FROM THE OFFICE OF PUBLIC AFFAIRS

HOUSE WAYS AND MEANS SUBCOMMITTEE ON HEALTH

I am pleased to present the views of the Department of the Treasury on the implementation of the access, portability, preexisting condition, and long-term care provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). These provisions are designed to improve portability and continuity of group health plan coverage provided in connection with employment, and to clarify the tax treatment of long-term care insurance contracts and the tax deductibility of expenses associated with long-term care services. This legislation, enacted on a bipartisan basis with the strong support of the Administration, provides important insurance reform that enhances health care coverage for American families. We commend this Subcommittee and the Committee for its critical efforts in achieving passage of this law.

My testimony will focus on the HIPAA guidance that the Treasury Department has provided to date. On April 1, 1997, the Department of the Treasury issued proposed and temporary regulations on the HIPAA group market portability provisions, together with substantially similar interim final rules issued by the Department of Health and Human Services and the Department of Labor. On May 6, 1997, the Treasury Department provided interim guidance on long-term care issues.

HIPAA GROUP MARKET PORTABILITY PROVISIONS

Coordinated Structure of Rules. HIPAA sets forth federal requirements relating to portability, access, and renewability of group health plan and group health insurance coverage (the "portability" provisions.) The HIPAA portability provisions relating to group health plans (the "group market" provisions) are set forth in the Internal Revenue Code, ERISA, and the Public Health Service Act (PHSA). HIPAA also added provisions governing insurance in the individual market (the "individual market" provisions) which are contained only in the Public Health Service Act, and thus are not within the regulatory jurisdiction of the Department of the Treasury (or the Department of Labor).

In general, the group market provisions create overlapping jurisdiction for the Secretaries of the Treasury, Labor, and Health and Human Services. The statute provides for the three Departments to share regulatory responsibility for most of the group market provisions (the "shared group market" provisions), and the Departments have worked together in developing regulations in this area.

The shared group market provisions under the three statutes are substantially similar. Under the Code, these provisions generally apply to all group health plans, other than governmental plans and plans with fewer than two participants who are current employees, but, unlike the corresponding provisions in the PHSA and ERISA, do not apply to insurance issuers. In general, a plan sponsor that fails to comply with these provisions may be subject to an excise tax under the Code.

Key Portability Provisions. HIPAA’s shared group market provisions include four key elements. First, HIPAA imposes limitations on preexisting condition exclusions. Second, it requires that group health plans and health insurance issuers provide certifications of creditable coverage. Third, HIPAA creates certain special enrollment rights for employees and dependents. Fourth, HIPAA prohibits group health plans or issuers from discriminating against individuals on the basis of health status.

Most plans are not yet subject to the group market provisions of HIPAA, except for the certification provisions. Moreover, a statutory good faith enforcement standard applies to all of the group market provisions, including the certification requirements, through the end of this year. The substantive requirements of the group market rules, such as the limitations on preexisting condition exclusions and the prohibitions on discrimination based on health status-related factors, are generally effective for plan years beginning after June 30, 1997. (e.g., for a calendar year plan January 1, 1998.) At the same time, HIPAA provides that no enforcement action may be taken, pursuant to the group market portability provisions, against a group health plan or health insurance issuer with respect to a violation of a requirement imposed by those provisions before January 1, 1998 if the plan or issuer has sought to comply in good faith with those requirements. The requirement that a group health plan and a health insurance issuer in the group market deliver to individuals certifications of their creditable coverage upon certain events (e.g., loss of coverage) applies to events occurring after June 30, 1996. However, no certification was required to be provided before June 1, 1997. Certifications are not required to reflect coverage before July 1, 1996, and certifications for events before October 1, 1996 need be provided only upon written request.

Implementation. Under HIPAA, the Departments were instructed to "first issue by not later than April 1, 1997, such regulations as may be necessary to carry out" the group market portability provisions. The Departments met this goal through the issuance of interim regulations on the key aspects of the shared HIPAA group market portability provisions.

