patient Bill of Rights.'' The Department is publishing today in the 
Federal Register a proposal that would revise the Department's 
regulation at 29 CFR 2520.102-3 to accomplish, inter alia, this 
goal.
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    The proposal also builds upon the commitments made to the 
President, addressing several additional issues not dealt with in the 
February 19 Report. In particular, the proposal clarifies who is a 
``claimant'' and when the time limits begin to apply to a claim. With 
respect to the concept of a ``claimant,'' the proposal explicitly 
provides that a claimant is the participant or beneficiary to whom the 
benefit may be due. The proposal also clarifies the right of claimants 
to have individuals act on their behalf by eliminating the requirement 
in the current regulation that claimant representatives be ``duly 
authorized.'' Prop. Reg. Secs. 2560.503-1(a), (b)(5). In this respect, 
it is the Department's view that an individual's attending physician 
would generally be treated as a representative of the claimant. The 
proposal further clarifies that, whether or not a representative is 
acting for a claimant, notices must, at a minimum, be provided to the 
claimant. This clarification is provided to reduce any confusion that 
may result from providing notice only to a representative.
    Because the proposal would replace the current regulation in its 
entirety, much of the proposed regulation is not limited to group 
health plans. Much of it changes the claim and appeal procedures of 
employee benefit plans generally, including pension plans, disability 
plans, and other benefit plans. (Apprenticeship plans are excluded from 
the proposed regulation, however.) The Department believes that the 
proposed changes that apply to non-health plans will be beneficial and 
that it is desirable, as appropriate, to have uniform claim and appeal 
procedures for different types of employee benefits. The Department 
solicits comments on the application of the changed claim and appeal 
procedures to non-health benefit plans.
    It is the Department's view that the administrator of a plan has 
the responsibility to ensure that procedures consistent with section 
503 and the Department's regulation are established and maintained. The 
plan can only act through its trustees, administrators, or others to 
whom specific responsibilities have been assigned by those trustees and 
administrators. The proposal therefore clarifies the plan 
administrator's responsibility with respect to each of the procedural 
steps delineated in the proposal. The Department understands, however, 
that plan administrators may contract with third-party administrators 
or others to carry out aspects of the plan administrator's 
responsibilities, and this proposal is not intended to preclude such 
contracts. While the plan administrator may designate another 
individual or entity to carry out the responsibilities assigned to it 
under the proposal, the plan administrator would remain responsible for 
ensuring the required responsibility is discharged in a manner 
consistent with the Act and regulations.
    With respect to the application of time limits, the proposal 
clarifies that those limits begin to run at such time as a claim is 
first filed 4 with the plan or a party (including an 
insurance company or claims adjudicator) acting on behalf of the plan 
who has the authority to decide the claim. This clarification responds 
to comments suggesting that there is considerable uncertainty in the 
public view of the current regulation concerning the standards that 
should apply to third-party administrators and claims adjudicators 
hired by a plan to make benefit claims decisions. Many comments 
suggested that there is a prevalent view that the time limits do not 
apply to claims reviews conducted by a third party, such as an 
insurance company or claims adjudicator, that is hired by the plan to 
conduct an initial claims processing. The proposal articulates the 
Department's view of the current regulation on this issue and clarifies 
its application by eliminating the provisions in the current regulation 
that provide specific treatment for insured welfare or pension plans. 
See Reg. Sec. 2560.503-1(c), (g)(2). It is the view of the Department 
that these provisions were included in the current regulation to make 
clear that plans could employ the services of insurance companies and 
other similar organizations as third-party administrators to make 
claims decisions, but not to imply that such plans are subject to 
different standards than other plans that do not employ the services of 
third-party administrators with respect to the obligations and duties 
of their administrators.5 The Department considers that 
these provisions have become confusing in light of current practices 
and are no longer necessary to clarify what is permissible procedure.
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    \4\ Reference should be made to paragraph (d) of the current 
regulation for guidance on when a claim is deemed to have been 
filed.
    \5\ Whether a party with authority to make claims decisions is 
acting as a fiduciary depends on the extent to which the party 
``exercises any discretionary authority or discretionary control 
respecting management of such plan or exercises any authority or 
control respecting management or disposition of it assets, * * * or 
* * * has any discretionary authority or discretionary 
responsibility in the administration of such plan.'' ERISA 
Sec. 3(21)(A).
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    The proposal also amplifies the provision in the current regulation 
prohibiting the use of procedures that unduly inhibit or hamper the 
initiation or processing of plan claims by adding specific examples of 
prohibited practices. See Reg. Sec. 2560.503-1(b)(1)(iii); Prop. Reg. 
Secs. 2560.503-1(b)(3), (b)(4). In this regard, the proposal retains 
the principle that any provision or practice that requires claimants to 
pay a fee or costs in order to make or appeal a claim would be 
considered unduly inhibiting. The proposal also makes clear that 
practices like the use of ``preauthorization'' requirements as a basis 
for denying a claim under circumstances in which obtaining the 
preauthorization is impossible, such as where the claimant is 
unconscious and in need of immediate medical care, but unable to secure 
the plan's authorization to obtain the necessary emergency services, 
are prohibited.
    The proposal also clarifies the methods and means that are deemed 
appropriate for the plan administrator's delivery of the required 
notifications. The proposal provides that ``notice'' or 
``notification'' under the proposal generally should be provided in a 
manner that satisfies the standards of 29 CFR 2520.104b-1(b) with 
reference to materials furnished or made available to individuals. 
Prop. Reg. Sec. 2560.503-1(j)(3).6 The proposal further 
specifies that the notices may be provided through electronic means 
that satisfy the standards of 29 CFR 2520.104b-1(c)(1)(i), (iii), and 
(iv). Those standards provide assurance that the claimant will know in 
advance that electronic means will be used for notification, that the

[[Page 48393]]

claimant will actually receive the notification, and that a paper copy 
of any electronically distributed notification will be provided upon 
request free of charge.
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    \6\ That regulation provides that plan administrators should use 
means ``reasonably calculated to ensure actual receipt,'' which 
include mailing to an address provided by the participant or 
beneficiary, personal delivery, and disclosure through electronic 
media provided certain specific standards for electronic 
distribution are met.
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    The changes to the minimum procedural standards applicable to 
claims decisions currently being proposed are intended to update the 
procedural standards generally applicable to all employee benefit plans 
and to provide specific, more tailored rules applicable to health care 
claims and disability claims.7 It is the view of the 
Department that the proposed changes in minimum procedural standards 
for employee benefit plans would substantially improve the 
administration of employee benefit plans, provide benefit claimants 
with better understanding of their procedural rights, and ensure that 
benefit claims are expeditiously and fairly resolved.
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    \7\ The current regulation and this proposal pertain to 
procedures governing claims for benefits. The Department notes that 
section 206(d)(3) of the Act mandates certain plan procedures for 
determining the qualified status of domestic relations orders and 
administering qualified domestic relations orders. It is the view of 
the Department that issues pertaining to such domestic relations 
orders must be resolved pursuant to the procedures described in 
section 206(d)(3) of the Act and not the claims procedures governed 
by section 503 of the Act and the current regulation.
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    This regulation is proposed to be effective 180 days after the date 
of adoption of a final rule. The Department proposes that the 
regulation would not be applicable to plans until the later of the 
effective date or the first day of the first plan year beginning after 
the effective date. A special applicability date for collectively 
bargained plans not subject to section 302(c)(5) of the Labor-
Management Relations Act (29 U.S.C. 186(c)(5)) is also proposed.
    The following discussion addresses other major procedural reforms 
adopted in the proposal.

1. New Time Frames for Decision-Making

    The current regulation provides that all benefit claimants must be 
informed in writing ``within a reasonable period of time'' if a claim 
is partially or wholly denied. 29 CFR 2560.503-1(e)(1). The regulation 
defines any period in excess of 90 days as unreasonable for this 
purpose, unless ``special circumstances'' require an extension of time 
for processing, in which case an extension of an additional 90 days is 
available, provided the claimant is given notice describing the special 
circumstances prior to expiration of the original 90-day period.
    The current regulation also provides that a plan may establish a 
limited period within which a claimant may seek review of a denial, but 
such period must be ``reasonable and related to the nature of the 
benefit which is the subject of the claim and to other attendant 
circumstances'' and may not be less than 60 days. 29 CFR 2560.503-
1(g)(3). A decision on review must be made ``promptly,'' ``ordinarily'' 
not later than 60 days after request, unless ``special circumstances'' 
require an extension of time, in which case the decision must be made 
``as soon as possible, but not later than 120 days after receipt.'' 
Special rules are provided for plans operated by committees or boards 
of trustees that regularly hold meetings at least quarterly. Such plans 
generally may decide reviews of denials by the date of the next 
scheduled meeting, unless the request is filed within 30 days preceding 
the next meeting, in which case the decision may be delayed until the 
next scheduled meeting. If ``special circumstances'' warrant further 
delay, the review decision may be delayed until the third scheduled 
meeting of the committee or board.
    The proposed regulation retains the current time frames, with minor 
modifications, for claims under most pension plans and many welfare 
plans.8 Prop. Reg. Sec. 2560.503-1(d)(1), (g)(1). Claims 
involving group health benefits 9 would be governed by new, 
shorter time frames that are more appropriate to health care decisions. 
Id. at (d)(2), (g)(2). Disability benefit claims would also be subject 
to new, shorter time frames that, while not as short as the time limits 
imposed on health care decisions, would ensure more expeditious 
resolution of these types of claims. Id. at (d)(3), (g)(3). The 
Department solicits comments on the proposed shorter time frames 
pertinent to disability plans. For group health plans and for 
disability plans, the proposal also increases to 180 days the period of 
time during which plans must permit claimants under any plan to appeal 
an adverse benefit determination.10 Id. at (f)(2)(i)(A). The 
Department solicits comments on the additional time for claimants to 
appeal disability determinations. For plans other than group health 
plans and disability plans, the proposal does not change the current 60 
day period during which plans must permit claimants to appeal. The 
Department however is considering making the proposed 180-day period 
applicable to all plans. The Department solicits comments on whether 
the final regulation should provide that all plans must allow claimants 
at least 180 days to file an appeal from an adverse benefit 
determination.
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    \8\ Under the proposal, the current time frames would continue 
to apply to benefit determinations on pension benefit claims and 
welfare benefit claims other than those for group health and 
disability benefits. The proposal would modify those time frames, 
however, to require that plan administrators notify claimants, 
within 45 days of receipt, of any claim that is incomplete when 
filed and of the information necessary to complete the claim. A plan 
that provided notice that a claim was incomplete would be required 
to provide claimants a period of not less than 180 days within which 
to supplement the claim and would be required to resolve the claim 
within 45 days of the earlier of the date on which the claimant 
supplied the requested information or the end of the 180-day period. 
Prop. Reg. Sec. 2560.503-1(d)(1).
    \9\ For purposes of the proposal, a ``group health plan'' is a 
plan within the meaning of section 733(a) of the Act. Prop. Reg. 
Sec. 2560.503-1(j)(4).
    \10\ In this regard, the proposal responds to the numerous 
comments from claimants and their representatives that asserted that 
the current regulation's minimum standard of 60 days within which a 
claimant must be permitted to appeal a denial is inadequate. The 
Department believes, in light of these comments, that providing a 
longer minimum period of 180 days would ensure that claimants have 
an adequate period within which to consider whether appeal is 
warranted and to gather additional evidence to support their claims. 
The longer period would be unlikely, in the Department's view, to 
cause plans any additional costs or burdens. Comments are solicited 
on whether any additional costs or burdens would be imposed by this 
regulatory change.
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    With respect to group health claims, the proposal provides a time 
frame for deciding non-urgent health care benefit claims and a special 
expedited time frame for deciding health care claims involving urgent 
care. The proposal requires that notification of initial decisions on 
non-urgent health care benefit claims generally be provided by the plan 
administrator within a reasonable period, appropriate to the 
circumstances, taking into account any medical circumstances, but not 
later than 15 days after filing. If a claim that is filed is determined 
to be incomplete, however, for example because it does not contain 
sufficient factual information, the proposal requires the plan 
administrator to notify the claimant, within 5 days of receipt, of that 
fact and of the information necessary to complete the claim. The plan 
is then required to provide the claimant a period of not less than 45 
days within which to provide the missing information. Notification of 
the decision on that claim would have to be provided within 15 days of 
the earlier of the date the claimant provides the additional 
information or the end of the additional period. With respect to 
decisions on review, the proposal requires plans to provide 
notifications of decisions on non-urgent health care claims not later 
than 30 days after receipt of the request for review. The

