Td 9491

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 9815.—Additional
Market Reforms

lifetime and annual dollar limits on benefits, rescissions, and patient protections.

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

DATES: Effective Date: These interim final regulations are effective on August 27,
2010.
Comment date: Comments are due on
or before August 27, 2010.
Applicability dates:
1. Group health plans and group health
insurance coverage. These interim final
regulations, except those under Public
Health Service Act (PHS Act) section
2704 (26 CFR 54.9815–2704T, 29 CFR
2590.715–2704, 45 CFR 147.108), generally apply to group health plans and group
health insurance issuers for plan years
beginning on or after September 23, 2010.
These interim final regulations under PHS
Act section 2704 (26 CFR 54.9815–2704T,
29 CFR 2590.715–2704, 45 CFR 147.108)
generally apply for plan years beginning
on or after January 1, 2014, except that in
the case of individuals who are under 19
years of age, these interim final regulations
under PHS Act section 2704 apply for plan
years beginning on or after September 23,
2010.
2. Individual health insurance coverage. These interim final regulations,
except those under PHS Act section
2704 (45 CFR 147.108), generally apply to individual health insurance issuers
for policy years beginning on or after September 23, 2010. These interim
final regulations under PHS Act section
2704 (45 CFR 147.108) generally apply
to individual health insurance issuers
for policy years beginning on or after
January 1, 2014, except that in the case of
enrollees who are under 19 years of age,
these interim final regulations under PHS
Act section 2704 apply for policy years
beginning on or after September 23, 2010.

T.D. 9491
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 54 and 602
DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2590
RIN 1210–AB43
DEPARTMENT OF HEALTH
AND HUMAN SERVICES
OCIIO–9994–IFC
45 CFR Parts 144, 146, and
147
RIN 0991–AB69
Patient Protection and
Affordable Care Act:
Preexisting Condition
Exclusions, Lifetime and
Annual Limits, Rescissions,
and Patient Protections
AGENCIES: Internal Revenue Service,
Department of the Treasury; Employee
Benefits Security Administration, Department of Labor; Office of Consumer
Information and Insurance Oversight, Department of Health and Human Services.
ACTION: Interim final rules with request
for comments.
SUMMARY: This document contains interim final regulations implementing the
rules for group health plans and health insurance coverage in the group and individual markets under provisions of the Patient
Protection and Affordable Care Act regarding preexisting condition exclusions,

2010–32 I.R.B.

ADDRESSES: Written comments may be
submitted to any of the addresses specified
below. Any comment that is submitted to
any Department will be shared with the
other Departments. Please do not submit
duplicates.
All comments will be made available
to the public. WARNING: Do not include any personally identifiable informa-

186

tion (such as name, address, or other contact information) or confidential business
information that you do not want publicly
disclosed. All comments are posted on the
Internet exactly as received, and can be
retrieved by most Internet search engines.
No deletions, modifications, or redactions
will be made to the comments received, as
they are public records. Comments may be
submitted anonymously.
Department of Labor. Comments to the
Department of Labor, identified by RIN
1210–AB43, by one of the following methods:

•
•
•

Portal:
Federal
eRulemaking
Follow
http://www.regulations.gov.
the instructions for submitting comments.
Email:
[email protected].
Mail or Hand Delivery: Office of
Health Plan Standards and Compliance
Assistance, Employee Benefits Security Administration, Room N–5653,
U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC
20210, Attention: RIN 1210–AB43.

Comments received by the Department of Labor will be posted without
change to http://www.regulations.gov and
http://www.dol.gov/ebsa, and available for
public inspection at the Public Disclosure
Room, N–1513, Employee Benefits Security Administration, 200 Constitution
Avenue, NW, Washington, DC 20210.
Department of Health and Human Services. In commenting, please refer to file
code OCIIO–9994–IFC. Because of staff
and resource limitations, we cannot accept
comments by facsimile (FAX) transmission.
You may submit comments in one of
four ways (please choose only one of the
ways listed):

•

•

Electronically. You may submit electronic comments on this regulation
to http://www.regulations.gov. Follow the instructions under the “More
Search Options” tab.
By regular mail. You may mail written comments to the following address
ONLY:

August 9, 2010

Office of Consumer Information
and Insurance Oversight
Department of Health
and Human Services,
Attention: OCIIO–9994–IFC,
P.O. Box 8016,
Baltimore, MD 21244–1850.

•

Please allow sufficient time for
mailed comments to be received before the close of the comment period.
By express or overnight mail. You may
send written comments to the following address ONLY:
Office of Consumer Information
and Insurance Oversight,
Department of Health
and 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, you
may deliver (by hand or courier) your
written comments before the close of
the comment period to either of the following addresses:
• For delivery in Washington, DC—
Office of Consumer
Information
and Insurance Oversight,
Department of Health
and Human Services,
Room 445-G, Hubert H.
Humphrey Building,
200 Independence Avenue, SW,
Washington, DC 20201

•

(Because access to the interior
of the Hubert H. Humphrey Building is not readily available to persons without Federal government
identification, commenters are encouraged to leave their comments
in the OCIIO drop slots located in
the main lobby of the building. A
stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an
extra copy of the comments being
filed.)
For delivery in Baltimore, MD—

Centers for Medicare
& Medicaid Services,
Department of Health
and Human Services,
7500 Security Boulevard,
Baltimore, MD 21244–1850

If you intend to deliver your comments
to the Baltimore address, please call (410)
786–7195 in advance to schedule your arrival with one of our staff members.
Comments mailed to the addresses indicated as appropriate for hand or courier
delivery may be delayed and received after
the comment period.
Submission of comments on paperwork
requirements. You may submit comments
on this document’s paperwork requirements by following the instructions at the
end of the “Collection of Information Requirements” section in this document.
Inspection of Public Comments: All
comments received before the close of
the comment period are available for
viewing by the public, including any
personally identifiable or confidential
business information that is included in
a comment. We post all comments received before the close of the comment
period on the following website as soon
as possible after they have been received:
http://www.regulations.gov. Follow the
search instructions on that Web site to
view public comments.
Comments received timely will also
be available for public inspection as they
are received, generally beginning approximately three weeks after publication
of a document, at the headquarters of
the Centers for Medicare & Medicaid
Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through
Friday of each week from 8:30 a.m. to
4 p.m. EST. To schedule an appointment to view public comments, phone
1–800–743–3951.
Internal Revenue Service. Comments
to the IRS, identified by REG–120399–10,
by one of the following methods:

•
•

August 9, 2010

Federal
eRulemaking
Portal:
http://www.regulations.gov.
Follow
the instructions for submitting comments.
Mail:
CC:PA:LPD:PR
(REG–120399–10),
Room 5205,
Internal Revenue Service, P.O. Box

187

•

7604, Ben Franklin Station, Washington, DC 20044.
Hand or courier delivery: Monday
through Friday between the hours of
8 a.m. and 4 p.m. to: CC:PA:LPD:PR
(REG–120399–10), Courier’s Desk,
Internal Revenue Service, 1111
Constitution Avenue, NW, Washington
DC 20224.

All submissions to the IRS will be open
to public inspection and copying in Room
1621, 1111 Constitution Avenue, NW,
Washington, DC from 9 a.m. to 4 p.m.
FOR FURTHER INFORMATION
CONTACT: Amy Turner or Beth Baum,
Employee Benefits Security Administration, Department of Labor, at (202)
693–8335; Karen Levin, Internal Revenue Service, Department of the Treasury, at (202) 622–6080; Jim Mayhew,
Office of Consumer Information and
Insurance Oversight, Department of
Health and Human Services, at (410)
786–1565. Customer Service Information: Individuals interested in obtaining information from the Department
of Labor concerning employment-based
health coverage laws may call the EBSA
Toll-Free Hotline at 1–866–444–EBSA
(3272) or visit the Department of Labor’s website (http://www.dol.gov/ebsa).
In addition, information from HHS on
private health insurance for consumers
can be found on the Centers for Medicare & Medicaid Services (CMS) website
(http://www.cms.hhs.gov/HealthInsReformforConsume/01_Overview.asp) and
information on health reform can be found
at http://www.healthreform.gov.
SUPPLEMENTARY INFORMATION:
I. Background
The Patient Protection and Affordable Care Act (the Affordable Care
Act), Pub. L. 111–148, was enacted
on March 23, 2010; the Health Care
and Education Reconciliation Act (the
Reconciliation Act), Pub. L. 111–152,
was enacted on March 30, 2010.
The Affordable Care Act and the
Reconciliation Act reorganize, amend,
and add to the provisions of part A of
title XXVII of the Public Health Service
Act (PHS Act) relating to group health
plans and health insurance issuers in the

2010–32 I.R.B.

group and individual markets. The term
“group health plan” includes both insured
and self-insured group health plans.1
The Affordable Care Act adds section
715(a)(1) to the Employee Retirement
Income Security Act (ERISA) and section
9815(a)(1) to the Internal Revenue Code
(the Code) to incorporate the provisions
of part A of title XXVII of the PHS Act
into ERISA and the Code, and make
them applicable to group health plans,
and health insurance issuers providing
health insurance coverage in connection
with group health plans. The PHS Act
sections incorporated by this reference
are sections 2701 through 2728. PHS
Act sections 2701 through 2719A are
substantially new, though they incorporate
some provisions of prior law. PHS Act
sections 2722 through 2728 are sections of
prior law renumbered, with some, mostly
minor, changes.
Subtitles A and C of title I of the Affordable Care Act amend the requirements
of title XXVII of the PHS Act (changes
to which are incorporated into ERISA
section 715).
The preemption provisions of ERISA section 731 and PHS Act
section 27242 (implemented in 29 CFR
2590.731(a) and 45 CFR 146.143(a)) apply so that the requirements of part 7 of
ERISA and title XXVII of the PHS Act,
as amended by the Affordable Care Act,
are not to be “construed to supersede any
provision of State law which establishes,
implements, or continues in effect any
standard or requirement solely relating
to health insurance issuers in connection
with group or individual health insurance coverage except to the extent that
such standard or requirement prevents
the application of a requirement” of the
Affordable Care Act. Accordingly, State
laws that impose on health insurance issuers requirements that are stricter than the
requirements imposed by the Affordable
Care Act will not be superseded by the
Affordable Care Act.
The Departments of Health and Human
Services, Labor, and the Treasury (the

Departments) are issuing regulations in
several phases implementing the revised
PHS Act sections 2701 through 2719A
and related provisions of the Affordable
Care Act. The first phase in this series
was a pair of publications consisting of
a Request for Information relating to the
medical loss ratio provisions of PHS Act
section 2718 and a Request for Information relating to the rate review process of
PHS Act 2794, both published in the Federal Register on April 14, 2010 (75 FR
19297 and 19335). The second phase was
interim final regulations implementing
PHS Act section 2714 (requiring coverage
of adult children to age 26), published in
the Federal Register on May 13, 2010
(T.D. 9482, 2010–22 I.R.B. 698 [75 FR
27122]). The third phase was interim final
regulations implementing section 1251 of
the Affordable Care Act (relating to status
as a grandfathered health plan), published
in the Federal Register on June 17, 2010
(T.D. 9489, 2010–29 I.R.B. 55 [75 FR
34538]). These interim final regulations
are being published to implement PHS
Act sections 2704 (prohibiting preexisting
condition exclusions), 2711 (regarding
lifetime and annual dollar limits on benefits), 2712 (regarding restrictions on
rescissions), and 2719A (regarding patient
protections). PHS Act section 2704 generally is effective for plan years (in the
individual market, policy years) beginning
on or after January 1, 2014. However, with
respect to enrollees, including applicants
for enrollment, who are under 19 years of
age, PHS Act section 2704 is effective for
plan years beginning on or after September 23, 2010 (which is six months after
the March 23, 2010 date of enactment of
the Affordable Care Act); or in the case
of individual health insurance coverage,
for policy years beginning, or applications
denied, on or after September 23, 2010.3
The rest of these provisions generally are
effective for plan years (in the individual
market, policy years) beginning on or after
September 23, 2010. The implementation
of other provisions of PHS Act sections

2701 through 2719A will be addressed in
future regulations.
II. Overview of the Regulations
A. PHS Act Section 2704, Prohibition of
Preexisting Condition Exclusions (26 CFR
54.9815–2704T, 29 CFR 2590.715–2704,
45 CFR 147.108)
Section 1201 of the Affordable Care
Act adds a new PHS Act section 2704,
which amends the HIPAA4 rules relating
to preexisting condition exclusions to provide that a group health plan and a health
insurance issuer offering group or individual health insurance coverage may not impose any preexisting condition exclusion.
The HIPAA rules (in effect prior to the effective date of these amendments) apply
only to group health plans and group health
insurance coverage, and permit limited exclusions of coverage based on a preexisting condition under certain circumstances.
The Affordable Care Act provision prohibits any preexisting condition exclusion
from being imposed by group health plans
or group health insurance coverage and extends this protection to individual health
insurance coverage. This prohibition generally is effective with respect to plan years
(in the individual market, policy years) beginning on or after January 1, 2014, but
for enrollees who are under 19 years of
age, this prohibition becomes effective for
plan years (in the individual market, policy
years) beginning on or after September 23,
2010. Until the new Affordable Care Act
rules take effect, the HIPAA rules regarding preexisting condition exclusions continue to apply.
HIPAA generally defines a preexisting
condition exclusion5 as a limitation or exclusion of benefits relating to a condition
based on the fact that the condition was
present before the date of enrollment for
the coverage, whether or not any medical
advice, diagnosis, care, or treatment was
recommended 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 of
title 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 the
Code.

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 ERISA
section 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 coverage of specific benefits associated with a
preexisting condition in the case of an enrollee, but a complete exclusion from such
plan or coverage, if that exclusion is based
on a preexisting condition.
The protections in the new PHS Act
section 2704 generally apply for plan years
(in the individual market, policy years) beginning on or after January 1, 2014. The
Affordable Care Act provides, however,
that these protections apply with respect
to enrollees under age 19 for plan years
(in the individual market, policy years) beginning on or after September 23, 2010.
An enrollee under age 19 thus could not
be denied benefits based on a preexisting
condition. In order for an individual seeking enrollment to receive the same protection that applies in the case of such an enrollee, the individual similarly could not
be denied enrollment or specific benefits
based on a preexisting condition. Thus, for
plan years (in the individual market, policy years) beginning on or after September
23, 2010, PHS Act section 2704 protects
individuals under age 19 with a preexisting condition from being denied coverage
under a plan or health insurance coverage
(through denial of enrollment or denial of
specific benefits) based on the preexisting
condition.
These interim final regulations do not
change the HIPAA rule that an exclusion of
benefits for a condition under a plan or policy is not a preexisting condition exclusion
if the exclusion applies regardless of when
the condition arose relative to the effective
date of coverage. This point is illustrated
with examples in the HIPAA regulations
on preexisting condition exclusions, which
remain in effect.6 (Other requirements of
Federal or State law, however, may prohibit certain benefit exclusions.)
Application to grandfathered health
plans. Under the statute and these interim
final regulations, a grandfathered health
plan that is a group health plan or group
health insurance coverage must comply
with the PHS Act section 2704 prohibition
6

against preexisting condition exclusions;
however, a grandfathered health plan that
is individual health insurance coverage is
not required to comply with PHS Act section 2704. See 26 CFR 54.9815–1251T,
29 CFR 2590.715–1251, and 45 CFR
147.140 regarding status as a grandfathered health plan.
B. PHS Act Section 2711, Lifetime and
Annual Limits (26 CFR 54.9815–2711T,
29 CFR 2590.715–2711, 45 CFR 147.126)
Section 2711 of the PHS Act, as added
by the Affordable Care Act, and these interim final regulations generally prohibit
group health plans and health insurance
issuers offering group or individual health
insurance coverage from imposing lifetime or annual limits on the dollar value
of health benefits.
The restriction on annual limits applies
differently to certain account-based plans,
especially where other rules apply to limit
the benefits available. For example, under
section 9005 of the Affordable Care Act,
salary reduction contributions for health
flexible spending arrangements (health
FSAs) are specifically limited to $2,500
(indexed for inflation) per year, beginning
with taxable years in 2013. These interim
final regulations provide that the PHS Act
section 2711 annual limit rules do not apply to health FSAs. The restrictions on
annual limits also do not apply to Medical
Savings Accounts (MSAs) under section
220 of the Code and Health Savings Accounts (HSAs) under section 223 of the
Code. Both MSAs and HSAs generally
are not treated as group health plans because the amounts available under the
plans are available for both medical and
non-medical expenses.7 Moreover, annual
contributions to MSAs and HSAs are subject to specific statutory provisions that
require that the contributions be limited.
Health Reimbursement Arrangements
(HRAs) are another type of account-based
health plan and typically consist of a
promise by an employer to reimburse medical expenses for the year up to a certain
amount, with unused amounts available

to reimburse medical expenses in future
years. See Notice 2002–45, 2002–2 C.B.
93; Rev. Rul. 2002–41, 2002–2 C.B.
75. When HRAs are integrated with other
coverage as part of a group health plan and
the other coverage alone would comply
with the requirements of PHS Act section
2711, the fact that benefits under the HRA
by itself are limited does not violate PHS
Act section 2711 because the combined
benefit satisfies the requirements. Also,
in the case of a stand-alone HRA that is
limited to retirees, the exemption from the
requirements of ERISA and the Code relating to the Affordable Care Act for plans
with fewer than two current employees
means that the retiree-only HRA is generally not subject to the rules in PHS Act
section 2711 relating to annual limits. The
Departments request comments regarding
the application of PHS Act section 2711 to
stand-alone HRAs that are not retiree-only
plans.
The statute prohibits annual limits on
the dollar value of benefits generally, but
allows “restricted annual limits” with respect to essential health benefits (as defined in section 1302(b) of the Affordable
Care Act) for plan years (in the individual market, policy years) beginning before
January 1, 2014. Grandfathered individual market policies are exempted from this
provision. In addition, the statute provides
that, with respect to benefits that are not essential health benefits, a plan or issuer may
impose annual or lifetime per-individual
dollar limits on specific covered benefits.
These interim final regulations define “essential health benefits” by cross-reference
to section 1302(b) of the Affordable Care
Act8 and applicable regulations. Regulations under section 1302(b) of the Affordable Care Act have not yet been issued.
For plan years (in the individual market, policy years) beginning before the issuance of regulations defining “essential
health benefits”, for purposes of enforcement, the Departments will take into account good faith efforts to comply with a
reasonable interpretation of the term “essential health benefits”. For this purpose, a

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, including
oral and vision care.”

August 9, 2010

189

2010–32 I.R.B.

plan or issuer must apply the definition of
essential health benefits consistently. For
example, a plan could not both apply a lifetime limit to a particular benefit — thus
taking the position that it was not an essential health benefit — and at the same time
treat that particular benefit as an essential
health benefit for purposes of applying the
restricted annual limit.
These interim final regulations clarify
that the prohibition under PHS Act section
2711 does not prevent a plan or issuer from
excluding all benefits for a condition, but
if any benefits are provided for a condition,
then the requirements of the rule apply.
Therefore, an exclusion of all benefits for a
condition is not considered to be an annual
or lifetime dollar limit.
The statute and these interim final regulations provide that for plan years (in
the individual market, policy years) beginning before January 1, 2014, group health
plans and health insurance issuers offering
group or individual health insurance coverage may establish a restricted annual limit
on the dollar value of essential health benefits. The statute provides that in defining
the term restricted annual limit, the Departments should ensure that access to needed
services is made available with a minimal
impact on premiums. For a detailed discussion of the basis for determining restricted annual limits, see section IV.B.3
later in this preamble.
In order to mitigate the potential for
premium increases for all plans and policies, while at the same time ensuring access to essential health benefits, these interim final regulations adopt a three-year
phased approach for restricted annual limits. Under these interim final regulations,
annual limits on the dollar value of benefits that are essential health benefits may
not be less than the following amounts for
plan years (in the individual market, policy
years) beginning before January 1, 2014:

•
•

9

For plan or policy years beginning on
or after September 23, 2010 but before
September 23, 2011, $750,000;
For plan or policy years beginning on
or after September 23, 2011 but before September 23, 2012, $1.25 million; and

•

For plan or policy years beginning on
or after September 23, 2012 but before
January 1, 2014, $2 million.

As these are minimums for plan years
(in the individual market, policy years) beginning before 2014, plans or issuers may
use higher annual limits or impose no limits. Plans and policies with plan or policy years that begin between September 23
and December 31 have more than one plan
or policy year under which the $2 million
minimum annual limit is available; however, a plan or policy generally may not
impose an annual limit for a plan year (in
the individual market, policy year) beginning after December 31, 2013.
The minimum annual limits for plan
or policy years beginning before 2014 apply on an individual-by-individual basis.
Thus, any overall annual dollar limit on
benefits applied to families may not operate to deny a covered individual the minimum annual benefits for the plan year (in
the individual market, policy year). These
interim final regulations clarify that, in applying annual limits for plan years (in the
individual market, policy years) beginning
before January 1, 2014, the plan or health
insurance coverage may take into account
only essential health benefits.
The restricted annual limits provided
in these interim final regulations are designed to ensure, in the vast majority of
cases, that individuals would have access
to needed services with a minimal impact
on premiums. So that individuals with certain coverage, including coverage under
a limited benefit plan or so-called “minimed” plans, would not be denied access to
needed services or experience more than
a minimal impact on premiums, these interim final regulations provide for the Secretary of Health and Human Services to establish a program under which the requirements relating to restricted annual limits
may be waived if compliance with these
interim final regulations would result in
a significant decrease in access to benefits or a significant increase in premiums.
Guidance from the Secretary of Health and
Human Services regarding the scope and
process for applying for a waiver is expected to be issued in the near future.
Under these interim final regulations,
individuals who reached a lifetime limit

under a plan or health insurance coverage
prior to the applicability date of these interim final regulations and are otherwise
still eligible under the plan or health insurance coverage must be provided with
a notice that the lifetime limit no longer
applies. If such individuals are no longer
enrolled in the plan or health insurance
coverage, these interim final regulations
also provide an enrollment (in the individual market, reinstatement) opportunity for
such individuals. In the individual market,
this reinstatement opportunity does not apply to individuals who reached their lifetime limits on individual health insurance
coverage if the contract is not renewed or
otherwise is no longer in effect. It would
apply, however, to a family member who
reached the lifetime limit in a family policy in the individual market while other
family members remain in the coverage.
These notices and the enrollment opportunity must be provided beginning not later
than the first day of the first plan year (in
the individual market, policy year) beginning on or after September 23, 2010. Anyone eligible for an enrollment opportunity
must be treated as a special enrollee.9 That
is, they must be given the right to enroll
in all of the benefit packages available to
similarly situated individuals upon initial
enrollment.
Application to grandfathered health
plans. The statute and these interim final
regulations relating to the prohibition on
lifetime limits apply to all group health
plans and health insurance issuers offering group or individual health insurance
coverage, whether or not the plan qualifies
as a grandfathered health plan, for plan
years (in the individual market, policy
years) beginning on or after September 23,
2010. The statute and these interim final
regulations relating to the prohibition on
annual limits, including the special rules
regarding restricted annual limits for plan
years beginning before January 1, 2014,
apply to group health plans and group
health insurance coverage that qualify as
a grandfathered health plan, but do not
apply to grandfathered health plans that
are individual health insurance coverage.
The interim final regulations issued under
section 1251 of the Affordable Care Act
provide that:

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 coverage
that, on March 23, 2010, did not impose an overall annual or lifetime
limit on the dollar value of all benefits
ceases to be a grandfathered health
plan if the plan or health insurance
coverage imposes an overall annual
limit on the dollar value of benefits.
A plan or health insurance coverage,
that, on March 23, 2010, imposed
an overall lifetime limit on the dollar
value of all benefits but no overall
annual limit on the dollar value of all
benefits ceases to be a grandfathered
health plan if the plan or health insurance coverage adopts an overall annual
limit at a dollar value that is lower than
the dollar value of the lifetime limit on
March 23, 2010.
A plan or health insurance coverage
that, on March 23, 2010, imposed an
overall annual limit on the dollar value
of all benefits ceases to be a grandfathered health plan if the plan or health
insurance coverage decreases the dollar value of the annual limit (regardless
of whether the plan or health insurance
coverage also imposed an overall lifetime limit on March 23, 2010 on the
dollar value of all benefits).