The regulations were developed on a coordinated basis by the three Departments. Except to the extent needed to reflect the statutory differences described earlier, the shared group market provisions in the regulations of each Department are substantively identical. The development of the regulations on a collaborative basis proved to be neither an easy nor a simple task, but the Departments made special efforts to overcome the problems inherent in this type of overlapping responsibility.

In developing the interim regulations, the Departments were committed to working to implement the law in ways that protect the ability of workers and their families to maintain their health insurance when they change jobs, without imposing undue burdens on employers, plans, insurance carriers, and others providing coverage.

The regulations seek to ensure that the statutory provisions designed to protect and assist participants and their dependents are implemented effectively. For example, implementation of the limitations on preexisting condition exclusions will be facilitated through the delivery of coverage information using certificates provided to individuals and transmitted to a new employer when an employee changes jobs. In accordance with authorization in HIPAA, the regulations include several features that are intended to facilitate this essential process of transferring information.

Demonstrating creditable coverage. HIPAA's portability provisions limit the ability of group health plans and group health insurance issuers to impose a preexisting condition exclusion, which is a limitation or exclusion of benefits relating to a condition that is based on the fact that the condition was present before the date of enrollment. Under HIPAA, a preexisting condition exclusion may be imposed only if it relates to a condition for which medical advice, diagnosis, care, or treatment was received or recommended within six months prior to the individual’s "enrollment date." In addition, a preexisting condition exclusion may not be applied for more than 12 months (or 18 months in the case of late enrollment) after the enrollment date.

If the individual has previous "creditable coverage," including coverage under another group health plan, the maximum preexisting condition exclusion period must be reduced by the aggregate of the individual’s periods of creditable coverage. Coverage generally may be disregarded if it precedes a 63-day break in coverage or if the coverage consists solely of certain "excepted" benefits. In addition, special protections apply for pregnancy, and for newborn children, adopted children, and children placed for adoption.

To enable individuals to provide evidence of, and thus receive credit for, previous coverage, HIPAA generally requires that group health plans and health insurance issuers provide certifications of the periods of creditable coverage. Certifications must be provided when an individual ceases plan coverage or otherwise becomes covered under COBRA, when an individual ceases COBRA coverage, and in certain cases where a request is made. HIPAA also provides that periods of creditable coverage are established through presentation of certifications or in such other manner as may be specified in regulations. Moreover, HIPAA directs the Departments to establish rules to prevent an entity’s failure to provide information concerning creditable coverage from adversely affecting any subsequent coverage of the individual under another group health plan or health insurance coverage.

To prevent an individual from being adversely affected if the individual does not receive a certificate, the regulations identify practical ways for individuals to demonstrate creditable coverage to a new plan through the presentation of documentation or other means. For example, an individual may not have a certificate because an entity failed to provide a certificate within the required time period, an entity was not required to provide a certificate, the coverage of the individual was for a period before July 1, 1996, or the individual has an urgent medical condition that necessitates an immediate determination of creditable coverage by a plan or issuer before the prior plan or issuer is required to provide a certificate. Under these circumstances, the regulations permit an individual to present evidence of creditable coverage through documents, records, third party statements, or other means, including telephone calls by the plan or issuer to a third party provider. If an individual needs to demonstrate that he or she is a dependent of a participant, the individual can simply attest to his or her status as a dependent (including the period of the status). Of course, the individual must cooperate with efforts by the plan or issuer to verify the prior creditable coverage or dependent status.

Notice of possible exclusion period. A plan that imposes a preexisting condition exclusion must notify participants that it has a preexisting condition exclusion and that the individual has a right to demonstrate creditable coverage. If the plan receives a certificate, other evidence of coverage, or information relating to the alternative method, it must notify the individual of the length of time that a preexisting condition exclusion may apply to the individual after taking into account their prior creditable coverage. A plan or issuer is expressly permitted under the regulations to reconsider and modify its initial determination of the length of the preexisting condition exclusion if it determines that the individual did not have the claimed creditable coverage, assuming the individual is notified of such reconsideration and, until a final determination is made, the plan or issuer acts in accordance with its initial determination for purposes of approving medical services.

