[Federal Register Volume 67, Number 144 (Friday, July 26, 2002)]
[Rules and Regulations]
[Pages 48802-48814]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-17621]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

45 CFR Part 146

[CMS-2033-IFC]
RIN 0938-AK00


Technical Change to Requirements for the Group Health Insurance 
Market; Non-Federal Governmental Plans Exempt From HIPAA Title I 
Requirements

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule with comment period amends the 
exemption election requirements that apply to self-funded non-Federal 
governmental plans. In it, we clarify the circumstances under which 
plan sponsors may exempt these plans from most of the requirements of 
title XXVII of the Public Health Service (PHS) Act and provide guidance 
on the procedures, limitations, and documentation associated with 
exemption elections.
    In this interim final rule with comment period, we provide that a 
sponsor of a self-funded, non-Federal governmental plan may elect to 
exempt its plan from the Women's Health and Cancer Rights Act of 1998. 
Additionally, we revise a number of procedural requirements affecting 
the exemption election process and establish certain enrollee 
protections with respect to exemption elections.
    In response to public comments on an interim final rule published 
in the Federal Register on April 8, 1997 (62 FR 16894), we amend our 
regulation to clarify that nothing in the statute or regulation affects 
a State's right to limit the extent to which its non-Federal 
governmental employers may exempt their self-funded plans from title 
XXVII of the PHS Act.
    Finally, we include a technical correction to our regulation on 
guaranteed availability of health insurance coverage for employers in 
the small group market.

DATES: Effective date: These regulations are effective on September 24, 
2002.
    Comment date: Comments will be considered if we receive them at the 
appropriate address, as provided below, no later than 4 p.m. on 
September 24, 2002.

ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Centers for Medicare & Medicaid Services, Department 
of Health and Human Services, Attention: CMS-2033-IFC, P.O. Box 8010, 
Baltimore, MD 21244-8010.
    To ensure that mailed comments are received in time for us to 
consider, please allow for possible delays in delivery.
    If you prefer, you may deliver (by hand or courier) your written 
comments (1 original and 3 copies) to one of the following addresses: 
Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or Room C5-14-03, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and could be considered late. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission. In commenting, please refer to file code 
CMS-2033-IFC. For information on viewing public comments, see the 
beginning of the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: David Holstein, (410) 786-1565.s

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments

    Comments received timely will be available for public inspection in 
Room C5-16-03, 7500 Security Blvd., Baltimore, Maryland 21244-1850, 
generally beginning approximately 3 weeks after the document has been 
published. Members of the public who are interested in reviewing timely 
public comments are asked to schedule an appointment by calling (410) 
786-9994 Monday through Friday from 8:30 a.m. to 5 p.m.

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I. Background

    Title I of the Health Insurance Portability and Accountability Act 
of 1996 (HIPAA) added a new title XXVII to the PHS Act to establish 
various reforms to the group and individual health insurance markets. 
The group market reforms are contained under Part A of title XXVII, 
which includes, among other things, guaranteed availability of coverage 
to small group market employers and renewability of coverage in the 
small and large group markets; limitations on pre-existing condition 
exclusion periods; special enrollment periods under certain 
circumstances; and prohibition of discrimination against individual 
participants and beneficiaries based on health status.
    Part A of title XXVII was amended by the Newborns' and Mothers' 
Health Protection Act of 1996 (NMHPA), the Mental Health Parity Act of 
1996 (MHPA), and the Women's Health and Cancer Rights Act of 1998 
(WHCRA), which added new sections 2704, 2705 and 2706 (subpart 2 of 
Part A of title XXVII), respectively. NMHPA provides protections for 
mothers and newborn children for hospital stays following childbirth. 
MHPA, which applies to group health plans sponsored by employers with 
more than 50 employees, provides for parity between annual and lifetime 
dollar limits applicable to mental health benefits, and annual and 
lifetime dollar limits applicable to medical and surgical benefits. 
WHCRA requires group health plans that provide medical and surgical 
benefits for mastectomies to cover, among other things, reconstructive

[[Page 48803]]

surgery and prostheses following a mastectomy.
    Section 2721(b)(2) of the PHS Act, as added by HIPAA and 
implemented at 45 CFR 146.180, permits non-Federal governmental 
employers to elect to exempt self-funded portions of their group health 
plans (that is, benefits not provided through health insurance 
coverage) from most of the requirements of title XXVII of the PHS Act. 
(This practice is sometimes referred to in this preamble as ``opting 
out of HIPAA.'') However, health plans cannot be exempted from 
certification and disclosure of creditable coverage requirements under 
section 2701(e) of the PHS Act.
    We received numerous inquiries as to whether non-Federal 
governmental entities may ``opt out'' of various requirements added by 
NMHPA, MHPA and WHCRA, which were enacted after the initial HIPAA 
legislation. Section 2721(b)(2) of the PHS Act permits a plan sponsor 
of a self-funded non-Federal governmental plan to elect to exempt its 
group health plan from the requirements of ``subparts 1 through 3'' of 
Part A of title XXVII (except with respect to section 2701(e) of 
subpart 1). Therefore, the requirements of sections 2704, 2705 and 
2706, which comprise subpart 2 of Part A of title XXVII, fall within 
the scope of section 2721(b)(2).

II. Technical Correction to Sec. 146.150 Guaranteed Availability of 
Coverage for employers in the small group Market

    The regulation at Sec. 146.150(d)(2), which was intended to track 
the statute (section 2711(d)(2) of the PHS Act), misstates a statutory 
requirement. Under section 2711(d)(2), an issuer that denies group 
health insurance coverage to any small employer in a State on the basis 
that the issuer does not have financial reserves necessary to 
underwrite additional coverage, is prohibited from offering additional 
coverage in the small group market in the State for a period of 180 
days after the date coverage is denied, or until the issuer 
demonstrates to the applicable State authority, if required under State 
law, that the issuer has sufficient financial reserves to underwrite 
additional coverage, ``whichever is later.'' However, 
Sec. 146.150(d)(2) is worded in a way that the issuer is required to 
wait 180 days after it demonstrates renewed financial capacity before 
it may offer additional coverage in the small group market.
    Section 146.150(d)(2), which was simply intended to track the 
statute, is revised to correctly reflect section 2711(d)(2) of the PHS 
Act. Because the revision is a technical correction that is required by 
statute, the effective date of this revision is as if it was included 
in the regulations published on April 8, 1997 in the Federal Register 
at 62 FR 16894; that is, on June 7, 1997.

III. Analysis of and Response to Public Comments Received on the 
April 8, 1997 Interim Final Rule

    (For ease of reference, unless otherwise specified, the acronym 
``HIPAA,'' as used subsequently in this preamble, refers to title I of 
HIPAA, as well as to NMHPA, MHPA, and WHCRA, and ``HIPAA requirements'' 
refers to requirements of all of these statutes.)
    We received two letters of comment in response to the April 8, 1997 
interim final rule with comment period published in the Federal 
Register (62 FR 16894) that pertained exclusively to 45 CFR 146.180 
``Treatment of non-Federal governmental plans.''
    Comment: One commenter noted that there appeared to be an 
inconsistency in HIPAA between an amendment made to the PHS Act, and 
another amendment made to the Internal Revenue Code (the Code). The PHS 
Act, as amended by HIPAA, provides that non-Federal governmental plans 
are subject to HIPAA (while permitting self-funded non-Federal 
governmental plans to elect to be exempted); the Internal Revenue Code, 
as amended by HIPAA, states that HIPAA amendments to the Code do not 
apply to governmental plans. The commenter requested that we clarify 
whether the PHS Act or the Code is the appropriate authority.
    Response: The group market provisions of HIPAA made parallel 
amendments to the PHS Act, the Internal Revenue Code, and the Employee 
Retirement Income Security Act (ERISA). However, the HIPAA provisions 
of each statute generally apply to a different set of entities. In 
particular, the PHS Act applies to health insurance issuers and non-
Federal governmental plans, and the Code applies to employer-sponsored 
group health plans (including church plans) except governmental plans. 
The fact that the Code does not reference non-Federal governmental 
plans simply means that the Code is not the source of HIPAA 
requirements for those plans. Rather, the PHS Act is the source of 
those requirements. Thus, non-Federal governmental plans are subject to 
HIPAA (except to the extent that the plan sponsor has elected to exempt 
a self-funded plan under section 2721(b)(2) of the PHS Act), and 
authority for enforcing HIPAA requirements with respect to non-Federal 
governmental plans rests with HHS in accordance with section 
2722(b)(1)(B) of the PHS Act.
    Comment: The commenter stated that Sec. 146.180 should be amended 
to clarify that an election to exempt a plan from HIPAA means that the 
plan becomes subject to State law, including any applicable provisions 
that might parallel the requirements of HIPAA. The commenter noted that 
governmental plans are exempted from ERISA, and, accordingly, some 
States regulate their State and local plans. The commenter cited 
section 2723(a) of the PHS Act, presumably as the authority for 
adopting the suggested change.
    Response: We adopt the recommendation, but not on the basis of 
section 2723(a). Section 2723(a) of the PHS Act addresses the 
preemption of State laws`` * * * solely relating to health insurance 
issuers in connection with group health insurance coverage. * * *'' 
Self-funded plans are not provided through health insurance issuers. 
Section 2721(b)(2) of the PHS Act permits only plan sponsors of self-
funded non-Federal governmental plans to elect to exempt their plans 
from HIPAA requirements.
    There is nothing in section 2721(b)(2) that prevents a State, by 
law, regulation, or other State action having the effect of law, from 
establishing State requirements for non-Federal governmental plans that 
parallel HIPAA requirements, or from simply limiting the extent to 
which its non-Federal governmental employers may elect to exempt their 
self-funded plans from HIPAA requirements. States are free to regulate 
group health plans of non-Federal governmental employers because 
governmental group health plans, unlike group health plans sponsored by 
private employers, are exempt from ERISA requirements under section 
4(b)(1) of ERISA. (Section 514(a) of ERISA preempts State laws relating 
to employee benefit plans, including group health plans, that are 
subject to ERISA.) We amend 45 CFR 146.180 by adding a new paragraph 
(l) Construction to make clear that HIPAA does not interfere with a 
State's right to regulate non-Federal governmental plans. (This change 
is referenced in section IV.L. of this preamble.)

