Bulletin No. 2010-32August 9, 2010

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

EMPLOYEE PLANS

T.D. 9491, page 186.REG–120399–10, page 239.Temporary and proposed regulations under section 9815 of theCode provide guidance concerning the rules for group healthplans and health insurance coverage relating to preexistingcondition exclusions, lifetime and annual benefit limits, rescis-sions, and patient protections under the Affordable Care Act.

EXCISE TAX

T.D. 9491, page 186.REG–120399–10, page 239.Temporary and proposed regulations under section 9815 of theCode provide guidance concerning the rules for group healthplans and health insurance coverage relating to preexistingcondition exclusions, lifetime and annual benefit limits, rescis-sions, and patient protections under the Affordable Care Act.

TAX CONVENTIONS

Announcement 2010–48, page 234.The United States and Greenland (on behalf of the Govern-ment of Denmark pursuant to the Danish Act on the Conclu-sion of Agreements under International Law by the Governmentof Greenland) have exchanged diplomatic notes evidencing areciprocal exemption agreement for income from the interna-tional operation of ships or aircraft for taxable years beginningon or after January 1, 2011.

Finding Lists begin on page ii.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-

force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

August 9, 2010 2010–32 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 9815.—AdditionalMarket Reforms

26 CFR 54.9815–2704T: Prohibition of preexistingcondition exclusions (temporary).

T.D. 9491

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 54 and 602

DEPARTMENT OF LABOREmployee Benefits SecurityAdministration29 CFR Part 2590RIN 1210–AB43

DEPARTMENT OF HEALTHAND HUMAN SERVICESOCIIO–9994–IFC45 CFR Parts 144, 146, and147RIN 0991–AB69

Patient Protection andAffordable Care Act:Preexisting ConditionExclusions, Lifetime andAnnual Limits, Rescissions,and Patient Protections

AGENCIES: Internal Revenue Service,Department of the Treasury; EmployeeBenefits Security Administration, De-partment of Labor; Office of ConsumerInformation and Insurance Oversight, De-partment of Health and Human Services.

ACTION: Interim final rules with requestfor comments.

SUMMARY: This document contains in-terim final regulations implementing therules for group health plans and health in-surance coverage in the group and individ-ual markets under provisions of the PatientProtection and Affordable Care Act re-garding preexisting condition exclusions,

lifetime and annual dollar limits on bene-fits, rescissions, and patient protections.

DATES: Effective Date: These interim fi-nal regulations are effective on August 27,2010.

Comment date: Comments are due onor before August 27, 2010.

Applicability dates:1. Group health plans and group health

insurance coverage. These interim finalregulations, except those under PublicHealth Service Act (PHS Act) section2704 (26 CFR 54.9815–2704T, 29 CFR2590.715–2704, 45 CFR 147.108), gener-ally apply to group health plans and grouphealth insurance issuers for plan yearsbeginning on or after September 23, 2010.These interim final regulations under PHSAct section 2704 (26 CFR 54.9815–2704T,29 CFR 2590.715–2704, 45 CFR 147.108)generally apply for plan years beginningon or after January 1, 2014, except that inthe case of individuals who are under 19years of age, these interim final regulationsunder PHS Act section 2704 apply for planyears beginning on or after September 23,2010.

2. Individual health insurance cov-erage. These interim final regulations,except those under PHS Act section2704 (45 CFR 147.108), generally ap-ply to individual health insurance issuersfor policy years beginning on or af-ter September 23, 2010. These interimfinal regulations under PHS Act section2704 (45 CFR 147.108) generally applyto individual health insurance issuersfor policy years beginning on or afterJanuary 1, 2014, except that in the case ofenrollees who are under 19 years of age,these interim final regulations under PHSAct section 2704 apply for policy yearsbeginning on or after September 23, 2010.

ADDRESSES: Written comments may besubmitted to any of the addresses specifiedbelow. Any comment that is submitted toany Department will be shared with theother Departments. Please do not submitduplicates.

All comments will be made availableto the public. WARNING: Do not in-clude any personally identifiable informa-

tion (such as name, address, or other con-tact information) or confidential businessinformation that you do not want publiclydisclosed. All comments are posted on theInternet exactly as received, and can beretrieved by most Internet search engines.No deletions, modifications, or redactionswill be made to the comments received, asthey are public records. Comments may besubmitted anonymously.

Department of Labor. Comments to theDepartment of Labor, identified by RIN1210–AB43, by one of the following meth-ods:

• Federal eRulemaking Portal:http://www.regulations.gov. Followthe instructions for submitting com-ments.

• Email:E-OHPSCA715.EBSA@dol.gov.

• Mail or Hand Delivery: Office ofHealth Plan Standards and ComplianceAssistance, Employee Benefits Secu-rity Administration, Room N–5653,U.S. Department of Labor, 200 Con-stitution Avenue NW, Washington, DC20210, Attention: RIN 1210–AB43.

Comments received by the Depart-ment of Labor will be posted withoutchange to http://www.regulations.gov andhttp://www.dol.gov/ebsa, and available forpublic inspection at the Public DisclosureRoom, N–1513, Employee Benefits Se-curity Administration, 200 ConstitutionAvenue, NW, Washington, DC 20210.

Department of Health and Human Ser-vices. In commenting, please refer to filecode OCIIO–9994–IFC. Because of staffand resource limitations, we cannot acceptcomments by facsimile (FAX) transmis-sion.

You may submit comments in one offour ways (please choose only one of theways listed):

• Electronically. You may submit elec-tronic comments on this regulationto http://www.regulations.gov. Fol-low the instructions under the “MoreSearch Options” tab.

• By regular mail. You may mail writ-ten comments to the following addressONLY:

2010–32 I.R.B. 186 August 9, 2010

Office of Consumer Informationand Insurance Oversight

Department of Healthand Human Services,

Attention: OCIIO–9994–IFC,P.O. Box 8016,Baltimore, MD 21244–1850.

Please allow sufficient time formailed comments to be received be-fore the close of the comment period.

• By express or overnight mail. You maysend written comments to the follow-ing address ONLY:

Office of Consumer Informationand Insurance Oversight,

Department of Healthand Human Services,

Attention: OCIIO–9994–IFC,Mail Stop C4–26–05,7500 Security Boulevard,Baltimore, MD 21244–1850.

• By hand or courier. If you prefer, youmay deliver (by hand or courier) yourwritten comments before the close ofthe comment period to either of the fol-lowing addresses:• For delivery in Washington, DC—

Office of ConsumerInformationand Insurance Oversight,

Department of Healthand Human Services,

Room 445-G, Hubert H.Humphrey Building,

200 Independence Avenue, SW,Washington, DC 20201

(Because access to the interiorof the Hubert H. Humphrey Build-ing is not readily available to per-sons without Federal governmentidentification, commenters are en-couraged to leave their commentsin the OCIIO drop slots located inthe main lobby of the building. Astamp-in clock is available for per-sons wishing to retain a proof of fil-ing by stamping in and retaining anextra copy of the comments beingfiled.)

• For delivery in Baltimore, MD—

Centers for Medicare& Medicaid Services,

Department of Healthand Human Services,

7500 Security Boulevard,Baltimore, MD 21244–1850

If you intend to deliver your commentsto the Baltimore address, please call (410)786–7195 in advance to schedule your ar-rival with one of our staff members.

Comments mailed to the addresses in-dicated as appropriate for hand or courierdelivery may be delayed and received afterthe comment period.

Submission of comments on paperworkrequirements. You may submit commentson this document’s paperwork require-ments by following the instructions at theend of the “Collection of Information Re-quirements” section in this document.

Inspection of Public Comments: Allcomments received before the close ofthe comment period are available forviewing by the public, including anypersonally identifiable or confidentialbusiness information that is included ina comment. We post all comments re-ceived before the close of the commentperiod on the following website as soonas possible after they have been received:http://www.regulations.gov. Follow thesearch instructions on that Web site toview public comments.

Comments received timely will alsobe available for public inspection as theyare received, generally beginning ap-proximately three weeks after publicationof a document, at the headquarters ofthe Centers for Medicare & MedicaidServices, 7500 Security Boulevard, Balti-more, Maryland 21244, Monday throughFriday of each week from 8:30 a.m. to4 p.m. EST. To schedule an appoint-ment to view public comments, phone1–800–743–3951.

Internal Revenue Service. Commentsto the IRS, identified by REG–120399–10,by one of the following methods:

• Federal eRulemaking Portal:http://www.regulations.gov. Followthe instructions for submitting com-ments.

• Mail: CC:PA:LPD:PR(REG–120399–10), Room 5205,Internal Revenue Service, P.O. Box

7604, Ben Franklin Station, Washing-ton, DC 20044.

• Hand or courier delivery: Mondaythrough Friday between the hours of8 a.m. and 4 p.m. to: CC:PA:LPD:PR(REG–120399–10), Courier’s Desk,Internal Revenue Service, 1111Constitution Avenue, NW, WashingtonDC 20224.

All submissions to the IRS will be opento public inspection and copying in Room1621, 1111 Constitution Avenue, NW,Washington, DC from 9 a.m. to 4 p.m.

FOR FURTHER INFORMATIONCONTACT: Amy Turner or Beth Baum,Employee Benefits Security Adminis-tration, Department of Labor, at (202)693–8335; Karen Levin, Internal Rev-enue Service, Department of the Trea-sury, at (202) 622–6080; Jim Mayhew,Office of Consumer Information andInsurance Oversight, Department ofHealth and Human Services, at (410)786–1565. Customer Service Informa-tion: Individuals interested in obtain-ing information from the Departmentof Labor concerning employment-basedhealth coverage laws may call the EBSAToll-Free Hotline at 1–866–444–EBSA(3272) or visit the Department of La-bor’s website (http://www.dol.gov/ebsa).In addition, information from HHS onprivate health insurance for consumerscan be found on the Centers for Medi-care & Medicaid Services (CMS) website(http://www.cms.hhs.gov/HealthInsRe-formforConsume/01_Overview.asp) andinformation on health reform can be foundat http://www.healthreform.gov.

SUPPLEMENTARY INFORMATION:

I. Background

The Patient Protection and Afford-able Care Act (the Affordable CareAct), Pub. L. 111–148, was enactedon March 23, 2010; the Health Careand Education Reconciliation Act (theReconciliation Act), Pub. L. 111–152,was enacted on March 30, 2010.The Affordable Care Act and theReconciliation Act reorganize, amend,and add to the provisions of part A oftitle XXVII of the Public Health ServiceAct (PHS Act) relating to group healthplans and health insurance issuers in the

August 9, 2010 187 2010–32 I.R.B.

group and individual markets. The term“group health plan” includes both insuredand self-insured group health plans.1

The Affordable Care Act adds section715(a)(1) to the Employee RetirementIncome Security Act (ERISA) and section9815(a)(1) to the Internal Revenue Code(the Code) to incorporate the provisionsof part A of title XXVII of the PHS Actinto ERISA and the Code, and makethem applicable to group health plans,and health insurance issuers providinghealth insurance coverage in connectionwith group health plans. The PHS Actsections incorporated by this referenceare sections 2701 through 2728. PHSAct sections 2701 through 2719A aresubstantially new, though they incorporatesome provisions of prior law. PHS Actsections 2722 through 2728 are sections ofprior law renumbered, with some, mostlyminor, changes.

Subtitles A and C of title I of the Af-fordable Care Act amend the requirementsof title XXVII of the PHS Act (changesto which are incorporated into ERISAsection 715). The preemption provi-sions of ERISA section 731 and PHS Actsection 27242 (implemented in 29 CFR2590.731(a) and 45 CFR 146.143(a)) ap-ply so that the requirements of part 7 ofERISA and title XXVII of the PHS Act,as amended by the Affordable Care Act,are not to be “construed to supersede anyprovision of State law which establishes,implements, or continues in effect anystandard or requirement solely relatingto health insurance issuers in connectionwith group or individual health insur-ance coverage except to the extent thatsuch standard or requirement preventsthe application of a requirement” of theAffordable Care Act. Accordingly, Statelaws that impose on health insurance is-suers requirements that are stricter than therequirements imposed by the AffordableCare Act will not be superseded by theAffordable Care Act.

The Departments of Health and HumanServices, Labor, and the Treasury (the

Departments) are issuing regulations inseveral phases implementing the revisedPHS Act sections 2701 through 2719Aand related provisions of the AffordableCare Act. The first phase in this serieswas a pair of publications consisting ofa Request for Information relating to themedical loss ratio provisions of PHS Actsection 2718 and a Request for Informa-tion relating to the rate review process ofPHS Act 2794, both published in the Fed-eral Register on April 14, 2010 (75 FR19297 and 19335). The second phase wasinterim final regulations implementingPHS Act section 2714 (requiring coverageof adult children to age 26), published inthe Federal Register on May 13, 2010(T.D. 9482, 2010–22 I.R.B. 698 [75 FR27122]). The third phase was interim finalregulations implementing section 1251 ofthe Affordable Care Act (relating to statusas a grandfathered health plan), publishedin the Federal Register on June 17, 2010(T.D. 9489, 2010–29 I.R.B. 55 [75 FR34538]). These interim final regulationsare being published to implement PHSAct sections 2704 (prohibiting preexistingcondition exclusions), 2711 (regardinglifetime and annual dollar limits on ben-efits), 2712 (regarding restrictions onrescissions), and 2719A (regarding patientprotections). PHS Act section 2704 gen-erally is effective for plan years (in theindividual market, policy years) beginningon or after January 1, 2014. However, withrespect to enrollees, including applicantsfor enrollment, who are under 19 years ofage, PHS Act section 2704 is effective forplan years beginning on or after Septem-ber 23, 2010 (which is six months afterthe March 23, 2010 date of enactment ofthe Affordable Care Act); or in the caseof individual health insurance coverage,for policy years beginning, or applicationsdenied, on or after September 23, 2010.3

The rest of these provisions generally areeffective for plan years (in the individualmarket, policy years) beginning on or afterSeptember 23, 2010. The implementationof other provisions of PHS Act sections

2701 through 2719A will be addressed infuture regulations.

II. Overview of the Regulations

A. PHS Act Section 2704, Prohibition ofPreexisting Condition Exclusions (26 CFR54.9815–2704T, 29 CFR 2590.715–2704,45 CFR 147.108)

Section 1201 of the Affordable CareAct adds a new PHS Act section 2704,which amends the HIPAA4 rules relatingto preexisting condition exclusions to pro-vide that a group health plan and a healthinsurance issuer offering group or individ-ual health insurance coverage may not im-pose any preexisting condition exclusion.The HIPAA rules (in effect prior to the ef-fective date of these amendments) applyonly to group health plans and group healthinsurance coverage, and permit limited ex-clusions of coverage based on a preexist-ing condition under certain circumstances.The Affordable Care Act provision pro-hibits any preexisting condition exclusionfrom being imposed by group health plansor group health insurance coverage and ex-tends this protection to individual healthinsurance coverage. This prohibition gen-erally is effective with respect to plan years(in the individual market, policy years) be-ginning on or after January 1, 2014, butfor enrollees who are under 19 years ofage, this prohibition becomes effective forplan years (in the individual market, policyyears) beginning on or after September 23,2010. Until the new Affordable Care Actrules take effect, the HIPAA rules regard-ing preexisting condition exclusions con-tinue to apply.

HIPAA generally defines a preexistingcondition exclusion5 as a limitation or ex-clusion of benefits relating to a conditionbased on the fact that the condition waspresent before the date of enrollment forthe coverage, whether or not any medicaladvice, diagnosis, care, or treatment wasrecommended or received before that date.Based on this definition, PHS Act section

1 The term “group health plan” is used in title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, and is distinct from the term “health plan,” as used in other provisions oftitle I of the Affordable Care Act. The term “health plan” does not include self-insured group health plans.

2 Code section 9815 incorporates the preemption provisions of PHS Act section 2724. Prior to the Affordable Care Act, there were no express preemption provisions in chapter 100 of theCode.

3 Section 1255 of the Affordable Care Act. See also section 10103(e)-(f) of the Affordable Care Act.

4 HIPAA is the Health Insurance Portability and Accountability Act of 1996 (Public Law 104–191).

5 Before the amendments made by the Affordable Care Act, PHS Act section 2701(b)(1); after the amendments made by the Affordable Care Act, PHS Act section 2704(b)(1). See also ERISAsection 701(b)(1) and Code section 9801(b)(1).

2010–32 I.R.B. 188 August 9, 2010

2704, as added by the Affordable Care Act,prohibits not just an exclusion of cover-age of specific benefits associated with apreexisting condition in the case of an en-rollee, but a complete exclusion from suchplan or coverage, if that exclusion is basedon a preexisting condition.

The protections in the new PHS Actsection 2704 generally apply for plan years(in the individual market, policy years) be-ginning on or after January 1, 2014. TheAffordable Care Act provides, however,that these protections apply with respectto enrollees under age 19 for plan years(in the individual market, policy years) be-ginning on or after September 23, 2010.An enrollee under age 19 thus could notbe denied benefits based on a preexistingcondition. In order for an individual seek-ing enrollment to receive the same protec-tion that applies in the case of such an en-rollee, the individual similarly could notbe denied enrollment or specific benefitsbased on a preexisting condition. Thus, forplan years (in the individual market, pol-icy years) beginning on or after September23, 2010, PHS Act section 2704 protectsindividuals under age 19 with a preexist-ing condition from being denied coverageunder a plan or health insurance coverage(through denial of enrollment or denial ofspecific benefits) based on the preexistingcondition.

These interim final regulations do notchange the HIPAA rule that an exclusion ofbenefits for a condition under a plan or pol-icy is not a preexisting condition exclusionif the exclusion applies regardless of whenthe condition arose relative to the effectivedate of coverage. This point is illustratedwith examples in the HIPAA regulationson preexisting condition exclusions, whichremain in effect.6 (Other requirements ofFederal or State law, however, may pro-hibit certain benefit exclusions.)

Application to grandfathered healthplans. Under the statute and these interimfinal regulations, a grandfathered healthplan that is a group health plan or grouphealth insurance coverage must complywith the PHS Act section 2704 prohibition

against preexisting condition exclusions;however, a grandfathered health plan thatis individual health insurance coverage isnot required to comply with PHS Act sec-tion 2704. See 26 CFR 54.9815–1251T,29 CFR 2590.715–1251, and 45 CFR147.140 regarding status as a grandfa-thered health plan.

B. PHS Act Section 2711, Lifetime andAnnual Limits (26 CFR 54.9815–2711T,29 CFR 2590.715–2711, 45 CFR 147.126)

Section 2711 of the PHS Act, as addedby the Affordable Care Act, and these in-terim final regulations generally prohibitgroup health plans and health insuranceissuers offering group or individual healthinsurance coverage from imposing life-time or annual limits on the dollar valueof health benefits.

The restriction on annual limits appliesdifferently to certain account-based plans,especially where other rules apply to limitthe benefits available. For example, undersection 9005 of the Affordable Care Act,salary reduction contributions for healthflexible spending arrangements (healthFSAs) are specifically limited to $2,500(indexed for inflation) per year, beginningwith taxable years in 2013. These interimfinal regulations provide that the PHS Actsection 2711 annual limit rules do not ap-ply to health FSAs. The restrictions onannual limits also do not apply to MedicalSavings Accounts (MSAs) under section220 of the Code and Health Savings Ac-counts (HSAs) under section 223 of theCode. Both MSAs and HSAs generallyare not treated as group health plans be-cause the amounts available under theplans are available for both medical andnon-medical expenses.7 Moreover, annualcontributions to MSAs and HSAs are sub-ject to specific statutory provisions thatrequire that the contributions be limited.

Health Reimbursement Arrangements(HRAs) are another type of account-basedhealth plan and typically consist of apromise by an employer to reimburse med-ical expenses for the year up to a certainamount, with unused amounts available

to reimburse medical expenses in futureyears. See Notice 2002–45, 2002–2 C.B.93; Rev. Rul. 2002–41, 2002–2 C.B.75. When HRAs are integrated with othercoverage as part of a group health plan andthe other coverage alone would complywith the requirements of PHS Act section2711, the fact that benefits under the HRAby itself are limited does not violate PHSAct section 2711 because the combinedbenefit satisfies the requirements. Also,in the case of a stand-alone HRA that islimited to retirees, the exemption from therequirements of ERISA and the Code re-lating to the Affordable Care Act for planswith fewer than two current employeesmeans that the retiree-only HRA is gen-erally not subject to the rules in PHS Actsection 2711 relating to annual limits. TheDepartments request comments regardingthe application of PHS Act section 2711 tostand-alone HRAs that are not retiree-onlyplans.

The statute prohibits annual limits onthe dollar value of benefits generally, butallows “restricted annual limits” with re-spect to essential health benefits (as de-fined in section 1302(b) of the AffordableCare Act) for plan years (in the individ-ual market, policy years) beginning beforeJanuary 1, 2014. Grandfathered individ-ual market policies are exempted from thisprovision. In addition, the statute providesthat, with respect to benefits that are not es-sential health benefits, a plan or issuer mayimpose annual or lifetime per-individualdollar limits on specific covered benefits.These interim final regulations define “es-sential health benefits” by cross-referenceto section 1302(b) of the Affordable CareAct8 and applicable regulations. Regula-tions under section 1302(b) of the Afford-able Care Act have not yet been issued.

For plan years (in the individual mar-ket, policy years) beginning before the is-suance of regulations defining “essentialhealth benefits”, for purposes of enforce-ment, the Departments will take into ac-count good faith efforts to comply with areasonable interpretation of the term “es-sential health benefits”. For this purpose, a

6 See Examples 6, 7, and 8 in 26 CFR 54.9801–3(a)(1)(ii), 29 CFR 701–3(a)(1)(ii), 45 CFR 146.111(a)(1)(ii).

7 Distributions from MSAs and HSAs that are not used for qualified medical expenses are included in income and subject to an additional tax, under sections 220(f)(1), (4) and 223(f)(1), (4)of the Code.

8 Section 1302(b) of the Affordable Care Act defines essential health benefits to “include at least the following general categories and the items and services covered within the categories:ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment;prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, includingoral and vision care.”

August 9, 2010 189 2010–32 I.R.B.

plan or issuer must apply the definition ofessential health benefits consistently. Forexample, a plan could not both apply a life-time limit to a particular benefit — thustaking the position that it was not an essen-tial health benefit — and at the same timetreat that particular benefit as an essentialhealth benefit for purposes of applying therestricted annual limit.

These interim final regulations clarifythat the prohibition under PHS Act section2711 does not prevent a plan or issuer fromexcluding all benefits for a condition, butif any benefits are provided for a condition,then the requirements of the rule apply.Therefore, an exclusion of all benefits for acondition is not considered to be an annualor lifetime dollar limit.

The statute and these interim final reg-ulations provide that for plan years (inthe individual market, policy years) begin-ning before January 1, 2014, group healthplans and health insurance issuers offeringgroup or individual health insurance cover-age may establish a restricted annual limiton the dollar value of essential health ben-efits. The statute provides that in definingthe term restricted annual limit, the Depart-ments should ensure that access to neededservices is made available with a minimalimpact on premiums. For a detailed dis-cussion of the basis for determining re-stricted annual limits, see section IV.B.3later in this preamble.

In order to mitigate the potential forpremium increases for all plans and poli-cies, while at the same time ensuring ac-cess to essential health benefits, these in-terim final regulations adopt a three-yearphased approach for restricted annual lim-its. Under these interim final regulations,annual limits on the dollar value of bene-fits that are essential health benefits maynot be less than the following amounts forplan years (in the individual market, policyyears) beginning before January 1, 2014:

• For plan or policy years beginning onor after September 23, 2010 but beforeSeptember 23, 2011, $750,000;

• For plan or policy years beginning onor after September 23, 2011 but be-fore September 23, 2012, $1.25 mil-lion; and

• For plan or policy years beginning onor after September 23, 2012 but beforeJanuary 1, 2014, $2 million.

As these are minimums for plan years(in the individual market, policy years) be-ginning before 2014, plans or issuers mayuse higher annual limits or impose no lim-its. Plans and policies with plan or pol-icy years that begin between September 23and December 31 have more than one planor policy year under which the $2 millionminimum annual limit is available; how-ever, a plan or policy generally may notimpose an annual limit for a plan year (inthe individual market, policy year) begin-ning after December 31, 2013.

The minimum annual limits for planor policy years beginning before 2014 ap-ply on an individual-by-individual basis.Thus, any overall annual dollar limit onbenefits applied to families may not oper-ate to deny a covered individual the mini-mum annual benefits for the plan year (inthe individual market, policy year). Theseinterim final regulations clarify that, in ap-plying annual limits for plan years (in theindividual market, policy years) beginningbefore January 1, 2014, the plan or healthinsurance coverage may take into accountonly essential health benefits.

The restricted annual limits providedin these interim final regulations are de-signed to ensure, in the vast majority ofcases, that individuals would have accessto needed services with a minimal impacton premiums. So that individuals with cer-tain coverage, including coverage undera limited benefit plan or so-called “mini-med” plans, would not be denied access toneeded services or experience more thana minimal impact on premiums, these in-terim final regulations provide for the Sec-retary of Health and Human Services to es-tablish a program under which the require-ments relating to restricted annual limitsmay be waived if compliance with theseinterim final regulations would result ina significant decrease in access to bene-fits or a significant increase in premiums.Guidance from the Secretary of Health andHuman Services regarding the scope andprocess for applying for a waiver is ex-pected to be issued in the near future.

Under these interim final regulations,individuals who reached a lifetime limit

under a plan or health insurance coverageprior to the applicability date of these in-terim final regulations and are otherwisestill eligible under the plan or health in-surance coverage must be provided witha notice that the lifetime limit no longerapplies. If such individuals are no longerenrolled in the plan or health insurancecoverage, these interim final regulationsalso provide an enrollment (in the individ-ual market, reinstatement) opportunity forsuch individuals. In the individual market,this reinstatement opportunity does not ap-ply to individuals who reached their life-time limits on individual health insurancecoverage if the contract is not renewed orotherwise is no longer in effect. It wouldapply, however, to a family member whoreached the lifetime limit in a family pol-icy in the individual market while otherfamily members remain in the coverage.These notices and the enrollment opportu-nity must be provided beginning not laterthan the first day of the first plan year (inthe individual market, policy year) begin-ning on or after September 23, 2010. Any-one eligible for an enrollment opportunitymust be treated as a special enrollee.9 Thatis, they must be given the right to enrollin all of the benefit packages available tosimilarly situated individuals upon initialenrollment.

Application to grandfathered healthplans. The statute and these interim finalregulations relating to the prohibition onlifetime limits apply to all group healthplans and health insurance issuers offer-ing group or individual health insurancecoverage, whether or not the plan qualifiesas a grandfathered health plan, for planyears (in the individual market, policyyears) beginning on or after September 23,2010. The statute and these interim finalregulations relating to the prohibition onannual limits, including the special rulesregarding restricted annual limits for planyears beginning before January 1, 2014,apply to group health plans and grouphealth insurance coverage that qualify asa grandfathered health plan, but do notapply to grandfathered health plans thatare individual health insurance coverage.The interim final regulations issued undersection 1251 of the Affordable Care Actprovide that:

9 See 26 CFR 54.9801–6(d), 29 CFR 2590.701–6(d), and 45 CFR 146.117(d).

2010–32 I.R.B. 190 August 9, 2010

• A plan or health insurance coveragethat, on March 23, 2010, did not im-pose an overall annual or lifetimelimit on the dollar value of all benefitsceases to be a grandfathered healthplan if the plan or health insurancecoverage imposes an overall annuallimit on the dollar value of benefits.

• A plan or health insurance coverage,that, on March 23, 2010, imposedan overall lifetime limit on the dollarvalue of all benefits but no overallannual limit on the dollar value of allbenefits ceases to be a grandfatheredhealth plan if the plan or health insur-ance coverage adopts an overall annuallimit at a dollar value that is lower thanthe dollar value of the lifetime limit onMarch 23, 2010.

• A plan or health insurance coveragethat, on March 23, 2010, imposed anoverall annual limit on the dollar valueof all benefits ceases to be a grandfa-thered health plan if the plan or healthinsurance coverage decreases the dol-lar value of the annual limit (regardlessof whether the plan or health insurancecoverage also imposed an overall life-time limit on March 23, 2010 on thedollar value of all benefits).

C. PHS Act Section 2712, Prohibition onRescissions (26 CFR 54.9815–2712T, 29CFR 2590.715–2712, 45 CFR 147.128)

PHS Act section 2712 provides rulesregarding rescissions of health coveragefor group health plans and health insur-ance issuers offering group or individualhealth insurance coverage. Under thestatute and these interim final regulations,a group health plan, or a health insuranceissuer offering group or individual healthinsurance coverage, must not rescind cov-erage except in the case of fraud or anintentional misrepresentation of a materialfact. This standard sets a Federal floorand is more protective of individuals withrespect to the standard for rescission thanthe standard that might have previouslyexisted under State insurance law or Fed-eral common law. That is, under prior law,rescission may have been permissible ifan individual made a misrepresentation ofmaterial fact, even if the misrepresentationwas not intentional or made knowingly.Under the new standard for rescissions setforth in PHS Act section 2712 and these

interim final regulations, plans and issuerscannot rescind coverage unless an indi-vidual was involved in fraud or made anintentional misrepresentation of materialfact. This standard applies to all rescis-sions, whether in the group or individualinsurance market, and whether insured orself-insured coverage. These rules alsoapply regardless of any contestability pe-riod that may otherwise apply.

This provision in PHS Act section 2712builds on already-existing protections inPHS Act sections 2703(b) and 2742(b) re-garding cancellations of coverage. Theseprovisions generally provide that a healthinsurance issuer in the group and indi-vidual markets cannot cancel, or fail torenew, coverage for an individual or agroup for any reason other than those enu-merated in the statute (that is, nonpaymentof premiums; fraud or intentional misrep-resentation of material fact; withdrawal ofa product or withdrawal of an issuer fromthe market; movement of an individualor an employer outside the service area;or, for bona fide association coverage,cessation of association membership).Moreover, this new provision also buildson existing HIPAA nondiscriminationprotections for group health coverage inERISA section 702, Code section 9802,and PHS Act section 2705 (previously in-cluded in PHS Act section 2702 prior to theAffordable Care Act’s amendments andreorganization to PHS Act title XXVII).The HIPAA nondiscrimination provisionsgenerally provide that group health plansand group health insurance issuers maynot set eligibility rules based on factorssuch as health status and evidence of in-surability — including acts of domesticviolence or disability. They also providelimits on the ability of plans and issuers tovary premiums and contributions based onhealth status. For policy years beginningon or after January 1, 2014, additionalprotections will apply in the individualmarket, including guaranteed issue ofall products, nondiscrimination based onhealth status, and no preexisting conditionexclusions. These protections will reducethe likelihood of rescissions.

These interim final regulations alsoclarify that other requirements of Federalor State law may apply in connection witha rescission or cancellation of coveragebeyond the standards established in PHSAct section 2712, if they are more pro-

tective of individuals. For example, if aState law applicable to health insuranceissuers were to provide that rescissions arepermitted only in cases of fraud, or onlywithin a contestability period, which ismore protective of individuals, such a lawwould not conflict with, or be preemptedby, the Federal standard and would apply.

These interim final regulations includeseveral clarifications regarding the stan-dards for rescission in PHS Act section2712. First, these interim final regulationsclarify that the rules of PHS Act section2712 apply whether the rescission appliesto a single individual, an individual withina family, or an entire group of individuals.Thus, for example, if an issuer attempted torescind coverage of an entire employment-based group because of the actions of anindividual within the group, the standardsof these interim final regulations would ap-ply. Second, these interim final regula-tions clarify that the rules of PHS Act sec-tion 2712 apply to representations made bythe individual or a person seeking cover-age on behalf of the individual. Thus, ifa plan sponsor seeks coverage from an is-suer for an entire employment-based groupand makes representations, for example,regarding the prior claims experience ofthe group, the standards of these interim fi-nal regulations would also apply. Finally,PHS Act section 2712 refers to acts orpractices that constitute fraud. These in-terim final regulations clarify that, to theextent that an omission constitutes fraud,that omission would permit the plan or is-suer to rescind coverage under this section.An example in these interim final regula-tions illustrates the application of the ruleto misstatements of fact that are inadver-tent.

For purposes of these interim final regu-lations, a rescission is a cancellation or dis-continuance of coverage that has retroac-tive effect. For example, a cancellationthat treats a policy as void from the time ofthe individual’s or group’s enrollment is arescission. As another example, a cancel-lation that voids benefits paid up to a yearbefore the cancellation is also a rescissionfor this purpose. A cancellation or discon-tinuance of coverage with only a prospec-tive effect is not a rescission, and neither isa cancellation or discontinuance of cover-age that is effective retroactively to the ex-tent it is attributable to a failure to timelypay required premiums or contributions to-

August 9, 2010 191 2010–32 I.R.B.

wards the cost of coverage. Cancellationsof coverage are addressed under other Fed-eral and State laws, including section PHSAct section 2703(b) and 2742(b), whichlimit the grounds for cancellation or non-renewal of coverage, as discussed above.Moreover, PHS Act section 2719, as addedby the Affordable Care Act and incorpo-rated in ERISA section 715 and Code sec-tion 9815, addresses appeals of coveragedeterminations and includes provisions forkeeping coverage in effect pending an ap-peal. The Departments expect to issueguidance on PHS Act section 2719 in thevery near future.

