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104th Congress                                            Rept. 104-496
                        HOUSE OF REPRESENTATIVES

 2d Session                                                      Part 1
_______________________________________________________________________


 
       HEALTH COVERAGE AVAILABILITY AND AFFORDABILITY ACT OF 1996

_______________________________________________________________________


                 March 25, 1996.--Ordered to be printed

                                _______


    Mr. Archer, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 3103]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Ways and Means, to whom was referred the 
bill (H.R. 3103) to amend the Internal Revenue Code of 1986 to 
improve portability and continuity of health insurance coverage 
in the group and individual markets, to combat waste, fraud, 
and abuse in health insurance and health care delivery, to 
promote the use of medical savings accounts, to improve access 
to long-term care services and coverage, to simplify the 
administration of health insurance, and for other purposes, 
having considered the same, report favorably thereon with an 
amendment and recommend that the bill as amended do pass.
  The amendment is as follows:
  Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

  (a) Short Title.--This Act may be cited as the ``Health Coverage 
Availability and Affordability Act of 1996''.
  (b) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short title; table of contents.

  TITLE I--IMPROVED AVAILABILITY AND PORTABILITY OF HEALTH INSURANCE 
                                COVERAGE

             Subtitle A--Coverage Under Group Health Plans

Sec. 101. Portability of coverage for previously covered individuals.
Sec. 102. Limitation on preexisting condition exclusions; no 
application to certain newborns, adopted children, and pregnancy.
Sec. 103. Prohibiting exclusions based on health status and providing 
for enrollment periods.
Sec. 104. Enforcement.

              Subtitle B--Definitions; General Provisions

Sec. 191. Definitions; scope of coverage.
Sec. 192. State flexibility to provide greater protection.
Sec. 193. Effective date.
Sec. 194. Rule of construction.

   TITLE II--PREVENTING HEALTH CARE FRAUD AND ABUSE; ADMINISTRATIVE 
                             SIMPLIFICATION

Sec. 200. References in title.

              Subtitle A--Fraud and Abuse Control Program

Sec. 201. Fraud and abuse control program.
Sec. 202. Medicare integrity program.
Sec. 203. Beneficiary incentive programs.
Sec. 204. Application of certain health anti-fraud and abuse sanctions 
to fraud and abuse against Federal health care programs.
Sec. 205. Guidance regarding application of health care fraud and abuse 
sanctions.

     Subtitle B--Revisions to Current Sanctions for Fraud and Abuse

Sec. 211. Mandatory exclusion from participation in medicare and State 
health care programs.
Sec. 212. Establishment of minimum period of exclusion for certain 
individuals and entities subject to permissive exclusion from medicare 
and State health care programs.
Sec. 213. Permissive exclusion of individuals with ownership or control 
interest in sanctioned entities.
Sec. 214. Sanctions against practitioners and persons for failure to 
comply with statutory obligations.
Sec. 215. Intermediate sanctions for medicare health maintenance 
organizations.
Sec. 216. Additional exception to anti-kickback penalties for 
discounting and managed care arrangements.
Sec. 217. Criminal penalty for fraudulent disposition of assets in 
order to obtain medicaid benefits.
Sec. 218. Effective date.

                      Subtitle C--Data Collection

Sec. 221. Establishment of the health care fraud and abuse data 
collection program.

                  Subtitle D--Civil Monetary Penalties

Sec. 231. Social security act civil monetary penalties.
Sec. 232. Clarification of level of intent required for imposition of 
sanctions.
Sec. 233. Penalty for false certification for home health services.

                 Subtitle E--Revisions to Criminal Law

Sec. 241. Definition of Federal health care offense.
Sec. 242. Health care fraud.
Sec. 243. Theft or embezzlement.
Sec. 244. False statements.
Sec. 245. Obstruction of criminal investigations of health care 
offenses.
Sec. 246. Laundering of monetary instruments.
Sec. 247. Injunctive relief relating to health care offenses.
Sec. 248. Authorized investigative demand procedures.
Sec. 249. Forfeitures for Federal health care offenses.

               Subtitle F--Administrative Simplification

             Part 1--General Administrative Simplification

Sec. 251. Purpose.
Sec. 252. Administrative simplification.

                ``Part C--Administrative Simplification

        ``Sec. 1171. Definitions.
        ``Sec. 1172. General requirements for adoption of standards.
        ``Sec. 1173. Standards for information transactions and data 
                        elements.
        ``Sec. 1174. Timetables for adoption of standards.
        ``Sec. 1175. Requirements.
        ``Sec. 1176. General penalty for failure to comply with 
                        requirements and standards.
        ``Sec. 1177. Wrongful disclosure of individually identifiable 
                        health information.
        ``Sec. 1178. Effect on State law.
        ``Sec. 1179. Health Information Advisory Committee.

     Part 2--Administrative Simplification for Laboratory Services

Sec. 261. Administrative simplification for laboratory services.

   Subtitle G--Duplication and Coordination of Medicare-Related Plans

Sec. 271. Duplication and coordination of medicare-related plans.

                TITLE III--TAX-RELATED HEALTH PROVISIONS

Sec. 300. Amendment of 1986 code.

                  Subtitle A--Medical Savings Accounts

Sec. 301. Medical savings accounts.

 Subtitle B--Increase in Deduction for Health Insurance Costs of Self-
                          Employed Individuals

Sec. 311. Increase in deduction for health insurance costs of self-
employed individuals.

           Subtitle C--Long-Term Care Services and Contracts

                       Part I--General Provisions

Sec. 321. Treatment of long-term care insurance.
Sec. 322. Qualified long-term care services treated as medical care.
Sec. 323. Reporting requirements.

                Part II--Consumer Protection Provisions

Sec. 325. Policy requirements.
Sec. 326. Requirements for issuers of long-term care insurance 
policies.
Sec. 327. Coordination with State requirements.
Sec. 328. Effective dates.

          Subtitle D--Treatment of Accelerated Death Benefits

Sec. 331. Treatment of accelerated death benefits by recipient.
Sec. 332. Tax treatment of companies issuing qualified accelerated 
death benefit riders.

                      Subtitle E--High-Risk Pools

Sec. 341. Exemption from income tax for State-sponsored organizations 
providing health coverage for high-risk individuals.

            Subtitle F--Organizations Subject to Section 833

Sec. 351. Organizations subject to section 833.

                       TITLE IV--REVENUE OFFSETS

Sec. 400. Amendment of 1986 Code.

   Subtitle A--Repeal of Bad Debt Reserve Method for Thrift Savings 
                              Associations

Sec. 401. Repeal of bad debt reserve method for thrift savings 
associations.

             Subtitle B--Reform of the Earned Income Credit

Sec. 411. Earned income credit denied to individuals not authorized to 
be employed in the United States.

Subtitle C--Treatment of Individuals Who Lose United States Citizenship

Sec. 421. Revision of income, estate, and gift taxes on individuals who 
lose United States citizenship.
Sec. 422. Information on individuals losing United States citizenship.
Sec. 423. Report on tax compliance by United States citizens and 
residents living abroad.

  TITLE I--IMPROVED AVAILABILITY AND PORTABILITY OF HEALTH INSURANCE 
                                COVERAGE

             Subtitle A--Coverage Under Group Health Plans

SEC. 101. PORTABILITY OF COVERAGE FOR PREVIOUSLY COVERED INDIVIDUALS.