C. PHS Act Section 2712, Prohibition on
Rescissions (26 CFR 54.9815–2712T, 29
CFR 2590.715–2712, 45 CFR 147.128)
PHS Act section 2712 provides rules
regarding rescissions of health coverage
for group health plans and health insurance issuers offering group or individual
health insurance coverage. Under the
statute and these interim final regulations,
a group health plan, or a health insurance
issuer offering group or individual health
insurance coverage, must not rescind coverage except in the case of fraud or an
intentional misrepresentation of a material
fact. This standard sets a Federal floor
and is more protective of individuals with
respect to the standard for rescission than
the standard that might have previously
existed under State insurance law or Federal common law. That is, under prior law,
rescission may have been permissible if
an individual made a misrepresentation of
material fact, even if the misrepresentation
was not intentional or made knowingly.
Under the new standard for rescissions set
forth in PHS Act section 2712 and these

August 9, 2010

interim final regulations, plans and issuers
cannot rescind coverage unless an individual was involved in fraud or made an
intentional misrepresentation of material
fact. This standard applies to all rescissions, whether in the group or individual
insurance market, and whether insured or
self-insured coverage. These rules also
apply regardless of any contestability period that may otherwise apply.
This provision in PHS Act section 2712
builds on already-existing protections in
PHS Act sections 2703(b) and 2742(b) regarding cancellations of coverage. These
provisions generally provide that a health
insurance issuer in the group and individual markets cannot cancel, or fail to
renew, coverage for an individual or a
group for any reason other than those enumerated in the statute (that is, nonpayment
of premiums; fraud or intentional misrepresentation of material fact; withdrawal of
a product or withdrawal of an issuer from
the market; movement of an individual
or an employer outside the service area;
or, for bona fide association coverage,
cessation of association membership).
Moreover, this new provision also builds
on existing HIPAA nondiscrimination
protections for group health coverage in
ERISA section 702, Code section 9802,
and PHS Act section 2705 (previously included in PHS Act section 2702 prior to the
Affordable Care Act’s amendments and
reorganization to PHS Act title XXVII).
The HIPAA nondiscrimination provisions
generally provide that group health plans
and group health insurance issuers may
not set eligibility rules based on factors
such as health status and evidence of insurability — including acts of domestic
violence or disability. They also provide
limits on the ability of plans and issuers to
vary premiums and contributions based on
health status. For policy years beginning
on or after January 1, 2014, additional
protections will apply in the individual
market, including guaranteed issue of
all products, nondiscrimination based on
health status, and no preexisting condition
exclusions. These protections will reduce
the likelihood of rescissions.
These interim final regulations also
clarify that other requirements of Federal
or State law may apply in connection with
a rescission or cancellation of coverage
beyond the standards established in PHS
Act section 2712, if they are more pro-

191

tective of individuals. For example, if a
State law applicable to health insurance
issuers were to provide that rescissions are
permitted only in cases of fraud, or only
within a contestability period, which is
more protective of individuals, such a law
would not conflict with, or be preempted
by, the Federal standard and would apply.
These interim final regulations include
several clarifications regarding the standards for rescission in PHS Act section
2712. First, these interim final regulations
clarify that the rules of PHS Act section
2712 apply whether the rescission applies
to a single individual, an individual within
a family, or an entire group of individuals.
Thus, for example, if an issuer attempted to
rescind coverage of an entire employmentbased group because of the actions of an
individual within the group, the standards
of these interim final regulations would apply. Second, these interim final regulations clarify that the rules of PHS Act section 2712 apply to representations made by
the individual or a person seeking coverage on behalf of the individual. Thus, if
a plan sponsor seeks coverage from an issuer for an entire employment-based group
and makes representations, for example,
regarding the prior claims experience of
the group, the standards of these interim final regulations would also apply. Finally,
PHS Act section 2712 refers to acts or
practices that constitute fraud. These interim final regulations clarify that, to the
extent that an omission constitutes fraud,
that omission would permit the plan or issuer to rescind coverage under this section.
An example in these interim final regulations illustrates the application of the rule
to misstatements of fact that are inadvertent.
For purposes of these interim final regulations, a rescission is a cancellation or discontinuance of coverage that has retroactive effect. For example, a cancellation
that treats a policy as void from the time of
the individual’s or group’s enrollment is a
rescission. As another example, a cancellation that voids benefits paid up to a year
before the cancellation is also a rescission
for this purpose. A cancellation or discontinuance of coverage with only a prospective effect is not a rescission, and neither is
a cancellation or discontinuance of coverage that is effective retroactively to the extent it is attributable to a failure to timely
pay required premiums or contributions to-

2010–32 I.R.B.

wards the cost of coverage. Cancellations
of coverage are addressed under other Federal and State laws, including section PHS
Act section 2703(b) and 2742(b), which
limit the grounds for cancellation or nonrenewal of coverage, as discussed above.
Moreover, PHS Act section 2719, as added
by the Affordable Care Act and incorporated in ERISA section 715 and Code section 9815, addresses appeals of coverage
determinations and includes provisions for
keeping coverage in effect pending an appeal. The Departments expect to issue
guidance on PHS Act section 2719 in the
very near future.
In addition to setting a new Federal
floor standard for rescissions, PHS Act
section 2712 adds a new advance notice
requirement when coverage is rescinded
where still permissible. Specifically, the
second sentence in section 2712 provides
that coverage may not be cancelled unless
prior notice is provided. These interim final regulations provide that a group health
plan, or a health insurance issuer offering group health insurance coverage, must
provide at least 30 calendar days advance
notice to an individual before coverage
may be rescinded.10 The notice must be
provided regardless of whether the rescission is of group or individual coverage;
or whether, in the case of group coverage,
the coverage is insured or self-insured, or
the rescission applies to an entire group
or only to an individual within the group.
This 30-day period will provide individuals and plan sponsors with an opportunity to explore their rights to contest the
rescission, or look for alternative coverage, as appropriate. The Departments expect to issue future guidance on any notice
requirements under PHS Act section 2712
for cancellations of coverage other than in
the case of rescission.
In this new Federal statutory protection
against rescissions, the Affordable Care
Act provides new rights to individuals
who, for example, may have done their
best to complete what can sometimes be
long, complex enrollment questionnaires
but may have made some errors, for which
the consequences were overly broad and
unfair. These interim final regulations
provide initial guidance with respect to the
10

statutory restrictions on rescission. If the
Departments become aware of attempts in
the marketplace to subvert these rules, the
Departments may issue additional regulations or administrative guidance to ensure
that individuals do not lose health coverage unjustly or without due process.
Application to grandfathered health
plans. The rules regarding rescissions and
advance notice apply to all grandfathered
health plans.
D. PHS Act Section 2719A, Patient
Protections (26 CFR 54.9815–2719AT, 29
CFR 2590.715–2719A, 45 CFR 147.138)
Section 2719A of the PHS Act imposes,
with respect to a group health plan, or
group or individual health insurance coverage, a set of three requirements relating to
the choice of a health care professional and
requirements relating to benefits for emergency services. The three requirements relating to the choice of health care professional apply only with respect to a plan
or health insurance coverage with a network of providers.11 Thus, a plan or issuer
that has not negotiated with any provider
for the delivery of health care but merely
reimburses individuals covered under the
plan for their receipt of health care is not
subject to the requirements relating to the
choice of a health care professional. However, such plans or health insurance coverage are subject to requirements relating
to benefits for emergency services. These
interim final regulations reorder the statutory requirements so that all three of the
requirements relating to the choice of a
health care professional are together and
add a notice requirement for those three
requirements. None of these requirements
apply to grandfathered health plans.
1. Choice of Health Care Professional
The statute and these interim final regulations provide that if a group health plan,
or a health insurance issuer offering group
or individual health insurance coverage,
requires or provides for designation by a
participant, beneficiary, or enrollee of a
participating primary care provider, then
the plan or issuer must permit each participant, beneficiary, or enrollee to designate

any participating primary care provider
who is available to accept the participant,
beneficiary, or enrollee. Under these interim final regulations, the plan or issuer
must provide a notice informing each participant (or in the individual market, the
primary subscriber) of the terms of the
plan or health insurance coverage regarding designation of a primary care provider.
The statute and these interim final regulations impose a requirement for the designation of a pediatrician similar to the
requirement for the designation of a primary care physician. Specifically, if a
plan or issuer requires or provides for the
designation of a participating primary care
provider for a child by a participant, beneficiary, or enrollee, the plan or issuer must
permit the designation of a physician (allopathic or osteopathic) who specializes
in pediatrics as the child’s primary care
provider if the provider participates in the
network of the plan or issuer and is available to accept the child. In such a case, the
plan or issuer must comply with the notice
requirements with respect to designation
of a primary care provider. The general
terms of the plan or health insurance coverage regarding pediatric care otherwise are
unaffected, including any exclusions with
respect to coverage of pediatric care.
The statute and these interim final regulations also provide rules for a group health
plan, or a health insurance issuer offering
group or individual health insurance coverage, that provides coverage for obstetrical or gynecological care and requires
the designation of an in-network primary
care provider. In such a case, the plan
or issuer may not require authorization or
referral by the plan, issuer, or any person (including a primary care provider) for
a female participant, beneficiary, or enrollee who seeks obstetrical or gynecological care provided by an in-network health
care professional who specializes in obstetrics or gynecology. The plan or issuer
must inform each participant (in the individual market, primary subscriber) that the
plan or issuer may not require authorization or referral for obstetrical or gynecological care by a participating health care
professional who specializes in obstetrics
or gynecology. Nothing in these interim

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 issuer from requiring an in-network obstetrical or gynecological provider to otherwise
adhere to policies and procedures regarding referrals, prior authorization for treatments, and the provision of services pursuant to a treatment plan approved by the
plan or issuer. The plan or issuer must treat
the provision of obstetrical and gynecological care, and the ordering of related obstetrical and gynecological items and services,
by the professional who specializes in obstetrics or gynecology as the authorization
of the primary care provider. For this purpose, a health care professional who specializes in obstetrics or gynecology is any
individual who is authorized under applicable State law to provide obstetrical or
gynecological care, and is not limited to a
physician.
The general terms of the plan or coverage regarding exclusions of coverage with
respect to obstetrical or gynecological care
are otherwise unaffected. These interim final regulations do not preclude the plan or
issuer from requiring that the obstetrical or
gynecological provider notify the primary
care provider or the plan or issuer of treatment decisions.
When applicable, it is important that individuals enrolled in a plan or health insurance coverage know of their rights to (1)
choose a primary care provider or a pediatrician when a plan or issuer requires designation of a primary care physician; or
(2) obtain obstetrical or gynecological care
without prior authorization. Accordingly,
these interim final regulations require such
plans and issuers to provide a notice to participants (in the individual market, primary
subscribers) of these rights when applicable. Model language is provided in these
interim final regulations. The notice must
be provided whenever the plan or issuer
provides a participant with a summary plan
description or other similar description of
benefits under the plan or health insurance
coverage, or in the individual market, provides a primary subscriber with a policy,
certificate, or contract of health insurance.
2. Emergency Services
If a plan or health insurance coverage
provides any benefits with respect to emergency services in an emergency depart12

ment of a hospital, the plan or issuer must
cover emergency services in a way that is
consistent with these interim final regulations. These interim final regulations require that a plan or health insurance coverage providing emergency services must do
so without the individual or the health care
provider having to obtain prior authorization (even if the emergency services are
provided out of network) and without regard to whether the health care provider
furnishing the emergency services is an
in-network provider with respect to the services. The emergency services must be
provided without regard to any other term
or condition of the plan or health insurance coverage other than the exclusion or
coordination of benefits, an affiliation or
waiting period permitted under part 7 of
ERISA, part A of title XXVII of the PHS
Act, or chapter 100 of the Code, or applicable cost-sharing requirements. For a
plan or health insurance coverage with a
network of providers that provides benefits for emergency services, the plan or issuer may not impose any administrative
requirement or limitation on benefits for
out-of-network emergency services that is
more restrictive than the requirements or
limitations that apply to in-network emergency services.
Additionally, for a plan or health insurance coverage with a network, these
interim final regulations provide rules for
cost-sharing requirements for emergency
services that are expressed as a copayment
amount or coinsurance rate, and other
cost-sharing requirements. Cost-sharing
requirements expressed as a copayment
amount or coinsurance rate imposed for
out-of-network emergency services cannot exceed the cost-sharing requirements
that would be imposed if the services were
provided in-network.
Out-of-network
providers may, however, also balance bill
patients for the difference between the
providers’ charges and the amount collected from the plan or issuer and from the
patient in the form of a copayment or coinsurance amount. Section 1302(c)(3)(B)
of the Affordable Care Act excludes such
balance billing amounts from the definition of cost sharing, and the requirement
in section 2719A(b)(1)(C)(ii)(II) that cost
sharing for out-of-network services be
limited to that imposed in network only

applies to cost sharing expressed as a copayment or coinsurance rate.
Because the statute does not require
plans or issuers to cover balance billing
amounts, and does not prohibit balance
billing, even where the protections in the
statute apply, patients may be subject to
balance billing. It would defeat the purpose of the protections in the statute if a
plan or issuer paid an unreasonably low
amount to a provider, even while limiting
the coinsurance or copayment associated
with that amount to in-network amounts.
To avoid the circumvention of the protections of PHS Act section 2719A, it is
necessary that a reasonable amount be
paid before a patient becomes responsible
for a balance billing amount. Thus, these
interim final regulations require that a
reasonable amount be paid for services by
some objective standard. In establishing
the reasonable amount that must be paid,
the Departments had to account for wide
variation in how plans and issuers determine both in-network and out-of-network
rates. For example, for a plan using a capitation arrangement to determine in-network payments to providers, there is no
in-network rate per service. Accordingly,
these interim final regulations consider
three amounts: the in-network rate, the
out-of-network rate, and the Medicare
rate. Specifically, a plan or issuer satisfies
the copayment and coinsurance limitations in the statute if it provides benefits
for out-of-network emergency services in
an amount equal to the greatest of three
possible amounts—
(1) The amount negotiated with in-network providers for the emergency service
furnished;
(2) The amount for the emergency service calculated using the same method the
plan generally uses to determine payments
for out-of-network services (such as the
usual, customary, and reasonable charges)
but substituting the in-network cost-sharing provisions for the out-of-network costsharing provisions; or
(3) The amount that would be paid under Medicare for the emergency service.12
Each of these three amounts is calculated
excluding any in-network copayment or
coinsurance imposed with respect to the
participant, beneficiary, or enrollee.

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 coverage under which there is no per-service amount negotiated with in-network
providers (such as under a capitation or
other similar payment arrangement), the
first amount above is disregarded, meaning that the greatest amount is going to be
either the out-of-network amount or the
Medicare amount. Additionally, with respect to determining the first amount, if a
plan or issuer has more than one negotiated
amount with in-network providers for a
particular emergency service, the amount
is the median of these amounts, treating
the amount negotiated with each provider
as a separate amount in determining the
median. Thus, for example, if for a given
emergency service a plan negotiated a rate
of $100 with three providers, a rate of
$125 with one provider, and a rate of $150
with one provider; the amounts taken into
account to determine the median would
be $100, $100, $100, $125, and $150; and
the median would be $100. Following the
commonly accepted definition of median,
if there are an even number of amounts,
the median is the average of the middle
two. (Cost sharing imposed with respect
to the participant, beneficiary, or enrollee
would be deducted from this amount before determining the greatest of the three
amounts above.)
The second amount above is determined without reduction for out-of-network cost sharing that generally applies
under the plan or health insurance coverage with respect to out-of-network services. Thus, for example, if a plan generally pays 70 percent of the usual, customary, and reasonable amount for out-of-network services, the second amount above
for an emergency service is the total (that
is, 100 percent) of the usual, customary,
and reasonable amount for the service, not
reduced by the 30 percent coinsurance that
would generally apply to out-of-network
services (but reduced by the in-network
copayment or coinsurance that the individual would be responsible for if the
emergency service had been provided
in-network).
Although a plan or health insurance
coverage is generally not constrained
by the requirements of PHS Act section 2719A for cost-sharing requirements
other than copayments or coinsurance,
these interim final regulations include
an anti-abuse rule with respect to such

2010–32 I.R.B.

other cost-sharing requirements so that
the purpose of limiting copayments and
coinsurance for emergency services to
the in-network rate cannot be thwarted
by manipulation of these other cost-sharing requirements. Accordingly, any other
cost-sharing requirement, such as a deductible or out-of-pocket maximum, may
be imposed with respect to out-of-network emergency services only if the
cost-sharing requirement generally applies
to out-of-network benefits. Specifically, a
deductible may be imposed with respect to
out-of-network emergency services only
as part of a deductible that generally applies to out-of-network benefits. Similarly,
if an out-of-pocket maximum generally
applies to out-of-network benefits, that
out-of-pocket maximum must apply to
out-of-network emergency services. A
plan or health insurance coverage could
fashion these other cost-sharing requirements so that a participant, beneficiary, or
enrollee is required to pay less for emergency services than for general out-of-network services; the anti-abuse rule merely
prohibits a plan or health insurance coverage from fashioning such rules so that a
participant, beneficiary, or enrollee is required to pay more for emergency services
than for general out-of-network services.
In applying the rules relating to emergency services, the statute and these interim final regulations define the terms
emergency medical condition, emergency
services, and stabilize. These terms are
defined generally in accordance with their
meaning under the Emergency Medical
Treatment and Labor Act (EMTALA),
section 1867 of the Social Security Act.
There are, however, some minor variances
from the EMTALA definitions. For example, both EMTALA and PHS Act section
2719A define “emergency medical condition” in terms of the same consequences
that could reasonably be expected to occur in the absence of immediate medical
attention. Under EMTALA regulations,
the likelihood of these consequences is
determined by qualified hospital medical
personnel, while under PHS Act section
2719A the standard is whether a prudent layperson, who possesses an average
knowledge of health and medicine, could
reasonably expect the absence of immediate medical attention to result in such
consequences.

194

Application to grandfathered health
plans. The statute and these interim final regulations relating to certain patient
protections do not apply to grandfathered
health plans. However, other Federal or
State laws related to these patient protections may apply regardless of grandfather
status.
III. Interim Final Regulations and
Request for Comments
Section 9833 of the Code, section 734
of ERISA, and section 2792 of the PHS
Act authorize the Secretaries of the Treasury, Labor, and HHS (collectively, the
Secretaries) to promulgate any interim final rules that they determine are appropriate to carry out the provisions of chapter
100 of the Code, part 7 of subtitle B of title I of ERISA, and part A of title XXVII of
the PHS Act, which include PHS Act sections 2701 through 2728 and the incorporation of those sections into ERISA section
715 and Code section 9815.
In addition, under Section 553(b) of
the Administrative Procedure Act (APA)
(5 U.S.C. 551 et seq.) a general notice
of proposed rulemaking is not required
when an agency, for good cause, finds
that notice and public comment thereon are
impracticable, unnecessary, or contrary to
the public interest. The provisions of the
APA that ordinarily require a notice of proposed rulemaking do not apply here because of the specific authority granted by
section 9833 of the Code, section 734 of
ERISA, and section 2792 of the PHS Act.
However, even if the APA were applicable, the Secretaries have determined that it
would be impracticable and contrary to the
public interest to delay putting the provisions in these interim final regulations in
place until a full public notice and comment process was completed. As noted
above, numerous provisions of the Affordable Care Act are applicable for plan years
(in the individual market, policy years) beginning on or after September 23, 2010,
six months after date of enactment. Had
the Departments published a notice of proposed rulemaking, provided for a 60-day
comment period, and only then prepared
final regulations, which would be subject
to a 60-day delay in effective date, it is
unlikely that it would have been possible to have final regulations in effect before late September, when these require-

August 9, 2010

ments could be in effect for some plans
or policies. Moreover, the requirements in
these interim final regulations require significant lead time in order to implement.
For example, in the case of the requirement
under PHS Act section 2711 prohibiting
overall lifetime dollar limits, these interim
final regulations require that an enrollment
opportunity be provided for an individual
whose coverage ended by reason of reaching a lifetime limit no later than the first
day this requirement takes effect. Preparations presumably would have to be made
to put such an enrollment process in place.
In the case of requirements for emergency
care under PHS Act section 2719A, plans
and issuers need to know how to process
charges by out-of-network providers by as
early as the first plan or policy year beginning on or after September 23, 2010. With
respect to all the changes that would be required to be made under these interim final
regulations, whether adding coverage of
children with a preexisting condition under
PHS Act section 2704, or determining the
scope of rescissions prohibited under PHS
Act section 2712, group health plans and
health insurance issuers have to be able
to take these changes into account in establishing their premiums, and in making
other changes to the designs of plan or policy benefits, and these premiums and plan
or policy changes would have to receive
necessary approvals in advance of the plan
or policy year in question.
Accordingly, in order to allow plans and
health insurance coverage to be designed
and implemented on a timely basis, regulations must be published and available to
the public well in advance of the effective
date of the requirements of the Affordable
Care Act. It is not possible to have a full
notice and comment process and to publish
final regulations in the brief time between
enactment of the Affordable Care Act and
the date regulations are needed.
The Secretaries further find that issuance of proposed regulations would not
be sufficient because the provisions of the
Affordable Care Act protect significant
rights of plan participants and beneficiaries and individuals covered by individual
health insurance policies and it is essential
that participants, beneficiaries, insureds,

plan sponsors, and issuers have certainty
about their rights and responsibilities.
Proposed regulations are not binding and
cannot provide the necessary certainty.
By contrast, the interim final regulations
provide the public with an opportunity for
comment, but without delaying the effective date of the regulations.
For the foregoing reasons, the Departments have determined that it is impracticable and contrary to the public interest
to engage in full notice and comment rulemaking before putting these interim final
regulations into effect, and that it is in the
public interest to promulgate interim final
regulations.
IV. Economic Impact and Paperwork
Burden
A. Summary—Department of Labor
and Department of Health and Human
Services
As stated earlier in this preamble, these
interim final regulations implement PHS
Act sections 2704 (prohibiting preexisting
condition exclusions), 2711 (prohibiting
lifetime and annual dollar limits on benefits), 2712 (rules regarding rescissions),
and 2719A (patient protections).13 These
interim final regulations also provide
guidance on the requirement to provide
enrollment opportunities to individuals
who reached a lifetime limit. PHS Act
section 2704 regarding preexisting condition exclusions generally is effective for
plan years (in the individual market, policy years) beginning on or after January 1,
2014. However, with respect to enrollees,
including applicants for enrollment, who
are under 19 years of age, this section is
effective for plan years beginning on or
after September 23, 2010; or in the case
of individual health insurance coverage,
for policy years beginning on or after
September 23, 2010.14 The rest of these
provisions generally are effective for plan
years (in the individual market, policy
years) beginning on or after September
23, 2010, which is six months after the
March 23, 2010 date of enactment of the
Affordable Care Act.

The Departments have crafted these
interim final regulations to secure the protections intended by Congress in the most
economically efficient manner possible.
In accordance with OMB Circular A–4,
they have quantified the benefits and costs
where possible and provided a qualitative
discussion of some of the benefits and the
costs that may stem from these interim
final regulations.
B. Executive Order 12866—Department
of Labor and Department of Health and
Human Services
Under Executive Order 12866 (58 FR
51735), “significant” regulatory actions
are subject to review by the Office of
Management and Budget (OMB). Section
3(f) of the Executive Order defines a “significant regulatory action” as an action
that is likely to result in a rule (1) having
an annual effect on the economy of $100
million or more in any one year, or adversely and materially affecting a sector
of the economy, productivity, competition, jobs, the environment, public health
or safety, or State, local or tribal governments or communities (also referred to as
“economically significant”); (2) creating
a serious inconsistency or otherwise interfering with an action taken or planned by
another agency; (3) materially altering the
budgetary impacts of entitlement grants,
user fees, or loan programs or the rights
and obligations of recipients thereof; or
(4) raising novel legal or policy issues
arising out of legal mandates, the President’s priorities, or the principles set forth
in the Executive Order. OMB has determined that this rule is significant within
the meaning of section 3(f)(1) of the Executive Order, because it is likely to have
an effect on the economy of $100 million
in any one year. Accordingly, OMB has
reviewed these rules pursuant to the Executive Order. The Departments provide an
assessment of the potential costs and benefits 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 of
part 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 ERISA
and 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
Benefits
Qualitative: These patient protections are expected to expand coverage for children with preexisting conditions and individuals
who face rescissions, lifetime limits, and annual limits as a result of high health care costs. Expanded coverage is likely to increase
access 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 those
who 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 health
promotion. Removing referrals and prior authorizations for primary care, obstetrical and gynecological care, and emergency
services is likely to reduce administrative and time burdens on both patients and physicians, while improving health outcomes by
allowing quicker access to medical services when necessary.
Costs
Annualized Monetized ($millions/year)

Estimate

Year Dollar

Discount Rate

Period
Covered15

4.9
4.9

2010
2010

7%
3%

2011–2013
2011–2013

Monetized costs are due to a requirement to notify participants that exceeded their lifetime limit and were disenrolled from their
plan or coverage of their right to re-enroll in the plan; a requirement that a group health plan or a health insurance issuer offering
group or individual health insurance coverage must notify an affected individual 30 days before coverage may be rescinded; and
a notice of a participant’s right to choose any available participating primary care provider or pediatrician as their primary care
provider, 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 and
costs will result due to increased uptake. Expanding coverage to children with preexisting conditions and individuals subject to
rescissions will likely increase overall health care costs, given that these groups tend to have high cost conditions and require
more costly care than average.
Transfers
Qualitative: These patient protections create a small transfer from those paying premiums in the group market to those obtaining
the 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 by
the Affordable Care Act, prohibits group
health plans and health insurance issuers
offering group or individual health insurance from imposing any preexisting condition exclusion. This new protection applies to children who are under age 19 for
plan years (in the individual market, policy years) beginning on or after September
23, 2010. For individuals age 19 and over,
this provision applies for plan years (in the

individual market, policy years) beginning
on or after January 1, 2014.
Preexisting conditions affect millions
of Americans and include a broad range of
conditions from heart disease — which affects one in three adults16 — or cancer —
which affects 11 million Americans17 — to
relatively minor conditions like hay fever,
asthma, or previous sports injuries.18
Denials of benefits or coverage based
on a preexisting condition make adequate
health insurance unavailable to millions of
Americans. Before the enactment of the
Affordable Care Act, in 45 States, health
insurance issuers in the individual market
could deny coverage, charge higher premi-

ums, and/or deny benefits for a preexisting
condition.19
These interim final regulations are necessary to amend the Departments’ existing regulations to implement this statutory
provision, which was enacted by Congress
to ensure that quality health coverage is
available to more Americans without the
imposition of a preexisting condition exclusion.
b. Lifetime and annual limits
As discussed earlier in this preamble,
Section 2711 of the PHS Act was added to
the Affordable Care Act to prohibit group
health 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 Act
in 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
able/heart/1240250946756LS–1982%20Heart%20and%20Stroke%20Update.042009.pdf

Statistics

2009

Update-at-a-Glance.

http://www.americanheart.org/download-

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.