[[Page 48394]]

Department solicits comment on this aspect of the proposed regulation.
    The proposal does not provide for any extension of the time period 
for deciding non-urgent group health claims. The Department is 
concerned that providing for such an extension of time would create an 
opportunity for delay in resolving health care claims and could be 
subject to substantial abuse that could nullify the intended reform. 
The Department notes that nothing in the proposed regulation would 
preclude a claimant from agreeing to an extension of time sought by the 
plan, inasmuch as the claimant would be entitled, under the proposal, 
to decide whether to proceed to court in the event that the plan did 
not comply with the time limits mandated by the proposal.
    In the case of group health plans and plans providing disability 
benefits, the Department is proposing to eliminate the special timing 
rules for appealed decisions by plans operated by committees or boards 
of trustees that regularly hold meetings on a quarterly basis. Under 
the current regulation, such plans are permitted to defer a decision on 
review until the meeting of the committee or board that immediately 
follows the plan's receipt of the request for review, unless the 
request for review is filed within 30 days preceding the date of such 
meeting, in which case the plan's review may be deferred until the 
second meeting following receipt of the claim. While elimination of the 
special rule may require changes in the operation of some group health 
and disability benefit plans, the Department believes that such changes 
are necessary and appropriate to ensure timely benefit determinations 
for participants and beneficiaries covered by such plans.
    The proposal requires quicker resolution of health care claims 
involving urgent care. For purposes of the proposal, a ``claim 
involving urgent care'' is defined as any claim with respect to which 
the application of the non-urgent care time frames could seriously 
jeopardize the life or health of the claimant or the ability of the 
claimant to regain maximum function, or, in the judgment of a physician 
with knowledge of the claimant's condition, would subject the claimant 
to severe pain that cannot be adequately managed without the care or 
treatment that is the subject of the claim. Prop. Reg. Sec. 2560.503-
1(j)(1). The decision whether a claim involves urgent care would 
generally be made by an individual acting on behalf of the plan and 
applying the standard of a reasonable individual who is not a trained 
health professional; however, any claim that a physician with knowledge 
of a claimant's medical condition determines to be a claim involving 
urgent care would be treated as such for purposes of the proposal. 
Under the proposal, thus, only those claims for which the delay 
resulting from application of the non-urgent 15-day schedule would 
carry a risk to the claimant are required to be resolved under the 
expedited time frame.11 The Department solicits comment on 
the proposed definition of a ``claim involving urgent care.''
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    \11\ It is anticipated that ``claims involving urgent care'' 
would largely involve claims for access to care, rather than claims 
respecting payment for care because, under the proposed definition, 
a claim would not involve urgent care unless failure to decide the 
claim on an expedited basis would create a risk to the claimant's 
health or cause unmanageable pain. This would not ordinarily be the 
case with claims where services have already been provided and only 
the question of payment remains unresolved.
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    Under the proposal, claims involving urgent care must be decided as 
soon as possible after receipt of the claim, taking into account the 
medical exigencies of the case, but not later than 72 hours after 
receipt.12 Prop. Reg. Sec. 2560.503-1(d)(2)(i). Appeals of 
adverse determinations on urgent care claims also would be required to 
be decided, and communicated to the claimant, as soon as possible, 
taking into account the medical exigencies of the case, but not later 
than 72 hours after receipt of the request for review. Id. at 
(g)(2)(ii).
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    \12\ If the plan determines that an urgent care claim is 
incomplete, the plan administrator would be required under the 
proposal to notify the claimant of that fact, and of the missing 
information, within 24 hours of receipt of the claim, and the 
claimant would be permitted not less than 48 hours to provide the 
specified information. The decision on the claim would then be 
required to be provided to the claimant not later than 48 hours 
after the earlier of the plan's receipt of the specified information 
or the end of the additional period of time.
---------------------------------------------------------------------------

    The Department's view that these shorter time limits are necessary 
to ensure the timely resolution of group health claims is based in part 
on the comments received from interested parties in response to the 
RFI. The majority of commenters who spoke for health plan 
administrators and health plan sponsors asserted that their routine 
claims administration practices provide resolution of claims within 
periods far shorter than the 60 or 90 days referred to in the current 
regulation. The Department notes that several commenters representing 
plans indicated that health benefit claims are normally resolved within 
5 to 7 days. The consensus of the comments appeared to be that health 
care claimants need prompt response to their benefit claims and that 
the health care delivery systems in place today are well-equipped to 
provide that response. The Department therefore believes that the 
proposed standards for determining when expedited handling of urgent 
care claims is necessary and for the timeliness of resolving such 
claims are both appropriate and feasible.
    The proposal also adopts shorter, specific time limits for 
resolving disability claims. Prop. Reg. Sec. 2560.503-1(d)(3), (g)(3). 
Under the proposal, those claims must be resolved initially within 30 
days (with a further requirement that notification as to incomplete 
claims be made within 15 days), and appeals of adverse determinations 
on disability claims must be resolved within 45 days. This proposal is 
made in response to issues raised by commenters to questions in the RFI 
on timeliness of resolution of long-term disability claims. Most 
commenters representing claimants asserted that many disability plans 
take the maximum amount of time available under the current regulation 
to resolve disability claims, unnecessarily delaying decisions on 
benefit payments. Because many claimants are dependent upon these 
payments for general support, the Department believes that shorter 
periods for benefit determination are appropriate for these claims. The 
Department solicits comment on the shorter time limits to resolve 
disability claims.

2. New Disclosure Requirements

    The proposal contains several new disclosure-type requirements that 
would be applicable to all plans. The Department solicits comment on 
the burden to plans of the new requirements for disclosure, including 
the effects on group health, pension, disability, and other benefit 
plans. First, the proposal reinforces the current requirement that a 
claims procedure will be considered ``reasonable'' only if it is 
described in the summary plan description (SPD) of the plan as required 
by 29 CFR 2520.102-3. Prop. Reg. Sec. 2560.503-1(b)(2). The proposal 
clarifies that descriptions of all benefit claims procedures of the 
plan and the time limits applicable to the procedures must be disclosed 
as part of the SPD. The proposed regulation further clarifies that the 
plan's benefit claims procedures include all procedures for filing 
claim forms, providing notification of benefit determinations, 
reviewing denied claims, and, for group health plans, for obtaining 
preauthorizations, approvals, or utilization review decisions. It is 
the Department's intention in proposing this clarification to remove 
any uncertainty regarding whether

[[Page 48395]]

``managed care'' arrangements that involve pre-approval or pre-
certification of eligibility for benefits are considered part of the 
plan's benefit claims procedures and therefore subject to disclosure. 
The Department considers this enhanced description of the mandated 
disclosure an important reform because of the apparent confusion about 
the treatment of such procedures demonstrated by the comments received 
in response to the RFI and because of the emphasis placed by the 
Commission on the need for increasing health consumers' awareness of 
the limits placed on benefit eligibility through such ``managed care'' 
measures.
    The proposal also clarifies the current regulation's requirement 
that the written notification of an initial adverse benefit 
determination must include a reference to the plan provisions on which 
the determination is based. Prop. Reg. Sec. 2560.503-1(e)(1)(ii). The 
proposal states that this reference must identify specifically any 
internal rules, guidelines, protocols, etc. that have been used by the 
initial decision-maker as a basis for denying the claim. The Department 
intends by this clarification to emphasize that such internal rules are 
``instruments under which the plan is established or operated'' and, as 
such, cannot be concealed from claimants, who have a legitimate right 
to understand the rules that govern benefit claims 
decisions.13
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    \13\ In Advisory Opinion 96-14A (July 31, 1996), the Department 
stated its opinion that ``usual and customary'' fee schedules used 
as a basis for determining the dollar amount that would be paid for 
health claims are ``instruments under which the plan is established 
or operated'' within the meaning of section 104(b) of the Act and 
therefore must be furnished to participants and beneficiaries upon 
written request. The Department emphasized that under ERISA 
participants and beneficiaries should have access to documents that 
directly affect their benefit entitlements. This principle takes on 
an enhanced importance when such documents are directly relevant to 
the denial of a specific benefit claim.
---------------------------------------------------------------------------

    Under the proposal, the notification is required to include a full 
description of the plan's review processes, including a statement of 
the claimant's right to bring a civil action under section 502(a) of 
the Act following an adverse determination on review. Prop. Reg. 
Sec. 2560.503-1(e)(1)(iv). Many of the comments received from 
employers, plan representatives, and claimants alike requested that the 
disclosure be amplified to include fuller descriptions of the 
administrative review process and the possibility of court review. The 
comments indicate widespread misunderstanding among benefit claimants 
of their rights to appeal adverse benefit determinations, and this 
problem is confirmed by the Commission's findings. The Department 
agrees that claimants whose benefit claims are denied need to 
understand fully the basis for the denial and their avenues of appeal. 
While inclusion of a description of the benefit claims procedures in 
the SPD provides some basic level of information, claimants whose 
claims are denied have a more immediate need and will be provided more 
helpful guidance if this information is included directly in the 
notification of an adverse benefit determination. Better understanding 
by claimants of the plan's terms and the claimants' rights will, in the 
Department's view, serve to both expedite reviews and reduce 
unwarranted appeals.
    Thirdly, the proposal clarifies the current regulation's 
requirement that claimants must be provided, upon receiving an adverse 
benefit determination, with access to ``pertinent documents.'' The 
comments received in response to the RFI support a need to clarify this 
requirement because they demonstrate substantial confusion about its 
scope. The proposal makes clear that claimants are entitled to review 
all documents, records, and information relevant to their claims for 
benefits, whether or not such documents, records, and information were 
in fact relied upon by the plan in making the adverse benefit 
determination. Prop. Reg. Sec. 2560.503-1(f)(2)(i)(C). Such information 
would include internal rules, guidelines, protocols, and criteria under 
which the plan is operated and any documents or records that may be 
favorable to the claimant's position. In the Department's view, 
permitting the claimant access to relevant documents, records, and 
information would generally satisfy the claimant's need to understand 
the evidentiary basis for the decision and therefore to determine 
whether an appeal is justified and how such an appeal might best be 
pursued.
    The proposal further provides claimants whose appeals on review are 
denied with access, upon request, to relevant documents, records, and 
information, to the extent not previously provided to the claimant. 
Prop. Reg. Sec. 2560.503-1(h)(3). In particular, the proposal requires 
disclosure of any documents that were created or received during the 
review process, including, specifically, the reports and identities of 
any experts consulted by the plan during the review. In the view of the 
Department, allowing this further access would advance the same goals 
articulated above with respect to the request for review. In 
particular, claimants would be better equipped to determine whether to 
pursue their claims further by filing a civil action under section 
502(a) of the Act.
    The Department is concerned that claimants who have filed a civil 
action following an adverse benefit determination on review do not have 
sufficient access to information that will aid them in determining 
whether the plan and insurance issuer have acted fairly and 
consistently in denying their claims, in light of the plan's practices 
in deciding other claims that involve the same plan or contract 
language, the same diagnosis, and the same treatment. Such information 
may be important to claimants who file suit to recover benefits because 
courts have frequently held that, where plan fiduciaries have 
discretionary authority to determine eligibility for benefits, benefit 
claims decisions may be overturned only if the claimant demonstrates 
that the decision was unreasonable or arbitrary and capricious. See, 
e.g., Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). 
Although evidence regarding plan decisions on other, similar claims may 
be necessary to support a case of unreasonable or arbitrary and 
capricious treatment, it is not clear that courts would allow a 
claimant access to such evidence as part of the discovery process. See, 
e.g., Chambers v. Family Health Plan Corp., 100 F. 3d 818, 821 (10th 
Cir. 1996) (review of benefit denial limited to evidence before plan at 
time of denial, although court of appeals noted that ``magistrate judge 
stated that if she had been able to conduct a de novo review of all the 
evidence, she would have found that [plan's] denial of coverage was 
erroneous''). As a result, the Department is considering adding to the 
final regulation a requirement that the plan administrator provide each 
claimant who receives an adverse benefit determination on review with 
respect to a health benefit claim with a statement that, in the event 
of litigation challenging the benefit determination, he or she will be 
entitled to receive, upon request, reasonable access to and copies of 
all documents and records relating to previous claims involving the 
same diagnosis and treatment that were decided by the plan within the 
five years prior to the adverse benefit determination. If the claim 
involved benefits that were provided through insurance, the health 
insurance issuer would also be subject to this disclosure requirement 
with respect to previous claims involving the same diagnosis and 
proposed treatment and the same plan or insurance contract language. 
The plan and issuer would be required to provide information on claims 
decided in the previous five years, up to a

[[Page 48396]]

maximum of 50 of the most recent such claims, and the claims records 
would have to be redacted or otherwise screened as necessary to protect 
the privacy of the claimants involved in the previous claims.
    The Department solicits comments on the advisability of the 
proposed policy. Furthermore, the Department recognizes that there may 
be other ways to address the problem described above, and is open to 
consideration of whether such additional disclosure is necessary or 
sufficiently beneficial to justify any burdens or cost it may impose on 
plans. The Department solicits comment on the contemplated requirement 
and, in particular, about the burden on group health plans of this 
provision, including whether there should be a charge for redacting the 
records or providing such copies, as well as how the charge should be 
determined.