  (a) Crediting Periods of Previous Coverage Toward Preexisting 
Condition Restrictions.--Subject to the succeeding provisions of this 
section, a group health plan, and an insurer or health maintenance 
organization offering health insurance coverage in connection with a 
group health plan, shall provide that any preexisting condition 
limitation period (as defined in subsection (b)(2)) is reduced by the 
length of the aggregate period of qualified prior coverage (if any, as 
defined in subsection (b)(3)) applicable to the participant or 
beneficiary as of the date of commencement of coverage under the plan.
  (b) Definitions and Other Provisions Relating to Preexisting 
Conditions.--
          (1) Preexisting condition.--
                  (A) In general.--For purposes of this subtitle, 
                subject to subparagraph (B), the term ``preexisting 
                condition'' means a condition, regardless of the cause 
                of the condition, for which medical advice, diagnosis, 
                care, or treatment was recommended or received within 
                the 6-month period ending on the day before--
                          (i) the effective date of the coverage of 
                        such participant or beneficiary, or
                          (ii) the earliest date upon which such 
                        coverage could have been effective if there 
                        were no waiting period applicable,
                whichever is earlier.
                  (B) Treatment of genetic information.--For purposes 
                of this section, genetic information shall not be 
                considered to be a preexisting condition, so long as 
                treatment of the condition to which the information is 
                applicable has not been sought during the 6-month 
                period described in subparagraph (A).
          (2) Preexisting condition limitation period.--For purposes of 
        this subtitle, the term ``preexisting condition limitation 
        period'' means, with respect to coverage of an individual under 
        a group health plan or under health insurance coverage, the 
        period during which benefits with respect to treatment of a 
        condition of such individual are not provided based on the fact 
        that the condition is a preexisting condition.
          (3) Aggregate period of qualified prior coverage.--
                  (A) In general.--For purposes of this section, the 
                term ``aggregate period of qualified prior coverage'' 
                means, with respect to commencement of coverage of an 
                individual under a group health plan or health 
                insurance coverage offered in connection with a group 
                health plan, the aggregate of the qualified coverage 
                periods (as defined in subparagraph (B)) of such 
                individual occurring before the date of such 
                commencement. Such period shall be treated as zero if 
                there is more than a 60-day break in coverage under a 
                group health plan (or health insurance coverage offered 
                in connection with such a plan) between the date the 
                most recent qualified coverage period ends and the date 
                of such commencement.
                  (B) Qualified coverage period.--
                          (i) In general.--For purposes of this 
                        paragraph, subject to subsection (c), the term 
                        ``qualified coverage period'' means, with 
                        respect to an individual, any period of 
                        coverage of the individual under a group health 
                        plan, health insurance coverage, under title 
                        XVIII or XIX of the Social Security Act, 
                        coverage under the TRICARE program under 
                        chapter 55 of title 10, United States Code, a 
                        program of the Indian Health Service, and State 
                        health insurance coverage or risk pool, and 
                        includes coverage under a health plan offered 
                        under chapter 89 of title 5, United States 
                        Code.
                          (ii) Disregarding periods before breaks in 
                        coverage.--Such term does not include any 
                        period occurring before any 60-day break in 
                        coverage described in subparagraph (A).
                  (C) Waiting period not treated as a break in 
                coverage.--For purposes of subparagraphs (A) and (B), 
                any period that is in a waiting period for any coverage 
                under a group health plan (or for health insurance 
                coverage offered in connection with a group health 
                plan) shall not be considered to be a break in coverage 
                described in subparagraph (B)(ii).
                  (D) Establishment of period.--A qualified coverage 
                period with respect to an individual shall be 
                established through presentation of certifications 
                described in subsection (c) or in such other manner as 
                may be specified in regulations to carry out this 
                section.
  (c) Certifications of Coverage; Conforming Coverage.--
          (1) In general.--The plan administrator of a group health 
        plan, or the insurer or HMO offering health insurance coverage 
        in connection with a group health plan, shall, on request made 
        on behalf of an individual covered (or previously covered 
        within the previous 18 months) under the plan or coverage, 
        provide for a certification of the period of coverage of the 
        individual under such plan or coverage and of the waiting 
        period (if any) imposed with respect to the individual for any 
        coverage under the plan.
          (2) Standard method.--Subject to paragraph (3), a group 
        health plan, or insurer or HMO offering health insurance 
        coverage in connection with a group health plan, shall 
        determine qualified coverage periods under subsection (b)(3)(B) 
        by including all periods described in such subsection, without 
        regard to the specific benefits offered during such a period.
          (3) Alternative method.--Such a plan, insurer, or HMO may 
        elect to make such determination on a benefit-specific basis 
        for all participants and beneficiaries and not to include as a 
        qualified coverage period with respect to a specific benefit 
        coverage during a previous period unless such previous coverage 
        for that benefit was included at the end of the most recent 
        period of coverage. In the case of such an election--
                  (A) the plan, insurer, or HMO shall prominently state 
                in any disclosure statements concerning the plan or 
                coverage and to each enrollee at the time of enrollment 
                under the plan (or at the time the health insurance 
                coverage is offered for sale in the group health 
                market) that the plan or coverage has made such 
                election and shall include a description of the effect 
                of this election; and
                  (B) upon the request of the plan, insurer, or HMO, 
                the entity providing a certification under paragraph 
                (1)--
                          (i) shall promptly disclose to the requesting 
                        plan, insurer, or HMO the plan statement 
                        (insofar as it relates to health benefits under 
                        the plan) or other detailed benefit information 
                        on the benefits available under the previous 
                        plan or coverage, and
                          (ii) may charge for the reasonable cost of 
                        providing such information.

SEC. 102. LIMITATION ON PREEXISTING CONDITION EXCLUSIONS; NO 
                    APPLICATION TO CERTAIN NEWBORNS, ADOPTED CHILDREN, 
                    AND PREGNANCY.

  (a) Limitation of Period.--
          (1) In general.--Subject to the succeeding provisions of this 
        section, a group health plan, and an insurer or HMO offering 
        health insurance coverage in connection with a group health 
        plan, shall provide that any preexisting condition limitation 
        period (as defined in section 101(b)(2)) does not exceed 12 
        months, counting from the effective date of coverage.
          (2) Extension of period in the case of late enrollment.--In 
        the case of a participant or beneficiary whose initial coverage 
        commences after the date the participant or beneficiary first 
        becomes eligible for coverage under the group health plan, the 
        reference in paragraph (1) to ``12 months'' is deemed a 
        reference to ``18 months''.
  (b) Exclusion Not Applicable to Certain Newborns and Certain 
Adoptions.--
          (1) In general.--Subject to paragraph (2), a group health 
        plan, and an insurer or HMO offering health insurance coverage 
        in connection with a group health plan, may not provide any 
        limitation on benefits based on the existence of a preexisting 
        condition in the case of--
                  (A) an individual who within the 30-day period 
                beginning with the date of birth, or
                  (B) an adopted child or a child placed for adoption 
                beginning at the time of adoption or placement if the 
                individual, within the 30-day period beginning on the 
                date of adoption or placement,
        becomes covered under a group health plan or otherwise becomes 
        covered under health insurance coverage (or covered for medical 
        assistance under title XIX of the Social Security Act).
          (2) Loss if break in coverage.--Paragraph (1) shall no longer 
        apply to an individual if the individual does not have any 
        coverage described in section 101(b)(3)(B)(i) for a continuous 
        period of 60 days, not counting in such period any days that 
        are in a waiting period for any coverage under a group health 
        plan.
          (3) Placed for adoption defined.--In this subsection and 
        section 103(d), the term ``placement'', or being ``placed'', 
        for adoption, in connection with any placement for adoption of 
        a child with any person, means the assumption and retention by 
        such person of a legal obligation for total or partial support 
        of such child in anticipation of adoption of such child. The 
        child's placement with such person terminates upon the 
        termination of such legal obligation.
  (c) Exclusion Not Applicable to Pregnancy.--For purposes of this 
section, pregnancy shall not be treated as a preexisting condition.
  (d) Eligibility Period Imposed by Health Maintenance Organizations as 
Alternative to Preexisting Condition Limitation.--A health maintenance 
organization which offers health insurance coverage in connection with 
a group health plan and which does not use the preexisting condition 
limitations allowed under this section and section 101 with respect to 
any particular coverage option may impose an eligibility period for 
such coverage option, but only if such period does not exceed--
          (1) 60 days, in the case of a participant or beneficiary 
        whose initial coverage commences at the time such participant 
        or beneficiary first becomes eligible for coverage under the 
        plan, or
          (2) 90 days, in the case of a participant or beneficiary 
        whose initial coverage commences after the date on which such 
        participant or beneficiary first becomes eligible for coverage.
Such an HMO may use alternative methods, from those described in the 
previous sentence, to address adverse selection as approved by the 
applicable State authority. For purposes of this subsection, the term 
``eligibility period'' means a period which, under the terms of the 
health insurance coverage offered by the health maintenance 
organization, must expire before the health insurance coverage becomes 
effective. Any such eligibility period shall be treated for purposes of 
this subtitle as a waiting period under the plan and shall run 
concurrently with any other applicable waiting period under the plan.