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August 9, 2010

offering group or individual health insurance coverage from imposing lifetime limits on the dollar value of health benefits.
Annual limits also are prohibited, but the
statute includes a phase-in of this provision before January 1, 2014, that allows
plans and issuers to impose “restricted annual limits” at the levels discussed earlier
in this preamble.
These new protections ensure that patients are not confronted with devastating
health costs because they have exhausted
their health coverage when faced with a
serious medical condition. For example,
in one recent national survey, ten percent
of all cancer patients reported that they
reached a benefit limit in their insurance
policy and were forced to seek alternative
insurance coverage or pay the remainder of
their treatment out-of-pocket.20
These interim final regulations are necessary to amend the Departments’ existing regulations to implement the statutory
provisions with respect to annual and lifetime limits that Congress enacted to help
ensure that more Americans with chronic,
long-term, and/or expensive illnesses have
access to quality health coverage. The
provisions of the regulations regarding restricted annual limits function as a type of
transition rule, providing for staged implementation and helping ensure against adverse impacts on premiums or the offering
of health coverage in the marketplace. For
more detail about these provisions, see the
discussion of PHS Act Section 2711, Lifetime and Annual Limits, in section II.B
earlier in this preamble.
c. Rescission
As discussed earlier in this preamble,
Section 2712 of the PHS Act was added by
the Affordable Care Act to prohibit group
health plans and health insurance issuers
offering group or individual health insurance coverage from rescinding coverage
except in the case of fraud or intentional
misrepresentation of material fact.

20

Prior to the Affordable Care Act, thousands of Americans lost health coverage
each year due to rescission. According to
a House Energy and Commerce Committee staff memorandum,21 rather than reviewing medical histories when applications are submitted, if the policyholders
become sick and file expensive claims, insurance companies then initiate investigations to scrutinize the details of the policyholder’s application materials and medical records, and if discrepancies, omissions, or misrepresentations are found, the
insurer rescinds the policies, returns the
premiums, and refuses payment for medical services. The Committee found some
questionable practices in this area including insurance companies rescinding coverage even when discrepancies are unintentional or caused by others, for conditions that are unknown to policyholders,
and for discrepancies unrelated to the medical conditions for which patients sought
medical care.
When a coverage rescission occurs, an
individual’s health coverage is retroactively cancelled, which means that the
insurance company is no longer responsible for medical care claims that they had
previously accepted and paid. Rescissions
can result in significant financial hardship
for affected individuals, because, in most
cases, the individuals have accumulated
significant medical expenses. The NAIC
Regulatory Framework Task Force collected data on 52 companies covering the
period 2004–2008, and found that rescissions averaged 1.46 per thousand policies
in force.22 This estimate implies there are
approximately 10,700 rescissions per year.
These interim final regulations implement the statutory provision enacted by
Congress to protect the most vulnerable
Americans, those that incur substantial
medical expenses due to a serious medical
condition, from financial devastation by
ensuring that such individuals do not unjustly lose health coverage by rescission.

d. Patient Protections
As discussed earlier in this preamble,
Section 2719A of the PHS Act was added
by the Affordable Care Act to require
group health plans and health insurance
issuers offering group or individual health
insurance coverage to ensure choice of
health care professionals and greater access to benefits for emergency services. As
discussed in more detail below, provider
choice is a strong predictor of patient
trust in a provider, and patient-provider
trust can increase health promotion and
therapeutic effects.23 Studies also have
found that patients tend to experience
better quality health care if they have
long-term relationships with their health
care provider.24
The emergency care provisions of PHS
Act section 2719A require (1) non-grandfathered group health plans and health
insurance issuers that cover emergency
services to cover such services without
prior authorization and without regard to
whether the health care provider providing the services is a participating network
provider, and (2) copayments and coinsurance for out-of-network emergency care
not to exceed the cost-sharing requirements that would have been imposed if
the services were provided in-network.
These provisions will ensure that patients
get emergency care when they need it,
especially in situations where prior authorization cannot be obtained due to exigent
circumstances or an in-network provider
is not available to provide the services. It
also will protect patients from the substantial financial burden that can be imposed
when differing copayment or coinsurance
arrangements apply to in-network and
out-of-network emergency care.
This regulation is necessary to implement the statutory provision enacted by
Congress to provide these essential patient
protections.
2. PHS Act Section 2704, Prohibition of
Preexisting Condition Exclusions (26 CFR

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 Patient
Care 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

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

are implemented. In addition, the potential cost implications are discussed.

a. Summary

b. Estimated Number of Affected
Individuals

As discussed earlier in this preamble,
section 1201 of the Affordable Care Act
adds a new PHS Act section 2704, which
amends the HIPAA rules relating to preexisting condition exclusions to provide
that a group health plan and a health insurance issuer offering group or individual health insurance coverage may not impose any preexisting condition exclusion.
The HIPAA rules (in effect prior to the
effective date of these amendments) apply only to group health plans and group
health insurance coverage, and permit limited exclusions of coverage based on a preexisting condition under certain circumstances. The Affordable Care Act and
these interim final regulations prohibit any
preexisting condition exclusions imposed
by group health plans or group health insurance coverage and extends this protection to individual health insurance coverage. This prohibition generally is effective
with respect to plan years (in the individual
market, policy years) beginning on or after
January 1, 2014, but for enrollees who are
under 19 years of age, this prohibition becomes effective for plan years (in the individual market, policy years) beginning on
or after September 23, 2010.
Under the statute and these interim
final regulations, a grandfathered health
plan that is a group health plan or group
health insurance coverage must comply
with the prohibition against preexisting
condition exclusions; however, a grandfathered health plan that is individual health
insurance coverage is not required to comply with PHS Act section 2704.
In this section, the Departments estimate the likely effects of these interim final regulations. Beginning with the population of individuals age 0–18, the number
of individuals potentially affected is estimated in several steps. First, the number of
children who have preexisting conditions
that might cause them to be excluded from
coverage is estimated. Second, a range of
take-up rates is used to estimate the number of children who might be newly covered after these interim final regulations

In the individual market, those applying for insurance will no longer face exclusions or denials of coverage based on a preexisting condition exclusion if they are under the age of 19. In addition, children covered by non-grandfathered individual coverage with a rider or an exclusion period
that excludes coverage for a preexisting
condition will gain coverage for that condition. In the group market, participants
and dependents who are under 19 years old
and have experienced a lapse in coverage
will no longer face up to a twelve-month
exclusion for preexisting conditions.
The Departments’ estimates in this section are based on the 2004–2006 Medical Expenditure Panel Survey Household
Component (MEPS-HC) which was projected to 2010 and calibrated to be consistent with the National Health Accounts
projections. The analysis tabulated counts
and costs for persons under age 19 by age,
health status, and insurance status.
There are two main categories of children who are most likely to be directly affected by these interim final regulations:
first, children who have a preexisting condition and who are uninsured; second, children who are covered by individual insurance with a rider excluding coverage for a
preexisting condition or a preexisting condition exclusion period. For the latter category, obtaining coverage for the preexisting condition may require terminating
the child’s existing policy and beginning
a new one, because individual health insurance coverage that is a grandfathered
health plan is not required to comply with
PHS Act section 2704 or these interim final regulations.
It is difficult to estimate precisely how
many uninsured children have a preexisting condition that would cause them to be
denied coverage for that condition if they
were to apply. Information on whether
individuals have a preexisting condition
for the purpose of obtaining health insurance is not collected in any major population-based survey. In its annual survey on

market practices, America’s Health Insurance Plans (AHIP) estimated that 429,464
applications for children were medically
underwritten, and 20,747, or 4.8 percent,
were denied.25 The survey does not measure the number of applicants who did not
make it through an underwriting process,
nor does it measure the applicants’ prior
insurance status, and therefore, while useful, it does not provide direct estimates
of the number or proportion of uninsured
children who would be denied coverage
based on a preexisting condition. Thus, the
Departments use proxies for preexisting
conditions available in nationally representative surveys to estimate the universe
of potentially eligible individuals.
The Departments estimate that in 2010
there are approximately 78.0 million children under the age of 19 in the United
States, of whom an estimated 19.4 million
report ’fair’ or ’poor’ health or take three
or more prescription medications. The Departments assume that these children have
a preexisting condition. Whether or not the
statute and these interim final regulations
are likely to affect these children depends
on their own and their parents’ insurance
status. Of the 19.4 million children that
potentially have a preexisting condition,
10.2 million already have employer-sponsored insurance (ESI), 760,000 have individual coverage, and 7.9 million have
public or other coverage, leaving 540,000
uninsured children with preexisting conditions.26 The Departments assume that this
group of 540,000 uninsured children with
a preexisting condition would be denied
coverage for that condition or altogether if
they were to apply.
The likelihood that an uninsured child
with a preexisting condition will gain coverage due to these interim final regulations will likely vary by the insurance status of the child’s parent. As shown in Table
2.1, approximately one-half of the 540,000
uninsured children who the Departments
estimate have a preexisting condition live
with a parent who is also uninsured and
is not offered ESI. An additional 190,000
have a parent who is covered by ESI, and
60,000 children have a parent who was offered ESI but did not accept the offer (and
the insurance status of the parent is unknown).

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.

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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 by
these interim final regulations is uninsured
children whose parents have purchased
non-group coverage, of whom there are
an estimated 10,000. These parents have
demonstrated a strong preference for
coverage by being willing to pay for a
non-group premium for themselves, but
their child is uninsured. Although the
Departments cannot know with any certainty, it is quite plausible that the child is
uninsured because the insurer refused to
sell coverage to the child due to a preexisting condition. If an individual market
insurance policy does not change substantially and retains its grandfather status,
the insurer is not required to add a child
with a preexisting condition. However,
if the parent terminates the existing policy and purchases a new policy (which is
quite plausible given the high prevalence
of churning in the individual insurance
market), then the new policy will be required to cover the child, and a substantial
proportion of these children could gain
access to coverage due to these interim
final regulations.27
At the other extreme, roughly 190,000
uninsured children with a preexisting condition have a parent with ESI. It is possible that these children are uninsured because their parents’ ESI does not offer de-

pendent coverage. It is also possible that
the parent could not afford the employee
portion of a family plan premium. These
interim final regulations are not likely to
have much effect on coverage for children
in these circumstances. A very small subset of uninsured children whose parents
have ESI could have had to be in a preexisting exclusion period before coverage
is provided for services to treat that condition. Under the statute and these interim
final regulations, there would no longer be
such a period, making coverage desirable.
Such children may be affected by this provision.
Approximately 60,000 uninsured children with a preexisting condition have parents who were offered ESI but did not accept that offer. It also seems unlikely that
these interim final regulations will have
much effect on that group, because almost all of those parents could have chosen
to cover themselves, and potentially their
child, through ESI in the absence of these
interim final regulations.
In between these extremes are the approximately 270,000 uninsured children
whose parents are themselves uninsured.
Many of these parents have low to moderate income, and many may not be able
to afford insurance.28 However, some of
these parents might purchase a policy for

their child with a preexisting condition if
it were available to them.
While it is relatively easy to hypothesize about the relationship between
parental insurance status and the likelihood that a child will be newly covered,
it is much more difficult to estimate with
any precision the take-up rates for each
parental coverage category. Acknowledging substantial uncertainty, based on
the discussion above, the Departments’
mid-range estimate is that 50 percent of
uninsured children whose parents have
individual coverage will be newly insured,
15 percent of uninsured children whose
parents are uninsured will be newly insured, and that very few children whose
parents have ESI, are offered ESI, or who
do not live with a parent will become
covered as a result of these interim final
regulations.29 For the high-end estimate,
the Departments assume that the 50 percent and 15 percent assumptions increase
to 75 percent and 20 percent, respectively.
For the low-end assumption, they assume
that they decrease to 25 percent and 10
percent.
As shown in Table 2.2, the Departments’ mid-range estimate is that 51,000
uninsured children with preexisting conditions could gain coverage as a result of
these 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 who
are 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 are
choosing between being uninsured and buying individual insurance (Aizer, 2006; Kronson, 2009; KFF, 2007; Bernard and Selden, 2006; Sommers and Krimmel, 2008). This work shows that
take-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 estimate
the 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/doc8712/10–31HealthInsurModel.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 coverage
for 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 our
assumptions.

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end of the range, this could be 31,000 and
at the high end of the range, it could be
72,000. Given that most ESI already cov-

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

coverage are expected to gain individual
coverage.30

Table 2.2 Estimated number of uninsured children gaining coverage
Gain EmployerSponsored Insurance

Gain Individual
Market 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 be
affected by these interim final regulations
is children who already have non-group
insurance coverage, but who are covered
with a “condition waiver” that excludes
coverage or imposes an exclusion period
for coverage of a preexisting condition.
After the implementation of these interim
final regulations, children whose parents
purchase individual coverage will not be
subject to condition waivers or preexisting condition exclusion periods. The Departments estimate that there are 90,000
children covered by individual insurance
with a condition waiver (or with a period
during which coverage for a preexisting
condition is excluded).31 The individual
market issuers who insure these estimated
90,000 children with a condition waiver
may decide to remain grandfathered health
plans and thus these children will not be directly affected by these interim final regulations. However, the parents of those
children could choose to switch from an
individual policy that is a grandfathered
health plan to a new policy that is not
grandfathered, although the premium that
they pay for such coverage could increase.
Similarly, for those children currently covered but in a preexisting condition exclu-

sion period, curtailing the exclusion period
would require the termination of the current plan and purchase of a policy on or
after September 23, 2010.
c. Benefits
The benefits of PHS Act Section 2704
and these interim final regulations are expected to amply justify the costs. These interim final regulations will expand and improve coverage for those under the age of
19 with preexisting conditions. This will
likely increase access to health care, improve health outcomes, and reduce family financial strain and “job lock,” as described below.
Numerous studies confirm that when
children become insured, they are better
able to access health care. Uninsured children are six times more likely than insured children to lack a usual site of care.32
By contrast, one year after enrollment in
health insurance, nearly every child in one
study had a regular physician and the percentage of children who saw a dentist increased by approximately 25 percent.33Insured children also experience fewer unmet needs and delays in care. In one
study, 37 percent of the children 15 to 19

years of age faced some unmet need or delayed physician care in the prior 6 months,
whereas at 12 months after insurance enrollment, only 3.7 percent reported such
delays or care deficiencies.34
With regular access to health care, children’s health and well-being are likely
to improve. When children are sick and
without health insurance, they may, out
of financial necessity, have to forgo treatment; insurance improves the likelihood
that children get timely and appropriate
health care services.35 Insured children are
less likely to experience avoidable hospital stays than uninsured children36 and,
when hospitalized, insured children are
at less risk of dying.37 When children are
insured, it not only improves their health
status, but also confers corollary benefits. Children without health insurance
may not be allowed to participate in as
many physical activities as peers because
parents are concerned about the financial
impacts of unintentional injury. One study
determined that 12 percent of uninsured
children had various activity restrictions
(e.g., related to sports or biking). However, 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 join
a 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 estimate
was 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 found
about 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 their
condition.

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/security/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/publications/PDFs/Health/Reformhealthcare_IB1.pdf

2010–32 I.R.B.

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removed once they gained insurance.38
And health insurance and access to care
improve school attendance. An evaluation of an initiative designed to connect
children to Healthy Kids, an insurance
program piloted in Santa Clara County,
California for children in low-income families, found that the proportion of children
missing three or more school days in the
previous month decreased from 11 percent
among non-enrollees to 5 percent after
enrollment in the insurance program.39
In addition to their benefits relating
to access to care, health, and well-being
of children, these interim final regulations are likely to lower families’ out of
pocket health care spending. Some families would face the possibility of paying
high out-of-pocket expenses for health
care for children under 19 who could not
obtain insurance because of a preexisting
condition. Further, expanded insurance
coverage should reduce the number of
medical bankruptcies.40 In cases where
medical expenses are substantial, families
may no longer need to spend down their
assets in order to qualify for Medicaid and
other public assistance programs. Approximately 34 States offer Medicaid eligibility
to adults and children who spend-down to
State-established medically needy income
limits.41 Eight percent of Medicaid beneficiaries qualify via spend-down yet this
group accounts for a disproportionately
high percentage of Medicaid spending
nationally (14 percent), due to the fact
that coverage kicks in when individuals’
medical costs are high.42 Despite the fact
that medically needy populations become
eligible on account of onerous medical

bills, this group is especially vulnerable
to losing coverage because States are not
required to cover this group. For example,
in 2003, when Oklahoma eliminated its
medically needy program due to a budget
shortfall, an estimated 800 children lost
coverage.43 Such coverage interruptions
likely contribute to higher rates of uncompensated care — the primary source
for which is Federal funding.44 Reduced
reliance on these programs under these
interim final regulations will benefit State
and Federal governments and, by extension, taxpayers.
In addition, these interim final regulations may reduce instances of “job lock”
— situations in which workers are unable
to change jobs due to concerns regarding
health insurance coverage for their children.45 For example, under the Affordable
Care Act and these interim final regulations, someone currently insured through
the group market with less than 18 months
of continuous coverage may be more willing to leave her job and become a selfemployed entrepreneur if she has a child
under age 19 with a preexisting condition, because her child now will be able
to obtain immediate coverage for the preexisting condition in the individual market. Similarly, even a worker with more
than 18 months of continuous coverage
who is already protected by HIPAA may
be more likely to consider switching firms
and changing policies because he would
not have to worry that his child’s preexisting condition would be excluded for up
to 12 months.46 While the total reduction
in job-lock may be small, the impact on
those families with children with preexist-

ing conditions may be significant. The effect of these interim final regulations on
job-lock is discussed further in the summary section below.
Executive Order 12866 explicitly requires agencies to take account of “distributive impacts” and “equity.” Requiring health insurers to provide coverage to
children with preexisting conditions will,
as described below, result in a small increase in premium for relatively healthy
adults and children, and a large increase in
health and financial security for children
with preexisting conditions and their parents. This transfer is a meaningful increase
in equity, and is a benefit of these interim
final regulations.
d. Costs and Transfers
Children with preexisting conditions
have high health care costs — approximately three times the average for those
without such conditions.47 Although children with preexisting conditions have
higher health care costs than healthier
children, among children with preexisting
conditions, those who are uninsured have
expenditures that are somewhat lower than
the average for all children with preexisting conditions. Therefore, it is expected
that when uninsured children obtain coverage, there will be additional demand for
and utilization of services. There will also
be a transfer from out-of-pocket spending
to spending covered by insurance, which
will partially be mitigated by a reduction
in cost-shifting of uncompensated care to
the insured population as coverage expands.

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/security/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 only
have 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 Economic
Case 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 preexisting
condition 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 these
interim 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 Confidence
Survey, 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

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As shown above in Table 2.2, the Departments estimate that approximately
2,000 to 10,000 children whose parents
have ESI or an offer of ESI will be newly
covered in the group market. Because few
children are likely to be newly covered in
the group market, the estimated costs and
transfers are extremely small, on the order
of hundredths of a percent.
The Departments expect that these interim final regulations will have a larger
effect on the number of children covered in the individual market, resulting
in new coverage for between 29,000 and
62,000 children. Medical expenses for
these newly covered children are likely
to be greater than for the average child
covered by individual insurance. The
Departments’ analysis also assumes that
children with preexisting conditions gaining insurance under these interim final
regulations will have greater health needs
than the average uninsured child with a
preexisting condition. This assumption
concerning adverse selection is common
to most analyses of purchasing behavior
in the individual insurance market.
In the majority of States that do not
require community rating, much of the
additional cost of care for newly-covered children with preexisting condition is
likely to be borne by the parents who purchase coverage for their children. Based
on discussions with industry experts, it
appears that even in the absence of community rating, it is rare for an insurer
to charge more than twice the standard
rate for someone in poor health. The
Departments’ analysis assumes that in
non-community rated States, the parents
of newly insured children will pay a premium that is equal to twice the standard
rate, and the remainder of the additional
costs will be spread to other policy holders
in the individual market.48 However, with
the enactment of the Affordable care Act
and the issuance of these interim final regulations, rating practices in the insurance
industry could certainly change, lending
uncertainty to this estimate. In the approx-

imately twenty States that require adjusted
community rating or rating bands in the
individual market, the Departments’ analysis assumes that all of the additional costs
of newly covered children will be spread
across policies in the individual market
that are not grandfathered health plans.49
Making these assumptions, the estimated
increase in premiums is 1 percent or less
in community rated States, and approximately one-half of one percent in States
without community rating.
Finally, for the estimated 90,000 children with existing individual coverage that
excludes coverage for the preexisting condition or requires an exclusion period before coverage for that condition begins, the
Departments assume that many of these
children will receive coverage for their
condition(s). Because their existing individual policies could be grandfathered, the
parents of these children may need to purchase new policies in order to gain coverage for their children’s condition without a
waiver. Children in a preexisting condition
exclusion period in particular will need to
terminate their current policy and purchase
a new one in order to take advantage of
the elimination of any preexisting condition exclusion period. Of note, the Departments estimate that turnover in the individual market is between 40 percent and
70 percent per year.50 Therefore, in a few
years, most children who would have been
covered with a condition waiver in the absence of these interim final regulations are
expected to be in new policies that are not
grandfathered health plans in any case.
The Departments analyzed expenditures for the approximately 90,000 children who reported fair or poor health, or
who were taking three or more prescription medications, and for whom insurance
covered only a small portion of spending
for one or more medical conditions. Total
spending for these 90,000 children was
not much different than spending for the
children who did not appear to have a preexisting condition waiver, although less
of the spending was covered by private

insurance, and more of it was paid for
out-of-pocket or by other sources.51
Similar to the expectations for newly
covered children in the individual market,
in States that require rating bands or some
form of community rating, much of the
additional cost for eliminating condition
waivers will be spread across the insured
population, while in States without rating
restrictions, much of the additional costs
will be borne by the parents who purchase
the coverage. However, the estimate that
insured benefits per child will increase by
a relatively modest amount suggests that
even in States with community rating, the
cost and transfer effects will be relatively
small, at most a few tenths of a percent
over the next few years.
In evaluating the impact of this provision, it is important to remember that
the full net effects of this provision cannot be estimated because of its interactions with other provisions in the Affordable Care Act that go into effect at the same
time. For example, under the current guaranteed renewability protections in the individual market, if a child with a preexisting condition is now able to obtain coverage on a parental plan, he or she can
potentially stay on that plan until age 26.
As another example, the Affordable Care
Act will require non-grandfathered health
plans to provide recommended preventive
services at no cost-sharing. This will amplify the benefits of coverage for newly
insured children with preexisting conditions. Therefore, the Departments cannot
provide a more precise estimation of either
the benefits or the costs and transfers of
this provision.
3. PHS Act Section 2711, No Lifetime or
Annual 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 by
the Affordable Care Act, and these interim
final 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 of
the 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 newly
covered 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 condition
waiver, 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.

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health plans and health insurance issuers
offering group or individual health insurance coverage from imposing lifetime or
annual limits on the dollar value of health
benefits. The statute also provides a special rule allowing “restricted annual limits” with respect to essential health benefits (as defined in section 1302(b) of the
Affordable Care Act) for plan years (in the
individual market, policy years) beginning
before January 1, 2014. In addition, the
statute specifies that a plan or issuer may
impose annual or lifetime per-individual
limits on specific covered benefits that are
not essential health benefits to the extent
that such limits are permitted under Federal or State law.
For purposes of establishing a restricted
annual limit on the dollar value of essential health benefits, the statute provides
that in defining the term restricted annual
limit, the Departments “ensure that access to needed services is made available
with a minimal impact on premiums.”52
Based on this Congressional directive,
the interim final regulations allow annual limits on the dollar value of benefits
that are essential health benefits of no
less than $750,000 for plan years (in the
individual market, policy years) beginning on or after September 23, 2010,

but before September 23, 2011; $1.25
million for plan years (in the individual
market, policy years) beginning on
or after September 23, 2011, but
before September 23, 2012; and $2
million for plan years (in the individual
market, policy years) beginning on or
after September 23, 2012, but before
January 1, 2014. For plan years (in the
individual market, policy years) beginning
January 1, 2014, no annual limits may be
placed on essential health benefits.
The statute and these interim final
regulations relating to the prohibition
on lifetime limits generally apply to all
group health plans and health insurance
issuers offering group or individual health
insurance coverage, whether or not the
plan qualifies as a grandfathered health
plan, for plan years (in the individual market, policy years) beginning on or after
September 23, 2010. The statute and these
interim final regulations relating to the
prohibition on annual limits, including
the special rules for plan years beginning
before January 1, 2014, generally apply
to group health plans and group health
insurance coverage that qualify as a
grandfathered health plan, but do not
apply to grandfathered health plans that
are individual health insurance coverage.

b. Estimated Number of Affected Entities
In 2009, the latest data available indicates that both the incidence and amount
of lifetime limits vary by market and plan
type (e.g., HMO, PPO, POS). Table 3.1
displays the prevalence of lifetime limits
for large employer, small employer and individual markets by plan type. Sixty-three
percent of large employers had lifetime
limits; 52 percent of small employers had
lifetime limits and 89 percent of individual market plans had lifetime limits. HMO
plans are the least likely to have a lifetime limit with only 37 percent of large employer HMO plans having a limit, 16 percent of small employer HMO plans having
a limit and 23 percent of individual HMO
plans having a limit. The generosity of
the limit also varies, with 45 percent of all
large employer plans imposing a lifetime
limit of $2,000,000 or more; 39 percent of
small employers’ plans imposing a limit of
$2,000,000 or more and 86 percent of individual market plans imposing a limit of
$2,000,000 or more. Note that small employers are more likely than large employers to offer HMOs that tend not to have
lifetime limits, but when small businesses
offer plans with lifetime limits, the maximum limit tends to be lower than those in
large firms.53

Table 3.1: Prevalence of Lifetime Limits
Market

Prevalence of Limit

Number of Enrollees

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

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

Large Group

Small Group

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

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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 Health
Research & Educational Trust, (September 2009). Individual Health Plan Enrollment and Lifetime Maximum: Table 10 and
Table 17, respectively, AHIP Center for Policy Research Individual Health Insurance 2009: A Comprehensive Survey of
Premiums, Availability, and Benefits
There are scant data on annual limits on
which to base this impact analysis. Table
3.2 displays the prevalence of annual limits by market, plan type and amount of the
limit. Only 8 percent of large employers,
14 percent of small employers and 19 percent of individual market policies impose
an annual limit and thus would be directly
impacted by these interim final regulations.54 In the first year of implementation
(beginning September 23, 2010), it is estimated that less than 0.08 percent (less
than one tenth of one percent) of large employer plans, approximately 2.6 percent of
small employer plans, and 2.3 percent of

individual plans would have to raise their
annual limit to $750,000.55 This first-year
increase in annual limits would potentially
affect an estimated 1,670,000 persons
across the three markets. The second
year of the phase-in, beginning September
23, 2011, would affect additional plans
and policies, requiring a cumulative 0.7
percent of large employer plans, 3.9 percent of small employer plans, and 5.3
percent of individual policies to increase
their annual limit to $1,250,000. The second-year increase in annual limits would
affect an estimated 3,278,250 persons
across the three markets. The third and

final year of the phase-in period (beginning on September 23, 2012) would affect
additional plans and policies requiring a
cumulative 2.4 percent of large employer
plans, 8.1 percent of small employer plans
and 14.3 percent of individual policies to
increase their annual limit to $2 million.
The third-year increase in annual limits
would affect an estimated 8,104,500 persons across the three markets. Note that
the estimated number of plans and people
affected are upper-bound estimates since
they do not take into account grandfathered health plans and plans that receive
a 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 their
2005, 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 annual
limit 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 percentages
of 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 the KFF/HRET employer surveys), and the distribution was constrained to be consistent with the Mercer reported median values for
annual maximums. For annual benefit limits in individual coverage the relationship observed between AHIP’s reported lifetime benefit maximum levels and the KFF/HRET employer lifetime
benefit 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.