IV. Amendments to Sec. 146.180 ``Treatment of non-Federal 
Governmental Plans''

    This regulation amends Sec. 146.180 by redesignating existing 
paragraphs and adding new text to this section. For reference purposes, 
a redesignation table is provided at the end of this section for 
specific citations under Sec. 146.180.

[[Page 48804]]

A. Paragraph (a) Requirements Subject to Exemption

    We amend Sec. 146.180 by revising paragraph (a) and adding four new 
paragraphs. New paragraph (a)(1) summarizes the former prefatory text 
of Sec. 146.180 and adds WHCRA requirements to the list of HIPAA 
requirements from which a non-Federal governmental plan sponsor may 
elect to exempt its self-funded plan.
    New paragraph (a)(2)(i) clarifies that an exemption election cannot 
circumvent a HIPAA requirement to the extent the requirement applied to 
the plan before the effective date of the exemption election. Examples 
are provided.
    New paragraph (a)(2)(ii) clarifies that if a group health plan is 
co-sponsored by two or more employers, only those participants and 
dependents enrolled in the plan through the non-Federal governmental 
employer or employers that have opted out of HIPAA are affected by the 
opt-out election. This limitation is in accordance with the express 
language of section 2721(b)(2) of the PHS Act, which permits only ``* * 
* the plan sponsor of a nonfederal governmental plan'' to opt out of 
HIPAA with regard to self-funded plans. To the extent a plan is 
sponsored by an employer that is not a governmental employer, the plan 
is not a ``non-Federal governmental plan,'' which is defined at 
Sec. 144.103 to mean ``a governmental plan established or maintained 
for its employees by the government of any State or political 
subdivision thereof, or by any agency or instrumentality of either.'' 
Similarly, to the extent a plan is co-sponsored by governmental 
employers, not all of which have elected to opt out of HIPAA, HIPAA 
applies with respect to enrollees of the non-Federal governmental 
employers that have not opted out.
    New paragraph (a)(3) deals with stop-loss or excess risk coverage. 
In general, the purchase of stop-loss or excess risk coverage by a 
self-funded non-Federal governmental plan has no effect on the plan 
sponsor's ability to opt out of HIPAA. However, if coverage offered by 
an issuer as stop-loss or excess risk coverage is regulated as group 
health insurance coverage under State law that has not been preempted 
by ERISA or otherwise invalidated by any court, then for purposes of 
Sec. 146.180, the non-Federal governmental plan that purchases the 
coverage is considered to be fully insured. In that event, the plan is 
not permitted to opt out of HIPAA.
    Accordingly, a sponsor of a non-Federal governmental plan that 
wishes to opt out of HIPAA should ensure that the stop-loss policy 
being considered is not regulated as group health insurance coverage by 
the State. Paragraph (a)(3) applies solely for purposes of 
Sec. 146.180.
    New paragraph (a)(4) clarifies that nothing in part 146 imposes 
collective bargaining obligations on any party to the collective 
bargaining process. However, as stated in the preamble to our initial 
HIPAA regulations published on April 8, 1997 in the Federal Register 
(62 FR 16906), Sec. 146.180 does not preempt State and local collective 
bargaining laws. While neither title XXVII of the PHS Act nor this 
regulation mandates that HIPAA protections be collectively bargained, 
State or local law may do so.

B. Paragraph (b) Form and Manner of Election

    (A model election document is provided under section V. of this 
preamble as an example to assist the reader.) Paragraph (b) is amended 
to list the requirements pertaining to the form and manner of an opt-
out election under a new paragraph (b)(1). Paragraph (b)(1)(iii) 
incorporates existing paragraphs (d)(1) and (2) (with the exception of 
the parenthetical statement in the existing (d)(2), which is 
incorporated in a new paragraph (b)(2)). Paragraph (b)(1)(iii) requires 
an election document to include a statement specifying the beginning 
and ending dates of the applicable election period. That period may be 
a single specified plan year, or, in the case of a collectively 
bargained plan, the ``term of the agreement'' as defined in paragraph 
(b)(2) (discussed below). In order to facilitate administrative 
efficiency, paragraph (b)(1)(iv) requires the election document to 
include the name and telephone number of a person CMS may contact 
regarding the election.
    New paragraph (b)(2) defines ``term of the agreement,'' and 
clarifies the extent to which an opt-out election applies to the 
initial plan year under a collective bargaining agreement and the last 
plan year governed by the agreement. Except as provided in new 
paragraphs (b)(2)(i) and (ii), paragraph (b)(2) provides that for 
purposes of the opt-out provision, ``term of the agreement'' means all 
plan years governed by a single collective bargaining agreement.
    For the last plan year governed by a collective bargaining 
agreement, it has come to our attention that a collective bargaining 
agreement may expire before the last plan year governed by the 
agreement expires. In that event, we interpret the statutory reference 
to an opt-out election applying ``for the term of such agreement'' to 
mean that the election applies to the last plan year (in its entirety) 
governed by a particular collective bargaining agreement. For instance, 
a collective bargaining agreement may expire on December 31 and the 
last group health plan year governed by that agreement may expire on 
June 30 of the following year. If, in this example, the plan sponsor 
decided not to renew its opt-out election, HIPAA requirements would not 
take effect in the middle of the plan year (that is, on January 1), but 
rather on July 1, the first day of the plan year following expiration 
of the last plan year governed by the prior collective bargaining 
agreement.
    For purposes of the opt-out provision, new paragraph (b)(2), which 
incorporates and revises the parenthetical statement of existing 
paragraph (d)(2), may effectively extend the last plan year under a 
prior collective bargaining agreement or shorten the initial plan year 
under a new agreement. Paragraph (b)(2)(i) provides that if the last 
plan year governed by a collective bargaining agreement expires during 
the bargaining process for a new agreement, the term of the prior 
agreement continues until the latest of the following dates, as 
applicable: the date agreement is reached for the new agreement, the 
date of ratification of the agreement, or other closure of the 
collective bargaining process. Under paragraph (b)(2)(ii), the term of 
the new agreement begins at that point.
    This rule revises the existing rule, which provided that the 
parties to the collective bargaining process had to ``agree'' that the 
prior agreement continued until the new agreement took effect. For 
purposes of the opt-out provision, we are revising the rule by deleting 
the precondition that the parties must agree to the extension, because 
the collective bargaining process should not, by default, cause HIPAA 
requirements that were not previously in effect to take effect, nor, 
conversely, to effectively permit a plan sponsor, for the period 
preceding closure of the collective bargaining process for a new 
agreement, to retroactively opt out of HIPAA requirements that continue 
to be in effect under a prior agreement.
    Under section 2721(b)(2) of the PHS Act, the opt-out decision is 
vested solely in the plan sponsor (in the absence of applicable State 
law or regulation). Thus, it is our position that in instances when 
collective bargaining for a new agreement extends beyond the contract 
expiration date under which a plan was exempt from HIPAA requirements, 
those requirements should not take effect by default (merely because 
the

[[Page 48805]]