SEC. 103. PROHIBITING EXCLUSIONS BASED ON HEALTH STATUS AND PROVIDING 
                    FOR ENROLLMENT PERIODS.

  (a) Prohibition of Exclusion of Participants or Beneficiaries Based 
on Health Status.--
          (1) In general.--A group health plan, and an insurer or HMO 
        offering health insurance coverage in connection with a group 
        health plan, may not exclude an employee or his or her 
        beneficiary from being (or continuing to be) a participant or 
        beneficiary under the terms of such plan or coverage based on 
        health status (as defined in section 191(c)(6)).
          (2) Construction.--Nothing in this subsection shall be 
        construed as preventing the establishment of preexisting 
        condition limitations and restrictions to the extent consistent 
        with the provisions of this subtitle.
  (b) Enrollment of Eligible Individuals Who Lose Other Coverage.--A 
group health plan shall permit an uncovered employee who is otherwise 
eligible for coverage under the terms of the plan (or an uncovered 
dependent, as defined under the terms of the plan, of such an employee, 
if family coverage is available) to enroll for coverage under the plan 
under at least one benefit option if each of the following conditions 
is met:
          (1) The employee or dependent was covered under a group 
        health plan or had health insurance coverage at the time 
        coverage was previously offered to the employee or individual.
          (2) The employee stated in writing at such time that coverage 
        under a group health plan or health insurance coverage was the 
        reason for declining enrollment.
          (3) The employee or dependent lost coverage under a group 
        health plan or health insurance coverage (as a result of loss 
        of eligibility for the coverage, termination of employment, or 
        reduction in the number of hours of employment).
          (4) The employee requests such enrollment within 30 days 
        after the date of termination of such coverage.
  (c) Dependent Beneficiaries.--
          (1) In general.--If a group health plan makes family coverage 
        available, the plan may not require, as a condition of coverage 
        of an individual as a dependent (as defined under the terms of 
        the plan) of a participant in the plan, a waiting period 
        applicable to the coverage of a dependent who--
                  (A) is a newborn,
                  (B) is an adopted child or child placed for adoption 
                (within the meaning of section 102(b)(3)), at the time 
                of adoption or placement, or
                  (C) is a spouse, at the time of marriage,
        if the participant has met any waiting period applicable to 
        that participant.
          (2) Timely enrollment.--
                  (A) In general.--Enrollment of a participant's 
                beneficiary described in paragraph (1) shall be 
                considered to be timely if a request for enrollment is 
                made within 30 days of the date family coverage is 
                first made available or, in the case described in--
                          (i) paragraph (1)(A), within 30 days of the 
                        date of the birth,
                          (ii) paragraph (1)(B), within 30 days of the 
                        date of the adoption or placement for adoption, 
                        or
                          (iii) paragraph (1)(C), within 30 days of the 
                        date of the marriage with such a beneficiary 
                        who is the spouse of the participant,
                if family coverage is available as of such date.
                  (B) Coverage.--If available coverage includes family 
                coverage and enrollment is made under such coverage on 
                a timely basis under subparagraph (A), the coverage 
                shall become effective not later than the first day of 
                the first month beginning 15 days after the date the 
                completed request for enrollment is received.

SEC. 104. ENFORCEMENT.