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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 and
2009 National Survey of Employer-Sponsored Health Plans. For employer plans, the Mercer data provides prevalence
information for PPOs and HMOs, and median annual limit 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 percentages
of 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 the
KFF/HRET employer surveys), and the distribution was constrained to be consistent with the Mercer reported median values
for annual maximums. For annual benefit limits in individual coverage the relationship observed between AHIP’s reported
lifetime benefit maximum levels and the KFF/HRET employer lifetime benefit maximums was used to generate corresponding
distributions 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 and
2009 National Survey of Employer-Sponsored Health Plans. For employer plans, the Mercer data provides prevalence
information for PPOs and HMOs, and median annual limit 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 percentages
of 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 the
KFF/HRET employer surveys), and the distribution was constrained to be consistent with the Mercer reported median values
for annual maximums. For annual benefit limits in individual coverage the relationship observed between AHIP’s reported
lifetime benefit maximum levels and the KFF/HRET employer lifetime benefit maximums was used to generate corresponding
distributions from the synthesized employer annual limits
Fear and anxiety about reaching annual
or lifetime limits on coverage is a major concern among Americans who have
health insurance. At the same time, the
data suggest that relatively few individuals
actually reach their policies’ annual and
lifetime limits. Thus, while such limits
are relatively common in health insurance, the numbers of people expected to

August 9, 2010

exceed either an annual or lifetime limit
is quite low. The estimates provided in
Table 3.4 provide a high and low range
of the number of people who would hit
such limits. Such a range is necessary
because of the tremendous uncertainty
around high-cost individuals. First, data
are sparse, given that high-cost individuals
lie at the tail of statistical cost distri-

205

butions. The Departments attempted to
extrapolate characteristics of the high-cost
population who would be affected by these
interim final regulations using several data
sources. Second, data on per-capita cost
is available on a year-by-year basis, and
not on a lifetime basis. Assumptions were
necessary to convert annual costs into
lifetime costs, including considerations of

2010–32 I.R.B.

how current spending could be related to
future spending.56
Considering these caveats, Table 3.4 illustrates that raising the restriction of an-

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

estimated 18,650 to 20,400 people who
would be expected to exceed a lifetime
limit 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

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

Current Annual Limit

Source: Estimates of the expected percentage of the insured population who would exceed a limit are based on an analysis of
the 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 the
individual, small group and large group
health insurance markets. These limits
function as caps on how much an insurance
company will spend on medical care for a
given insured individual over the course of
a year, or the individual’s lifetime. Once
a person reaches this limit or cap, the person is essentially uninsured: he or she must
pay the remaining cost of medical care
out-of-pocket. These limits particularly
affect people with high-cost conditions,58
which are typically very serious. For example, one recent survey found that 10 percent of cancer patients reached the limit of
what insurance would pay for treatment.59

The same survey also found that 25 percent
of cancer patients or their family members
used up all or most of their savings, 13 percent were contacted by a collection agency,
and 11 percent said they were unable to pay
for basic necessities like food and housing as a result of the financial cost of dealing with cancer. By prohibiting lifetime
limits and restricting annual limits, these
interim final regulations will help families and individuals experiencing financial
burdens due to exceeding the benefit limits of their insurance policy. By ensuring
and continuing coverage, these interim final regulations also reduce uncompensated
care, which would otherwise increase premiums of the insured population through

cost-shifting, as discussed in more detail
in section IV.B.6 later in this preamble.
These interim final regulations will also
improve access to care. Reaching a limit
could interrupt or cause the termination
of needed treatment, leading to worsening
of medical conditions. Moreover, those
with medical debt are more likely to skip
a needed test or treatment, and less likely
to fill a prescription or visit a doctor or
clinic for a medical issue.60 The removal
and restriction of benefit limits helps ensure continuity of care and the elimination
of the extra costs that arise when an untreated or undertreated condition leads to
the need for even more costly treatment,
that could have been prevented if no loss of
coverage 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 was
drawn 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 Society
of 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 aggregate
increase 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 $787,000
while 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 Care
2006;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)

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coverage leads to additional mortality and
lost workplace productivity, effects that
would be amplified for a sicker population
such as those who would reach a benefit
limit.61 By ensuring continuation of coverage, these interim final regulations benefit
the health and the economic well-being of
participants, beneficiaries, and enrollees.
These interim final regulations also
benefit those without an alternative source
of health coverage in the group health
insurance market. Under HIPAA rules,
when an individual exceeds a limit and
loses coverage, that individual has a special enrollment right. If his or her plan
offered multiple benefit packages or a
spouse has access to ESI, the individual
could enroll in the coverage, although it
might lead to a change in providers and
less generous coverage. Those without an
alternative option would lose coverage,
and the history of high medical claims and
presence of preexisting conditions could
make health insurance in the individual
market impossible. Under these interim
final regulations, people will no longer be
treated differently depending on whether
they have an alternative source of coverage.
Executive Order 12866 explicitly requires agencies to take account of “distributive impacts” and “equity,” and these
considerations help to motivate the relevant statutory provisions and these interim final regulations. Prohibiting lifetime limits and restricting annual limits assures that insurance will perform the function for which it was designed — namely,
protecting health and financial well being
for those most in need of care. This represents a meaningful improvement in equity,
which is a benefit associated with these interim final regulations.
d. Costs and Transfers
Extending health insurance coverage
for individuals who would otherwise hit
a lifetime or annual limit will increase
the demand for and utilization of health
care services, thereby generating additional costs to the system. The three year
phase-in of the elimination of annual limits
and the immediate elimination of lifetime
limits will increase the actuarial value of
the insurance coverage for affected plans

and policies if no other changes are made
to the plan or policy. Issuers and plans
in the group market may choose to make
changes to the plan or policy to maintain the pre-regulation actuarial value of
the plan or policy, such as changing their
provider networks or copayments in some
manner. To the extent that higher premiums (or other plan or policy changes)
are passed on to all employees, there will
be an explicit transfer from workers who
would not incur high medical costs to
those who do incur high medical costs.
If, instead, the employers do not pass on
the higher costs of insurance coverage to
their workers, this could result in lower
profits or higher prices for the employer’s
goods or services. Given the relatively
small proportion of people who exceed the
benefit limits in the current group markets,
the Departments anticipate such transfers
to be minimal when spread across the insured population (at a premium increase
of one-half of a percent or less for lifetime limits and one-tenth of a percent or
less for annual limits), compared with the
substantial benefit rendered to individual
high-cost enrollees. However, as this discussion demonstrates, there is substantial
uncertainty in data and in the choices plans
will decide to make in response to these
interim final regulations, preventing more
precise estimations of effects.
In the individual market, where policies
are individually underwritten with no rating bands in the majority of States, the Departments expect the added premium cost
or other benefit changes to be largely borne
by the individual policyholder. As discussed in the impact analysis for Section
2704, if costs exceed 200 percent of the
standard rate, some of the additional costs
could be spread across the insurance market. In the 20 States with modified community rating, issuers could spread the increased costs across the entire individual
market, leading to a transfer from those
who would not incur high medical costs to
those who do incur such costs. However,
as with the group market, such a transfer
is expected to be modest, given the small
numbers of people who would exceed their
benefit limit. The Departments estimate
that the transfer would be three-quarters
of a percent or less for lifetime limits and

one-tenth of a percent or less for annual
limits, under a situation of pure community rating where all the costs get spread
across the insured population. This impact
does not apply to grandfathered individual
market plans. Also, given the wide variation in State insurance markets, a more
precise estimation is not possible, and the
premium impact would be even less in the
majority of States that allow underwriting
in the individual insurance market.
It is worth noting that the transfers discussed above will be significantly mitigated by the associated expansion of coverage that these interim final regulations
create. The Departments expect, as a result
of the gradual elimination of annual limits
and the immediate elimination of lifetime
limits, fewer people will be left without
protection against high medical costs. This
will lead fewer individuals to spend down
resources and enroll in Medicaid or receive other State and locally funded medical support. It can be anticipated that
such an effect will be amplified due to
the high-cost nature of people who exceed
benefit limits. As a result, there will be
a reduction in Medicaid, State and local
funded health care coverage programs, as
well as uncompensated care, all of which
would otherwise raise taxes and/or premiums for the larger population. Unfortunately, data around these high-cost individuals is limited, preventing the Departments from quantifying these benefits at
the present time.
Additional uncertainty prevents more
precise estimation of the benefits and impacts of this provision. As discussed in
the impact analysis for Section 2704, there
are interactive effects of the various provisions in these interim final regulations
which cannot be estimated. For example,
prohibiting rescissions and lifetime limits
could mean that someone who would have
had a policy rescinded now maintains coverage, and also maintains coverage beyond
a previous lifetime limit. Moreover, it is
important to note that the estimates presented here, by necessity, utilize “average”
experiences and “average” plans. Different plans have different characteristics of
enrollees, for example in terms of age or
health status, meaning that provisions such
as 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 Without
Coverage: Too Little, Too Late. Washington, DC: National Academy Press.

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nual limits could affect them differently.
This also means that average impacts of
the various provisions in these interim final regulations or others cannot simply be
added to obtain a total impact, since a plan
may be affected by one provision but not
another. Moreover, plans and issuers will
consider these impacts when making decisions about whether or not to make other
changes to their coverage that could affect
their grandfather status — a consideration
that is pertinent in the case of restricted
annual limits, which do not apply to the
grandfathered individual market. This further compounds any precise calculation of
benefits and costs.
e. Enrollment Opportunity
These interim final regulations provide
an enrollment (or, in the case of the individual market, reinstatement) opportunity
for individuals who reached their lifetime
limits in a group health plan or health insurance coverage and remain otherwise eligible for the coverage. In the individual market, the reinstatement opportunity
does not apply to individuals who reached
their lifetime limits in individual health
insurance coverage if the contract is not
renewed or otherwise is no longer in effect. It would apply, however, to a family member who reached the lifetime limit
in an individual health insurance family
policy while other family members remain
in coverage. Such enrollment opportunity would generate a total hour burden of
3,800 hours and a cost burden of $21,000,
as detailed in the Paperwork Reduction
Act section.
f. Alternatives
PHS Act section 2711(a)(2) requires
the Departments to “ensure that access to
needed services is made available with
a minimal impact on premiums.” Accordingly, the Departments undertook
an analysis of different restricted annual
limit thresholds to study the issue, taking
into consideration several factors: (1) the
current use of annual limits in the group
and individual market; (2) the average
premium impact of imposing different annual limits on the individual, small group,
and large group markets; (3) the number
of individuals who will continue to have
62

annual medical expenses that exceed an
annual limit; and (4) the possibility that a
plan or issuer would switch to an annual
limit when lifetime limits are prohibited.
In order to mitigate the potential for premium increases for all plans and policies,
while at the same time ensuring access to
essential health benefits, the Departments
decided to adopt a three-year phased approach for restricted annual limits.
As discussed above, it is important to
note that it is difficult to predict exactly
how plans and issuers will respond under the new regulations. Annual or lifetime limits on benefits help control risk
and costs, and the elimination of a lifetime limit or a possible increase in an annual limit may lead plans and issuers to alter benefit design (such as increasing costsharing), and/or raise premiums. The Departments cannot determine which option
or combination of options plans and issuers will choose. Therefore, it is very difficult to measure the impact on premiums
due to the elimination of lifetime limits and
a maximum annual limit. This uncertainty
is compounded by the data uncertainties
discussed earlier in section IV.B.2.b of this
preamble.
Given the above data limitations, the
Departments modeled the impact on premiums of increasing the annual limits for
plans that currently have annual limits,
assuming that the only reaction to a required increase in annual limits would be
an increase in premiums. Because some
plans may choose to avoid or offset the
potential premium increase by increasing
cost sharing, tightening the network of
providers, adopting cost savings tools, or
making other plan changes, the modeled
premium impacts represent the high-end
of the possible increases in premiums.
The Departments modeled a range of
options and ways to implement a restricted
annual limit. Two of the options considered were setting the annual restricted
limit on essential benefits at $1 million
or at $2 million. The higher the limit is
set, the fewer the people that would exceed the limit and experience a gap in
insurance coverage. However, plans with
current low limits could see increases in
costs and potentially premiums because
the proportion of claims covered by the
plans would increase. One final issue to

consider is that for plan years (in the individual market, policy years) beginning
after January 1, 2014, all group plans and
non-grandfathered individual policies will
be required to remove annual limits. A low
annual limit until 2014 would offer less
protection to those with medical expenses
exceeding the limit, and could result in an
increase in premiums in 2014 (although
a variety of other changes that will be
implemented in 2014 could be expected to
result in lower premium increases in most
States). Therefore, a stepped approach
allowing the restricted annual limit to
be phased in over time seemed to be the
fairest approach and most likely to result
in a minimal impact on premiums, so it
was selected.
Table 3.5 demonstrates premium impacts at different annual limit thresholds,
and Table 3.4 above demonstrates the
numbers of people expected to exceed
different annual limit thresholds. The Departments chose to set the restricted annual
limit relatively low in the first year, and
to then increase the limit up to $2 million
over the three-year period. This phased approach was intended to ease any increases
in premiums in any one year, particularly
for plans with low initial annual limits,
and to help group plans and non-grandfathered individual policies transition to no
annual limits starting in 2014. With this
approach, a threshold of $750,000 was
associated with a 5.1 percent premium impact for plans with very low annual limits
of $250,000, but it is anticipated that these
plans comprise only less than one-half of
one percent of the market. On the other
hand, raising the restricted annual limits
to $2,000,000 under these interim final
regulations could be expected to help an
estimated 2,700 to 3,500 people62 who
would no longer exceed their annual limit,
ensuring financial protection to those who
have high medical claims.
It is important to note that these interim
final regulations also provide that the Secretary of HHS may establish a waiver program under which issuers or plans may assert that adhering to the restricted annual
limit provisions of these interim final regulations would result in a significant decrease in access to benefits or a significant
premium increase. The Departments provided for this waiver in order to prevent the

Numbers calculated from Table 3.4 may differ due to rounding.

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loss of coverage for enrollees in low-benefit 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 consequences given the paucity of data on the

incidence and prevalence of annual limits
in the markets today.

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

Current
Limit

People Subject
to Current
Limit

$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 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 coverages was used. The underlying assumed medical spending profile was
drawn 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 Society of 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
aggregate increase in premiums for the possible option. For the low impact estimates, the distributions were then adjusted
only for the expected marginal loading impact of using commercial reinsurance for many of the smaller carriers. For the
high impact estimates, the distributions were also adjusted to reflect possible underestimation of the tails of the expenditure
distribution once coverage of unlimited benefit levels was required. The adjustments were set at levels that generated aggregate
impacts that were conservative relative to estimates from PricewaterhouseCoopers’ March 2009 study of lifetime limits for the
National Hemophilia Foundation.
4. PHS Act Section 2712, Rescissions
(26 CFR 54.9815–2712T, 29 CFR
2590.715–2712, 45 CFR 147.128)
a. Summary
As discussed earlier in this preamble,
PHS Act Section 2712 provides rules regarding rescissions for group health plans
and health insurance issuers that offer
group or individual health insurance coverage. A plan or issuer must not rescind
coverage under the plan, policy, certificate, or contract of insurance from the individual covered under the plan or coverage
unless the individual (or a person seeking coverage on behalf of the individual)
performs an act, practice, or omission that
constitutes fraud, or unless the individual
makes an intentional misrepresentation of
material fact, as prohibited by the terms of
the plan or coverage. These interim final
regulations provide that a group health

plan, or a health insurance issuer offering
group health insurance coverage, must
provide at least 30 calendar days advance
notice to an individual before coverage
may be rescinded.64 The notice must be
provided regardless of whether the rescission is of group or individual coverage;
or whether, in the case of group coverage,
the coverage is insured or self-insured, or
the rescission applies to an entire group or
only to an individual within the group.
PHS Act Section 2712 and these interim
final regulations create a statutory Federal standard and enforcement power in the
group and individual markets where it did
not exist. Prior to this provision taking effect, varying court-made Federal common
law existed for ERISA plans. State rules
pertaining to rescission have been found
to be preempted by ERISA by five circuit
courts (5th, 6th, 7th, 9th and 11th as of
2008). Each styled a remedy looking to

State law, the majority of Federal courts or
the Restatement of Contracts. According
to a House Energy and Commerce Committee staff memorandum,65 rather than reviewing medical histories when applications are submitted, some insurers engage
in “post-claims underwriting.” Under this
practice, if the policyholders become sick
and file expensive claims, the insurance
companies initiate investigations to scrutinize the details of the policyholder’s application materials and medical records, and
if discrepancies, omissions, or misrepresentations are found, the insurer rescinds
the policies, returns the premiums, and refuses payment for medical services. The
Committee found some questionable practices in this area including insurance companies rescinding coverage even when discrepancies are unintentional or caused by
others, for conditions that are unknown to
policyholders, 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.

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lated to the medical conditions for which
patients sought medical care. According
to the Committee, the current regulatory
framework governing the individual insurance market in this area is a haphazard collection of inconsistent State and Federal
laws. Protections for consumers and enforcement actions by regulators vary depending on where individuals live. Because of these varying standards, many
patients lack adequate protections against
rescission, prompting the need for and benefits from this rule.
When a coverage rescission occurs, an
individual’s health insurance coverage is
retroactively cancelled, which means that
the insurance company is no longer responsible for medical care claims that they
had previously accepted and paid. Rescissions can result in significant financial
hardship for affected individuals, because,
in most cases, the individuals have accumulated significant medical expenses.
b. Estimated Number of Affected Entities
The Departments assume that these
interim final regulations will have their
largest impact on the individual insurance
market, because group health coverage
rarely is rescinded.66 By creating a new
Federal standard governing when policies
can be rescinded, the Departments expect
these interim final regulations to potentially affect the approximately 17 million
non-elderly individual health insurance
policy holders and their dependents in the
individual health insurance market.67 In
addition, approximately 490 health insurance issuers offering coverage in the
individual health insurance market who
currently could rescind health insurance
coverage are expected to be affected.68
That said, the actual incidence of individuals who are subject to rescissions each
year is likely to be small. The NAIC Regulatory Framework Task Force collected
data on 52 companies covering the period
2004–2008, and found that rescissions
averaged 1.46 per thousand policies in

force.69 This estimate implies there are
approximately 10,700 rescissions per year.
c. Benefits
There are many benefits that flow from
these interim final regulations, which the
Departments believe justify the costs. As
noted, Executive Order 12866 requires
consideration of “distributive impacts”
and “equity.” To the extent that rescissions
are arbitrary and revoke the insurance
that enrollees paid for and expected to
cover the cost of expensive illnesses and
conditions, preventing rescissions would
prevent inequity and greatly increase
health and economic well-being. Consumers would have greater confidence
that purchasing insurance would be worthwhile, and policies would represent better
value for money. As discussed further
in section IV.B.6.b of this preamble, it is
also well-documented that lack of insurance leads to lost workplace productivity
and additional mortality and morbidity.
Thus, these rules would contribute to reducing the burden from lost productivity
that arises from people being uncovered.
These effects would be especially large
relative to the number of individuals affected given that the affected population
tends to be much sicker on average.
Specifically, this provision also could
protect against interruptions or terminations in care resulting from rescissions.
As a result of the statute and these interim
final regulations, people with high-cost
illnesses at risk of rescission would have
continued access to care throughout their
illness, possibly avoiding more expensive
and debilitating complications down the
road. Gaps in health insurance, even if
brief, can have significant health and financial consequences.70 A survey from
the Commonwealth Fund found that about
three of five adults with any time uninsured said they had not received needed
health care in the past year because of
costs — more than two times the rate of
adults who were insured all year. Further,

44 percent of respondents who had experienced any coverage break during the prior
year said they had failed to go to a doctor
or clinic when they had a medical problem because of costs, compared with 15
percent of adults who did not experience
such breaks.71
These interim final regulations will also
have substantial financial benefits for individuals who otherwise would have had
their policies rescinded. While there has
been minimal documentation of financial
losses associated with rescissions, reports
suggest severe financial hardships may result. In one case, a woman faced more than
$129,000 in medical bills and was forced
to stop chemotherapy for several months
after being dropped by an insurer.72 The
maintenance of coverage through illness
not only prevents financial hardship for the
particular enrollee, but can also translate
into lower premiums for the broader insured population by reducing cost-shifting
from the costs of uncompensated care.
d. Costs and Transfers
The prohibition of rescissions except in
cases of fraud or intentional misrepresentation of material fact could lead insurers
to spend more resources checking applications before issuing policies than they
did before the Affordable Care Act, which
would increase administrative costs. However, these costs could be partially offset
by decreased costs associated with reduced
post-claims underwriting under the interim
final rule. Due to lack of data on the
administrative costs of underwriting and
post-claims underwriting, as well as lack
of data on the full prevalence of rescissions, it is difficult for the Departments to
quantify these costs. The new requirement
for an advance notice prior to rescission of
a policy imposes an hour burden of 350
hours and a cost burden of $29,000. These
costs are discussed in more detail in the Paperwork Reduction Act section later in this
preamble.

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-insure23feb23,1,5039339.story.

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To the extent that continuing coverage
for these generally high-cost populations
leads to additional demand for and utilization of health care services, there will
be additional costs generated in the health
care system. However, given the relatively
low rate of rescissions (approximately 0.15
percent of individual policies in force) and
the relatively sick nature of people who
have policies rescinded (who would have
difficulty going without treatment), the
Departments estimate that these additional
costs would be small.
Under this provision of these interim
final regulations, a transfer likely will
occur within the individual health insurance market from policyholders whose
policies would not have been rescinded
before the Affordable Care Act to some
of those whose policies would have been
rescinded before the Affordable Care Act,
depending on the market and the rules
which apply to it. This transfer could
result from higher overall premiums insurers will charge to recoup their increased
costs to cover the health care costs of very
sick individuals whose policies previously
could be rescinded (the precise change
in premiums depends on the competitive
conditions in specific insurance markets).
However, rescissions are extremely rare
in group markets where such costs would
be most likely to be transferred through
premium increases. As described earlier,
they are also rare in the individual market,
affecting 0.15 percent of policies. In this
market, the potential costs would likely
be born by the individuals themselves unless they live in a State with regulations
limiting rate increases based on health, as
discussed further below.
While the Departments are unable to
estimate the impact of prohibiting rescissions except in cases of fraud or intentional
misrepresentation with certainty, they expect it to be small. Even the high rates of
rescission acknowledged by some smaller
insurers would still be expected to translate
into only a small average impact across the
individual health insurance market. And
since this small impact across the market
would be primarily attributable to insurers
paying benefits to persons with substantial
medical expenditures, the transfer would
be useful.