union does not agree that the prior agreement is extended), and thereby 
prevent a plan sponsor from electing to opt out of those requirements 
under the new agreement. This situation could arise in the case of a 
collectively bargained plan that is exempt from HIPAA requirements 
under the special effective date rule of section 102(c)(3) of HIPAA and 
Sec. 146.125(a)(2) of the implementing regulations, and in the case 
where a plan was exempt from HIPAA requirements under a prior opt-out 
election.
    The special effective date rule provides that for a group health 
plan that is governed by one or more collective bargaining agreements 
that were ratified before enactment of HIPAA (that is, before August 
21, 1996), the requirements of title I of HIPAA do not take effect 
until the last of those collective bargaining agreements expires. The 
last of the collective bargaining agreements ratified before August 21, 
1996 may expire before closure is reached for a new agreement. Also, 
the period of time during which a plan is exempt from HIPAA 
requirements under a prior opt-out election could expire before closure 
is reached for a new agreement and the opt-out election is renewed.
    We believe that the rule permitting a HIPAA exemption to continue 
during the collective bargaining process for a new agreement does not 
unduly affect enrollees because the plan was previously exempt from 
HIPAA requirements. (Of course, if collective bargaining that continues 
beyond the beginning of a plan year leads to an agreement that the plan 
will comply with one or more HIPAA requirements that legitimately did 
not apply to the plan under the prior agreement, the plan must comply 
with the requirement(s) retroactively to the first day of the initial 
plan year governed by the new agreement.) The special rules for the 
term of the agreement under paragraphs (b)(2)(i) and (ii) apply only 
for purposes of Sec. 146.180; that is, only for HIPAA requirements from 
which a plan opts out under the new agreement.
    On the other hand, to the extent a plan was subject to HIPAA 
requirements under a prior agreement, a plan sponsor's decision to opt 
out of HIPAA for those requirements must have prospective effect in 
order to ensure that enrollees that have benefited from those HIPAA 
requirements cannot be disadvantaged retroactively. This situation 
could arise in the case of a collectively bargained plan that is 
subject to HIPAA because the plan sponsor had not previously opted out, 
as well as in the case of a plan that is generally exempt from HIPAA 
requirements under the special effective date rule discussed above, but 
that was amended solely to conform the plan to any HIPAA requirement, 
as permitted under section 102(c)(3) of HIPAA and Sec. 146.125(a)(2) of 
the implementing regulations.
    When a plan has been in compliance with one or more HIPAA 
requirements, there is a greater need to strike a balance between the 
interests of the plan and the interests of enrollees. For a 
collectively bargained plan that is in compliance with HIPAA, we 
believe that enrollees expect the plan to continue to comply with those 
requirements unless otherwise notified. The same is true of new 
enrollees. Permitting a plan in that situation, following closure of 
the collective bargaining process, to retroactively opt out of HIPAA to 
the first day of the plan year could seriously disadvantage enrollees.
    For instance, under the prior collective bargaining agreement, a 
plan was in compliance with HIPAA. An enrollee with a serious medical 
condition enrolls in the plan under the HIPAA special enrollment period 
rules during ongoing collective bargaining with respect to a new 
agreement. Two months later, after a collective bargaining agreement 
has been reached, the plan sponsor opts out of the special enrollment 
period requirements effective with the beginning of the first plan year 
governed by the new agreement. Conceivably, in the absence of this 
rule, the plan could attempt to disenroll the individual retroactively, 
causing great financial harm to that individual. (This situation would 
not arise in the case where a plan under the prior agreement was exempt 
from the special enrollment period rules because, under that exemption, 
the individual would not have been entitled to a special enrollment 
period.) Thus, the definition of ``term of the agreement'' in paragraph 
(b)(2) precludes the possibility that someone who properly benefitted 
under HIPAA could be retroactively deprived of that benefit.
    New paragraph (b)(3) clarifies that we do not arbitrate disputes 
regarding whether an opt-out election complies with all of a plan 
sponsor's rules. These disputes must be resolved by the parties to the 
election or by the courts. Also, paragraph (b)(3) clarifies that if a 
plan must comply with one or more HIPAA requirements for a given plan 
year or period of plan coverage, the plan sponsor is free to opt out of 
those requirements for a subsequent plan year or period of plan 
coverage. For instance, a plan may comply with HIPAA requirements 
because the plan sponsor declined to opt out, or decided after opting 
out to rescind its election in whole or in part. Also, a plan might 
have to comply with HIPAA requirements because its opt-out election is 
invalidated in whole or in part by CMS (refer to sections IV.J. & K of 
this preamble) or by a court order. Such occurrences do not inhibit a 
plan sponsor's ability to opt out of HIPAA requirements for subsequent 
plan years.

C. Paragraph (c) Mailing Address

    A new paragraph (c) is added to specify the mailing address for a 
non-Federal governmental employer to mail its opt-out election.

D. Paragraph (d) Filing a Timely Election

    Under paragraph (d)(1), which incorporates existing paragraph 
(c)(1), we made a minor revision to the filing deadline for an opt-out 
election for a plan that is not governed by a collective bargaining 
agreement. Since under the existing rule we had to receive the election 
document before the first day of the plan year, new paragraph (d)(1) 
now provides that, subject to a good cause extension, the election 
document must be filed (that is, mailed) before the first day of the 
plan year.
    In new paragraph (d)(2), which incorporates existing paragraph 
(c)(2), we revise the filing deadline for a plan that is governed by a 
collective bargaining agreement. The existing regulation stipulates 
that an election must be received by us within 30 days after certain 
events associated with collective bargaining. New paragraph (d)(2) 
provides that, subject to an extension based on good cause, an election 
for a plan governed by a collective bargaining agreement must be filed 
(that is, mailed) before the first day of the first plan year governed 
by the agreement, or by the 45th day after the latest of the following 
dates, as applicable, if the 45th day falls on or after the first day 
of the plan year: the date of the agreement between the governmental 
employer and union officials; the date of ratification of the 
agreement; or the date impasse resolution, arbitration, or other 
closure of the collective bargaining process is finalized when 
agreement is not reached. (Paragraph (d)(2) incorporates these dates 
via cross reference to paragraph (b)(2)(i).) The date of impasse 
resolution, arbitration or other closure of the collective bargaining 
process is included to make clear that a non-Federal governmental plan 
sponsor is not foreclosed under HIPAA from opting out in the event 
agreement is not

[[Page 48806]]

reached with the union through collective bargaining.
    Paragraph (d)(3) specifies that we will use the postmark on the 
envelope in which the election is submitted to verify timely filing.
    Paragraph (d)(4), which incorporates existing paragraph (c)(3), 
clarifies that we may extend the filing deadlines established in 
paragraphs (d)(1) and (d)(2) by finding good cause if a plan 
substantially complies with the requirements of paragraph (f) of this 
regulation to notify enrollees of an opt-out election at the time of 
enrollment and on an annual basis. For example, we could find that good 
cause exists for extending an election filing deadline in a case where 
a plan is not in violation of paragraph (f) and a plan sponsor states 
that there was a miscommunication between the plan sponsor and another 
entity that administers the plan regarding which entity was to file the 
election document with us.
    Under certain situations, we may find good cause even if the plan 
sponsor does not make a specific request. For example, the sponsor of a 
self-funded non-Federal governmental plan decides to opt out of HIPAA 
for an upcoming plan year that begins on January 1. During the annual 
open enrollment period, all employees are given a plan brochure that 
contains a prominently printed notice that the plan will be exempt from 
HIPAA requirements for the upcoming plan year. After the plan year 
begins, all new enrollees are provided notice of the opt-out election 
at the time of enrollment. Five months into the plan year, the 
Personnel Department discovers that it did not file an election 
document with us. It belatedly files the document, which includes a 
statement that the plan has complied with the enrollee notification 
requirements of paragraph (f) of this regulation. However, the plan 
sponsor does not request an extension of the filing deadline for good 
cause. In this case, we may find that good cause exists to accept the 
election as being timely filed.
    We believe that extending the filing deadlines in situations such 
as these is appropriate. Enrollees are entitled to the group health 
plan benefit package offered by the plan sponsor. As long as a plan has 
complied with the enrollee notification requirements regarding an opt-
out election, extending the election filing deadlines does not 
disadvantage enrollees beyond the extent to which they are 
disadvantaged directly by the statute, which permits non-Federal 
governmental employers that sponsor self-funded plans to opt out of 
HIPAA.
    Paragraph (d)(5), which incorporates and revises existing paragraph 
(c)(4), provides that, absent an extension based on good cause, if an 
election is not timely filed, the plan becomes subject to HIPAA 
requirements for the entire plan year to which the election would have 
applied, or, in the case of a plan governed by collective bargaining, 
for any plan year under the agreement for which the election is not 
timely filed.
    For a collectively bargained plan, in paragraph (d)(5) we revise 
the requirement of existing paragraph (c)(4) that provides that failure 
to file a timely election subjects the plan to HIPAA requirements for 
the term of the collective bargaining agreement. It is our position 
that it is inequitable to penalize a plan governed by collective 
bargaining to a greater extent than other plans, which, in the case of 
untimely filing, must comply with HIPAA requirements only for the 
single plan year to which the election would have applied. Therefore, 
in the case of a collectively bargained plan, the plan must comply with 
HIPAA requirements only for plan years for which the election is not 
timely filed.
    For instance, a collective bargaining agreement governs a group 
health plan for a period of 5 years, but the plan sponsor does not 
submit its opt-out election to us until after the third plan year has 
begun. The plan complies with the enrollee notification requirements of 
paragraph (f) of this regulation beginning with the third plan year 
governed by the agreement. The plan must comply with HIPAA requirements 
solely with respect to the first 2 plan years governed by the 
collective bargaining agreement. Under the revised regulation, the 
election is considered to be filed timely with regard to the remaining 
3 plan years.

E. Paragraph (e) Additional Information Required

    This paragraph provides that, in response to a notice from us, a 
plan sponsor, or the entity that filed the election if other than the 
plan sponsor, must submit additional information by the end of the plan 
year or 45 days after the date of the written notification, whichever 
is later. We will use the postmark on the envelope in which the 
additional information is submitted to verify timely filing. We may 
invalidate an election in the event of a failure to respond timely.