  (a) Enforcement Through COBRA Provisions in Internal Revenue Code.--
          (1) Application of COBRA sanctions.--Subsection (a) of 
        section 4980B of the Internal Revenue Code of 1986 is amended 
        by striking ``the requirements of'' and all that follows and 
        inserting ``the requirements of--
          ``(1) subsection (f) with respect to any qualified 
        beneficiary, or
          ``(2) subject to subsection (h)--
                  ``(A) section 101 or 102 of the Health Coverage 
                Availability and Affordability Act of 1996 with respect 
                to any individual covered under the group health plan, 
                or
                  ``(B) section 103 of such Act with respect to any 
                individual.''.
          (2) Notice requirement.--Section 4980B(f)(6)(A) of such Code 
        is amended by inserting before the period the following: ``and 
        subtitle A of title I of the Health Coverage Availability and 
        Affordability Act of 1996''.
          (3) Special rules.--Section 4980B of such Code is amended by 
        adding at the end the following:
  ``(h) Special Rules.--For purposes of applying this section in the 
case of requirements described in subsection (a)(2) relating to section 
101, section 102, or section 103 of the Health Coverage Availability 
and Affordability Act of 1996--
          ``(1) In general.--
                  ``(A) Definition of group health plan.--The term 
                `group health plan' has the meaning given such term in 
                section 191(a) of the Health Coverage Availability and 
                Affordability Act of 1996.
                  ``(B) Qualified beneficiary.--Subsections (b), (c), 
                and (e) shall be applied by substituting the term 
                `individual' for the term `qualified beneficiary' each 
                place it appears.
                  ``(C) Noncompliance period.--Clause (ii) of 
                subsection (b)(2)(B) and the second sentence of 
                subsection (b)(2) shall not apply.
                  ``(D) Limitation on tax.--Subparagraph (B) of 
                subsection (c)(3) shall not apply.
                  ``(E)  Liability for tax.--Paragraph (2) of 
                subsection (e) shall not apply.
          ``(2) Deferral to state regulation.--No tax shall be imposed 
        by this section on any failure to meet the requirements of such 
        section by any entity which offers health insurance coverage 
        and which is an insurer or health maintenance organization (as 
        defined in section 191(c) of the Health Coverage Availability 
        and Affordability Act of 1996) regulated by a State unless the 
        Secretary of Health and Human Services has made the 
        determination described in section 104(c)(2) of such Act with 
        respect to such State, section, and entity.
          ``(3) Limitation for insured plans.--In the case of a group 
        health plan of a small employer (as defined in section 191 of 
        the Health Coverage Availability and Affordability Act of 1996) 
        that provides health care benefits solely through a contract 
        with an insurer or health maintenance organization (as defined 
        in such section), no tax shall be imposed by this section upon 
        the employer on a failure to meet such requirements if the 
        failure is solely because of the product offered by the insurer 
        or organization under such contract.
          ``(4) Limitation on imposition of tax.--In no case shall a 
        tax be imposed by this section for a failure to meet such a 
        requirement if--
                  ``(A) a civil money penalty has been imposed by the 
                Secretary of Labor under part 5 of subtitle A of title 
                I of the Employee Retirement Income Security Act of 
                1974 with respect to such failure, or
                  ``(B) a civil money penalty has been imposed by the 
                Secretary of Health and Human Services under section 
                104(c) of the Health Coverage Availability and 
                Affordability Act of 1996 with respect to such 
                failure.''.
  (b) Enforcement Through ERISA Sanctions for Certain Group Health 
Plans.--
          (1) In general.--Subject to the succeeding provisions of this 
        subsection, sections 101 through 103 of this subtitle shall be 
        deemed to be provisions of title I of the Employee Retirement 
        Income Security Act of 1974 for purposes of applying such 
        title.
          (2) Federal enforcement only if no enforcement through 
        state.--The Secretary of Labor shall enforce each section 
        referred to in paragraph (1) with respect to any entity which 
        is an insurer or health maintenance organization regulated by a 
        State only if the Secretary of Labor determines that such State 
        has not provided for enforcement of State laws which govern the 
        same matters as are governed by such section and which require 
        compliance by such entity with at least the same requirements 
        as those provided under such section.
          (3) Limitations on liability.--
                  (A) No application where failure not discovered 
                exercising reasonable diligence.--No liability shall be 
                imposed under this subsection on the basis of any 
                failure during any period for which it is established 
                to the satisfaction of the Secretary of Labor that none 
                of the persons against whom the liability would be 
                imposed knew, or exercising reasonable diligence would 
                have known, that such failure existed.
                  (B) No application where failure corrected within 30 
                days.--No liability shall be imposed under this 
                subsection on the basis of any failure if such failure 
                was due to reasonable cause and not to willful neglect, 
                and such failure is corrected during the 30-day period 
                beginning on the first day any of the persons against 
                whom the liability would be imposed knew, or exercising 
                reasonable diligence would have known, that such 
                failure existed.
          (4) Avoiding duplication of certain penalties.--In no case 
        shall a civil money penalty be imposed under the authority 
        provided under paragraph (1) for a violation of this subtitle 
        for which an excise tax has been imposed under section 4980B of 
        the Internal Revenue Code of 1986 or a civil money penalty 
        imposed under subsection (c).
  (c) Enforcement Through Civil Money Penalties.--
          (1) Imposition.--
                  (A) In general.--Subject to the succeeding provisions 
                of this subsection, any group health plan, insurer, or 
                organization that fails to meet a requirement of this 
                subtitle is subject to a civil money penalty under this 
                section.
                  (B) Liability for penalty.--Rules similar to the 
                rules described in section 4980B(e) of the Internal 
                Revenue Code of 1986 for liability for a tax imposed 
                under section 4980B(a) of such Code shall apply to 
                liability for a penalty imposed under subparagraph (A).
                  (C) Amount of penalty.--
                          (i) In general.--The maximum amount of 
                        penalty imposed under this paragraph is $100 
                        for each day for each individual with respect 
                        to which such a failure occurs.
                          (ii) Considerations in imposition.--In 
                        determining the amount of any penalty to be 
                        assessed under this paragraph, the Secretary of 
                        Health and Human Services shall take into 
                        account the previous record of compliance of 
                        the person being assessed with the applicable 
                        requirements of this subtitle, the gravity of 
                        the violation, and the overall limitations for 
                        unintentional failures provided under section 
                        4980B(c)(4) of the Internal Revenue Code of 
                        1986.
                          (iii) Limitations.--
                                  (I) Penalty not to apply where 
                                failure not discovered exercising 
                                reasonable diligence.--No civil money 
                                penalty shall be imposed under this 
                                paragraph on any failure during any 
                                period for which it is established to 
                                the satisfaction of the Secretary that 
                                none of the persons against whom the 
                                penalty would be imposed knew, or 
                                exercising reasonable diligence would 
                                have known, that such failure existed.
                                  (II) Penalty not to apply to failures 
                                corrected within 30 days.--No civil 
                                money penalty shall be imposed under 
                                this paragraph on any failure if such 
                                failure was due to reasonable cause and 
                                not to willful neglect, and such 
                                failure is corrected during the 30-day 
                                period beginning on the first day any 
                                of the persons against whom the penalty 
                                would be imposed knew, or exercising 
                                reasonable diligence would have known, 
                                that such failure existed.
                  (D) Administrative review.--
                          (i) Opportunity for hearing.--The person 
                        assessed shall be afforded an opportunity for 
                        hearing by the Secretary upon request made 
                        within 30 days after the date of the issuance 
                        of a notice of assessment. In such hearing the 
                        decision shall be made on the record pursuant 
                        to section 554 of title 5, United States Code. 
                        If no hearing is requested, the assessment 
                        shall constitute a final and unappealable 
                        order.
                          (ii) Hearing procedure.--If a hearing is 
                        requested, the initial agency decision shall be 
                        made by an administrative law judge, and such 
                        decision shall become the final order unless 
                        the Secretary modifies or vacates the decision. 
                        Notice of intent to modify or vacate the 
                        decision of the administrative law judge shall 
                        be issued to the parties within 30 days after 
                        the date of the decision of the judge. A final 
                        order which takes effect under this paragraph 
                        shall be subject to review only as provided 
                        under subparagraph (D).
                  (E) Judicial review.--
                          (i) Filing of action for review.--Any person 
                        against whom an order imposing a civil money 
                        penalty has been entered after an agency 
                        hearing under this paragraph may obtain review 
                        by the United States district court for any 
                        district in which such person is located or the 
                        United States District Court for the District 
                        of Columbia by filing a notice of appeal in 
                        such court within 30 days from the date of such 
                        order, and simultaneously sending a copy of 
                        such notice be registered mail to the 
                        Secretary.
                          (ii) Certification of administrative 
                        record.--The Secretary shall promptly certify 
                        and file in such court the record upon which 
                        the penalty was imposed.
                          (iii) Standard for review.--The findings of 
                        the Secretary shall be set aside only if found 
                        to be unsupported by substantial evidence as 
                        provided by section 706(2)(E) of title 5, 
                        United States Code.
                          (iv) Appeal.--Any final decision, order, or 
                        judgment of such district court concerning such 
                        review shall be subject to appeal as provided 
                        in chapter 83 of title 28 of such Code.
                  (F) Failure to pay assessment; maintenance of 
                action.--
                          (i) Failure to pay assessment.--If any person 
                        fails to pay an assessment after it has become 
                        a final and unappealable order, or after the 
                        court has entered final judgment in favor of 
                        the Secretary, the Secretary shall refer the 
                        matter to the Attorney General who shall 
                        recover the amount assessed by action in the 
                        appropriate United States district court.
                          (ii) Nonreviewability.--In such action the 
                        validity and appropriateness of the final order 
                        imposing the penalty shall not be subject to 
                        review.
                  (G) Payment of penalties.--Except as otherwise 
                provided, penalties collected under this paragraph 
                shall be paid to the Secretary (or other officer) 
                imposing the penalty and shall be available without 
                appropriation and until expended for the purpose of 
                enforcing the provisions with respect to which the 
                penalty was imposed.
          (2) Federal enforcement only if no enforcement through 
        state.--Paragraph (1) shall apply to enforcement of the 
        requirements of section 101, 102, or 103 with respect to any 
        entity which offers health insurance coverage and which is an 
        insurer or HMO regulated by a State only if the Secretary of 
        Health and Human Services has determined that such State has 
        not provided for enforcement of State laws which govern the 
        same matters as are governed by such section and which require 
        compliance by such entity with at least the same requirements 
        as those provided under such section.
          (3) Nonduplication of sanctions.--In no case shall a civil 
        money penalty be imposed under this subsection for a violation 
        of this subtitle for which an excise tax has been imposed under 
        section 4980B of the Internal Revenue Code of 1986 or for which 
        a civil money penalty has been imposed under the authority 
        provided under subsection (b).
  (d) Coordination in Administration.--The Secretaries of the Treasury, 
Labor, and Health and Human Services shall issue regulations that are 
nonduplicative to carry out this subtitle. Such regulations shall be 
issued in a manner that assures coordination and nonduplication in 
their activities under this subtitle.

              Subtitle B--Definitions; General Provisions

SEC. 191. DEFINITIONS; SCOPE OF COVERAGE.