Receipt of certificate before coverage ceases. The regulations clarify the statutory rules by expressly permitting individuals to obtain a certificate, upon request, before coverage under a plan ceases. This enables an individual to confirm in advance that he or she has at least 12 months of creditable coverage, information that may be important in deciding whether to change jobs.

Description of special enrollment rights. The special enrollment rules allow individuals to enroll in a plan in certain circumstances in which they have lost other coverage, have gotten married, or have a new dependent child by birth, adoption, or placement for adoption. The special enrollment rules apply to individuals who are unlikely to have received a summary plan description (because they are not enrolled as participants). To ensure that these individuals know about their enrollment rights, the regulations provide for individuals to be furnished a description of their rights to special enrollment under a plan if they decline coverage. To assist plan sponsors, the regulations include a simple model of such a description.

Many provisions of the regulations are designed to reduce costs and burdens, including those described below.

Model certificate. The solicitation of comments published last December specifically requested input on whether a model certificate of creditable coverage, that could be used by plans and issuers, would be useful. In response to favorable comments received by the Departments, a simple model has been provided. The Departments believe that the model certification will significantly reduce the potential burdens on employers and insurance carriers, while also making the certification process more effective for employees and dependents. The model should facilitate the transmission of coverage information by standardizing the information that employees and dependents receive and deliver to their next group health plan or use to evidence their eligibility for coverage in the individual market.

Transition rule allowing optional notice in lieu of certificate, plus model notice. As indicated above, HIPAA required that no later than June 1, 1997, a plan or issuer provide an automatic certificate for events occurring on and after October 1, 1996. In light of the fact that the limitations on preexisting condition exclusions do not go into effect until plan years beginning after June 30, 1997, the regulations provide an optional transition rule that could be used by plans and issuers to satisfy this obligation. Under the regulations, the plan or issuer is deemed to satisfy this obligation if a special notice explaining an individual’s right to receive a certificate was provided by June 1, 1997. This enables plans and issuers to provide the same notice to all individuals instead of certificates containing information tailored to each individual. A model notice that could be used to satisfy this rule was included with the regulations. The transition rule and model notice are designed to address the concerns that were repeatedly expressed to the Departments concerning the automatic certificates relating to this transition period, while remaining faithful to the statutory protections for workers and their families.

Model notice for categories of benefits. HIPAA permits a plan or issuer to reduce a period of a preexisting condition exclusion by using either a standard method of counting coverage (which is determined without regard to the specific benefits included in the coverage), or an alternative method under which the plan or issuer can elect to determine the amount of prior coverage within particular categories of benefits specified in regulations. The interim regulations identify the categories of benefits that can be used -- mental health, substance abuse treatment, prescription drugs, dental care, and vision care. The regulations also provide a model notice that a plan or issuer may use for information about the prior coverage within the categories of benefits.

Coverage information by telephone. The regulations allow coverage information to be provided by telephone if all parties -- the individual, the sending plan or issuer, and the receiving plan or issuer -- agree. In addition, the regulations request comments as to whether, and under what conditions, other methods of transmitting certification information (including electronic communication) should be permitted.

Reducing unnecessary duplication in issuance of certificate. The statutory obligation to furnish a written certificate of information regarding creditable coverage is imposed on both the group health plan and the health insurance issuer offering group health insurance coverage. This dual obligation was the subject of many of the comments received by the Departments. Concerns were raised about superfluous, duplicate certificates being issued and the potential responsibility of issuers for reporting on an individual’s coverage under the plan after one issuer has been replaced by another.