3. New Notice Requirements

    The proposal contains new notice requirements that are intended to 
ensure that participants and beneficiaries are afforded fair and timely 
consideration of their claims and appeals of those claims as mandated 
by section 503 of the Act. In every instance, the plan administrator is 
responsible for providing claimants with the required notification at 
each level of the claims process. While the plan administrator may 
designate another individual or entity to generate and deliver the 
notices to claimants, in the Department's view, it is the plan 
administrator's responsibility to ensure that the required notification 
is provided.
    First, the proposal requires notification to participants and 
beneficiaries where the participant or beneficiary makes a request for 
benefits, but fails to follow the plan's claim filing procedures. Prop. 
Reg. Sec. 2560.503-1(b)(6). In such circumstances, the plan would have 
to provide the participant or beneficiary, within 5 days (24 hours in 
the case of an urgent care request), with a notice explaining that the 
participant's or beneficiary's request does not constitute a claim 
because it fails to satisfy the plan's filing procedures. The notice 
would also have to describe those filing procedures. This requirement 
would ensure that no reasonable attempt to file a claim could be 
ignored by a plan for failure to meet some aspect of the filing process 
set up by the plan, but would also preserve the integrity of those 
procedures.14
---------------------------------------------------------------------------

    \14\ In this regard, the proposal eliminates the provision in 
the current regulation that deems a claim to be filed, with respect 
to a plan that does not have reasonable filing procedures, when it 
is brought to the attention of an appropriate person responsible for 
benefit claims decisions. This ``deeming'' provision is unnecessary 
and would be counterproductive in the context of the proposal 
because the proposal provides that, in any case in which a plan 
fails to provide reasonable procedures, a claimant is entitled to 
treat the procedures as having been exhausted and to immediately 
pursue the claim in court pursuant to section 502(a) of the Act. See 
Prop. Reg. Sec. 2560.503-1(i).
---------------------------------------------------------------------------

    Second, as mentioned above in connection with the proposed new time 
frames, the proposal imposes an obligation on plan administrators to 
inform claimants promptly of any claims that, while properly filed, are 
found to be incomplete. Prop. Reg. Sec. 2560.503-1(d)(1), (2). For each 
type of plan subject to a specific time frame, the proposal establishes 
an earlier time at which notification of an incomplete claim must be 
given. The notice would include a description of the information 
necessary to complete the claim. The comments submitted in response to 
the RFI suggested that in many instances plans delay in informing 
claimants of obvious deficiencies in their claim filings until the end 
of the maximum time period for making a decision, resulting in 
successive periods of delay. It is the view of the Department therefore 
that specification of this additional procedural step would 
significantly reduce unnecessary delay in resolving claims by focusing 
early attention on the completeness of any filing. Moreover, because, 
as discussed below, appealed claims must be reviewed by a party 
different from the initial claims reviewer, the Department believes 
that a mechanism is necessary to enable and encourage initial claims 
reviewers to compile complete files on a claim prior to a 
determination. This will reduce the number of claims denials that are 
likely to be reversed on appeal and increase the number of correct 
initial decisions.
    Third, the proposal requires notice to claimants in some instances 
in which health care benefits that are being provided over a period of 
time are subsequently terminated or reduced. The proposal provides that 
if a plan has granted a health care benefit that is to be provided over 
a period of time, whether for a specific time period or an unlimited 
period, and the plan later determines to reduce or terminate the 
benefit (before the end of a specified period for benefits of specific 
duration), the reduction or termination is deemed to be an adverse 
determination of a benefit claim.15 Moreover, if the 
termination or reduction would create a situation meeting the 
proposal's definition of a ``claim involving urgent care,'' the plan 
administrator would be required to give notice of that decision at a 
time sufficiently in advance of the termination or reduction to provide 
the claimant with the opportunity to appeal before the termination or 
reduction takes effect.16 Prop. Reg. Sec. 2560.503-
1(d)(2)(ii). The Department believes that, in circumstances where the 
denial of continuation of a benefit may create a health risk to the 
claimant, advance notice of the denial is necessary in order to ensure 
a timely full and fair review. Requiring advance resolution of any 
dispute over the denial of health benefits of a continuing nature, 
where serious harm to the claimant may be involved, will also reduce 
the possibility of unintended harm to the claimant.
---------------------------------------------------------------------------

    \15\ The proposal is not intended, however, to require settlor 
decisions to amend or terminate a plan to be treated as adverse 
benefit determinations, even if such decisions result in the 
termination or reduction of a benefit being provided over a period 
of time.
    \16\ The termination or reduction would have to cause a risk to 
the claimant's health of sufficient degree to make application of 
the standard time frames for deciding health care claims 
inappropriate. See Prop. Reg. Sec. 2560.503-1(j)(1).
---------------------------------------------------------------------------

4. New Standards of Review on Appeal

    The proposal adopts new standards for what constitutes a full and 
fair appeal of an adverse benefit determination. In this respect, the 
proposal responds to comments that allege bias on the part of claims 
reviewers and a need for more independent decision-making. Under the 
current regulation, claimants whose claims have been denied must be 
provided an opportunity to request review and to submit issues and 
comments in writing. The proposal supplements these minimums by 
requiring that the review of an adverse benefit determination be 
conducted by an appropriate named fiduciary who is neither the party 
who made the initial adverse determination, nor the subordinate of such 
party; that the review not afford deference to the initial adverse 
benefit determination; and that the review take into account all 
comments, documents, records, and other information submitted by the 
claimant, without regard to whether such information was previously 
submitted or relied upon in the initial determination. Prop. Reg. 
Sec. 2560.503-1(f)(2)(i)(D), (E). It is the Department's intention in 
making this proposal that a claimant be permitted upon appeal to raise, 
and have considered, additional issues and evidence beyond those 
presented at the initial determination.
    With respect to adverse benefit determinations involving health 
care

[[Page 48397]]

claims, the proposal requires that the review of any determination 
based on a medical judgment be conducted through consultation with a 
health care professional who is independent of any health care 
professional involved in the initial decision and who has appropriate 
training and experience in the field of medicine involved in the 
medical judgment.17 Prop. Reg. Sec. 2560.503-1(f)(2)(ii)(A). 
In addition, the proposal provides that any appeal of a claim involving 
urgent care must be conducted on an expedited basis in which the review 
may be requested orally or in writing and necessary information, 
including the decision on review, may be transmitted by telephone, 
facsimile, or other similarly expeditious means. Prop. Reg. 
Sec. 2560.503-1(f)(ii)(C).
---------------------------------------------------------------------------

    \17\ Nothing in this proposal is intended to limit the extent to 
which a plan fiduciary may consult with others as appropriate under 
the circumstances in reaching a decision on appeal.
---------------------------------------------------------------------------

    The Department believes that these minimum requirements are 
essential to affording participants and beneficiaries a full and fair 
review of their benefit claims. In the case of group health plans, the 
Department believes that the requirement to consult with an 
appropriately qualified health professional is consistent with the 
obligation of plan fiduciaries to discharge their duties ``with the 
care, skill, prudence, and diligence under the circumstances then 
prevailing that a prudent man acting in a like capacity and familiar 
with such matters would use in the conduct of an enterprise of a like 
character and with like aims.'' ERISA Sec. 404(a)(1)(B). To the extent 
that the review of group health claims implicates medical judgments, a 
fiduciary would be constrained to consult an appropriate medical 
advisor to ensure that any such decisions comport with the standards of 
section 404(a)(1)(B) of the Act.
    The comments indicate that, at least in some percentage of claims 
reviews, the same decision-maker (or a subordinate of such decision-
maker) conducts both the initial processing of a claim and the review 
of a denial. The comments also assert instances in which decision-
makers have refused to permit expansion of the evidentiary record on 
review or have ignored additional submissions in making decisions on 
review. The Department believes that the proposal would prevent these 
practices, consistent with the recommendations of the Commission, and 
would ensure full and fair review of adverse benefit determinations.
    In proposing this regulation, one of the Department's primary 
concerns is to prevent unnecessary delays in resolving claims disputes, 
especially in situations where the dispute must be resolved before the 
plan will provide the requested benefit. The Department considers it 
essential that claimants be free to decide, after having completed the 
minimum number of administrative appeals necessary to allow for a full 
and fair review of the claim, whether to continue to pursue a claim 
through a plan's additional procedures, if any, or to file suit under 
section 502(a) of the Act. Thus, the proposed regulation provides that 
benefit claim procedures may not include more than one level of 
mandatory appeal and that plans are precluded from requiring claimants 
to submit to binding arbitration either subsequently or as part of that 
single level of appeal. In making this proposal, it is not the 
Department's intention to require plans to dismantle effective and fair 
claims procedures that they have already put in place. As a result, the 
Department is willing to consider whether procedures that require more 
than one appeal would be reasonable. The Department also notes that 
there is nothing in the proposal that would preclude a plan from 
establishing a second level review or appeal process following a 
determination on review in accordance with this regulation, or from 
offering to submit a determination to arbitration, provided that such 
review or arbitration is voluntary on the part of the claimant and does 
not otherwise serve to foreclose a claimant from pursuing his or her 
claim in court. The Department is particularly interested in receiving 
comments on whether limiting the number of appeals or precluding 
mandatory arbitration before filing suit is necessary or sufficiently 
beneficial to prevent delays or unfairness in making and reviewing 
benefit claims. The Department also solicits comments on the 
appropriate number of appeals at which such limit should be set.

5. Consequences of Failure to Establish and Follow Reasonable Claims 
Procedures

    Many of the comments that the Department received in response to 
the RFI asserted that plans often fail to follow the minimum standards 
for procedural fairness set by the current regulation. The Department 
believes it is important to make clear that the claims procedure 
regulation prescribes the minimum standards for an administrative 
claims review process consistent with ERISA. Accordingly, a failure to 
provide the procedures mandated by the regulations effectively denies 
participants and beneficiaries access to the administrative review 
process mandated by the Act. It is the view of the Department that 
claimants should not be required to continue to pursue claims through 
an administrative process that fails to meet the minimum standards of 
the regulation. At a minimum, claimants denied access to the statutory 
administrative review process should be entitled to pursue claims under 
section 502(a) of the Act. In addition, such claimants should be 
entitled to a full and fair review of their claims in the forum in 
which they are first provided adequate procedural safeguards. The 
proposal therefore incorporates a new paragraph (i) that would specify 
more clearly the consequences that the Department believes flow from a 
failure to provide procedures that meet the minimum regulatory 
standards. Under the proposed paragraph (i), a claimant who attempts to 
pursue a claim is deemed to have exhausted the administrative remedies 
available to him or her if the plan fails to provide or to abide by 
procedures that meet the regulatory minimum standards required under 
the proposal. Such a claimant is entitled to pursue any remedies he or 
she may have under section 502(a) of the Act on the basis that the plan 
has failed to provide a reasonable claims procedure that would yield a 
full and fair decision on the merits of the claim. Prop. Reg. 
Sec. 2560.503-1(i). It is the Department's view that, in such a case, 
any decision that may have been made by the plan with respect to the 
claim is not entitled to the deference that would be accorded to a 
decision based upon a full and fair review that comports with the 
requirements of section 503 of the Act.
    In addition to the above, the failure to establish or maintain 
claims procedures in accordance with regulations issued by the 
Secretary pursuant to section 503 of ERISA, would be a violation of 
section 503 which could give rise to a cause of action under sections 
502(a)(3) or (a)(5) of ERISA for appropriate equitable relief. It is 
also possible, depending on the circumstances, that an action or 
omission by a plan fiduciary which does not comply with the 
requirements of such regulations would also constitute a fiduciary 
breach in violation of ERISA sections 404(a)(1)(A), (B), or (D). Such 
potential consequences are beyond the scope of this rulemaking.