  (a) Group Health Plan.--
          (1) Definition.--Subject to the succeeding provisions of this 
        subsection and subsection (d)(1), the term ``group health 
        plan'' means an employee welfare benefit plan to the extent 
        that the plan provides medical care (as defined in subsection 
        (c)(9)) to employees or their dependents (as defined under the 
        terms of the plan) directly or through insurance, 
        reimbursement, or otherwise, and includes a group health plan 
        (within the meaning of section 5000(b)(1) of the Internal 
        Revenue Code of 1986).
          (2) Limitation of requirements to plans with 2 or more 
        employee participants.--The requirements of subtitle Ashall 
        apply in the case of a group health plan for any plan year, or 
        for health insurance coverage offered in connection with a 
        group health plan for a year, only if the group health plan has 
        two or more participants as current employees on the first day 
        of the plan year.
          (3) Exclusion of plans with limited coverage.--An employee 
        welfare benefit plan shall be treated as a group health plan 
        under this title only with respect to medical care which is 
        provided under the plan and which does not consist of coverage 
        excluded from the definition of health insurance coverage under 
        subsection (c)(4)(B).
          (4) Treatment of church plans.--
                  (A) Exclusion.--The requirements of this title 
                insofar as they apply to group health plans shall not 
                apply to church plans.
                  (B) Optional disregard in determining period of 
                coverage.--For purposes of applying section 
                101(b)(3)(B)(i), a group health plan may elect to 
                disregard periods of coverage of an individual under a 
                church plan that, pursuant to subparagraph (A), is not 
                subject to the requirements of this title.
          (5) Treatment of governmental plans.--
                  (A) Election to be excluded.--If the plan sponsor of 
                a governmental plan which is a group health plan to 
                which the provisions of this subtitle otherwise apply 
                makes an election under this paragraph for any 
                specified period (in such form and manner as the 
                Secretary of Health and Human Services may by 
                regulations prescribe), then the requirements of this 
                title insofar as they apply to group health plans shall 
                not apply to such governmental plans for such period.
                  (B) Optional disregard in determining period of 
                coverage if election made.--For purposes of applying 
                section 101(b)(3)(B)(i), a group health plan may elect 
                to disregard periods of coverage of an individual under 
                a governmental plan that, under an election under 
                subparagraph (A), is not subject to the requirements of 
                this title.
          (6) Treatment of medicaid plan as group health plan.--A State 
        plan under title XIX of the Social Security Act shall be 
        treated as a group health plan for purposes of applying section 
        101(c), unless the State elects not to be so treated.
          (7) Treatment of medicare as group health plan.--Title XVIII 
        of the Social Security Act shall be treated as a group health 
        plan for purposes of applying section 101(c).
  (b) Incorporation of Certain Definitions in Employee Retirement 
Income Security Act of 1974.--Except as provided in this section, the 
terms ``beneficiary'', ``church plan'', ``employee'', ``employee 
welfare benefit plan'', ``employer'', ``governmental plan'', 
``multiemployer plan'', ``multiple employer welfare arrangement'', 
``participant'', ``plan sponsor'', and ``State'' have the meanings 
given such terms in section 3 of the Employee Retirement Income 
Security Act of 1974.
  (c) Other Definitions.--For purposes of this title:
          (1) Applicable state authority.--The term ``applicable State 
        authority'' means, with respect to an insurer or health 
        maintenance organization in a State, the State insurance 
        commissioner or official or officials designated by the State 
        to enforce the requirements of this title for the State 
        involved with respect to such insurer or organization.
          (2) Bona fide association.--The term ``bona fide 
        association'' means an association which--
                  (A) has been actively in existence for at least 5 
                years,
                  (B) has been formed and maintained in good faith for 
                purposes other than obtaining insurance,
                  (C) does not condition membership in the association 
                on health status,
                  (D) makes health insurance coverage offered through 
                the association available to all members regardless of 
                health status,
                  (E) does not make health insurance coverage offered 
                through the association available to any individual who 
                is not a member (or dependent of a member) of the 
                association at the time the coverage is initially 
                issued,
                  (F) does not impose preexisting condition exclusions 
                except in a manner consistent with the requirements of 
                sections 101 and 102 as they relate to group health 
                plans, and
                  (G) provides for renewal and continuation of health 
                insurance coverage in a manner consistent with the 
                requirements of section 132 as they relate to the 
                renewal and continuation in force of coverage in a 
                group market.
          (3) COBRA continuation provision.--The term ``COBRA 
        continuation provision'' means any of the following:
                  (A) Section 4980B of the Internal Revenue Code of 
                1986, other than subsection (f)(1) of such section 
                insofar as it relates to pediatric vaccines.
                  (B) Part 6 of subtitle B of title I of the Employee 
                Retirement Income Security Act of 1974 (29 U.S.C. 1161 
                et seq.), other than section 609.
                  (C) Title XXII of the Public Health Service Act.
          (4) Health insurance coverage.--
                  (A) In general.--Except as provided in subparagraph 
                (B), the term ``health insurance coverage'' means 
                benefits consisting of medical care (provided directly, 
                through insurance or reimbursement, or otherwise) under 
                any hospital or medical service policy or certificate, 
                hospital or medical service plan contract, or health 
                maintenance organization group contract offered by an 
                insurer or a health maintenance organization.
                  (B) Exception.--Such term does not include coverage 
                under any separate policy, certificate, or contract 
                only for one or more of any of the following:
                          (i) Coverage for accident, credit-only, 
                        vision, disability income, long-term care, 
                        nursing home care, community-based care dental, 
                        on-site medical clinics, or employee assistance 
                        programs, or any combination thereof.
                          (ii) Medicare supplemental health insurance 
                        (within the meaning of section 1882(g)(1) of 
                        the Social Security Act (42 U.S.C. 
                        1395ss(g)(1))) and similar supplemental 
                        coverage provided under a group health plan.
                          (iii) Coverage issued as a supplement to 
                        liability insurance.
                          (iv) Liability insurance, including general 
                        liability insurance and automobile liability 
                        insurance.
                          (v) Workers' compensation or similar 
                        insurance.
                          (vi) Automobile medical-payment insurance.
                          (vii) Coverage consisting of benefit payments 
                        made on a periodic basis for a specified 
                        disease or illness or period of 
                        hospitalization, without regard to the costs 
                        incurred or services rendered during the period 
                        to which the payments relate.
                          (viii) Short-term limited duration insurance.
                          (ix) Such other coverage, comparable to that 
                        described in previous clauses, as may be 
                        specified in regulations prescribed under this 
                        title.
          (5) Health maintenance organization; hmo.--The terms ``health 
        maintenance organization'' and ``HMO'' mean--
                  (A) a Federally qualified health maintenance 
                organization (as defined in section 1301(a) of the 
                Public Health Service Act (42 U.S.C. 300e(a))),
                  (B) an organization recognized under State law as a 
                health maintenance organization, or
                  (C) a similar organization regulated under State law 
                for solvency in the same manner and to the same extent 
                as such a health maintenance organization,
        if it is subject to State law which regulates insurance (within 
        the meaning of section 514(b)(2) of the Employee Retirement 
        Income Security Act of 1974).
          (6) Health status.--The term ``health status'' includes, with 
        respect to an individual, medical condition, claims experience, 
        receipt of health care, medical history, genetic information, 
        evidence of insurability (including conditions arising out of 
        acts of domestic violence), or disability.
          (7) Individual health insurance coverage.--The term 
        ``individual health insurance coverage'' means health insurance 
        coverage offered to individuals if the coverage is not offered 
        in connection with a group health plan (other than such a plan 
        that has fewer than two participants as current employees on 
        the first day of the plan year).
          (8) Insurer.--The term ``insurer'' means an insurance 
        company, insurance service, or insurance organization which is 
        licensed to engage in the business of insurance in a State and 
        which is regulated by a State (within the meaning of section 
        514(b)(2)(A) of the Employee Retirement Income Security Act of 
        1974).
          (9) Medical care.--The term ``medical care'' means--
                  (A) amounts paid for, or items or services in the 
                form of, the diagnosis, cure, mitigation, treatment, or 
                prevention of disease, or amounts paid for, or items or 
                services provided for, the purpose of affecting any 
                structure or function of the body,
                  (B) amounts paid for, or services in the form of, 
                transportation primarily for and essential to medical 
                care referred to in subparagraph (A), and
                  (C) amounts paid for insurance covering medical care 
                referred to in subparagraphs (A) and (B).
          (10) Network plan.--The term ``network plan'' means, with 
        respect to health insurance coverage, an arrangement of an 
        insurer or a health maintenance organization under which the 
        financing and delivery of medical care are provided, in whole 
        or in part, through a defined set of providers under contract 
        with the insurer or health maintenance organization.
          (11) Waiting period.--The term ``waiting period'' means, with 
        respect to a group health plan and an individual who is a 
        potential participant or beneficiary in the plan, the minimum 
        period that must pass with respect to the individual before the 
        individual is eligible to be covered for benefits under the 
        plan.
  (d) Treatment of Partnerships.--
          (1) Treatment as a group health plan.--Any plan, fund, or 
        program which would not be (but for this paragraph) an employee 
        welfare benefit plan and which is established or maintained by 
        a partnership, to the extent that such plan, fund, or program 
        provides medical care to present or former partners in the 
        partnership or to their dependents (as defined under the terms 
        of the plan, fund, or program), directly or through insurance, 
        reimbursement, or otherwise, shall be treated (subject to 
        paragraph (1)) as an employee welfare benefit plan which is a 
        group health plan.
          (2) Treatment of partnership and partners and employer and 
        participants.--In the case of a group health plan--
                  (A) the term ``employer'' includes the partnership in 
                relation to any partner; and
                  (B) the term ``participant'' includes--
                          (i) in connection with a group health plan 
                        maintained by a partnership, an individual who 
                        is a partner in relation to the partnership, or
                          (ii) in connection with a group health plan 
                        maintained by a self-employed individual (under 
                        which one or more employees are participants), 
                        the self-employed individual,
                if such individual is or may become eligible to receive 
                a benefit under the plan or such individual's 
                beneficiaries may be eligible to receive any such 
                benefit.
  (e) Definitions Relating to Markets and Small Employers.--As used in 
this title:
          (1) Individual market.--The term ``individual market'' means 
        the market for health insurance coverage offered to individuals 
        and not to employers or in connection with a group health plan 
        and does not include the market for such coverage issued only 
        by an insurer or HMO that makes such coverage available only on 
        the basis of affiliation with a bona fide association (as 
        defined in subsection (c)(2)).
          (2) Large group market.--The term ``large group market'' 
        means the market for health insurance coverage offered to 
        employers (other than small employers) on behalf of their 
        employees (and their dependents) and does not include health 
        insurance coverage available solely in connection with a bona 
        fide association (as defined in subsection (c)(2)).
          (3) Small employer.--The term ``small employer'' means, in 
        connection with a group health plan with respect to a calendar 
        year, an employer who employs at least 2 but fewer than 51 
        employees on a typical business day in the year. All persons 
        treated as a single employer under subsection (a) or (b) of 
        section 52 of the Internal Revenue Code of 1986 shall be 
        treated as a single employer for purposes of this title.
          (4) Small group market.--The term ``small group market'' 
        means the health insurance market under which individuals 
        obtain health insurance coverage (directly or through any 
        arrangement) on behalf of themselves (and their dependents) on 
        the basis of employment or other relationship with respect to a 
        small employer and does not include health insurance coverage 
        available solely in connection with a bona fide association (as 
        defined in subsection (c)(2)).