The regulations address these concerns in various ways. For example, the regulations provide that an entity is deemed to satisfy the requirement to provide a certificate to the extent that any other party provides a certificate that discloses the creditable coverage (including the waiting period information) that was to be provided by the entity. Also, the regulations amplify the statutory rule that a plan is deemed to have satisfied its obligation if the issuer agrees to provide certificates for individuals covered under the plan. In addition, an issuer is not required to provide any coverage information regarding coverage periods for which it was not responsible. The framework provided by the regulations gives plans and issuers the flexibility to arrange the most efficient certification process for each situation, while at the same time ensuring that individuals will receive the information they need.

Only essential information required in certificate. The regulations specify that a certificate must provide information identifying the parties involved, whether the individual had at least 18 months of creditable coverage under the plan without a 63-day break, and, if not, the date any waiting period began, and the beginning and ending dates of coverage. Thus, plans and issuers are relieved of the need to report detailed information regarding the starting date of coverage and waiting period information if a certificate shows that an individual has at least 18 months of creditable coverage. Further, information concerning the particular benefits provided under the plan need not be provided; this information would be required to be furnished only if another plan or issuer that uses the "alternative method," after receiving the certification, requested additional information in accordance with the statute.

Special rules for dependents. Family members receiving health coverage through an employer are also entitled to a written certificate of creditable coverage. Comments from the public raised concerns because plans and issuers often do not know the existence of dependents or their coverage periods until claims are filed. To address these concerns, the regulations include two special rules to provide dependents with the coverage information they need. First, under a transition rule that lasts through June 30, 1998, a plan or issuer may satisfy its obligation to provide a written certificate regarding a dependent’s coverage by including in the certificate the name of the participant and the type of coverage provided (such as family coverage or employee-plus-spouse coverage). However, if asked to provide a certificate relating to a specific dependent, the plan must make reasonable efforts to obtain and provide the name of the dependent. This rule will provide plans and issuers with a transition period to update their data systems to include information on dependents, yet ensure that dependents get the documentation they may need. Second, the regulations include a special rule that is not limited to the transition period, under which a plan or issuer must make a reasonable effort to collect information on dependents and include it on the certificate. However, an automatic certificate for dependents is not required to be issued until the plan or issuer knows (or, making reasonable efforts, should know) of the dependent’s cessation of coverage. This information can be collected annually, such as during open enrollment, as part of the normal collection of health information from participants.

Prohibition of discrimination based on health status. The HIPAA group market rules prohibit a group health plan or health insurance issuer in the group market from establishing rules for an individual's eligibility to enroll in a plan that are based on an individual's medical history, evidence of insurability, or other health status-related factors. The legislative history indicates that evidence of insurability is intended to include personal activities, such as skiing or riding horses. Similarly, a group health plan or health insurance issuer in the group market cannot require an individual to pay greater premiums or contributions based on any health status-related factor. An exception is provided for discounts, rebates, or modifications to copayments or deductibles in return for adherence to "programs of health promotion and disease prevention" (sometimes referred to as "wellness" programs).

The regulations include examples illustrating how the group market rules operate to ensure that an individual who seeks to enroll in a plan cannot be denied eligibility based on a condition identified in a pre-enrollment physical and how a plan can include a bona fide wellness program that encourages participants to adhere to the program in order to obtain a discount on their health premiums. While these examples do not answer all of the important issues arising under the new nondiscrimination provisions, they provide guidance concerning commonly asked questions and the guidance extends the application of the good faith enforcement standard until further regulations are promulgated. Since the regulations were issued last April, we have sought and received comments on a number of other issues which the Departments are taking into account as we work closely together in considering future guidance.

Reactions to the shared group market regulations from the public have generally been positive. They have commented favorably on the timeliness of the guidance, the thoroughness with which issues are addressed by the regulations, and the effort made in the regulations to implement the protections afforded to participants and beneficiaries while minimizing costs and burdens on issuers and employers.