In addition to setting a new Federalfloor standard for rescissions, PHS Actsection 2712 adds a new advance noticerequirement when coverage is rescindedwhere still permissible. Specifically, thesecond sentence in section 2712 providesthat coverage may not be cancelled unlessprior notice is provided. These interim fi-nal regulations provide that a group healthplan, or a health insurance issuer offer-ing group health insurance coverage, mustprovide at least 30 calendar days advancenotice to an individual before coveragemay be rescinded.10 The notice must beprovided regardless of whether the rescis-sion is of group or individual coverage;or whether, in the case of group coverage,the coverage is insured or self-insured, orthe rescission applies to an entire groupor only to an individual within the group.This 30-day period will provide individ-uals and plan sponsors with an opportu-nity to explore their rights to contest therescission, or look for alternative cover-age, as appropriate. The Departments ex-pect to issue future guidance on any noticerequirements under PHS Act section 2712for cancellations of coverage other than inthe case of rescission.

In this new Federal statutory protectionagainst rescissions, the Affordable CareAct provides new rights to individualswho, for example, may have done theirbest to complete what can sometimes belong, complex enrollment questionnairesbut may have made some errors, for whichthe consequences were overly broad andunfair. These interim final regulationsprovide initial guidance with respect to the

statutory restrictions on rescission. If theDepartments become aware of attempts inthe marketplace to subvert these rules, theDepartments may issue additional regula-tions or administrative guidance to ensurethat individuals do not lose health cover-age unjustly or without due process.

Application to grandfathered healthplans. The rules regarding rescissions andadvance notice apply to all grandfatheredhealth plans.

D. PHS Act Section 2719A, PatientProtections (26 CFR 54.9815–2719AT, 29CFR 2590.715–2719A, 45 CFR 147.138)

Section 2719A of the PHS Act imposes,with respect to a group health plan, orgroup or individual health insurance cover-age, a set of three requirements relating tothe choice of a health care professional andrequirements relating to benefits for emer-gency services. The three requirements re-lating to the choice of health care profes-sional apply only with respect to a planor health insurance coverage with a net-work of providers.11 Thus, a plan or issuerthat has not negotiated with any providerfor the delivery of health care but merelyreimburses individuals covered under theplan for their receipt of health care is notsubject to the requirements relating to thechoice of a health care professional. How-ever, such plans or health insurance cov-erage are subject to requirements relatingto benefits for emergency services. Theseinterim final regulations reorder the statu-tory requirements so that all three of therequirements relating to the choice of ahealth care professional are together andadd a notice requirement for those threerequirements. None of these requirementsapply to grandfathered health plans.

1. Choice of Health Care Professional

The statute and these interim final regu-lations provide that if a group health plan,or a health insurance issuer offering groupor individual health insurance coverage,requires or provides for designation by aparticipant, beneficiary, or enrollee of aparticipating primary care provider, thenthe plan or issuer must permit each partic-ipant, beneficiary, or enrollee to designate

any participating primary care providerwho is available to accept the participant,beneficiary, or enrollee. Under these in-terim final regulations, the plan or issuermust provide a notice informing each par-ticipant (or in the individual market, theprimary subscriber) of the terms of theplan or health insurance coverage regard-ing designation of a primary care provider.

The statute and these interim final reg-ulations impose a requirement for the des-ignation of a pediatrician similar to therequirement for the designation of a pri-mary care physician. Specifically, if aplan or issuer requires or provides for thedesignation of a participating primary careprovider for a child by a participant, bene-ficiary, or enrollee, the plan or issuer mustpermit the designation of a physician (al-lopathic or osteopathic) who specializesin pediatrics as the child’s primary careprovider if the provider participates in thenetwork of the plan or issuer and is avail-able to accept the child. In such a case, theplan or issuer must comply with the noticerequirements with respect to designationof a primary care provider. The generalterms of the plan or health insurance cover-age regarding pediatric care otherwise areunaffected, including any exclusions withrespect to coverage of pediatric care.

The statute and these interim final regu-lations also provide rules for a group healthplan, or a health insurance issuer offeringgroup or individual health insurance cov-erage, that provides coverage for obstet-rical or gynecological care and requiresthe designation of an in-network primarycare provider. In such a case, the planor issuer may not require authorization orreferral by the plan, issuer, or any per-son (including a primary care provider) fora female participant, beneficiary, or en-rollee who seeks obstetrical or gynecolog-ical care provided by an in-network healthcare professional who specializes in ob-stetrics or gynecology. The plan or issuermust inform each participant (in the indi-vidual market, primary subscriber) that theplan or issuer may not require authoriza-tion or referral for obstetrical or gyneco-logical care by a participating health careprofessional who specializes in obstetricsor gynecology. Nothing in these interim

10 Even though prior notice must be provided in the case of a rescission, applicable law may permit the rescission to void coverage retroactively.

11 The statute and these interim final regulations refer to providers both in terms of their participation (participating provider) and in terms of a network (in-network provider). In both situations,the intent is to refer to a provider that has a contractual relationship or other arrangement with a plan or issuer.

2010–32 I.R.B. 192 August 9, 2010

final regulations precludes the plan or is-suer from requiring an in-network obstetri-cal or gynecological provider to otherwiseadhere to policies and procedures regard-ing referrals, prior authorization for treat-ments, and the provision of services pur-suant to a treatment plan approved by theplan or issuer. The plan or issuer must treatthe provision of obstetrical and gynecolog-ical care, and the ordering of related obstet-rical and gynecological items and services,by the professional who specializes in ob-stetrics or gynecology as the authorizationof the primary care provider. For this pur-pose, a health care professional who spe-cializes in obstetrics or gynecology is anyindividual who is authorized under appli-cable State law to provide obstetrical orgynecological care, and is not limited to aphysician.

The general terms of the plan or cover-age regarding exclusions of coverage withrespect to obstetrical or gynecological careare otherwise unaffected. These interim fi-nal regulations do not preclude the plan orissuer from requiring that the obstetrical orgynecological provider notify the primarycare provider or the plan or issuer of treat-ment decisions.

When applicable, it is important that in-dividuals enrolled in a plan or health insur-ance coverage know of their rights to (1)choose a primary care provider or a pedia-trician when a plan or issuer requires des-ignation of a primary care physician; or(2) obtain obstetrical or gynecological carewithout prior authorization. Accordingly,these interim final regulations require suchplans and issuers to provide a notice to par-ticipants (in the individual market, primarysubscribers) of these rights when applica-ble. Model language is provided in theseinterim final regulations. The notice mustbe provided whenever the plan or issuerprovides a participant with a summary plandescription or other similar description ofbenefits under the plan or health insurancecoverage, or in the individual market, pro-vides a primary subscriber with a policy,certificate, or contract of health insurance.

2. Emergency Services

If a plan or health insurance coverageprovides any benefits with respect to emer-gency services in an emergency depart-

ment of a hospital, the plan or issuer mustcover emergency services in a way that isconsistent with these interim final regula-tions. These interim final regulations re-quire that a plan or health insurance cover-age providing emergency services must doso without the individual or the health careprovider having to obtain prior authoriza-tion (even if the emergency services areprovided out of network) and without re-gard to whether the health care providerfurnishing the emergency services is anin-network provider with respect to the ser-vices. The emergency services must beprovided without regard to any other termor condition of the plan or health insur-ance coverage other than the exclusion orcoordination of benefits, an affiliation orwaiting period permitted under part 7 ofERISA, part A of title XXVII of the PHSAct, or chapter 100 of the Code, or ap-plicable cost-sharing requirements. For aplan or health insurance coverage with anetwork of providers that provides bene-fits for emergency services, the plan or is-suer may not impose any administrativerequirement or limitation on benefits forout-of-network emergency services that ismore restrictive than the requirements orlimitations that apply to in-network emer-gency services.

Additionally, for a plan or health in-surance coverage with a network, theseinterim final regulations provide rules forcost-sharing requirements for emergencyservices that are expressed as a copaymentamount or coinsurance rate, and othercost-sharing requirements. Cost-sharingrequirements expressed as a copaymentamount or coinsurance rate imposed forout-of-network emergency services can-not exceed the cost-sharing requirementsthat would be imposed if the services wereprovided in-network. Out-of-networkproviders may, however, also balance billpatients for the difference between theproviders’ charges and the amount col-lected from the plan or issuer and from thepatient in the form of a copayment or coin-surance amount. Section 1302(c)(3)(B)of the Affordable Care Act excludes suchbalance billing amounts from the defini-tion of cost sharing, and the requirementin section 2719A(b)(1)(C)(ii)(II) that costsharing for out-of-network services belimited to that imposed in network only

applies to cost sharing expressed as a co-payment or coinsurance rate.

Because the statute does not requireplans or issuers to cover balance billingamounts, and does not prohibit balancebilling, even where the protections in thestatute apply, patients may be subject tobalance billing. It would defeat the pur-pose of the protections in the statute if aplan or issuer paid an unreasonably lowamount to a provider, even while limitingthe coinsurance or copayment associatedwith that amount to in-network amounts.To avoid the circumvention of the pro-tections of PHS Act section 2719A, it isnecessary that a reasonable amount bepaid before a patient becomes responsiblefor a balance billing amount. Thus, theseinterim final regulations require that areasonable amount be paid for services bysome objective standard. In establishingthe reasonable amount that must be paid,the Departments had to account for widevariation in how plans and issuers deter-mine both in-network and out-of-networkrates. For example, for a plan using a cap-itation arrangement to determine in-net-work payments to providers, there is noin-network rate per service. Accordingly,these interim final regulations considerthree amounts: the in-network rate, theout-of-network rate, and the Medicarerate. Specifically, a plan or issuer satisfiesthe copayment and coinsurance limita-tions in the statute if it provides benefitsfor out-of-network emergency services inan amount equal to the greatest of threepossible amounts—

(1) The amount negotiated with in-net-work providers for the emergency servicefurnished;

(2) The amount for the emergency ser-vice calculated using the same method theplan generally uses to determine paymentsfor out-of-network services (such as theusual, customary, and reasonable charges)but substituting the in-network cost-shar-ing provisions for the out-of-network cost-sharing provisions; or

(3) The amount that would be paid un-der Medicare for the emergency service.12

Each of these three amounts is calculatedexcluding any in-network copayment orcoinsurance imposed with respect to theparticipant, beneficiary, or enrollee.

12 As of the date of publication of these interim final regulations, these rates are available to the public at http://www.cms.hhs.gov/MedicareAdvtgSpecRateStats/downloads/oon-payments.pdf.

August 9, 2010 193 2010–32 I.R.B.

For plans and health insurance cov-erage under which there is no per-ser-vice amount negotiated with in-networkproviders (such as under a capitation orother similar payment arrangement), thefirst amount above is disregarded, mean-ing that the greatest amount is going to beeither the out-of-network amount or theMedicare amount. Additionally, with re-spect to determining the first amount, if aplan or issuer has more than one negotiatedamount with in-network providers for aparticular emergency service, the amountis the median of these amounts, treatingthe amount negotiated with each provideras a separate amount in determining themedian. Thus, for example, if for a givenemergency service a plan negotiated a rateof $100 with three providers, a rate of$125 with one provider, and a rate of $150with one provider; the amounts taken intoaccount to determine the median wouldbe $100, $100, $100, $125, and $150; andthe median would be $100. Following thecommonly accepted definition of median,if there are an even number of amounts,the median is the average of the middletwo. (Cost sharing imposed with respectto the participant, beneficiary, or enrolleewould be deducted from this amount be-fore determining the greatest of the threeamounts above.)

The second amount above is deter-mined without reduction for out-of-net-work cost sharing that generally appliesunder the plan or health insurance cov-erage with respect to out-of-network ser-vices. Thus, for example, if a plan gener-ally pays 70 percent of the usual, custom-ary, and reasonable amount for out-of-net-work services, the second amount abovefor an emergency service is the total (thatis, 100 percent) of the usual, customary,and reasonable amount for the service, notreduced by the 30 percent coinsurance thatwould generally apply to out-of-networkservices (but reduced by the in-networkcopayment or coinsurance that the indi-vidual would be responsible for if theemergency service had been providedin-network).

Although a plan or health insurancecoverage is generally not constrainedby the requirements of PHS Act sec-tion 2719A for cost-sharing requirementsother than copayments or coinsurance,these interim final regulations includean anti-abuse rule with respect to such

other cost-sharing requirements so thatthe purpose of limiting copayments andcoinsurance for emergency services tothe in-network rate cannot be thwartedby manipulation of these other cost-shar-ing requirements. Accordingly, any othercost-sharing requirement, such as a de-ductible or out-of-pocket maximum, maybe imposed with respect to out-of-net-work emergency services only if thecost-sharing requirement generally appliesto out-of-network benefits. Specifically, adeductible may be imposed with respect toout-of-network emergency services onlyas part of a deductible that generally ap-plies to out-of-network benefits. Similarly,if an out-of-pocket maximum generallyapplies to out-of-network benefits, thatout-of-pocket maximum must apply toout-of-network emergency services. Aplan or health insurance coverage couldfashion these other cost-sharing require-ments so that a participant, beneficiary, orenrollee is required to pay less for emer-gency services than for general out-of-net-work services; the anti-abuse rule merelyprohibits a plan or health insurance cov-erage from fashioning such rules so that aparticipant, beneficiary, or enrollee is re-quired to pay more for emergency servicesthan for general out-of-network services.

In applying the rules relating to emer-gency services, the statute and these in-terim final regulations define the termsemergency medical condition, emergencyservices, and stabilize. These terms aredefined generally in accordance with theirmeaning under the Emergency MedicalTreatment and Labor Act (EMTALA),section 1867 of the Social Security Act.There are, however, some minor variancesfrom the EMTALA definitions. For exam-ple, both EMTALA and PHS Act section2719A define “emergency medical condi-tion” in terms of the same consequencesthat could reasonably be expected to oc-cur in the absence of immediate medicalattention. Under EMTALA regulations,the likelihood of these consequences isdetermined by qualified hospital medicalpersonnel, while under PHS Act section2719A the standard is whether a pru-dent layperson, who possesses an averageknowledge of health and medicine, couldreasonably expect the absence of imme-diate medical attention to result in suchconsequences.

Application to grandfathered healthplans. The statute and these interim fi-nal regulations relating to certain patientprotections do not apply to grandfatheredhealth plans. However, other Federal orState laws related to these patient protec-tions may apply regardless of grandfatherstatus.

III. Interim Final Regulations andRequest for Comments

Section 9833 of the Code, section 734of ERISA, and section 2792 of the PHSAct authorize the Secretaries of the Trea-sury, Labor, and HHS (collectively, theSecretaries) to promulgate any interim fi-nal rules that they determine are appropri-ate to carry out the provisions of chapter100 of the Code, part 7 of subtitle B of ti-tle I of ERISA, and part A of title XXVII ofthe PHS Act, which include PHS Act sec-tions 2701 through 2728 and the incorpo-ration of those sections into ERISA section715 and Code section 9815.

In addition, under Section 553(b) ofthe Administrative Procedure Act (APA)(5 U.S.C. 551 et seq.) a general noticeof proposed rulemaking is not requiredwhen an agency, for good cause, findsthat notice and public comment thereon areimpracticable, unnecessary, or contrary tothe public interest. The provisions of theAPA that ordinarily require a notice of pro-posed rulemaking do not apply here be-cause of the specific authority granted bysection 9833 of the Code, section 734 ofERISA, and section 2792 of the PHS Act.However, even if the APA were applica-ble, the Secretaries have determined that itwould be impracticable and contrary to thepublic interest to delay putting the provi-sions in these interim final regulations inplace until a full public notice and com-ment process was completed. As notedabove, numerous provisions of the Afford-able Care Act are applicable for plan years(in the individual market, policy years) be-ginning on or after September 23, 2010,six months after date of enactment. Hadthe Departments published a notice of pro-posed rulemaking, provided for a 60-daycomment period, and only then preparedfinal regulations, which would be subjectto a 60-day delay in effective date, it isunlikely that it would have been possi-ble to have final regulations in effect be-fore late September, when these require-

2010–32 I.R.B. 194 August 9, 2010

ments could be in effect for some plansor policies. Moreover, the requirements inthese interim final regulations require sig-nificant lead time in order to implement.For example, in the case of the requirementunder PHS Act section 2711 prohibitingoverall lifetime dollar limits, these interimfinal regulations require that an enrollmentopportunity be provided for an individualwhose coverage ended by reason of reach-ing a lifetime limit no later than the firstday this requirement takes effect. Prepara-tions presumably would have to be madeto put such an enrollment process in place.In the case of requirements for emergencycare under PHS Act section 2719A, plansand issuers need to know how to processcharges by out-of-network providers by asearly as the first plan or policy year begin-ning on or after September 23, 2010. Withrespect to all the changes that would be re-quired to be made under these interim finalregulations, whether adding coverage ofchildren with a preexisting condition underPHS Act section 2704, or determining thescope of rescissions prohibited under PHSAct section 2712, group health plans andhealth insurance issuers have to be ableto take these changes into account in es-tablishing their premiums, and in makingother changes to the designs of plan or pol-icy benefits, and these premiums and planor policy changes would have to receivenecessary approvals in advance of the planor policy year in question.

Accordingly, in order to allow plans andhealth insurance coverage to be designedand implemented on a timely basis, regu-lations must be published and available tothe public well in advance of the effectivedate of the requirements of the AffordableCare Act. It is not possible to have a fullnotice and comment process and to publishfinal regulations in the brief time betweenenactment of the Affordable Care Act andthe date regulations are needed.

The Secretaries further find that is-suance of proposed regulations would notbe sufficient because the provisions of theAffordable Care Act protect significantrights of plan participants and beneficia-ries and individuals covered by individualhealth insurance policies and it is essentialthat participants, beneficiaries, insureds,

plan sponsors, and issuers have certaintyabout their rights and responsibilities.Proposed regulations are not binding andcannot provide the necessary certainty.By contrast, the interim final regulationsprovide the public with an opportunity forcomment, but without delaying the effec-tive date of the regulations.

For the foregoing reasons, the Depart-ments have determined that it is imprac-ticable and contrary to the public interestto engage in full notice and comment rule-making before putting these interim finalregulations into effect, and that it is in thepublic interest to promulgate interim finalregulations.

IV. Economic Impact and PaperworkBurden

A. Summary—Department of Laborand Department of Health and HumanServices

As stated earlier in this preamble, theseinterim final regulations implement PHSAct sections 2704 (prohibiting preexistingcondition exclusions), 2711 (prohibitinglifetime and annual dollar limits on ben-efits), 2712 (rules regarding rescissions),and 2719A (patient protections).13 Theseinterim final regulations also provideguidance on the requirement to provideenrollment opportunities to individualswho reached a lifetime limit. PHS Actsection 2704 regarding preexisting condi-tion exclusions generally is effective forplan years (in the individual market, pol-icy years) beginning on or after January 1,2014. However, with respect to enrollees,including applicants for enrollment, whoare under 19 years of age, this section iseffective for plan years beginning on orafter September 23, 2010; or in the caseof individual health insurance coverage,for policy years beginning on or afterSeptember 23, 2010.14 The rest of theseprovisions generally are effective for planyears (in the individual market, policyyears) beginning on or after September23, 2010, which is six months after theMarch 23, 2010 date of enactment of theAffordable Care Act.

The Departments have crafted theseinterim final regulations to secure the pro-tections intended by Congress in the mosteconomically efficient manner possible.In accordance with OMB Circular A–4,they have quantified the benefits and costswhere possible and provided a qualitativediscussion of some of the benefits and thecosts that may stem from these interimfinal regulations.

B. Executive Order 12866—Departmentof Labor and Department of Health andHuman Services

Under Executive Order 12866 (58 FR51735), “significant” regulatory actionsare subject to review by the Office ofManagement and Budget (OMB). Section3(f) of the Executive Order defines a “sig-nificant regulatory action” as an actionthat is likely to result in a rule (1) havingan annual effect on the economy of $100million or more in any one year, or ad-versely and materially affecting a sectorof the economy, productivity, competi-tion, jobs, the environment, public healthor safety, or State, local or tribal govern-ments or communities (also referred to as“economically significant”); (2) creatinga serious inconsistency or otherwise inter-fering with an action taken or planned byanother agency; (3) materially altering thebudgetary impacts of entitlement grants,user fees, or loan programs or the rightsand obligations of recipients thereof; or(4) raising novel legal or policy issuesarising out of legal mandates, the Presi-dent’s priorities, or the principles set forthin the Executive Order. OMB has deter-mined that this rule is significant withinthe meaning of section 3(f)(1) of the Ex-ecutive Order, because it is likely to havean effect on the economy of $100 millionin any one year. Accordingly, OMB hasreviewed these rules pursuant to the Exec-utive Order. The Departments provide anassessment of the potential costs and ben-efits of each regulatory provision below,summarized in the following table.

13 The Affordable Care Act adds Section 715 to the Employee Retirement Income Security Act (ERISA) and section 9815 to the Internal Revenue Code (the Code) to make the provisions ofpart A of title XXVII of the PHS Act applicable to group health plans, and health insurance issuers providing health insurance coverage in connection with group health plans, under ERISAand the Code as if those provisions of the PHS Act were included in ERISA and the Code.

14 Section 1255 of the Affordable Care Act. See also section 10103(e)-(f) of the Affordable Care Act.

August 9, 2010 195 2010–32 I.R.B.

Table 1.1 Accounting Table

TABLE 1.1—Accounting Table

BenefitsQualitative: These patient protections are expected to expand coverage for children with preexisting conditions and individualswho face rescissions, lifetime limits, and annual limits as a result of high health care costs. Expanded coverage is likely to increaseaccess to health care, improve health outcomes, improve worker productivity, and reduce family financial strain and “job lock”.Many of these benefits have a distributional component, and promote equity, in the sense that they will be enjoyed by thosewho are especially vulnerable as a result of health problems and financial status. Choice of physician will likely lead to better,sustained patient-provider relationships, resulting in decreased malpractice claims and improved medication adherence and healthpromotion. Removing referrals and prior authorizations for primary care, obstetrical and gynecological care, and emergencyservices is likely to reduce administrative and time burdens on both patients and physicians, while improving health outcomes byallowing quicker access to medical services when necessary.

Costs Estimate Year Dollar Discount RatePeriod

Covered15

Annualized Monetized ($millions/year) 4.9 2010 7% 2011–20134.9 2010 3% 2011–2013

Monetized costs are due to a requirement to notify participants that exceeded their lifetime limit and were disenrolled from theirplan or coverage of their right to re-enroll in the plan; a requirement that a group health plan or a health insurance issuer offeringgroup or individual health insurance coverage must notify an affected individual 30 days before coverage may be rescinded; anda notice of a participant’s right to choose any available participating primary care provider or pediatrician as their primary careprovider, and of increased protections for those participants seeking emergency services.

Qualitative: To the extent these patient protections increase access to health care services, increased health care utilization andcosts will result due to increased uptake. Expanding coverage to children with preexisting conditions and individuals subject torescissions will likely increase overall health care costs, given that these groups tend to have high cost conditions and requiremore costly care than average.

TransfersQualitative: These patient protections create a small transfer from those paying premiums in the group market to those obtainingthe increased patient protections. To the extent there is risk pooling in the individual market, a similar transfer will occur.

1. Need for Regulatory Action

a. Preexisting condition exclusions

As discussed earlier in this preamble,Section 2704 of the PHS Act as added bythe Affordable Care Act, prohibits grouphealth plans and health insurance issuersoffering group or individual health insur-ance from imposing any preexisting con-dition exclusion. This new protection ap-plies to children who are under age 19 forplan years (in the individual market, pol-icy years) beginning on or after September23, 2010. For individuals age 19 and over,this provision applies for plan years (in the

individual market, policy years) beginningon or after January 1, 2014.

Preexisting conditions affect millionsof Americans and include a broad range ofconditions from heart disease — which af-fects one in three adults16 — or cancer —which affects 11 million Americans17 — torelatively minor conditions like hay fever,asthma, or previous sports injuries.18

Denials of benefits or coverage basedon a preexisting condition make adequatehealth insurance unavailable to millions ofAmericans. Before the enactment of theAffordable Care Act, in 45 States, healthinsurance issuers in the individual marketcould deny coverage, charge higher premi-

ums, and/or deny benefits for a preexistingcondition.19

These interim final regulations are nec-essary to amend the Departments’ exist-ing regulations to implement this statutoryprovision, which was enacted by Congressto ensure that quality health coverage isavailable to more Americans without theimposition of a preexisting condition ex-clusion.

b. Lifetime and annual limits

As discussed earlier in this preamble,Section 2711 of the PHS Act was added tothe Affordable Care Act to prohibit grouphealth plans and health insurance issuers

15 The Departments’ analysis extends to 2013. The analysis does not attempt to estimate effects in 2014 and beyond because the extensive changes provided for by the Affordable Care Actin sources of coverage, rating rules, and the structure of insurance markets make it nearly impossible to isolate the effects of the provisions of these interim final regulations.

16 American Heart Association. Heart Disease and Stroke Statistics 2009 Update-at-a-Glance. http://www.americanheart.org/download-able/heart/1240250946756LS–1982%20Heart%20and%20Stroke%20Update.042009.pdf

17 National Cancer Institute. Cancer Query System: Cancer Prevalence Database. http://srab.cancer.gov/prevalence/canques.html

18 Pollitz K, Sorian R. How Accessible is Individual Health Insurance for Consumers in Less than Perfect Health? Kaiser Family Foundation, June 2001.

19 Kaiser State Health Facts. http://statehealthfacts.org/comparetable.jsp?ind=353&cat=7.

2010–32 I.R.B. 196 August 9, 2010

offering group or individual health insur-ance coverage from imposing lifetime lim-its on the dollar value of health benefits.Annual limits also are prohibited, but thestatute includes a phase-in of this provi-sion before January 1, 2014, that allowsplans and issuers to impose “restricted an-nual limits” at the levels discussed earlierin this preamble.

These new protections ensure that pa-tients are not confronted with devastatinghealth costs because they have exhaustedtheir health coverage when faced with aserious medical condition. For example,in one recent national survey, ten percentof all cancer patients reported that theyreached a benefit limit in their insurancepolicy and were forced to seek alternativeinsurance coverage or pay the remainder oftheir treatment out-of-pocket.20

These interim final regulations are nec-essary to amend the Departments’ exist-ing regulations to implement the statutoryprovisions with respect to annual and life-time limits that Congress enacted to helpensure that more Americans with chronic,long-term, and/or expensive illnesses haveaccess to quality health coverage. Theprovisions of the regulations regarding re-stricted annual limits function as a type oftransition rule, providing for staged imple-mentation and helping ensure against ad-verse impacts on premiums or the offeringof health coverage in the marketplace. Formore detail about these provisions, see thediscussion of PHS Act Section 2711, Life-time and Annual Limits, in section II.Bearlier in this preamble.

c. Rescission

As discussed earlier in this preamble,Section 2712 of the PHS Act was added bythe Affordable Care Act to prohibit grouphealth plans and health insurance issuersoffering group or individual health insur-ance coverage from rescinding coverageexcept in the case of fraud or intentionalmisrepresentation of material fact.

Prior to the Affordable Care Act, thou-sands of Americans lost health coverageeach year due to rescission. According toa House Energy and Commerce Commit-tee staff memorandum,21 rather than re-viewing medical histories when applica-tions are submitted, if the policyholdersbecome sick and file expensive claims, in-surance companies then initiate investiga-tions to scrutinize the details of the poli-cyholder’s application materials and med-ical records, and if discrepancies, omis-sions, or misrepresentations are found, theinsurer rescinds the policies, returns thepremiums, and refuses payment for med-ical services. The Committee found somequestionable practices in this area includ-ing insurance companies rescinding cov-erage even when discrepancies are unin-tentional or caused by others, for condi-tions that are unknown to policyholders,and for discrepancies unrelated to the med-ical conditions for which patients soughtmedical care.

When a coverage rescission occurs, anindividual’s health coverage is retroac-tively cancelled, which means that theinsurance company is no longer responsi-ble for medical care claims that they hadpreviously accepted and paid. Rescissionscan result in significant financial hardshipfor affected individuals, because, in mostcases, the individuals have accumulatedsignificant medical expenses. The NAICRegulatory Framework Task Force col-lected data on 52 companies covering theperiod 2004–2008, and found that rescis-sions averaged 1.46 per thousand policiesin force.22 This estimate implies there areapproximately 10,700 rescissions per year.

These interim final regulations imple-ment the statutory provision enacted byCongress to protect the most vulnerableAmericans, those that incur substantialmedical expenses due to a serious medicalcondition, from financial devastation byensuring that such individuals do not un-justly lose health coverage by rescission.

d. Patient Protections

As discussed earlier in this preamble,Section 2719A of the PHS Act was addedby the Affordable Care Act to requiregroup health plans and health insuranceissuers offering group or individual healthinsurance coverage to ensure choice ofhealth care professionals and greater ac-cess to benefits for emergency services. Asdiscussed in more detail below, providerchoice is a strong predictor of patienttrust in a provider, and patient-providertrust can increase health promotion andtherapeutic effects.23 Studies also havefound that patients tend to experiencebetter quality health care if they havelong-term relationships with their healthcare provider.24

The emergency care provisions of PHSAct section 2719A require (1) non-grand-fathered group health plans and healthinsurance issuers that cover emergencyservices to cover such services withoutprior authorization and without regard towhether the health care provider provid-ing the services is a participating networkprovider, and (2) copayments and coinsur-ance for out-of-network emergency carenot to exceed the cost-sharing require-ments that would have been imposed ifthe services were provided in-network.These provisions will ensure that patientsget emergency care when they need it,especially in situations where prior autho-rization cannot be obtained due to exigentcircumstances or an in-network provideris not available to provide the services. Italso will protect patients from the substan-tial financial burden that can be imposedwhen differing copayment or coinsurancearrangements apply to in-network andout-of-network emergency care.

This regulation is necessary to imple-ment the statutory provision enacted byCongress to provide these essential patientprotections.

2. PHS Act Section 2704, Prohibition ofPreexisting Condition Exclusions (26 CFR

20 USA Today/Kaiser Family Foundation/Harvard School of Public Health. National Survey of Households Affected by Cancer. November 2006.

21 Terminations of Individual Health Insurance Policies by Insurance Companies, Hearing before the House Comm. On Energy and Commerce, Subcommittee on Oversight and Investigations,June 16, 2009) (supplemental memorandum) http://energycommerce.house.gov/Press_111/20090616/rescission_supplemental.pdf.

22 NAIC Rescission Data Call, December 17, 2009, p.1.

23 Piette, John, et al., “The Role of Patient-Physician Trust in Moderating Medication Nonadherence Due to Cost Pressures.” Archives of Internal Medicine 165, August (2005) and Roberts,Kathleen J., “Physician-Patient Relationships, Patient Satisfaction, and Antiretroviral Medication Adherence Among HIV-Infected Adults Attending a Public Health Clinic.” AIDS PatientCare and STDs 16.1 (2002).

24 Blewett, Lynn, et al., “When a Usual Source of Care and Usual Provider Matter: Adult Prevention and Screening Services.” Journal of General Internal Medicine 23.9 (2008).

August 9, 2010 197 2010–32 I.R.B.

54.9815–2704T, 29 CFR 2590.715–2704,45 CFR 147.108)

a. Summary

As discussed earlier in this preamble,section 1201 of the Affordable Care Actadds a new PHS Act section 2704, whichamends the HIPAA rules relating to pre-existing condition exclusions to providethat a group health plan and a health in-surance issuer offering group or individ-ual health insurance coverage may not im-pose any preexisting condition exclusion.The HIPAA rules (in effect prior to theeffective date of these amendments) ap-ply only to group health plans and grouphealth insurance coverage, and permit lim-ited exclusions of coverage based on a pre-existing condition under certain circum-stances. The Affordable Care Act andthese interim final regulations prohibit anypreexisting condition exclusions imposedby group health plans or group health in-surance coverage and extends this protec-tion to individual health insurance cover-age. This prohibition generally is effectivewith respect to plan years (in the individualmarket, policy years) beginning on or afterJanuary 1, 2014, but for enrollees who areunder 19 years of age, this prohibition be-comes effective for plan years (in the indi-vidual market, policy years) beginning onor after September 23, 2010.

Under the statute and these interimfinal regulations, a grandfathered healthplan that is a group health plan or grouphealth insurance coverage must complywith the prohibition against preexistingcondition exclusions; however, a grandfa-thered health plan that is individual healthinsurance coverage is not required to com-ply with PHS Act section 2704.

In this section, the Departments esti-mate the likely effects of these interim fi-nal regulations. Beginning with the popu-lation of individuals age 0–18, the numberof individuals potentially affected is esti-mated in several steps. First, the number ofchildren who have preexisting conditionsthat might cause them to be excluded fromcoverage is estimated. Second, a range oftake-up rates is used to estimate the num-ber of children who might be newly cov-ered after these interim final regulations

are implemented. In addition, the poten-tial cost implications are discussed.

b. Estimated Number of AffectedIndividuals

In the individual market, those apply-ing for insurance will no longer face exclu-sions or denials of coverage based on a pre-existing condition exclusion if they are un-der the age of 19. In addition, children cov-ered by non-grandfathered individual cov-erage with a rider or an exclusion periodthat excludes coverage for a preexistingcondition will gain coverage for that con-dition. In the group market, participantsand dependents who are under 19 years oldand have experienced a lapse in coveragewill no longer face up to a twelve-monthexclusion for preexisting conditions.