SEC. 192. STATE FLEXIBILITY TO PROVIDE GREATER PROTECTION.

  (a) State Flexibility To Provide Greater Protection.--Subject to 
subsection (b), nothing in this title shall be construed to preempt 
State laws that require insurers or HMOs--
          (1) to impose a limitation or exclusion of benefits relating 
        to the treatment of a preexisting condition for a period that 
        is shorter than the applicable period provided for under this 
        title;
          (2) to allow individuals, participants, and beneficiaries to 
        be considered to be in a period of previous qualifying coverage 
        if such individual, participant, or beneficiary experiences a 
        lapse in coverage that is greater than the 60-day periods 
        provided for under sections 101(b)(3)(A), 101(b)(3)(B)(ii), and 
        102(b)(2); or
          (3) require insurers or HMOs, in defining pre-existing 
        condition, to have a look-back period that is shorter than the 
        6-month period described in section 101(b)(1)(A).
  (b) No Override of ERISA Preemption.--Nothing in this Act shall be 
construed to affect or modify the provisions of section 514 of the 
Employee Retirement Income Security Act of 1974 (29 U.S.C. 1144).

SEC. 193. EFFECTIVE DATE.

  (a) In General.--Except as otherwise provided for in this title, the 
provisions of this title shall apply with respect to--
          (1) group health plans, and health insurance coverage offered 
        in connection with group health plans, for plan years beginning 
        on or after January 1, 1998, and
          (2) individual health insurance coverage issued, renewed, in 
        effect, or operated on or after July 1, 1998.
  (b) Consideration of Previous Coverage.--The Secretaries of Health 
and Human Services, Treasury, and Labor shall jointly establish rules 
regarding the treatment (in determining qualified coverage periods 
under sections 102(b) and 141(b)) of coverage before the applicable 
effective date specified in subsection (a).
  (c) Timely Issuance of Regulations.--The Secretaries of Health and 
Human Services, the Treasury, and Labor shall issue such regulations on 
a timely basis as may be required to carry out this title.

SEC. 194. RULE OF CONSTRUCTION.

  Nothing in this title or any amendment made thereby may be construed 
to require the coverage of any specific procedure, treatment, or 
service as part of a group health plan or health insurance coverage 
under this title or through regulation.

   TITLE II--PREVENTING HEALTH CARE FRAUD AND ABUSE; ADMINISTRATIVE 
                             SIMPLIFICATION

SEC. 200. REFERENCES IN TITLE.

  Except as otherwise specifically provided, whenever in this title an 
amendment is expressed in terms of an amendment to or repeal of a 
section or other provision, the reference shall be considered to be 
made to that section or other provision of the Social Security Act.

              Subtitle A--Fraud and Abuse Control Program

SEC. 201. FRAUD AND ABUSE CONTROL PROGRAM.