73

The Departments assume for their analysis that the individuals covered by the
rescinded policies are much sicker than
average. Specifically, these individuals
are assumed to have total spending in the
top 10 percent of spending, which represents about 70 percent of total spending for the population as a whole, as estimated from the 2007 MEPS-HC person
level medical expenditure distributions. If
the overall NAIC rescission rate of 0.15
percent comes from this subset randomly,
then they would account for one percent
of claims. Depending on the percentage of
rescissions that no longer occur as a result
of these interim final regulations, and other
changes to the insurance market as detailed
below, these claims would now have to be
covered, representing a transfer of costs
from the affected entities to the larger insured population.
Substantial uncertainty exists around
the estimated transfer discussed above.
First, since post-claims underwriting is
limited by these interim final regulations,
plans may expand their pre-claims underwriting practices, potentially leading to
increased denials, preexisting condition
riders, or rate-ups.73 This in turn would
decrease the number of rescissions, but
without expanding coverage or increasing
claims paid. Second, there is uncertainty
concerning what proportion of the rescissions would be considered to result from
fraud or intentional misrepresentation of
material fact, and also uncertainty regarding the interaction of this provision with
other provisions, such as the elimination
of lifetime limits discussed in the impact
analysis for PHS Act section 2711, or
the prohibition of preexisting condition
exclusions for children — since new children will now be able to enroll in policies
which also cannot be rescinded. As a result of this uncertainty, the Departments
are unable to precisely estimate an overall or average premium impact from this
provision, but given the relatively low
prevalence of rescissions in the current
market, the impact is estimated to be at
most a few tenths of a percent.

5. PHS Act Section 2719A, Patient
Protections (26 CFR 54.9815–2719AT, 29
CFR 2590.715–2719A, 45 CFR 147.138)
As discussed earlier in this preamble,
Section 2719A of the PHS Act and these
interim final regulations impose, with respect to a group health plan, or group or
individual health insurance coverage, a set
of three requirements relating to the choice
of a health care professional and requirements relating to benefits for emergency
services. The three requirements relating to the choice of health care professional apply only with respect to a plan or
health insurance coverage with a network
of providers. Thus, a plan or issuer that
has not negotiated with any provider for
the delivery of health care but merely reimburses individuals covered under the plan
for their receipt of health care is not subject
to the requirements relating to the choice
of a health care professional. However,
all plans or health insurance coverage are
subject to requirements relating to benefits
for emergency services. The cost, benefits,
and transfers associated with each of these
requirements are discussed separately below.
PHS Act section 2719A and these interim final regulations are generally effective for plan years (or, in the case of the
individual market, policy years) beginning
on or after September 23, 2010.
a. Choice of Health Care Professional
i. Designation of Primary Care Provider
Summary. The statute and these interim final regulations provide that if a
group health plan, or a health insurance
issuer offering group or individual health
insurance coverage, requires or provides
for designation by a participant, beneficiary, or enrollee of a participating primary care provider, then the plan or issuer
must permit each participant, beneficiary,
and enrollee to designate any participating
primary care provider who is available to
accept the participant, beneficiary, or enrollee.
Estimated Number of Affected Entities.
Choice or assignment to a primary care
provider is typically required by health
maintenance organizations (HMOs) and
Point of Service plans (POS). Recent

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

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data suggest that there are 577 HMOs in
the United States,74 accounting for more
than 32.3 million enrollees,75 of whom
about 40 percent have their primary care
provider serve as a gatekeeper.76 Similar
data does not exist for POS plans, although
as a reference, about 10 percent of workers
with ESI are enrolled in POS plans.77
PHS Act section 2719A and these interim final regulations only apply to nongrandfathered health plans. However, due
to the lack of data on HMO and POS enrollees by type of market, and the inability to predict new plans that may enter
those markets, the Departments are unable
to predict the number enrollees and plans
that would be affected by these provisions.
Moreover, there are no data on the number of plans that auto-assign patients to primary care physicians and do not already
allow patients to make the final provider
choice, as this would be the population
to benefit maximally from the interim final rule. From conversations with industry
experts the Departments expect, however,
that this number would be very small, and
therefore the benefits and costs of this provision would be small as well, as discussed
further below.
Benefits. Provider choice allows patients to take into account factors they may
value when choosing their provider, such
as provider credentials, office hours and
location, advice from professionals, and
information on the experience of other patients.78 Freedom of choice is an important
value, particularly in this domain, even if
it cannot easily be turned into monetary
equivalents. Provider choice is a strong

predictor of patient trust in their provider,
which could lead to decreased likelihood
of malpractice claims.79 As well, studies
show that better patient-provider trust results in improved medication adherence.80
Research literature suggests that better patient-provider relationships also increase
health promotion and therapeutic effects.81
Moreover, one study found that adults who
identified having a primary care provider,
rather than a specialist, as their regular
source of care had 33 percent lower annual adjusted health care expenditures and
lower adjusted mortality.82
Studies have also found that patients
who have long-term relationships with
their health care providers tend to experience better quality health care. Adults
that have a usual provider and place are
more likely to receive preventive care and
screening services than those who do not.
For example, adults were 2.8 times more
likely to receive a flu shot and women
between the ages of 20–64 were 3.9 times
more likely to receive a clinical breast
exam if they had a usual provider and
place of service.83
Regular contact with primary care
providers also can decrease emergency department visits and hospitalizations. One
study found that adolescents with the same
regular source of care were more likely to
receive preventive care and less likely to
seek care in an emergency room.84 Another study found that patients without
a relationship with a regular physician
were 60 percent more likely to go to the
emergency department with a non-urgent
condition.85 Patients that have a usual

source of care tend to also have fewer
hospital admissions.86
Costs and Transfers. Although difficult
to estimate given the data limitations described above, the costs for this provision
are likely to be minimal. As previously
noted, when enrollees like their providers,
they are more likely to maintain appointments and comply with treatment, both of
which could induce demand for services,
but these services could then in turn reduce costs associated with treating more
advanced conditions. However, the number of affected entities from this provision
is very small, leading to small additional
costs.
There will likely be negligible transfers
due to this provision given no changes in
coverage or cost-sharing.
ii. Designation of Pediatrician as Primary
Care Provider
Summary. If a plan or issuer requires
or provides for the designation of a participating primary care provider for a child by
a participant, beneficiary, or enrollee, the
plan or issuer must permit the designation
of a physician (allopathic or osteopathic)
who specializes in pediatrics as the child’s
primary care provider if the provider participates in the network of the plan or issuer and is available to accept the child.
The general terms of the plan or health insurance coverage regarding pediatric care
otherwise are unaffected, including any
exclusions with respect to coverage of pediatric 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 the
number 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 Economics
9:183–19 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”), available
at 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 Patient
Care 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 Psychology
12.2 (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.”

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aged care organizations by age, as well as
lack of data on HMO and POS enrollees
by type of market, and the inability to predict new plans that may enter those markets, the Departments are unable to predict
the number enrollees and plans that would
be affected by these provisions. As a reference, there are an estimated 11.8 million
individuals under age 19 with ESI who are
in an HMO plan.87
Benefits. By expanding participating
primary care provider options for children
to include physicians who specialize in
pediatrics, this provision could benefit individuals who are making decisions about
care for their children. As discussed in the
previous section, research indicates that
when doctors and patients have a strong,
trusting relationship, patients often have
improved medication adherence, health
promotion, and other beneficial health
outcomes. Considering this research, this
provision could lead to better, sustained
patient-provider relationships and health
outcomes.
In addition, allowing enrollees to select a physician specializing in pediatrics
as their children’s primary care provider
could remove any referral-related delays
for individuals in plans that require referrals to pediatricians and do not allow
physicians specializing in pediatrics to
serve as primary care providers.88 The
American Academy of Pediatrics (AAP)
strongly supports the idea that the choice
of primary care clinicians for children
should include pediatricians.89 Relatedly,
at least two States have laws providing
children immediate access to pediatricians.90
Regular pediatric care, including care
by physicians specializing in pediatrics,
can improve child health outcomes and
avert preventable health care costs. For
example, one study of Medicaid enrolled
children found that when children were
up to date for age on their schedule of

well-child visits, they were less likely to
have an avoidable hospitalization at a later
time.91 Likewise, if providers are able to
proactively identify and monitor obesity in
child patients, they may reduce the incidence of adult health conditions that can
be expensive to treat; various studies have
documented links between childhood obesity and diabetes, hypertension, and adult
obesity.92 One recent study modeled that
a one-percentage-point reduction in obesity among twelve-year-olds would save
$260.4 million in total medical expenditures.93
Giving enrollees in covered plans (that
require the designation of a primary care
provider) the ability to select a participating physician who specializes in pediatrics
as the child’s primary care provider benefits individuals who would not otherwise
have been given these choices. Again, the
extent of these benefits will depend on the
number of enrollees with children that are
covered by plans that do not allow the selection of a pediatrician as the primary care
provider, which industry experts suggest
would be small.
Costs and Transfers. Although difficult
to estimate given the data limitations described above, the costs for this provision
are likely to be small. Giving enrollees a
greater choice of primary care providers
by allowing them to select participating
physicians who specialize in pediatrics as
their child’s primary care provider could
lead to health care costs by increasing the
take-up of primary care services, assuming
they would not have utilized appropriate
services as frequently if they had not been
given this choice.
Any transfers associated with these interim final regulations are expected to be
minimal. To the extent that pediatricians
acting as primary care providers would
receive higher payment rates for services
provided than would other primary care
physicians, there may be some transfer of

wealth from policy holders of non grandfathered group plans to those enrollees that
choose the former providers. However,
the Departments do not believe that this
is likely given the similarity in income for
primary care providers that care for children.94
iii. Patient Access to Obstetrical and
Gynecological Care
Summary. The statute and these interim
final regulations also provide rules for a
group health plan, or a health insurance issuer offering group or individual health insurance coverage, that provides coverage
for obstetrical or gynecological care and
requires the designation of an in-network
primary care provider. Specifically, the
plan or issuer may not require authorization or referral by the plan, issuer, or any
person (including a primary care provider)
for a female participant, beneficiary, or enrollee who seeks obstetrical or gynecological care provided by an in-network health
care professional who specializes in obstetrics or gynecology. These plans and issuers must also treat the provision of obstetrical and gynecological care, and the
ordering of related obstetrical and gynecological items and services, by the professional who specializes in obstetrics or gynecology as the authorization of the primary care provider. For this purpose, a
health care professional specializing in obstetrics or gynecology is any individual
who is authorized under applicable State
law to provide obstetrical or gynecological
care, and is not limited to a physician.
Estimated Number of Affected Entities.
Requiring referrals or authorizations to
health care professional who specializes
in obstetrics or gynecology (OB/GYNs)
is typically required by health maintenance organizations (HMOs) and Point
of 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://aappolicy.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 Access
to 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

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Health Survey, 46 percent of women reported seeing an OB/GYN in the past
year and 47 percent of women of reproductive age counted OB/GYNs among
their routine health care providers.95 In
2006, there were 69.4 million visits to an
OB/GYN according to the National Ambulatory Medical Care Survey conducted
by the Centers for Disease Control and
Prevention.96 Although more recent data
is not available, a 1999 survey showed
that 60 percent of all OB/GYNs in plans
requiring the designation of a primary care
provider reported that their gynecologic
patients were either limited or barred from
seeing their OB/GYNs without first getting permission from another physician,
and 28 percent reported that their pregnant patients needed permission before
seeing an OB/GYN.97 Nearly 75 percent
of surveyed OB/GYNs reported that their
patients needed to return to their primary
care physicians for permission before they
could provide necessary follow-up care.
Notably, beginning in 1994, due to
both consumer demand and efforts to regulate managed care, many States passed
direct access laws for OB/GYNs, allowing patients to seek care at an OB/GYN
office without a referral from a primary
care physician. As of 2008, 36 States
plus the District of Columbia have laws
that provide direct access to OB/GYNs.
However, 14 States have not mandated
direct access: Alaska, Arizona, Hawaii,
Indiana, Iowa, Nebraska, New Jersey,
New Mexico, North Dakota, Oklahoma,
South Dakota, Tennessee, Vermont, and
Wyoming.98 This provision gives females
direct access to OB/GYNs in covered
plans in these States, who may otherwise
not have had this direct access. As well,
because State law is preempted by ERISA,
women in self-insured plans did not previously receive this legal protection. In
addition, these women will not need to
get an authorization from their primary
care provider for the care and ordering of

95

obstetrical and gynecological items and
services by their participating OB/GYN.
These interim final regulations apply to
non-grandfathered health plans. However,
due to the lack of data on HMO and POS
enrollees by type of market, and the inability to predict new plans that may enter
those markets, the Departments are unable
to predict the number enrollees and plans
that would be affected by this provision.
As a reference, there are an estimated 14.8
million females between ages 21 to 65 with
ESI who are in HMO plans.99
Benefits. This provision gives women
in covered plans easier access to their
OB/GYNs, where they can receive preventive services such as pelvic and breast
exams, without the added time, expense,
and inconvenience of needing permission
first from their primary care providers.
Moreover, this provision may also save
time and reduce administrative burden
since participating OB/GYNs do not need
to get an authorization from a primary care
provider to provide care and order obstetrical and gynecological items and services.
To the extent that primary care providers
spend less time seeing women who need a
referral to an OB/GYN, access to primary
care providers will be improved. To the
extent that the items and services are critical and would have been delayed while
getting an authorization from the primary
care provider, this provision could improve the treatment and health outcomes
of female patients.
Access to such care can have substantial benefits in women’s lives. About
42,000 American women die each year
from breast cancer, and it is estimated
that about 4,000 additional lives would
be saved each year just by increasing the
percentage of women who receive recommended breast cancer screenings to
90 percent.100 As well, regular screening
with pap smears is the major reason for the
30-year decline in cervical cancer mortality.101

To the extent that direct access to
OB/GYN services results in increased utilization of recommended and appropriate
care, this provision may result in benefits
associated with improved health status
for the women affected. Potential cost
savings also exist since women in affected
plans will not need to visit their primary
care provider in order to get a referral for
routine obstetrical and gynecological care,
items, and services, thereby reducing unnecessary time and administrative burden,
and decreasing the number of office visits
paid by her and by her health plan.
Costs and Transfers. One potential
area of additional costs associated with
this provision would be induced demand,
as women who no longer need a referral
to see an OB/GYN may be more likely to
receive preventive screenings and other
care. Data is limited to provide an estimate
of this induced demand, but the Departments believe it to be small.
To the extent these interim final regulations result in a shift in services to higher
cost providers, it would result in a transfer
of wealth from enrollees in non grandfathered group plans to those individuals using the services affected. However, such
an effect is expected to be small.
b. Coverage of Emergency Services
i. Summary
PHS Act section 2719A and these interim final regulations provide that a group
health plan and a health insurance issuer
covering emergency services must do so
without the individual or the health care
provider having to obtain prior authorization (even if the emergency services are
provided out of network). For a plan or
health insurance coverage with a network
of providers that provide benefits for emergency services, the plan or issuer may not
impose any administrative requirement or
limitation on benefits for out-of-network
emergency services that is more restrictive

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 that
apply to in-network emergency services.
Finally, these interim final regulations
provide that cost-sharing requirements
expressed as a copayment amount or coinsurance rate imposed for out-of-network
emergency services cannot exceed the
cost-sharing requirements that would be
imposed if the services were provided
in-network. These interim final regulations also provide that a plan or health
insurance issuer pay for out-of-network
emergency services (prior to imposing
in-network cost-sharing), the greatest of:
(1) the median in-network rate; (2) the
usual customary and reasonable rate (or
similar rate determined using the plans or
issuer’s general formula for determining
payments for out-of-network services); or
(3) the Medicare rate.
In applying the rules relating to emergency services, the statute and these interim final regulations define the terms
emergency medical condition, emergency
services, and stabilize. These terms are
defined generally in accordance with their
meaning under Emergency Medical Treatment and Labor Act (EMTALA), section
1867 of the Social Security Act. There
are, however, some variances from the
EMTALA definitions.
The statute and these interim final regulations relating to emergency services do
not apply to grandfathered health plans;
however, other Federal or State laws related to emergency services may apply regardless of grandfather status.
ii. Estimated Number of Affected Entities
These interim final regulations will
directly affect out-of-pocket expenditures
for individuals enrolled in non-grandfathered private health insurance plans
(group or individual) whose copayment
or coinsurance arrangements for emergency services differ between in network
and out of network providers. These interim final regulations may also require
some health plans to make higher payments to out of network providers than
are made under their current contractual
arrangements. There are no available data,
however, that allow for national estimates
102

of the number of plans (or number of
enrollees in plans) that have different payment arrangements for out of network than
in-network providers, or differences between in- and out-of-network copayment
and coinsurance arrangements, in order
to more precisely estimate the number of
enrollees affected.
The Departments conducted an informal survey of benefits plans for large insurers in order to assess the landscape with
regard to copayment and coinsurance for
emergency department services, but found
that a variety of arrangements currently exist in the marketplace. Many of the large
insurers maintained identical copayment
and/or coinsurance arrangements between
in and out of network providers. Others
have differing arrangements based on copayments, coinsurance rates, or a combination of the two. While useful for examining the types of arrangement that exist in
the market place, these data do not contain
enrollment information and therefore cannot be used to make impact estimates.
Although these data do not permit
quantitative estimates of plans or persons
affected, other data can be illustrative of
overall magnitudes for emergency services. For a point of reference, in 2005,
115.3 million visits were made to hospital emergency departments. Of these,
39.9 percent were made by individuals
with private insurance. This represents
approximately 46.0 million visits, at approximately 1.7 visits per insured person
that utilized emergency department services, or 27.4 million people.102 While
data on rates of out-of-network emergency room encounters is sparse, the Blue
Cross Blue Shield (BCBS) Association
reports that nationally about 8 percent
of its emergency room visits are sought
out-of-network.103 Given the breadth of
the Blue Cross networks, it is reasonable
to assume that 8 percent to 16 percent of
emergency room visits are out-of-network
each year, since a plan with a smaller
provider network will be more likely to
have out-of-network use by enrollees.
If each individual was equally likely to
utilize out of network services, a maximum of 2.1 to 4.2 million individuals
would be potentially affected by differing

out-of-pocket requirements. Based on the
informal survey, some proportion, possibly a large portion, of these individuals are
covered by plans that have identical in and
out-of-network requirements. Therefore,
the number of individuals affected by this
regulatory provision would be smaller.
iii. Benefits
Insurers maintain differing copayment
and coinsurance arrangements between
in- and out-of-network providers as a
cost containment mechanism.
Implementing reduced cost sharing for the use
of in-network providers provides financial incentive for enrollees to use these
providers, with whom plans often have
lower-cost contractual arrangements. In
emergency situations, however, the choice
of an in-network provider may not be
available — for example, when a patient
is some distance from his or her local
provider networks or when an ambulance
transports a patient to the nearest hospital
which may not have contractual arrangements with the person’s insurer. In these
situations, the differing copayment or
coinsurance arrangements could place a
substantial financial burden on the patient.
These interim final regulations eliminate
this disparity in out-of-pocket burden for
enrollees, leading to potentially substantial financial benefit.
These interim final regulations also provide for potentially higher payments to
out-of-network providers, if usual customary rates or Medicare rates are higher than
median in-network rates. This could have
a direct economic benefit to providers and
patients, as the remaining differential between provider charge and plan payment
will be smaller, leading to a smaller balance-bill for patients.
To the extent that expectations about
such financial burden with out-of-network
emergency department usage would cause
individuals to delay or avoid seeking necessary medical treatment when they cannot access a network provider, this provision may result in more timely use of necessary medical care. It may therefore result in health and economic benefits associated with improved health status; and

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 has
reciprocity 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 of
ER services that insured individuals receive out-of-network.

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fewer complications and hospitalizations
due to delayed and possibly reduced mortality. The Departments expect that this effect would be small, however, because insured individuals are less likely to delay
care in emergency situations.
iv. Costs and Transfers
The economic costs associated with
the emergency department provisions
are likely to be minimal. These costs
would occur to the extent that any lower
cost-sharing would induce new utilization
of out of network emergency services.
Given the nature of these services as emergency services, this effect is likely to be
small for insured individuals. In addition,
the demand for emergency services in truly
emergency situations can result in health
care cost savings and population health
improvements due to the timely treatment
of conditions that could otherwise rapidly
worsen.
The emergency services provisions are
likely to result in some transfers from
the general membership of non-grandfathered group policies that have differing
copayment and coinsurance arrangements to those policy holders that use the
out-of-network emergency services. The
transfers could occur through two avenues.
First, if there is reduced cost sharing for
out-of-network emergency services, then
plans must pay more when enrollees use
those services. Out-of-pocket costs for the
enrollees using out-of-network services
will decrease, while plan costs will get
spread across the insured market. Second,
if the provision results in plans paying
higher rates than they currently do for
out-of-network providers, then those costs
will get spread across the insured market while the individual enrollees using
out-of-network care would potentially get
a smaller balance bill. For all of the data
issues described above, the precise amount
of the transfer which would occur through
an increase in premiums for these group
plans is impossible to quantify with any
precision, but it is likely to be less than
one-tenth of one percent of premium, and
only applies to non-grandfathered health
plans.

104

c. Application to Grandfathered Health
Plans
As discussed earlier in this preamble,
the statute and these interim final regulations relating to certain patient protections
do not apply to grandfathered health plans.
However, other Federal or State laws related to these patient protections may apply regardless of grandfather status.
d. Patient Protection Disclosure
Requirement
When applicable, it is important that individuals enrolled in a plan or health insurance coverage know of their rights to (1)
choose a primary care provider or a pediatrician when a plan or issuer requires participants or subscribers to designate a primary care physician; or (2) obtain obstetrical or gynecological care without prior authorization. Accordingly, these interim final regulations require such plans and issuers to provide a notice to participants
(in the individual market, primary subscribers) of these rights when applicable.
Model language is provided in these interim final regulations. The notice must be
provided whenever the plan or issuer provides a participant with a summary plan
description or other similar description of
benefits under the plan or health insurance
coverage, or in the individual market, provides a primary subscriber with a policy,
certificate, or contract of health insurance.
The Departments estimate that the cost
to plans and insurance issuers to prepare
and distribute the disclosure is $6.1 million in 2011. For a discussion of the Patient Protection Disclosure Requirement,
see the Paperwork Reduction Act section
later in this preamble.
6. Combined Effects of the Insurance
Market Reforms
a. Summary
The Affordable Care Act includes
a number of provisions that are effective for plan years (or in the case
of individual health insurance coverage, for policy years) beginning on
or after September 23, 2010. These
interim final regulations include four
of those provisions whose purpose is

to improve consumer protections. Two
additional provisions — the extension of
dependent coverage to adult children and
the rules defining a grandfathered health
plan — were the subject of previously
published interim final regulations. The
implementation of other provisions —
including those relating to coverage of
preventive services (PHS Act section
2713) and appeals (PHS Act section 2719)
— will be addressed in future regulations.
This set of regulations is distinct from
the others in that its primary beneficiaries
are people who generally already have
some type of illness, injury or disability.
The provision prohibiting preexisting condition exclusions for children could help
31,000 to 72,000 uninsured children gain
insurance, and up to 90,000 children who
have insurance with benefit carve-outs
or preexisting condition exclusion periods. The policy on restricted annual limits
could help up to 2,700 to 3,500 people
who hit these limits each year; the prohibition on lifetime limits could help 18,650 to
20,400 each year who would be expected
to have costs that exceed a limit. Based
on an NAIC survey, the Departments estimate there are approximately 10,700
rescissions of policies in the individual
market each year, and these interim final
regulations are expected to reduce this
number substantially.104 And one of the
patient protections, access to emergency
care from out-of-network providers, could
limit the out-of-pocket spending for up to
2.1 to 4.2 million individuals with some
acute health care need. While the estimates on the number of people affected
by these policies may be relatively small,
a much larger number of Americans are
at risk of hitting one of these barriers to
insurance coverage and will gain indirect
benefits of the legislation. This section
describes the potential combined benefits,
costs, and transfers of these provisions.
b. Benefits
These interim final regulations could
generate significant economic and social
welfare benefits to consumers. This would
take the form of reductions in mortality
and morbidity, a reduction in medical expenditure risk, an increase in worker productivity, and a decrease the cross-subsidy

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

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in premiums to offset uncompensated care,
sometimes referred to as the “hidden tax.”
Each of these effects is described below. It
should be noted that the benefits described
are substantially greater in each of these areas once all the protections of the full Affordable Care Act are effective.
A first type of benefit is reductions in
mortality and morbidity. While the empirical literature leaves many questions
unresolved, a growing body of evidence
convincingly demonstrates that health can
be improved by spending more on at-risk
individuals and by expanding health insurance coverage. For example, Almond
et al.105 find that newborns classified just
below a medical threshold for “very low
birthweight” have lower mortality rates
than newborns classified as just above the
threshold, despite an association between
low birth weight and higher mortality in
general, because they tend to receive additional medical care. In a study of severe
automobile accidents, Doyle106 found that
uninsured individuals receive less care
and have a substantially higher mortality
rate. Currie and Gruber107 found that increased eligibility for Medicaid coverage
expanded utilization of care for otherwise
uninsured children, leading to a sizeable
and significant reduction in child mortality. A study of Medicare by Card et al.108
found that individuals just old enough to
qualify for coverage have lower mortality
rates — despite similar illness severity —
than do those just too young for eligibility. Finally, a report by the Institute of
Medicine (IOM)109 found mortality risks
for uninsured individuals that were 25
percent higher than those of observably
similar insured individuals. In addition
to the prospect that expanded insurance
coverage will result in reductions in mor-

tality, it will almost certainly substantially
reduce morbidity, as demonstrated in extensive reviews of the literature by Hadley
and the IOM.110
These interim final regulations will
expand access to currently uninsured individuals. These newly insured populations
will likely achieve both mortality and
meaningful morbidity reductions from the
regulations, especially those populations
who face rescissions, restricted annual or
lifetime limits, or preexisting conditions
exclusions, since they are on average in
worse health and thus likely to benefit
even more from insurance coverage than
uninsured individuals in general.
Because considerable uncertainty surrounds any specific estimate of the effect
of expanded coverage on mortality and
morbidity, this benefit is not quantified
in this analysis.111 However, the Departments conclude that reductions in mortality and morbidity are likely to be a significant benefit of these interim final regulations and will become substantially greater
in 2014 and subsequent years, when millions of additional individuals will obtain
health insurance coverage.
A second type of benefit from the cumulative effects of these interim final
regulations is a reduction in medical risk.
A central goal of health insurance is to
protect individuals against catastrophic
financial hardship that would come with a
debilitating medical condition. By pooling
expenses across healthy and sick individuals, insurance can substantially improve
the economic well-being of the sick while
imposing modest costs on the healthy.
This insurance is valuable, and economic
theory suggests that the gains to the sick
from a properly implemented insurance
system far exceed the costs to healthy in-

dividuals. A recent paper shows that the
benefits from this reduction in exposure to
financial risks would be sufficient to cover
almost two-fifths of insurance costs.112
Previous research also suggests that protecting patients who have very high medical costs or low financial assets is likely
to have even larger benefits. Indeed, research indicates that approximately half of
the more than 500,000 personal bankruptcies in the U.S. in 2007 were to some
extent contributed to by very high medical expenses.113 Exclusions from health
insurance coverage based on preexisting
conditions expose the uninsured to the
aforementioned financial risks. Rescissions of coverage and binding annual or
lifetime limits on benefits increase the
chance that medical expenditures will go
uncompensated, exposing individuals to
the financial risks associated with illness.
Regulations that prevent these practices
thus reduce the uncertainty and hardship associated with these financial risks.
Moreover, because they secure coverage
for individuals with high probabilities
of incurring extensive medical expenses,
regulations that guard against rescissions
and prevent insurance exclusion based
on preexisting conditions for children are
likely to have especially large economic
benefits in terms of reducing financial
risk. These interim final regulations will
help insurance more effectively protect
patients from the financial hardship of
illness, including bankruptcy and reduced
funds for non-medical purposes.
A third type of benefit from these interim final regulations is improved workplace productivity. These interim final
regulations will benefit employers and
workers by increasing workplace productivity 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 Quarterly
Journal 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.jstor.org/stable/2946684?cookieSet=1.