F. Paragraph (f) Notice to Enrollees

    (A model enrollee notice is provided under section V. of this 
preamble as an example to assist the reader.)
    This paragraph consolidates existing paragraphs (f) and (g). 
Paragraph (f)(1)(i) provides that a plan must notify enrollees of an 
opt-out election and explain the consequences of the election. If the 
dependents of a participant reside with the participant, the plan need 
only provide a notice to the participant.
    Paragraph (f)(1)(ii) provides that the opt-out notice must be in 
writing, and, subject to notice rules associated with the initial plan 
year under an opt-out election, must be given to enrollees at the time 
of enrollment, and on an annual basis, which generally means that the 
notice to plan enrollees must be provided no later than the last day of 
each plan year for which there is an election. Thus, in general, the 
annual notice may be provided to plan enrollees prior to the beginning 
of a plan year--for instance, during an annual open enrollment period--
or at any time during a plan year. Also, paragraph (f)(1)(iii) 
clarifies that a notice provided to an enrollee at the time of 
enrollment can also serve as the initial annual notice for that 
enrollee. That is, a plan is not required to give an enrollee more than 
one notice with respect to a given plan year.
    Paragraph (f)(2) sets forth new special rules applicable to notices 
associated with the initial plan year under an opt-out election. For a 
plan not governed by a collective bargaining agreement, paragraph 
(f)(2)(i) states that a plan must provide the annual notice to all 
enrollees before the first day of that plan year, and at the time of 
enrollment to individuals who enroll during that plan year.
    For a collectively bargained plan, paragraph (f)(2)(ii) states that 
the plan must provide the annual notice for the initial plan year under 
an election before the first day of that plan year, or within 30 days 
after the latest of the following dates, as applicable, if the 30th day 
falls on or after the first day of the plan year: the date of the 
agreement between the governmental employer and union officials; the 
date of ratification of the agreement; or the date impasse resolution, 
arbitration, or other closure of the collective bargaining process is 
finalized when agreement is not reached. (Paragraph (f)(2)(ii) 
incorporates these dates via cross reference to paragraph (b)(2)(i)). 
Also, the plan must provide a notice at the time of enrollment to all 
individuals who enroll on or after the first day of the plan year when 
closure of the collective bargaining process is reached prior to the 
beginning of the plan year, or to individuals who enroll on or after 
the date of closure of the collective

[[Page 48807]]

bargaining process, if that date falls on or after the first day of the 
plan year.
    For the initial plan year that is subject to an opt-out election, 
this regulation requires that the annual notice be provided ``up 
front'' to ensure that plan enrollees are informed from the beginning 
that their rights under HIPAA are limited. This is consistent with the 
intent of the statute that enrollees have this knowledge from the 
beginning, that is, from ``the time of enrollment.'' This rule ensures 
that individuals who are already enrolled in the plan when the initial 
opt-out election takes effect will not be deprived of important 
information relevant to their health benefits, and the rule will help 
to eliminate situations where an enrollee assumes he or she is 
protected under HIPAA only to discover later that he or she is not.
    For instance, if an enrollee who has had a mastectomy would be 
eligible to switch to other coverage, but declines to do so because she 
expects to have WHCRA protections under the non-Federal governmental 
plan, clearly she would be disadvantaged upon learning several months 
later (after it is too late to switch coverage) that she does not have 
those protections. Similarly, if someone covered under the plan expects 
to adopt a child, he or she may be relying on the fact that there are 
special enrollment rights under HIPAA, perhaps only to discover after 
the child is adopted that the plan sponsor has opted out of the special 
enrollment period requirements.
    However, for a plan that is governed by collective bargaining, a 
plan may not be able to provide the initial opt-out notice by the 
beginning of the plan year because of ongoing collective bargaining. 
Under section 2721(b)(2) of the PHS Act, a plan must notify enrollees 
of the ``fact and consequences'' of an opt-out election. When a plan 
sponsor's intention to opt out of HIPAA is subject to collective 
bargaining, an (initial) election does not in ``fact'' exist until the 
collective bargaining process with respect to the election is 
completed. Therefore, when closure of the collective bargaining process 
occurs after the beginning of the initial plan year to which the 
election is to apply, a plan cannot disseminate a notice regarding the 
``fact'' of that election prior to the point of closure.
    In that event, individuals who enroll in the plan on or after the 
first day of the initial plan year that is to be subject to an opt-out 
election, but before closure of the collective bargaining process, are 
not entitled to an opt-out notice at the time of enrollment because the 
election in ``fact'' does not exist at that point. However, these 
individuals are afforded some protection by the rule in paragraph 
(b)(2) that prohibits an opt-out election from taking effect 
retroactively. (Refer to the previous discussion under item IV.B of 
this preamble.) Also, these individuals along with other enrollees will 
receive the annual notice, which must be provided within 30 days after 
closure of the collective bargaining process. Individuals who enroll on 
or after the date of closure of the collective bargaining process must 
be given a notice at the time of enrollment.
    New paragraph (f)(3) incorporates existing paragraph (g) for notice 
content. A new paragraph (f)(3)(v) requires that the notice to plan 
enrollees regarding the opt-out election include a statement informing 
plan enrollees that the plan will provide for certification and 
disclosure of creditable coverage for covered employees and their 
dependents who lose coverage under the plan. This requirement is 
designed to benefit plan enrollees by ensuring that plans inform them 
of their rights regarding certification and disclosure of creditable 
coverage, regardless of the plan sponsor's decision to exempt the plan 
from other HIPAA requirements.

G. Paragraph (g) Subsequent Elections

    (A model election renewal document is provided under section V. of 
this preamble as an example to assist the reader.)
    New paragraph (g)(1) incorporates existing paragraph (e), and 
states that election renewals are subject to the timeliness standards 
in paragraph (d). Paragraph (g)(2) addresses the form and manner of 
renewing an election.
    Paragraph (g)(3) specifies that if an opt-out election renewal 
includes a HIPAA requirement from which the plan sponsor did not elect 
to exempt the plan for the preceding plan year, the advance 
notification requirements that apply to initial elections (paragraph 
(f)(2)) also apply for the additional HIPAA requirements from which the 
plan sponsor is electing to exempt the plan. As in the case of initial 
elections, this rule requires that the annual notice be provided ``up 
front'' to ensure that plan enrollees are informed from the beginning 
that the plan sponsor is electing to exempt the plan from certain HIPAA 
requirements from which the plan was not exempted under the previous 
opt-out election.
    Paragraph (g)(4) specifies new special rules regarding the renewal 
of an election under a collective bargaining agreement. Paragraph 
(g)(4)(i) requires that if protracted negotiations for a new agreement 
result in an extension of the term of the prior agreement under which 
an opt-out election was in effect (Refer to the previous discussion in 
section IV.B of this preamble), the plan sponsor must comply with the 
enrollee notification requirements of paragraph (f)(1), and file an 
election renewal with us in accordance with the time frames specified 
in paragraph (d)(2).
    Also, if a non-Federal governmental employer provides coverage to 
employees and dependents under a single group health plan, but enters 
into separate collective bargaining agreements of varying lengths with 
various bargaining units, paragraph (g)(4)(ii) specifies that in the 
case of an election renewal, the timeliness standards of paragraph 
(d)(2) apply to the plan as governed by the agreement that results in 
the earliest filing date.

H. Paragraph (h) Certification and Disclosure of Creditable Coverage

    Existing paragraph (h) is retained with minor editorial changes.

I. Paragraph (i) Effect of Failure to Comply With Certification and 
Notification Requirements

    This paragraph revises existing paragraphs (i)(1) and (2). New 
paragraph (i)(1) generally provides that a substantial failure to 
comply with the enrollee notification requirements of paragraph (f) or 
the certification and disclosure requirements of paragraph (h) results 
in the invalidation of an opt-out election with respect to all plan 
enrollees for the entire plan year.
    We determine whether a non-Federal governmental plan has 
substantially failed to comply based on a review of all relevant facts 
and circumstances, including the previous record of compliance, gravity 
of the violation, and whether the plan takes corrective action, as 
warranted, within 30 days of learning of the violation. However, in 
general, a failure to provide the opt-out notice to an enrollee at the 
time of enrollment or on an annual basis is considered to be a 
substantial failure to comply. In the case of a substantial failure 
that is limited to certain individuals, CMS may permit the election to 
remain in effect if the plan agrees not to apply the election with 
respect to the affected individuals for the plan year with respect to 
which the failure has occurred and so informs those individuals in 
writing.
    New paragraph (i)(1) further specifies that in the case of a plan 
that is sponsored by multiple employers, the invalidation applies only 
for the employer(s) responsible for the substantial failure, and not 
for other employers that complied with the

[[Page 48808]]

requirements of paragraphs (f) or (h), unless the plan chooses to 
cancel its election entirely. For example, if 10 non-Federal 
governmental employers co-sponsor a plan, and one employer 
substantially fails to comply with the requirements of paragraph (f), 
the invalidation applies only with respect to enrollees of that one 
employer (unless the plan chooses to cancel its election entirely).
    Examples illustrating the rules of new paragraph (i)(1) are 
provided in new paragraph (i)(2).

J. Paragraph (j) Election Invalidated

    Paragraph (j) specifies the rules that apply if we invalidate an 
opt-out election.

K. Paragraph (k) Enforcement

    Existing paragraph (i) (3) is redesignated and revised as new 
paragraph (k). Paragraph (k) cross-refers to part 150 of 45 CFR under 
which we enforce HIPAA requirements that apply to non-Federal 
governmental plans, including imposing a civil money penalty on a plan 
or plan sponsor when a non-Federal governmental plan is subject to the 
requirements of part 146 and fails to comply with one or more of those 
requirements. All non-Federal governmental plans must comply with 
requirements pertaining to certification and disclosure of creditable 
coverage under section 2701(e) of the PHS Act and Sec. 146.115.
    Paragraph (k) applies not only to a plan for which an election has 
not been filed, or for which an election has been invalidated, but also 
to a plan that has selectively opted out of HIPAA requirements and 
fails to comply with any requirements that are not subject to the opt-
out election. For instance, a plan opts out of the preexisting 
condition exclusion limitations only, but also fails to comply with 
requirements pertaining to special enrollment periods. We enforce the 
special enrollment period rules under part 150.