6. Other Changes

    The Department is proposing to eliminate two provisions in the 
current regulation that provide special treatment for two classes of 
plans. First, the proposal eliminates the special

[[Page 48398]]

treatment afforded by paragraph (b)(2) of the current regulation for 
plans established and maintained pursuant to a collective bargaining 
agreement (other than plans subject to section 302(c)(5) of the Labor 
Management Relations Act of 1947, 29 U.S.C. 186 (c)(5)) (non-Taft-
Hartley plans). The current regulation provides that such a 
collectively-bargained plan is deemed to satisfy the standards for 
claims filing procedures, procedures for initial decisions, and 
procedures for review if the collective bargaining agreement 
incorporates (by reference or directly) provisions for the filing and 
initial disposition of claims and for a grievance and arbitration 
procedure to which denied claims are subject.18 Second, the 
Department is proposing to eliminate the special treatment afforded 
under paragraph (j) of the current regulation to certain plans that 
provide benefits through membership in a qualified health maintenance 
organization (HMO), as defined in section 1310(d) of the Public Health 
Service Act, 42 U.S.C. 300(e)-9(d) (the PHSA). The current regulation 
provides that such plans are deemed to satisfy the standards of the 
regulation with respect to such benefits if the claims procedures 
provided by the qualified health maintenance organization meet the 
requirements of section 1301 of the PHSA. Under the proposal, both of 
these types of plan would be fully subject to the new procedural 
standards applicable based on the type of benefit provided.
---------------------------------------------------------------------------

    \18\ Alternatively, a non-Taft-Hartley collectively-bargained 
plan may comply with the initial filing and decision standards of 
the current regulation and be exempted from complying with its 
review standards if its collective bargaining agreement incorporates 
the grievance and arbitration procedure as the avenue for denied 
claims.
---------------------------------------------------------------------------

    This approach is in accord with the majority of the comments 
received in response to the RFI. Several of the questions posed by the 
RFI focused on whether there is a perceived need for greater uniformity 
in the procedural standards applicable to employee benefit plans. A 
majority of the comments asserted that such a need exists and argued 
that the lack of uniformity, and specifically the special rules 
applicable to group health plans offering HMO-type benefits, has led to 
confusion among benefit claimants as their rights and their avenues of 
appeal. On this basis, the Department has determined to propose 
eliminating the special treatments provided under the current 
regulation. Elimination of these special provisions will help ensure 
that participants and beneficiaries will be provided timely benefit 
determinations and full and fair reviews of denied claims without 
regard to whether they participate in an HMO-type or collectively 
bargained plan. The Department solicits comment on these changes for 
greater uniformity in the standards for benefit plans.

B. Economic Analysis Under Executive Order 12866

    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, it has been 
determined that this action is consistent with the President's 
priorities as articulated in the President's February 20, 1998, 
directive to the Secretary of Labor to issue proposed rules 
implementing the recommendations of the President's Advisory Commission 
on Consumer Protection and Quality in the Health Care Industry. In 
addition, the Department estimates that this regulatory action will 
have an economic effect exceeding $100 million in the year 2000. 
Therefore, this notice is ``significant'' and subject to OMB review 
under sections 3(f)(1) and 3(f)(4) of the Executive Order.
    Therefore, consistent with the Executive Order, the Department has 
undertaken to assess the costs and benefits of this regulatory action. 
The Department's assessment, and the analysis underlying that 
assessment, is detailed below.
    The Department projects that the proposed regulation will prompt 
all ERISA-covered employee benefit plans to revise their claims and 
appeals procedures by the end of calendar year 2000. The new procedures 
will better ensure the timeliness, fairness, and accuracy of claims and 
appeals determinations, but will also be somewhat more costly to 
administer. Therefore, the proposed regulation is expected both to 
yield benefits and to impose costs. Expected improvements in the 
timeliness, accuracy, and fairness of determinations will be of benefit 
to plan participants and beneficiaries. Costs will be incurred in 
connection with the implementation and administration of improved 
claims and appeals procedures.
    The Department estimates the proposed regulation will add $30 
million to annual claims and appeals processing costs in 2000, 
reflecting the processing of 806 million claims. This amounts to $0.04 
per claim or $0.09 per participant. This ongoing cost will change each 
year as claims volume increases or decreases or as the actual 
proportions of claims by type (e.g., pension, health, long-term 
disability) differ from the proportions assumed for purposes of this 
analysis. The proposed regulation will also impose a one-time start-up 
cost of $125 million in 2000 to design and implement the new 
procedures. This amounts to $0.35 per participant.
    The data, assumptions, and analysis underlying this assessment of 
costs are summarized following the discussions of the Regulatory 
Flexibility Act and the Paperwork Reduction Act.
    These estimates are for administrative costs associated with 
processing claims and appeals. A separate question involves how many 
claims determinations might be changed as a result of this proposed 
regulation, and what the costs and benefits of those changed 
determinations might be.
    The Department was unable to develop quantitative estimates of 
changes in determinations or of the associated costs and benefits, and 
solicits comments on the expected nature and magnitude of these 
changes, costs, and benefits. What follows is a qualitative discussion 
of these issues.
    The Department expects that the proposed regulation will reduce the 
number of inaccurate claims determinations, especially following 
appeal. It will also accelerate any health and disability claims 
determinations that would otherwise have been delayed longer than 
permitted under the proposed regulation. The regulation is further 
likely to influence some claimants' decisions as to whether and how to 
appeal denied claims. Finally, if the proposed regulation increases the 
likelihood that some accurate and previously undisputed claim denials 
will now be appealed, and if the

[[Page 48399]]

expected cost of such appeals exceeds the cost of paying these claims, 
plans might elect to pay rather than deny them. The costs and benefits 
of each of these effects is considered below.
    The proposed regulation's provisions requiring fuller review of 
denied claims aim to reduce the number of inaccurate claims 
determinations. In particular, the Department expects that some claims 
which otherwise would have been denied on appeal, but which in fact 
should have been paid under plans' terms, will now be paid. The 
Department has no data on how many denied appeals should have been 
approved. Economic theory suggests, however, that all else equal, 
improving adherence to private voluntary agreements such as plans' 
terms tends to increase economic efficiency by reducing losses of 
social welfare. Therefore, the Department believes that the benefits 
associated with this effect of the proposed regulation are likely to 
outweigh the costs. The Department also notes that plans' obligations 
to pay covered benefits arise from plans' terms and from ERISA's 
statutory provisions and are not modified by this proposed regulation.
    Accelerating the processing of some claims and appeals may also 
change some claims determinations. For example, delays in processing 
health benefit claims can result in delays in medical treatment. Those 
delays in turn can result in the deterioration of claimants' medical 
condition to the point that the treatment is no longer medically safe 
or effective. Thus, accelerating the processing of medical claims may 
result in payment for some treatments that otherwise would not have 
been provided. On the other hand, deterioration in claimants' medical 
condition may result in additional claims for additional treatment. 
Thus, accelerating health benefit claims processing may eliminate some 
claims. The Department is uncertain of the magnitude of these two 
offsetting effects, but notes that both are associated with the 
potential for better medical outcomes and are therefore are likely to 
be of substantial economic benefit.
    The Department also expects that the proposed regulation may 
influence denied claimants' decisions about whether to appeal. 
Providing claimants with fuller information on their appeal rights, 
with an opportunity for fuller and more timely review of their denied 
claims, and with a longer period of time in which to prepare and submit 
an appeal might prompt more claimants to appeal more denied claims. 
Providing claimants with fuller information on the reasons for claims 
denials might facilitate and prompt some appeals, but might discourage 
others. To the extent that additional appeals result in the reversal of 
inaccurate claims denials that would otherwise have been sustained, 
this would represent an improvement in the accuracy of claims 
determinations, as discussed above. Additional appeals that are denied 
would increase administrative cost, and reductions in appeals that 
would have been denied would reduce administrative cost. Discouraging 
appeals of inaccurate claims determinations, which would have been 
reversed on appeal, could reduce social welfare, but the Department 
believes providing fuller information to denied claimants will rarely 
discourage them from appealing inaccurate determinations. In summary, 
the main effects of any change in denied claimants' appeals decisions 
are likely to be some improvement in the accuracy of determinations and 
an increase or decrease in administrative costs.
    Finally, the Department considered whether the proposed regulation 
might prompt plans to approve some claims that are not truly covered 
under plans' terms in order to avoid the higher expected cost of 
processing associated appeals. ERISA obligates plan fiduciaries to 
administer plans in accordance with the plans' terms. Nonetheless, it 
is possible that plans may engage in at least some such inaccurate 
claims approvals under the current regulation. Such inaccurate claims 
approvals might increase if the proposed regulation increases the 
likelihood that some accurate and previously undisputed claim denials 
will be appealed, and/or if it increases the expected cost of some 
appeals of accurate claims denials to an amount greater than the cost 
of paying these claims. Increasing inaccurate claims approvals could 
reduce overall social welfare. However, such losses might sometimes be 
accompanied by improved medical outcomes and associated economic 
benefits, and might be offset by potential welfare gains from 
discouraging appeals of accurate claims denials, which are noted above. 
The Department lacks data to estimate the potential increase in 
inaccurate claims approvals and associated costs and benefits, and 
solicits comments on this question.
    The Department also considered potential indirect effects of the 
proposed regulation on plans sponsors' decisions regarding plan 
sponsorship, design, and benefit levels. Provisions that increase 
plans' administrative costs or that result in net increases in plans' 
claims payments might prompt plan sponsors to reduce benefits, to alter 
plan designs so as to offset or eliminate additional claims payments 
(for example by clarifying or expanding exclusions from coverage in a 
health benefit plan document), to fail to adopt or enrich benefit 
plans, or even to drop benefit plans entirely. Because the estimated 
cost of this proposed regulation is exceptionally small relative to the 
total cost of benefit plans, the Department expects that these effects 
will be equally small. However, the Department lacks the data to 
validate this expectation, and solicits comments on whether such 
effects might be more substantial.

1. Benefits of the Proposed Regulation

    The Department believes that the benefits of this proposed 
regulation, although unquantified, will outweigh its potential costs. 
In particular, updating the regulation to address recent, dramatic 
changes in the delivery and financing of health care services can 
improve health care quality by preventing harmful, inappropriate delays 
and denials of health benefits, thereby yielding substantial social 
benefits. This conclusion is supported by the findings of the 
Commission, The Lewin Group,19 and the U.S. General 
Accounting Office (GAO), and by responses to the Department's RFI.
---------------------------------------------------------------------------

    \19\ Two different reports prepared by The Lewin Group serve as 
sources of information for this analysis. In 1997, the Commission 
contracted with The Lewin Group to analyze the benefits and costs of 
the information disclosure and external appeals provisions of the 
Consumer Bill of Rights. The resulting report, dated November 15, 
1997, is entitled ``Consumer Bill of Rights and Responsibilities: 
Information Disclosure and External Appeals.'' The Lewin Group also 
prepared a report dated May 21, 1998, for the Kaiser Family 
Foundation, Sierra Health Foundation, and California Wellness 
Foundation, entitled Analysis of the Survey of Consumer Experiences 
in Managed Care, Summary of the Findings.
---------------------------------------------------------------------------

    The evidence of changes in the health care system is compelling. In 
a 1995 survey of 2,000 physicians, 59 percent said their decisions 
regarding hospital length of stay were subject to review. Forty-five 
percent were subject to review in connection with site-of-care 
decisions, as were 39 percent in connection with treatment 
appropriateness. On average for various types of treatment, plans 
initially denied between 1.8 percent (for cardiac catheterizations) and 
5.8 percent (for mental health referrals) of physician-recommended 
actions. Average denial rates following appeal ranged from 0.7 percent 
(for cardiac catheterizations) to 3.0 percent (for mental health 
referrals). (Dahlia K. Remler et al., ``What do Managed Care Plans Do 
to Affect Care?

[[Page 48400]]

Results from a Survey of Physicians,'' Inquiry 34: 196-204 (Fall 
1997).)
    The Department believes that excessive delays and inappropriate 
denials of health benefits are relatively rare. Most claims are 
approved in a timely fashion. Many claim denials and delays are 
appropriate given the plan's terms and the circumstances at hand. 
Nonetheless, a substantial number of excessive delays and inappropriate 
denials do occur. When they do, participants and beneficiaries can 
suffer grievous, avoidable harm.
    The proposed regulation's new standards for processing health 
benefit claims will reduce the incidence of excessive delays and 
inappropriate denials, preventing serious, avoidable lapses in health 
care quality and resultant injuries and losses to participants and 
beneficiaries. It will raise participants' and beneficiaries' level of 
confidence in and satisfaction with their health care benefits, thereby 
enhancing the value of those benefits. It will improve plans' awareness 
of participant, beneficiary, and provider concerns, prompting plan 
responses that improve health care quality. Finally, by helping assure 
prompt and precise adherence to contract terms and by improving the 
flow of information between plans and enrollees, the proposed 
regulation will bolster the efficiency of health care insurance 
markets.