  (a) Establishment of Program.--Title XI (42 U.S.C. 1301 et seq.) is 
amended by inserting after section 1128B the following new section:
                   ``fraud and abuse control program
  ``Sec. 1128C. (a) Establishment of Program.--
          ``(1) In general.--Not later than January 1, 1997, the 
        Secretary, acting through the Office of the Inspector General 
        of the Department of Health and Human Services, and the 
        Attorney General shall establish a program--
                  ``(A) to coordinate Federal, State, and local law 
                enforcement programs to control fraud and abuse with 
                respect to health plans,
                  ``(B) to conduct investigations, audits, evaluations, 
                and inspections relating to the delivery of and payment 
                for health care in the United States,
                  ``(C) to facilitate the enforcement of the provisions 
                of sections 1128, 1128A, and 1128B and other statutes 
                applicable to health care fraud and abuse,
                  ``(D) to provide for the modification and 
                establishment of safe harbors and to issue advisory 
                opinions and special fraud alerts pursuant to section 
                1128D, and
                  ``(E) to provide for the reporting and disclosure of 
                certain final adverse actions against health care 
                providers, suppliers, or practitioners pursuant to the 
                data collection system established under section 1128E.
          ``(2) Coordination with health plans.--In carrying out the 
        program established under paragraph (1), the Secretary and the 
        Attorney General shall consult with, and arrange for the 
        sharing of data with representatives of health plans.
          ``(3) Guidelines.--
                  ``(A) In general.--The Secretary and the Attorney 
                General shall issue guidelines to carry out the program 
                under paragraph (1). The provisions of sections 553, 
                556, and 557 of title 5, United States Code, shall not 
                apply in the issuance of such guidelines.
                  ``(B) Information guidelines.--
                          ``(i) In general.--Such guidelines shall 
                        include guidelines relating to the furnishing 
                        of information by health plans, providers, and 
                        others to enable the Secretary and the Attorney 
                        General to carry out the program (including 
                        coordination with health plans under paragraph 
                        (2)).
                          ``(ii) Confidentiality.--Such guidelines 
                        shall include procedures to assure that such 
                        information is provided and utilized in a 
                        manner that appropriately protects the 
                        confidentiality of the information and the 
                        privacy of individuals receiving health care 
                        services and items.
                          ``(iii) Qualified immunity for providing 
                        information.--The provisions of section 1157(a) 
                        (relating to limitation on liability) shall 
                        apply to a person providing information to the 
                        Secretary or the Attorney General in 
                        conjunction with their performance of duties 
                        under this section.
          ``(4) Ensuring access to documentation.--The Inspector 
        General of the Department of Health and Human Services is 
        authorized to exercise such authority described in paragraphs 
        (3) through (9) of section 6 of the Inspector General Act of 
        1978 (5 U.S.C. App.) as necessary with respect to the 
        activities under the fraud and abuse control program 
        established under this subsection.
          ``(5) Authority of inspector general.--Nothing in this Act 
        shall be construed to diminish the authority of any Inspector 
        General, including such authority as provided in the Inspector 
        General Act of 1978 (5 U.S.C. App.).
  ``(b) Additional Use of Funds by Inspector General.--
          ``(1) Reimbursements for investigations.--The Inspector 
        General of the Department of Health and Human Services is 
        authorized to receive and retain for current use reimbursement 
        for the costs of conducting investigations and audits and for 
        monitoring compliance plans when such costs are ordered by a 
        court, voluntarily agreed to by the payor, or otherwise.
          ``(2) Crediting.--Funds received by the Inspector General 
        under paragraph (1) as reimbursement for costs of conducting 
        investigations shall be deposited to the credit of the 
        appropriation from which initially paid, or to appropriations 
        for similar purposes currently available at the time of 
        deposit, and shall remain available for obligation for 1 year 
        from the date of the deposit of such funds.
  ``(c) Health Plan Defined.--For purposes of this section, the term 
`health plan' means a plan or program that provides health benefits, 
whether directly, through insurance, or otherwise, and includes--
          ``(1) a policy of health insurance;
          ``(2) a contract of a service benefit organization; and
          ``(3) a membership agreement with a health maintenance 
        organization or other prepaid health plan.''.
  (b) Establishment of Health Care Fraud and Abuse Control Account in 
Federal Hospital Insurance Trust Fund.--Section 1817 (42 U.S.C. 1395i) 
is amended by adding at the end the following new subsection:
  ``(k) Health Care Fraud and Abuse Control Account.--
          ``(1) Establishment.--There is hereby established in the 
        Trust Fund an expenditure account to be known as the `Health 
        Care Fraud and Abuse Control Account' (in this subsection 
        referred to as the `Account').
          ``(2) Appropriated amounts to trust fund.--
                  ``(A) In general.--There are hereby appropriated to 
                the Trust Fund--
                          ``(i) such gifts and bequests as may be made 
                        as provided in subparagraph (B);
                          ``(ii) such amounts as may be deposited in 
                        the Trust Fund as provided in sections 242(b) 
                        and 249(c) of the Health Coverage Availability 
                        and Affordability Act of 1996, and title XI; 
                        and
                          ``(iii) such amounts as are transferred to 
                        the Trust Fund under subparagraph (C).
                  ``(B) Authorization to accept gifts.--The Trust Fund 
                is authorized to accept on behalf of the United States 
                money gifts and bequests made unconditionally to the 
                Trust Fund, for the benefit of the Account or any 
                activity financed through the Account.
                  ``(C) Transfer of amounts.--The Managing Trustee 
                shall transfer to the Trust Fund, under rules similar 
                to the rules in section 9601 of the Internal Revenue 
                Code of 1986, an amount equal to the sum of the 
                following:
                          ``(i) Criminal fines recovered in cases 
                        involving a Federal health care offense (as 
                        defined in section 982(a)(6)(B) of title 18, 
                        United States Code).
                          ``(ii) Civil monetary penalties and 
                        assessments imposed in health care cases, 
                        including amounts recovered under titles XI, 
                        XVIII, and XIX, and chapter 38 of title 31, 
                        United States Code (except as otherwise 
                        provided by law).
                          ``(iii) Amounts resulting from the forfeiture 
                        of property by reason of a Federal health care 
                        offense.
                          ``(iv) Penalties and damages obtained and 
                        otherwise creditable to miscellaneous receipts 
                        of the general fund of the Treasury obtained 
                        under sections 3729 through 3733 of title 31, 
                        United States Code (known as the False Claims 
                        Act), in cases involving claims related to the 
                        provision of health care items and services 
                        (other than funds awarded to a relator, for 
                        restitution or otherwise authorized by law).
          ``(3) Appropriated amounts to account for fraud and abuse 
        control program, etc.--
                  ``(A) Departments of health and human services and 
                justice.--
                          ``(i) In general.--There are hereby 
                        appropriated to the Account from the Trust Fund 
                        such sums as the Secretary and the Attorney 
                        General certify are necessary to carry out the 
                        purposes described in subparagraph (C), to be 
                        available without further appropriation, in an 
                        amount not to exceed--
                                  ``(I) for fiscal year 1997, 
                                $104,000,000,
                                  ``(II) for each of the fiscal years 
                                1998 through 2003, the limit for the 
                                preceding fiscal year, increased by 15 
                                percent; and
                                  ``(III) for each fiscal year after 
                                fiscal year 2003, the limit for fiscal 
                                year 2003.
                          ``(ii) Medicare and medicaid activities.--For 
                        each fiscal year, of the amount appropriated in 
                        clause (i), the following amounts shall be 
                        available only for the purposes of the 
                        activities of the Office of the Inspector 
                        General of the Department of Health and Human 
                        Services with respect to the medicare and 
                        medicaid programs--
                                  ``(I) for fiscal year 1997, not less 
                                than $60,000,000 and not more than 
                                $70,000,000;
                                  ``(II) for fiscal year 1998, not less 
                                than $80,000,000 and not more than 
                                $90,000,000;
                                  ``(III) for fiscal year 1999, not 
                                less than $90,000,000 and not more than 
                                $100,000,000;
                                  ``(IV) for fiscal year 2000, not less 
                                than $110,000,000 and not more than 
                                $120,000,000;
                                  ``(V) for fiscal year 2001, not less 
                                than $120,000,000 and not more than 
                                $130,000,000;
                                  ``(VI) for fiscal year 2002, not less 
                                than $140,000,000 and not more than 
                                $150,000,000; and
                                  ``(VII) for each fiscal year after 
                                fiscal year 2002, not less than 
                                $150,000,000 and not more than 
                                $160,000,000.
                  ``(B) Federal bureau of investigation.--There are 
                hereby appropriated from the general fund of the United 
                States Treasury and hereby appropriated to the Account 
                for transfer to the Federal Bureau of Investigation to 
                carry out the purposes described in subparagraph (C), 
                to be available without further appropriation--
                          ``(i) for fiscal year 1997, $47,000,000;
                          ``(ii) for fiscal year 1998, $56,000,000;
                          ``(iii) for fiscal year 1999, $66,000,000;
                          ``(iv) for fiscal year 2000, $76,000,000;
                          ``(v) for fiscal year 2001, $88,000,000;
                          ``(vi) for fiscal year 2002, $101,000,000; 
                        and
                          ``(vii) for each fiscal year after fiscal 
                        year 2002, $114,000,000.
                  ``(C) Use of funds.--The purposes described in this 
                subparagraph are to cover the costs (including 
                equipment, salaries and benefits, and travel and 
                training) of the administration and operation of the 
                health care fraud and abuse control program established 
                under section 1128C(a), including the costs of--
                          ``(i) prosecuting health care matters 
                        (through criminal, civil, and administrative 
                        proceedings);
                          ``(ii) investigations;
                          ``(iii) financial and performance audits of 
                        health care programs and operations;
                          ``(iv) inspections and other evaluations; and
                          ``(v) provider and consumer education 
                        regarding compliance with the provisions of 
                        title XI.
          ``(4) Appropriated amounts to account for medicare integrity 
        program.--
                  ``(A) In general.--There are hereby appropriated to 
                the Account from the Trust Fund for each fiscal year 
                such amounts as are necessary to carry out the Medicare 
                Integrity Program under section 1893, subject to 
                subparagraph (B) and to be available without further 
                appropriation.
                  ``(B) Amounts specified.--The amount appropriated 
                under subparagraph (A) for a fiscal year is as follows:
                          ``(i) For fiscal year 1997, such amount shall 
                        be not less than $430,000,000 and not more than 
                        $440,000,000.
                          ``(ii) For fiscal year 1998, such amount 
                        shall be not less than $490,000,000 and not 
                        more than $500,000,000.
                          ``(iii) For fiscal year 1999, such amount 
                        shall be not less than $550,000,000 and not 
                        more than $560,000,000.
                          ``(iv) For fiscal year 2000, such amount 
                        shall be not less than $620,000,000 and not 
                        more than $630,000,000.
                          ``(v) For fiscal year 2001, such amount shall 
                        be not less than $670,000,000 and not more than 
                        $680,000,000.
                          ``(vi) For fiscal year 2002, such amount 
                        shall be not less than $690,000,000 and not 
                        more than $700,000,000.
                          ``(vii) For each fiscal year after fiscal 
                        year 2002, such amount shall be not less than 
                        $710,000,000 and not more than $720,000,000.
          ``(5) Annual report.--The Secretary and the Attorney General 
        shall submit jointly an annual report to Congress on the amount 
        of revenue which is generated and disbursed, and the 
        justification for such disbursements, by the Account in each 
        fiscal year.''.