L. Paragraph (l) Construction

    This paragraph clarifies that States are not precluded from 
restricting the extent to which their non-Federal governmental 
employers may opt out of HIPAA. (Refer to our response to public 
comments on the April 8, 1997 interim final rule with comment period 
published in the Federal Register (62 FR 16894) that appears under 
section III. of this preamble.)

                                      Redesignation Table for Sec.  146.180
----------------------------------------------------------------------------------------------------------------
          Existing designation                                       New designation
----------------------------------------------------------------------------------------------------------------
Prefatory text and paragraph (a).......  Paragraph (a)(1).
Paragraph (b)..........................  Paragraph (b)(1).
Paragraph (c)(1) and (2)...............  Paragraph (d)(1) and paragraph (d)(2).
Paragraph (c)(3).......................  Paragraph (d)(4).
Paragraph (c)(4).......................  Paragraph (d)(5).
Paragraph (d)(1) and paragraph (2)       Paragraph (b)(1)(iii).
 (except parenthetical).
Paragraph (d)(2) (parenthetical).......  Paragraph (b)(2)(i) and Paragraph (b)(2)(ii).
Paragraph (e)..........................  Paragraph (g)(1).
Paragraph (f)..........................  Paragraph (f)(1).
Paragraph (g)..........................  Paragraph (f)(3).
Paragraph (h)..........................  Paragraph (h).
Paragraph (i)(1) and paragraph (i)(2)    Paragraph (i)(1).
 (except invalidation notice).
Paragraph (i)(2) (invalidation notice).  Paragraph (j).
Paragraph (i)(3).......................  Paragraph (k).
----------------------------------------------------------------------------------------------------------------

V. Model Election/Election Renewal Document; Model Notice to Plan 
Enrollees

    To assist non-Federal governmental employers that wish to exercise 
their option to exempt their self-funded plans from requirements of 
title XXVII of the PHS Act, we have developed a model election/election 
renewal document, and a model notice to plan enrollees. Use of these 
model documents, which are presented below, is not required. However, 
use of these model documents will satisfy applicable requirements of 
Sec. 146.180(b)(1), (f)(3) and (g)(2). We encourage you to access these 
model documents at our Web site at http://www.cms.hhs.gov/hipaa1.

A. Model HIPAA Exemption Election/Election Renewal Document

    The following may be submitted on plan sponsor's or plan 
administrator's letterhead:

Name of Plan:---------------------------------------------------------
Plan Sponsor:---------------------------------------------------------
Address:--------------------------------------------------------------
(Not applicable if election document is on letterhead showing the 
plan sponsor's address.)
EIN:------------------------------------------------------------------
Plan Number: ________ (if applicable)
Plan Year/Period of Plan coverage:
(beginning date) through (ending date)
(may reflect multiple plan years governed by a collective bargaining 
agreement.)
Plan Administrator:
Address: (If different from plan sponsor's)

(Name of plan, or portion of plan that is self-funded) is not provided 
through insurance. (Plan sponsor) elects under authority of section 
2721(b)(2) of the Public Health Service (PHS) Act, and 45 CFR 146.180 
of Federal regulations, to exempt (name of plan or self-funded portion) 
from the following requirements of title XXVII of the PHS Act (list any 
or all of the following requirements):
    1. Limitations on preexisting condition exclusion periods.
    2. Special enrollment periods.
    3. Prohibitions against discriminating against individual 
participants and beneficiaries based on health status.
    4. Standards relating to benefits for mothers and newborns.
    5. Parity in the application of certain limits to mental health 
benefits.
    6. Required coverage for reconstructive surgery following 
mastectomies.
    This election has been made in conformity with all rules of the 
plan sponsor, including any public hearing, if required. I certify that 
the undersigned is authorized to submit this election on behalf of 
(name of plan). A copy of the notice to plan enrollees is enclosed. (In 
the case of an election renewal, in lieu of enclosing a copy of an 
updated notice to plan enrollees, the plan sponsor may include a 
statement that the notice has been, or will be, provided to plan 
enrollees in accordance with 45 CFR 146.180(f).) If CMS has any 
questions regarding this election, please contact (name) at (phone 
number).


[[Page 48809]]


Signature
Title

B. Model Notice to Enrollees in a Self-Funded Non-Federal Governmental 
Group Health Plan

    Under a Federal law known as the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA), Public Law 104-191, as amended, 
group health plans must generally comply with the requirements listed 
below. However, the law also permits State and local governmental 
employers that sponsor health plans to elect to exempt a plan from 
these requirements for any part of the plan that is ``self-funded'' by 
the employer, rather than provided through a health insurance policy. 
(Name of plan sponsor) has elected to exempt (name of plan) from (all) 
(or specify which ones) of the following requirements:
    [The description of each listed requirement may be omitted.]
    1. Limitations on preexisting condition exclusion periods. A 
preexisting condition exclusion period generally may not exceed 12 
months, and generally must be reduced by prior health coverage an 
individual has had. Also, a plan may not impose any preexisting 
condition exclusion relating to pregnancy as a preexisting condition, 
nor, under certain conditions, with respect to newborns or children 
adopted or placed for adoption.
    2. Special enrollment periods. Group health plans are required to 
provide special enrollment periods for individuals who do not enroll in 
the plan because they have other coverage, but subsequently lose that 
coverage. Also, if a plan provides dependent coverage, the plan must 
provide a special enrollment period for new dependents (and the 
employee if not already enrolled) within 30 days after a marriage, 
birth, adoption or placement for adoption.
    3. Prohibitions against discriminating against individual 
participants and beneficiaries based on health status. A group health 
plan may not discriminate in enrollment rules or in the amount of 
premiums or contributions it requires an individual to pay based on 
certain health status-related factors: health status, medical condition 
(physical and mental illnesses), claims experience, receipt of health 
care, medical history, genetic information, evidence of insurability, 
and disability.
    4. Standards relating to benefits for mothers and newborns. Group 
health plans offering health coverage for hospital stays in connection 
with the birth of a child generally may not restrict benefits for the 
stay to less than 48 hours for a vaginal delivery, and 96 hours for a 
cesarean section.
    5. Parity in the application of certain limits to mental health 
benefits. Group health plans (of employers that employ more than 50 
employees) offering mental health benefits may not set annual or 
lifetime dollar limits on mental health benefits that are lower than 
limits for medical and surgical benefits. A plan that does not impose 
an annual or lifetime dollar limit on medical and surgical benefits may 
not impose that type of limit on mental health benefits. These 
requirements do not apply to benefits for substance abuse or chemical 
dependency.
    6. Required coverage for reconstructive surgery following 
mastectomies. Group health plans that provide medical and surgical 
benefits for a mastectomy must provide certain benefits in connection 
with breast reconstruction as well as certain other related benefits.
    The exemption from these Federal requirements will be in effect for 
the (plan year) (period of plan coverage) beginning (specify date) and 
ending (specify date). The election may be renewed for subsequent plan 
years.
    (If the Plan provides protections similar to any of the exempted 
requirements, either voluntarily or in accordance with State law, 
identify those protections.)
    HIPAA also requires the Plan to provide covered employees and 
dependents with a ``certificate of creditable coverage'' when they 
cease to be covered under the Plan. There is no exemption from this 
requirement. The certificate provides evidence that you were covered 
under this Plan, because if you can establish your prior coverage, you 
may be entitled to certain rights to reduce or eliminate a preexisting 
condition exclusion if you join another employer's health plan, or if 
you wish to purchase an individual health insurance policy. (If someone 
will be available to answer questions, an appropriate contact, such as 
a third party administrator, or personnel officer may be identified).

VI. Response to Comments on this Interim Final Rule

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the DATES 
section of this preamble, and, when we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document.

VII. Waiver of Proposed Rulemaking

    In accordance with the requirements of the Administrative 
Procedures Act (APA), we ordinarily publish a notice of proposed 
rulemaking in the Federal Register and invite public comment before a 
final rule is made effective. The notice of proposed rulemaking 
required by the APA incorporates a reference to the legal authority 
under which the rule is proposed, and the terms and substances of the 
proposed rule or a description of the subjects and issues involved. 
This procedure can be waived, however, if an agency finds good cause 
that a notice-and-comment procedure is impracticable, unnecessary, or 
contrary to the public interest and incorporates a statement of the 
finding and its reasons in the rule issued.
    We are making various discretionary changes to the prior April 8, 
1997 interim final rule (62 FR 16894) at Sec. 146.180 under the broad 
authority granted by the Congress to the Secretary of Health and Human 
Services--``The Secretary may promulgate any interim final rules as the 
Secretary determines are appropriate to carry out this title [XXVII of 
the PHS Act].'' (Section 2792 of the PHS Act, as added by HIPAA, Public 
Law 104-191.) Because this broad regulatory authority was made a 
permanent part of title XXVII of the PHS Act, it has continuing effect 
with respect to any rules the Secretary may promulgate for purposes of 
carrying out title XXVII of the PHS Act. We believe that it serves the 
public interest to issue these regulations in accordance with the 
authority granted by the Congress under section 2792 of the PHS Act.
    Therefore, we find good cause to waive the notice of proposed 
rulemaking and to issue this rule as an interim final rule with comment 
period. We are providing a 60-day public comment period and will 
respond to major comments we receive in any subsequent Federal Register 
document.