2. Preventing Harmful Errors

    The 1997 survey of Sacramento-area managed care enrollees conducted 
by the The Lewin Group identified delay or denial of coverage as the 
single most prevalent difficulty, reported by 42 percent of enrollees 
with difficulty. Among those experiencing delays or denials, 41 percent 
suffered resultant financial losses, while 8 percent lost more than 
$1,000. Twenty-seven percent lost time from school or work, and 9 
percent lost more than 10 days. Eleven percent reported worsened 
health; 3 percent were permanently disabled. It is likely that many of 
the reported coverage delays and denials were appropriate, but it is 
also likely that at least some were not. The proposed regulation will 
help reduce the number of managed care enrollees harmed by delay or 
denial of health coverage.
    The report prepared for the Commission by the The Lewin Group 
documents the potential benefits of improved health benefits appeals 
processes. The report focuses on external appeals, but the Department 
believes that, by improving plans' internal appeals processes, the 
proposed regulation will yield at least some of these same benefits. 
According to Lewin, both consumers and plans can benefit from improved 
appeals processes. Effective appeals procedures can prevent claims 
disputes from escalating into costly litigation, thereby saving money 
for both plans and consumers. Such procedures can also improve consumer 
confidence and may elevate health care quality, Lewin says.
    The Commission's Consumer Bill of Rights notes that improved claims 
and appeals procedures serve many purposes. It notes that ``first and 
foremost, enhanced internal and external review processes will assist 
consumers in obtaining access to appropriate services in a timely 
fashion, thus maximizing the likelihood of positive health outcomes.''
    The Commission's final report to the President, entitled ``Quality 
First: Better Health Care for All Americans,'' also documents the 
expected benefits of improving claims and appeals procedures. Chapter 
10, ``Reducing Errors and Increasing Safety in Health Care,'' points 
out that some patients suffer harm when ``inappropriate benefit 
coverage decisions * * * impinge on or limit the delivery of necessary 
care.'' A wrongful denial of coverage ``can lead to a delay in care or 
to a decision to forego care entirely.'' The report points out that 
``even a small number of mistakes * * * can have serious, costly, or 
fatal consequences,'' such as ``additional health expenses, increased 
disability, lost wages, and lost productivity.''

3. Improving Consumer Confidence

    With respect to consumer confidence, the Consumer Bill of Rights 
concludes that shorter time frames for claims and appeals handling will 
improve participants' and beneficiaries' confidence in their health 
plans. It states that ``the opportunity for consumers to be heard by 
people whose decisions significantly touch their lives evidences 
respect for the dignity of consumers as individuals and engenders their 
respect for the integrity of the institutions that serve them.''
    The proposed regulation will do much to improve the public's 
general perception of managed care. In various surveys, consumers have 
expressed concern that plans sometimes withhold care or benefits. The 
ability to get a promised benefit, particularly when sick or disabled, 
is at the heart of these consumer concerns. A Kaiser Family Foundation/
Harvard University survey 20 found that a majority of 
Americans say managed care plans have made it harder for people who are 
sick to see medical specialists and have decreased the quality of 
health care for the sick. A majority of those in managed care plans are 
very or somewhat worried that their health plan would be more concerned 
about saving money than about what is the best treatment for them if 
they are sick. Improved confidence may in itself represent derivation 
of greater value from health care coverage.
---------------------------------------------------------------------------

    \20\ ``Kaiser/Harvard National Survey of Americans' Views on 
Consumer Protection in Managed Care,'' Kaiser Family Foundation, 
January 1998.
---------------------------------------------------------------------------

4. Signaling Consumer and Provider Concerns

    Effective claims procedures can also improve health care and health 
plan quality by serving as a communication channel, providing feedback 
from participants, beneficiaries, and providers to plans about quality 
issues.
    The Consumer Bill of Rights asserts that enhanced appeals 
procedures ``can be used to bridge communication gaps between consumers 
and their health plans and providers, and to provide useful information 
to all parties regarding effective treatment.''
    GAO 21 points out that plan participants and 
beneficiaries who have a choice of coverage options and who experience 
difficulty with their health plan may respond by simply moving to a 
different coverage option. This response is especially likely if 
participants and beneficiaries believe that their plans' claims and 
appeals procedures will not effectively resolve their difficulty. 
Unlike initiating an appeal, however, this response may fail to alert 
plans to the difficulty that prompted it if plans do not inquire into 
their loss of members. More effective appeals procedures can give 
participants and beneficiaries an alternative way to respond to 
difficulties with their plans. Plans in turn can use the information 
gleaned from the appeals process to improve services.
---------------------------------------------------------------------------

    \21\ HMO Complaints and Appeals: Most Key Procedures in Place, 
but Others Valued by Consumers Largely Absent (GAO/HEHS-98-119, May 
12, 1998)
---------------------------------------------------------------------------

    By providing an alternative to disenrollment, improved claims and 
appeals procedures may also reduce disenrollment rates. Although such 
disenrollments may serve to lower expenses for managed care 
organizations (MCOs) in the short term, lowering disenrollment rates 
may offer MCOs additional incentives to keep enrollees healthy over the 
long term, prompting efforts to promote preventive

[[Page 48401]]

care and healthy lifestyles. In contrast, the high disenrollment rates 
associated with ineffective claims and appeals procedures discourage 
MCOs from investing in such efforts. Such efforts by MCOs may yield 
long term improvements in population health and reductions in national 
health care costs.

5. Improving Health Market Efficiency

    Finally, clarification of existing requirements for information 
disclosure with respect to claims and appeals procedures may have 
significant benefits for participants and beneficiaries, according to 
GAO and others. Several studies have found that participants and 
beneficiaries generally do not understand procedures or their rights 
with respect to claims and appeals. GAO contends that effective 
communication with plan participants is one of the most important 
elements of a claims and appeals procedure, and that improved 
understanding of these procedures is likely to result in expedited 
claims and a reduction of unwarranted appeals.

6. Beneficial Improvements

    The proposed regulation includes elements of effective claims and 
appeals procedures that are highly likely to yield substantial 
benefits. These elements have been identified and endorsed by several 
respondents to the Department's RFI, GAO, and/or the Commission.
    The Department's RFI elicited a number of responses highlighting 
serious weak points in current health benefits claims and appeals 
procedure standards. Several respondents cited instances of delays of 
120 days or even 6 or 7 months in deciding claims and appeals, and a 
lack of objectivity in some decisions. They characterized as inadequate 
the information plans provide to participants and beneficiaries when 
denying claims and appeals. (Some similar responses were received in 
connection with non-health welfare and pension benefit claims.) Several 
respondents specifically recommended requiring fuller disclosure of 
information on claims and appeal procedures and decisions, and faster 
and fuller reviews of disputed claims, including review by medical 
professionals where appropriate.
    GAO interviewed organizations representing a range of interests, 
including private accreditation agencies, consumer advocates, 
regulators, and the health industry. Through these interviews, GAO 
heard consistently that there are three essential elements to any 
complaint and appeal system. These elements are timeliness, integrity 
in the decision making process, and effective communications. The 
Department supports the view that improved requirements regarding these 
features of a claims and appeals process will be beneficial to 
participants and beneficiaries and has addressed each of these areas in 
the proposed regulation.
    Based on its interviews, GAO further found that timeliness 
generally consists of two key elements--explicit time periods and 
expedited review. Although the organizations varied as to the exact 
length of time that they considered appropriate, all agreed that 
expedited procedures are critical. The Department supports the view 
that procedures that are responsive to the clinical urgency of a 
situation can prevent harm to a patient's health or life and thus have 
a positive impact on health outcomes.
    All the organizations interviewed by GAO agreed that integrity of 
the decision making process is a critical component of an appeals 
procedure. GAO concluded that procedures consisting of certain key 
elements can empower participants and enhance the perception of 
fairness regarding a plan's procedures. The proposed regulation 
incorporates many of these factors, including requiring that certain 
decisions be made with the assistance of a medical professional with 
appropriate expertise, and that certain decisions be made by 
individuals not involved in previous denials.
    The Commission's final report placed ``highest priority'' on 
``creating systems that minimize errors and correct them in a timely 
fashion,'' concluding that ``one way to reduce the number of injuries 
related to inappropriate decisions to deny insurance coverage for 
services that ultimately are determined to be medically necessary and 
covered by the plan is to establish more timely systems to allow 
consumers to appeal plan decisions. Establishment of such systems can 
go a long way toward reducing the number of injuries caused by 
inappropriate decisions to deny coverage.'' The proposed regulation 
will help ensure the establishment of such systems.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and likely to have 
a significant economic impact on a substantial number of small 
entities. If an agency determines that a proposed rule is likely to 
have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires that the agency present an 
initial regulatory flexibility analysis at the time of the publication 
of the notice of proposed rulemaking describing the impact of the rule 
on small entities and seeking public comment on such impact. Small 
entities include small businesses, organizations, and governmental 
jurisdictions.
    For purposes of analysis under the RFA, the Pension and Welfare 
Benefits Administration (PWBA) proposes to continue to consider a small 
entity to be an employee benefit plan with fewer than 100 participants. 
The basis of this definition is found in section 104(a)(2) of ERISA, 
which permits the Secretary of Labor to prescribe simplified annual 
reports for pension plans which cover fewer than 100 participants. 
Under section 104(a)(3), the Secretary may also provide for simplified 
annual reporting and disclosure if the statutory requirements of part 1 
of Title I of ERISA would otherwise be inappropriate for welfare 
benefit plans. Pursuant to the authority of section 104(a)(3), the 
Department has previously issued at 29 CFR 2520.104-20, 2520.104-21, 
2520.104-41, 2520.104-46 and 2520.104b-10 certain simplified reporting 
provisions and limited exemptions from reporting and disclosure 
requirements for small plans, including unfunded or insured welfare 
plans covering fewer than 100 participants and which satisfy certain 
other requirements.
    Further, while some large employers may have small plans, in 
general most small plans are maintained by small employers. Thus, PWBA 
believes that assessing the impact of this proposed rule on small plans 
is an appropriate substitute for evaluating the effect on small 
entities. The definition of small entity considered appropriate for 
this purpose differs, however, from a definition of small business 
based on size standards promulgated by the Small Business 
Administration (SBA) (13 CFR 121.201) pursuant to the Small Business 
Act (5 U.S.C. 631 et seq.). PWBA therefore requests comments on the 
appropriateness of the size standard used in evaluating the impact of 
this proposed rule on small entities.
    On this basis, however, PWBA has preliminarily determined that this 
rule will not have a significant economic impact on a substantial 
number of small entities. In support of this determination, and in an 
effort to provide a sound basis for this conclusion, PWBA has 
considered the elements of an initial regulatory flexibility analysis 
in the discussion that follows.

[[Page 48402]]

    This regulation applies to all small employee benefit plans covered 
by ERISA. Employee benefit plans with fewer than 100 participants 
include 629,000 pension plans, 2.6 million health plans, and 3.4 
million non-health welfare plans (mainly life and disability insurance 
plans).
    The proposed regulation amends the Department's current benefit 
claims regulation, which implements ERISA's statutory claims and 
appeals requirements. Both the Act and the current regulation require 
plans to maintain procedures to determine claims and to review disputed 
claims determinations. The compliance requirements of this proposed 
regulation consist of new standards for claims and appeals procedures.
    The Department believes that revising claims and appeals procedures 
to meet the new standards and administering those revised procedures 
requires a combination of professional and clerical skills. Some claims 
determinations involve unique circumstances or issues and therefore 
demand professional attention, while others are straightforward or 
formulaic and can be carried out by clerical personnel. Professional 
skills pertaining to employee benefits law and plan design and 
administration are needed to design new procedures, to weigh facts and 
circumstances against plan provisions in order to reach decisions on 
unique claims, and to prepare forms to be used in providing notice of 
claims and appeals determinations. Clerical skills are needed to make 
formulaic determinations and to fill in and distribute notice forms.
    The Department estimates that the ongoing, annual cost to small 
plans of complying with the proposed regulation will amount to $6 
million on aggregate, which amounts to $0.04 per claim or $0.13 per 
participant, in 2000. This ongoing cost will change each year as claims 
volume increases or decreases or as the types, or ``mix,'' of claims 
that are filed change. The proposed regulation will also impose a one-
time start-up cost of $102 million, or $2.16 per participant, in the 
year 2000 to design and implement the new procedures.
    Most of the one-time start-up cost is attributable to small pension 
plans. The start-up costs for health plans and other welfare plans are 
modest primarily because the features of a majority of small welfare 
plans are chosen from a finite menu of products offered by insurers and 
HMOs. The insurers and HMOs process claims and appeals the same way or 
in only a few different ways for all of their small plan customers. 
Thus, the cost of revising and implementing a relatively small number 
of claims and appeal procedures is spread thinly over a far larger 
number of small plans.
    The basis of these estimates is explained below, following the 
discussion of the Paperwork Reduction Act.