We believe that the successful completion of the HIPAA shared group market portability regulations issued on April 1, 1997 is attributable in part to the fact that the Departments actively sought and took into account information and views from the public while developing the regulations. The Departments engaged in extensive discussions with representatives of insurance companies, State insurance regulators, employers, plan administrators, and consumer groups, both to educate others about HIPAA and to be educated about concerns and issues raised by those affected by the new requirements. In addition, last December, the Departments published in the Federal Register a public solicitation of further comments on the HIPAA portability provisions in order that comments could be taken into account, to the extent practicable, for purposes of developing the regulations. We believe that consideration of public comments, both on behalf of employees, dependents, and others seeking health care coverage, and on behalf of employers, plan administrators, and insurance issuers, provided the Departments with valuable information to consider during the process of drafting the regulations. This will continue to be an essential component of our implementation efforts.

LONG-TERM CARE

Summary of Statutory Provisions. Prior to the enactment of HIPAA, the Code did not contain explicit rules concerning the tax treatment of long-term care insurance or unreimbursed expenses relating to long-term care services. The tax law generally excluded from income amounts received under accident or health insurance and employer-provided coverage under an accident or health plan, and also permitted certain unreimbursed expenses for medical care to be deducted from income.

The new HIPAA provisions establish requirements under which a long-term care insurance contract can qualify for treatment as an accident or health plan under federal tax laws and eligible premiums for such insurance and expenses for long-term care services (that are paid without the purchase of insurance) can qualify for treatment as expenses for medical care for federal tax purposes. For these tax advantages to apply, HIPAA requires that the individual be unable to perform certain daily activities that are essential to living independently without substantial assistance, or need substantial supervision due to severe cognitive impairment. Eligibility for special tax treatment does not depend on whether the care is provided in a nursing home, in the individual’s community, or at the individual’s home. In addition, in the case of insurance policies, certain consumer protection requirements must be satisfied.

The statute defines "qualified long-term care services" as necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services and maintenance or personal care services that are required by a "chronically ill individual" and are provided pursuant to a plan of care prescribed by a licensed health care practitioner. A "chronically ill individual" is defined as any individual who has been certified by a licensed health care practitioner as --

(i) being unable to perform without substantial assistance from another individual at least 2 out of 6 activities of daily living (ADLs) listed in § 7702B(c)(2)(B) for a period of at least 90 days due to a loss of functional capacity (the "ADL Trigger");

(ii) having a level of disability similar to the level of disability described in the ADL Trigger as determined under regulations prescribed by the Secretary of the Treasury in consultation with the Secretary of Health and Human Services (the "Similar Level Trigger"); or

(iii) requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment (the "Cognitive Impairment Trigger").

The 6 ADLs listed in the tax law are eating, toileting, transferring, bathing, dressing, and continence. A contract is not a qualified long-term care insurance contract unless it takes into account at least 5 of these 6 activities in determining whether an individual is a chronically ill individual.

In addition, HIPAA amended the tax law to provide that, for purposes of determining a taxpayer’s eligibility to deduct amounts paid for medical care expenses, the term "medical care" includes (1) eligible premiums paid for any qualified long-term care insurance contract and (2) amounts paid for qualified long-term care services.

HIPAA provides that, except for policies issued before January 1, 1997, the only insurance protection that can be provided under a qualified long-term care insurance contract is coverage for qualified long-term care services. Thus, an insurance policy issued after December 31, 1996 is qualified only if the policy provides coverage solely for maintenance, personal care, or other identified medical care services that are required by a "chronically ill individual," and only if such services are provided pursuant to a plan of care prescribed by a licensed health care practitioner. This standard applies both to individuals who have purchased insurance and to individuals whose long-term care expenses are paid for without insurance.

A qualified policy must also satisfy certain consumer protection standards. These standards reflect many of the provisions that are in the NAIC’s model long-term care act and regulations. These model provisions are incorporated into the tax law by reference to the model act and regulations. A qualified policy must also satisfy certain other requirements, including that the policy must state that it is intended to be tax-qualified, the purchaser must have been offered the opportunity to purchase a nonforfeiture feature that will provide benefits in the event the purchaser is unable to continue to pay premiums, and any claim denial must be explained to the policyholder in writing within 60 days. Certain of these requirements are conditions that must be satisfied in order for the policy to be tax-qualified, and others are enforced by an excise tax that may be imposed on the insurance company that issued the qualified policy.