The Departments’ estimates in this sec-tion are based on the 2004–2006 Medi-cal Expenditure Panel Survey HouseholdComponent (MEPS-HC) which was pro-jected to 2010 and calibrated to be con-sistent with the National Health Accountsprojections. The analysis tabulated countsand costs for persons under age 19 by age,health status, and insurance status.

There are two main categories of chil-dren who are most likely to be directly af-fected by these interim final regulations:first, children who have a preexisting con-dition and who are uninsured; second, chil-dren who are covered by individual insur-ance with a rider excluding coverage for apreexisting condition or a preexisting con-dition exclusion period. For the latter cat-egory, obtaining coverage for the preex-isting condition may require terminatingthe child’s existing policy and beginninga new one, because individual health in-surance coverage that is a grandfatheredhealth plan is not required to comply withPHS Act section 2704 or these interim fi-nal regulations.

It is difficult to estimate precisely howmany uninsured children have a preexist-ing condition that would cause them to bedenied coverage for that condition if theywere to apply. Information on whetherindividuals have a preexisting conditionfor the purpose of obtaining health insur-ance is not collected in any major popula-tion-based survey. In its annual survey on

market practices, America’s Health Insur-ance Plans (AHIP) estimated that 429,464applications for children were medicallyunderwritten, and 20,747, or 4.8 percent,were denied.25 The survey does not mea-sure the number of applicants who did notmake it through an underwriting process,nor does it measure the applicants’ priorinsurance status, and therefore, while use-ful, it does not provide direct estimatesof the number or proportion of uninsuredchildren who would be denied coveragebased on a preexisting condition. Thus, theDepartments use proxies for preexistingconditions available in nationally repre-sentative surveys to estimate the universeof potentially eligible individuals.

The Departments estimate that in 2010there are approximately 78.0 million chil-dren under the age of 19 in the UnitedStates, of whom an estimated 19.4 millionreport ’fair’ or ’poor’ health or take threeor more prescription medications. The De-partments assume that these children havea preexisting condition. Whether or not thestatute and these interim final regulationsare likely to affect these children dependson their own and their parents’ insurancestatus. Of the 19.4 million children thatpotentially have a preexisting condition,10.2 million already have employer-spon-sored insurance (ESI), 760,000 have in-dividual coverage, and 7.9 million havepublic or other coverage, leaving 540,000uninsured children with preexisting condi-tions.26 The Departments assume that thisgroup of 540,000 uninsured children witha preexisting condition would be deniedcoverage for that condition or altogether ifthey were to apply.

The likelihood that an uninsured childwith a preexisting condition will gain cov-erage due to these interim final regula-tions will likely vary by the insurance sta-tus of the child’s parent. As shown in Table2.1, approximately one-half of the 540,000uninsured children who the Departmentsestimate have a preexisting condition livewith a parent who is also uninsured andis not offered ESI. An additional 190,000have a parent who is covered by ESI, and60,000 children have a parent who was of-fered ESI but did not accept the offer (andthe insurance status of the parent is un-known).

25 AHIP Center for Health Policy Research. Individual Health Insurance 2009. http://www.ahipresearch.org/pdfs/2009IndividualMarketSurveyFinalReport.pdf

26 These estimates are from the Departments’ analysis of the 2004–2006 Medical Expenditure Panel Survey, trended forward to 2010.

2010–32 I.R.B. 198 August 9, 2010

Table 2.1 Estimated number of uninsured children with preexisting conditions, by parent’s insurance status, 2010

Parent’s insurance status Number of children

Parent has employer-sponsored insurance (ESI) 190,000

Parent offered ESI 60,000

Parent has individual market insurance 10,000

Parent does not have private insurance* 270,000

No parent 20,000

Total ** 540,000

* Primarily parents who are uninsured, but also including a small number who have public coverage.** Total is not the sum of the components due to rounding.

Source: Departments’ analysis of MEPS-HC data, 2004–2006, trended forward to 2010.

The group most likely to be affected bythese interim final regulations is uninsuredchildren whose parents have purchasednon-group coverage, of whom there arean estimated 10,000. These parents havedemonstrated a strong preference forcoverage by being willing to pay for anon-group premium for themselves, buttheir child is uninsured. Although theDepartments cannot know with any cer-tainty, it is quite plausible that the child isuninsured because the insurer refused tosell coverage to the child due to a preex-isting condition. If an individual marketinsurance policy does not change substan-tially and retains its grandfather status,the insurer is not required to add a childwith a preexisting condition. However,if the parent terminates the existing pol-icy and purchases a new policy (which isquite plausible given the high prevalenceof churning in the individual insurancemarket), then the new policy will be re-quired to cover the child, and a substantialproportion of these children could gainaccess to coverage due to these interimfinal regulations.27

At the other extreme, roughly 190,000uninsured children with a preexisting con-dition have a parent with ESI. It is possi-ble that these children are uninsured be-cause their parents’ ESI does not offer de-

pendent coverage. It is also possible thatthe parent could not afford the employeeportion of a family plan premium. Theseinterim final regulations are not likely tohave much effect on coverage for childrenin these circumstances. A very small sub-set of uninsured children whose parentshave ESI could have had to be in a pre-existing exclusion period before coverageis provided for services to treat that condi-tion. Under the statute and these interimfinal regulations, there would no longer besuch a period, making coverage desirable.Such children may be affected by this pro-vision.

Approximately 60,000 uninsured chil-dren with a preexisting condition have par-ents who were offered ESI but did not ac-cept that offer. It also seems unlikely thatthese interim final regulations will havemuch effect on that group, because al-most all of those parents could have chosento cover themselves, and potentially theirchild, through ESI in the absence of theseinterim final regulations.

In between these extremes are the ap-proximately 270,000 uninsured childrenwhose parents are themselves uninsured.Many of these parents have low to mod-erate income, and many may not be ableto afford insurance.28 However, some ofthese parents might purchase a policy for

their child with a preexisting condition ifit were available to them.

While it is relatively easy to hypoth-esize about the relationship betweenparental insurance status and the likeli-hood that a child will be newly covered,it is much more difficult to estimate withany precision the take-up rates for eachparental coverage category. Acknowl-edging substantial uncertainty, based onthe discussion above, the Departments’mid-range estimate is that 50 percent ofuninsured children whose parents haveindividual coverage will be newly insured,15 percent of uninsured children whoseparents are uninsured will be newly in-sured, and that very few children whoseparents have ESI, are offered ESI, or whodo not live with a parent will becomecovered as a result of these interim finalregulations.29 For the high-end estimate,the Departments assume that the 50 per-cent and 15 percent assumptions increaseto 75 percent and 20 percent, respectively.For the low-end assumption, they assumethat they decrease to 25 percent and 10percent.

As shown in Table 2.2, the Depart-ments’ mid-range estimate is that 51,000uninsured children with preexisting con-ditions could gain coverage as a result ofthese interim final regulations. At the low

27 Adele M. Kirk. The Individual Insurance Market: A Building Block for Health Care Reform? Health Care Financing Organization Research Synthesis. May 2008.

28 Approximately two-thirds of the uninsured are in families with income below 200 percent of the Federal Poverty Level. Current Population Survey, March 2008.

29 The Departments researched the literature in an attempt to provide support for the take-up rate assumptions made here. There is a substantial literature on take-up rates among employees whoare offered ESI, on take-up rates of public coverage among people eligible for Medicaid and Children’s Health Insurance Program, and some work on the purchasing behavior of people who arechoosing between being uninsured and buying individual insurance (Aizer, 2006; Kronson, 2009; KFF, 2007; Bernard and Selden, 2006; Sommers and Krimmel, 2008). This work shows thattake-up rates are very high for workers who are offered ESI, but that approximately 25 percent of people without ESI purchase individual coverage. This literature can also be used to estimatethe price-elasticity of demand, as has been used by the Congressional Budget Office in its estimates of the effects of the Affordable Care Act (http://www.cbo.gov/ftpdocs/87xx/doc8712/10–31-HealthInsurModel.pdf) However, none of this work is very helpful in estimating the level of take-up the Departments should expect as parents are given the opportunity to purchase coveragefor their children with preexisting conditions. In the absence of strong empirical guidance, the Departments consulted with experts, used their best judgment, and provide a wide range for ourassumptions.

August 9, 2010 199 2010–32 I.R.B.

end of the range, this could be 31,000 andat the high end of the range, it could be72,000. Given that most ESI already cov-

ers children with preexisting conditions,almost all of these children newly gaining

coverage are expected to gain individualcoverage.30

Table 2.2 Estimated number of uninsured children gaining coverage

Gain Employer-Sponsored Insurance

Gain IndividualMarket Insurance

Total

High Take-Up 10,000 62,000 72,000

Medium Take-Up 6,000 45,000 51,000

Low take-Up 2,000 29,000 31,000

Source: Departments’ analysis of 2004–2006 MEPS-HC, trended forward to 2010.

The other group of children who will beaffected by these interim final regulationsis children who already have non-groupinsurance coverage, but who are coveredwith a “condition waiver” that excludescoverage or imposes an exclusion periodfor coverage of a preexisting condition.After the implementation of these interimfinal regulations, children whose parentspurchase individual coverage will not besubject to condition waivers or preexist-ing condition exclusion periods. The De-partments estimate that there are 90,000children covered by individual insurancewith a condition waiver (or with a periodduring which coverage for a preexistingcondition is excluded).31 The individualmarket issuers who insure these estimated90,000 children with a condition waivermay decide to remain grandfathered healthplans and thus these children will not be di-rectly affected by these interim final reg-ulations. However, the parents of thosechildren could choose to switch from anindividual policy that is a grandfatheredhealth plan to a new policy that is notgrandfathered, although the premium thatthey pay for such coverage could increase.Similarly, for those children currently cov-ered but in a preexisting condition exclu-

sion period, curtailing the exclusion periodwould require the termination of the cur-rent plan and purchase of a policy on orafter September 23, 2010.

c. Benefits

The benefits of PHS Act Section 2704and these interim final regulations are ex-pected to amply justify the costs. These in-terim final regulations will expand and im-prove coverage for those under the age of19 with preexisting conditions. This willlikely increase access to health care, im-prove health outcomes, and reduce fam-ily financial strain and “job lock,” as de-scribed below.

Numerous studies confirm that whenchildren become insured, they are betterable to access health care. Uninsured chil-dren are six times more likely than in-sured children to lack a usual site of care.32

By contrast, one year after enrollment inhealth insurance, nearly every child in onestudy had a regular physician and the per-centage of children who saw a dentist in-creased by approximately 25 percent.33In-sured children also experience fewer un-met needs and delays in care. In onestudy, 37 percent of the children 15 to 19

years of age faced some unmet need or de-layed physician care in the prior 6 months,whereas at 12 months after insurance en-rollment, only 3.7 percent reported suchdelays or care deficiencies.34

With regular access to health care, chil-dren’s health and well-being are likelyto improve. When children are sick andwithout health insurance, they may, outof financial necessity, have to forgo treat-ment; insurance improves the likelihoodthat children get timely and appropriatehealth care services.35 Insured children areless likely to experience avoidable hos-pital stays than uninsured children36 and,when hospitalized, insured children areat less risk of dying.37 When children areinsured, it not only improves their healthstatus, but also confers corollary bene-fits. Children without health insurancemay not be allowed to participate in asmany physical activities as peers becauseparents are concerned about the financialimpacts of unintentional injury. One studydetermined that 12 percent of uninsuredchildren had various activity restrictions(e.g., related to sports or biking). How-ever, almost all of these restrictions were

30 For those parents who turned down an offer of ESI and whose insurance status is not known, the Departments assume that half of the children who takeup coverage join ESI, and half joina private insurance plan in the individual insurance market.

31 The 2009 AHIP survey for individual coverage estimated that approximately 2.7 percent of children with individual coverage are covered with a condition waiver. This 3 percent estimatewas applied to the MEPS-based estimate that there are approximately 3.3 million children covered by individual insurance. A separate analysis of MEPS by the Departments similarly foundabout 90,000 children with a preexisting condition (defined as being in fair or poor health or taking three or more prescription medications) had a low actuarial value of coverage for theircondition.

32 “Children’s Health, Why Health Insurance Matters.” Kaiser Commission on Medicaid and the Uninsured, available at: http://www.kff.org/uninsured/loader.cfm?url=/commonspot/secu-rity/getfile.cfm&PageID=14132

33 Ibid.

34 Keane, Christopher et al. “The Impact of Children’s Health Insurance Program by Age.” Pediatrics 104:5 (1999), available at: http://pediatrics.aappublications.org/cgi/reprint/104/5/1051.

35 Uninsured children are at least 70 percent more likely than insured children to not receive medical care for common childhood conditions like sore throats, ear infections, and asthma. Ibid.

36 Ibid.

37 Bernstein, Jill et al. “How Does Insurance Coverage Improve Health Outcomes?” Mathematica Policy Research (2010), available: http://www.mathematica-mpr.com/publica-tions/PDFs/Health/Reformhealthcare_IB1.pdf

2010–32 I.R.B. 200 August 9, 2010

removed once they gained insurance.38

And health insurance and access to careimprove school attendance. An evalua-tion of an initiative designed to connectchildren to Healthy Kids, an insuranceprogram piloted in Santa Clara County,California for children in low-income fam-ilies, found that the proportion of childrenmissing three or more school days in theprevious month decreased from 11 percentamong non-enrollees to 5 percent afterenrollment in the insurance program.39

In addition to their benefits relatingto access to care, health, and well-beingof children, these interim final regula-tions are likely to lower families’ out ofpocket health care spending. Some fam-ilies would face the possibility of payinghigh out-of-pocket expenses for healthcare for children under 19 who could notobtain insurance because of a preexistingcondition. Further, expanded insurancecoverage should reduce the number ofmedical bankruptcies.40 In cases wheremedical expenses are substantial, familiesmay no longer need to spend down theirassets in order to qualify for Medicaid andother public assistance programs. Approx-imately 34 States offer Medicaid eligibilityto adults and children who spend-down toState-established medically needy incomelimits.41 Eight percent of Medicaid bene-ficiaries qualify via spend-down yet thisgroup accounts for a disproportionatelyhigh percentage of Medicaid spendingnationally (14 percent), due to the factthat coverage kicks in when individuals’medical costs are high.42 Despite the factthat medically needy populations becomeeligible on account of onerous medical

bills, this group is especially vulnerableto losing coverage because States are notrequired to cover this group. For example,in 2003, when Oklahoma eliminated itsmedically needy program due to a budgetshortfall, an estimated 800 children lostcoverage.43 Such coverage interruptionslikely contribute to higher rates of un-compensated care — the primary sourcefor which is Federal funding.44 Reducedreliance on these programs under theseinterim final regulations will benefit Stateand Federal governments and, by exten-sion, taxpayers.

In addition, these interim final regula-tions may reduce instances of “job lock”— situations in which workers are unableto change jobs due to concerns regardinghealth insurance coverage for their chil-dren.45 For example, under the AffordableCare Act and these interim final regula-tions, someone currently insured throughthe group market with less than 18 monthsof continuous coverage may be more will-ing to leave her job and become a self-employed entrepreneur if she has a childunder age 19 with a preexisting condi-tion, because her child now will be ableto obtain immediate coverage for the pre-existing condition in the individual mar-ket. Similarly, even a worker with morethan 18 months of continuous coveragewho is already protected by HIPAA maybe more likely to consider switching firmsand changing policies because he wouldnot have to worry that his child’s preex-isting condition would be excluded for upto 12 months.46 While the total reductionin job-lock may be small, the impact onthose families with children with preexist-

ing conditions may be significant. The ef-fect of these interim final regulations onjob-lock is discussed further in the sum-mary section below.

Executive Order 12866 explicitly re-quires agencies to take account of “dis-tributive impacts” and “equity.” Requir-ing health insurers to provide coverage tochildren with preexisting conditions will,as described below, result in a small in-crease in premium for relatively healthyadults and children, and a large increase inhealth and financial security for childrenwith preexisting conditions and their par-ents. This transfer is a meaningful increasein equity, and is a benefit of these interimfinal regulations.

d. Costs and Transfers

Children with preexisting conditionshave high health care costs — approxi-mately three times the average for thosewithout such conditions.47 Although chil-dren with preexisting conditions havehigher health care costs than healthierchildren, among children with preexistingconditions, those who are uninsured haveexpenditures that are somewhat lower thanthe average for all children with preexist-ing conditions. Therefore, it is expectedthat when uninsured children obtain cov-erage, there will be additional demand forand utilization of services. There will alsobe a transfer from out-of-pocket spendingto spending covered by insurance, whichwill partially be mitigated by a reductionin cost-shifting of uncompensated care tothe insured population as coverage ex-pands.

38 “Children’s Health, Why Health Insurance Matters.” Kaiser Commission on Medicaid and the Uninsured, available at: http://www.kff.org/uninsured/loader.cfm?url=/commonspot/secu-rity/getfile.cfm&PageID=14132

39 Howell, Embry and Trenholm, Christopher “Santa Clara County Children’s Health Initiative Improves Children’s Health.” Mathematica Policy Research and The Urban Institute (2007),available at: http://www.mathematica-mpr.com/publications/PDFs/CHIimproves.pdf

40 Himmelstein, D., Warren, E., Thorne, D., and Woolhandler, S. Illness and Injury as Contributors to Bankruptcy, Health Affairs W5–63, February 2 (2005); Himmelstein, D., Thorne, D.,Warren, E., Woolhandler, S. Medical Bankruptcy in the United States, 2007: The Results of a National Study, The American Journal of Medicine June 4 (2009).

41 http://www.statehealthfacts.org/comparereport.jsp?rep=60&cat=4

42 Page 4: http://www.kff.org/medicaid/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=14325

43 Page 4: http://www.nashp.org/sites/default/files/shpmonitor_medicallyneedy.pdf

44 Page 4: http://www.kff.org/uninsured/upload/The-Cost-of-Care-for-the-Uninsured-What-Do-We-Spend-Who-Pays-and-What-Would-Full-Coverage-Add-to-Medical-Spending.pdf

45 A CEA report suggests that the overall cost of job-lock could be $3.7 billion annually, which is about 10 percent of affected workers wages. While these interim final regulations may onlyhave an impact on a small percentage of all individuals affected by job-lock it could still have a large dollar impact for those affected. Council of Economic Advisors Report, The EconomicCase for Health Reform (June 2009), at http://www.whitehouse.gov/assets/documents/CEA_Health_Care_Report.pdf.

46 A 2006 study found no evidence that the introduction of HIPAA, which reduced preexisting condition exclusions, had any impact on job lock, but HIPAA still allows a 12-month preexistingcondition exclusion meaning that for conditions that need immediate care someone could still effectively be uninsured for up to a year. In contrast, the provisions of the statute and theseinterim final regulations would not allow any preexisting condition exclusion. See e.g., Paul Fronstin, Health Insurance Portability and Job Lock: Findings from the 1998 Health ConfidenceSurvey, Employee Benefit Research Institute Notes, Volume 19, Number 8, pages 4–6 (Aug. 1998) and Anna Sanz-de-Galdeano, Job-Lock and Public Policy: Clinton’s Second Mandate,Industrial and Labor Relations Review, Volume 59, Number 3, pages 430–37 (Apr. 2006).

47 From the Departments’ analysis of MEPS data.

August 9, 2010 201 2010–32 I.R.B.

As shown above in Table 2.2, the De-partments estimate that approximately2,000 to 10,000 children whose parentshave ESI or an offer of ESI will be newlycovered in the group market. Because fewchildren are likely to be newly covered inthe group market, the estimated costs andtransfers are extremely small, on the orderof hundredths of a percent.

The Departments expect that these in-terim final regulations will have a largereffect on the number of children cov-ered in the individual market, resultingin new coverage for between 29,000 and62,000 children. Medical expenses forthese newly covered children are likelyto be greater than for the average childcovered by individual insurance. TheDepartments’ analysis also assumes thatchildren with preexisting conditions gain-ing insurance under these interim finalregulations will have greater health needsthan the average uninsured child with apreexisting condition. This assumptionconcerning adverse selection is commonto most analyses of purchasing behaviorin the individual insurance market.

In the majority of States that do notrequire community rating, much of theadditional cost of care for newly-cov-ered children with preexisting condition islikely to be borne by the parents who pur-chase coverage for their children. Basedon discussions with industry experts, itappears that even in the absence of com-munity rating, it is rare for an insurerto charge more than twice the standardrate for someone in poor health. TheDepartments’ analysis assumes that innon-community rated States, the parentsof newly insured children will pay a pre-mium that is equal to twice the standardrate, and the remainder of the additionalcosts will be spread to other policy holdersin the individual market.48 However, withthe enactment of the Affordable care Actand the issuance of these interim final reg-ulations, rating practices in the insuranceindustry could certainly change, lendinguncertainty to this estimate. In the approx-

imately twenty States that require adjustedcommunity rating or rating bands in theindividual market, the Departments’ anal-ysis assumes that all of the additional costsof newly covered children will be spreadacross policies in the individual marketthat are not grandfathered health plans.49

Making these assumptions, the estimatedincrease in premiums is 1 percent or lessin community rated States, and approxi-mately one-half of one percent in Stateswithout community rating.

Finally, for the estimated 90,000 chil-dren with existing individual coverage thatexcludes coverage for the preexisting con-dition or requires an exclusion period be-fore coverage for that condition begins, theDepartments assume that many of thesechildren will receive coverage for theircondition(s). Because their existing indi-vidual policies could be grandfathered, theparents of these children may need to pur-chase new policies in order to gain cover-age for their children’s condition without awaiver. Children in a preexisting conditionexclusion period in particular will need toterminate their current policy and purchasea new one in order to take advantage ofthe elimination of any preexisting condi-tion exclusion period. Of note, the Depart-ments estimate that turnover in the indi-vidual market is between 40 percent and70 percent per year.50 Therefore, in a fewyears, most children who would have beencovered with a condition waiver in the ab-sence of these interim final regulations areexpected to be in new policies that are notgrandfathered health plans in any case.

The Departments analyzed expendi-tures for the approximately 90,000 chil-dren who reported fair or poor health, orwho were taking three or more prescrip-tion medications, and for whom insurancecovered only a small portion of spendingfor one or more medical conditions. Totalspending for these 90,000 children wasnot much different than spending for thechildren who did not appear to have a pre-existing condition waiver, although lessof the spending was covered by private

insurance, and more of it was paid forout-of-pocket or by other sources.51

Similar to the expectations for newlycovered children in the individual market,in States that require rating bands or someform of community rating, much of theadditional cost for eliminating conditionwaivers will be spread across the insuredpopulation, while in States without ratingrestrictions, much of the additional costswill be borne by the parents who purchasethe coverage. However, the estimate thatinsured benefits per child will increase bya relatively modest amount suggests thateven in States with community rating, thecost and transfer effects will be relativelysmall, at most a few tenths of a percentover the next few years.

In evaluating the impact of this pro-vision, it is important to remember thatthe full net effects of this provision can-not be estimated because of its interac-tions with other provisions in the Afford-able Care Act that go into effect at the sametime. For example, under the current guar-anteed renewability protections in the in-dividual market, if a child with a preexist-ing condition is now able to obtain cov-erage on a parental plan, he or she canpotentially stay on that plan until age 26.As another example, the Affordable CareAct will require non-grandfathered healthplans to provide recommended preventiveservices at no cost-sharing. This will am-plify the benefits of coverage for newlyinsured children with preexisting condi-tions. Therefore, the Departments cannotprovide a more precise estimation of eitherthe benefits or the costs and transfers ofthis provision.

3. PHS Act Section 2711, No Lifetime orAnnual Limits (26 CFR 54.9815–2711T,29 CFR 2590.715–2711, 45 CFR 147.126)

a. Summary

As discussed earlier in this preamble,section 2711 of the PHS Act, as added bythe Affordable Care Act, and these interimfinal regulations generally prohibits group

48 The Departments assume that in non-community rated States, parents purchasing individual coverage for a child with a preexisting condition will be charged a rate equal to 200 percent ofthe standard rate for a child, because it is rare for insurers to charge more than this amount, but it seems unlikely they will charge less. To the extent that the estimated expenditures for newlycovered children are above the premium that the Departments assume will be charged, the analysis assumes that the difference will be spread over all policies in the individual market.

49 http://www.statehealthfacts.kff.org/comparetable.jsp?ind=354&cat=7

50 Adele M. Kirk. The Individual Insurance Market: A Building Block for Health Care Reform? Health Care Financing Organization Research Synthesis. May 2008.

51 The Departments’ analysis used MEPS data to identify approximately 90,000 children with individual coverage for whom insurance coverage for one or more conditions was extremely low— averaging 10 percent of covered expenditures, compared to approximately 80 percent for other children. The analysis assumes that these children were subject to a preexisting conditionwaiver, and then assumes that when these waivers are eliminated, the expenditures that are not covered by insurance in the MEPS data will now be shifted to insurance.

2010–32 I.R.B. 202 August 9, 2010

health plans and health insurance issuersoffering group or individual health insur-ance coverage from imposing lifetime orannual limits on the dollar value of healthbenefits. The statute also provides a spe-cial rule allowing “restricted annual lim-its” with respect to essential health bene-fits (as defined in section 1302(b) of theAffordable Care Act) for plan years (in theindividual market, policy years) beginningbefore January 1, 2014. In addition, thestatute specifies that a plan or issuer mayimpose annual or lifetime per-individuallimits on specific covered benefits that arenot essential health benefits to the extentthat such limits are permitted under Fed-eral or State law.

For purposes of establishing a restrictedannual limit on the dollar value of essen-tial health benefits, the statute providesthat in defining the term restricted annuallimit, the Departments “ensure that ac-cess to needed services is made availablewith a minimal impact on premiums.”52

Based on this Congressional directive,the interim final regulations allow an-nual limits on the dollar value of benefitsthat are essential health benefits of noless than $750,000 for plan years (in theindividual market, policy years) begin-ning on or after September 23, 2010,

but before September 23, 2011; $1.25million for plan years (in the individualmarket, policy years) beginning onor after September 23, 2011, butbefore September 23, 2012; and $2million for plan years (in the individualmarket, policy years) beginning on orafter September 23, 2012, but beforeJanuary 1, 2014. For plan years (in theindividual market, policy years) beginningJanuary 1, 2014, no annual limits may beplaced on essential health benefits.

The statute and these interim finalregulations relating to the prohibitionon lifetime limits generally apply to allgroup health plans and health insuranceissuers offering group or individual healthinsurance coverage, whether or not theplan qualifies as a grandfathered healthplan, for plan years (in the individual mar-ket, policy years) beginning on or afterSeptember 23, 2010. The statute and theseinterim final regulations relating to theprohibition on annual limits, includingthe special rules for plan years beginningbefore January 1, 2014, generally applyto group health plans and group healthinsurance coverage that qualify as agrandfathered health plan, but do notapply to grandfathered health plans thatare individual health insurance coverage.

b. Estimated Number of Affected Entities

In 2009, the latest data available indi-cates that both the incidence and amountof lifetime limits vary by market and plantype (e.g., HMO, PPO, POS). Table 3.1displays the prevalence of lifetime limitsfor large employer, small employer and in-dividual markets by plan type. Sixty-threepercent of large employers had lifetimelimits; 52 percent of small employers hadlifetime limits and 89 percent of individ-ual market plans had lifetime limits. HMOplans are the least likely to have a life-time limit with only 37 percent of large em-ployer HMO plans having a limit, 16 per-cent of small employer HMO plans havinga limit and 23 percent of individual HMOplans having a limit. The generosity ofthe limit also varies, with 45 percent of alllarge employer plans imposing a lifetimelimit of $2,000,000 or more; 39 percent ofsmall employers’ plans imposing a limit of$2,000,000 or more and 86 percent of in-dividual market plans imposing a limit of$2,000,000 or more. Note that small em-ployers are more likely than large employ-ers to offer HMOs that tend not to havelifetime limits, but when small businessesoffer plans with lifetime limits, the maxi-mum limit tends to be lower than those inlarge firms.53

Table 3.1: Prevalence of Lifetime Limits

Market Prevalence of Limit Number of Enrollees

Large Group

Under $1,000,000 1% 1,000,000

$1,000,000 — $2,000,000 18% 18,700,000

$2,000,000 or higher 45% 46,600,000

No Limit 37% 38,300,000

Small Group

Under $1,000,000 1% 500,000

$1,000,000 — $2,000,000 12% 6,300,000

$2,000,000 or higher 39% 20,500,000

No Limit 48% 25,200,000

52 PHS Act section 2711(a)(2) as added by Section 1001(5) of the Affordable Care Act and amended by section 10101(a) of such Act.

53 Employer Health Benefits: 2009 Annual Survey. Washington, DC: Henry J. Kaiser Family Foundation and Health Research & Educational Trust, (September 2009).

August 9, 2010 203 2010–32 I.R.B.

Individual

Under $1,000,000 2% 200,000

$1,000,000 — $2,000,000 1% 100,000

$2,000,000 or higher 86% 8,400,000

No Limit 11% 1,100,000

Source: Large and Small Employer Health Plan Enrollment: and Lifetime Maximum Exhibit 5.2 and Exhibit 13.12,respectively, Employer Health Benefits: 2009 Annual Survey. Washington, DC: Henry J. Kaiser Family Foundation and HealthResearch & Educational Trust, (September 2009). Individual Health Plan Enrollment and Lifetime Maximum: Table 10 andTable 17, respectively, AHIP Center for Policy Research Individual Health Insurance 2009: A Comprehensive Survey ofPremiums, Availability, and Benefits

There are scant data on annual limits onwhich to base this impact analysis. Table3.2 displays the prevalence of annual lim-its by market, plan type and amount of thelimit. Only 8 percent of large employers,14 percent of small employers and 19 per-cent of individual market policies imposean annual limit and thus would be directlyimpacted by these interim final regula-tions.54 In the first year of implementation(beginning September 23, 2010), it is es-timated that less than 0.08 percent (lessthan one tenth of one percent) of large em-ployer plans, approximately 2.6 percent ofsmall employer plans, and 2.3 percent of

individual plans would have to raise theirannual limit to $750,000.55 This first-yearincrease in annual limits would potentiallyaffect an estimated 1,670,000 personsacross the three markets. The secondyear of the phase-in, beginning September23, 2011, would affect additional plansand policies, requiring a cumulative 0.7percent of large employer plans, 3.9 per-cent of small employer plans, and 5.3percent of individual policies to increasetheir annual limit to $1,250,000. The sec-ond-year increase in annual limits wouldaffect an estimated 3,278,250 personsacross the three markets. The third and

final year of the phase-in period (begin-ning on September 23, 2012) would affectadditional plans and policies requiring acumulative 2.4 percent of large employerplans, 8.1 percent of small employer plansand 14.3 percent of individual policies toincrease their annual limit to $2 million.The third-year increase in annual limitswould affect an estimated 8,104,500 per-sons across the three markets. Note thatthe estimated number of plans and peopleaffected are upper-bound estimates sincethey do not take into account grandfa-thered health plans and plans that receivea waiver from the annual limits policy.

54 There is limited survey data on annual total benefit limits. The data utilized in these analyses are derived from data collected by Mercer’s Health and Benefits Research Unit for their2005, 2008 and 2009 National Survey of Employer-Sponsored Health Plans. For employer plans, the Mercer data provides prevalence information for PPOs and HMOs, and median annuallimit levels for PPOs, split by small and large employer plans. In order to generate a plausible baseline of annual benefit maximums, broken by level of maximum, the reported percentagesof employer plans that had annual maximums were spread into four intervals broken at $500k, $1 million, and $2 million. For PPOs and HMOs, the data were spread using the dispersionobserved in lifetime benefit maximums (using data from the KFF/HRET employer surveys), and the distribution was constrained to be consistent with the Mercer reported median values forannual maximums. For annual benefit limits in individual coverage the relationship observed between AHIP’s reported lifetime benefit maximum levels and the KFF/HRET employer lifetimebenefit maximums was used to generate corresponding distributions from the synthesized employer annual limits.

55 These figures and the ones that follow in this paragraph are estimated from Tables 2.2 and 2.3 by assuming a uniform distribution within each cell.