108

Card, David, C. Dobkin, and N. Maestas.
nals.org/doi/abs/10.1162/qjec.2009.124.2.597.

“Does Medicare Save Lives?” The Quarterly Journal of Economics, May 2009.

124(2):597–636.

http://www.mitpressjour-

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.
nal/122342601/abstract?CRETRY=1&SRETRY=0.

April 2009.

44(4):1211–1231.

http://www3.interscience.wiley.com/jour-

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 Economics
92: 1644–1669.

113

David Himmelstein et al, 2009.

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productivity at work due to preventable
illness, and “job-lock.” A June 2009 report by the Council of Economic Advisers
found that increased access to health insurance coverage improves labor market
outcomes by improving worker health.114
The health benefits of eliminating coverage rescissions and lifetime coverage
limits, restricting annual limits, and expanding access to primary care providers
and OB/GYNs will help to reduce disability, low productivity at work due to
preventable illness, and absenteeism in the
work place, thereby increasing workplace
productivity and labor supply. Economic
theory suggests that these benefits would
likely be shared by workers, employers,
and consumers. In addition, these interim
final regulations will increase labor market efficiency by reducing “job lock,” or
the reluctance to switch jobs or engage in
entrepreneurship because such activities
would result in the loss of health insurance
or limitations on coverage. For example,
without the regulations, a parent with generous coverage for a child with a medical
condition might fear moving to a different
employer or launching his or her own business given the concern that the new plan
could exclude coverage for the child on the
basis of the preexisting condition. These
reforms will increase not only productivity
and innovation through entrepreneurship,
but also worker wages since job lock prevents workers from pursuing jobs with
potentially higher salaries.115 The Council
of Economic Advisers’ June 2009 report
estimates that for workers between the
ages of 25 and 54, the short-term gain from
eliminating job lock would be an increase
in wages of 0.3 percent.
Fourth, the Affordable Care Act’s provisions will reduce the transfers in the
health care system due to cost shifting of
uncompensated care that lead to higher
premiums for private insurance. The insurance market regulations will help expand
the number of individuals who are insured
and reduce the likelihood that individu-

als who have insurance do not bankrupt
themselves by paying medical bills. Both
effects will help reduce the amount of uncompensated care that imposes a “hidden
tax” on consumers of health care since the
costs of this care are shifted to those who
are able to pay for services in the form of
higher prices.
The Departments provide here an order of magnitude for the compensatory reduction in cost-shifting of uncompensated
care that is associated with the expansion
of coverage of these interim final regulations. Three assumptions were made.
First, the uninsured populations affected
by these interim final regulations tend to
have worse health, greater needs for health
care, higher health care spending, and less
ability to reduce utilization when they are
uninsured. These interim final regulations
are therefore unlikely to induce as much
demand for health care as would be assumed for the uninsured population in general when coverage expands. As such, the
Departments assume that extending insurance coverage to this group is unlikely to
significantly increase the overall costs of
the U.S. health care system. The Departments therefore assume that the vast majority of the premium increases estimated
in this regulatory impact analysis result
from transfers from out-of-pocket or uncompensated care costs to covered costs,
although we emphasize that there is considerable uncertainty surrounding this estimate.
Second, on the basis of the economics literature on the subject,116 the Departments estimate that two-thirds of the previously uncovered costs would have been
uncompensated care (with the remaining
one-third paid for out-of-pocket), of which
75 percent would have been paid for by
public sources, and 25 percent would have
been paid for by private sources. If reductions in privately-financed uncompensated
care are passed on in the form of lower
prices charged by hospitals, and result in
lower insurance premiums charged to con-

sumers, then the Departments estimate that
increased insurance coverage for the vulnerable populations affected by these interim final regulations could result in reductions in insurance premiums of up to
$1 billion in 2013.117 There would also be
corresponding decreases in public expenditure as uncompensated care is reduced.
c. Costs and Transfers
Premiums reflect both effects on health
system costs as well as transfers in the payment of costs from one payer or group
of individuals to another. For example,
as consumer protections expand coverage
and/or reduce cost-sharing, the costs for
services that people previously paid for out
of pocket — often creating substantial burdens as described above — will be distributed over a wider insured population.
On the other hand, the cost-shifting that
previously occurred onto the insured population when people could no longer pay for
their out-of-pocket care will be reduced.
Expansion of coverage will also generate
induced demand for services, with corresponding benefits to health and productivity. These costs and transfers together will
generate a change in premiums. As discussed previously, the populations affected
by these interim final regulations tend to
be in poorer health than the general uninsured population, leading to less induced
demand when coverage expands.
The Departments estimate that the premium effect of prohibiting preexisting
condition exclusions for children would
be on average one percent or less in the
individual market and negligible in the
group market. The provisions relating
to annual and lifetime limits would have
approximately one-half of one percent
impact on premiums in the group market and less than a one percent impact
on premiums in the individual market.
While the prohibition on lifetime limits
applies to individual plans that are grandfathered, 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 Expenditure
Panel 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 by
2013. Projections of national health expenditures from the National Health Expenditure Accounts to 2013 were distributed among these groups, and premium impacts as discussed in this
regulatory impact analysis were applied. Potential premium reductions secondary to reductions in the cost-shifting of uncompensated care were then calculated using the information from
the 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.

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August 9, 2010

and preexisting condition exclusion policy
for children do not, limiting the premium
effect for the grandfathered market. Although precise estimates of the effects
of restricting rescissions and expanding
patient protections are even more difficult
to make than for preexisting condition
exclusions or annual and lifetime limits,
the Departments’ analysis suggest that the
effects of restricting rescissions will be no
more than a few tenths of one percent of
premium, and that patient protections will
increase premiums by less than one tenth
of one percent.
The Departments emphasize that these
individual premium effects cannot be simply added to get a combined impact on
premiums for several reasons. The first
relates to their simultaneous implementation. Quantifying the precise and unique
premium impact of policies that take effect
at the same time is difficult. Health insurers will consider the totality of the provisions in making decisions about coverage
modifications, so that disentangling the effects of each provision is impossible. This
is especially so given the complex interactions among the policies. For example,
prohibiting rescissions and lifetime limits
could mean that someone who would have
had a policy rescinded now maintains coverage, and also maintains coverage beyond
a previous lifetime limit. Under the current
guaranteed renewability protections in the
individual market, if a child with a preexisting condition is now able to obtain coverage on a parental plan, he or she can potentially stay on that plan until age 26.
This difficulty is compounded by the
flexibility afforded in the grandfather rule.
Plans and issuers will consider the cumulative impact of these provisions when making decisions about whether or not to make
other changes to their coverage that could
affect their grandfather status. It can be expected that the plans that are most affected
by these provisions in terms of potential
premium impact will likely be the most aggressive in taking steps to maintain grandfather status, although, as described in that
regulatory impact analysis, other factors
affect plans’ decisions as well. It is unlikely that plans will make this calculation
multiple times for the multiple provisions
that will take effect at the same time.
Lastly, estimating these effects cumulatively compounds the errors of highly

August 9, 2010

uncertain estimates. As discussed, plan
and enrollee behaviors may change in response to the incentives created by these
interim final regulations. Data are also
limited in many areas, including: the
prevalence of annual limits in insurance
markets; characteristics of high-cost enrollees; prevalence and characteristics of
rescissions; and take-up rates under different insurance scenarios. As discussed
above, the estimates presented here, by
necessity, utilize “average” experiences
and “average” plans. Variability around
the average increases substantially when
multiple provisions are considered, since
the number of provisions that affect each
plan will differ (for example, a plan may
already offer coverage without preexisting
condition exclusions and bar rescissions,
meaning they will not be affected by those
provisions, but may have a lifetime limit
of $1 million, meaning they will be affected by that provision). Different plans
also have different characteristics of enrollees, for example in terms of age or
health status, meaning that provisions such
as eliminating lifetime limits could affect
them differently. It is especially important
to note the variation in insurance market
reforms across States. Only a few States
have community rating, where costs get
distributed across the entire insured pool.
Fractions of the cost will get distributed
across the pool and to individual enrollees
in other States depending on the degree
of rating restrictions, if any exist. Uncertainty compounds as ranges and errors
and assumptions are summed across provisions.
D. Regulatory Flexibility
Act—Department of Labor and
Department of Health and Human
Services
The Regulatory Flexibility Act
(5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to
Federal rules that are subject to the notice
and comment requirements of section
553(b) of the APA (5 U.S.C. 551 et seq.)
and that are likely to have a significant
economic impact on a substantial number
of small entities. Section 9833 of the Code,
section 734 of ERISA, and section 2792
of the PHS Act authorize the Secretaries
to promulgate any interim final rules that
they determine are appropriate to carry

219

out the provisions of chapter 100 of the
Code, part 7 of subtitle B or title I of
ERISA, and part A of title XXVII of the
PHS Act, which include PHS Act sections
2701 through 2728 and the incorporation
of those sections into ERISA section 715
and Code section 9815.
Moreover, under Section 553(b) of the
APA, a general notice of proposed rulemaking is not required when an agency,
for good cause, finds that notice and public comment thereon are impracticable, unnecessary, or contrary to the public interest. These interim final regulations are exempt from APA, because the Departments
made a good cause finding that a general
notice of proposed rulemaking is not necessary earlier in this preamble. Therefore,
the RFA does not apply and the Departments are not required to either certify that
the rule would not have a significant economic impact on a substantial number of
small entities or conduct a regulatory flexibility analysis.
Nevertheless, the Departments carefully considered the likely impact of the
rule on small entities in connection with
their assessment under Executive Order
12866. Consistent with the policy of
the RFA, the Departments encourage the
public to submit comments that suggest
alternative rules that accomplish the stated
purpose of the Affordable Care Act and
minimize the impact on small entities.
E. Special Analyses-Department of the
Treasury
Notwithstanding the determinations of
the Department of Labor and Department
of Health and Human Services, for purposes of the Department of the Treasury, it
has been determined that this Treasury decision is not a significant regulatory action
for purposes of Executive Order 12866.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the APA (5 U.S.C. chapter 5) does not apply to these interim final regulations. For the applicability of the
RFA, refer to the Special Analyses section
in the preamble to the cross-referencing
notice of proposed rulemaking published
elsewhere in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these
temporary regulations have been submitted to the Chief Counsel for Advocacy
of the Small Business Administration for

2010–32 I.R.B.

comment on their impact on small businesses.
F. Paperwork Reduction Act
1. Department of Labor and Department
of Treasury
As further discussed below, these interim final regulations contain enrollment
opportunity, rescission notice, and patient
protection disclosure requirements that
are information collection requests (ICRs)
subject to the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)).
Each of these requirements is discussed in
detail below.
Currently, the Departments are soliciting 60 days of public comments concerning these disclosures. The Departments
have submitted a copy of these interim final regulations to OMB in accordance with
44 U.S.C. 3507(d) for review of the information collections. The Departments and
OMB are particularly interested in comments that:

•

•

•
•

Evaluate whether the collection of information is necessary for the proper
performance of the functions of the
agency, including whether the information will have practical utility;
Evaluate the accuracy of the agency’s
estimate of the burden of the collection
of information, including the validity
of the methodology and assumptions
used;
Enhance the quality, utility, and clarity
of the information to be collected; and
Minimize the burden of the collection
of information on those who are to respond, including through the use of
appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, for example, by
permitting electronic submission of responses.

Comments should be sent to the Office
of Information and Regulatory Affairs,
Attention: Desk Officer for the Employee
Benefits Security Administration either
by fax to (202) 395–7285 or by email to
[email protected]. A copy
of the ICR may be obtained by contacting the PRA addressee: G. Christopher
Cosby, Office of Policy and Research,
U.S. Department of Labor, Employee
Benefits Security Administration, 200
Constitution Avenue, NW, Room N–5718,
Washington, DC 20210.
Telephone:
(202) 693–8410; Fax: (202) 219–4745.
These are not toll-free numbers. E-mail:
[email protected]. ICRs submitted to
OMB also are available at reginfo.gov
(http://www.reginfo.gov/public/do/ PRAMain).
a. ICR Regarding Affordable Care Act
Enrollment Opportunity Notice Relating
to Lifetime Limits
As discussed earlier in this preamble
these interim final regulations require a
plan or issuer to provide an individual
whose coverage ended due to reaching
a lifetime limit on the dollar value of all
benefits with an opportunity to enroll (including notice of an opportunity to enroll)
that continues for at least 30 days, regardless of whether the plan or coverage offers
an open enrollment period and regardless
of when any open enrollment period might
otherwise occur. This enrollment opportunity must be presented not later than the
first day of the first plan year (or, in the
individual market, policy year) beginning
on or after September 23, 2010 (which is
the applicability date of PHS Act section
2711). Coverage must begin not later than
the first day of the first plan year (in the
individual market, policy year) beginning
on or after September 23, 2010.118 The
Affordable Care Act dependent coverage
enrollment notice is an ICR subject to the
PRA.

The Departments estimate that approximately 29,000 individuals qualify for this
enrollment right, which as discussed more
fully below, should be considered an upward bound. The estimate is based on
the following methodology. The Departments estimate that of the approximately
139.6 million individuals in ERISA-covered plans,119 63 percent of such individuals are covered by plans with lifetime limits.120
While limited data are available regarding lifetime limits, the Departments estimated that the average lifetime limit across
all markets is about $4.7 million,121 which
means that an individual would exceed a
lifetime limit by incurring at least $4.7
million in medical expenses during one
year or across many years. Although the
Departments are unable to track spending
across time to estimate the number of individuals that would reach the lifetime limit,
the Departments estimate that about 0.033
percent of individuals incur more than $1
million in medical spending in a year.122 If
these individuals incurred this amount every year, 29,000 individuals would incur
expenses of at least $4.7 million limit by
the fifth year.
There are several reasons to suspect
that these assumptions lead to an over-estimate. First, individuals would have to
average $1 million in medical expenses
per year to exceed the $4.7 million limit.
Second, an individual’s lifetime limit is
reset if he switches employers or, for employees who work for employers with
multiple health insurance coverage options, switches to a different health insurance plan.
The interim final regulations require
plans or insurers to notify individuals
whose coverage ended due to reaching
a lifetime limit on the dollar value of all
benefits that they are now eligible to reenroll in the plan or policy. The Departments
assume that the notice for all plans and
policies (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 HIPAA
portability 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 or
cessation 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 Health
Insurance, Table 22.
122

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

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August 9, 2010

are administered by insurers) will be prepared by the estimated 630 health insurers
operating in the United States.123 On average, the Departments expect that one-half
hour of a legal professional’s time, valued as $119, will be required to draft this
notice, resulting in an hour burden of approximately 160 hours with an equivalent
cost of $19,000.
The Departments assume that insurers
track information regarding individuals
that have lost coverage due to reaching
a lifetime limit (including contact information in their administrative records).
Based on the foregoing, the Departments
estimate that, on average, five minutes of a
clerical staff member’s time, valued at $26
per hour will be required to incorporate
the specific information into the notice
and mail the estimated 29,000 notices.
This results in an estimated hour burden of
approximately 2,400 hours with an equivalent cost of $63,000. Therefore, the total
hour burden of this notice requirement is
approximately 2,600 hours with an equivalent cost of $82,000.
The associated cost burden of the rule
results from material and mailing costs
that are required to distribute the estimated
29,000 notices. The Departments estimate
that the notice will be one-page in length,
material and print costs will be five cents
per page, and postage will be 44 cents per
notice resulting in a per notice cost of 49
cents. This leads to a total cost burden
of approximately $14,000 to distribute the
notices.
Type of Review: New collection.
Agencies: Employee Benefits Security
Administration, Department of Labor; Internal Revenue Service, U.S. Department
of the Treasury,
Title: Notice of Special Enrollment Opportunity under the Patient Protection and
Affordable Care Act Relating to Lifetime
Limits.
OMB
Number:
1210–0143;
1545–2179.
Affected Public: Business or other forprofit; 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 Security
Administration); 1,300 hours (Internal
Revenue Service).
Estimated Total Annual Burden Cost:
$7,000 (Employee Benefits Security Administration); $7,000 (Internal Revenue
Service).
b. ICR Regarding Affordable Care Act
Notice Relating to Rescission
As discussed earlier in this preamble,
PHS Act Section 2712 and these interim
final regulations provide rules regarding
rescissions for group health plans and
health insurance issuers that offer group
or individual health insurance coverage.
A plan or issuer must not rescind coverage under the plan, policy, certificate, or
contract of insurance except in the case of
fraud or intentional misrepresentation of
a material fact. These interim final regulations provide that a group health plan
or a health insurance issuer offering group
health insurance coverage must provide
at least 30 calendar days advance notice
to an individual before coverage may be
rescinded.
The Departments assume that rescissions are rare in the group market and
that small group health plans are affected by rescissions. The Departments
are not aware of a data source on the
number of group plans whose policy is
rescinded; therefore, the Departments assume that 100 group health plan policies
are rescinded in a year. The Departments
estimate that there is an average of 16 participants in small, insured plans.124 Based
on these numbers the Departments estimate that approximately 100 policies are
rescinded during a year, which would result in 1,600 notices being sent to affected
participants. The Departments estimate
that 15 minutes of legal profession time
at $119 per hour would be required by
the insurers of the 100 plans to prepare
the notice and one minute per notice of
clerical professional time at $26 per hour
would be required to distribute the notice.

This results in an hour burden of approximately 50 hours with an equivalent cost of
approximately $3,700. The Departments
estimate that the cost burden associated
with distributing the notices will be approximately $800.125
These paperwork burden estimates are
summarized as follows:
Type of Review: New collection.
Agencies: Employee Benefits Security
Administration, Department of Labor; Internal Revenue Service, U.S. Department
of the Treasury,
Title: Required Notice of Rescission of
Coverage under the Patient Protection and
Affordable Care Act Disclosures.
OMB
Number:
1210–0141;
1545–2180.
Affected Public: Business or other forprofit; 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 Administration); 25 hours (Internal Revenue
Service).
Estimated Total Annual Burden Cost:
$400 (Employee Benefits Security Administration); $400 (Internal Revenue
Service).
c. ICR Regarding Affordable Care
Act Patient Protection Disclosure
Requirement
As discussed earlier in this preamble,
PHS Act section 2719A imposes, with respect to a group health plan, or group or
individual health insurance coverage, a set
of three requirements relating to the choice
of a health care professionals When applicable, it is important that individuals enrolled in a plan or health insurance coverage know of their rights to (1) choose
a primary care provider or a pediatrician
when a plan or issuer requires participants
or subscribers to designate a primary care
physician; or (2) obtain obstetrical or gynecological care without prior authorization. Accordingly, these interim final regulations 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 are
630 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 data
and 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 of
Labor/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 individual market, primary subscriber) of these
rights when applicable. Model language is
provided in these interim final regulations.
The notice must be provided whenever the
plan or issuer provides a participant with
a summary plan description or other similar description of benefits under the plan
or health insurance coverage, or in the individual market, provides a primary subscriber with a policy, certificate, or contract of health insurance. The Affordable
Care Act patient protection disclosure requirement is an ICR subject to the PRA.
In order to satisfy these interim final
regulations’ patient protection disclosure
requirement, the Departments estimate
that 339,000 ERISA-covered plans will
need to notify an estimated 8.0 million policy holders of their plans’ policy in regards
to designating a primary care physician
and for obstetrical or gynecological visits.126 The following estimates are based
on the assumption that 22 percent of group
health plans will not have grandfathered
health plan status in 2011. Because the
interim final regulations provide model
language for this purpose, the Departments estimate that five minutes of clerical
time (with a labor rate of $26.14/hour)
will be required to incorporate the required language into the plan document
and ten minutes of an human resource
professional’s time (with a labor rate of
$89.12/hour) will be required to review
the modified language.127 Therefore, the
Departments estimate that plans will incur
a one-time hour burden of 85,000 hours
with an equivalent cost of $5.8 million
to meet the disclosure requirement in the
first year.
The Departments assume that only
printing and material costs are associated
with the disclosure requirement, because
the interim final regulations provide model
language that can be incorporated into
existing plan documents, such as an SPD.
The Departments estimate that the notice
will require one-half of a page, five cents

per page printing and material cost will be
incurred, and 38 percent of the notices will
be delivered electronically. This results
in a cost burden of $124,000 ($0.05 per
page*1/2 pages per notice * 8.0 million
notices*0.62).
Plans that relinquish their grandfather
status in subsequent years also will become subject to this notice requirement
and incur a cost to prepare and distribute
the notice in the year they relinquish their
grandfather status. The Departments estimate a total hour burden of 62,000 hours
in 2012 and 50,000 in 2013 for plans relinquishing their grandfather status in 2012
or 2013. There also will be an estimated
total cost burden of $90,000 in 2012 and
$73,000 in 2013.
The Departments note that persons are
not required to respond to, and generally
are not subject to any penalty for failing to
comply with, an ICR unless the ICR has a
valid OMB control number.
These paperwork burden estimates are
summarized as follows:
Type of Review: New Collection
Agencies: Employee Benefits Security
Administration, Department of Labor; Internal Revenue Service, U.S. Department
of Treasury.
Title: Disclosure Requirement for Patient Protections under the Affordable Care
Act.
OMB
Number:
1210–0142;
1545–2181.
Affected Public: Business or other forprofit; not-for-profit institutions.
Total Respondents 262,000 (three year
average).
Total Responses: 6,186,000 (three year
average).
Frequency of Response: One time
Estimated Total Annual Burden Hours:
33,000 (Employee Benefits Security Administration); 33,000 (Internal Revenue
Service).
Estimated Total Annual Burden Cost:
$48,000 (Employee Benefits Security Ad-

ministration); $48,000 (Internal Revenue
Service).
2. Department of Health and Human
Services
As discussed above in the Department
of Labor and Department of the Treasury
PRA section, these interim final regulations contain an enrollment opportunity
notice, rescissions notice, and patient protection disclosures requirement for issuers.
These requirements are information collection requirements under the Paperwork
Reduction Act. Each of these requirements is discussed in detail below.
a. ICR Regarding Affordable Care Act
Enrollment Opportunity Notice Regarding
Lifetime Limits
PHS Act section 2711 and these interim final regulations requires health insurance issuers offering individual health
insurance coverage to provide an individual whose coverage ended due to reaching
a lifetime limit on the dollar value of all
benefits with an opportunity to enroll (including notice of an opportunity to enroll)
that continues for at least 30 days, regardless of whether the plan or coverage offers
an open enrollment period and regardless
of when any open enrollment period might
otherwise occur. This enrollment opportunity must be presented not later than the
first day of the first plan year (or, in the
individual market, policy year) beginning
on or after September 23, 2010 (which is
the applicability date of PHS Act section
2711). Coverage must begin not later than
the first day of the first plan year (or policy year in the individual market) beginning on or after September 23, 2010.128
The Department estimates that approximately 13,182 individuals qualify for this
enrollment right, which as discussed more
fully below, should be considered an upward bound. The estimate is based on the
following methodology. The Department
estimates 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 the
number 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/HRET
Survey 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 were
issued 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 the
Employment 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 HIPAA
portability 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 or
cessation 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

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million individuals129 covered by family policies in the individual market, 89
percent of such individuals have a policy
with a lifetime limit.130 The Department
also estimates that out of the approximately 40.1 million individuals covered
by public, non-Federal employer group
health plans sponsored by State and local
governments,131 63 percent of such individuals are covered by plans with lifetime
limits.132
While limited data are available regarding lifetime limits, the Department estimated that the average lifetime limit across
all markets is about $4.7 million,133 which
means that an individual would exceed a
lifetime limit by incurring at least $4.7 million in medical expenses during one year
or across many years. Although the Department is unable to track spending across
time to estimate the number of individuals that would reach the lifetime limit, the
Department estimates that about 0.033 percent of individuals incur more than $1 million in medical spending in a year.134 If
these individuals incurred this amount every year, 13,000 individuals would incur
expenses of at least $4.7 million limit by
the fifth year.
There are several reasons to suspect
that these assumptions lead to an over-estimate. First, individuals who incur $1
million of medical expenses in a year
would need to sustain this level every year
for five years to exceed the $4.7 million
limit. Second, an individual’s lifetime
limit is reset if he switches employers or,
for employees who work for employers
with multiple health insurance coverage
options, switches to a different health insurance plan.
These interim final regulations require
plans or insurers to notify individuals
whose coverage ended due to reaching
a lifetime limit on the dollar value of all
129

benefits that they are now eligible to reenroll in the plan or policy. The Department
assumes that the notice for all plans and
policies (including self-insured plans that
are administered by insurers) will be prepared by the estimated 630 health insurers
operating in the United States.135 On average, the Department expects that one-half
hour of a legal professional’s time, valued as $119, will be required to draft this
notice, resulting in an hour burden of approximately 200 hours with an equivalent
cost of $19,000.
The Department assumes that plans
and insurers track information regarding
individuals that have lost coverage due to
reaching a lifetime limit (including contact information) in their administrative
records. Based on the foregoing, the Department estimates that, on average, five
minutes of a clerical staff member’s time,
valued at $26.14 per hour will be required
to incorporate the specific information into
the notice and mail the estimated 13,000
notices. This results in an estimated hour
burden of approximately 1,100 hours with
an equivalent cost of $29,000. Therefore,
the total hour burden of this notice requirement is 1,300 hours with an equivalent
cost of $48,000.
The associated cost burden of the rule
results from material and mailing cost to
distribute the estimated 13,000 notices.
The Department estimates that the notice
will be one-page in length, material and
print costs will be five cents per page,
and postage will be 44 cents per notice
resulting in a per notice cost of 49 cents.
This leads to a total estimated cost burden
of approximately $6,500 to distribute the
notices.
Type of Review: New collection.
Agency: Department of Health and Human Services.