VIII. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork

[[Page 48810]]

Reduction Act of 1995 requires that we solicit comment on the following 
issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    The reporting and disclosure requirements referenced under 
Sec. 146.180 are currently approved under OMB number 0938-0702 (HIPAA 
Group Market Information Collection Requirements), with a current 
expiration date of December 31, 2002.
    As required by section 3504(h) of the Paperwork Reduction Act of 
1995, we have submitted a copy of this document to OMB for its review 
of these information collection requirements.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Information 
Services, DCES, SSG, Attn: John Burke, Room N2-14-26, 7500 Security 
Boulevard, Baltimore, MD 21244-1850; ATTN: CMS 0047-F
and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Brenda Aguilar, CMS Desk Officer.

IX. Regulatory Impact Statement

    We have examined the impacts of this rule as required by Executive 
Order 12866 and the Regulatory Flexibility Act (RFA) (Public Law 96-
354). Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more annually).
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations and government agencies.
    For purposes of the RFA, all political subdivisions of States, and 
any agency or instrumentality of these political subdivisions, are 
considered to be small entities. Individuals and States are not 
included in the definition of a small entity.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any one year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $110 million. This regulation does not have the 
effect of imposing unfunded mandates on State or local governments.
    We have previously estimated that between 3,500 and 5,000 non-
Federal governmental plans would be affected by Sec. 146.180 (62 FR 
16927, April 8, 1997). (Only non-Federal governmental entities that 
provide group health plan coverage to employees on a self-funded basis 
(not through health insurance coverage) are eligible to elect to exempt 
their plans from the requirements of title XXVII of the PHS Act.) To 
date, we have received approximately 650 elections covering fewer than 
2,000 non-Federal governmental entities, virtually all of which are 
small entities for purposes of the RFA.
    As a group, non-Federal governmental entities that elect to opt out 
of HIPAA are diverse and difficult to categorize. Depending on the 
circumstances, elections can vary tremendously, from single plan 
groups, to those which incorporate multiple political and plan 
subdivisions. There have also been cases where plan sponsors that 
initially sought exemption from HIPAA requirements have subsequently 
elected to bring their plans into HIPAA compliance. Although there is 
no way to estimate the number of additional non-Federal governmental 
entities that will elect to exempt their plans from HIPAA requirements, 
based on our experience to date, we maintain that most of the eligible 
non-Federal governmental entities that intend to exempt their plans 
from one or more HIPAA requirements have already done so.
    The Women's Health and Cancer Rights Act of 1998 (WHCRA) was 
effective for plan years beginning on or after October 21, 1998. 
However, we believe that, in general, non-Federal governmental entities 
that were eligible, but declined to exempt their plans from the 
requirements of HIPAA , the Newborns' and Mothers' Health Protection 
Act of 1996, and the Mental Health Parity Act of 1996 are not likely to 
elect to exempt their plans from the requirements of WHCRA. Thus, we do 
not anticipate that the number of opt-out elections will increase 
substantially as a result of WHCRA. Accordingly, we estimate that fewer 
than 2,000 non-Federal governmental entities are affected by these 
regulations, and we expect that number to remain fairly stable.
    Non-Federal governmental entities are subject to these regulations 
only if they elect to exempt their plans from any requirements of title 
XXVII of the PHS Act. We did not consider alternatives to these 
regulations because regulations are necessary to modify existing 
regulations at Sec. 146.180. Moreover, section 2721(b)(2)(A) of the PHS 
Act expressly calls for regulations--plan sponsors of non-Federal 
governmental plans may elect to exempt their self-funded group health 
plans from the requirements of title XXVII ``in such form and manner as 
the Secretary may by regulations prescribe.''
    These regulations are designed to assist non-Federal governmental 
employers in exercising their prerogative under section 2721(b)(2) to 
exempt eligible plans from various requirements of title XXVII of the 
PHS Act, and to clarify that States are not precluded by section 
2721(b)(2) and Sec. 146.180 from limiting the extent to which non-
Federal governmental plan sponsors may elect to exempt their self-
funded group health plans from HIPAA requirements. The effect of not 
issuing these regulations would be to deprive non-Federal governmental 
employers and States of information pertinent to implementing section 
2721(b)(2) of the PHS Act. However, not issuing these regulations would 
have negligible economic consequences for non-Federal governmental 
employers. The requirement that group health plans must notify 
enrollees regarding an exemption election at the time of enrollment and 
on an annual basis is prescribed by the statute. Our initial 
implementing regulations (62 FR 16894, April 8, 1997) address the 
consequences of a plan's failure to comply with those statutory 
enrollee notification requirements--a plan's exemption election is 
invalidated, and the plan must come into compliance with HIPAA 
requirements. Thus, the potential for incurring costs associated with 
bringing a plan into HIPAA compliance as a result of a plan's failure 
to comply with the enrollee notification requirements already exists 
and would not accrue to non-Federal governmental employers if these 
regulations are not issued.
    For these reasons, we are not preparing an analysis for the RFA 
because we have determined, and we certify, that this rule will not 
have a significant economic impact on a substantial number of small 
entities.

[[Page 48811]]

    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

X. Federalism

    We have reviewed this regulation under the threshold criteria of 
Executive Order 13132. We have determined that this interim final rule 
with comment period does not significantly affect the rights, roles, 
and responsibilities of States.

List of Subjects in 45 CFR Part 146

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

    For the reasons set forth in the preamble, 45 CFR Part 146 is 
amended as set forth below:

PART 146--REQUIREMENTS FOR THE GROUP HEALTH INSURANCE MARKET

    A. Part 146 is amended as set forth below.
    1. The authority citation for part 146 is corrected to read as 
follows:

    Authority: Secs. 2701 through 2723, 2791, and 2792 of the PHS 
Act (42 U.S.C. 300gg through 300gg-23, 300gg-91, and 300gg-92).


    2. In Sec. 146.150, paragraph (d)(2) is revised to read as follows:


Sec. 146.150  Guaranteed availability of coverage for employers in the 
small group market.

* * * * *
    (d) Application of financial capacity limits.
* * * * *
    (2) An issuer that denies group health insurance coverage to any 
small employer in a State under paragraph (d)(1) of this section may 
not offer coverage in connection with group health plans in the small 
group market in the State before the later of the following dates:
    (i) The 181st day after the date the issuer denies coverage.
    (ii) The date the issuer demonstrates to the applicable State 
authority, if required under applicable State law, that the issuer has 
sufficient financial reserves to underwrite additional coverage.
* * * * *

    3. Section 146.180 is revised to read as follows:


Sec. 146.180  Treatment of non-Federal governmental plans.

    (a) Requirements subject to exemption. (1) Basic rule. A sponsor of 
a non-Federal governmental plan may elect to exempt its plan, to the 
extent that the plan is not provided through health insurance coverage, 
(that is, it is self-funded), from any or all of the following 
requirements:
    (i) Limitations on preexisting condition exclusion periods 
described in Sec. 146.111.
    (ii) Special enrollment periods for individuals and dependents 
described in Sec. 146.117.
    (iii) Prohibitions against discriminating against individual 
participants and beneficiaries based on health status described in 
Sec. 146.121.
    (iv) Standards relating to benefits for mothers and newborns 
described in Sec. 146.130.
    (v) Parity in the application of certain limits to mental health 
benefits described in Sec. 146.136.
    (vi) Required coverage for reconstructive surgery and certain other 
services following a mastectomy under section 2706 of the PHS Act.
    (2) Limitations. (i) An election under this section cannot 
circumvent a requirement of this part to the extent the requirement 
applied to the plan before the effective date of the election.

    (A) Example 1. A plan is subject to requirements of section 2706 
of the PHS Act, under which a plan that covers medical and surgical 
benefits with respect to a mastectomy must cover reconstructive 
surgery and certain other services following a mastectomy. An 
enrollee who has had a mastectomy receives reconstructive surgery on 
August 24. Claims with respect to the surgery are submitted to and 
processed by the plan in September. The group health plan commences 
a new plan year each September 1. Effective September 1, the plan 
sponsor elects to exempt its plan from section 2706 of the PHS Act. 
The plan cannot, on the basis of its exemption election, decline to 
pay for the claims incurred on August 24.
    (B) Example 2. An individual is hired by a non-Federal 
governmental employer and reports to work on August 6. The 
individual has diabetes. Under the terms of the plan in effect on 
August 6, if an individual files an enrollment application within 
the first 30 days of employment, enrollment in the plan is effective 
as of the first day of employment. The individual timely files an 
enrollment application. The application is processed on September 
10. The group health plan commences a new plan year each September 
1. Effective September 1, the plan sponsor elects to exempt its plan 
from Sec. 146.121, which prohibits enrollment discrimination based 
on health status-related factors, by requiring new enrollees to pass 
medical underwriting. The plan cannot decline to enroll the 
individual effective August 6, even if he would not pass medical 
underwriting under the terms of the plan in effect on September 1.