2010–32 I.R.B. 204 August 9, 2010

Table 3.2 Percent of plans employing annual limits in each market

Annual Limit Large Employer Small Employer Individual

Under $250,000 * 0.4% 0.4%

$250,000 — 499,999 * 1.3% 1.2%

$500,000 — 999,999 * 1.7% 1.6%

$1,000,000 — 1,999,999 2.3% 5.5% 12.0%

$2,000,000 plus 5.8% 5.5% 3.8%

Total 8.2% 14.4% 19.0%

* Less than 0.1%

Source: The data are derived from data collected by Mercer’s Health and Benefits Research Unit for their 2005, 2008 and2009 National Survey of Employer-Sponsored Health Plans. For employer plans, the Mercer data provides prevalenceinformation for PPOs and HMOs, and median annual limit levels for PPOs, split by small and large employer plans. Inorder to generate a plausible baseline of annual benefit maximums, broken by level of maximum, the reported percentagesof employer plans that had annual maximums were spread into four intervals broken at $500k, $1 million, and $2 million.For PPOs and HMOs, the data were spread using the dispersion observed in lifetime benefit maximums (using data from theKFF/HRET employer surveys), and the distribution was constrained to be consistent with the Mercer reported median valuesfor annual maximums. For annual benefit limits in individual coverage the relationship observed between AHIP’s reportedlifetime benefit maximum levels and the KFF/HRET employer lifetime benefit maximums was used to generate correspondingdistributions from the synthesized employer annual limits

Table 3.3 Number of persons subjected to annual limits in each market

Annual Limit Large Employer Small Employer Individual Total

Under $250,000 15,000 225,000 38,000 278,000

$250,000 — 499,999 45,000 675,000 115,000 835,000

$500,000 — 999,999 60,000 900,000 153,000 1,113,000

$1,000,000 — 1,999,999 2,389,000 2,869,000 1,177,000 6,435,000

$2,000,000 plus 6,041,000 2,869,000 377,000 9,287,000

Total 8,550,000 7,538,000 1,860,000 17,948,000

Source: The data are derived from data collected by Mercer’s Health and Benefits Research Unit for their 2005, 2008 and2009 National Survey of Employer-Sponsored Health Plans. For employer plans, the Mercer data provides prevalenceinformation for PPOs and HMOs, and median annual limit levels for PPOs, split by small and large employer plans. Inorder to generate a plausible baseline of annual benefit maximums, broken by level of maximum, the reported percentagesof employer plans that had annual maximums were spread into four intervals broken at $500k, $1 million, and $2 million.For PPOs and HMOs, the data were spread using the dispersion observed in lifetime benefit maximums (using data from theKFF/HRET employer surveys), and the distribution was constrained to be consistent with the Mercer reported median valuesfor annual maximums. For annual benefit limits in individual coverage the relationship observed between AHIP’s reportedlifetime benefit maximum levels and the KFF/HRET employer lifetime benefit maximums was used to generate correspondingdistributions from the synthesized employer annual limits

Fear and anxiety about reaching annualor lifetime limits on coverage is a ma-jor concern among Americans who havehealth insurance. At the same time, thedata suggest that relatively few individualsactually reach their policies’ annual andlifetime limits. Thus, while such limitsare relatively common in health insur-ance, the numbers of people expected to

exceed either an annual or lifetime limitis quite low. The estimates provided inTable 3.4 provide a high and low rangeof the number of people who would hitsuch limits. Such a range is necessarybecause of the tremendous uncertaintyaround high-cost individuals. First, dataare sparse, given that high-cost individualslie at the tail of statistical cost distri-

butions. The Departments attempted toextrapolate characteristics of the high-costpopulation who would be affected by theseinterim final regulations using several datasources. Second, data on per-capita costis available on a year-by-year basis, andnot on a lifetime basis. Assumptions werenecessary to convert annual costs intolifetime costs, including considerations of

August 9, 2010 205 2010–32 I.R.B.

how current spending could be related tofuture spending.56

Considering these caveats, Table 3.4 il-lustrates that raising the restriction of an-

nual limits to $2 million by 2013 would ex-tend additional coverage to 2,700 to 3,500people per year.57 The elimination of life-time limits would extend coverage to an

estimated 18,650 to 20,400 people whowould be expected to exceed a lifetimelimit during a calendar year.

Table 3.4 Percent and number of persons expected to exceed a lifetime or annual limit

Projected to ever exceed limit

Current Lifetime Limit Percentage Number

Under $1,000,000 0.03–0.06% 550–1,050

$1,000,000 to $1,999,999 0.02% 4,500–5,000

$2,000,000 plus 0.02% 13,600–14,350

Current Annual Limit

Under $250,000 0.19–0.23% 550–650

$250,000 to $499,999 0.08–0.10% 650–850

$500,000 to $999,000 0.03–0.06% 350–700

$1,000,000 to $1,999,999 0.02% 1,150–1,300

$2,000,000 or more 0.01–0.02% 750–1,750

Source: Estimates of the expected percentage of the insured population who would exceed a limit are based on an analysis ofthe MEPS-HC expenditure data supplemental with adjusted insurer claims from the Society of Actuaries large claims database;http://www.soa.org/files/pdf/Large_Claims_Report.pdf. Numbers of people rounded to the nearest 50.

c. Benefits

Annual and lifetime limits exist in theindividual, small group and large grouphealth insurance markets. These limitsfunction as caps on how much an insurancecompany will spend on medical care for agiven insured individual over the course ofa year, or the individual’s lifetime. Oncea person reaches this limit or cap, the per-son is essentially uninsured: he or she mustpay the remaining cost of medical careout-of-pocket. These limits particularlyaffect people with high-cost conditions,58

which are typically very serious. For ex-ample, one recent survey found that 10 per-cent of cancer patients reached the limit ofwhat insurance would pay for treatment.59

The same survey also found that 25 percentof cancer patients or their family membersused up all or most of their savings, 13 per-cent were contacted by a collection agency,and 11 percent said they were unable to payfor basic necessities like food and hous-ing as a result of the financial cost of deal-ing with cancer. By prohibiting lifetimelimits and restricting annual limits, theseinterim final regulations will help fami-lies and individuals experiencing financialburdens due to exceeding the benefit lim-its of their insurance policy. By ensuringand continuing coverage, these interim fi-nal regulations also reduce uncompensatedcare, which would otherwise increase pre-miums of the insured population through

cost-shifting, as discussed in more detailin section IV.B.6 later in this preamble.

These interim final regulations will alsoimprove access to care. Reaching a limitcould interrupt or cause the terminationof needed treatment, leading to worseningof medical conditions. Moreover, thosewith medical debt are more likely to skipa needed test or treatment, and less likelyto fill a prescription or visit a doctor orclinic for a medical issue.60 The removaland restriction of benefit limits helps en-sure continuity of care and the eliminationof the extra costs that arise when an un-treated or undertreated condition leads tothe need for even more costly treatment,that could have been prevented if no loss ofcoverage had occurred. Lack of insurance

56 To estimate the conditional premium impact of moving a given plan with a given annual benefit maximum to a higher benefit maximum, the percentage change in estimated benefit rates(percent of medical spending that the plan pays for as benefits) based on simulated benefit payments for such coverage was used. The underlying assumed medical spending profile wasdrawn from MEPS-HC person level spending data, calibrated to National Health Account levels, with the shape of the distribution modified based on high-cost claims data from the Societyof Actuaries. The conditional premium increases were then applied to the fractions of plans in each of the three market segments by level of current annual limits to calculate the aggregateincrease in premiums for the possible option.

57 Numbers in this paragraph calculated from Table 2.4 may differ due to rounding.

58 An April 2008 study by Milliman “2008 U.S. Organ and Tissue transplant cost estimates”, found that the average one year billed charges related to a heart transplant averaged $787,000while a liver transplant averaged $523,400. The lifetime costs for the treatment chronic disease such as of HIV infection have been well documented with one estimate of $618,000 (Med Care2006;44: 990–997).

59 See “National Survey of Households Affected by Cancer.” (2006) accessed at http://www.kff.org/kaiserpolls/upload/7591.pdf

60 Seifert, Robert W., and Mark Rukavina. “Bankruptcy Is The Tip Of A Medical-Debt Iceberg.” Health Affairs Web Exclusive (2006)

2010–32 I.R.B. 206 August 9, 2010

coverage leads to additional mortality andlost workplace productivity, effects thatwould be amplified for a sicker populationsuch as those who would reach a benefitlimit.61 By ensuring continuation of cover-age, these interim final regulations benefitthe health and the economic well-being ofparticipants, beneficiaries, and enrollees.

These interim final regulations alsobenefit those without an alternative sourceof health coverage in the group healthinsurance market. Under HIPAA rules,when an individual exceeds a limit andloses coverage, that individual has a spe-cial enrollment right. If his or her planoffered multiple benefit packages or aspouse has access to ESI, the individualcould enroll in the coverage, although itmight lead to a change in providers andless generous coverage. Those without analternative option would lose coverage,and the history of high medical claims andpresence of preexisting conditions couldmake health insurance in the individualmarket impossible. Under these interimfinal regulations, people will no longer betreated differently depending on whetherthey have an alternative source of cover-age.

Executive Order 12866 explicitly re-quires agencies to take account of “dis-tributive impacts” and “equity,” and theseconsiderations help to motivate the rel-evant statutory provisions and these in-terim final regulations. Prohibiting life-time limits and restricting annual limits as-sures that insurance will perform the func-tion for which it was designed — namely,protecting health and financial well beingfor those most in need of care. This repre-sents a meaningful improvement in equity,which is a benefit associated with these in-terim final regulations.

d. Costs and Transfers

Extending health insurance coveragefor individuals who would otherwise hita lifetime or annual limit will increasethe demand for and utilization of healthcare services, thereby generating addi-tional costs to the system. The three yearphase-in of the elimination of annual limitsand the immediate elimination of lifetimelimits will increase the actuarial value ofthe insurance coverage for affected plans

and policies if no other changes are madeto the plan or policy. Issuers and plansin the group market may choose to makechanges to the plan or policy to main-tain the pre-regulation actuarial value ofthe plan or policy, such as changing theirprovider networks or copayments in somemanner. To the extent that higher pre-miums (or other plan or policy changes)are passed on to all employees, there willbe an explicit transfer from workers whowould not incur high medical costs tothose who do incur high medical costs.If, instead, the employers do not pass onthe higher costs of insurance coverage totheir workers, this could result in lowerprofits or higher prices for the employer’sgoods or services. Given the relativelysmall proportion of people who exceed thebenefit limits in the current group markets,the Departments anticipate such transfersto be minimal when spread across the in-sured population (at a premium increaseof one-half of a percent or less for life-time limits and one-tenth of a percent orless for annual limits), compared with thesubstantial benefit rendered to individualhigh-cost enrollees. However, as this dis-cussion demonstrates, there is substantialuncertainty in data and in the choices planswill decide to make in response to theseinterim final regulations, preventing moreprecise estimations of effects.

In the individual market, where policiesare individually underwritten with no rat-ing bands in the majority of States, the De-partments expect the added premium costor other benefit changes to be largely borneby the individual policyholder. As dis-cussed in the impact analysis for Section2704, if costs exceed 200 percent of thestandard rate, some of the additional costscould be spread across the insurance mar-ket. In the 20 States with modified com-munity rating, issuers could spread the in-creased costs across the entire individualmarket, leading to a transfer from thosewho would not incur high medical costs tothose who do incur such costs. However,as with the group market, such a transferis expected to be modest, given the smallnumbers of people who would exceed theirbenefit limit. The Departments estimatethat the transfer would be three-quartersof a percent or less for lifetime limits and

one-tenth of a percent or less for annuallimits, under a situation of pure commu-nity rating where all the costs get spreadacross the insured population. This impactdoes not apply to grandfathered individualmarket plans. Also, given the wide vari-ation in State insurance markets, a moreprecise estimation is not possible, and thepremium impact would be even less in themajority of States that allow underwritingin the individual insurance market.

It is worth noting that the transfers dis-cussed above will be significantly miti-gated by the associated expansion of cov-erage that these interim final regulationscreate. The Departments expect, as a resultof the gradual elimination of annual limitsand the immediate elimination of lifetimelimits, fewer people will be left withoutprotection against high medical costs. Thiswill lead fewer individuals to spend downresources and enroll in Medicaid or re-ceive other State and locally funded med-ical support. It can be anticipated thatsuch an effect will be amplified due tothe high-cost nature of people who exceedbenefit limits. As a result, there will bea reduction in Medicaid, State and localfunded health care coverage programs, aswell as uncompensated care, all of whichwould otherwise raise taxes and/or premi-ums for the larger population. Unfortu-nately, data around these high-cost indi-viduals is limited, preventing the Depart-ments from quantifying these benefits atthe present time.

Additional uncertainty prevents moreprecise estimation of the benefits and im-pacts of this provision. As discussed inthe impact analysis for Section 2704, thereare interactive effects of the various pro-visions in these interim final regulationswhich cannot be estimated. For example,prohibiting rescissions and lifetime limitscould mean that someone who would havehad a policy rescinded now maintains cov-erage, and also maintains coverage beyonda previous lifetime limit. Moreover, it isimportant to note that the estimates pre-sented here, by necessity, utilize “average”experiences and “average” plans. Differ-ent plans have different characteristics ofenrollees, for example in terms of age orhealth status, meaning that provisions suchas eliminating lifetime or restricting an-

61 See Institute of Medicine.(2003). Hidden Costs, Value Lost: Uninsurance in America. Washington, DC: National Academy Press; and Institute of Medicine. (2002). Care WithoutCoverage: Too Little, Too Late. Washington, DC: National Academy Press.

August 9, 2010 207 2010–32 I.R.B.

nual limits could affect them differently.This also means that average impacts ofthe various provisions in these interim fi-nal regulations or others cannot simply beadded to obtain a total impact, since a planmay be affected by one provision but notanother. Moreover, plans and issuers willconsider these impacts when making deci-sions about whether or not to make otherchanges to their coverage that could affecttheir grandfather status — a considerationthat is pertinent in the case of restrictedannual limits, which do not apply to thegrandfathered individual market. This fur-ther compounds any precise calculation ofbenefits and costs.

e. Enrollment Opportunity

These interim final regulations providean enrollment (or, in the case of the indi-vidual market, reinstatement) opportunityfor individuals who reached their lifetimelimits in a group health plan or health in-surance coverage and remain otherwise el-igible for the coverage. In the individ-ual market, the reinstatement opportunitydoes not apply to individuals who reachedtheir lifetime limits in individual healthinsurance coverage if the contract is notrenewed or otherwise is no longer in ef-fect. It would apply, however, to a fam-ily member who reached the lifetime limitin an individual health insurance familypolicy while other family members remainin coverage. Such enrollment opportu-nity would generate a total hour burden of3,800 hours and a cost burden of $21,000,as detailed in the Paperwork ReductionAct section.

f. Alternatives

PHS Act section 2711(a)(2) requiresthe Departments to “ensure that access toneeded services is made available witha minimal impact on premiums.” Ac-cordingly, the Departments undertookan analysis of different restricted annuallimit thresholds to study the issue, takinginto consideration several factors: (1) thecurrent use of annual limits in the groupand individual market; (2) the averagepremium impact of imposing different an-nual limits on the individual, small group,and large group markets; (3) the numberof individuals who will continue to have

annual medical expenses that exceed anannual limit; and (4) the possibility that aplan or issuer would switch to an annuallimit when lifetime limits are prohibited.In order to mitigate the potential for pre-mium increases for all plans and policies,while at the same time ensuring access toessential health benefits, the Departmentsdecided to adopt a three-year phased ap-proach for restricted annual limits.

As discussed above, it is important tonote that it is difficult to predict exactlyhow plans and issuers will respond un-der the new regulations. Annual or life-time limits on benefits help control riskand costs, and the elimination of a life-time limit or a possible increase in an an-nual limit may lead plans and issuers to al-ter benefit design (such as increasing cost-sharing), and/or raise premiums. The De-partments cannot determine which optionor combination of options plans and is-suers will choose. Therefore, it is very dif-ficult to measure the impact on premiumsdue to the elimination of lifetime limits anda maximum annual limit. This uncertaintyis compounded by the data uncertaintiesdiscussed earlier in section IV.B.2.b of thispreamble.

Given the above data limitations, theDepartments modeled the impact on pre-miums of increasing the annual limits forplans that currently have annual limits,assuming that the only reaction to a re-quired increase in annual limits would bean increase in premiums. Because someplans may choose to avoid or offset thepotential premium increase by increasingcost sharing, tightening the network ofproviders, adopting cost savings tools, ormaking other plan changes, the modeledpremium impacts represent the high-endof the possible increases in premiums.

The Departments modeled a range ofoptions and ways to implement a restrictedannual limit. Two of the options con-sidered were setting the annual restrictedlimit on essential benefits at $1 millionor at $2 million. The higher the limit isset, the fewer the people that would ex-ceed the limit and experience a gap ininsurance coverage. However, plans withcurrent low limits could see increases incosts and potentially premiums becausethe proportion of claims covered by theplans would increase. One final issue to

consider is that for plan years (in the in-dividual market, policy years) beginningafter January 1, 2014, all group plans andnon-grandfathered individual policies willbe required to remove annual limits. A lowannual limit until 2014 would offer lessprotection to those with medical expensesexceeding the limit, and could result in anincrease in premiums in 2014 (althougha variety of other changes that will beimplemented in 2014 could be expected toresult in lower premium increases in mostStates). Therefore, a stepped approachallowing the restricted annual limit tobe phased in over time seemed to be thefairest approach and most likely to resultin a minimal impact on premiums, so itwas selected.

Table 3.5 demonstrates premium im-pacts at different annual limit thresholds,and Table 3.4 above demonstrates thenumbers of people expected to exceeddifferent annual limit thresholds. The De-partments chose to set the restricted annuallimit relatively low in the first year, andto then increase the limit up to $2 millionover the three-year period. This phased ap-proach was intended to ease any increasesin premiums in any one year, particularlyfor plans with low initial annual limits,and to help group plans and non-grandfa-thered individual policies transition to noannual limits starting in 2014. With thisapproach, a threshold of $750,000 wasassociated with a 5.1 percent premium im-pact for plans with very low annual limitsof $250,000, but it is anticipated that theseplans comprise only less than one-half ofone percent of the market. On the otherhand, raising the restricted annual limitsto $2,000,000 under these interim finalregulations could be expected to help anestimated 2,700 to 3,500 people62 whowould no longer exceed their annual limit,ensuring financial protection to those whohave high medical claims.

It is important to note that these interimfinal regulations also provide that the Sec-retary of HHS may establish a waiver pro-gram under which issuers or plans may as-sert that adhering to the restricted annuallimit provisions of these interim final reg-ulations would result in a significant de-crease in access to benefits or a significantpremium increase. The Departments pro-vided for this waiver in order to prevent the

62 Numbers calculated from Table 3.4 may differ due to rounding.

2010–32 I.R.B. 208 August 9, 2010

loss of coverage for enrollees in low-ben-efit plans (for example, “mini-med” plans)that have low annual limits. While the im-

pact of this policy is not quantified, it, too,is intended to mitigate any unintended con-sequences given the paucity of data on the

incidence and prevalence of annual limitsin the markets today.

Table 3.5 Estimated premium impacts for a plan moving to a new annual limit

New LimitCurrentLimit

People Subjectto CurrentLimit $500k $750k $1 million $1.5 million $2 million

$250k 278,000 3.7% 5.1% 6.1% 6.2–6.4% 6.263–6.6%

$500k 835,000 1.4% 2.3% 2.4–2.6% 2.4–2.8%

$750k 1,113,000 1.0% 1.0–1.2% 1.0–1.5%

$1 million 6,435,000 0.1–0.3% 0.1–0.5%

$1.5 million 9,287,000 0.04–0.2%

Source: Premium estimates are calculated based MEPS-HC supplemented with the Society of Actuaries Large Claim Database— To estimate the conditional premium impact of moving a given plan with a given annual benefit maximum to a higher benefitmaximum, the percentage change in estimated benefit rates (percent of medical spending that the plan pays for as benefits)based on simulated benefit payments for such coverages was used. The underlying assumed medical spending profile wasdrawn from MEPS-HC person level spending data, calibrated to National Health Account levels, with the shape of thedistribution modified based on high-cost claims data from the Society of Actuaries. The conditional premium increases werethen applied to the fractions of plans in each of the three market segments by level of current annual limits to calculate theaggregate increase in premiums for the possible option. For the low impact estimates, the distributions were then adjustedonly for the expected marginal loading impact of using commercial reinsurance for many of the smaller carriers. For thehigh impact estimates, the distributions were also adjusted to reflect possible underestimation of the tails of the expendituredistribution once coverage of unlimited benefit levels was required. The adjustments were set at levels that generated aggregateimpacts that were conservative relative to estimates from PricewaterhouseCoopers’ March 2009 study of lifetime limits for theNational Hemophilia Foundation.

4. PHS Act Section 2712, Rescissions(26 CFR 54.9815–2712T, 29 CFR2590.715–2712, 45 CFR 147.128)

a. Summary

As discussed earlier in this preamble,PHS Act Section 2712 provides rules re-garding rescissions for group health plansand health insurance issuers that offergroup or individual health insurance cov-erage. A plan or issuer must not rescindcoverage under the plan, policy, certifi-cate, or contract of insurance from the indi-vidual covered under the plan or coverageunless the individual (or a person seek-ing coverage on behalf of the individual)performs an act, practice, or omission thatconstitutes fraud, or unless the individualmakes an intentional misrepresentation ofmaterial fact, as prohibited by the terms ofthe plan or coverage. These interim finalregulations provide that a group health

plan, or a health insurance issuer offeringgroup health insurance coverage, mustprovide at least 30 calendar days advancenotice to an individual before coveragemay be rescinded.64 The notice must beprovided regardless of whether the rescis-sion is of group or individual coverage;or whether, in the case of group coverage,the coverage is insured or self-insured, orthe rescission applies to an entire group oronly to an individual within the group.

PHS Act Section 2712 and these interimfinal regulations create a statutory Fed-eral standard and enforcement power in thegroup and individual markets where it didnot exist. Prior to this provision taking ef-fect, varying court-made Federal commonlaw existed for ERISA plans. State rulespertaining to rescission have been foundto be preempted by ERISA by five circuitcourts (5th, 6th, 7th, 9th and 11th as of2008). Each styled a remedy looking to

State law, the majority of Federal courts orthe Restatement of Contracts. Accordingto a House Energy and Commerce Com-mittee staff memorandum,65 rather than re-viewing medical histories when applica-tions are submitted, some insurers engagein “post-claims underwriting.” Under thispractice, if the policyholders become sickand file expensive claims, the insurancecompanies initiate investigations to scruti-nize the details of the policyholder’s appli-cation materials and medical records, andif discrepancies, omissions, or misrepre-sentations are found, the insurer rescindsthe policies, returns the premiums, and re-fuses payment for medical services. TheCommittee found some questionable prac-tices in this area including insurance com-panies rescinding coverage even when dis-crepancies are unintentional or caused byothers, for conditions that are unknown topolicyholders, and for discrepancies unre-

63 If a second decimal place were included, the lower end of the range in this column would be greater than the lower end of the range in the $1.5 million column.

64 Even though prior notice must be provided in the case of a rescission, applicable law may permit the rescission to void coverage retroactively.

65 Terminations of Individual Health Insurance Policies by Insurance Companies, Hearing before the House Comm. On Energy and Commerce, Subcommittee On Oversight and Investigations,June 16, 2009 (supplemental memorandum), at: http://energycommerce.house.gov/Press_111/20090616/rescission_supplemental.pdf.

August 9, 2010 209 2010–32 I.R.B.

lated to the medical conditions for whichpatients sought medical care. Accordingto the Committee, the current regulatoryframework governing the individual insur-ance market in this area is a haphazard col-lection of inconsistent State and Federallaws. Protections for consumers and en-forcement actions by regulators vary de-pending on where individuals live. Be-cause of these varying standards, manypatients lack adequate protections againstrescission, prompting the need for and ben-efits from this rule.

When a coverage rescission occurs, anindividual’s health insurance coverage isretroactively cancelled, which means thatthe insurance company is no longer re-sponsible for medical care claims that theyhad previously accepted and paid. Rescis-sions can result in significant financialhardship for affected individuals, because,in most cases, the individuals have accu-mulated significant medical expenses.

b. Estimated Number of Affected Entities

The Departments assume that theseinterim final regulations will have theirlargest impact on the individual insurancemarket, because group health coveragerarely is rescinded.66 By creating a newFederal standard governing when policiescan be rescinded, the Departments expectthese interim final regulations to poten-tially affect the approximately 17 millionnon-elderly individual health insurancepolicy holders and their dependents in theindividual health insurance market.67 Inaddition, approximately 490 health in-surance issuers offering coverage in theindividual health insurance market whocurrently could rescind health insurancecoverage are expected to be affected.68

That said, the actual incidence of individ-uals who are subject to rescissions eachyear is likely to be small. The NAIC Reg-ulatory Framework Task Force collecteddata on 52 companies covering the period2004–2008, and found that rescissionsaveraged 1.46 per thousand policies in

force.69 This estimate implies there areapproximately 10,700 rescissions per year.

c. Benefits

There are many benefits that flow fromthese interim final regulations, which theDepartments believe justify the costs. Asnoted, Executive Order 12866 requiresconsideration of “distributive impacts”and “equity.” To the extent that rescissionsare arbitrary and revoke the insurancethat enrollees paid for and expected tocover the cost of expensive illnesses andconditions, preventing rescissions wouldprevent inequity and greatly increasehealth and economic well-being. Con-sumers would have greater confidencethat purchasing insurance would be worth-while, and policies would represent bettervalue for money. As discussed furtherin section IV.B.6.b of this preamble, it isalso well-documented that lack of insur-ance leads to lost workplace productivityand additional mortality and morbidity.Thus, these rules would contribute to re-ducing the burden from lost productivitythat arises from people being uncovered.These effects would be especially largerelative to the number of individuals af-fected given that the affected populationtends to be much sicker on average.

Specifically, this provision also couldprotect against interruptions or termina-tions in care resulting from rescissions.As a result of the statute and these interimfinal regulations, people with high-costillnesses at risk of rescission would havecontinued access to care throughout theirillness, possibly avoiding more expensiveand debilitating complications down theroad. Gaps in health insurance, even ifbrief, can have significant health and fi-nancial consequences.70 A survey fromthe Commonwealth Fund found that aboutthree of five adults with any time unin-sured said they had not received neededhealth care in the past year because ofcosts — more than two times the rate ofadults who were insured all year. Further,

44 percent of respondents who had experi-enced any coverage break during the prioryear said they had failed to go to a doctoror clinic when they had a medical prob-lem because of costs, compared with 15percent of adults who did not experiencesuch breaks.71

These interim final regulations will alsohave substantial financial benefits for in-dividuals who otherwise would have hadtheir policies rescinded. While there hasbeen minimal documentation of financiallosses associated with rescissions, reportssuggest severe financial hardships may re-sult. In one case, a woman faced more than$129,000 in medical bills and was forcedto stop chemotherapy for several monthsafter being dropped by an insurer.72 Themaintenance of coverage through illnessnot only prevents financial hardship for theparticular enrollee, but can also translateinto lower premiums for the broader in-sured population by reducing cost-shiftingfrom the costs of uncompensated care.

d. Costs and Transfers

The prohibition of rescissions except incases of fraud or intentional misrepresen-tation of material fact could lead insurersto spend more resources checking appli-cations before issuing policies than theydid before the Affordable Care Act, whichwould increase administrative costs. How-ever, these costs could be partially offsetby decreased costs associated with reducedpost-claims underwriting under the interimfinal rule. Due to lack of data on theadministrative costs of underwriting andpost-claims underwriting, as well as lackof data on the full prevalence of rescis-sions, it is difficult for the Departments toquantify these costs. The new requirementfor an advance notice prior to rescission ofa policy imposes an hour burden of 350hours and a cost burden of $29,000. Thesecosts are discussed in more detail in the Pa-perwork Reduction Act section later in thispreamble.

66 This statement is based on the Departments’ conversations with industry experts.

67 2009 Current Population Survey.

68 Estimates are from 2007 NAIC financial statements data and the California Department of Managed Healthcare (http://wpso.dmhc.ca.gov/hpsearch/viewall.aspx).

69 NAIC Rescission Data Call, December 17, 2009, p.1.

70 This point is discussed further in the section IV.B.6.b. later in this preamble.

71 Collins et al. “Gaps in Health Insurance: An All American Problem” Commonwealth Fund (2006), available http://www.commonwealthfund.org/usr_doc/Collins_gapshltins_920.pdf

72 Girion, Lisa “Health Net Ordered to Pay $9 million after Canceling Cancer Patient’s Policy,” Los Angeles Times (2008), available at: http://www.latimes.com/business/la-fi-in-sure23feb23,1,5039339.story.

2010–32 I.R.B. 210 August 9, 2010

To the extent that continuing coveragefor these generally high-cost populationsleads to additional demand for and uti-lization of health care services, there willbe additional costs generated in the healthcare system. However, given the relativelylow rate of rescissions (approximately 0.15percent of individual policies in force) andthe relatively sick nature of people whohave policies rescinded (who would havedifficulty going without treatment), theDepartments estimate that these additionalcosts would be small.

Under this provision of these interimfinal regulations, a transfer likely willoccur within the individual health insur-ance market from policyholders whosepolicies would not have been rescindedbefore the Affordable Care Act to someof those whose policies would have beenrescinded before the Affordable Care Act,depending on the market and the ruleswhich apply to it. This transfer couldresult from higher overall premiums insur-ers will charge to recoup their increasedcosts to cover the health care costs of verysick individuals whose policies previouslycould be rescinded (the precise changein premiums depends on the competitiveconditions in specific insurance markets).However, rescissions are extremely rarein group markets where such costs wouldbe most likely to be transferred throughpremium increases. As described earlier,they are also rare in the individual market,affecting 0.15 percent of policies. In thismarket, the potential costs would likelybe born by the individuals themselves un-less they live in a State with regulationslimiting rate increases based on health, asdiscussed further below.

While the Departments are unable toestimate the impact of prohibiting rescis-sions except in cases of fraud or intentionalmisrepresentation with certainty, they ex-pect it to be small. Even the high rates ofrescission acknowledged by some smallerinsurers would still be expected to translateinto only a small average impact across theindividual health insurance market. Andsince this small impact across the marketwould be primarily attributable to insurerspaying benefits to persons with substantialmedical expenditures, the transfer wouldbe useful.

The Departments assume for their anal-ysis that the individuals covered by therescinded policies are much sicker thanaverage. Specifically, these individualsare assumed to have total spending in thetop 10 percent of spending, which rep-resents about 70 percent of total spend-ing for the population as a whole, as es-timated from the 2007 MEPS-HC personlevel medical expenditure distributions. Ifthe overall NAIC rescission rate of 0.15percent comes from this subset randomly,then they would account for one percentof claims. Depending on the percentage ofrescissions that no longer occur as a resultof these interim final regulations, and otherchanges to the insurance market as detailedbelow, these claims would now have to becovered, representing a transfer of costsfrom the affected entities to the larger in-sured population.

Substantial uncertainty exists aroundthe estimated transfer discussed above.First, since post-claims underwriting islimited by these interim final regulations,plans may expand their pre-claims under-writing practices, potentially leading toincreased denials, preexisting conditionriders, or rate-ups.73 This in turn woulddecrease the number of rescissions, butwithout expanding coverage or increasingclaims paid. Second, there is uncertaintyconcerning what proportion of the rescis-sions would be considered to result fromfraud or intentional misrepresentation ofmaterial fact, and also uncertainty regard-ing the interaction of this provision withother provisions, such as the eliminationof lifetime limits discussed in the impactanalysis for PHS Act section 2711, orthe prohibition of preexisting conditionexclusions for children — since new chil-dren will now be able to enroll in policieswhich also cannot be rescinded. As a re-sult of this uncertainty, the Departmentsare unable to precisely estimate an over-all or average premium impact from thisprovision, but given the relatively lowprevalence of rescissions in the currentmarket, the impact is estimated to be atmost a few tenths of a percent.

5. PHS Act Section 2719A, PatientProtections (26 CFR 54.9815–2719AT, 29CFR 2590.715–2719A, 45 CFR 147.138)

As discussed earlier in this preamble,Section 2719A of the PHS Act and theseinterim final regulations impose, with re-spect to a group health plan, or group orindividual health insurance coverage, a setof three requirements relating to the choiceof a health care professional and require-ments relating to benefits for emergencyservices. The three requirements relat-ing to the choice of health care profes-sional apply only with respect to a plan orhealth insurance coverage with a networkof providers. Thus, a plan or issuer thathas not negotiated with any provider forthe delivery of health care but merely reim-burses individuals covered under the planfor their receipt of health care is not subjectto the requirements relating to the choiceof a health care professional. However,all plans or health insurance coverage aresubject to requirements relating to benefitsfor emergency services. The cost, benefits,and transfers associated with each of theserequirements are discussed separately be-low.

PHS Act section 2719A and these in-terim final regulations are generally effec-tive for plan years (or, in the case of theindividual market, policy years) beginningon or after September 23, 2010.

a. Choice of Health Care Professional

i. Designation of Primary Care Provider

Summary. The statute and these in-terim final regulations provide that if agroup health plan, or a health insuranceissuer offering group or individual healthinsurance coverage, requires or providesfor designation by a participant, benefi-ciary, or enrollee of a participating pri-mary care provider, then the plan or issuermust permit each participant, beneficiary,and enrollee to designate any participatingprimary care provider who is available toaccept the participant, beneficiary, or en-rollee.

Estimated Number of Affected Entities.Choice or assignment to a primary careprovider is typically required by healthmaintenance organizations (HMOs) andPoint of Service plans (POS). Recent

73 These interim final regulations eliminate preexisting condition riders for children, but such riders will continue to be allowed for adults until January 1, 2014.

August 9, 2010 211 2010–32 I.R.B.

data suggest that there are 577 HMOs inthe United States,74 accounting for morethan 32.3 million enrollees,75 of whomabout 40 percent have their primary careprovider serve as a gatekeeper.76 Similardata does not exist for POS plans, althoughas a reference, about 10 percent of workerswith ESI are enrolled in POS plans.77

PHS Act section 2719A and these in-terim final regulations only apply to non-grandfathered health plans. However, dueto the lack of data on HMO and POS en-rollees by type of market, and the inabil-ity to predict new plans that may enterthose markets, the Departments are unableto predict the number enrollees and plansthat would be affected by these provisions.Moreover, there are no data on the num-ber of plans that auto-assign patients to pri-mary care physicians and do not alreadyallow patients to make the final providerchoice, as this would be the populationto benefit maximally from the interim fi-nal rule. From conversations with industryexperts the Departments expect, however,that this number would be very small, andtherefore the benefits and costs of this pro-vision would be small as well, as discussedfurther below.