Title: Patient Protection and Affordable
Care Act Enrollment Opportunity Notice
Relating 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 Act
Notice Relating to Rescission
As discussed earlier in this preamble,
PHS Act Section 2712 and these interim
final regulations prohibit group health
plans and health insurance issuers that
offer group or individual health insurance
coverage generally from rescinding coverage under the plan, policy, certificate, or
contract of insurance from the individual
covered under the plan or coverage unless
the individual (or a person seeking coverage on behalf of the individual) performs
an act, practice, or omission that constitutes fraud, or unless the individual makes
an intentional misrepresentation of material fact, as prohibited by the terms of the
plan or coverage. These interim final regulations provide that a group health plan
or a health insurance issuer offering group
health insurance coverage must provide at
least 30 days advance notice to an individual before coverage may be rescinded.
This analysis assumes that rescissions
only occur in the individual health insurance market, because rescissions in the
group market are rare. The Department
estimates that there are approximately 7.1
million individual policy holders in the individual market during a year. A report

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 Health
Insurance, 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 are
630 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 data
and 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 of
Labor/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 of
policies were rescinded during the 2004 to
2008 time period.136 Based on these numbers, the Department estimates that approximately 10,700 policies are rescinded
during a year, which would result in 10,700
notices being sent to affected policyholders. The Department estimates that 15
minutes of legal profession time at $119
per hour would be required by the estimated 490 insurers in the individual market to prepare the notice and one minute
per notice of clerical professional time at
$26 per hour would be required to distribute the notice. This results in an hour burden of approximately 300 hours with an
equivalent cost of approximately $19,200.
The Department estimates that the cost
burden associated with distributing the notices will be approximately $5,200.137
These paperwork burden estimates are
summarized as follows:
Type of Review: New collection.
Agency: Department of Health and Human Services.
Title: Required Notice of Rescission of
Coverage under the Patient Protection and
Affordable Care Act Disclosures.
OMB Number: 0938–1094.
Affected Public: For Profit Business.
Respondents: 490
Responses: 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 Care
Act Patient Protections Disclosure
Requirement
As discussed above in the Department
of Labor and Department of Treasury
PRA section, these interim final regulations contains a disclosure requirement for
non-grandfathered health plans or policies
requiring the designation of a primary
care physician or usually requiring a refer-

ral from a primary care physician before
receiving care from a specialist. These
requirements are information collection
requirements under the PRA.
In order to satisfy the interim final regulations’ patient protection disclosure requirement, the Department estimates that
14,000 State and local governmental plans
will need to notify approximately 2.6 million policy holders of their plans’ policy
in regards to designating a primary care
physician and for obstetrical or gynecological visits. An estimated 490 insurers
providing coverage in the individual market will need to notify an estimated 55,000
policy holders of their policy in regards
to designating a primary care physician
and for obstetrical or gynecological visits. These estimates are based on the assumption that 22 percent of group plans
and 40 percent of individual policies will
not have grandfathered health plan status
in 2011.138
Because the interim final regulations
provide model language for this purpose, the Department estimates that five
minute of clerical time (with a labor rate
of $26.14/hour) will be required to incorporate the required language into the plan
document and ten minutes of a human
resource professional’s time (with a labor
rate of $89.12/hour) will be required to
review the modified language.139 Therefore, the Department estimates that plans
and insurers will incur a one-time hour
burden of 3,500 hours with an equivalent
cost of $239,000 to meet the disclosure
requirement.
The Department assumes that only
printing and material costs are associated
with the disclosure requirement, because
the interim final regulations provide model
language that can be incorporated into
existing plan documents, such as an SPD.
The Department estimates that the notice
will require one-half of a page, five cents
per page printing and material cost will be
incurred, and 38 percent of the notices will
be delivered electronically. This results

in a cost burden of $42,000 ($0.05 per
page*1/2 pages per notice * 1.7 million
notices*0.62).
Plans that relinquish their grandfather
status in subsequent years will also become subject to this notice requirement
and incur a cost to prepare and distribute the notice in the year they relinquish
their grandfather status. Policy holders of
non-grandfathered policies in the individual market will also have to receive this
notice. The Department estimates a total
hour burden of 2,500 hours in 2012 and
2,000 in 2013 for plans relinquishing their
grandfather status in such years. There
will, also be an estimated total cost burden
of $30,000 in 2012 and $24,000 in 2013.
The Department notes that persons are
not required to respond to, and generally
are not subject to any penalty for failing to
comply with, an ICR unless the ICR has a
valid OMB control number.
These paperwork burden estimates are
summarized as follows:
Type of Review: New collection.
Agency: Department of Health and Human Services.
Title: Disclosure Requirements for Patient Protection under the Affordable Care
Act.
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 information collection requirements, please do
either of the following:
1. Submit your comments electronically as specified in the ADDRESSES section of this proposed rule; or
2. Submit your comments to the Office
of Information and Regulatory Affairs, Office 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_framework_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 holders
in 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/HRET
Survey 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’ 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 were issued
on 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 the
Employment 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; or
Email:
[email protected]
G. Congressional Review Act
These interim final regulations are
subject to the Congressional Review Act
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and have
been transmitted to Congress and the
Comptroller General for review.
H. Unfunded Mandates Reform Act
The Unfunded Mandates Reform Act of
1995 (Public Law 104–4) requires agencies to prepare several analytic statements
before proposing any rules that may result in annual expenditures of $100 million
(as adjusted for inflation) by State, local
and tribal governments or the private sector. These interim final regulations are not
subject to the Unfunded Mandates Reform
Act because they are being issued as interim final regulations. However, consistent with the policy embodied in the Unfunded Mandates Reform Act, the regulation has been designed to be the least
burdensome alternative for State, local and
tribal governments, and the private sector,
while achieving the objectives of the Affordable Care Act.
I. Federalism Statement—Department of
Labor and Department of Health and
Human Services
Executive Order 13132 outlines fundamental principles of federalism, and
requires the adherence to specific criteria
by Federal agencies in the process of their
formulation and implementation of policies that have ’’substantial direct effects’’
on the States, the relationship between the
national government and States, or on the
distribution of power and responsibilities
among the various levels of government.
Federal agencies promulgating regulations
that have these federalism implications
must consult with State and local officials,
and describe the extent of their consultation and the nature of the concerns of State
and local officials in the preamble to the
regulation.

August 9, 2010

In the Departments’ view, these interim
final regulations have federalism implications, because they have direct effects
on the States, the relationship between
the national government and States, or on
the distribution of power and responsibilities among various levels of government.
However, in the Departments’ view, the
federalism implications of these interim final regulations are substantially mitigated
because, with respect to health insurance
issuers, the Departments expect that the
majority of States will enact laws or take
other appropriate action resulting in their
meeting or exceeding the Federal standards.
In general, through section 514, ERISA
supersedes State laws to the extent that
they relate to any covered employee benefit plan, and preserves State laws that
regulate insurance, banking, or securities.
While ERISA prohibits States from regulating a plan as an insurance or investment
company or bank, the preemption provisions of section 731 of ERISA and section
2724 of the PHS Act (implemented in 29
CFR 2590.731(a) and 45 CFR 146.143(a))
apply so that the HIPAA requirements (including those of the Affordable Care Act)
are not to be ’’construed to supersede any
provision of State law which establishes,
implements, or continues in effect any
standard or requirement solely relating
to health insurance issuers in connection
with group health insurance coverage except to the extent that such standard or
requirement prevents the application of a
requirement’’ of a Federal standard. The
conference report accompanying HIPAA
indicates that this is intended to be the
’’narrowest’’ preemption of State laws.
(See House Conf. Rep. No. 104–736, at
205, reprinted in 1996 U.S. Code Cong. &
Admin. News 2018.) States may continue
to apply State law requirements except to
the extent that such requirements prevent
the application of the Affordable Care
Act requirements that are the subject of
this rulemaking. State insurance laws
that are more stringent than the Federal
requirements are unlikely to ’’prevent the
application of’’ the Affordable Care Act,
and be preempted. Accordingly, States
have significant latitude to impose requirements on health insurance issuers that are
more restrictive than the Federal law.
In compliance with the requirement of
Executive Order 13132 that agencies ex-

225

amine closely any policies that may have
federalism implications or limit the policy
making discretion of the States, the Departments have engaged in efforts to consult with and work cooperatively with affected State and local officials, including
attending conferences of the National Association of Insurance Commissioners and
consulting with State insurance officials on
an individual basis. It is expected that the
Departments will act in a similar fashion in
enforcing the Affordable Care Act requirements. Throughout the process of developing these interim final regulations, to the
extent feasible within the specific preemption provisions of HIPAA as it applies to
the Affordable Care Act, the Departments
have attempted to balance the States’ interests in regulating health insurance issuers, and Congress’ intent to provide uniform minimum protections to consumers
in every State. By doing so, it is the Departments’ view that they have complied
with the requirements of Executive Order
13132.
Pursuant to the requirements set forth
in section 8(a) of Executive Order 13132,
and by the signatures affixed to these interim final regulations, the Departments
certify that the Employee Benefits Security Administration and the Centers for
Medicare & Medicaid Services have complied with the requirements of Executive
Order 13132 for the attached regulations in
a meaningful and timely manner.
V. Statutory Authority
The Department of the Treasury temporary regulations are adopted pursuant to
the authority contained in sections 7805
and 9833 of the Code.
The Department of Labor interim final
regulations are adopted pursuant to the
authority 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, 124
Stat. 1029; Secretary of Labor’s Order
6–2009, 74 FR 21524 (May 7, 2009).
The Department of Health and Human Services interim final regulations are

2010–32 I.R.B.

adopted pursuant to the authority contained in sections 2701 through 2763,
2791, and 2792 of the PHS Act (42 USC
300gg through 300gg–63, 300gg–91, and
300gg–92), as amended.
Continuation coverage, Disclosure,
Employee benefit plans, Group health
plans, Health care, Health insurance, Medical child support, Reporting and recordkeeping requirements.
45 CFR Parts 144, 146, and 147
Health care, Health insurance, Reporting and recordkeeping requirements, and
State 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 Secretary
Employee Benefits
Security Administration
Department of Labor.
OCIIO–9994–IFC
Dated: June 18, 2010.
Jay Angoff,
Director,
Office of Consumer Information
and Insurance Oversight.
Dated: June 18, 2010.
Kathleen Sebelius,
Secretary,
Department of Health
and Human Services.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Chapter 1
Accordingly, 26 CFR Parts 54 and 602
are amended as follows:

2010–32 I.R.B.

PART 54—PENSION EXCISE TAXES
Paragraph 1. The authority citation
for part 54 is amended by adding entries
for §§54.9815–2704T, 54.9815–2711T,
54.9815–2712T, and 54.9815–2719AT in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Section 54.9815–2704T also issued under 26 U.S.C. 9833.
Section 54.9815–2711T also issued under 26 U.S.C. 9833.
Section 54.9815–2712T also issued under 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 health
plan and preexisting condition exclusion to
read 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 (including a denial of coverage) based on the
fact that the condition was present before
the effective date of coverage (or if coverage is denied, the date of the denial) under a group health plan or group or individual health insurance coverage (or other
coverage provided to federally eligible individuals pursuant to 45 CFR part 148),
whether or not any medical advice, diagnosis, care, or treatment was recommended
or received before that day. A preexisting condition exclusion includes any limitation or exclusion of benefits (including
a denial of coverage) applicable to an individual as a result of information relating
to an individual’s health status before the
individual’s effective date of coverage (or
if coverage is denied, the date of the denial) under a group health plan, or group
or individual health insurance coverage (or
other coverage provided to Federally eligible individuals pursuant to 45 CFR part
148), such as a condition identified as a
result of a pre-enrollment questionnaire or
physical examination given to the individual, or review of medical records relating
to the pre-enrollment period.
*****

226

Par. 3. Section 54.9801–3 is amended
by revising paragraph (a)(1)(i) to read as
follows:
§54.9801–3 Limitations on preexisting
condition exclusion period.
(a) * * *
(1) * * *
(i) A preexisting condition exclusion means a preexisting condition exclusion 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 of
preexisting condition exclusions
(temporary).
(a) No preexisting condition exclusions—(1) In general. A group health
plan, or a health insurance issuer offering
group health insurance coverage, may not
impose any preexisting condition exclusion (as defined in §54.9801–2).
(2) Examples.
The rules of this
paragraph (a) are illustrated by the following examples (for additional examples illustrating the definition of a
preexisting condition exclusion, see
§54.9801–3(a)(1)(ii)):
Example 1. (i) Facts. A group health plan provides benefits solely through an insurance policy offered by Issuer P. At the expiration of the policy, the
plan switches coverage to a policy offered by Issuer
N. N’s policy excludes benefits for oral surgery required as a result of a traumatic injury if the injury
occurred before the effective date of coverage under
the policy.
(ii) Conclusion. In this Example 1, the exclusion of benefits for oral surgery required as a result
of a traumatic injury if the injury occurred before the
effective date of coverage is a preexisting condition
exclusion because it operates to exclude benefits for
a condition based on the fact that the condition was
present before the effective date of coverage under
the policy.
Example 2. (i) Facts. Individual C applies for individual health insurance coverage with Issuer M. M
denies C’s application for coverage because a pre-enrollment physical revealed that C has type 2 diabetes.
(ii) Conclusion. See Example 2 in 45 CFR
147.108(a)(2) for a conclusion that M’s denial of C’s
application for coverage is a preexisting condition
exclusion because a denial of an application for coverage based on the fact that a condition was present
before the date of denial is an exclusion of benefits
based on a preexisting condition.

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

August 9, 2010

the rules of this section apply for plan
years beginning on or after January 1,
2014.
(2) Early applicability date for children. The rules of this section apply with
respect to enrollees, including applicants
for enrollment, who are under 19 years of
age for plan years beginning on or after
September 23, 2010.
(3) Applicability to grandfathered
health plans. See §54.9815–1251T for determining the application of this section to
grandfathered health plans (providing that
a grandfathered health plan that is a group
health plan or group health insurance coverage must comply with the prohibition
against preexisting condition exclusions).
(4) Example. The rules of this paragraph (b) are illustrated by the following
example:
Example. (i) Facts. Individual F commences employment and enrolls F and F’s 16-year-old child in
the group health plan maintained by F’s employer,
with a first day of coverage of October 15, 2010. F’s
child had a significant break in coverage because of
a lapse of more than 63 days without creditable coverage immediately prior to enrolling in the plan. F’s
child was treated for asthma within the six-month period prior to the enrollment date and the plan imposes
a 12-month preexisting condition exclusion for coverage of asthma. The next plan year begins on January
1, 2011.
(ii) Conclusion. In this Example, the plan year
beginning January 1, 2011 is the first plan year of the
group health plan beginning on or after September 23,
2010. Thus, beginning on January 1, 2011, because
the child is under 19 years of age, the plan cannot
impose a preexisting condition exclusion with respect
to the child’s asthma regardless of the fact that the
preexisting condition exclusion was imposed by the
plan before the applicability date of this provision.

(c) Expiration date. This section expires on June 21, 2013.
Par. 5. Section 54.9815–2711T is
added to read as follows:
§54.9815–2711T No lifetime or annual
limits (temporary).
(a) Prohibition—(1) Lifetime limits.
Except as provided in paragraph (b) of this
section, a group health plan, or a health
insurance issuer offering group health insurance coverage, may not establish any
lifetime limit on the dollar amount of benefits for any individual.
(2) Annual limits—(i) General rule.
Except as provided in paragraphs
(a)(2)(ii), (b), and (d) of this section, a
group health plan, or a health insurance
issuer offering group health insurance
coverage, may not establish any annual

August 9, 2010

limit on the dollar amount of benefits for
any individual.
(ii) Exception for health flexible spending arrangements.
A health flexible
spending arrangement (as defined in section 106(c)(2)) is not subject to the requirement in paragraph (a)(2)(i) of this
section.
(b) Construction—(1) Permissible limits on specific covered benefits. The rules
of this section do not prevent a group
health plan, or a health insurance issuer
offering group health insurance coverage,
from placing annual or lifetime dollar
limits with respect to any individual on
specific covered benefits that are not essential health benefits to the extent that
such limits are otherwise permitted under applicable Federal or State law. (The
scope of essential health benefits is addressed in paragraph (c) of this section).
(2) Condition-based exclusions. The
rules of this section do not prevent a group
health plan, or a health insurance issuer
offering group health insurance coverage,
from excluding all benefits for a condition.
However, if any benefits are provided for
a condition, then the requirements of this
section apply. Other requirements of Federal or State law may require coverage of
certain benefits.
(c) Definition of essential health benefits. The term “essential health benefits”
means essential health benefits under section 1302(b) of the Patient Protection and
Affordable Care Act and applicable regulations.
(d) Restricted annual limits permissible prior to 2014—(1) In general. With
respect to plan years beginning prior to
January 1, 2014, a group health plan, or
a health insurance issuer offering group
health insurance coverage, may establish,
for any individual, an annual limit on the
dollar amount of benefits that are essential health benefits, provided the limit is
no less than the amounts in the following
schedule:
(i) For a plan year beginning on or after
September 23, 2010, but before September
23, 2011, $750,000.
(ii) For a plan year beginning on or after
September 23, 2011, but before September
23, 2012, $1,250,000.
(iii) For plan years beginning on or after
September 23, 2012, but before January 1,
2014, $2,000,000.

227

(2) Only essential health benefits taken
into account. In determining whether an
individual has received benefits that meet
or exceed the applicable amount described
in paragraph (d)(1) of this section, a plan or
issuer must take into account only essential
health benefits.
(3) Waiver authority of the Secretary
of Health and Human Services. For plan
years beginning before January 1, 2014,
the Secretary of Health and Human Services may establish a program under which
the requirements of paragraph (d)(1) of
this section relating to annual limits may
be waived (for such period as is specified by the Secretary of Health and Human Services) for a group health plan or
health insurance coverage that has an annual dollar limit on benefits below the restricted annual limits provided under paragraph (d)(1) of this section if compliance
with paragraph (d)(1) of this section would
result in a significant decrease in access to
benefits under the plan or health insurance
coverage or would significantly increase
premiums for the plan or health insurance
coverage.
(e) Transitional rules for individuals
whose coverage or benefits ended by reason of reaching a lifetime limit—(1) In
general. The relief provided in the transitional rules of this paragraph (e) applies
with respect to any individual—
(i) Whose coverage or benefits under a
group health plan or group health insurance coverage ended by reason of reaching a lifetime limit on the dollar value of
all benefits for any individual (which, under this section, is no longer permissible);
and
(ii) Who becomes eligible (or is required to become eligible) for benefits not
subject to a lifetime limit on the dollar
value of all benefits under the group health
plan or group health insurance coverage
on the first day of the first plan year beginning on or after September 23, 2010, by
reason of the application of this section.
(2) Notice and enrollment opportunity
requirements—(i) If an individual described in paragraph (e)(1) of this section
is eligible for benefits (or is required to
become eligible for benefits) under the
group health plan — or group health insurance coverage — described in paragraph
(e)(1) of this section, the plan and the
issuer are required to give the individual
written notice that the lifetime limit on

2010–32 I.R.B.

the dollar value of all benefits no longer
applies and that the individual, if covered,
is once again eligible for benefits under
the plan. Additionally, if the individual is
not enrolled in the plan or health insurance
coverage, or if an enrolled individual is
eligible for but not enrolled in any benefit
package under the plan or health insurance
coverage, then the plan and issuer must
also give such an individual an opportunity
to enroll that continues for at least 30 days
(including written notice of the opportunity to enroll). The notices and enrollment
opportunity required under this paragraph
(e)(2)(i) must be provided beginning not
later than the first day of the first plan year
beginning on or after September 23, 2010.
(ii) The notices required under paragraph (e)(2)(i) of this section may be provided to an employee on behalf of the
employee’s dependent. In addition, the
notices may be included with other enrollment materials that a plan distributes
to employees, provided the statement is
prominent. For either notice, if a notice
satisfying the requirements of this paragraph (e)(2) is provided to an individual,
the obligation to provide the notice with respect to that individual is satisfied for both
the plan and the issuer.
(3) Effective date of coverage. In the
case of an individual who enrolls under
paragraph (e)(2) of this section, coverage
must take effect not later than the first day
of the first plan year beginning on or after
September 23, 2010.
(4) Treatment of enrollees in a group
health plan. Any individual enrolling in
a group health plan pursuant to paragraph
(e)(2) of this section must be treated as if
the individual were a special enrollee, as
provided under the rules of §54.9801–6(d).
Accordingly, the individual (and, if the individual would not be a participant once
enrolled in the plan, the participant through
whom the individual is otherwise eligible
for coverage under the plan) must be offered all the benefit packages available to
similarly situated individuals who did not
lose coverage by reason of reaching a lifetime limit on the dollar value of all benefits. For this purpose, any difference in
benefits or cost-sharing requirements constitutes a different benefit package. The
individual also cannot be required to pay
more for coverage than similarly situated
individuals who did not lose coverage by

2010–32 I.R.B.

reason of reaching a lifetime limit on the
dollar value of all benefits.
(5) Examples. The rules of this paragraph (e) are illustrated by the following
examples:
Example 1. (i) Facts. Employer Y maintains a
group health plan with a calendar year plan year. The
plan has a single benefit package. For plan years beginning before September 23, 2010, the plan has a
lifetime limit on the dollar value of all benefits. Individual B, an employee of Y, was enrolled in Y’s group
health plan at the beginning of the 2008 plan year. On
June 10, 2008, B incurred a claim for benefits that exceeded the lifetime limit under Y’s plan and ceased to
be enrolled in the plan. B is still eligible for coverage
under Y’s group health plan. On or before January 1,
2011, Y’s group health plan gives B written notice informing B that the lifetime limit on the dollar value of
all benefits no longer applies, that individuals whose
coverage ended by reason of reaching a lifetime limit
under the plan are eligible to enroll in the plan, and
that individuals can request such enrollment through
February 1, 2011 with enrollment effective retroactively to January 1, 2011.
(ii) Conclusion. In this Example 1, the plan has
complied with the requirements of this paragraph (e)
by providing a timely written notice and enrollment
opportunity to B that lasts at least 30 days.
Example 2. (i) Facts. Employer Z maintains a
group health plan with a plan year beginning October
1 and ending September 30. Prior to October 1, 2010,
the group health plan has a lifetime limit on the dollar value of all benefits. Individual D, an employee of
Z, and Individual E, D’s child, were enrolled in family coverage under Z’s group health plan for the plan
year beginning on October 1, 2008. On May 1, 2009,
E incurred a claim for benefits that exceeded the lifetime limit under Z’s plan. D dropped family coverage
but remains an employee of Z and is still eligible for
coverage under Z’s group health plan.
(ii) Conclusion. In this Example 2, not later than
October 1, 2010, the plan must provide D and E an
opportunity to enroll (including written notice of
an opportunity to enroll) that continues for at least
30 days, with enrollment effective not later than
October 1, 2010.
Example 3. (i) Facts. Same facts as Example
2, except that Z’s plan had two benefit packages (a
low-cost and a high-cost option). Instead of dropping
coverage, D switched to the low-cost benefit package
option.
(ii) Conclusion. In this Example 3, not later than
October 1, 2010, the plan must provide D and E an
opportunity to enroll in any benefit package available
to similarly situated individuals who enroll when first
eligible. The plan would have to provide D and E the
opportunity to enroll in any benefit package available
to similarly situated individuals who enroll when first
eligible, even if D had not switched to the low-cost
benefit package option.
Example 4. (i) Facts. Employer Q maintains
a group health plan with a plan year beginning
October 1 and ending September 30. For the plan
year beginning on October 1, 2009, Q has an annual
limit on the dollar value of all benefits of $500,000.
(ii) Conclusion. In this Example 4, Q must raise
the annual limit on the dollar value of essential health
benefits to at least $750,000 for the plan year begin-

228

ning October 1, 2010. For the plan year beginning
October 1, 2011, Q must raise the annual limit to at
least $1.25 million. For the plan year beginning October 1, 2012, Q must raise the annual limit to at least
$2 million. Q may also impose a restricted annual
limit of $2 million for the plan year beginning October 1, 2013. After the conclusion of that plan year, Q
cannot impose an overall annual limit.
Example 5. (i) Facts. Same facts as Example 4,
except that the annual limit for the plan year beginning on October 1, 2009 is $1 million and Q lowers
the annual limit for the plan year beginning October
1, 2010 to $750,000.
(ii) Conclusion. In this Example 5, Q complies
with 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 plan
will cease to be a grandfathered health plan and will
be generally subject to all of the provisions of PHS
Act sections 2701 through 2719A.