    (ii) If a group health plan is co-sponsored by two or more 
employers, then only plan enrollees of the non-Federal governmental 
employer(s) with a valid election under this section are affected by 
the election.
    (3) Stop-loss or excess risk coverage. For purposes of this 
section--(i) Subject to paragraph (a)(3)(ii), the purchase of stop-loss 
or excess risk coverage by a self-funded non-Federal governmental plan 
does not prevent an election under this section.
    (ii) Regardless of whether coverage offered by an issuer is 
designated as ``stop-loss'' coverage or ``excess risk'' coverage, if it 
is regulated as group health insurance under an applicable State law, 
then for purposes of this section, a non-Federal governmental plan that 
purchases the coverage is considered to be fully insured. In that 
event, a plan may not be exempted under this section from the 
requirements of this part.
    (4) Construction. Nothing in this part should be construed as 
imposing collective bargaining obligations on any party to the 
collective bargaining process.
    (b) Form and manner of election. (1) Election requirements. The 
election must meet the following requirements:
    (i) Be made in writing.
    (ii) Be made in conformance with all of the plan sponsor's rules, 
including any public hearing requirements.
    (iii) Specify the beginning and ending dates of the period to which 
the election is to apply. This period can be either of the following 
periods:
    (A) A single specified plan year, as defined in Sec. 144.103 of 
this subchapter.
    (B) The ``term of the agreement,'' as specified in paragraph (b)(2) 
of this section, in the case of a plan governed by collective 
bargaining.
    (iv) Specify the name of the plan and the name and address of the 
plan administrator, and include the name and telephone number of a 
person CMS may contact regarding the election.
    (v) State that the plan does not include health insurance coverage, 
or identify which portion of the plan is not funded through health 
insurance coverage.
    (vi) Specify each requirement described in paragraph (a) of this 
section from which the plan sponsor elects to exempt the plan.
    (vii) Certify that the person signing the election document, 
including (if applicable) a third party plan administrator, is legally 
authorized to do so by the plan sponsor.
    (viii) Include, as an attachment, a copy of the notice described in 
paragraph (f) of this section.
    (2) ``Term of the agreement'' defined. Except as provided in 
paragraphs (b)(2)(i) and (b)(2)(ii), for purposes of

[[Page 48812]]

this section ``term of the agreement'' means all group health plan 
years governed by a single collective bargaining agreement.
    (i) In the case of a group health plan for which the last plan year 
governed by a prior collective bargaining agreement expires during the 
bargaining process for a new agreement, the term of the prior agreement 
includes all plan years governed by the agreement plus the period of 
time that precedes the latest of the following dates, as applicable, 
with respect to the new agreement:
    (A) The date of an agreement between the governmental employer and 
union officials.
    (B) The date of ratification of an agreement between the 
governmental employer and the union.
    (C) The date impasse resolution, arbitration or other closure of 
the collective bargaining process is finalized when agreement is not 
reached.
    (ii) In the case of a group health plan governed by a collective 
bargaining agreement for which closure is not reached before the last 
plan year under the immediately preceding agreement expires, the term 
of the new agreement includes all plan years governed by the agreement 
excluding the period that precedes the latest applicable date specified 
in paragraph (b)(2)(i) of this section.
    (3) Construction. (i) Dispute resolution. Nothing in paragraph 
(b)(1)(ii) of this section should be construed to mean that CMS 
arbitrates disputes between plan sponsors, participants, beneficiaries, 
or their representatives regarding whether an election complies with 
all of a plan sponsor's rules.
    (ii) Future elections not preempted. If a plan must comply with one 
or more requirements of this part for a given plan year or period of 
plan coverage, nothing in this section should be construed as 
preventing a plan sponsor from submitting an election in accordance 
with this section for a subsequent plan year or period of plan 
coverage.
    (c) Mailing address. The plan sponsor should mail the election to: 
Centers for Medicare & Medicaid Services, Private Health Insurance 
Group, CMSO, 7500 Security Boulevard, S3-16-16, Baltimore, MD 21244-
1850.
    (d) Filing a timely election. (1) Plan not governed by collective 
bargaining. Subject to paragraph (d)(4) of this section, if a plan is 
not governed by a collective bargaining agreement, a plan sponsor or 
entity acting on behalf of a plan sponsor must file an election with 
CMS before the first day of the plan year.
    (2) Plan governed by a collective bargaining agreement. Subject to 
paragraph (d)(4) of this section, if a plan is governed by a collective 
bargaining agreement, a plan sponsor or entity acting on behalf of a 
plan sponsor must file an election with CMS before the first day of the 
first plan year governed by a collective bargaining agreement, or by 
the 45th day after the latest applicable date specified in paragraph 
(b)(2)(i) of this section, if the 45th day falls on or after the first 
day of the plan year.
    (3) Verifying timely filing. CMS uses the postmark on the envelope 
in which the election is submitted to determine that the election is 
timely filed as specified under paragraphs (d)(1) or (d)(2) of this 
section, as applicable. If the latest filing date falls on a Saturday, 
Sunday, or a State or Federal holiday, CMS accepts a postmark on the 
next business day.
    (4) Filing extension based on good cause. CMS may extend the 
deadlines specified in paragraphs (d)(1) and (d)(2) of this section for 
good cause if the plan substantially complies with the requirements of 
paragraph (f) of this section.
    (5) Failure to file a timely election. Absent an extension under 
paragraph (d)(4) of this section, a plan sponsor's failure to file a 
timely election under paragraph (d)(1) or (d)(2) of this section makes 
the plan subject to all requirements of this part for the entire plan 
year to which the election would have applied, or, in the case of a 
plan governed by a collective bargaining agreement, for any plan years 
under the agreement for which the election is not timely filed.
    (e) Additional information required. (1) Written notification. If 
an election is timely filed, but CMS determines that the election 
document (or the notice to plan enrollees) does not meet all of the 
requirements of this section, CMS may notify the plan sponsor, or other 
entity that filed the election, that it must submit any additional 
information that CMS has determined is necessary to meet those 
requirements. The additional information must be filed with CMS by the 
later of the following dates:
    (i) The last day of the plan year.
    (ii) The 45th day after the date of CMS's written notification 
requesting additional information.
    (2) Timely response. CMS uses the postmark on the envelope in which 
the additional information is submitted to determine that the 
information is timely filed as specified under paragraph (e)(1) of this 
section. If the latest filing date falls on a Saturday, Sunday, or a 
State or Federal holiday, CMS accepts a postmark on the next business 
day.
    (3) Failure to respond timely. CMS may invalidate an election if 
the plan sponsor, or other entity that filed the election, fails to 
timely submit the additional information as specified under paragraph 
(e)(1) of this section.
    (f) Notice to enrollees. (1) Mandatory notification.
    (i) A plan that makes the election described in this section must 
notify each affected enrollee of the election, and explain the 
consequences of the election. For purposes of this paragraph (f), if 
the dependent(s) of a participant reside(s) with the participant, a 
plan need only provide notice to the participant.
    (ii) The notice must be in writing and, except as provided in 
paragraph (f)(2) of this section with regard to initial notices, must 
be provided to each enrollee at the time of enrollment under the plan, 
and on an annual basis no later than the last day of each plan year (as 
defined in Sec. 144.103 of this subchapter) for which there is an 
election.
    (iii) A plan may meet the notification requirements of this 
paragraph (f) by prominently printing the notice in a summary plan 
description, or equivalent description, that it provides to each 
enrollee at the time of enrollment, and annually. Also, when a plan 
provides a notice to an enrollee at the time of enrollment, that notice 
may serve as the initial annual notice for that enrollee.
    (2) Initial notices. (i) If a plan is not governed by a collective 
bargaining agreement, with regard to the initial plan year to which an 
election under this section applies, the plan must provide the initial 
annual notice of the election to all enrollees before the first day of 
that plan year, and notice at the time of enrollment to all individuals 
who enroll during that plan year.
    (ii) In the case of a collectively bargained plan (including a 
self-funded non-Federal governmental plan that has been exempted from 
requirements of this part under Sec. 146.125(a)(2)), with regard to the 
initial plan year to which an election under this section applies, the 
plan must provide the initial annual notice of the election to all 
enrollees before the first day of the plan year, or within 30 days 
after the latest applicable date specified in paragraph (b)(2)(i) of 
this section if the 30th day falls on or after the first day of the 
plan year. Also, the plan must provide a notice at the time of 
enrollment to individuals who--
    (A) Enroll on or after the first day of the plan year, when closure 
of the collective bargaining process is reached before the plan year 
begins; or
    (B) Enroll on or after the latest applicable date specified in 
paragraph

[[Page 48813]]