Benefits. Provider choice allows pa-tients to take into account factors they mayvalue when choosing their provider, suchas provider credentials, office hours andlocation, advice from professionals, andinformation on the experience of other pa-tients.78 Freedom of choice is an importantvalue, particularly in this domain, even ifit cannot easily be turned into monetaryequivalents. Provider choice is a strong

predictor of patient trust in their provider,which could lead to decreased likelihoodof malpractice claims.79 As well, studiesshow that better patient-provider trust re-sults in improved medication adherence.80

Research literature suggests that better pa-tient-provider relationships also increasehealth promotion and therapeutic effects.81

Moreover, one study found that adults whoidentified having a primary care provider,rather than a specialist, as their regularsource of care had 33 percent lower an-nual adjusted health care expenditures andlower adjusted mortality.82

Studies have also found that patientswho have long-term relationships withtheir health care providers tend to expe-rience better quality health care. Adultsthat have a usual provider and place aremore likely to receive preventive care andscreening services than those who do not.For example, adults were 2.8 times morelikely to receive a flu shot and womenbetween the ages of 20–64 were 3.9 timesmore likely to receive a clinical breastexam if they had a usual provider andplace of service.83

Regular contact with primary careproviders also can decrease emergency de-partment visits and hospitalizations. Onestudy found that adolescents with the sameregular source of care were more likely toreceive preventive care and less likely toseek care in an emergency room.84 An-other study found that patients withouta relationship with a regular physicianwere 60 percent more likely to go to theemergency department with a non-urgentcondition.85 Patients that have a usual

source of care tend to also have fewerhospital admissions.86

Costs and Transfers. Although difficultto estimate given the data limitations de-scribed above, the costs for this provisionare likely to be minimal. As previouslynoted, when enrollees like their providers,they are more likely to maintain appoint-ments and comply with treatment, both ofwhich could induce demand for services,but these services could then in turn re-duce costs associated with treating moreadvanced conditions. However, the num-ber of affected entities from this provisionis very small, leading to small additionalcosts.

There will likely be negligible transfersdue to this provision given no changes incoverage or cost-sharing.

ii. Designation of Pediatrician as PrimaryCare Provider

Summary. If a plan or issuer requiresor provides for the designation of a partici-pating primary care provider for a child bya participant, beneficiary, or enrollee, theplan or issuer must permit the designationof a physician (allopathic or osteopathic)who specializes in pediatrics as the child’sprimary care provider if the provider par-ticipates in the network of the plan or is-suer and is available to accept the child.The general terms of the plan or health in-surance coverage regarding pediatric careotherwise are unaffected, including anyexclusions with respect to coverage of pe-diatric care.

Estimated Number of Affected Entities.Due to lack of data on enrollment in man-

74 Kaiser Family Foundation, “Number of HMOs, July 2008,” available at http://www.statehealthfacts.kff.org/comparetable.jsp?ind=347&cat=7⊂=85&yr=71&typ=1&sort=a Note that thenumber of HMOs also includes Medicaid and Medicare only HMOs that are not covered by these interim final regulations.

75 Departments’ estimates are based on the 2009 CPS and the 2008 Medical Expenditure Panel Survey.

76 See Fang, Hai, et al., “Has the use of physician gatekeepers declined among HMOs? Evidence from the United States.” International Journal of Health Care Finance and Economics9:183–19 5 (2009).

77 See Kaiser Employer Health Benefits Annual Survey, 2009, Exhibit 5.2 (“Distribution of Health Plan Enrollment for Covered Workers, by Firm Size, Region, and Industry, 2009”), availableat http://ehbs.kff.org/pdf/2009/7936.pdf.

78 See Fanjiang, Gary, et al., “Providing Patients Web-based Data to Inform Physician Choice: If You Build It, Will They Come?.” Journal of General Internal Medicine 22.10 (2007).

79 Balkrishnan, Rajesh, and Chu-Weininger, Ming Ying L., “Consumer Satisfaction with Primary Care Provider Choice and Associated Trust.” BMC Health Services Research 22.10 (2007).

80 Piette, John, et al., “The Role of Patient-Physician Trust in Moderating Medication Nonadherence Due to Cost Pressures.” Archives of Internal Medicine 165, August (2005) and Roberts,Kathleen J., “Physician-Patient Relationships, Patient Satisfaction, and Antiretroviral Medication Adherence Among HIV-Infected Adults Attending a Public Health Clinic.” AIDS PatientCare and STDs 16.1 (2002).

81 Ibid. See also DiMatteo, Robin M., et al., “Physicians’ Characteristics Influence Patients’ Adherence to Medical Treatment: Results From the Medical Outcomes Study.” Health Psychology12.2 (1993), and Bazemore, Andrew, and Phillips, Robert, “Primary Care and Why it Matters for U.S. Health Reform.” Health Affairs 29.5 (2010).

82 Franks, P., and K. Fiscella, “Primary Care Physicians and Specialists as Personal Physicians. Health Care Expenditures and Mortality Experience.” Journal of Family Practice 47 (1998).

83 Blewett, Lynn, et al., “When a Usual Source of Care and Usual Provider Matter: Adult Prevention and Screening Services.” Journal of General Internal Medicine 23.9 (2008).

84 Macinko, James, et al., “Contribution of Primary Care to Health Systems and Health.” Milbank Quarterly 83.3 (2005).

85 Burstin, “Nonurgent Emergency Department Visits: The Effect of Having a Regular Doctor.”

86 Bazemore, “Primary Care and Why it Matters for U.S. Health Reform.”

2010–32 I.R.B. 212 August 9, 2010

aged care organizations by age, as well aslack of data on HMO and POS enrolleesby type of market, and the inability to pre-dict new plans that may enter those mar-kets, the Departments are unable to predictthe number enrollees and plans that wouldbe affected by these provisions. As a ref-erence, there are an estimated 11.8 millionindividuals under age 19 with ESI who arein an HMO plan.87

Benefits. By expanding participatingprimary care provider options for childrento include physicians who specialize inpediatrics, this provision could benefit in-dividuals who are making decisions aboutcare for their children. As discussed in theprevious section, research indicates thatwhen doctors and patients have a strong,trusting relationship, patients often haveimproved medication adherence, healthpromotion, and other beneficial healthoutcomes. Considering this research, thisprovision could lead to better, sustainedpatient-provider relationships and healthoutcomes.

In addition, allowing enrollees to se-lect a physician specializing in pediatricsas their children’s primary care providercould remove any referral-related delaysfor individuals in plans that require re-ferrals to pediatricians and do not allowphysicians specializing in pediatrics toserve as primary care providers.88 TheAmerican Academy of Pediatrics (AAP)strongly supports the idea that the choiceof primary care clinicians for childrenshould include pediatricians.89 Relatedly,at least two States have laws providingchildren immediate access to pediatri-cians.90

Regular pediatric care, including careby physicians specializing in pediatrics,can improve child health outcomes andavert preventable health care costs. Forexample, one study of Medicaid enrolledchildren found that when children wereup to date for age on their schedule of

well-child visits, they were less likely tohave an avoidable hospitalization at a latertime.91 Likewise, if providers are able toproactively identify and monitor obesity inchild patients, they may reduce the inci-dence of adult health conditions that canbe expensive to treat; various studies havedocumented links between childhood obe-sity and diabetes, hypertension, and adultobesity.92 One recent study modeled thata one-percentage-point reduction in obe-sity among twelve-year-olds would save$260.4 million in total medical expendi-tures.93

Giving enrollees in covered plans (thatrequire the designation of a primary careprovider) the ability to select a participat-ing physician who specializes in pediatricsas the child’s primary care provider bene-fits individuals who would not otherwisehave been given these choices. Again, theextent of these benefits will depend on thenumber of enrollees with children that arecovered by plans that do not allow the se-lection of a pediatrician as the primary careprovider, which industry experts suggestwould be small.

Costs and Transfers. Although difficultto estimate given the data limitations de-scribed above, the costs for this provisionare likely to be small. Giving enrollees agreater choice of primary care providersby allowing them to select participatingphysicians who specialize in pediatrics astheir child’s primary care provider couldlead to health care costs by increasing thetake-up of primary care services, assumingthey would not have utilized appropriateservices as frequently if they had not beengiven this choice.

Any transfers associated with these in-terim final regulations are expected to beminimal. To the extent that pediatriciansacting as primary care providers wouldreceive higher payment rates for servicesprovided than would other primary carephysicians, there may be some transfer of

wealth from policy holders of non grandfa-thered group plans to those enrollees thatchoose the former providers. However,the Departments do not believe that thisis likely given the similarity in income forprimary care providers that care for chil-dren.94

iii. Patient Access to Obstetrical andGynecological Care

Summary. The statute and these interimfinal regulations also provide rules for agroup health plan, or a health insurance is-suer offering group or individual health in-surance coverage, that provides coveragefor obstetrical or gynecological care andrequires the designation of an in-networkprimary care provider. Specifically, theplan or issuer may not require authoriza-tion or referral by the plan, issuer, or anyperson (including a primary care provider)for a female participant, beneficiary, or en-rollee who seeks obstetrical or gynecolog-ical care provided by an in-network healthcare professional who specializes in ob-stetrics or gynecology. These plans and is-suers must also treat the provision of ob-stetrical and gynecological care, and theordering of related obstetrical and gyneco-logical items and services, by the profes-sional who specializes in obstetrics or gy-necology as the authorization of the pri-mary care provider. For this purpose, ahealth care professional specializing in ob-stetrics or gynecology is any individualwho is authorized under applicable Statelaw to provide obstetrical or gynecologicalcare, and is not limited to a physician.

Estimated Number of Affected Entities.Requiring referrals or authorizations tohealth care professional who specializesin obstetrics or gynecology (OB/GYNs)is typically required by health mainte-nance organizations (HMOs) and Pointof Service plans (POS). As a reference,according to the 2004 Kaiser Women’s

87 U.S. Department of Labor/EBSA calculations using the March 2009 Current Population Survey Annual Social and Economic Supplement and the 2008 Medical Expenditure Panel Survey.

88 There is no data available to estimate the number of plans that fall into this category.

89 See AAP Policy, “Guiding Principles for Managed Care Arrangements for the Health Care of Newborns, Infants, Children, Adolescents, and Young Adults,” available at http://aappol-icy.aappublications.org/cgi/reprint/pediatrics;105/1/132.pdf.

90 For example, Michigan and North Carolina mandate direct access to pediatricians as a part of patients’ rights requirements. See Kaiser Family Foundation, “Patients’ Rights: Direct Accessto Providers, 2008,” available at http://www.statehealthfacts.kff.org/comparetable.jsp?ind=364&cat=7.

91 Bye, “Effectiveness of Compliance with Pediatric Preventative Care Guidelines Among Medicaid Beneficiaries.”

92 “Working Group Report on Future Research Directions in Childhood Obesity Prevention and Treatment.” National Heart Lung and Blood Institute, National Institute of Health, U.S.Department of Health and Human Services (2007), available at http://www.nhlbi.nih.gov/meetings/workshops/child-obesity/index.htm.

93 Ibid.

94 http://www.merritthawkins.com/pdf/2008-mha-survey-primary-care.pdf

August 9, 2010 213 2010–32 I.R.B.

Health Survey, 46 percent of women re-ported seeing an OB/GYN in the pastyear and 47 percent of women of repro-ductive age counted OB/GYNs amongtheir routine health care providers.95 In2006, there were 69.4 million visits to anOB/GYN according to the National Am-bulatory Medical Care Survey conductedby the Centers for Disease Control andPrevention.96 Although more recent datais not available, a 1999 survey showedthat 60 percent of all OB/GYNs in plansrequiring the designation of a primary careprovider reported that their gynecologicpatients were either limited or barred fromseeing their OB/GYNs without first get-ting permission from another physician,and 28 percent reported that their preg-nant patients needed permission beforeseeing an OB/GYN.97 Nearly 75 percentof surveyed OB/GYNs reported that theirpatients needed to return to their primarycare physicians for permission before theycould provide necessary follow-up care.

Notably, beginning in 1994, due toboth consumer demand and efforts to reg-ulate managed care, many States passeddirect access laws for OB/GYNs, allow-ing patients to seek care at an OB/GYNoffice without a referral from a primarycare physician. As of 2008, 36 Statesplus the District of Columbia have lawsthat provide direct access to OB/GYNs.However, 14 States have not mandateddirect access: Alaska, Arizona, Hawaii,Indiana, Iowa, Nebraska, New Jersey,New Mexico, North Dakota, Oklahoma,South Dakota, Tennessee, Vermont, andWyoming.98 This provision gives femalesdirect access to OB/GYNs in coveredplans in these States, who may otherwisenot have had this direct access. As well,because State law is preempted by ERISA,women in self-insured plans did not pre-viously receive this legal protection. Inaddition, these women will not need toget an authorization from their primarycare provider for the care and ordering of

obstetrical and gynecological items andservices by their participating OB/GYN.

These interim final regulations apply tonon-grandfathered health plans. However,due to the lack of data on HMO and POSenrollees by type of market, and the in-ability to predict new plans that may enterthose markets, the Departments are unableto predict the number enrollees and plansthat would be affected by this provision.As a reference, there are an estimated 14.8million females between ages 21 to 65 withESI who are in HMO plans.99

Benefits. This provision gives womenin covered plans easier access to theirOB/GYNs, where they can receive pre-ventive services such as pelvic and breastexams, without the added time, expense,and inconvenience of needing permissionfirst from their primary care providers.Moreover, this provision may also savetime and reduce administrative burdensince participating OB/GYNs do not needto get an authorization from a primary careprovider to provide care and order obstet-rical and gynecological items and services.To the extent that primary care providersspend less time seeing women who need areferral to an OB/GYN, access to primarycare providers will be improved. To theextent that the items and services are crit-ical and would have been delayed whilegetting an authorization from the primarycare provider, this provision could im-prove the treatment and health outcomesof female patients.

Access to such care can have substan-tial benefits in women’s lives. About42,000 American women die each yearfrom breast cancer, and it is estimatedthat about 4,000 additional lives wouldbe saved each year just by increasing thepercentage of women who receive rec-ommended breast cancer screenings to90 percent.100 As well, regular screeningwith pap smears is the major reason for the30-year decline in cervical cancer mortal-ity.101

To the extent that direct access toOB/GYN services results in increased uti-lization of recommended and appropriatecare, this provision may result in benefitsassociated with improved health statusfor the women affected. Potential costsavings also exist since women in affectedplans will not need to visit their primarycare provider in order to get a referral forroutine obstetrical and gynecological care,items, and services, thereby reducing un-necessary time and administrative burden,and decreasing the number of office visitspaid by her and by her health plan.

Costs and Transfers. One potentialarea of additional costs associated withthis provision would be induced demand,as women who no longer need a referralto see an OB/GYN may be more likely toreceive preventive screenings and othercare. Data is limited to provide an estimateof this induced demand, but the Depart-ments believe it to be small.

To the extent these interim final regula-tions result in a shift in services to highercost providers, it would result in a transferof wealth from enrollees in non grandfa-thered group plans to those individuals us-ing the services affected. However, suchan effect is expected to be small.

b. Coverage of Emergency Services

i. Summary

PHS Act section 2719A and these in-terim final regulations provide that a grouphealth plan and a health insurance issuercovering emergency services must do sowithout the individual or the health careprovider having to obtain prior authoriza-tion (even if the emergency services areprovided out of network). For a plan orhealth insurance coverage with a networkof providers that provide benefits for emer-gency services, the plan or issuer may notimpose any administrative requirement orlimitation on benefits for out-of-networkemergency services that is more restrictive

95 See Salganicoff, Alina, et al., “Women and Health Care: A National Profile.” Kaiser Family Foundation (2005).

96 See Cherry, Donald K., et al., “National Ambulatory Medical Care Survey: 2006 Summary.” National Health Statistics Reports (August 2008), Centers for Disease Control and Prevention,available at http://www.cdc.gov/nchs/data/nhsr/nhsr003.pdf.

97 See American College of Obstetricians and Gynecologists/Princeton Survey Research Associates, 1999.

98 Kaiser Family Foundation, “Mandates Direct Access to OB/GYNs?,” available at http://www.statehealthfacts.kff.org/comparemaptable.jsp?ind=493&cat=10⊂=114

99 U.S. Department of Labor/EBSA calculations using the March 2009 Current Population Survey Annual Social and Economic Supplement and the 2008 Medical Expenditure Panel Survey.

100 See National Commission on Prevention Priorities, “Preventive Care: A National Profile on Use, Disparities, and Health Benefits.” Partnership for Prevention, August 2007.

101 See “Preventive Care: A National Profile on Use, Disparities, and Health Benefits” at 26.

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than the requirements or limitations thatapply to in-network emergency services.

Finally, these interim final regulationsprovide that cost-sharing requirementsexpressed as a copayment amount or coin-surance rate imposed for out-of-networkemergency services cannot exceed thecost-sharing requirements that would beimposed if the services were providedin-network. These interim final regula-tions also provide that a plan or healthinsurance issuer pay for out-of-networkemergency services (prior to imposingin-network cost-sharing), the greatest of:(1) the median in-network rate; (2) theusual customary and reasonable rate (orsimilar rate determined using the plans orissuer’s general formula for determiningpayments for out-of-network services); or(3) the Medicare rate.

In applying the rules relating to emer-gency services, the statute and these in-terim final regulations define the termsemergency medical condition, emergencyservices, and stabilize. These terms aredefined generally in accordance with theirmeaning under Emergency Medical Treat-ment and Labor Act (EMTALA), section1867 of the Social Security Act. Thereare, however, some variances from theEMTALA definitions.

The statute and these interim final reg-ulations relating to emergency services donot apply to grandfathered health plans;however, other Federal or State laws re-lated to emergency services may apply re-gardless of grandfather status.

ii. Estimated Number of Affected Entities

These interim final regulations willdirectly affect out-of-pocket expendituresfor individuals enrolled in non-grand-fathered private health insurance plans(group or individual) whose copaymentor coinsurance arrangements for emer-gency services differ between in networkand out of network providers. These in-terim final regulations may also requiresome health plans to make higher pay-ments to out of network providers thanare made under their current contractualarrangements. There are no available data,however, that allow for national estimates

of the number of plans (or number ofenrollees in plans) that have different pay-ment arrangements for out of network thanin-network providers, or differences be-tween in- and out-of-network copaymentand coinsurance arrangements, in orderto more precisely estimate the number ofenrollees affected.

The Departments conducted an infor-mal survey of benefits plans for large in-surers in order to assess the landscape withregard to copayment and coinsurance foremergency department services, but foundthat a variety of arrangements currently ex-ist in the marketplace. Many of the largeinsurers maintained identical copaymentand/or coinsurance arrangements betweenin and out of network providers. Othershave differing arrangements based on co-payments, coinsurance rates, or a combi-nation of the two. While useful for exam-ining the types of arrangement that exist inthe market place, these data do not containenrollment information and therefore can-not be used to make impact estimates.

Although these data do not permitquantitative estimates of plans or personsaffected, other data can be illustrative ofoverall magnitudes for emergency ser-vices. For a point of reference, in 2005,115.3 million visits were made to hos-pital emergency departments. Of these,39.9 percent were made by individualswith private insurance. This representsapproximately 46.0 million visits, at ap-proximately 1.7 visits per insured personthat utilized emergency department ser-vices, or 27.4 million people.102 Whiledata on rates of out-of-network emer-gency room encounters is sparse, the BlueCross Blue Shield (BCBS) Associationreports that nationally about 8 percentof its emergency room visits are soughtout-of-network.103 Given the breadth ofthe Blue Cross networks, it is reasonableto assume that 8 percent to 16 percent ofemergency room visits are out-of-networkeach year, since a plan with a smallerprovider network will be more likely tohave out-of-network use by enrollees.If each individual was equally likely toutilize out of network services, a max-imum of 2.1 to 4.2 million individualswould be potentially affected by differing

out-of-pocket requirements. Based on theinformal survey, some proportion, possi-bly a large portion, of these individuals arecovered by plans that have identical in andout-of-network requirements. Therefore,the number of individuals affected by thisregulatory provision would be smaller.

iii. Benefits

Insurers maintain differing copaymentand coinsurance arrangements betweenin- and out-of-network providers as acost containment mechanism. Imple-menting reduced cost sharing for the useof in-network providers provides finan-cial incentive for enrollees to use theseproviders, with whom plans often havelower-cost contractual arrangements. Inemergency situations, however, the choiceof an in-network provider may not beavailable — for example, when a patientis some distance from his or her localprovider networks or when an ambulancetransports a patient to the nearest hospitalwhich may not have contractual arrange-ments with the person’s insurer. In thesesituations, the differing copayment orcoinsurance arrangements could place asubstantial financial burden on the patient.These interim final regulations eliminatethis disparity in out-of-pocket burden forenrollees, leading to potentially substan-tial financial benefit.

These interim final regulations also pro-vide for potentially higher payments toout-of-network providers, if usual custom-ary rates or Medicare rates are higher thanmedian in-network rates. This could havea direct economic benefit to providers andpatients, as the remaining differential be-tween provider charge and plan paymentwill be smaller, leading to a smaller bal-ance-bill for patients.

To the extent that expectations aboutsuch financial burden with out-of-networkemergency department usage would causeindividuals to delay or avoid seeking nec-essary medical treatment when they can-not access a network provider, this provi-sion may result in more timely use of nec-essary medical care. It may therefore re-sult in health and economic benefits as-sociated with improved health status; and

102 Vital and Health Statistics, Advanced Data No. 386, June 29, 2007

103 BCBS, however, reports its rates vary considerably by State, with 11 States having double digit rates ranging from 10 percent to a high of 41 percent. Moreover, because BCBS hasreciprocity between many State Blue Cross Blue Shield plans, its statistics for out of network emergency services utilization should be considered a conservative estimate of the proportion ofER services that insured individuals receive out-of-network.

August 9, 2010 215 2010–32 I.R.B.

fewer complications and hospitalizationsdue to delayed and possibly reduced mor-tality. The Departments expect that this ef-fect would be small, however, because in-sured individuals are less likely to delaycare in emergency situations.

iv. Costs and Transfers

The economic costs associated withthe emergency department provisionsare likely to be minimal. These costswould occur to the extent that any lowercost-sharing would induce new utilizationof out of network emergency services.Given the nature of these services as emer-gency services, this effect is likely to besmall for insured individuals. In addition,the demand for emergency services in trulyemergency situations can result in healthcare cost savings and population healthimprovements due to the timely treatmentof conditions that could otherwise rapidlyworsen.

The emergency services provisions arelikely to result in some transfers fromthe general membership of non-grandfa-thered group policies that have differingcopayment and coinsurance arrange-ments to those policy holders that use theout-of-network emergency services. Thetransfers could occur through two avenues.First, if there is reduced cost sharing forout-of-network emergency services, thenplans must pay more when enrollees usethose services. Out-of-pocket costs for theenrollees using out-of-network serviceswill decrease, while plan costs will getspread across the insured market. Second,if the provision results in plans payinghigher rates than they currently do forout-of-network providers, then those costswill get spread across the insured mar-ket while the individual enrollees usingout-of-network care would potentially geta smaller balance bill. For all of the dataissues described above, the precise amountof the transfer which would occur throughan increase in premiums for these groupplans is impossible to quantify with anyprecision, but it is likely to be less thanone-tenth of one percent of premium, andonly applies to non-grandfathered healthplans.

c. Application to Grandfathered HealthPlans

As discussed earlier in this preamble,the statute and these interim final regula-tions relating to certain patient protectionsdo not apply to grandfathered health plans.However, other Federal or State laws re-lated to these patient protections may ap-ply regardless of grandfather status.

d. Patient Protection DisclosureRequirement

When applicable, it is important that in-dividuals enrolled in a plan or health insur-ance coverage know of their rights to (1)choose a primary care provider or a pedia-trician when a plan or issuer requires par-ticipants or subscribers to designate a pri-mary care physician; or (2) obtain obstetri-cal or gynecological care without prior au-thorization. Accordingly, these interim fi-nal regulations require such plans and is-suers to provide a notice to participants(in the individual market, primary sub-scribers) of these rights when applicable.Model language is provided in these in-terim final regulations. The notice must beprovided whenever the plan or issuer pro-vides a participant with a summary plandescription or other similar description ofbenefits under the plan or health insurancecoverage, or in the individual market, pro-vides a primary subscriber with a policy,certificate, or contract of health insurance.

The Departments estimate that the costto plans and insurance issuers to prepareand distribute the disclosure is $6.1 mil-lion in 2011. For a discussion of the Pa-tient Protection Disclosure Requirement,see the Paperwork Reduction Act sectionlater in this preamble.

6. Combined Effects of the InsuranceMarket Reforms

a. Summary

The Affordable Care Act includesa number of provisions that are ef-fective for plan years (or in the caseof individual health insurance cover-age, for policy years) beginning onor after September 23, 2010. Theseinterim final regulations include fourof those provisions whose purpose is

to improve consumer protections. Twoadditional provisions — the extension ofdependent coverage to adult children andthe rules defining a grandfathered healthplan — were the subject of previouslypublished interim final regulations. Theimplementation of other provisions —including those relating to coverage ofpreventive services (PHS Act section2713) and appeals (PHS Act section 2719)— will be addressed in future regulations.

This set of regulations is distinct fromthe others in that its primary beneficiariesare people who generally already havesome type of illness, injury or disability.The provision prohibiting preexisting con-dition exclusions for children could help31,000 to 72,000 uninsured children gaininsurance, and up to 90,000 children whohave insurance with benefit carve-outsor preexisting condition exclusion peri-ods. The policy on restricted annual limitscould help up to 2,700 to 3,500 peoplewho hit these limits each year; the prohibi-tion on lifetime limits could help 18,650 to20,400 each year who would be expectedto have costs that exceed a limit. Basedon an NAIC survey, the Departments es-timate there are approximately 10,700rescissions of policies in the individualmarket each year, and these interim finalregulations are expected to reduce thisnumber substantially.104 And one of thepatient protections, access to emergencycare from out-of-network providers, couldlimit the out-of-pocket spending for up to2.1 to 4.2 million individuals with someacute health care need. While the esti-mates on the number of people affectedby these policies may be relatively small,a much larger number of Americans areat risk of hitting one of these barriers toinsurance coverage and will gain indirectbenefits of the legislation. This sectiondescribes the potential combined benefits,costs, and transfers of these provisions.

b. Benefits

These interim final regulations couldgenerate significant economic and socialwelfare benefits to consumers. This wouldtake the form of reductions in mortalityand morbidity, a reduction in medical ex-penditure risk, an increase in worker pro-ductivity, and a decrease the cross-subsidy

104 NAIC Rescission Data Call, December 17, 2009, p.1.

2010–32 I.R.B. 216 August 9, 2010

in premiums to offset uncompensated care,sometimes referred to as the “hidden tax.”Each of these effects is described below. Itshould be noted that the benefits describedare substantially greater in each of these ar-eas once all the protections of the full Af-fordable Care Act are effective.

A first type of benefit is reductions inmortality and morbidity. While the em-pirical literature leaves many questionsunresolved, a growing body of evidenceconvincingly demonstrates that health canbe improved by spending more on at-riskindividuals and by expanding health in-surance coverage. For example, Almondet al.105 find that newborns classified justbelow a medical threshold for “very lowbirthweight” have lower mortality ratesthan newborns classified as just above thethreshold, despite an association betweenlow birth weight and higher mortality ingeneral, because they tend to receive ad-ditional medical care. In a study of severeautomobile accidents, Doyle106 found thatuninsured individuals receive less careand have a substantially higher mortalityrate. Currie and Gruber107 found that in-creased eligibility for Medicaid coverageexpanded utilization of care for otherwiseuninsured children, leading to a sizeableand significant reduction in child mortal-ity. A study of Medicare by Card et al.108

found that individuals just old enough toqualify for coverage have lower mortalityrates — despite similar illness severity —than do those just too young for eligibil-ity. Finally, a report by the Institute ofMedicine (IOM)109 found mortality risksfor uninsured individuals that were 25percent higher than those of observablysimilar insured individuals. In additionto the prospect that expanded insurancecoverage will result in reductions in mor-

tality, it will almost certainly substantiallyreduce morbidity, as demonstrated in ex-tensive reviews of the literature by Hadleyand the IOM.110

These interim final regulations willexpand access to currently uninsured indi-viduals. These newly insured populationswill likely achieve both mortality andmeaningful morbidity reductions from theregulations, especially those populationswho face rescissions, restricted annual orlifetime limits, or preexisting conditionsexclusions, since they are on average inworse health and thus likely to benefiteven more from insurance coverage thanuninsured individuals in general.

Because considerable uncertainty sur-rounds any specific estimate of the effectof expanded coverage on mortality andmorbidity, this benefit is not quantifiedin this analysis.111 However, the Depart-ments conclude that reductions in mortal-ity and morbidity are likely to be a signif-icant benefit of these interim final regula-tions and will become substantially greaterin 2014 and subsequent years, when mil-lions of additional individuals will obtainhealth insurance coverage.

A second type of benefit from the cu-mulative effects of these interim finalregulations is a reduction in medical risk.A central goal of health insurance is toprotect individuals against catastrophicfinancial hardship that would come with adebilitating medical condition. By poolingexpenses across healthy and sick individ-uals, insurance can substantially improvethe economic well-being of the sick whileimposing modest costs on the healthy.This insurance is valuable, and economictheory suggests that the gains to the sickfrom a properly implemented insurancesystem far exceed the costs to healthy in-

dividuals. A recent paper shows that thebenefits from this reduction in exposure tofinancial risks would be sufficient to coveralmost two-fifths of insurance costs.112

Previous research also suggests that pro-tecting patients who have very high med-ical costs or low financial assets is likelyto have even larger benefits. Indeed, re-search indicates that approximately half ofthe more than 500,000 personal bankrupt-cies in the U.S. in 2007 were to someextent contributed to by very high medi-cal expenses.113 Exclusions from healthinsurance coverage based on preexistingconditions expose the uninsured to theaforementioned financial risks. Rescis-sions of coverage and binding annual orlifetime limits on benefits increase thechance that medical expenditures will gouncompensated, exposing individuals tothe financial risks associated with illness.Regulations that prevent these practicesthus reduce the uncertainty and hard-ship associated with these financial risks.Moreover, because they secure coveragefor individuals with high probabilitiesof incurring extensive medical expenses,regulations that guard against rescissionsand prevent insurance exclusion basedon preexisting conditions for children arelikely to have especially large economicbenefits in terms of reducing financialrisk. These interim final regulations willhelp insurance more effectively protectpatients from the financial hardship ofillness, including bankruptcy and reducedfunds for non-medical purposes.

A third type of benefit from these in-terim final regulations is improved work-place productivity. These interim finalregulations will benefit employers andworkers by increasing workplace pro-ductivity and reducing absenteeism, low

105 Almond, Douglas, Joseph J. Doyle, Jr., Amanda E. Kowalski, and Heidi Williams. “Estimating Marginal Returns to Medical Care: Evidence from At-Risk Newborns.” The QuarterlyJournal of Economics, May 2010, 125(2): 591–634. http://www.mit.edu/~jjdoyle/vlbw.pdf.

106 Doyle, Joseph J. “Health Insurance, Treatment and Outcomes: Using Auto Accidents as Health Shocks.” The Review of Economics and Statistics, May 2005. 87(2):256–270.http://www.mitpressjournals.org/doi/abs/10.1162/0034653053970348.

107 Currie, Janet and J. Gruber. “Health Insurance Eligibility, Utilization of Medical Care, and Child Health.” The Quarterly Journal of Economics, May 1996. 111(2):431–466. http://www.js-tor.org/stable/2946684?cookieSet=1.

108 Card, David, C. Dobkin, and N. Maestas. “Does Medicare Save Lives?” The Quarterly Journal of Economics, May 2009. 124(2):597–636. http://www.mitpressjour-nals.org/doi/abs/10.1162/qjec.2009.124.2.597.

109 Institute of Medicine. Care Without Coverage: Too Little, Too Late. Washington, DC: National Academy Press, 2002. http://books.nap.edu/openbook.php?record_id=10367&page=R1.

110 Institute of Medicine, op. cit. Hadley J. Sicker and Poorer: The consequences of being uninsured. Medical Care Research and Review, Vol. 60, No. 2 suppl, 3S–75S (2003)

111 Kronick, Richard. “Health insurance coverage and mortality revisited.” Health Services Research. April 2009. 44(4):1211–1231. http://www3.interscience.wiley.com/jour-nal/122342601/abstract?CRETRY=1&SRETRY=0.

112 Amy Finkelstein and Robin McKnight. What Did Medicare Do? The Initial Impact of Medicare on Mortality and Out of Pocket Medical Spending. 2008. Journal of Public Economics92: 1644–1669.

113 David Himmelstein et al, 2009.

August 9, 2010 217 2010–32 I.R.B.

productivity at work due to preventableillness, and “job-lock.” A June 2009 re-port by the Council of Economic Advisersfound that increased access to health in-surance coverage improves labor marketoutcomes by improving worker health.114

The health benefits of eliminating cov-erage rescissions and lifetime coveragelimits, restricting annual limits, and ex-panding access to primary care providersand OB/GYNs will help to reduce dis-ability, low productivity at work due topreventable illness, and absenteeism in thework place, thereby increasing workplaceproductivity and labor supply. Economictheory suggests that these benefits wouldlikely be shared by workers, employers,and consumers. In addition, these interimfinal regulations will increase labor mar-ket efficiency by reducing “job lock,” orthe reluctance to switch jobs or engage inentrepreneurship because such activitieswould result in the loss of health insuranceor limitations on coverage. For example,without the regulations, a parent with gen-erous coverage for a child with a medicalcondition might fear moving to a differentemployer or launching his or her own busi-ness given the concern that the new plancould exclude coverage for the child on thebasis of the preexisting condition. Thesereforms will increase not only productivityand innovation through entrepreneurship,but also worker wages since job lock pre-vents workers from pursuing jobs withpotentially higher salaries.115 The Councilof Economic Advisers’ June 2009 reportestimates that for workers between theages of 25 and 54, the short-term gain fromeliminating job lock would be an increasein wages of 0.3 percent.