D. Paperwork Reduction Act

    The Department, 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 continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95) (44 U.S.C. 3506(c)(2)(A)). This 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, PWBA is soliciting comments concerning the proposed 
revision of the information collection request (ICR) included in this 
Notice of Proposed Rulemaking with respect to Rules and Regulations for 
Administration and Enforcement; Claims Procedure. A copy of the ICR may 
be obtained by contacting the office listed in the addressee section of 
this notice.
    The Department has submitted a copy of the proposed information 
collection to OMB in accordance with 44 U.S.C. 3507(d) for review of 
its information collections. The Department and OMB are particularly 
interested in comments that:
     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 submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Pension and Welfare Benefits Administration. Although comments may be 
submitted through November 9, 1998, OMB requests that comments be 
received within 30 days of publication of the Notice of Proposed 
Rulemaking to ensure their consideration.
    ADDRESSES (PRA 95): Gerald B. Lindrew, Office of Policy and 
Research, U.S. Department of Labor, Pension and Welfare Benefits 
Administration, 200 Constitution Avenue, NW, Room N-5647, Washington, 
D.C. 20210. Telephone: (202) 219-4782; Fax: (202) 219-4745. These are 
not toll-free numbers.

Appendix

I. Background

    Section 503 of ERISA provides that, pursuant to regulations 
promulgated by the Secretary of Labor, each employee benefit plan must 
provide adequate notice in writing to any participant or beneficiary 
whose claim for benefits under the plan has been denied. This notice 
must set forth the specific reasons for the denial and must be written 
in a manner calculated to be understood by the claimant. Each plan must 
also afford a reasonable opportunity for any participant or beneficiary 
whose claim has been denied to obtain a full and fair review of the 
denial by the appropriate named fiduciary of the plan.
    The Department previously issued a regulation pursuant to section 
503 that establishes certain minimum requirements for employee benefit 
plan procedures pertaining to claims. The ICR included in the benefit 
claims regulation generally requires timely written disclosures to 
participants and beneficiaries of employee benefit plans of information 
concerning the plan's claims procedures, the basis for the denial of a 
claim, and time limits for addressing or appealing the denial of a 
claim. These requirements are intended to ensure that plan 
administrators provide a full and fair review of claims and that plan 
participants and beneficiaries have information that is sufficient to 
allow them to exercise their rights under the plan.

II. Current Actions

    As described in detail in this preamble, the Department proposes a 
number of modifications to the current regulation pursuant to ERISA 
section

[[Page 48403]]

503, which establishes minimum requirements for benefit claims 
procedures for employee benefit plans. Generally, modifications are 
proposed for provisions affecting time frames for decision making, 
disclosure and notice requirements, standards of review on appeal, and 
consequences of failure to establish and follow reasonable claims 
procedures. The methodology and assumptions used in estimating the 
burden hours and costs associated with employee benefit plan claims 
procedure rules as proposed are described in the analysis of cost, 
which follows.
    Agency: Department of Labor, Pension and Welfare Benefits 
Administration.
    Title: Benefit Claims Procedure Regulation pursuant to 29 CFR 
2560.503-1.
    Type of Review: Revision of a currently approved collection.
    OMB Numbers: 1210-0053.
    Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions.
    Total Respondents: 6,690,345.
    Total Responses: 63,317,000.
    Frequency of Response: On occasion.
    Total Annual Burden: 496,000 (1998); 504,000 (1999); 730,000 
(2000).
    Estimated Annual Cost (Operating and Maintenance): $53,710,000 
(1998); $54,520,000 (1999); $89,520,000 (2000).
    Comments submitted in response to this notice will be summarized 
and/or included in the request for OMB approval of the information 
collection request; they will also become a matter of public record.

Analysis of Cost

    The Department performed a comprehensive, unified analysis to 
estimate the costs of the proposed regulation for purposes of 
compliance with Executive Order 12866, the Regulatory Flexibility Act, 
and the Paperwork Reduction Act. The methods and results of that 
analysis are summarized below.
    To estimate the cost of the proposed regulation, it was necessary 
to estimate the number of claims procedures and the volume of claims by 
type in the ERISA-covered employee benefit plan universe and to make 
certain assumptions about the cost of bringing those procedures and 
claims and appeals transactions into compliance with the proposed 
regulation's provisions.
    The Department estimated the number of claims procedures based on 
Form 5500 Series data and other sources. With respect to pension plans, 
the Department assumes that each plan designs and implements its own 
procedure. With respect to welfare plans, the number of claims 
procedures is estimated to be smaller than the number of plans. While 
large welfare plans are assumed to design and implement their own 
procedures, small plans are assumed typically to buy a limited number 
of standard products from vendors.

                 Number of Claims and Appeals Procedures                
------------------------------------------------------------------------
                                                              Non-health
                                     Pension       Health      welfare  
------------------------------------------------------------------------
Small Plans......................      629,000       11,000       14,000
Large Plans......................       62,000       40,000       41,000
    Total........................      690,000       51,000       55,000
                                  --------------------------------------
------------------------------------------------------------------------

    The Department estimated claims and appeals volume based on plan 
participation and various sources of data indicative of the number of 
claims and appeals per participant. The number of claims per 
participant is estimated to be far higher for plans with ongoing claim 
activity, such as health and dental plans, than for plans with one-time 
or highly contingent claim activity, such as pension and disability 
plans. Volume was adjusted to account for expected growth in 
participation.
    Where appropriate, the estimated number of claiming events affected 
by the proposed regulation was reduced to reflect the generally high 
levels of compliance with the proposed regulation's provisions 
represented by plans' current, normal business practices. (Responses to 
the Department's RFI and numerous other sources indicate that many 
plans are already largely in compliance with many of the proposed 
regulation's provisions, either as a result of state law or other 
requirements, or in response to plan sponsor and participant demands.)
    For purposes of the Paperwork Reduction Act, the Department assumes 
that 100 percent of small, fully insured welfare plans and 75 percent 
of all other plans use service providers to carry out information 
collection and disclosure tasks. Based on these assumptions, plan 
participation and numbers of procedures are distributed as shown in the 
chart below.

                     Participation and Procedures by Plan Type and Use of Service Providers                     
----------------------------------------------------------------------------------------------------------------
                                                      Service providers                       In-house          
----------------------------------------------------------------------------------------------------------------
Pension Plans:                                                                                                  
    Participation........................  65 MM.................................  22 MM                        
    Procedures...........................  518,000...............................  173,000                      
Health Plans:                                                                                                   
    Participation........................  56 MM.................................  14 MM                        
    Procedures...........................  39,000................................  12,000                       
Other Welfare Plans:                                                                                            
    Participation........................  131 MM................................  37 MM                        
    Procedures...........................  44,000................................  11,000                       
----------------------------------------------------------------------------------------------------------------

    The Department classified as preparation burden the resources 
expended on a one-time, start-up basis to revise the forms used for 
notices required by the proposed regulation and attributed this burden 
to the year 2000. These costs were estimated as a function of the 
number of claims and appeals procedures affected. The Department

[[Page 48404]]

classified as distribution burden the resources expended to process 
claims and appeals, including the resources used to fill in and 
distribute notice forms and provide for any associated disclosures. 
These costs were estimated as a function of the number of claims and 
appeals affected.
    The Department developed assumptions regarding the burden of 
complying with the proposed regulation's provisions, attributing for 
the purpose of this analysis a $11 hourly cost to purely clerical tasks 
and a $50 hourly rate to combined professional and clerical tasks, 
along with a $0.50 to $1.00 unit cost for materials and distribution of 
each claim or appeal decision notice. These assumptions yield the 
following estimates of the burden of the proposed regulation's notice 
and disclosure requirements for the year 2000. Recall that the 
preparation burden is a one-time cost and will be zero in other years, 
while the distribution burden will vary with claims volume and mix.

                                 Summary of Notice and Disclosure Burdens, 2000                                 
----------------------------------------------------------------------------------------------------------------
                                                            Hours                             Dollars           
----------------------------------------------------------------------------------------------------------------
All Plans................................  3.5 MM................................  90 MM                        
    Distribution.........................  2.6 MM................................  55 MM                        
    Preparation..........................  0.9 MM................................  34 MM                        
Using Service Providers..................  2.7 MM................................  83 MM                        
    Distribution.........................  2.1 MM................................  49 MM                        
    Preparation..........................  0.7 MM................................  34 MM                        
Not Using Service Providers..............  0.7 MM................................  6 MM                         
    Distribution.........................  0.5 MM................................  6 MM                         
    Preparation..........................  0.2 MM                                  .............................
----------------------------------------------------------------------------------------------------------------

    For purposes of Executive Order 12866 and the Regulatory 
Flexibility Act, the Department estimated the incremental economic 
impact of the proposed regulation `` that is, the added cost of the 
proposed regulation relative to a baseline reflecting no proposed 
regulation.
    Many of the provisions of the proposed regulation represent 
clarifications rather than changes of the existing regulation. Such 
provisions will have no economic impact. The Department estimated the 
impact of changes and additions embodied in the proposed regulation. 
The Department separately assessed ongoing costs, which will vary over 
time with claims volume and mix, and one-time, start-up costs, which 
are assumed to be incurred in 2000.
    The Department's estimates of the proposed regulation's ongoing 
costs reflect provisions requiring notification following the 
submission of benefit requests that do not follow plan filing rules, 
limiting to one the appeals required before seeking legal redress, 
requiring fuller and fairer review of denied claims on appeal, 
requiring disclosure on request following denied appeals, and 
establishing longer minimum time allowances for denied health plan 
claimants to appeal. They also reflect certain provisions directed 
solely at health plans, including those requiring plans to notify 
participants in advance of certain terminations of services, 
consultation with medical professionals in deciding appeals that 
involve medical issues, and shorter deadlines for making standard and 
urgent claims and appeals determinations.
    The Department developed assumptions regarding the cost of 
complying with the proposed regulation's provisions, attributing (as 
was done with respect to the burden analysis) an $11 hourly cost to 
purely clerical tasks and a $50 hourly rate to combined professional 
and clerical tasks. The Department further attributed a cost of $350 to 
professional medical reviews. Using these assumptions, the Department 
estimates the ongoing cost of the proposed regulation at $30 million in 
2000, including $6 million for small plans and $24 million for large 
plans. This amounts to $0.04 per claim and $0.09 per participant. The 
aggregate amount will vary over time with claims volume and mix.
    The proposed regulation will also prompt all plans to design and 
implement changes to their claims and appeals procedures, imposing a 
one-time, start-up cost. Whether changes will be required, and the 
extent of any required changes, depend not on the difference between 
the current and proposed regulations' standards, but on the difference 
between baseline plan practices and the proposed regulation's 
standards. As noted above, there is reason to believe that many plans 
are already in compliance or nearly in compliance with the proposed 
regulation. Health plan practices in particular often exceed the 
proposed regulation's new, higher standards. Nonetheless, it seems 
likely that many plans will need to revise at least some aspect of 
their formal procedures, even if this means little or no change to 
their actual practices.
    The Department assumes an average cost to revise procedures of 
$100. This yields an estimated $80 million in start-up costs for all 
plans in 2000, including $65 million for small plans. Most of the small 
plan costs are attributable to small pension rather than health or 
other welfare plans, reflecting the Department's understanding that 
small welfare plans using service providers share a limited menu of 
common claims procedures and therefore share the cost of revising those 
relatively few procedures.
    The Department also estimated the one-time cost of preparing claims 
and appeals determination forms as part of its estimates of the 
proposed regulation's notice and disclosure burdens in connection with 
the Paperwork Reduction Act, as discussed above. The total cost 
(including both the dollar burden and the dollar value of the hour 
burden) amounts to $45 million, including $37 million for small plans 
and $8 million for large plans. As with the cost to revise procedures, 
the small plan cost is attributable mostly to small pension plans.
    Summing these, the Department estimates the total start-up cost 
associated with the proposed regulation at $125 million, including $102 
million for small plans (most of this being for pension plans) and $22 
million for large plans. Given the large volume of claims and number of 
participants involved, the costs per claim or per participant are 
small. These costs respectively amount to $0.15 and $0.35 for all 
plans, $0.65 and $2.16 for small plans, and $0.03 and

[[Page 48405]]

$0.07 for large plans. The Department solicits comments on these 
estimates.
    Combining ongoing and start-up costs, the Department's estimates of 
the total cost of the proposed regulation in 2000 are reported in the 
table below. The Department solicits comments on these estimates. 
Recall that the one-time, start-up costs occur only in 2000 and not in 
other years, and that the ongoing costs will vary over time with claims 
volume and mix.