Implementation. We began the process of issuing guidance on the new long-term care provisions by considering the many helpful written comments that were submitted. In addition, Treasury and IRS personnel, together with personnel from the Department of Health and Human Services, engaged in extensive discussions with numerous parties. These include health professionals expert in the care and rehabilitation of chronic illnesses, insurance companies offering long-term care insurance, groups representing persons with chronic disabilities, State insurance regulators (including the NAIC), academics, and researchers.

Based largely on these discussions, our goal has been to issue guidance in two stages. First, Notice 97-31, which the Treasury Department and the IRS released on May 6, 1997, addressed issues identified as matters for which interim guidance would be particularly helpful. Second, we intend to provide additional and more permanent guidance under the new long-term care provisions, taking into account comments made by the public.

In general, Notice 97-31 provides interim standards concerning the key definitions for determining whether a person is a "chronically ill individual," as well as guidance concerning the scope of HIPAA’s grandfather provision for long-term care insurance contracts issued before 1997 and the consumer protection requirements imposed on qualified long-term care insurance contracts under HIPAA.

Safe harbor definitions. The notice provides interim safe harbor definitions of several key terms relating to determinations of whether a person is "chronically ill", specifically:

· substantial assistance;

· hands-on assistance and standby assistance;

· severe cognitive impairment; and

· substantial supervision.

The notice also includes a safe harbor that permits an insurance company to interpret its post-1996 contracts using the same standards that it applies to the benefit triggers in its pre-1997 contracts that are based on the inability to perform activities of daily living and cognitive impairment. These safe harbors may be used without the need to amend insurance contracts.

The safe harbors are designed to provide clearer standards for individuals and insurance companies to use in interpreting the new standards set forth in the HIPAA long-term care provisions, without requiring interim amendment of insurance contracts that might impede the development of the insurance market.

Grandfather provisions. The notice provides guidance on the scope of changes that may be made to an insurance contract issued before January 1, 1997 to ensure that such contracts will be treated as qualified long-term care insurance contracts under HIPAA. One important clarification in the notice is that the addition of a new certificate holder under a pre-1997 group contract will neither cause the previous certificate holders to lose grandfathered status for their certificates, nor prevent the new certificate holder under the contract from being covered by the grandfather provision.

Consumer protections. HIPAA incorporates certain provisions of the NAIC model insurance law and model regulations. Notice 97-31 provides that where a State has adopted the consumer protection requirements in the NAIC models that are incorporated in HIPAA, compliance with that State requirement satisfies the parallel HIPAA requirement and failure to comply with that State requirement is failure to comply with the parallel HIPAA requirement. The notice also recognizes the primacy of State insurance departments in the regulation of insurance contracts by treating an insurance contract as having received approval from the Secretary of the Treasury if the contract has been approved by the State insurance department for purposes of certain nonforfeiture requirements in the long-term care provisions.. At sections 1602(b) and (e) of the Taxpayer Relief Act of 1997.

CONCLUSION

In implementing the important HIPAA group market portability reforms, the Departments have developed interim regulations that effectuate the statutory protections for individuals while seeking to minimize the costs and burdens on entities that offer health care coverage. In addition, in developing guidance relating to qualified long-term care insurance and services, the Treasury Department has given careful consideration to the impact of new rules on both insurance issuers and individuals. Now that initial guidance in each of these areas has been issued, we will continue to be responsive to views expressed by affected parties as we consider possible changes to the initial guidance and as we develop additional guidance.

The Treasury Department appreciates the opportunity to testify before the Subcommittee concerning the implementation of these HIPAA provisions.

Mr. Chairman, this concludes my formal statement. I will be pleased to answer any questions you or other Members may wish to ask.