Fourth, the Affordable Care Act’s pro-visions will reduce the transfers in thehealth care system due to cost shifting ofuncompensated care that lead to higherpremiums for private insurance. The insur-ance market regulations will help expandthe number of individuals who are insuredand reduce the likelihood that individu-

als who have insurance do not bankruptthemselves by paying medical bills. Botheffects will help reduce the amount of un-compensated care that imposes a “hiddentax” on consumers of health care since thecosts of this care are shifted to those whoare able to pay for services in the form ofhigher prices.

The Departments provide here an or-der of magnitude for the compensatory re-duction in cost-shifting of uncompensatedcare that is associated with the expansionof coverage of these interim final regu-lations. Three assumptions were made.First, the uninsured populations affectedby these interim final regulations tend tohave worse health, greater needs for healthcare, higher health care spending, and lessability to reduce utilization when they areuninsured. These interim final regulationsare therefore unlikely to induce as muchdemand for health care as would be as-sumed for the uninsured population in gen-eral when coverage expands. As such, theDepartments assume that extending insur-ance coverage to this group is unlikely tosignificantly increase the overall costs ofthe U.S. health care system. The Depart-ments therefore assume that the vast ma-jority of the premium increases estimatedin this regulatory impact analysis resultfrom transfers from out-of-pocket or un-compensated care costs to covered costs,although we emphasize that there is con-siderable uncertainty surrounding this es-timate.

Second, on the basis of the econom-ics literature on the subject,116 the Depart-ments estimate that two-thirds of the pre-viously uncovered costs would have beenuncompensated care (with the remainingone-third paid for out-of-pocket), of which75 percent would have been paid for bypublic sources, and 25 percent would havebeen paid for by private sources. If reduc-tions in privately-financed uncompensatedcare are passed on in the form of lowerprices charged by hospitals, and result inlower insurance premiums charged to con-

sumers, then the Departments estimate thatincreased insurance coverage for the vul-nerable populations affected by these in-terim final regulations could result in re-ductions in insurance premiums of up to$1 billion in 2013.117 There would also becorresponding decreases in public expen-diture as uncompensated care is reduced.

c. Costs and Transfers

Premiums reflect both effects on healthsystem costs as well as transfers in the pay-ment of costs from one payer or groupof individuals to another. For example,as consumer protections expand coverageand/or reduce cost-sharing, the costs forservices that people previously paid for outof pocket — often creating substantial bur-dens as described above — will be dis-tributed over a wider insured population.On the other hand, the cost-shifting thatpreviously occurred onto the insured popu-lation when people could no longer pay fortheir out-of-pocket care will be reduced.Expansion of coverage will also generateinduced demand for services, with corre-sponding benefits to health and productiv-ity. These costs and transfers together willgenerate a change in premiums. As dis-cussed previously, the populations affectedby these interim final regulations tend tobe in poorer health than the general unin-sured population, leading to less induceddemand when coverage expands.

The Departments estimate that the pre-mium effect of prohibiting preexistingcondition exclusions for children wouldbe on average one percent or less in theindividual market and negligible in thegroup market. The provisions relatingto annual and lifetime limits would haveapproximately one-half of one percentimpact on premiums in the group mar-ket and less than a one percent impacton premiums in the individual market.While the prohibition on lifetime limitsapplies to individual plans that are grand-fathered, the restricted annual limit policy

114 Council of Economic Advisers. “The Economic Case for Health Reform.” (2009).

115 Gruber, J. and B. Madrian. “Health Insurance, Labor Supply, and Job Mobility: A Critical Review of the Literature.” (2001).

116 Hadley, Jack, J. Holahan, T. Coughlin, and D. Miller. “Covering the Uninsured in 2008: Current Costs, Sources of Payment, and Incremental Costs.” Health Affairs, 2008, 27(5):w399¬w415.

117 The Departments come to this estimate using the following methods. First, they estimated the proportion of the population in group and individual markets using the Medical ExpenditurePanel Survey (2008). Next, information from 75 FR 34538 (June 17,2010) was used to estimate the proportion of employer and individual plans that maintain or lose grandfather status by2013. Projections of national health expenditures from the National Health Expenditure Accounts to 2013 were distributed among these groups, and premium impacts as discussed in thisregulatory impact analysis were applied. Potential premium reductions secondary to reductions in the cost-shifting of uncompensated care were then calculated using the information fromthe economic literature as presented in this discussion. The Departments note that to the extent that not all of the reductions in uncompensated care costs are passed onto insured populations,these estimates may be an overestimate.

2010–32 I.R.B. 218 August 9, 2010

and preexisting condition exclusion policyfor children do not, limiting the premiumeffect for the grandfathered market. Al-though precise estimates of the effectsof restricting rescissions and expandingpatient protections are even more difficultto make than for preexisting conditionexclusions or annual and lifetime limits,the Departments’ analysis suggest that theeffects of restricting rescissions will be nomore than a few tenths of one percent ofpremium, and that patient protections willincrease premiums by less than one tenthof one percent.

The Departments emphasize that theseindividual premium effects cannot be sim-ply added to get a combined impact onpremiums for several reasons. The firstrelates to their simultaneous implementa-tion. Quantifying the precise and uniquepremium impact of policies that take effectat the same time is difficult. Health insur-ers will consider the totality of the provi-sions in making decisions about coveragemodifications, so that disentangling the ef-fects of each provision is impossible. Thisis especially so given the complex inter-actions among the policies. For example,prohibiting rescissions and lifetime limitscould mean that someone who would havehad a policy rescinded now maintains cov-erage, and also maintains coverage beyonda previous lifetime limit. Under the currentguaranteed renewability protections in theindividual market, if a child with a preex-isting condition is now able to obtain cov-erage on a parental plan, he or she can po-tentially stay on that plan until age 26.

This difficulty is compounded by theflexibility afforded in the grandfather rule.Plans and issuers will consider the cumula-tive impact of these provisions when mak-ing decisions about whether or not to makeother changes to their coverage that couldaffect their grandfather status. It can be ex-pected that the plans that are most affectedby these provisions in terms of potentialpremium impact will likely be the most ag-gressive in taking steps to maintain grand-father status, although, as described in thatregulatory impact analysis, other factorsaffect plans’ decisions as well. It is un-likely that plans will make this calculationmultiple times for the multiple provisionsthat will take effect at the same time.

Lastly, estimating these effects cumu-latively compounds the errors of highly

uncertain estimates. As discussed, planand enrollee behaviors may change in re-sponse to the incentives created by theseinterim final regulations. Data are alsolimited in many areas, including: theprevalence of annual limits in insurancemarkets; characteristics of high-cost en-rollees; prevalence and characteristics ofrescissions; and take-up rates under dif-ferent insurance scenarios. As discussedabove, the estimates presented here, bynecessity, utilize “average” experiencesand “average” plans. Variability aroundthe average increases substantially whenmultiple provisions are considered, sincethe number of provisions that affect eachplan will differ (for example, a plan mayalready offer coverage without preexistingcondition exclusions and bar rescissions,meaning they will not be affected by thoseprovisions, but may have a lifetime limitof $1 million, meaning they will be af-fected by that provision). Different plansalso have different characteristics of en-rollees, for example in terms of age orhealth status, meaning that provisions suchas eliminating lifetime limits could affectthem differently. It is especially importantto note the variation in insurance marketreforms across States. Only a few Stateshave community rating, where costs getdistributed across the entire insured pool.Fractions of the cost will get distributedacross the pool and to individual enrolleesin other States depending on the degreeof rating restrictions, if any exist. Un-certainty compounds as ranges and errorsand assumptions are summed across pro-visions.

D. Regulatory FlexibilityAct—Department of Labor andDepartment of Health and HumanServices

The Regulatory Flexibility Act(5 U.S.C. 601 et seq.) (RFA) imposescertain requirements with respect toFederal rules that are subject to the noticeand comment requirements of section553(b) of the APA (5 U.S.C. 551 et seq.)and that are likely to have a significanteconomic impact on a substantial numberof small entities. Section 9833 of the Code,section 734 of ERISA, and section 2792of the PHS Act authorize the Secretariesto promulgate any interim final rules thatthey determine are appropriate to carry

out the provisions of chapter 100 of theCode, part 7 of subtitle B or title I ofERISA, and part A of title XXVII of thePHS Act, which include PHS Act sections2701 through 2728 and the incorporationof those sections into ERISA section 715and Code section 9815.

Moreover, under Section 553(b) of theAPA, a general notice of proposed rule-making is not required when an agency,for good cause, finds that notice and pub-lic comment thereon are impracticable, un-necessary, or contrary to the public inter-est. These interim final regulations are ex-empt from APA, because the Departmentsmade a good cause finding that a generalnotice of proposed rulemaking is not nec-essary earlier in this preamble. Therefore,the RFA does not apply and the Depart-ments are not required to either certify thatthe rule would not have a significant eco-nomic impact on a substantial number ofsmall entities or conduct a regulatory flex-ibility analysis.

Nevertheless, the Departments care-fully considered the likely impact of therule on small entities in connection withtheir assessment under Executive Order12866. Consistent with the policy ofthe RFA, the Departments encourage thepublic to submit comments that suggestalternative rules that accomplish the statedpurpose of the Affordable Care Act andminimize the impact on small entities.

E. Special Analyses-Department of theTreasury

Notwithstanding the determinations ofthe Department of Labor and Departmentof Health and Human Services, for pur-poses of the Department of the Treasury, ithas been determined that this Treasury de-cision is not a significant regulatory actionfor purposes of Executive Order 12866.Therefore, a regulatory assessment is notrequired. It has also been determined thatsection 553(b) of the APA (5 U.S.C. chap-ter 5) does not apply to these interim fi-nal regulations. For the applicability of theRFA, refer to the Special Analyses sectionin the preamble to the cross-referencingnotice of proposed rulemaking publishedelsewhere in this issue of the Bulletin. Pur-suant to section 7805(f) of the Code, thesetemporary regulations have been submit-ted to the Chief Counsel for Advocacyof the Small Business Administration for

August 9, 2010 219 2010–32 I.R.B.

comment on their impact on small busi-nesses.

F. Paperwork Reduction Act

1. Department of Labor and Departmentof Treasury

As further discussed below, these in-terim final regulations contain enrollmentopportunity, rescission notice, and patientprotection disclosure requirements thatare information collection requests (ICRs)subject to the Paperwork Reduction Actof 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)).Each of these requirements is discussed indetail below.

Currently, the Departments are solicit-ing 60 days of public comments concern-ing these disclosures. The Departmentshave submitted a copy of these interim fi-nal regulations to OMB in accordance with44 U.S.C. 3507(d) for review of the infor-mation collections. The Departments andOMB are particularly interested in com-ments that:

• Evaluate whether the collection of in-formation is necessary for the properperformance of the functions of theagency, including whether the infor-mation will have practical utility;

• Evaluate the accuracy of the agency’sestimate of the burden of the collectionof information, including the validityof the methodology and assumptionsused;

• Enhance the quality, utility, and clarityof the information to be collected; and

• Minimize the burden of the collectionof information on those who are to re-spond, including through the use ofappropriate automated, electronic, me-chanical, or other technological collec-tion techniques or other forms of in-formation technology, for example, bypermitting electronic submission of re-sponses.

Comments should be sent to the Officeof Information and Regulatory Affairs,Attention: Desk Officer for the EmployeeBenefits Security Administration eitherby fax to (202) 395–7285 or by email tooira_submission@omb.eop.gov. A copyof the ICR may be obtained by contact-ing the PRA addressee: G. ChristopherCosby, Office of Policy and Research,U.S. Department of Labor, EmployeeBenefits Security Administration, 200Constitution Avenue, NW, Room N–5718,Washington, DC 20210. Telephone:(202) 693–8410; Fax: (202) 219–4745.These are not toll-free numbers. E-mail:ebsa.opr@dol.gov. ICRs submitted toOMB also are available at reginfo.gov(http://www.reginfo.gov/public/do/ PRA-Main).

a. ICR Regarding Affordable Care ActEnrollment Opportunity Notice Relatingto Lifetime Limits

As discussed earlier in this preamblethese interim final regulations require aplan or issuer to provide an individualwhose coverage ended due to reachinga lifetime limit on the dollar value of allbenefits with an opportunity to enroll (in-cluding notice of an opportunity to enroll)that continues for at least 30 days, regard-less of whether the plan or coverage offersan open enrollment period and regardlessof when any open enrollment period mightotherwise occur. This enrollment oppor-tunity must be presented not later than thefirst day of the first plan year (or, in theindividual market, policy year) beginningon or after September 23, 2010 (which isthe applicability date of PHS Act section2711). Coverage must begin not later thanthe first day of the first plan year (in theindividual market, policy year) beginningon or after September 23, 2010.118 TheAffordable Care Act dependent coverageenrollment notice is an ICR subject to thePRA.

The Departments estimate that approx-imately 29,000 individuals qualify for thisenrollment right, which as discussed morefully below, should be considered an up-ward bound. The estimate is based onthe following methodology. The Depart-ments estimate that of the approximately139.6 million individuals in ERISA-cov-ered plans,119 63 percent of such individu-als are covered by plans with lifetime lim-its.120

While limited data are available regard-ing lifetime limits, the Departments esti-mated that the average lifetime limit acrossall markets is about $4.7 million,121 whichmeans that an individual would exceed alifetime limit by incurring at least $4.7million in medical expenses during oneyear or across many years. Although theDepartments are unable to track spendingacross time to estimate the number of indi-viduals that would reach the lifetime limit,the Departments estimate that about 0.033percent of individuals incur more than $1million in medical spending in a year.122 Ifthese individuals incurred this amount ev-ery year, 29,000 individuals would incurexpenses of at least $4.7 million limit bythe fifth year.

There are several reasons to suspectthat these assumptions lead to an over-es-timate. First, individuals would have toaverage $1 million in medical expensesper year to exceed the $4.7 million limit.Second, an individual’s lifetime limit isreset if he switches employers or, for em-ployees who work for employers withmultiple health insurance coverage op-tions, switches to a different health insur-ance plan.

The interim final regulations requireplans or insurers to notify individualswhose coverage ended due to reachinga lifetime limit on the dollar value of allbenefits that they are now eligible to reen-roll in the plan or policy. The Departmentsassume that the notice for all plans andpolicies (including self-insured plans that

118 The interim final regulations require any individual enrolling in group health plan coverage pursuant to this enrollment right must be treated as a special enrollee, as provided under HIPAAportability rules. Accordingly, the individual must be offered all the benefit packages available to similarly situated individuals who did not lose coverage due to reaching a lifetime limit orcessation of dependent status. The individual also cannot be required to pay more for coverage than similarly situated individuals who did not lose coverage due to reaching a lifetime limit

119 The Departments’ estimate is based on the 2009 March Current Population Survey (CPS).

120 The Departments’ estimate for large and small employer health plans is derived from The Kaiser Family Foundation and Health Research & Educational Trust, Employer Health Benefits:2009 Annual Survey (Sept. 2009), at http://ehbs.kff.org/pdf/2009/7936.pdf, Exhibit 13.12.

121 The Departments’ estimate is based on America’s Health Insurance Plans, Individual Health Insurance 2009: A Comprehensive Survey of Premiums, Availability and Benefits, (Oct. 2009)at http://www.ahipresearch.org/pdfs/2009IndividualMarketSurveyFinalReport.pdf, Table 17; and America’s Health Insurance Plans, Individual Health Insurance 2008: Small Group HealthInsurance, Table 22.

122 The Departments’ estimate is based on adjusted insurer claims and MEPS-HC expenditures.

2010–32 I.R.B. 220 August 9, 2010

are administered by insurers) will be pre-pared by the estimated 630 health insurersoperating in the United States.123 On aver-age, the Departments expect that one-halfhour of a legal professional’s time, val-ued as $119, will be required to draft thisnotice, resulting in an hour burden of ap-proximately 160 hours with an equivalentcost of $19,000.

The Departments assume that insurerstrack information regarding individualsthat have lost coverage due to reachinga lifetime limit (including contact infor-mation in their administrative records).Based on the foregoing, the Departmentsestimate that, on average, five minutes of aclerical staff member’s time, valued at $26per hour will be required to incorporatethe specific information into the noticeand mail the estimated 29,000 notices.This results in an estimated hour burden ofapproximately 2,400 hours with an equiv-alent cost of $63,000. Therefore, the totalhour burden of this notice requirement isapproximately 2,600 hours with an equiv-alent cost of $82,000.

The associated cost burden of the ruleresults from material and mailing coststhat are required to distribute the estimated29,000 notices. The Departments estimatethat the notice will be one-page in length,material and print costs will be five centsper page, and postage will be 44 cents pernotice resulting in a per notice cost of 49cents. This leads to a total cost burdenof approximately $14,000 to distribute thenotices.

Type of Review: New collection.Agencies: Employee Benefits Security

Administration, Department of Labor; In-ternal Revenue Service, U.S. Departmentof the Treasury,

Title: Notice of Special Enrollment Op-portunity under the Patient Protection andAffordable Care Act Relating to LifetimeLimits.

OMB Number: 1210–0143;1545–2179.

Affected Public: Business or other for-profit; not-for-profit institutions.

Total Respondents: 315.Total Responses: 29,000.

Frequency of Response: One-time.Estimated Total Annual Burden Hours:

1,300 hours (Employee Benefits SecurityAdministration); 1,300 hours (InternalRevenue Service).

Estimated Total Annual Burden Cost:$7,000 (Employee Benefits Security Ad-ministration); $7,000 (Internal RevenueService).

b. ICR Regarding Affordable Care ActNotice Relating to Rescission

As discussed earlier in this preamble,PHS Act Section 2712 and these interimfinal regulations provide rules regardingrescissions for group health plans andhealth insurance issuers that offer groupor individual health insurance coverage.A plan or issuer must not rescind cover-age under the plan, policy, certificate, orcontract of insurance except in the case offraud or intentional misrepresentation ofa material fact. These interim final reg-ulations provide that a group health planor a health insurance issuer offering grouphealth insurance coverage must provideat least 30 calendar days advance noticeto an individual before coverage may berescinded.

The Departments assume that rescis-sions are rare in the group market andthat small group health plans are af-fected by rescissions. The Departmentsare not aware of a data source on thenumber of group plans whose policy isrescinded; therefore, the Departments as-sume that 100 group health plan policiesare rescinded in a year. The Departmentsestimate that there is an average of 16 par-ticipants in small, insured plans.124 Basedon these numbers the Departments esti-mate that approximately 100 policies arerescinded during a year, which would re-sult in 1,600 notices being sent to affectedparticipants. The Departments estimatethat 15 minutes of legal profession timeat $119 per hour would be required bythe insurers of the 100 plans to preparethe notice and one minute per notice ofclerical professional time at $26 per hourwould be required to distribute the notice.

This results in an hour burden of approxi-mately 50 hours with an equivalent cost ofapproximately $3,700. The Departmentsestimate that the cost burden associatedwith distributing the notices will be ap-proximately $800.125

These paperwork burden estimates aresummarized as follows:

Type of Review: New collection.Agencies: Employee Benefits Security

Administration, Department of Labor; In-ternal Revenue Service, U.S. Departmentof the Treasury,

Title: Required Notice of Rescission ofCoverage under the Patient Protection andAffordable Care Act Disclosures.

OMB Number: 1210–0141;1545–2180.

Affected Public: Business or other for-profit; not-for-profit institutions.

Total Respondents: 100.Total Responses: 1,600.Frequency of Response: Occasionally.Estimated Total Annual Burden Hours:

25 hours (Employee Benefits Security Ad-ministration); 25 hours (Internal RevenueService).

Estimated Total Annual Burden Cost:$400 (Employee Benefits Security Ad-ministration); $400 (Internal RevenueService).

c. ICR Regarding Affordable CareAct Patient Protection DisclosureRequirement

As discussed earlier in this preamble,PHS Act section 2719A imposes, with re-spect to a group health plan, or group orindividual health insurance coverage, a setof three requirements relating to the choiceof a health care professionals When appli-cable, it is important that individuals en-rolled in a plan or health insurance cov-erage know of their rights to (1) choosea primary care provider or a pediatricianwhen a plan or issuer requires participantsor subscribers to designate a primary carephysician; or (2) obtain obstetrical or gy-necological care without prior authoriza-tion. Accordingly, these interim final reg-ulations require such plans and issuers to

123 While plans could prepare their own notice, the Departments assume that the notices will be prepared by service providers. The Departments have previously estimated that there are630 health insurers (460 providing coverage in the group market, and 490 providing coverage in the individual market.). These estimates are from NAIC 2007 financial statements dataand the California Department of Managed Healthcare (2009), at http://wpso.dmhc.ca.gov/hpsearch/viewall.aspx. Because the hour and cost burden is shared between the Departments ofLabor/Treasury and the Department of Health and Human Services, the burden to prepare the notices is calculated using half the number of insurers (315).

124 U.S. Department of Labor, EBSA calculations using the March 2008 Current Population Survey Annual Social and Economic Supplement and the 2008 Medical Expenditure Panel Survey.

125 This estimate is based on an average document size of one page, $.05 cents per page material and printing costs, and $.44 cent postage costs.

August 9, 2010 221 2010–32 I.R.B.

provide a notice to participants (in the indi-vidual market, primary subscriber) of theserights when applicable. Model language isprovided in these interim final regulations.The notice must be provided whenever theplan or issuer provides a participant witha summary plan description or other sim-ilar description of benefits under the planor health insurance coverage, or in the in-dividual market, provides a primary sub-scriber with a policy, certificate, or con-tract of health insurance. The AffordableCare Act patient protection disclosure re-quirement is an ICR subject to the PRA.

In order to satisfy these interim finalregulations’ patient protection disclosurerequirement, the Departments estimatethat 339,000 ERISA-covered plans willneed to notify an estimated 8.0 million pol-icy holders of their plans’ policy in regardsto designating a primary care physicianand for obstetrical or gynecological vis-its.126 The following estimates are basedon the assumption that 22 percent of grouphealth plans will not have grandfatheredhealth plan status in 2011. Because theinterim final regulations provide modellanguage for this purpose, the Depart-ments estimate that five minutes of clericaltime (with a labor rate of $26.14/hour)will be required to incorporate the re-quired language into the plan documentand ten minutes of an human resourceprofessional’s time (with a labor rate of$89.12/hour) will be required to reviewthe modified language.127 Therefore, theDepartments estimate that plans will incura one-time hour burden of 85,000 hourswith an equivalent cost of $5.8 millionto meet the disclosure requirement in thefirst year.

The Departments assume that onlyprinting and material costs are associatedwith the disclosure requirement, becausethe interim final regulations provide modellanguage that can be incorporated intoexisting plan documents, such as an SPD.The Departments estimate that the noticewill require one-half of a page, five cents

per page printing and material cost will beincurred, and 38 percent of the notices willbe delivered electronically. This resultsin a cost burden of $124,000 ($0.05 perpage*1/2 pages per notice * 8.0 millionnotices*0.62).

Plans that relinquish their grandfatherstatus in subsequent years also will be-come subject to this notice requirementand incur a cost to prepare and distributethe notice in the year they relinquish theirgrandfather status. The Departments esti-mate a total hour burden of 62,000 hoursin 2012 and 50,000 in 2013 for plans re-linquishing their grandfather status in 2012or 2013. There also will be an estimatedtotal cost burden of $90,000 in 2012 and$73,000 in 2013.

The Departments note that persons arenot required to respond to, and generallyare not subject to any penalty for failing tocomply with, an ICR unless the ICR has avalid OMB control number.

These paperwork burden estimates aresummarized as follows:

Type of Review: New CollectionAgencies: Employee Benefits Security

Administration, Department of Labor; In-ternal Revenue Service, U.S. Departmentof Treasury.

Title: Disclosure Requirement for Pa-tient Protections under the Affordable CareAct.

OMB Number: 1210–0142;1545–2181.

Affected Public: Business or other for-profit; not-for-profit institutions.

Total Respondents 262,000 (three yearaverage).

Total Responses: 6,186,000 (three yearaverage).

Frequency of Response: One timeEstimated Total Annual Burden Hours:

33,000 (Employee Benefits Security Ad-ministration); 33,000 (Internal RevenueService).

Estimated Total Annual Burden Cost:$48,000 (Employee Benefits Security Ad-

ministration); $48,000 (Internal RevenueService).

2. Department of Health and HumanServices

As discussed above in the Departmentof Labor and Department of the TreasuryPRA section, these interim final regula-tions contain an enrollment opportunitynotice, rescissions notice, and patient pro-tection disclosures requirement for issuers.These requirements are information col-lection requirements under the PaperworkReduction Act. Each of these require-ments is discussed in detail below.

a. ICR Regarding Affordable Care ActEnrollment Opportunity Notice RegardingLifetime Limits

PHS Act section 2711 and these in-terim final regulations requires health in-surance issuers offering individual healthinsurance coverage to provide an individ-ual whose coverage ended due to reachinga lifetime limit on the dollar value of allbenefits with an opportunity to enroll (in-cluding notice of an opportunity to enroll)that continues for at least 30 days, regard-less of whether the plan or coverage offersan open enrollment period and regardlessof when any open enrollment period mightotherwise occur. This enrollment opportu-nity must be presented not later than thefirst day of the first plan year (or, in theindividual market, policy year) beginningon or after September 23, 2010 (which isthe applicability date of PHS Act section2711). Coverage must begin not later thanthe first day of the first plan year (or pol-icy year in the individual market) begin-ning on or after September 23, 2010.128

The Department estimates that approx-imately 13,182 individuals qualify for thisenrollment right, which as discussed morefully below, should be considered an up-ward bound. The estimate is based on thefollowing methodology. The Departmentestimates that of the approximately 16.5

126 The Departments’ estimate of the number of ERISA-covered health plans was obtained from the 2008 Medical Expenditure Panel Survey’s Insurance component. The estimate of thenumber of policy holders was obtained from the 2009 Current Population Survey. Information on HMO and POS plans and enrollment in such plans was obtained from the Kaiser/HRETSurvey of Employer Sponsored Health Benefits, 2009. The methodology used to estimate the percentage of plans that will not be grandfathered in 2011 is addressed in the Departments’Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan under the Patient Protection and Affordable Care Act that wereissued on June 17, 2010 (75 FR 34538).

127 EBSA estimates of labor rates include wages, other benefits, and overhead based on the National Occupational Employment Survey (May 2008, Bureau of Labor Statistics) and theEmployment Cost Index June 2009, Bureau of Labor Statistics).

128 The interim final regulations require any individual enrolling in group health plan coverage pursuant to this enrollment right must be treated as a special enrollee, as provided under HIPAAportability rules. Accordingly, the individual must be offered all the benefit packages available to similarly situated individuals who did not lose coverage due to reaching a lifetime limit orcessation of dependent status. The individual also cannot be required to pay more for coverage than similarly situated individuals who did not lose coverage due to reaching a lifetime limit

2010–32 I.R.B. 222 August 9, 2010

million individuals129 covered by fam-ily policies in the individual market, 89percent of such individuals have a policywith a lifetime limit.130 The Departmentalso estimates that out of the approxi-mately 40.1 million individuals coveredby public, non-Federal employer grouphealth plans sponsored by State and localgovernments,131 63 percent of such indi-viduals are covered by plans with lifetimelimits.132

While limited data are available regard-ing lifetime limits, the Department esti-mated that the average lifetime limit acrossall markets is about $4.7 million,133 whichmeans that an individual would exceed alifetime limit by incurring at least $4.7 mil-lion in medical expenses during one yearor across many years. Although the De-partment is unable to track spending acrosstime to estimate the number of individu-als that would reach the lifetime limit, theDepartment estimates that about 0.033 per-cent of individuals incur more than $1 mil-lion in medical spending in a year.134 Ifthese individuals incurred this amount ev-ery year, 13,000 individuals would incurexpenses of at least $4.7 million limit bythe fifth year.

There are several reasons to suspectthat these assumptions lead to an over-es-timate. First, individuals who incur $1million of medical expenses in a yearwould need to sustain this level every yearfor five years to exceed the $4.7 millionlimit. Second, an individual’s lifetimelimit is reset if he switches employers or,for employees who work for employerswith multiple health insurance coverageoptions, switches to a different health in-surance plan.

These interim final regulations requireplans or insurers to notify individualswhose coverage ended due to reachinga lifetime limit on the dollar value of all

benefits that they are now eligible to reen-roll in the plan or policy. The Departmentassumes that the notice for all plans andpolicies (including self-insured plans thatare administered by insurers) will be pre-pared by the estimated 630 health insurersoperating in the United States.135 On aver-age, the Department expects that one-halfhour of a legal professional’s time, val-ued as $119, will be required to draft thisnotice, resulting in an hour burden of ap-proximately 200 hours with an equivalentcost of $19,000.

The Department assumes that plansand insurers track information regardingindividuals that have lost coverage due toreaching a lifetime limit (including con-tact information) in their administrativerecords. Based on the foregoing, the De-partment estimates that, on average, fiveminutes of a clerical staff member’s time,valued at $26.14 per hour will be requiredto incorporate the specific information intothe notice and mail the estimated 13,000notices. This results in an estimated hourburden of approximately 1,100 hours withan equivalent cost of $29,000. Therefore,the total hour burden of this notice require-ment is 1,300 hours with an equivalentcost of $48,000.

The associated cost burden of the ruleresults from material and mailing cost todistribute the estimated 13,000 notices.The Department estimates that the noticewill be one-page in length, material andprint costs will be five cents per page,and postage will be 44 cents per noticeresulting in a per notice cost of 49 cents.This leads to a total estimated cost burdenof approximately $6,500 to distribute thenotices.

Type of Review: New collection.Agency: Department of Health and Hu-

man Services.

Title: Patient Protection and AffordableCare Act Enrollment Opportunity NoticeRelating to Lifetime Limits

OMB Number: 0938–1094.Affected Public: Business; State, Local,

or Tribal Governments.Respondents: 630.Responses: 13,000.Frequency of Response: One-time.Estimated Total Annual Burden Hours:

1,300 hours.Estimated Total Annual Burden Cost:

$6,500.

b. ICR Regarding Affordable Care ActNotice Relating to Rescission

As discussed earlier in this preamble,PHS Act Section 2712 and these interimfinal regulations prohibit group healthplans and health insurance issuers thatoffer group or individual health insurancecoverage generally from rescinding cov-erage under the plan, policy, certificate, orcontract of insurance from the individualcovered under the plan or coverage unlessthe individual (or a person seeking cover-age on behalf of the individual) performsan act, practice, or omission that consti-tutes fraud, or unless the individual makesan intentional misrepresentation of mate-rial fact, as prohibited by the terms of theplan or coverage. These interim final reg-ulations provide that a group health planor a health insurance issuer offering grouphealth insurance coverage must provide atleast 30 days advance notice to an individ-ual before coverage may be rescinded.

This analysis assumes that rescissionsonly occur in the individual health insur-ance market, because rescissions in thegroup market are rare. The Departmentestimates that there are approximately 7.1million individual policy holders in the in-dividual market during a year. A report

129 The Department’s estimate is based on the 2009 March Current Population Survey (CPS).

130 The Department’s estimate for individual health plans is derived from America’s Health Insurance Plans, Individual Health Insurance 2009: A Comprehensive Survey of Premiums,Availability and Benefits, (Oct. 2009) at http://www.ahipresearch.org/pdfs/2009IndividualMarketSurveyFinalReport.pdf, Table 10 and Table 17.

131 The Department’s estimate is based on the 2009 March Current Population Survey (CPS).

132 The Departments’ estimate for large and small employer health plans is derived from The Kaiser Family Foundation and Health Research & Educational Trust, Employer Health Benefits:2009 Annual Survey (Sept. 2009), at http://ehbs.kff.org/pdf/2009/7936.pdf, Exhibit 13.12.

133 The Department’s estimate is based on America’s Health Insurance Plans, Individual Health Insurance 2009: A Comprehensive Survey of Premiums, Availability and Benefits, (Oct. 2009)at http://www.ahipresearch.org/pdfs/2009IndividualMarketSurveyFinalReport.pdf, Table 17; and America’s Health Insurance Plans, Individual Health Insurance 2008: Small Group HealthInsurance, Table 22.

134 The Departments’ estimate is based on adjusted insurer claims and MEPS-HC expenditures.

135 While plans could prepare their own notice, the Departments assume that the notices will be prepared by service providers. The Departments have previously estimated that there are630 health insurers (460 providing coverage in the group market, and 490 providing coverage in the individual market.). These estimates are from NAIC 2007 financial statements dataand the California Department of Managed Healthcare (2009), at http://wpso.dmhc.ca.gov/hpsearch/viewall.aspx. Because the hour and cost burden is shared among the Departments ofLabor/Treasury and the Department of Health and Human Services, the burden to prepare the notices is calculated using half the number of insurers (315).