                                Estimated Total Cost of Proposed Regulation, 2000                               
----------------------------------------------------------------------------------------------------------------
                                           All plans                 Small plans               Large plans      
----------------------------------------------------------------------------------------------------------------
Total Cost.......................  $155 MM..................  $108 MM.................  $46 MM                  
    Per claim....................  0.19.....................  0.69....................  0.07                    
    Per participant..............  0.44.....................  2.29....................  0.15                    
Ongoing Cost.....................  30 MM....................  6 MM....................  24 MM                   
    Per claim....................  0.04.....................  0.04....................  0.04                    
    Per participant..............  0.09.....................  0.13....................  0.08                    
Start-Up Cost....................  125 MM...................  102 MM..................  22 MM                   
    Per claim....................  0.15.....................  0.65....................  0.03                    
    Per participant..............  0.35.....................  2.16....................  0.07                    
----------------------------------------------------------------------------------------------------------------

E. Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, this proposed rule does not 
include any Federal mandate that may result in expenditures by State, 
local, or tribal governments, but does include mandates which may 
impose an annual burden of $100 million or more on the private sector. 
The basis for this statement is described in the analysis of costs for 
purposes of Executive Order 12866 and the Regulatory Flexibility Act.

F. Small Business Regulatory Enforcement Fairness Act

    The rule proposed in this action is subject to the provisions of 
the Small Business Regulatory Enforcement Fairness Act of 1996 (5 
U.S.C. 801 et seq.) (SBREFA) and is a major rule under SBREFA. The 
rule, if finalized, will be transmitted to Congress and the Comptroller 
General for review.

Statutory Authority

    This proposed regulation would be adopted pursuant to the authority 
contained in sections 503 and 505 of ERISA (Pub. L. 93-406, 88 Stat. 
893, 894; 29 U.S.C. 1133, 1135) and under the Secretary of Labor's 
Order No. 1-87, 52 FR 13139 (April 21, 1987).

List of Subjects in 29 CFR Part 2560

    Employee benefit plans, Employee Retirement Income Security Act, 
Benefit Claims Procedures.

    For the reasons set out in the preamble, 29 CFR part 2560 is 
proposed to be amended as follows:

PART 2560--RULES AND REGULATIONS FOR ADMINISTRATION AND ENFORCEMENT

    1. The authority citation for part 2560 continues to read as 
follows:

    Authority: Secs. 502, 505 of ERISA, 29 U.S.C. 1132, 1135, and 
Secretary's Order 1-87, 52 FR 13139 (April 21, 1987).
    Section 2560-502-1 also issued under sec. 502(b)(1), 29 U.S.C. 
1132(b)(1).
    Section 2560-502i-1 also issued under sec. 502(i), 29 U.S.C. 
1132(i).
    Section 2560-503-1 also issued under sec. 503, 29 U.S.C. 1133.

    2. Section 2560.503-1, is proposed to be revised to read as 
follows:


Sec. 2560.503-1  Claims procedure.

    (a) Scope and purpose. In accordance with the authority of sections 
503 and 505 of the Employee Retirement Income Security Act of 1974 
(ERISA or the Act), 29 U.S.C. 1133, 1135, this section sets forth 
minimum requirements for employee benefit plan procedures pertaining to 
claims for benefits by participants and beneficiaries (hereinafter 
referred to as claimants) or their representatives. Except as otherwise 
specifically provided herein, these requirements apply to every 
employee benefit plan described in section 4(a) and not exempted under 
section 4(b) of the Act.
    (b) Obligation to establish and maintain reasonable claims 
procedures. Every employee benefit plan shall establish and maintain 
reasonable procedures governing the filing of benefit claims, 
notification of benefit determinations, and appeal of adverse benefit 
determinations (hereinafter collectively referred to as claims 
procedures). The claims procedures for a plan will be deemed to be 
reasonable only if:
    (1) The claims procedures comply with the requirements of 
paragraphs (c), (d), (e), (f), (g), and (h) of this section, as 
appropriate;
    (2) A description of all claims procedures (including, in the case 
of group health plan services or benefits, procedures for obtaining 
preauthorizations, approvals, or utilization review decisions) and the 
applicable time frames is included as part of a summary plan 
description meeting the requirements of 29 CFR 2520.102-3;
    (3) The claims procedures do not contain any provision, and are not 
administered in a way, that requires a claimant to submit an adverse 
benefit determination to arbitration or to file more than one appeal of 
an adverse benefit determination prior to bringing a civil action under 
section 502(a) of the Act;
    (4) The claims procedures do not contain any provision, and are not 
administered in a way, that unduly inhibits or hampers the initiation 
or processing of claims for benefits. For example, a provision or 
practice that requires payment of a fee or costs as a condition to 
making a claim or to appealing an adverse benefit determination would 
unduly inhibit the initiation and processing of claims for benefits. 
Also, the denial of a claim for failure to obtain a preauthorization 
under circumstances that would make obtaining such preauthorization 
impossible or where application of the preauthorization process could 
seriously jeopardize the life or health of the claimant (e.g., the 
claimant is unconscious and has no representative or is in extremely 
serious need of immediate care at the time medical treatment is 
required) would constitute a practice that unduly inhibits the 
initiation and processing of a claim;
    (5) The claims procedures do not foreclose or limit the ability of 
a representative to act on behalf of the claimant; and
    (6) The claims procedures provide that, in the event that a 
claimant or a representative of a claimant makes a benefit request that 
fails to comply with the requirements of the plan's procedures for 
making a claim, the plan administrator shall notify the claimant

[[Page 48406]]

of such failure and of the plan's procedures governing the making of a 
claim. The plan administrator shall provide this notification within a 
reasonable period of time appropriate to the circumstances, taking into 
account any pertinent medical exigencies, not to exceed 5 days (24 
hours in the case of a benefit request involving urgent care) following 
receipt of the benefit request by the plan. The benefit request shall 
be deemed to have been received by the plan when the claimant or 
representative makes a communication reasonably calculated to bring the 
request to the attention of persons responsible for benefit claim 
decisions. Communication with any of the following shall be deemed a 
communication reasonably calculated to bring the claim to the attention 
of persons responsible for benefit claim decisions:
    (i) In the case of a single employer plan, either the 
organizational unit customarily in charge of employee benefits matters 
for the employer or any officer of the employer;
    (ii) In the case of a plan to which more than one employer 
contributes or which is established or maintained by an employee 
organization, the joint board, association, committee, or similar group 
(or any member of any such board, association, committee or group) 
responsible for establishing or maintaining the plan or the person or 
the organizational unit customarily in charge of employee benefit 
matters;
    (iii) In the case of a plan the benefits of which are provided or 
administered by an insurance company, insurance service, third-party 
contract administrator, health maintenance organization, or similar 
entity, the person or organizational unit with the authority to pre-
approve, approve, or deny benefits under the plan or any officer of the 
insurance company, insurance service, third-party contract 
administrator, health maintenance organization, or similar entity.
    (iv) For purposes of paragraph (b)(6) of this section, a 
communication shall be deemed to have been brought to the attention of 
an organizational unit if it is received by any person employed in such 
unit.
    (7) The claims procedures provide that, in the case of a claim 
involving urgent care within the meaning of paragraph (j)(1), for an 
expedited process pursuant to which--
    (i) A request for an expedited determination may be submitted 
orally or in writing by the claimant or the claimant's representative; 
and
    (ii) All necessary information, including the plan's benefit 
determination, shall be transmitted between the plan and the claimant 
by telephone, facsimile or other similarly expeditious method.
    (c) Claim for benefits. For purposes of this section, a claim for 
benefits is a request for a plan benefit or benefits, made by a 
claimant or by a representative of a claimant, that complies with a 
plan's reasonable procedure for making benefit claims. In the case of a 
group health plan, a claim for benefits includes a request for a 
coverage determination, for preauthorization or approval of a plan 
benefit or for a utilization review determination in accordance with 
the terms of the plan.
    (d) Notification of benefit determination. (1) Except as provided 
in paragraphs (d)(2) and (d)(3) of this section, the plan administrator 
shall notify a claimant, in accordance with paragraph (e) of this 
section, of the plan's benefit determination within a reasonable period 
of time after receipt of the claim, but not later than 90 days after 
receipt of the claim by the plan, unless the claimant (or the 
claimant's representative) has failed to submit sufficient information 
to determine whether, or to what extent, benefits are covered or 
payable under the plan. In the case of such a failure, the plan 
administrator shall notify the claimant as soon as possible, but not 
later than 45 days after receipt of the claim by the plan, of the 
specific information necessary to complete the claim. The claimant 
shall then be afforded not less than 180 days after receipt of such 
notice to furnish the specified information to the plan. The plan 
administrator shall notify the claimant of the plan's benefit 
determination within a reasonable period of time, but not later than 45 
days after the earlier of: The plan's receipt of the specified 
additional information, or the end of the period afforded the claimant 
to submit the specified additional information. If special 
circumstances require an additional extension of time for processing 
the claim, the plan administrator shall provide the claimant with 
notice of the extension prior to the termination of the initial 90-day 
period. In no event shall such extension exceed a period of 90 days 
from the end of such initial period. The extension notice shall 
indicate the special circumstances requiring an extension of time and 
the date by which the plan expects to make the benefit determination.
    (2) In the case of a group health plan, the plan administrator 
shall notify a claimant of the plan's benefit determination in 
accordance with paragraph (d)(2)(i), (d)(2)(ii), or (d)(2)(iii) of this 
section, as appropriate.
    (i) In the case of a claim involving urgent care, within the 
meaning of paragraph (j)(1) of this section, the plan administrator 
shall notify the claimant, in accordance with paragraph (e) of this 
section, of the plan's benefit determination as soon as possible, 
taking into account the medical exigencies of the case, after receipt 
of the claim by the plan, but not later than 72 hours after receipt of 
the claim by the plan, unless the claimant (or the representative of 
the claimant) fails to provide sufficient information to determine 
whether, or to what extent, benefits are covered or payable under the 
plan. In the case of such a failure, the plan administrator shall 
notify the claimant as soon as possible, but not later than 24 hours 
after receipt of the claim by the plan of the specific information 
necessary to complete the claim. The claimant shall be afforded a 
reasonable amount of time, taking into account the circumstances, but 
not less than 48 hours, to provide the specified information. The plan 
administrator shall notify the claimant of the plan's benefit 
determination as soon as possible , but in no case later than 48 hours 
after the earlier of: The plan's receipt of the specified information, 
or the end of the period afforded the claimant to provide the specified 
additional information.
    (ii) If a group health plan has approved a benefit or service to be 
provided for a specified or indefinite period of time, any reduction or 
termination of such benefit or service (other than by plan amendment or 
termination) before the end of such period shall constitute an adverse 
benefit determination within the meaning of paragraph (j)(2) of this 
section. To the extent that such an adverse benefit determination 
denies a claim involving urgent care, as defined in paragraph (j)(1) of 
this section, the plan administrator shall provide notice of the 
adverse benefit determination, in accordance with paragraph (e) of this 
section, at a time sufficiently in advance of the reduction or 
termination to allow the claimant (or a representative of the claimant) 
to appeal and obtain a determination on review of that adverse benefit 
determination before the benefit is reduced or terminated.
    (iii) In the case of a claim that does not involve urgent care, the 
plan administrator shall notify the claimant, in accordance with 
paragraph (e) of this section, of the plan's benefit determination 
within a reasonable period of time appropriate to the circumstances, 
taking into account any