(f)
Effective/applicability
date.
The provisions of this section apply for plan years beginning on
or after September 23, 2010.
See
§54.9815–1251T for determining the
application of this section to grandfathered
health plans (providing that the
prohibitions on lifetime and annual limits
apply to all grandfathered health plans that
are group health plans and group health
insurance coverage, including the special
rules regarding restricted annual limits).
(g) Expiration date. This section expires on June 21. 2013.
Par. 6. Section 54.9815–2712T is
added to read as follows:
§54.9815–2712T Rules regarding
rescissions (temporary).
(a) Prohibition on rescissions—(1) A
group health plan, or a health insurance issuer offering group health insurance coverage, must not rescind coverage under
the plan, or under the policy, certificate,
or contract of insurance, with respect to
an individual (including a group to which
the individual belongs or family coverage
in which the individual is included) once
the individual is covered under the plan or
coverage, unless the individual (or a person seeking coverage on behalf of the individual) performs an act, practice, or omission that constitutes fraud, or unless the
individual makes an intentional misrepresentation of material fact, as prohibited by
the terms of the plan or coverage. A group
health plan, or a health insurance issuer
offering group health insurance coverage,
must provide at least 30 days advance written notice to each participant who would

August 9, 2010

be affected before coverage may be rescinded under this paragraph (a)(1), regardless of whether the coverage is insured
or self-insured, or whether the rescission
applies to an entire group or only to an individual within the group. (The rules of
this paragraph (a)(1) apply regardless of
any contestability period that may otherwise apply.)
(2) For purposes of this section, a
rescission is a cancellation or discontinuance of coverage that has retroactive
effect. For example, a cancellation that
treats a policy as void from the time of
the individual’s or group’s enrollment is a
rescission. As another example, a cancellation that voids benefits paid up to a year
before the cancellation is also a rescission
for this purpose. A cancellation or discontinuance of coverage is not a rescission
if—
(i) The cancellation or discontinuance
of coverage has only a prospective effect;
or
(ii) The cancellation or discontinuance
of coverage is effective retroactively to the
extent it is attributable to a failure to timely
pay required premiums or contributions towards the cost of coverage.
(3) The rules of this paragraph (a) are
illustrated by the following examples:
Example 1. (i) Facts. Individual A seeks enrollment in an insured group health plan. The plan
terms permit rescission of coverage with respect to
an individual if the individual engages in fraud or
makes an intentional misrepresentation of a material
fact. The plan requires A to complete a questionnaire regarding A’s prior medical history, which affects setting the group rate by the health insurance
issuer. The questionnaire complies with the other requirements of this part. The questionnaire includes
the following question: “Is there anything else relevant to your health that we should know?” A inadvertently fails to list that A visited a psychologist on two
occasions, six years previously. A is later diagnosed
with breast cancer and seeks benefits under the plan.
On or around the same time, the issuer receives information about A’s visits to the psychologist, which
was not disclosed in the questionnaire.
(ii) Conclusion. In this Example 1, the plan cannot rescind A’s coverage because A’s failure to disclose the visits to the psychologist was inadvertent.
Therefore, it was not fraudulent or an intentional misrepresentation of material fact.
Example 2. (i) Facts. An employer sponsors a
group health plan that provides coverage for employees who work at least 30 hours per week. Individual B has coverage under the plan as a full-time employee. The employer reassigns B to a part-time position. Under the terms of the plan, B is no longer
eligible for coverage. The plan mistakenly continues
to provide health coverage, collecting premiums from
B and paying claims submitted by B. After a routine

August 9, 2010

audit, the plan discovers that B no longer works at
least 30 hours per week. The plan rescinds B’s coverage effective as of the date that B changed from a
full-time employee to a part-time employee.
(ii) Conclusion. In this Example 2, the plan cannot rescind B’s coverage because there was no fraud
or 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 requirements. Other requirements of Federal or
State law may apply in connection with a
rescission of coverage.
(c)
Effective/applicability
date.
The provisions of this section apply for plan years beginning on
or after September 23, 2010.
See
§54.9815–1251T for determining the
application of this section to grandfathered
health plans (providing that the rules
regarding rescissions and advance notice
apply to all grandfathered health plans).
(d) Expiration date. This section expires on June 21, 2013.
Par. 7. Section 54.9815–2719AT is
added to read as follows:
§54.9815–2719AT Patient protections
(temporary).
(a) Choice of health care professional—(1) Designation of primary care
provider—(i) In general. If a group health
plan, or a health insurance issuer offering
group health insurance coverage, requires
or provides for designation by a participant
or beneficiary of a participating primary
care provider, then the plan or issuer must
permit each participant or beneficiary to
designate any participating primary care
provider who is available to accept the
participant or beneficiary. In such a case,
the plan or issuer must comply with the
rules of paragraph (a)(4) of this section
by informing each participant of the terms
of the plan or health insurance coverage
regarding designation of a primary care
provider.
(ii) Example. The rules of this paragraph (a)(1) are illustrated by the following example:
Example. (i) Facts. A group health plan requires
individuals covered under the plan to designate a primary care provider. The plan permits each individual
to designate any primary care provider participating
in the plan’s network who is available to accept the
individual as the individual’s primary care provider.
If an individual has not designated a primary care
provider, the plan designates one until one has been
designated by the individual. The plan provides a notice that satisfies the requirements of paragraph (a)(4)

229

of this section regarding the ability to designate a primary care provider.
(ii) Conclusion. In this Example, the plan has satisfied the requirements of paragraph (a) of this section.

(2) Designation of pediatrician as primary care provider—(i) In general. If a
group health plan, or a health insurance issuer offering group health insurance coverage, requires or provides for the designation of a participating primary care
provider for a child by a participant or beneficiary, the plan or issuer must permit the
participant or beneficiary to designate a
physician (allopathic or osteopathic) who
specializes in pediatrics as the child’s primary care provider if the provider participates in the network of the plan or issuer
and is available to accept the child. In such
a case, the plan or issuer must comply with
the rules of paragraph (a)(4) of this section
by informing each participant of the terms
of the plan or health insurance coverage regarding designation of a pediatrician as the
child’s primary care provider.
(ii) Construction. Nothing in paragraph
(a)(2)(i) of this section is to be construed
to waive any exclusions of coverage under the terms and conditions of the plan or
health insurance coverage with respect to
coverage of pediatric care.
(iii) Examples. The rules of this paragraph (a)(2) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan’s HMO
designates for each participant a physician who specializes in internal medicine to serve as the primary
care provider for the participant and any beneficiaries. Participant A requests that Pediatrician B be designated as the primary care provider for A’s child. B
is a participating provider in the HMO’s network.
(ii) Conclusion. In this Example 1, the HMO
must permit A’s designation of B as the primary care
provider for A’s child in order to comply with the requirements 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 the
child’s severe shellfish allergies. B wishes to refer A’s
child to an allergist for treatment. The HMO, however, does not provide coverage for treatment of food
allergies, nor does it have an allergist participating in
its network, and it therefore refuses to authorize the
referral.
(ii) Conclusion. In this Example 2, the HMO has
not violated the requirements of this paragraph (a)(2)
because the exclusion of treatment for food allergies
is in accordance with the terms of A’s coverage.

(3) Patient access to obstetrical and gynecological care—(i) General rights—(A)
Direct access. A group health plan, or
a health insurance issuer offering group
health insurance coverage, described in

2010–32 I.R.B.

paragraph (a)(3)(ii) of this section may
not require authorization or referral by
the plan, issuer, or any person (including
a primary care provider) in the case of
a female participant or beneficiary who
seeks coverage for obstetrical or gynecological care provided by a participating
health care professional who specializes in
obstetrics or gynecology. In such a case,
the plan or issuer must comply with the
rules of paragraph (a)(4) of this section by
informing each participant that the plan
may not require authorization or referral
for obstetrical or gynecological care by a
participating health care professional who
specializes in obstetrics or gynecology.
The plan or issuer may require such a
professional to agree to otherwise adhere
to the plan’s or issuer’s policies and procedures, including procedures regarding
referrals and obtaining prior authorization
and providing services pursuant to a treatment plan (if any) approved by the plan
or issuer. For purposes of this paragraph
(a)(3), a health care professional who specializes in obstetrics or gynecology is any
individual (including a person other than
a physician) who is authorized under applicable State law to provide obstetrical or
gynecological care.
(B) Obstetrical and gynecological care.
A group health plan or health insurance
issuer described in paragraph (a)(3)(ii) of
this section must treat the provision of obstetrical and gynecological care, and the
ordering of related obstetrical and gynecological items and services, pursuant to the
direct access described under paragraph
(a)(3)(i)(A) of this section, by a participating health care professional who specializes in obstetrics or gynecology as the authorization of the primary care provider.
(ii) Application of paragraph. A group
health plan, or a health insurance issuer
offering group health insurance coverage,
is described in this paragraph (a)(3) if the
plan or issuer—
(A) Provides coverage for obstetrical or
gynecological care; and
(B) Requires the designation by a participant or beneficiary of a participating
primary care provider.
(iii) Construction. Nothing in paragraph (a)(3)(i) of this section is to be construed to—
(A) Waive any exclusions of coverage
under the terms and conditions of the plan
or health insurance coverage with respect

2010–32 I.R.B.

to coverage of obstetrical or gynecological
care; or
(B) Preclude the group health plan or
health insurance issuer involved from requiring that the obstetrical or gynecological provider notify the primary care health
care professional or the plan or issuer of
treatment decisions.
(iv) Examples. The rules of this paragraph (a)(3) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan requires each participant to designate a physician to
serve as the primary care provider for the participant
and the participant’s family. Participant A, a female,
requests a gynecological exam with Physician B, an
in-network physician specializing in gynecological
care. The group health plan requires prior authorization from A’s designated primary care provider for the
gynecological exam.
(ii) Conclusion. In this Example 1, the group
health plan has violated the requirements of this paragraph (a)(3) because the plan requires prior authorization from A’s primary care provider prior to obtaining
gynecological services.
Example 2. (i) Facts. Same facts as Example 1
except that A seeks gynecological services from C,
an out-of-network provider.
(ii) Conclusion. In this Example 2, the group
health plan has not violated the requirements of this
paragraph (a)(3) by requiring prior authorization because C is not a participating health care provider.
Example 3. (i) Facts. Same facts as Example
1 except that the group health plan only requires B
to inform A’s designated primary care physician of
treatment decisions.
(ii) Conclusion. In this Example 3, the group
health plan has not violated the requirements of this
paragraph (a)(3) because A has direct access to B
without prior authorization. The fact that the group
health plan requires notification of treatment decisions to the designated primary care physician does
not violate this paragraph (a)(3).
Example 4. (i) Facts. A group health plan requires each participant to designate a physician to
serve as the primary care provider for the participant
and the participant’s family. The group health plan
requires prior authorization before providing benefits
for uterine fibroid embolization.
(ii) Conclusion. In this Example 4, the plan requirement for prior authorization before providing
benefits for uterine fibroid embolization does not violate the requirements of this paragraph (a)(3) because,
though the prior authorization requirement applies to
obstetrical services, it does not restrict access to any
providers specializing in obstetrics or gynecology.

(4) Notice of right to designate a primary care provider—(i) In general. If
a group health plan or health insurance
issuer requires the designation by a participant or beneficiary of a primary care
provider, the plan or issuer must provide
a notice informing each participant of the
terms of the plan or health insurance cov-

230

erage regarding designation of a primary
care provider and of the rights—
(A) Under paragraph (a)(1)(i) of this
section, that any participating primary care
provider who is available to accept the participant or beneficiary can be designated;
(B) Under paragraph (a)(2)(i) of this
section, with respect to a child, that any
participating physician who specializes in
pediatrics can be designated as the primary
care provider; and
(C) Under paragraph (a)(3)(i) of this
section, that the plan may not require authorization or referral for obstetrical or gynecological care by a participating health
care professional who specializes in obstetrics or gynecology.
(ii) Timing. The notice described in
paragraph (a)(4)(i) of this section must be
included whenever the plan or issuer provides a participant with a summary plan
description or other similar description of
benefits under the plan or health insurance
coverage.
(iii) Model language. The following
model language can be used to satisfy the
notice requirement described in paragraph
(a)(4)(i) of this section:
(A) For plans and issuers that require or
allow for the designation of primary care
providers by participants or beneficiaries,
insert:
[Name of group health plan or health
insurance issuer] generally [requires/allows] the designation of a primary care
provider. You have the right to designate any primary care provider who
participates in our network and who is
available to accept you or your family members. [If the plan or health insurance coverage designates a primary
care provider automatically, insert: Until you make this designation, [name of
group health plan or health insurance issuer] designates one for you.] For information on how to select a primary care
provider, and for a list of the participating primary care providers, contact the
[plan administrator or issuer] at [insert
contact information].
(B) For plans and issuers that require
or allow for the designation of a primary
care provider for a child, add:
For children, you may designate
a pediatrician as the primary care
provider.
(C) For plans and issuers that provide coverage for obstetric or gyneco-

August 9, 2010

logical care and require the designation
by a participant or beneficiary of a primary care provider, add:
You do not need prior authorization from [name of group health plan
or issuer] or from any other person
(including a primary care provider)
in order to obtain access to obstetrical or gynecological care from a
health care professional in our network who specializes in obstetrics
or gynecology. The health care professional, however, may be required
to comply with certain procedures,
including obtaining prior authorization for certain services, following a
pre-approved treatment plan, or procedures for making referrals. For
a list of participating health care
professionals who specialize in obstetrics or gynecology, contact the
[plan administrator or issuer] at [insert contact information].
(b) Coverage of emergency services—(1) Scope. If a group health plan,
or a health insurance issuer offering group
health insurance coverage, provides any
benefits with respect to services in an
emergency department of a hospital, the
plan or issuer must cover emergency services (as defined in paragraph (b)(4)(ii) of
this section) consistent with the rules of
this paragraph (b).
(2) General rules. A plan or issuer subject to the requirements of this paragraph
(b) must provide coverage for emergency
services in the following manner—
(i) Without the need for any prior authorization determination, even if the emergency services are provided on an out-ofnetwork basis;
(ii) Without regard to whether the
health care provider furnishing the emergency services is a participating network
provider with respect to the services;
(iii) If the emergency services are provided out of network, without imposing
any administrative requirement or limitation on coverage that is more restrictive
than the requirements or limitations that
apply to emergency services received from
in-network providers;
(iv) If the emergency services are provided out of network, by complying with
the cost-sharing requirements of paragraph
(b)(3) of this section; and
(v) Without regard to any other term or
condition of the coverage, other than —

August 9, 2010

(A) The exclusion of or coordination of
benefits;
(B) An affiliation or waiting period permitted under part 7 of ERISA, part A of title XXVII of the PHS Act, or chapter 100
of the Internal Revenue Code; or
(C) Applicable cost sharing.
(3) Cost-sharing requirements—(i) Copayments and coinsurance. Any cost-sharing requirement expressed as a copayment
amount or coinsurance rate imposed with
respect to a participant or beneficiary for
out-of-network emergency services cannot
exceed the cost-sharing requirement imposed with respect to a participant or beneficiary if the services were provided in-network. However, a participant or beneficiary may be required to pay, in addition
to the in-network cost sharing, the excess
of the amount the out-of-network provider
charges over the amount the plan or issuer is required to pay under this paragraph (b)(3)(i). A group health plan or
health insurance issuer complies with the
requirements of this paragraph (b)(3) if it
provides benefits with respect to an emergency service in an amount equal to the
greatest of the three amounts specified in
paragraphs (b)(3)(i)(A), (b)(3)(i)(B), and
(b)(3)(i)(C) of this section (which are adjusted for in-network cost-sharing requirements).
(A) The amount negotiated with in-network providers for the emergency service
furnished, excluding any in-network copayment or coinsurance imposed with respect to the participant or beneficiary. If
there is more than one amount negotiated
with in-network providers for the emergency service, the amount described under
this paragraph (b)(3)(i)(A) is the median of
these amounts, excluding any in-network
copayment or coinsurance imposed with
respect to the participant or beneficiary. In
determining the median described in the
preceding sentence, the amount negotiated
with each in-network provider is treated
as a separate amount (even if the same
amount is paid to more than one provider).
If there is no per-service amount negotiated with in-network providers (such as
under a capitation or other similar payment
arrangement), the amount under this paragraph (b)(3)(i)(A) is disregarded.
(B) The amount for the emergency service calculated using the same method the
plan generally uses to determine payments
for out-of-network services (such as the

231

usual, customary, and reasonable amount),
excluding any in-network copayment or
coinsurance imposed with respect to the
participant or beneficiary. The amount in
this paragraph (b)(3)(i)(B) is determined
without reduction for out-of-network cost
sharing that generally applies under the
plan or health insurance coverage with respect to out-of-network services. Thus, for
example, if a plan generally pays 70 percent of the usual, customary, and reasonable amount for out-of-network services,
the amount in this paragraph (b)(3)(i)(B)
for an emergency service is the total (that
is, 100 percent) of the usual, customary,
and reasonable amount for the service, not
reduced by the 30 percent coinsurance that
would generally apply to out-of-network
services (but reduced by the in-network
copayment or coinsurance that the individual would be responsible for if the emergency service had been provided in-network).
(C) The amount that would be paid
under Medicare (part A or part B of title XVIII of the Social Security Act, 42
U.S.C. 1395 et seq.) for the emergency
service, excluding any in-network copayment or coinsurance imposed with respect
to the participant or beneficiary.
(ii) Other cost sharing. Any cost-sharing requirement other than a copayment
or coinsurance requirement (such as a
deductible or out-of-pocket maximum)
may be imposed with respect to emergency services provided out of network
if the cost-sharing requirement generally
applies to out-of-network benefits. A
deductible may be imposed with respect
to out-of-network emergency services
only as part of a deductible that generally applies to out-of-network benefits.
If an out-of-pocket maximum generally
applies to out-of-network benefits, that
out-of-pocket maximum must apply to
out-of-network emergency services.
(iii) Examples. The rules of this paragraph (b)(3) are illustrated by the following examples. In all of these examples, the
group health plan covers benefits with respect to emergency services.
Example 1. (i) Facts. A group health plan imposes a 25% coinsurance responsibility on individuals who are furnished emergency services, whether
provided in network or out of network. If a covered
individual notifies the plan within two business days
after the day an individual receives treatment in an
emergency department, the plan reduces the coinsurance rate to 15%.

2010–32 I.R.B.

(ii) Conclusion. In this Example 1, the requirement to notify the plan in order to receive a reduction
in the coinsurance rate does not violate the requirement that the plan cover emergency services without
the need for any prior authorization determination.
This is the result even if the plan required that it be
notified before or at the time of receiving services at
the emergency department in order to receive a reduction in the coinsurance rate.
Example 2. (i) Facts. A group health plan imposes a $60 copayment on emergency services without preauthorization, whether provided in network or
out of network. If emergency services are preauthorized, the plan waives the copayment, even if it later
determines the medical condition was not an emergency medical condition.
(ii) Conclusion. In this Example 2, by requiring an individual to pay more for emergency services
if the individual does not obtain prior authorization,
the plan violates the requirement that the plan cover
emergency services without the need for any prior authorization determination. (By contrast, if, to have
the copayment waived, the plan merely required that
it be notified rather than a prior authorization, then
the plan would not violate the requirement that the
plan cover emergency services without the need for
any prior authorization determination.)
Example 3. (i) Facts. A group health plan covers individuals who receive emergency services with
respect to an emergency medical condition from an
out-of-network provider. The plan has agreements
with in-network providers with respect to a certain
emergency service. Each provider has agreed to provide the service for a certain amount. Among all the
providers for the service: one has agreed to accept
$85, two have agreed to accept $100, two have agreed
to accept $110, three have agreed to accept $120, and
one has agreed to accept $150. Under the agreement,
the plan agrees to pay the providers 80% of the agreed
amount, with the individual receiving the service responsible for the remaining 20%.
(ii) Conclusion. In this Example 3, the values
taken into account in determining the median are $85,
$100, $100, $110, $110, $120, $120, $120, and $150.
Therefore, the median amount among those agreed
to for the emergency service is $110, and the amount
under paragraph (b)(3)(i)(A) of this section is 80% of
$110 ($88).
Example 4. (i) Facts. Same facts as Example
3. Subsequently, the plan adds another provider to
its network, who has agreed to accept $150 for the
emergency service.
(ii) Conclusion. In this Example 4, the median
amount among those agreed to for the emergency
service is $115. (Because there is no one middle
amount, the median is the average of the two middle
amounts, $110 and $120.) Accordingly, the amount
under paragraph (b)(3)(i)(A) of this section is 80% of
$115 ($92).
Example 5. (i) Facts. Same facts as Example
4. An individual covered by the plan receives the
emergency service from an out-of-network provider,
who charges $125 for the service. With respect to
services provided by out-of-network providers generally, the plan reimburses covered individuals 50%

2010–32 I.R.B.

of the reasonable amount charged by the provider for
medical services. For this purpose, the reasonable
amount for any service is based on information on
charges by all providers collected by a third party,
on a zip-code-by-zip-code basis, with the plan treating 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 Medicare
for the emergency service, excluding any copayment
or coinsurance for the service, is $80.
(ii) Conclusion. In this Example 5, the plan is
responsible for paying $92.80, 80% of $116. The
median amount among those agreed to for the emergency service is $115 and the amount the plan would
pay is $92 (80% of $115); the amount calculated using the same method the plan uses to determine payments for out-of-network services — $116 — excluding the in-network 20% coinsurance, is $92.80;
and the Medicare payment is $80. Thus, the greatest
amount is $92.80. The individual is responsible for
the remaining $32.20 charged by the out-of-network
provider.
Example 6. (i) Facts. Same facts as Example 5.
The group health plan generally imposes a $250 deductible for in-network health care. With respect to
all health care provided by out-of-network providers,
the plan imposes a $500 deductible. (Covered in-network claims are credited against the deductible.) The
individual has incurred and submitted $260 of covered claims prior to receiving the emergency service
out of network.
(ii) Conclusion. In this Example 6, the plan is not
responsible for paying anything with respect to the
emergency service furnished by the out-of-network
provider because the covered individual has not satisfied the higher deductible that applies generally to
all health care provided out of network. However, the
amount the individual is required to pay is credited
against the deductible.

(4) Definitions. The definitions in this
paragraph (b)(4) govern in applying the
provisions of this paragraph (b).
(i) Emergency medical condition. The
term emergency medical condition means
a medical condition manifesting itself
by acute symptoms of sufficient severity
(including severe pain) so that a prudent layperson, who possesses an average
knowledge of health and medicine, could
reasonably expect the absence of immediate medical attention to result in a
condition described in clause (i), (ii), or
(iii) of section 1867(e)(1)(A) of the Social
Security Act (42 U.S.C. 1395dd(e)(1)(A)).
(In that provision of the Social Security
Act, clause (i) refers to placing the health
of the individual (or, with respect to a
pregnant woman, the health of the woman
or her unborn child) in serious jeopardy;
clause (ii) refers to serious impairment to

232

bodily functions; and clause (iii) refers to
serious dysfunction of any bodily organ or
part.)
(ii) Emergency services. The term
emergency services means, with respect to
an emergency medical condition—
(A) A medical screening examination
(as required under section 1867 of the Social Security Act, 42 U.S.C. 1395dd) that is
within the capability of the emergency department of a hospital, including ancillary
services routinely available to the emergency department to evaluate such emergency medical condition, and
(B) Such further medical examination
and treatment, to the extent they are within
the capabilities of the staff and facilities
available at the hospital, as are required
under section 1867 of the Social Security
Act (42 U.S.C. 1395dd) to stabilize the
patient.
(iii) Stabilize. The term to stabilize,
with respect to an emergency medical condition (as defined in paragraph (b)(4)(i) of
this section) has the meaning given in section 1867(e)(3) of the Social Security Act
(42 U.S.C. 1395dd(e)(3)).
(c)
Effective/applicability
date.
The provisions of this section apply for plan years beginning on
or after September 23, 2010.
See
§54.9815–1251T for determining the
application of this section to grandfathered
health plans (providing that these rules
regarding patient protections do not apply
to grandfathered health plans).
(d) Expiration date. This section expires on June 21, 2013.
Par. 8. The authority citation for part
602 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 numerical order to the table to read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *

August 9, 2010

CFR part or section where
Identified and described
*****
54.9815–2711T
54.9815–2712T
54.9815–2719AT
*****

Current OMB
control No.
...........................................................
...........................................................
...........................................................

1545–2179
1545–2180
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 Register
for June 28, 2010, 75 F.R. 37187)

August 9, 2010

233

2010–32 I.R.B.