August 9, 2010 223 2010–32 I.R.B.

on rescissions finds that 0.15 percent ofpolicies were rescinded during the 2004 to2008 time period.136 Based on these num-bers, the Department estimates that ap-proximately 10,700 policies are rescindedduring a year, which would result in 10,700notices being sent to affected policyhold-ers. The Department estimates that 15minutes of legal profession time at $119per hour would be required by the esti-mated 490 insurers in the individual mar-ket to prepare the notice and one minuteper notice of clerical professional time at$26 per hour would be required to distrib-ute the notice. This results in an hour bur-den of approximately 300 hours with anequivalent cost of approximately $19,200.The Department estimates that the costburden associated with distributing the no-tices will be approximately $5,200.137

These paperwork burden estimates aresummarized as follows:

Type of Review: New collection.Agency: Department of Health and Hu-

man Services.Title: Required Notice of Rescission of

Coverage under the Patient Protection andAffordable Care Act Disclosures.

OMB Number: 0938–1094.Affected Public: For Profit Business.Respondents: 490Responses: 10,700.Frequency of Response: Occasionally.Estimated Total Annual Burden Hours:

300 hours.Estimated Total Annual Burden Cost:

$5,200.

c. ICR Relating to Affordable CareAct Patient Protections DisclosureRequirement

As discussed above in the Departmentof Labor and Department of TreasuryPRA section, these interim final regula-tions contains a disclosure requirement fornon-grandfathered health plans or policiesrequiring the designation of a primarycare physician or usually requiring a refer-

ral from a primary care physician beforereceiving care from a specialist. Theserequirements are information collectionrequirements under the PRA.

In order to satisfy the interim final reg-ulations’ patient protection disclosure re-quirement, the Department estimates that14,000 State and local governmental planswill need to notify approximately 2.6 mil-lion policy holders of their plans’ policyin regards to designating a primary carephysician and for obstetrical or gyneco-logical visits. An estimated 490 insurersproviding coverage in the individual mar-ket will need to notify an estimated 55,000policy holders of their policy in regardsto designating a primary care physicianand for obstetrical or gynecological vis-its. These estimates are based on the as-sumption that 22 percent of group plansand 40 percent of individual policies willnot have grandfathered health plan statusin 2011.138

Because the interim final regulationsprovide model language for this pur-pose, the Department estimates that fiveminute of clerical time (with a labor rateof $26.14/hour) will be required to incor-porate the required language into the plandocument and ten minutes of a humanresource professional’s time (with a laborrate of $89.12/hour) will be required toreview the modified language.139 There-fore, the Department estimates that plansand insurers will incur a one-time hourburden of 3,500 hours with an equivalentcost of $239,000 to meet the disclosurerequirement.

The Department assumes that onlyprinting and material costs are associatedwith the disclosure requirement, becausethe interim final regulations provide modellanguage that can be incorporated intoexisting plan documents, such as an SPD.The Department estimates that the noticewill require one-half of a page, five centsper page printing and material cost will beincurred, and 38 percent of the notices willbe delivered electronically. This results

in a cost burden of $42,000 ($0.05 perpage*1/2 pages per notice * 1.7 millionnotices*0.62).

Plans that relinquish their grandfatherstatus in subsequent years will also be-come subject to this notice requirementand incur a cost to prepare and distrib-ute the notice in the year they relinquishtheir grandfather status. Policy holders ofnon-grandfathered policies in the individ-ual market will also have to receive thisnotice. The Department estimates a totalhour burden of 2,500 hours in 2012 and2,000 in 2013 for plans relinquishing theirgrandfather status in such years. Therewill, also be an estimated total cost burdenof $30,000 in 2012 and $24,000 in 2013.

The Department notes that persons arenot required to respond to, and generallyare not subject to any penalty for failing tocomply with, an ICR unless the ICR has avalid OMB control number.

These paperwork burden estimates aresummarized as follows:

Type of Review: New collection.Agency: Department of Health and Hu-

man Services.Title: Disclosure Requirements for Pa-

tient Protection under the Affordable CareAct.

OMB Number: 0938–1094.Affected Public: Business; State, Local,

or Tribal Governments.Respondents: 10,600.Responses: 2,067,000.Frequency of Response: One-time.Estimated Total Annual Burden Hours:

2,700 hours.Estimated Total Annual Burden Cost:

$32,000.If you comment on any of these infor-

mation collection requirements, please doeither of the following:

1. Submit your comments electroni-cally as specified in the ADDRESSES sec-tion of this proposed rule; or

2. Submit your comments to the Officeof Information and Regulatory Affairs, Of-fice of Management and Budget,

136 NAIC Report “Rescission Data Call of the NAIC Regulatory Framework (B) Task Force” December 17, 2009. http://www.naic.org/documents/committees_b_regulatory_frame-work_rescission_data_call_report.pdf

137 This estimate is based on an average document size of one page, $.05 cents per page material and printing costs, and $.44 cent postage costs.

138 The Department’s estimate of the number of State and local governmental health plans was obtained from the 2007 Census of Governments. The estimate of the number of policy holdersin the individual market were obtained from the 2009 Current Population Survey. Information on HMO and POS plans and enrollment in such plans was obtained from the Kaiser/HRETSurvey of Employer Sponsored Health Benefits, 2009. The methodology used to estimate the percentage of plans that will not be grandfathered in 2011 was discussed in Departments’ InterimFinal Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan under the Patient Protection and Affordable Care Act that were issuedon June 15, 2010: 75 FR 34538 (June 17, 2010).

139 EBSA estimates of labor rates include wages, other benefits, and overhead based on the National Occupational Employment Survey (May 2008, Bureau of Labor Statistics) and theEmployment Cost Index June 2009, Bureau of Labor Statistics).

2010–32 I.R.B. 224 August 9, 2010

Attention: CMS Desk Officer,OCIIO–9994–IFC

Fax: (202) 395–6974; orEmail:

OIRA_submission@omb.eop.gov

G. Congressional Review Act

These interim final regulations aresubject to the Congressional Review Actprovisions of the Small Business Reg-ulatory Enforcement Fairness Act of1996 (5 U.S.C. 801 et seq.) and havebeen transmitted to Congress and theComptroller General for review.

H. Unfunded Mandates Reform Act

The Unfunded Mandates Reform Act of1995 (Public Law 104–4) requires agen-cies to prepare several analytic statementsbefore proposing any rules that may re-sult in annual expenditures of $100 million(as adjusted for inflation) by State, localand tribal governments or the private sec-tor. These interim final regulations are notsubject to the Unfunded Mandates ReformAct because they are being issued as in-terim final regulations. However, consis-tent with the policy embodied in the Un-funded Mandates Reform Act, the regu-lation has been designed to be the leastburdensome alternative for State, local andtribal governments, and the private sector,while achieving the objectives of the Af-fordable Care Act.

I. Federalism Statement—Department ofLabor and Department of Health andHuman Services

Executive Order 13132 outlines fun-damental principles of federalism, andrequires the adherence to specific criteriaby Federal agencies in the process of theirformulation and implementation of poli-cies that have ’’substantial direct effects’’on the States, the relationship between thenational government and States, or on thedistribution of power and responsibilitiesamong the various levels of government.Federal agencies promulgating regulationsthat have these federalism implicationsmust consult with State and local officials,and describe the extent of their consulta-tion and the nature of the concerns of Stateand local officials in the preamble to theregulation.

In the Departments’ view, these interimfinal regulations have federalism impli-cations, because they have direct effectson the States, the relationship betweenthe national government and States, or onthe distribution of power and responsibili-ties among various levels of government.However, in the Departments’ view, thefederalism implications of these interim fi-nal regulations are substantially mitigatedbecause, with respect to health insuranceissuers, the Departments expect that themajority of States will enact laws or takeother appropriate action resulting in theirmeeting or exceeding the Federal stan-dards.

In general, through section 514, ERISAsupersedes State laws to the extent thatthey relate to any covered employee ben-efit plan, and preserves State laws thatregulate insurance, banking, or securities.While ERISA prohibits States from regu-lating a plan as an insurance or investmentcompany or bank, the preemption provi-sions of section 731 of ERISA and section2724 of the PHS Act (implemented in 29CFR 2590.731(a) and 45 CFR 146.143(a))apply so that the HIPAA requirements (in-cluding those of the Affordable Care Act)are not to be ’’construed to supersede anyprovision of State law which establishes,implements, or continues in effect anystandard or requirement solely relatingto health insurance issuers in connectionwith group health insurance coverage ex-cept to the extent that such standard orrequirement prevents the application of arequirement’’ of a Federal standard. Theconference report accompanying HIPAAindicates that this is intended to be the’’narrowest’’ preemption of State laws.(See House Conf. Rep. No. 104–736, at205, reprinted in 1996 U.S. Code Cong. &Admin. News 2018.) States may continueto apply State law requirements except tothe extent that such requirements preventthe application of the Affordable CareAct requirements that are the subject ofthis rulemaking. State insurance lawsthat are more stringent than the Federalrequirements are unlikely to ’’prevent theapplication of’’ the Affordable Care Act,and be preempted. Accordingly, Stateshave significant latitude to impose require-ments on health insurance issuers that aremore restrictive than the Federal law.

In compliance with the requirement ofExecutive Order 13132 that agencies ex-

amine closely any policies that may havefederalism implications or limit the policymaking discretion of the States, the De-partments have engaged in efforts to con-sult with and work cooperatively with af-fected State and local officials, includingattending conferences of the National As-sociation of Insurance Commissioners andconsulting with State insurance officials onan individual basis. It is expected that theDepartments will act in a similar fashion inenforcing the Affordable Care Act require-ments. Throughout the process of devel-oping these interim final regulations, to theextent feasible within the specific preemp-tion provisions of HIPAA as it applies tothe Affordable Care Act, the Departmentshave attempted to balance the States’ in-terests in regulating health insurance is-suers, and Congress’ intent to provide uni-form minimum protections to consumersin every State. By doing so, it is the De-partments’ view that they have compliedwith the requirements of Executive Order13132.

Pursuant to the requirements set forthin section 8(a) of Executive Order 13132,and by the signatures affixed to these in-terim final regulations, the Departmentscertify that the Employee Benefits Secu-rity Administration and the Centers forMedicare & Medicaid Services have com-plied with the requirements of ExecutiveOrder 13132 for the attached regulations ina meaningful and timely manner.

V. Statutory Authority

The Department of the Treasury tem-porary regulations are adopted pursuant tothe authority contained in sections 7805and 9833 of the Code.

The Department of Labor interim finalregulations are adopted pursuant to theauthority contained in 29 U.S.C. 1027,1059, 1135, 1161–1168, 1169, 1181–1183,1181 note, 1185, 1185a, 1185b, 1191,1191a, 1191b, and 1191c; sec. 101(g),Pub. L.104–191, 110 Stat. 1936; sec.401(b), Pub. L. 105–200, 112 Stat. 645(42 U.S.C. 651 note); sec. 512(d), Pub. L.110–343, 122 Stat. 3881; sec. 1001, 1201,and 1562(e), Pub. L. 111–148, 124 Stat.119, as amended by Pub. L. 111–152, 124Stat. 1029; Secretary of Labor’s Order6–2009, 74 FR 21524 (May 7, 2009).

The Department of Health and Hu-man Services interim final regulations are

August 9, 2010 225 2010–32 I.R.B.

adopted pursuant to the authority con-tained in sections 2701 through 2763,2791, and 2792 of the PHS Act (42 USC300gg through 300gg–63, 300gg–91, and300gg–92), as amended.

Continuation coverage, Disclosure,Employee benefit plans, Group healthplans, Health care, Health insurance, Med-ical child support, Reporting and record-keeping requirements.

45 CFR Parts 144, 146, and 147

Health care, Health insurance, Report-ing and recordkeeping requirements, andState regulation of health insurance.

Steven T. Miller,Deputy Commissioner for

Services and Enforcement,Internal Revenue Service.

Approved June 18, 2010.

Michael F. Mundaca,Assistant Secretary

of the Treasury (Tax Policy).

Signed this 18th day of June, 2010.

Phyllis C. Borzi,Assistant SecretaryEmployee Benefits

Security AdministrationDepartment of Labor.

OCIIO–9994–IFC

Dated: June 18, 2010.

Jay Angoff,Director,

Office of Consumer Informationand Insurance Oversight.

Dated: June 18, 2010.

Kathleen Sebelius,Secretary,

Department of Healthand Human Services.

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Chapter 1

Accordingly, 26 CFR Parts 54 and 602are amended as follows:

PART 54—PENSION EXCISE TAXES

Paragraph 1. The authority citationfor part 54 is amended by adding entriesfor §§54.9815–2704T, 54.9815–2711T,54.9815–2712T, and 54.9815–2719AT innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805. * * *Section 54.9815–2704T also issued un-

der 26 U.S.C. 9833.Section 54.9815–2711T also issued un-

der 26 U.S.C. 9833.Section 54.9815–2712T also issued un-

der 26 U.S.C. 9833. * * *Section 54.9815–2719AT also issued

under 26 U.S.C. 9833. * * *Par. 2. Section 54.9801–2 is amended

by revising the definitions of group healthplan and preexisting condition exclusion toread as follows:

§54.9801–2 Definitions.

* * * * *Group health plan or plan means a

group health plan within the meaning of§54.9831–1(a).

* * * * *Preexisting condition exclusion means

a limitation or exclusion of benefits (in-cluding a denial of coverage) based on thefact that the condition was present beforethe effective date of coverage (or if cover-age is denied, the date of the denial) un-der a group health plan or group or indi-vidual health insurance coverage (or othercoverage provided to federally eligible in-dividuals pursuant to 45 CFR part 148),whether or not any medical advice, diagno-sis, care, or treatment was recommendedor received before that day. A preexist-ing condition exclusion includes any lim-itation or exclusion of benefits (includinga denial of coverage) applicable to an in-dividual as a result of information relatingto an individual’s health status before theindividual’s effective date of coverage (orif coverage is denied, the date of the de-nial) under a group health plan, or groupor individual health insurance coverage (orother coverage provided to Federally eli-gible individuals pursuant to 45 CFR part148), such as a condition identified as aresult of a pre-enrollment questionnaire orphysical examination given to the individ-ual, or review of medical records relatingto the pre-enrollment period.

* * * * *

Par. 3. Section 54.9801–3 is amendedby revising paragraph (a)(1)(i) to read asfollows:

§54.9801–3 Limitations on preexistingcondition exclusion period.

(a) * * *(1) * * *(i) A preexisting condition exclu-

sion means a preexisting condition ex-clusion within the meaning set forth in§54.9801–2.

* * * * *Par. 4. Section 54.9815–2704T is

added to read as follows:

§54.9815–2704T Prohibition ofpreexisting condition exclusions(temporary).

(a) No preexisting condition exclu-sions—(1) In general. A group healthplan, or a health insurance issuer offeringgroup health insurance coverage, may notimpose any preexisting condition exclu-sion (as defined in §54.9801–2).

(2) Examples. The rules of thisparagraph (a) are illustrated by the fol-lowing examples (for additional ex-amples illustrating the definition of apreexisting condition exclusion, see§54.9801–3(a)(1)(ii)):

Example 1. (i) Facts. A group health plan pro-vides benefits solely through an insurance policy of-fered by Issuer P. At the expiration of the policy, theplan switches coverage to a policy offered by IssuerN. N’s policy excludes benefits for oral surgery re-quired as a result of a traumatic injury if the injuryoccurred before the effective date of coverage underthe policy.

(ii) Conclusion. In this Example 1, the exclu-sion of benefits for oral surgery required as a resultof a traumatic injury if the injury occurred before theeffective date of coverage is a preexisting conditionexclusion because it operates to exclude benefits fora condition based on the fact that the condition waspresent before the effective date of coverage underthe policy.

Example 2. (i) Facts. Individual C applies for in-dividual health insurance coverage with Issuer M. Mdenies C’s application for coverage because a pre-en-rollment physical revealed that C has type 2 diabetes.

(ii) Conclusion. See Example 2 in 45 CFR147.108(a)(2) for a conclusion that M’s denial of C’sapplication for coverage is a preexisting conditionexclusion because a denial of an application for cov-erage based on the fact that a condition was presentbefore the date of denial is an exclusion of benefitsbased on a preexisting condition.

(b) Effective/applicability date—(1)General applicability date. Except as pro-vided in paragraph (b)(2) of this section,

2010–32 I.R.B. 226 August 9, 2010

the rules of this section apply for planyears beginning on or after January 1,2014.

(2) Early applicability date for chil-dren. The rules of this section apply withrespect to enrollees, including applicantsfor enrollment, who are under 19 years ofage for plan years beginning on or afterSeptember 23, 2010.

(3) Applicability to grandfatheredhealth plans. See §54.9815–1251T for de-termining the application of this section tograndfathered health plans (providing thata grandfathered health plan that is a grouphealth plan or group health insurance cov-erage must comply with the prohibitionagainst preexisting condition exclusions).

(4) Example. The rules of this para-graph (b) are illustrated by the followingexample:

Example. (i) Facts. Individual F commences em-ployment and enrolls F and F’s 16-year-old child inthe group health plan maintained by F’s employer,with a first day of coverage of October 15, 2010. F’schild had a significant break in coverage because ofa lapse of more than 63 days without creditable cov-erage immediately prior to enrolling in the plan. F’schild was treated for asthma within the six-month pe-riod prior to the enrollment date and the plan imposesa 12-month preexisting condition exclusion for cover-age of asthma. The next plan year begins on January1, 2011.

(ii) Conclusion. In this Example, the plan yearbeginning January 1, 2011 is the first plan year of thegroup health plan beginning on or after September 23,2010. Thus, beginning on January 1, 2011, becausethe child is under 19 years of age, the plan cannotimpose a preexisting condition exclusion with respectto the child’s asthma regardless of the fact that thepreexisting condition exclusion was imposed by theplan before the applicability date of this provision.

(c) Expiration date. This section ex-pires on June 21, 2013.

Par. 5. Section 54.9815–2711T isadded to read as follows:

§54.9815–2711T No lifetime or annuallimits (temporary).

(a) Prohibition—(1) Lifetime limits.Except as provided in paragraph (b) of thissection, a group health plan, or a healthinsurance issuer offering group health in-surance coverage, may not establish anylifetime limit on the dollar amount of ben-efits for any individual.

(2) Annual limits—(i) General rule.Except as provided in paragraphs(a)(2)(ii), (b), and (d) of this section, agroup health plan, or a health insuranceissuer offering group health insurancecoverage, may not establish any annual

limit on the dollar amount of benefits forany individual.

(ii) Exception for health flexible spend-ing arrangements. A health flexiblespending arrangement (as defined in sec-tion 106(c)(2)) is not subject to the re-quirement in paragraph (a)(2)(i) of thissection.

(b) Construction—(1) Permissible lim-its on specific covered benefits. The rulesof this section do not prevent a grouphealth plan, or a health insurance issueroffering group health insurance coverage,from placing annual or lifetime dollarlimits with respect to any individual onspecific covered benefits that are not es-sential health benefits to the extent thatsuch limits are otherwise permitted un-der applicable Federal or State law. (Thescope of essential health benefits is ad-dressed in paragraph (c) of this section).

(2) Condition-based exclusions. Therules of this section do not prevent a grouphealth plan, or a health insurance issueroffering group health insurance coverage,from excluding all benefits for a condition.However, if any benefits are provided fora condition, then the requirements of thissection apply. Other requirements of Fed-eral or State law may require coverage ofcertain benefits.

(c) Definition of essential health bene-fits. The term “essential health benefits”means essential health benefits under sec-tion 1302(b) of the Patient Protection andAffordable Care Act and applicable regu-lations.

(d) Restricted annual limits permissi-ble prior to 2014—(1) In general. Withrespect to plan years beginning prior toJanuary 1, 2014, a group health plan, ora health insurance issuer offering grouphealth insurance coverage, may establish,for any individual, an annual limit on thedollar amount of benefits that are essen-tial health benefits, provided the limit isno less than the amounts in the followingschedule:

(i) For a plan year beginning on or afterSeptember 23, 2010, but before September23, 2011, $750,000.

(ii) For a plan year beginning on or afterSeptember 23, 2011, but before September23, 2012, $1,250,000.

(iii) For plan years beginning on or afterSeptember 23, 2012, but before January 1,2014, $2,000,000.

(2) Only essential health benefits takeninto account. In determining whether anindividual has received benefits that meetor exceed the applicable amount describedin paragraph (d)(1) of this section, a plan orissuer must take into account only essentialhealth benefits.

(3) Waiver authority of the Secretaryof Health and Human Services. For planyears beginning before January 1, 2014,the Secretary of Health and Human Ser-vices may establish a program under whichthe requirements of paragraph (d)(1) ofthis section relating to annual limits maybe waived (for such period as is speci-fied by the Secretary of Health and Hu-man Services) for a group health plan orhealth insurance coverage that has an an-nual dollar limit on benefits below the re-stricted annual limits provided under para-graph (d)(1) of this section if compliancewith paragraph (d)(1) of this section wouldresult in a significant decrease in access tobenefits under the plan or health insurancecoverage or would significantly increasepremiums for the plan or health insurancecoverage.

(e) Transitional rules for individualswhose coverage or benefits ended by rea-son of reaching a lifetime limit—(1) Ingeneral. The relief provided in the tran-sitional rules of this paragraph (e) applieswith respect to any individual—

(i) Whose coverage or benefits under agroup health plan or group health insur-ance coverage ended by reason of reach-ing a lifetime limit on the dollar value ofall benefits for any individual (which, un-der this section, is no longer permissible);and

(ii) Who becomes eligible (or is re-quired to become eligible) for benefits notsubject to a lifetime limit on the dollarvalue of all benefits under the group healthplan or group health insurance coverageon the first day of the first plan year begin-ning on or after September 23, 2010, byreason of the application of this section.

(2) Notice and enrollment opportunityrequirements—(i) If an individual de-scribed in paragraph (e)(1) of this sectionis eligible for benefits (or is required tobecome eligible for benefits) under thegroup health plan — or group health insur-ance coverage — described in paragraph(e)(1) of this section, the plan and theissuer are required to give the individualwritten notice that the lifetime limit on

August 9, 2010 227 2010–32 I.R.B.

the dollar value of all benefits no longerapplies and that the individual, if covered,is once again eligible for benefits underthe plan. Additionally, if the individual isnot enrolled in the plan or health insurancecoverage, or if an enrolled individual iseligible for but not enrolled in any benefitpackage under the plan or health insurancecoverage, then the plan and issuer mustalso give such an individual an opportunityto enroll that continues for at least 30 days(including written notice of the opportu-nity to enroll). The notices and enrollmentopportunity required under this paragraph(e)(2)(i) must be provided beginning notlater than the first day of the first plan yearbeginning on or after September 23, 2010.

(ii) The notices required under para-graph (e)(2)(i) of this section may be pro-vided to an employee on behalf of theemployee’s dependent. In addition, thenotices may be included with other en-rollment materials that a plan distributesto employees, provided the statement isprominent. For either notice, if a noticesatisfying the requirements of this para-graph (e)(2) is provided to an individual,the obligation to provide the notice with re-spect to that individual is satisfied for boththe plan and the issuer.

(3) Effective date of coverage. In thecase of an individual who enrolls underparagraph (e)(2) of this section, coveragemust take effect not later than the first dayof the first plan year beginning on or afterSeptember 23, 2010.

(4) Treatment of enrollees in a grouphealth plan. Any individual enrolling ina group health plan pursuant to paragraph(e)(2) of this section must be treated as ifthe individual were a special enrollee, asprovided under the rules of §54.9801–6(d).Accordingly, the individual (and, if the in-dividual would not be a participant onceenrolled in the plan, the participant throughwhom the individual is otherwise eligiblefor coverage under the plan) must be of-fered all the benefit packages available tosimilarly situated individuals who did notlose coverage by reason of reaching a life-time limit on the dollar value of all ben-efits. For this purpose, any difference inbenefits or cost-sharing requirements con-stitutes a different benefit package. Theindividual also cannot be required to paymore for coverage than similarly situatedindividuals who did not lose coverage by

reason of reaching a lifetime limit on thedollar value of all benefits.

(5) Examples. The rules of this para-graph (e) are illustrated by the followingexamples:

Example 1. (i) Facts. Employer Y maintains agroup health plan with a calendar year plan year. Theplan has a single benefit package. For plan years be-ginning before September 23, 2010, the plan has alifetime limit on the dollar value of all benefits. Indi-vidual B, an employee of Y, was enrolled in Y’s grouphealth plan at the beginning of the 2008 plan year. OnJune 10, 2008, B incurred a claim for benefits that ex-ceeded the lifetime limit under Y’s plan and ceased tobe enrolled in the plan. B is still eligible for coverageunder Y’s group health plan. On or before January 1,2011, Y’s group health plan gives B written notice in-forming B that the lifetime limit on the dollar value ofall benefits no longer applies, that individuals whosecoverage ended by reason of reaching a lifetime limitunder the plan are eligible to enroll in the plan, andthat individuals can request such enrollment throughFebruary 1, 2011 with enrollment effective retroac-tively to January 1, 2011.

(ii) Conclusion. In this Example 1, the plan hascomplied with the requirements of this paragraph (e)by providing a timely written notice and enrollmentopportunity to B that lasts at least 30 days.

Example 2. (i) Facts. Employer Z maintains agroup health plan with a plan year beginning October1 and ending September 30. Prior to October 1, 2010,the group health plan has a lifetime limit on the dol-lar value of all benefits. Individual D, an employee ofZ, and Individual E, D’s child, were enrolled in fam-ily coverage under Z’s group health plan for the planyear beginning on October 1, 2008. On May 1, 2009,E incurred a claim for benefits that exceeded the life-time limit under Z’s plan. D dropped family coveragebut remains an employee of Z and is still eligible forcoverage under Z’s group health plan.

(ii) Conclusion. In this Example 2, not later thanOctober 1, 2010, the plan must provide D and E anopportunity to enroll (including written notice ofan opportunity to enroll) that continues for at least30 days, with enrollment effective not later thanOctober 1, 2010.

Example 3. (i) Facts. Same facts as Example2, except that Z’s plan had two benefit packages (alow-cost and a high-cost option). Instead of droppingcoverage, D switched to the low-cost benefit packageoption.

(ii) Conclusion. In this Example 3, not later thanOctober 1, 2010, the plan must provide D and E anopportunity to enroll in any benefit package availableto similarly situated individuals who enroll when firsteligible. The plan would have to provide D and E theopportunity to enroll in any benefit package availableto similarly situated individuals who enroll when firsteligible, even if D had not switched to the low-costbenefit package option.

Example 4. (i) Facts. Employer Q maintainsa group health plan with a plan year beginningOctober 1 and ending September 30. For the planyear beginning on October 1, 2009, Q has an annuallimit on the dollar value of all benefits of $500,000.

(ii) Conclusion. In this Example 4, Q must raisethe annual limit on the dollar value of essential healthbenefits to at least $750,000 for the plan year begin-

ning October 1, 2010. For the plan year beginningOctober 1, 2011, Q must raise the annual limit to atleast $1.25 million. For the plan year beginning Oc-tober 1, 2012, Q must raise the annual limit to at least$2 million. Q may also impose a restricted annuallimit of $2 million for the plan year beginning Octo-ber 1, 2013. After the conclusion of that plan year, Qcannot impose an overall annual limit.

Example 5. (i) Facts. Same facts as Example 4,except that the annual limit for the plan year begin-ning on October 1, 2009 is $1 million and Q lowersthe annual limit for the plan year beginning October1, 2010 to $750,000.

(ii) Conclusion. In this Example 5, Q complieswith the requirements of this paragraph (e). However,Q’s choice to lower its annual limit means that under§54.9815–1251T(g)(1)(vi)(C), the group health planwill cease to be a grandfathered health plan and willbe generally subject to all of the provisions of PHSAct sections 2701 through 2719A.

(f) Effective/applicability date.The provisions of this section ap-ply for plan years beginning onor after September 23, 2010. See§54.9815–1251T for determining theapplication of this section to grandfatheredhealth plans (providing that theprohibitions on lifetime and annual limitsapply to all grandfathered health plans thatare group health plans and group healthinsurance coverage, including the specialrules regarding restricted annual limits).

(g) Expiration date. This section ex-pires on June 21. 2013.

Par. 6. Section 54.9815–2712T isadded to read as follows:

§54.9815–2712T Rules regardingrescissions (temporary).

(a) Prohibition on rescissions—(1) Agroup health plan, or a health insurance is-suer offering group health insurance cov-erage, must not rescind coverage underthe plan, or under the policy, certificate,or contract of insurance, with respect toan individual (including a group to whichthe individual belongs or family coveragein which the individual is included) oncethe individual is covered under the plan orcoverage, unless the individual (or a per-son seeking coverage on behalf of the indi-vidual) performs an act, practice, or omis-sion that constitutes fraud, or unless theindividual makes an intentional misrepre-sentation of material fact, as prohibited bythe terms of the plan or coverage. A grouphealth plan, or a health insurance issueroffering group health insurance coverage,must provide at least 30 days advance writ-ten notice to each participant who would

2010–32 I.R.B. 228 August 9, 2010

be affected before coverage may be re-scinded under this paragraph (a)(1), re-gardless of whether the coverage is insuredor self-insured, or whether the rescissionapplies to an entire group or only to an in-dividual within the group. (The rules ofthis paragraph (a)(1) apply regardless ofany contestability period that may other-wise apply.)

(2) For purposes of this section, arescission is a cancellation or discontin-uance of coverage that has retroactiveeffect. For example, a cancellation thattreats a policy as void from the time ofthe individual’s or group’s enrollment is arescission. As another example, a cancel-lation that voids benefits paid up to a yearbefore the cancellation is also a rescissionfor this purpose. A cancellation or discon-tinuance of coverage is not a rescissionif—

(i) The cancellation or discontinuanceof coverage has only a prospective effect;or

(ii) The cancellation or discontinuanceof coverage is effective retroactively to theextent it is attributable to a failure to timelypay required premiums or contributions to-wards the cost of coverage.

(3) The rules of this paragraph (a) areillustrated by the following examples:

Example 1. (i) Facts. Individual A seeks en-rollment in an insured group health plan. The planterms permit rescission of coverage with respect toan individual if the individual engages in fraud ormakes an intentional misrepresentation of a materialfact. The plan requires A to complete a question-naire regarding A’s prior medical history, which af-fects setting the group rate by the health insuranceissuer. The questionnaire complies with the other re-quirements of this part. The questionnaire includesthe following question: “Is there anything else rele-vant to your health that we should know?” A inadver-tently fails to list that A visited a psychologist on twooccasions, six years previously. A is later diagnosedwith breast cancer and seeks benefits under the plan.On or around the same time, the issuer receives in-formation about A’s visits to the psychologist, whichwas not disclosed in the questionnaire.

(ii) Conclusion. In this Example 1, the plan can-not rescind A’s coverage because A’s failure to dis-close the visits to the psychologist was inadvertent.Therefore, it was not fraudulent or an intentional mis-representation of material fact.

Example 2. (i) Facts. An employer sponsors agroup health plan that provides coverage for employ-ees who work at least 30 hours per week. Individ-ual B has coverage under the plan as a full-time em-ployee. The employer reassigns B to a part-time po-sition. Under the terms of the plan, B is no longereligible for coverage. The plan mistakenly continuesto provide health coverage, collecting premiums fromB and paying claims submitted by B. After a routine

audit, the plan discovers that B no longer works atleast 30 hours per week. The plan rescinds B’s cov-erage effective as of the date that B changed from afull-time employee to a part-time employee.

(ii) Conclusion. In this Example 2, the plan can-not rescind B’s coverage because there was no fraudor an intentional misrepresentation of material fact.The plan may cancel coverage for B prospectively,subject to other applicable Federal and State laws.

(b) Compliance with other require-ments. Other requirements of Federal orState law may apply in connection with arescission of coverage.

(c) Effective/applicability date.The provisions of this section ap-ply for plan years beginning onor after September 23, 2010. See§54.9815–1251T for determining theapplication of this section to grandfatheredhealth plans (providing that the rulesregarding rescissions and advance noticeapply to all grandfathered health plans).

(d) Expiration date. This section ex-pires on June 21, 2013.

Par. 7. Section 54.9815–2719AT isadded to read as follows:

§54.9815–2719AT Patient protections(temporary).

(a) Choice of health care profes-sional—(1) Designation of primary careprovider—(i) In general. If a group healthplan, or a health insurance issuer offeringgroup health insurance coverage, requiresor provides for designation by a participantor beneficiary of a participating primarycare provider, then the plan or issuer mustpermit each participant or beneficiary todesignate any participating primary careprovider who is available to accept theparticipant or beneficiary. In such a case,the plan or issuer must comply with therules of paragraph (a)(4) of this sectionby informing each participant of the termsof the plan or health insurance coverageregarding designation of a primary careprovider.

(ii) Example. The rules of this para-graph (a)(1) are illustrated by the follow-ing example:

Example. (i) Facts. A group health plan requiresindividuals covered under the plan to designate a pri-mary care provider. The plan permits each individualto designate any primary care provider participatingin the plan’s network who is available to accept theindividual as the individual’s primary care provider.If an individual has not designated a primary careprovider, the plan designates one until one has beendesignated by the individual. The plan provides a no-tice that satisfies the requirements of paragraph (a)(4)

of this section regarding the ability to designate a pri-mary care provider.

(ii) Conclusion. In this Example, the plan has sat-isfied the requirements of paragraph (a) of this sec-tion.