[[Page 48407]]

pertinent medical circumstances, but not later than 15 days after 
receipt of the claim by the plan, unless the claimant (or the 
claimant's representative) has failed to submit sufficient information 
to determine whether, or to what extent, benefits are covered or 
payable under the plan. In the case of such a failure, the plan 
administrator shall notify the claimant of the specific information 
necessary to complete the claim within a reasonable period of time 
appropriate to the circumstances, taking into account any pertinent 
medical circumstances, but not later than 5 days after receipt of the 
claim by the plan. The claimant shall then be afforded not less than 45 
days after receipt of such notice to furnish the specified information 
to the plan. The plan administrator shall notify the claimant of the 
plan's benefit determination within a reasonable period of time after 
the earlier of: The plan's receipt of the specified additional 
information, or the end of the period afforded the claimant to submit 
the specified additional information, but in no event later than 15 
days after the earlier of those two dates.
    (3) In the case of a plan that provides disability benefits, 
paragraph (d)(1) of this section shall apply to claims involving 
disability benefits, except that ``30 days'' shall be substituted 
therein for ``90 days'' and ``15 days'' shall be substituted therein 
for ``45 days,'' wherever such terms appear in that paragraph.
    (e) Manner and content of notification of benefit determination. 
(1) Except as provided in paragraph (e)(2) of this section, the plan 
administrator shall provide a claimant with written or electronic 
notification of the plan's benefit determination. Any electronic 
notification shall comply with the standards imposed by 29 CFR 
2520.104b-1(c)(1)(i), (iii), and (iv). In the case of an adverse 
benefit determination, within the meaning of paragraph (j)(2) of this 
section, the notification shall set forth, in a manner calculated to be 
understood by the claimant:
    (i) The specific reasons for the adverse determination;
    (ii) Reference to the specific plan provisions (including any 
internal rules, guidelines, protocols, criteria, etc.) on which the 
determination is based;
    (iii) A description of any additional material or information 
necessary for the claimant to complete the claim and an explanation of 
why such material or information is necessary;
    (iv) A description of the plan's review procedures and the time 
limits applicable to such procedures, including a statement of the 
claimant's right to bring a civil action under section 502(a) of the 
Act following an adverse benefit determination on review; and
    (v) In the case of an adverse benefit determination by a group 
health plan involving a claim for urgent care, a description of the 
expedited review process applicable to such claims.
    (2) In the case of an adverse benefit determination by a group 
health plan involving a claim for urgent care, the information 
described in paragraph (e)(1) of this section, may be provided to the 
claimant orally within the time frame prescribed in paragraph (d)(2)(i) 
of this section, provided that a written or electronic notification in 
accordance with paragraph (e)(1) of this section, is furnished to the 
claimant not later than 3 days after the oral notification.
    (f) Appeal of adverse benefit determinations. (1) In general. Every 
employee benefit plan shall establish and maintain a procedure by which 
a claimant shall have a reasonable opportunity to appeal an adverse 
benefit determination, within the meaning of paragraph (j)(2) of this 
section, to an appropriate named fiduciary of the plan, and under which 
there will be a full and fair review of the claim and the adverse 
benefit determination.
    (2) Full and fair review. A claims procedure will not be deemed to 
provide a claimant with a reasonable opportunity for a full and fair 
review of a claim and adverse benefit determination unless:
    (i) In the case of all plans, the claims procedure--
    (A) Provides claimants a reasonable period of time, related to the 
nature of the benefit which is the subject of the claim and the 
attendant circumstances within which to appeal the determination. In 
the case of a group health plan or a disability plan, such period shall 
not be less than 180 days following receipt by the claimant of a 
written notification of the adverse benefit determination. In the case 
of a plan, other than a group health plan or a disability plan, such 
period of time shall not be less than 60 days following receipt by the 
claimant of a written notification of the adverse benefit 
determination;
    (B) Provides claimants the opportunity to submit written comments, 
documents, records, and other information relating to the claim for 
benefits;
    (C) Provides that a claimant shall be provided, upon request, 
reasonable access to, and copies of, all documents, records, and other 
information relevant to the claimant's claim for benefits, without 
regard to whether such documents, records, and information were 
considered or relied upon in making the adverse benefit determination 
that is the subject of the appeal.
    (D) Provides for a review that:
    (1) Does not afford deference to the initial adverse benefit 
determination, and
    (2) Takes into account all comments, documents, records, and other 
information submitted by the claimant (or the claimant's 
representative) relating to the claim, without regard to whether such 
information was submitted or considered in the initial benefit 
determination; and
    (E) Provides for review by an appropriate named fiduciary of the 
plan who is neither:
    (1) The party who made the adverse benefit determination that is 
the subject of the appeal, nor
    (2) The subordinate of such party.
    (ii) In the case of a group health plan, the claims procedure--
    (A) Provides that, in deciding appeals of any adverse benefit 
determination involving a medical judgment, including determinations 
with regard to whether a particular treatment, drug, or other item is 
experimental, investigational, or not medically necessary or 
appropriate, the appropriate named fiduciary shall consult with a 
health care professional, as defined in paragraph (j)(5) of this 
section, who has appropriate training and experience in the field of 
medicine involved in the medical judgment;
    (B) Provides that the health care professional engaged for purposes 
of a consultation under paragraph (f)(2)(ii)(A) of this section shall 
be independent of any health care professional who participated in the 
initial adverse benefit determination; and
    (C) Provides in the case of a claim involving urgent care, within 
the meaning of paragraph (j)(1) of this section, for an expedited 
review process pursuant to which--
    (1) A request for an expedited appeal of an adverse benefit 
determination may be submitted orally or in writing by the claimant or 
the claimant's representative; and
    (2) All necessary information, including the plan's benefit 
determination on review, shall be transmitted between the plan and the 
claimant by telephone, facsimile, or other available similarly 
expeditious method.
    (g) Notification of benefit determination on review. (1) Except as

[[Page 48408]]

provided in paragraphs (g)(2) and (g)(3) of this section--
    (i) The plan administrator shall notify a claimant, in accordance 
with paragraph (h) of this section, of the plan's benefit determination 
on review within a reasonable period of time, but not later than 60 
days after the plan's receipt of the claimant's request for review of 
an adverse benefit determination, unless special circumstances (such as 
the need to hold a hearing, if the plan procedure provides for a 
hearing) require an extension of time for processing, in which case the 
claimant shall be notified of the plan's benefit determination on 
review as soon as possible, but not later than 120 days after receipt 
of a request for review.
    (ii) In the case of a plan with a committee or board of trustees 
designated as the appropriate named fiduciary that holds regularly 
scheduled meetings at least quarterly, the appropriate named fiduciary 
shall make a benefit determination no later than the date of the 
meeting of the committee or board that immediately follows the plan's 
receipt of a request for review, unless the request for review is filed 
within 30 days preceding the date of such meeting. In such case, a 
benefit determination may be made by no later than the date of the 
second meeting following the plan's receipt of the request for review. 
If special circumstances (such as the need to hold a hearing, if the 
plan procedure provides for a hearing) require a further extension of 
time for processing, a benefit determination shall be rendered not 
later than the third meeting of the committee or board following the 
plan's receipt of the request for review. If such an extension of time 
for review is required because of special circumstances, the plan 
administrator shall provide the claimant with written notice of the 
extension, describing the special circumstances and the date as of 
which the benefit determination will be made, prior to the commencement 
of the extension. The plan administrator shall provide the claimant 
with notification of the benefit determination in accordance with 
paragraph (h) of this section as soon as possible, but not later than 5 
days after the benefit determination is made.
    (2) In the case of a group health plan--
    (i) The plan administrator shall notify the claimant, in accordance 
with paragraph (h) of this section, of the plan's benefit determination 
on review within a reasonable period of time appropriate to the 
circumstances, taking into account any pertinent medical circumstances, 
but not later than 30 days after receipt by the plan of the claimant's 
request for review of an adverse benefit determination, unless the 
claim involves urgent care.
    (ii) If a claim involves urgent care, the plan administrator shall 
notify the claimant of the plan's benefit determination on review as 
soon as possible, taking into account the medical exigencies of the 
case, after receipt by the plan of the request for review, but not 
later than 72 hours after receipt of the claimant's request for review 
of an adverse benefit determination.
    (3) Claims involving disability benefits shall be governed by 
paragraph (g)(1)(i) of this section, except that ``45 days'' shall be 
substituted therein for ``60 days,'' and ``90 days'' shall be 
substituted therein for ``120 days,'' wherever such terms appear in 
that paragraph.
    (4) The plan administrator shall, in accordance with the statements 
required by paragraphs (h)(3) and (h)(4) of this section, provide 
claimants with copies of, or reasonable access to, the documents and 
records described in paragraph (h)(3) or paragraph (h)(4) of this 
section, or both, as appropriate.
    (h) Manner and content of notification of benefit determination on 
review. The plan administrator shall provide a claimant with written or 
electronic notification of a plan's benefit determination on review. 
Any electronic notification shall comply with the standards imposed by 
29 CFR 2520.104b-1(c)(1)(i), (iii), and (iv). In the case of an adverse 
benefit determination, within the meaning of paragraph (j)(2) of this 
section, the notification must set forth, in a manner calculated to be 
understood by the claimant:
    (1) The specific reasons for the adverse determination;
    (2) Reference to the specific plan provisions (including any 
internal rules, guidelines, protocols, criteria, etc.) on which the 
benefit determination is based;
    (3) A statement that the claimant is entitled to receive, upon 
request, reasonable access to, and copies of, all documents and records 
relevant to the claimant's claim for benefits, without regard to 
whether such records were considered or relied upon in making the 
adverse benefit determination on review, including any reports, and the 
identities, of any experts whose advice was obtained; and
    (4) A statement of the claimant's right to bring a civil action 
under section 502(a) of the Act following an adverse benefit 
determination on review.
    (i) Failure to establish and follow reasonable claims procedures. 
In the case of the failure of a plan to establish or follow claims 
procedures consistent with the requirements of this section, a claimant 
shall be deemed to have exhausted the administrative remedies available 
under the plan and shall be entitled to pursue any available remedies 
under section 502(a) of the Act on the basis that the plan has failed 
to provide a reasonable claims procedure that would yield a decision on 
the merits of the claim.
    (j) Definitions. For purposes of this section--
    (1) (i) A claim involving urgent care is any claim for medical care 
or treatment with respect to which the application of the time periods 
for making non-urgent care determinations--
    (A) Could seriously jeopardize the life or health of the claimant 
or the ability of the claimant to regain maximum function, or,
    (B) In the opinion of a physician with knowledge of the claimant's 
medical condition, would subject the claimant to severe pain that 
cannot be adequately managed without the care or treatment that is 
subject of the claim.
    (ii) Except as provided in paragraph (j)(1)(iii) of this section, 
whether a claim is a ``claim involving urgent care'' within the meaning 
of paragraph (j)(1)(i)(A) of this section is to be determined by an 
individual acting on behalf of the plan applying the judgment of a 
reasonable individual who is not a trained health professional.
    (iii) Any claim that a physician with knowledge of the claimant's 
medical condition determines is a ``claim involving urgent care'' 
within the meaning of paragraph (j)(1)(i) of this section shall be 
treated as a ``claim involving urgent care'' for purposes of this 
section.
    (2) The term adverse benefit determination means any of the 
following: a denial, reduction, or termination of, or a failure to 
provide or make payment (in whole or in part) for, a benefit, including 
a denial, reduction, or termination of, or a failure to provide or make 
payment (in whole or in part) for, a benefit resulting from the 
application of any utilization review directed at cost containment, as 
well as a failure to cover an item of service for which benefits are 
otherwise provided because it is determined to be experimental or 
investigational or not medically necessary or appropriate.
    (3) The term notice or notification means the delivery or 
furnishing of information to an individual in a manner that satisfies 
the standards of 29

[[Page 48409]]

CFR 2520.104b-1(b) as appropriate with respect to material required to 
be furnished or made available to an individual.
    (4) The term group health plan has the meaning given that term by 
section 733(a) of the Act.
    (5) The term health care professional means a physician or other 
health care professional licensed, accredited, or certified to perform 
specified health services consistent with State law.
    (k) Apprenticeship plans. This section does not apply to employee 
benefit plans that provide solely apprenticeship training benefits.
    (l) Effective date. This section is effective [180 days after 
publication of the final regulation].
    (m) Applicability Dates. (1) Except as provided in paragraph (m)(2) 
of this section, this section shall be applicable to plans on the later 
of the effective date or the first day of the first plan year beginning 
on or after the effective date.
    (2) In the case of a collectively bargained plan that is not 
subject to section 302(c)(5) of the Labor Management Relations Act, 
1947, 29 U.S.C. 186(c)(5), this section is effective as of the first 
day of the plan year beginning on or after the later of: July 1, 1999, 
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 July 1, 1999).

    Signed at Washington, D.C., this 28th day of August, 1998.
Meredith Miller,
Deputy Assistant Secretary for Policy, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 98-23730 Filed 9-4-98; 8:45 am]
BILLING CODE 4510-29-P