(b)(2)(i) of this section if that date falls on or after the first day 
of the plan year.
    (3) Notice content. The notice must include at least the following 
information:
    (i) The specific requirements described in paragraph (a)(1) of this 
section from which the plan sponsor is electing to exempt the plan, and 
a statement that, in general, Federal law imposes these requirements 
upon group health plans.
    (ii) A statement that Federal law gives the plan sponsor of a self-
funded non-Federal governmental plan the right to exempt the plan in 
whole, or in part, from the listed requirements, and that the plan 
sponsor has elected to do so.
    (iii) A statement identifying which parts of the plan are subject 
to the election.
    (iv) A statement identifying which of the listed requirements, if 
any, apply under the terms of the plan, or as required by State law, 
without regard to an exemption under this section.
    (v) A statement informing plan enrollees that the plan provides for 
certification and disclosure of creditable coverage for covered 
employees and their dependents who lose coverage under the plan.
    (g) Subsequent elections. (1) Election renewal. A plan sponsor may 
renew an election under this section through subsequent elections. The 
timeliness standards described in paragraph (d) apply to election 
renewals under this paragraph (g).
    (2) Form and manner of renewal. Except for the requirement to 
forward to CMS a copy of the notice to enrollees under paragraph 
(b)(1)(viii) of this section, the plan sponsor must comply with the 
election requirements of paragraph (b)(1) of this section. In lieu of 
providing a copy of the notice under (b)(1)(viii), the plan sponsor may 
include a statement that the notice has been, or will be, provided to 
enrollees as specified under paragraph (f) of this section.
    (3) Election renewal includes provisions from which plan not 
previously exempted. If an election renewal includes a requirement 
described in paragraph (a) of this section from which the plan sponsor 
did not elect to exempt the plan for the preceding plan year, the 
advance notification requirements of paragraph (f)(2) of this section 
apply with respect to the additional requirement(s) of paragraph (a) 
from which the plan sponsor is electing to exempt the plan.
    (4) Special rules regarding renewal of an election under a 
collective bargaining agreement. (i) If protracted negotiations with 
respect to a new agreement result in an extension of the term of the 
prior agreement (as provided under paragraph (b)(2)(i)) under which an 
election under this section was in effect, the plan must comply with 
the enrollee notification requirements of paragraph (f)(1), and, 
following closure of the collective bargaining process, must file an 
election renewal with CMS as provided under paragraph (d)(2) of this 
section.
    (ii) If a single plan applies to more than one bargaining unit, and 
the plan is governed by collective bargaining agreements of varying 
lengths, paragraph (d)(2) of this section, with respect to an election 
renewal, applies to the plan as governed by the agreement that results 
in the earliest filing date.
    (h) Certification and disclosure of creditable coverage. Without 
regard to an election under this section, a non-Federal governmental 
plan must provide for certification and disclosure of creditable 
coverage under the plan with respect to participants and their 
dependents as specified under Sec. 146.115. CMS enforces this 
requirement as provided under paragraph (k) of this section.
    (i) Effect of failure to comply with certification and notification 
requirements. (1) Substantial failure. (i) General rule. Except as 
provided in paragraph (i)(1)(iii) of this section, a substantial 
failure to comply with paragraphs (f) or (h) of this section results in 
the invalidation of an election under this section with respect to all 
plan enrollees for the entire plan year. That is, the plan is subject 
to all requirements of this part for the entire plan year to which the 
election otherwise would have applied.
    (ii) Determination of substantial failure. CMS determines whether a 
plan has substantially failed to comply with a requirement of paragraph 
(f) or paragraph (h) of this section based on all relevant facts and 
circumstances, including previous record of compliance, gravity of the 
violation and whether a plan corrects the failure, as warranted, within 
30 days of learning of the violation. However, in general, a plan's 
failure to provide a notice of the fact and consequences of an election 
under this section to an individual at the time of enrollment, or on an 
annual basis before a given plan year expires, constitutes a 
substantial failure.
    (iii) Exceptions. (A) Multiple employers. If the plan is sponsored 
by multiple employers, and only certain employers substantially fail to 
comply with the requirements of paragraphs (f) or (h) of this section, 
then the election is invalidated with respect to those employers only, 
and not with respect to other employers that complied with those 
requirements, unless the plan chooses to cancel its election entirely.
    (B) Limited failure to provide notice. If a substantial failure to 
notify enrollees of the fact and consequences of an election is limited 
to certain individuals, the election under this section is valid only 
if, for the plan year with respect to which the failure has occurred, 
the plan agrees not to apply the election with respect to the 
individuals who were not notified and so informs those individuals in 
writing.

    (2) Examples. (i) Example 1: A self-funded non-Federal group 
health plan is co-sponsored by 10 school districts. Nine of the 
school districts have fully complied with the requirements of 
paragraph (f) of this section, including providing notice to new 
employees at the time of their enrollment in the plan, regarding the 
group health plan's exemption under this section from requirements 
of this part. One school district, which hired 10 new teachers 
during the summer for the upcoming school year, neglected to notify 
three of the new hires about the group health plan's exemption 
election at the time they enrolled in the plan. The school district 
has substantially failed to comply with a requirement of paragraph 
(f) with respect to these individuals.
    The school district learned of the oversight six weeks into the 
school year, and promptly (within 30 days of learning of the 
oversight) provided notice to the three teachers regarding the 
plan's exemption under this section and that the exemption does not 
apply to them, or their dependents, during the plan year of their 
enrollment because of the plan's failure to timely notify them of 
its exemption. The plan complies with the requirements of this part 
for these individuals for the plan year of their enrollment. CMS 
would not require the plan to come into compliance with the 
requirements of this part for other enrollees.

    (ii) Example 2: Same facts as in Example 1, except the 
noncompliant school district failed to notify any enrollees 
regarding an election under this section. That is, the school 
district failed to provide the annual notice to current plan 
enrollees as well as the notice at the time of enrollment to new 
enrollees. The school district has substantially failed to comply 
with the requirements of paragraph (f) of this section. At a 
minimum, the election is invalidated with respect to all enrollees 
of the noncompliant school district for the plan year for which the 
substantial failure has occurred. In this example, the plan decides 
not to cancel its election entirely. The election with regard to the 
other nine school districts remains in effect.

    (iii) Example 3. Two non-Federal governmental employers 
cosponsor a self-funded group health plan. One employer 
substantially fails to comply with the requirements of paragraph (f) 
of this section. While the plan may limit the invalidation of the 
election to enrollees of the plan sponsor that is responsible for 
the substantial failure,

[[Page 48814]]

the plan sponsors determine that administering the plan in that 
manner would be too burdensome. Accordingly, in this example, the 
plan sponsors choose to cancel the election entirely. Both plan 
sponsors come into compliance with the requirements of this part 
with respect to all enrollees for the plan year for which the 
substantial failure has occurred.

    (iv) Example 4: A non-Federal governmental employer has elected 
to exempt its collectively bargained self-funded plan from certain 
requirements of this part. The collective bargaining agreement 
applies to five plan years, 2001 through 2005. For the first three 
plan years, enrollees are notified annually and at the time of 
enrollment of the election under this section. The notice specifies 
that the election applies to the period January 1, 2001 through 
December 31, 2005. Prior to the dissemination of the annual notice 
for the 2004 plan year, the individual responsible for disseminating 
the notice terminates employment. His replacement, who is unaware of 
the requirement that plan enrollees be notified annually, continues 
to notify new enrollees at the time of enrollment but fails to 
disseminate the annual notice. CMS does not consider that failure to 
be a substantial failure because enrollees previously had actual 
notice that the election under this section applies for the period 
January 1, 2001 through December 31, 2005. Accordingly, CMS would 
not invalidate the election for the 2004 plan year.

    (v) Example 5: A non-Federal governmental employer has elected 
to exempt its self-funded plan from certain requirements of this 
part. An individual terminates employment with the governmental 
employer, which fails to automatically provide a certificate of 
creditable coverage within the period specified in 
Sec. 146.115(a)(2)(ii)(A). (The governmental employer generally 
provides certificates to terminated employees on an automatic basis, 
but neglected to do so in this case.) The oversight is brought to 
the employer's attention when the individual inquires as to why he 
has not received his certificate of creditable coverage. The 
governmental employer promptly (within 30 days) forwards a 
certificate to the individual. CMS would not view that situation as 
constituting a substantial failure and would not invalidate the 
election under this section.
    (j) Election invalidated. If CMS finds cause to invalidate an 
election under this section, the following rules apply:
    (1) CMS notifies the plan sponsor (and the plan administrator if 
other than the plan sponsor and the administrator's address is known to 
CMS) in writing that CMS has made a preliminary determination that an 
election is invalid, and states the basis for that determination.
    (2) CMS's notice informs the plan sponsor that it has 45 days after 
the date of CMS's notice to explain in writing why it believes its 
election is valid. The plan sponsor should provide applicable statutory 
and regulatory citations to support its position.
    (3) CMS verifies that the plan sponsor's response is timely filed 
as provided under paragraph (d)(3) of this section. CMS will not 
consider a response that is not timely filed.
    (4) If CMS's preliminary determination that an election is invalid 
remains unchanged after CMS considers the plan sponsor's timely 
response (or in the event that the plan sponsor fails to respond 
timely), CMS provides written notice to the plan sponsor (and the plan 
administrator if other than the plan sponsor and the administrator's 
address is known to CMS) of CMS's final determination that the election 
is invalid. Also, CMS informs the plan sponsor that, within 45 days of 
the date of the notice of final determination, the plan, subject to 
paragraph (i)(1)(iii) of this section, must comply with all 
requirements of this part for the specified period for which CMS has 
determined the election to be invalid.
    (k) Enforcement. To the extent that an election under this section 
has not been filed or a non-Federal governmental plan otherwise is 
subject to one or more requirements of this part, CMS enforces those 
requirements under part 150 of this subchapter. This may include 
imposing a civil money penalty against the plan or the plan sponsor, as 
determined under Sec. 150.305.
    (l) Construction. Nothing in this section should be construed to 
prevent a State from taking the following actions:
    (1) Establishing, and enforcing compliance with, the requirements 
of State law (as defined in Sec. 146.143(d)(1)), including requirements 
that parallel provisions of title XXVII of the PHS Act, that apply to 
non-Federal governmental plans or sponsors.
    (2) Prohibiting a sponsor of a non-Federal governmental plan within 
the State from making an election under this section.

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

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

    Dated: December 7, 2001.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.

    Dated: March 20, 2002.
Tommy G. Thompson,
Secretary.
[FR Doc. 02-17621 Filed 7-25-02; 8:45 am]
BILLING CODE 4120-01-P