(2) Designation of pediatrician as pri-mary care provider—(i) In general. If agroup health plan, or a health insurance is-suer offering group health insurance cov-erage, requires or provides for the des-ignation of a participating primary careprovider for a child by a participant or ben-eficiary, the plan or issuer must permit theparticipant or beneficiary to designate aphysician (allopathic or osteopathic) whospecializes in pediatrics as the child’s pri-mary care provider if the provider partic-ipates in the network of the plan or issuerand is available to accept the child. In sucha case, the plan or issuer must comply withthe rules of paragraph (a)(4) of this sectionby informing each participant of the termsof the plan or health insurance coverage re-garding designation of a pediatrician as thechild’s primary care provider.

(ii) Construction. Nothing in paragraph(a)(2)(i) of this section is to be construedto waive any exclusions of coverage un-der the terms and conditions of the plan orhealth insurance coverage with respect tocoverage of pediatric care.

(iii) Examples. The rules of this para-graph (a)(2) are illustrated by the follow-ing examples:

Example 1. (i) Facts. A group health plan’s HMOdesignates for each participant a physician who spe-cializes in internal medicine to serve as the primarycare provider for the participant and any beneficia-ries. Participant A requests that Pediatrician B be des-ignated as the primary care provider for A’s child. Bis a participating provider in the HMO’s network.

(ii) Conclusion. In this Example 1, the HMOmust permit A’s designation of B as the primary careprovider for A’s child in order to comply with the re-quirements of this paragraph (a)(2).

Example 2. (i) Facts. Same facts as Example 1,except that A takes A’s child to B for treatment of thechild’s severe shellfish allergies. B wishes to refer A’schild to an allergist for treatment. The HMO, how-ever, does not provide coverage for treatment of foodallergies, nor does it have an allergist participating inits network, and it therefore refuses to authorize thereferral.

(ii) Conclusion. In this Example 2, the HMO hasnot violated the requirements of this paragraph (a)(2)because the exclusion of treatment for food allergiesis in accordance with the terms of A’s coverage.

(3) Patient access to obstetrical and gy-necological care—(i) General rights—(A)Direct access. A group health plan, ora health insurance issuer offering grouphealth insurance coverage, described in

August 9, 2010 229 2010–32 I.R.B.

paragraph (a)(3)(ii) of this section maynot require authorization or referral bythe plan, issuer, or any person (includinga primary care provider) in the case ofa female participant or beneficiary whoseeks coverage for obstetrical or gyneco-logical care provided by a participatinghealth care professional who specializes inobstetrics or gynecology. In such a case,the plan or issuer must comply with therules of paragraph (a)(4) of this section byinforming each participant that the planmay not require authorization or referralfor obstetrical or gynecological care by aparticipating health care professional whospecializes in obstetrics or gynecology.The plan or issuer may require such aprofessional to agree to otherwise adhereto the plan’s or issuer’s policies and pro-cedures, including procedures regardingreferrals and obtaining prior authorizationand providing services pursuant to a treat-ment plan (if any) approved by the planor issuer. For purposes of this paragraph(a)(3), a health care professional who spe-cializes in obstetrics or gynecology is anyindividual (including a person other thana physician) who is authorized under ap-plicable State law to provide obstetrical orgynecological care.

(B) Obstetrical and gynecological care.A group health plan or health insuranceissuer described in paragraph (a)(3)(ii) ofthis section must treat the provision of ob-stetrical and gynecological care, and theordering of related obstetrical and gyneco-logical items and services, pursuant to thedirect access described under paragraph(a)(3)(i)(A) of this section, by a participat-ing health care professional who special-izes in obstetrics or gynecology as the au-thorization of the primary care provider.

(ii) Application of paragraph. A grouphealth plan, or a health insurance issueroffering group health insurance coverage,is described in this paragraph (a)(3) if theplan or issuer—

(A) Provides coverage for obstetrical orgynecological care; and

(B) Requires the designation by a par-ticipant or beneficiary of a participatingprimary care provider.

(iii) Construction. Nothing in para-graph (a)(3)(i) of this section is to be con-strued to—

(A) Waive any exclusions of coverageunder the terms and conditions of the planor health insurance coverage with respect

to coverage of obstetrical or gynecologicalcare; or

(B) Preclude the group health plan orhealth insurance issuer involved from re-quiring that the obstetrical or gynecologi-cal provider notify the primary care healthcare professional or the plan or issuer oftreatment decisions.

(iv) Examples. The rules of this para-graph (a)(3) are illustrated by the follow-ing examples:

Example 1. (i) Facts. A group health plan re-quires each participant to designate a physician toserve as the primary care provider for the participantand the participant’s family. Participant A, a female,requests a gynecological exam with Physician B, anin-network physician specializing in gynecologicalcare. The group health plan requires prior authoriza-tion from A’s designated primary care provider for thegynecological exam.

(ii) Conclusion. In this Example 1, the grouphealth plan has violated the requirements of this para-graph (a)(3) because the plan requires prior authoriza-tion from A’s primary care provider prior to obtaininggynecological services.

Example 2. (i) Facts. Same facts as Example 1except that A seeks gynecological services from C,an out-of-network provider.

(ii) Conclusion. In this Example 2, the grouphealth plan has not violated the requirements of thisparagraph (a)(3) by requiring prior authorization be-cause C is not a participating health care provider.

Example 3. (i) Facts. Same facts as Example1 except that the group health plan only requires Bto inform A’s designated primary care physician oftreatment decisions.

(ii) Conclusion. In this Example 3, the grouphealth plan has not violated the requirements of thisparagraph (a)(3) because A has direct access to Bwithout prior authorization. The fact that the grouphealth plan requires notification of treatment deci-sions to the designated primary care physician doesnot violate this paragraph (a)(3).

Example 4. (i) Facts. A group health plan re-quires each participant to designate a physician toserve as the primary care provider for the participantand the participant’s family. The group health planrequires prior authorization before providing benefitsfor uterine fibroid embolization.

(ii) Conclusion. In this Example 4, the plan re-quirement for prior authorization before providingbenefits for uterine fibroid embolization does not vio-late the requirements of this paragraph (a)(3) because,though the prior authorization requirement applies toobstetrical services, it does not restrict access to anyproviders specializing in obstetrics or gynecology.

(4) Notice of right to designate a pri-mary care provider—(i) In general. Ifa group health plan or health insuranceissuer requires the designation by a par-ticipant or beneficiary of a primary careprovider, the plan or issuer must providea notice informing each participant of theterms of the plan or health insurance cov-

erage regarding designation of a primarycare provider and of the rights—

(A) Under paragraph (a)(1)(i) of thissection, that any participating primary careprovider who is available to accept the par-ticipant or beneficiary can be designated;

(B) Under paragraph (a)(2)(i) of thissection, with respect to a child, that anyparticipating physician who specializes inpediatrics can be designated as the primarycare provider; and

(C) Under paragraph (a)(3)(i) of thissection, that the plan may not require au-thorization or referral for obstetrical or gy-necological care by a participating healthcare professional who specializes in ob-stetrics or gynecology.

(ii) Timing. The notice described inparagraph (a)(4)(i) of this section must beincluded whenever the plan or issuer pro-vides a participant with a summary plandescription or other similar description ofbenefits under the plan or health insurancecoverage.

(iii) Model language. The followingmodel language can be used to satisfy thenotice requirement described in paragraph(a)(4)(i) of this section:

(A) For plans and issuers that require orallow for the designation of primary careproviders by participants or beneficiaries,insert:

[Name of group health plan or healthinsurance issuer] generally [requires/al-lows] the designation of a primary careprovider. You have the right to des-ignate any primary care provider whoparticipates in our network and who isavailable to accept you or your fam-ily members. [If the plan or health in-surance coverage designates a primarycare provider automatically, insert: Un-til you make this designation, [name ofgroup health plan or health insurance is-suer] designates one for you.] For infor-mation on how to select a primary careprovider, and for a list of the participat-ing primary care providers, contact the[plan administrator or issuer] at [insertcontact information].

(B) For plans and issuers that requireor allow for the designation of a primarycare provider for a child, add:

For children, you may designatea pediatrician as the primary careprovider.

(C) For plans and issuers that pro-vide coverage for obstetric or gyneco-

2010–32 I.R.B. 230 August 9, 2010

logical care and require the designationby a participant or beneficiary of a pri-mary care provider, add:

You do not need prior authoriza-tion from [name of group health planor issuer] or from any other person(including a primary care provider)in order to obtain access to obstet-rical or gynecological care from ahealth care professional in our net-work who specializes in obstetricsor gynecology. The health care pro-fessional, however, may be requiredto comply with certain procedures,including obtaining prior authoriza-tion for certain services, following apre-approved treatment plan, or pro-cedures for making referrals. Fora list of participating health careprofessionals who specialize in ob-stetrics or gynecology, contact the[plan administrator or issuer] at [in-sert contact information].

(b) Coverage of emergency ser-vices—(1) Scope. If a group health plan,or a health insurance issuer offering grouphealth insurance coverage, provides anybenefits with respect to services in anemergency department of a hospital, theplan or issuer must cover emergency ser-vices (as defined in paragraph (b)(4)(ii) ofthis section) consistent with the rules ofthis paragraph (b).

(2) General rules. A plan or issuer sub-ject to the requirements of this paragraph(b) must provide coverage for emergencyservices in the following manner—

(i) Without the need for any prior autho-rization determination, even if the emer-gency services are provided on an out-of-network basis;

(ii) Without regard to whether thehealth care provider furnishing the emer-gency services is a participating networkprovider with respect to the services;

(iii) If the emergency services are pro-vided out of network, without imposingany administrative requirement or limita-tion on coverage that is more restrictivethan the requirements or limitations thatapply to emergency services received fromin-network providers;

(iv) If the emergency services are pro-vided out of network, by complying withthe cost-sharing requirements of paragraph(b)(3) of this section; and

(v) Without regard to any other term orcondition of the coverage, other than —

(A) The exclusion of or coordination ofbenefits;

(B) An affiliation or waiting period per-mitted under part 7 of ERISA, part A of ti-tle XXVII of the PHS Act, or chapter 100of the Internal Revenue Code; or

(C) Applicable cost sharing.(3) Cost-sharing requirements—(i) Co-

payments and coinsurance. Any cost-shar-ing requirement expressed as a copaymentamount or coinsurance rate imposed withrespect to a participant or beneficiary forout-of-network emergency services cannotexceed the cost-sharing requirement im-posed with respect to a participant or bene-ficiary if the services were provided in-net-work. However, a participant or benefi-ciary may be required to pay, in additionto the in-network cost sharing, the excessof the amount the out-of-network providercharges over the amount the plan or is-suer is required to pay under this para-graph (b)(3)(i). A group health plan orhealth insurance issuer complies with therequirements of this paragraph (b)(3) if itprovides benefits with respect to an emer-gency service in an amount equal to thegreatest of the three amounts specified inparagraphs (b)(3)(i)(A), (b)(3)(i)(B), and(b)(3)(i)(C) of this section (which are ad-justed for in-network cost-sharing require-ments).

(A) The amount negotiated with in-net-work providers for the emergency servicefurnished, excluding any in-network co-payment or coinsurance imposed with re-spect to the participant or beneficiary. Ifthere is more than one amount negotiatedwith in-network providers for the emer-gency service, the amount described underthis paragraph (b)(3)(i)(A) is the median ofthese amounts, excluding any in-networkcopayment or coinsurance imposed withrespect to the participant or beneficiary. Indetermining the median described in thepreceding sentence, the amount negotiatedwith each in-network provider is treatedas a separate amount (even if the sameamount is paid to more than one provider).If there is no per-service amount negoti-ated with in-network providers (such asunder a capitation or other similar paymentarrangement), the amount under this para-graph (b)(3)(i)(A) is disregarded.

(B) The amount for the emergency ser-vice calculated using the same method theplan generally uses to determine paymentsfor out-of-network services (such as the

usual, customary, and reasonable amount),excluding any in-network copayment orcoinsurance imposed with respect to theparticipant or beneficiary. The amount inthis paragraph (b)(3)(i)(B) is determinedwithout reduction for out-of-network costsharing that generally applies under theplan or health insurance coverage with re-spect to out-of-network services. Thus, forexample, if a plan generally pays 70 per-cent of the usual, customary, and reason-able amount for out-of-network services,the amount in this paragraph (b)(3)(i)(B)for an emergency service is the total (thatis, 100 percent) of the usual, customary,and reasonable amount for the service, notreduced by the 30 percent coinsurance thatwould generally apply to out-of-networkservices (but reduced by the in-networkcopayment or coinsurance that the individ-ual would be responsible for if the emer-gency service had been provided in-net-work).

(C) The amount that would be paidunder Medicare (part A or part B of ti-tle XVIII of the Social Security Act, 42U.S.C. 1395 et seq.) for the emergencyservice, excluding any in-network copay-ment or coinsurance imposed with respectto the participant or beneficiary.

(ii) Other cost sharing. Any cost-shar-ing requirement other than a copaymentor coinsurance requirement (such as adeductible or out-of-pocket maximum)may be imposed with respect to emer-gency services provided out of networkif the cost-sharing requirement generallyapplies to out-of-network benefits. Adeductible may be imposed with respectto out-of-network emergency servicesonly as part of a deductible that gener-ally applies to out-of-network benefits.If an out-of-pocket maximum generallyapplies to out-of-network benefits, thatout-of-pocket maximum must apply toout-of-network emergency services.

(iii) Examples. The rules of this para-graph (b)(3) are illustrated by the follow-ing examples. In all of these examples, thegroup health plan covers benefits with re-spect to emergency services.

Example 1. (i) Facts. A group health plan im-poses a 25% coinsurance responsibility on individu-als who are furnished emergency services, whetherprovided in network or out of network. If a coveredindividual notifies the plan within two business daysafter the day an individual receives treatment in anemergency department, the plan reduces the coinsur-ance rate to 15%.

August 9, 2010 231 2010–32 I.R.B.

(ii) Conclusion. In this Example 1, the require-ment to notify the plan in order to receive a reductionin the coinsurance rate does not violate the require-ment that the plan cover emergency services withoutthe need for any prior authorization determination.This is the result even if the plan required that it benotified before or at the time of receiving services atthe emergency department in order to receive a reduc-tion in the coinsurance rate.

Example 2. (i) Facts. A group health plan im-poses a $60 copayment on emergency services with-out preauthorization, whether provided in network orout of network. If emergency services are preautho-rized, the plan waives the copayment, even if it laterdetermines the medical condition was not an emer-gency medical condition.

(ii) Conclusion. In this Example 2, by requir-ing an individual to pay more for emergency servicesif the individual does not obtain prior authorization,the plan violates the requirement that the plan coveremergency services without the need for any prior au-thorization determination. (By contrast, if, to havethe copayment waived, the plan merely required thatit be notified rather than a prior authorization, thenthe plan would not violate the requirement that theplan cover emergency services without the need forany prior authorization determination.)

Example 3. (i) Facts. A group health plan cov-ers individuals who receive emergency services withrespect to an emergency medical condition from anout-of-network provider. The plan has agreementswith in-network providers with respect to a certainemergency service. Each provider has agreed to pro-vide the service for a certain amount. Among all theproviders for the service: one has agreed to accept$85, two have agreed to accept $100, two have agreedto accept $110, three have agreed to accept $120, andone has agreed to accept $150. Under the agreement,the plan agrees to pay the providers 80% of the agreedamount, with the individual receiving the service re-sponsible for the remaining 20%.

(ii) Conclusion. In this Example 3, the valuestaken into account in determining the median are $85,$100, $100, $110, $110, $120, $120, $120, and $150.Therefore, the median amount among those agreedto for the emergency service is $110, and the amountunder paragraph (b)(3)(i)(A) of this section is 80% of$110 ($88).

Example 4. (i) Facts. Same facts as Example3. Subsequently, the plan adds another provider toits network, who has agreed to accept $150 for theemergency service.

(ii) Conclusion. In this Example 4, the medianamount among those agreed to for the emergencyservice is $115. (Because there is no one middleamount, the median is the average of the two middleamounts, $110 and $120.) Accordingly, the amountunder paragraph (b)(3)(i)(A) of this section is 80% of$115 ($92).

Example 5. (i) Facts. Same facts as Example4. An individual covered by the plan receives theemergency service from an out-of-network provider,who charges $125 for the service. With respect toservices provided by out-of-network providers gen-erally, the plan reimburses covered individuals 50%

of the reasonable amount charged by the provider formedical services. For this purpose, the reasonableamount for any service is based on information oncharges by all providers collected by a third party,on a zip-code-by-zip-code basis, with the plan treat-ing charges at a specified percentile as reasonable.For the emergency service received by the individual,the reasonable amount calculated using this method is$116. The amount that would be paid under Medicarefor the emergency service, excluding any copaymentor coinsurance for the service, is $80.

(ii) Conclusion. In this Example 5, the plan isresponsible for paying $92.80, 80% of $116. Themedian amount among those agreed to for the emer-gency service is $115 and the amount the plan wouldpay is $92 (80% of $115); the amount calculated us-ing the same method the plan uses to determine pay-ments for out-of-network services — $116 — ex-cluding the in-network 20% coinsurance, is $92.80;and the Medicare payment is $80. Thus, the greatestamount is $92.80. The individual is responsible forthe remaining $32.20 charged by the out-of-networkprovider.

Example 6. (i) Facts. Same facts as Example 5.The group health plan generally imposes a $250 de-ductible for in-network health care. With respect toall health care provided by out-of-network providers,the plan imposes a $500 deductible. (Covered in-net-work claims are credited against the deductible.) Theindividual has incurred and submitted $260 of cov-ered claims prior to receiving the emergency serviceout of network.

(ii) Conclusion. In this Example 6, the plan is notresponsible for paying anything with respect to theemergency service furnished by the out-of-networkprovider because the covered individual has not sat-isfied the higher deductible that applies generally toall health care provided out of network. However, theamount the individual is required to pay is creditedagainst the deductible.

(4) Definitions. The definitions in thisparagraph (b)(4) govern in applying theprovisions of this paragraph (b).

(i) Emergency medical condition. Theterm emergency medical condition meansa medical condition manifesting itselfby acute symptoms of sufficient severity(including severe pain) so that a pru-dent layperson, who possesses an averageknowledge of health and medicine, couldreasonably expect the absence of im-mediate medical attention to result in acondition described in clause (i), (ii), or(iii) of section 1867(e)(1)(A) of the SocialSecurity Act (42 U.S.C. 1395dd(e)(1)(A)).(In that provision of the Social SecurityAct, clause (i) refers to placing the healthof the individual (or, with respect to apregnant woman, the health of the womanor her unborn child) in serious jeopardy;clause (ii) refers to serious impairment to

bodily functions; and clause (iii) refers toserious dysfunction of any bodily organ orpart.)

(ii) Emergency services. The termemergency services means, with respect toan emergency medical condition—

(A) A medical screening examination(as required under section 1867 of the So-cial Security Act, 42 U.S.C. 1395dd) that iswithin the capability of the emergency de-partment of a hospital, including ancillaryservices routinely available to the emer-gency department to evaluate such emer-gency medical condition, and

(B) Such further medical examinationand treatment, to the extent they are withinthe capabilities of the staff and facilitiesavailable at the hospital, as are requiredunder section 1867 of the Social SecurityAct (42 U.S.C. 1395dd) to stabilize thepatient.

(iii) Stabilize. The term to stabilize,with respect to an emergency medical con-dition (as defined in paragraph (b)(4)(i) ofthis section) has the meaning given in sec-tion 1867(e)(3) of the Social Security Act(42 U.S.C. 1395dd(e)(3)).

(c) Effective/applicability date.The provisions of this section ap-ply for plan years beginning onor after September 23, 2010. See§54.9815–1251T for determining theapplication of this section to grandfatheredhealth plans (providing that these rulesregarding patient protections do not applyto grandfathered health plans).

(d) Expiration date. This section ex-pires on June 21, 2013.

Par. 8. The authority citation for part602 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 9. Section 602.101(b) is amended

by adding the following entries in numeri-cal order to the table to read as follows:

§602.101 OMB Control numbers.

* * * * *(b) * * *

2010–32 I.R.B. 232 August 9, 2010

CFR part or section whereIdentified and described

Current OMBcontrol No.

* * * * *54.9815–2711T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–217954.9815–2712T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–218054.9815–2719AT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–2181* * * * *

(Filed by the Office of the Federal Register on June 22, 2010,11:15 a.m., and published in the issue of the Federal Registerfor June 28, 2010, 75 F.R. 37187)

August 9, 2010 233 2010–32 I.R.B.

Part II. Treaties and Tax LegislationSubpart A.—Tax Conventions and Other Related Items

Announcement 2010–48U.S.—Greenland Reciprocal ExemptionAgreement

The U.S. and Greenland (on behalf ofthe Government of Denmark pursuant

to the Danish Act on the Conclusionof Agreements under International Lawby the Government of Greenland) haveexchanged diplomatic notes evidencinga reciprocal exemption for income from

the international operation of a ship orships or aircraft.

The United States and Greenland (onbehalf of the Government of Denmark pur-suant to the Danish Act on the Conclusionof Agreements under International Law bythe Government of Greenland) have ex-changed diplomatic notes evidencing an

agreement for the reciprocal exemption ofincome from the international operation ofa ship or ships or aircraft for taxable yearsbeginning on or after January 1, 2011.

The principal author of this announce-ment is Patricia Bray of the Office of

Associate Chief Counsel (International).For further information regarding this an-nouncement, contact Patricia Bray at (202)622–3880 (not a toll-free call).

The text of the agreement is as follows.

2010–32 I.R.B. 234 August 9, 2010

August 9, 2010 235 2010–32 I.R.B.

2010–32 I.R.B. 236 August 9, 2010

August 9, 2010 237 2010–32 I.R.B.

2010–32 I.R.B. 238 August 9, 2010

Part IV. Items of General InterestNotice of ProposedRulemaking byCross-Reference toTemporary Regulations

Requirements for GroupHealth Plans and HealthInsurance Issuers underthe Patient Protection andAffordable Care Act Relatingto Preexisting ConditionExclusions, Lifetime andAnnual Limits, Rescissions,and Patient Protections

REG–120399–10

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingby cross-reference to temporary regula-tions.

SUMMARY: Elsewhere in this issue ofthe Bulletin, the Treasury Departmentand the IRS are issuing temporary reg-ulations (T.D. 9491) under the PatientProtection and Affordable Care Act (theAffordable Care Act) relating to preex-isting condition exclusions, lifetime andannual limits, rescissions, and patient pro-tections. Those temporary regulationsare being issued at the same time that theEmployee Benefits Security Administra-tion of the U.S. Department of Labor andthe Office of Consumer Information andInsurance Oversight of the U.S. Depart-ment of Health and Human Services areissuing substantially similar interim finalregulations under the Employee Retire-ment Income Security Act of 1974 andthe Public Health Service Act. The tem-porary regulations provide guidance toemployers, group health plans, and healthinsurance issuers providing group healthinsurance coverage. The text of thosetemporary regulations also serves as thetext of these proposed regulations.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by September 27, 2010.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–120399–10),Room 5205, Internal Revenue Ser-vice, P.O. Box 7604, Ben Franklin Sta-tion, Washington, DC 20044. Sub-missions may be hand-delivered to:CC:PA:LPD:PR (REG–120399–10),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington DC 20224. Alternatively,taxpayers may submit comments elec-tronically via the Federal eRulemakingPortal at http://www.regulations.gov (IRSREG–120399–10).

FOR FURTHER INFORMATIONCONTACT: Concerning the regula-tions, Karen Levin at 202–622–6080;concerning submissions of comments,Oluwafunmilayo Taylor at 202–622–7180(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in this notice of proposed rulemak-ing have been submitted to the Office ofManagement and Budget for review inaccordance with the Paperwork Reduc-tion Act of 1995 (44 U.S.C. 3507(d)).Comments on the collection of infor-mation should be sent to the Office ofManagement and Budget, Attn: DeskOfficer for the Department of the Trea-sury, Office of Information and Regu-latory Affairs, Washington, DC 20503,with copies to the Internal RevenueService, Attn: IRS Reports ClearanceOfficer, SE:W:CAR:MP:T:T:SP, Wash-ington, DC 20224. Comments on thecollection of information should be re-ceived by August 27, 2010. Commentsare specifically requested concerning:

• Whether the proposed collection ofinformation is necessary for the properperformance of the functions of theInternal Revenue Service, includingwhether the information will havepractical utility;

• The accuracy of the estimated burdensassociated with the proposed collec-tion of information (see the preambleto the temporary regulations publishedelsewhere in this issue of the Bulletin);

• How to enhance the quality, utility, andclarity of the information to be col-lected;

• How to minimize the burden of com-plying with the proposed collection ofinformation, including the applicationof automated collection techniques orother forms of information technology;and

• Estimates of capital or start-up costsand costs of operation, maintenance,and purchase of services to provide in-formation.

The collections of informa-tion are in §54.9815–2711T(e)(2),§54.9815–2712T(a)(1), and§54.9815–2719AT(a)(4) (see the tempo-rary regulations published elsewhere inthis issue of the Bulletin). The temporaryregulations require that group health plansand group health insurance issuers: (1)notify individuals otherwise eligible forcoverage who have previously reacheda lifetime limit that the lifetime limit nolonger applies and of the right to enrollin the coverage; (2) notify any individualwhose coverage the plan or issuer intendsto rescind 30 days in advance of therescission; and (3) for plans or healthinsurance coverage that require or providefor covered individuals to designate aprimary care provider, notify individualsof their rights regarding such designationunder section 2719A of the Public HealthService Act (which is incorporated byreference into section 9815 of the Code)and of the right to obtain obstetrical andgynecological services without a referral.The likely respondents are business orother for-profit institutions, and nonprofitinstitutions. Responses to these collec-tions of information are mandatory.

An agency may not conduct or sponsor,and a person is not required to respond to, acollection of information unless it displaysa valid control number assigned by the Of-fice of Management and Budget.

Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally tax returns and tax returninformation are confidential, as requiredby 26 U.S.C. 6103.

August 9, 2010 239 2010–32 I.R.B.

Background

The temporary regulations publishedelsewhere in this issue of the Bulletinadd §§54.9815–2704T, 54.9815–2711T,54.9815–2712T, and 54.9815–2719AT tothe Miscellaneous Excise Tax Regulations.The proposed and temporary regulationsare being published as part of a joint rule-making with the Department of Laborand the Department of Health and HumanServices (the joint rulemaking). The textof those temporary regulations also servesas the text of these proposed regulations.The preamble to the temporary regulationsexplains those temporary regulations andthese proposed regulations.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It has also beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to this proposed regu-lation. It is hereby certified that the collec-tions of information contained in this no-tice of proposed rulemaking will not havea significant impact on a substantial num-ber of small entities. Accordingly, a regu-latory flexibility analysis is not required.

Section 54.9815–2711T(e) of the tem-porary regulations requires both grouphealth insurance issuers and group healthplans to notify individuals otherwise el-igible for coverage who have previouslyreached a lifetime limit that the lifetimelimit no longer applies and of the rightto enroll in the coverage. Under the tem-porary regulations, if a health insuranceissuer satisfies this notice obligation, it issatisfied not just for the issuer but also forthe group health plan. For group healthplans maintained by small entities, it isanticipated that the health insurance issuerwill satisfy this notice obligation for boththe plan and the issuer in almost all cases.For this reason, this information collectionrequirement will not impose a significantimpact on a substantial number of smallentities.

Section 54.9815–2712T(a)(1) of thetemporary regulations requires grouphealth plans and group health insuranceissuers to provide 30 days advance notice

to any individual whose coverage wouldbe affected before the plan or issuer canrescind the coverage. If a health insuranceissuer satisfies this notice obligation, it issatisfied not just for the issuer but also forthe group health plan. For group healthplans maintained by small entities, it isanticipated that the health insurance issuerwill satisfy this notice obligation for boththe plan and the issuer in almost all cases.For this reason, this information collectionrequirement will not impose a significantimpact on a substantial number of smallentities.

Under §54.9815–2719AT(a)(4) of thetemporary regulations, a group health planor health insurance coverage that requiresor provides for covered individuals to des-ignate a primary care provider must notifyindividuals covered under the plan of theirrights to choose any primary care providerin the plan’s network who is available toaccept the individual, to designate a pe-diatrician in the network for a child, andto obtain obstetrical and gynecological ser-vices without a referral. If a health insur-ance issuer satisfies this notice obligation,it is satisfied not just for the issuer but alsofor the group health plan. For group healthplans maintained by small entities, it is an-ticipated that the health insurance issuerwill satisfy this notice obligation for boththe plan and the issuer in almost all cases.For this reason, this information collectionrequirement will not impose a significantimpact on a substantial number of smallentities.

For further information and for analy-ses relating to the joint rulemaking, see thepreamble to the joint rulemaking. Pursuantto section 7805(f) of the Internal RevenueCode, this regulation has been submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments(a signed original and eight (8) copies)or electronic comments that are submittedtimely to the IRS. Comments are specifi-cally requested on the clarity of the pro-posed regulations and how they may bemade easier to understand. All comments

will be available for public inspection andcopying. A public hearing may be sched-uled if requested in writing by a personthat timely submits written comments. Ifa public hearing is scheduled, notice of thedate, time, and place for the hearing willbe published in the Federal Register.

Drafting Information

The principal author of these proposedregulations is Karen Levin, Office of theDivision Counsel/Associate Chief Coun-sel (Tax Exempt and Government Enti-ties), IRS. The proposed regulations, aswell as the temporary regulations, havebeen developed in coordination with per-sonnel from the U.S. Department of Laborand the U.S. Department of Health and Hu-man Services.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 54 is pro-posed to be amended as follows:

PART 54—PENSION EXCISE TAXES

Paragraph 1. The authority citation forpart 54 is amended by adding entries innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 54.9815–2704 also issued un-

der 26 U.S.C. 9833.Section 54.9815–2711 also issued un-

der 26 U.S.C. 9833.Section 54.9815–2712 also issued un-

der 26 U.S.C. 9833. * * *Section 54.9815–2719A also issued un-

der 26 U.S.C. 9833. * * *Par. 2. Section 54.9815–2704 is added

to read as follows:

§54.9815–2704 Prohibition of preexistingcondition exclusions.

[The text of proposed §54.9815–2704 isthe same as the text of §54.9815–2704Tpublished elsewhere in this issue of theBulletin].

Par. 3. Section 54.9815–2711 is addedto read as follows:

§54.9815–2711 No lifetime or annuallimits.

[The text of proposed §54.9815–2711 isthe same as the text of §54.9815–2711T

2010–32 I.R.B. 240 August 9, 2010

published elsewhere in this issue of theBulletin].

Par. 4. Section 54.9815–2712 is addedto read as follows:

§54.9815–2712 Rules regardingrescissions.

[The text of proposed §54.9815–2712 isthe same as the text of §54.9815–2712T

published elsewhere in this issue of theBulletin].

Par. 5. Section 54.9815–2719A isadded to read as follows:

§54.9815–2719A Patient protections.

[The text of proposed §54.9815–2719Ais the same as the text of

§54.9815–2719AT published elsewhere inthis issue of the Bulletin].

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on June 22, 2010,11:15 a.m., and published in the issue of the Federal Registerfor June 28, 2010, 75 F.R. 37242)

August 9, 2010 241 2010–32 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

2010–32 I.R.B. i August 9, 2010

Numerical Finding List1

Bulletins 2010–27 through 2010–32

Announcements:

2010-43, 2010-27 I.R.B. 42

2010-44, 2010-28 I.R.B. 54

2010-45, 2010-29 I.R.B. 87

2010-46, 2010-29 I.R.B. 87

2010-47, 2010-30 I.R.B. 173

2010-48, 2010-32 I.R.B. 234

Notices:

2010-48, 2010-27 I.R.B. 9

2010-49, 2010-27 I.R.B. 10

2010-50, 2010-27 I.R.B. 12

2010-51, 2010-29 I.R.B. 83

2010-52, 2010-30 I.R.B. 88

2010-53, 2010-31 I.R.B. 182

Proposed Regulations:

REG-151605-09, 2010-31 I.R.B. 184

REG-112841-10, 2010-27 I.R.B. 41

REG-118412-10, 2010-29 I.R.B. 85

REG-120399-10, 2010-32 I.R.B. 239

Revenue Procedures:

2010-25, 2010-27 I.R.B. 16

2010-26, 2010-30 I.R.B. 91

2010-27, 2010-31 I.R.B. 183

Revenue Rulings:

2010-18, 2010-27 I.R.B. 1

2010-19, 2010-31 I.R.B. 174

Tax Conventions:

2010-48, 2010-32 I.R.B. 234

Treasury Decisions:

9486, 2010-27 I.R.B. 3

9487, 2010-28 I.R.B. 48

9488, 2010-28 I.R.B. 51

9489, 2010-29 I.R.B. 55

9490, 2010-31 I.R.B. 176

9491, 2010-32 I.R.B. 186

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2010–1 through 2010–26 is in Internal Revenue Bulletin2010–26, dated June 28, 2010.

August 9, 2010 ii 2010–32 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2010–27 through 2010–32

Notices:

2003-19

Revoked by

Notice 2010-53, 2010-31 I.R.B. 182

Revenue Procedures:

81-18

Obsoleted by

Rev. Proc. 2010-27, 2010-31 I.R.B. 183

2007-44

Modified by

Notice 2010-48, 2010-27 I.R.B. 9

2009-18

Obsoleted in part by

Rev. Proc. 2010-25, 2010-27 I.R.B. 16

2009-30

Superseded by

Rev. Proc. 2010-26, 2010-30 I.R.B. 91

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2010–1 through 2010–26 is in Internal Revenue Bulletin 2010–26, dated June 28, 2010.

2010–32 I.R.B. iii August 9, 2010

August 9, 2010 2010–32 I.R.B.

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