SEC. 202. MEDICARE INTEGRITY PROGRAM.

  (a) Establishment of Medicare Integrity Program.--Title XVIII is 
amended by adding at the end the following new section:
                      ``medicare integrity program
  ``Sec. 1893. (a) Establishment of Program.--There is hereby 
established the Medicare Integrity Program (in this section referred to 
as the `Program') under which the Secretary shall promote the integrity 
of the medicare program by entering into contracts in accordance with 
this section with eligible private entities to carry out the activities 
described in subsection (b).
  ``(b) Activities Described.--The activities described in this 
subsection are as follows:
          ``(1) Review of activities of providers of services or other 
        individuals and entities furnishing items and services for 
        which payment may be made under this title (including skilled 
        nursing facilities and home health agencies), including medical 
        and utilization review and fraud review (employing similar 
        standards, processes, and technologies used by private health 
        plans, including equipment and software technologies which 
        surpass the capability of the equipment and technologies used 
        in the review of claims under this title as of the date of the 
        enactment of this section).
          ``(2) Audit of cost reports.
          ``(3) Determinations as to whether payment should not be, or 
        should not have been, made under this title by reason of 
        section 1862(b), and recovery of payments that should not have 
        been made.
          ``(4) Education of providers of services, beneficiaries, and 
        other persons with respect to payment integrity and benefit 
        quality assurance issues.
          ``(5) Developing (and periodically updating) a list of items 
        of durable medical equipment in accordance with section 
        1834(a)(15) which are subject to prior authorization under such 
        section.
  ``(c) Eligibility of Entities.--An entity is eligible to enter into a 
contract under the Program to carry out any of the activities described 
in subsection (b) if--
          ``(1) the entity has demonstrated capability to carry out 
        such activities;
          ``(2) in carrying out such activities, the entity agrees to 
        cooperate with the Inspector General of the Department of 
        Health and Human Services, the Attorney General of the United 
        States, and other law enforcement agencies, as appropriate, in 
        the investigation and deterrence of fraud and abuse in relation 
        to this title and in other cases arising out of such 
        activities;
          ``(3) the entity demonstrates to the Secretary that the 
        entity's financial holdings, interests, or relationships will 
        not interfere with its ability to perform the functions to be 
        required by the contract in an effective and impartial manner; 
        and
          ``(4) the entity meets such other requirements as the 
        Secretary may impose.
In the case of the activity described in subsection (b)(5), an entity 
shall be deemed to be eligible to enter into a contract under the 
Program to carry out the activity if the entity is a carrier with a 
contract in effect under section 1842.
  ``(d) Process for Entering Into Contracts.--The Secretary shall enter 
into contracts under the Program in accordance with such procedures as 
the Secretary shall by regulation establish, except that such 
procedures shall include the following:
          ``(1) The Secretary shall determine the appropriate number of 
        separate contracts which are necessary to carry out the Program 
        and the appropriate times at which the Secretary shall enter 
        into such contracts.
          ``(2)(A) Except as provided in subparagraph (B), the 
        provisions of section 1153(e)(1) shall apply to contracts and 
        contracting authority under this section.
          ``(B) Competitive procedures must be used when entering into 
        new contracts under this section, or at any other time 
        considered appropriate by the Secretary, except that the 
        Secretary may contract with entities that are carrying out the 
        activities described in this section pursuant to agreements 
        under section 1816 or contracts under section 1842 in effect on 
        the date of the enactment of this section.
          ``(3) A contract under this section may be renewed without 
        regard to any provision of law requiring competition if the 
        contractor has met or exceeded the performance requirements 
        established in the current contract.
  ``(e) Limitation on Contractor Liability.--The Secretary shall by 
regulation provide for the limitation of a contractor's liability for 
actions taken to carry out a contract under the Program, and such 
regulation shall, to the extent the Secretary finds appropriate, employ 
the same or comparable standards and other substantive and procedural 
provisions as are contained in section 1157.''.
  (b) Elimination of FI and Carrier Responsibility for Carrying Out 
Activities Subject to Program.--
          (1) Responsibilities of fiscal intermediaries under part a.--
        Section 1816 (42 U.S.C. 1395h) is amended by adding at the end 
        the following new subsection:
  ``(l) No agency or organization may carry out (or receive payment for 
carrying out) any activity pursuant to an agreement under this section 
to the extent that the activity is carried out pursuant to a contract 
under the Medicare Integrity Program under section 1893.''.
          (2) Responsibilities of carriers under part b.--Section 
        1842(c) (42 U.S.C. 1395u(c)) is amended by adding at the end 
        the following new paragraph:
  ``(6) No carrier may carry out (or receive payment for carrying out) 
any activity pursuant to a contract under this subsection to the extent 
that the activity is carried out pursuant to a contract under the 
Medicare Integrity Program under section 1893. The previous sentence 
shall not apply with respect to the activity described in section 
1893(b)(5) (relating to prior authorization of certain items of durable 
medical equipment under section 1834(a)(15)).''.

SEC. 203. BENEFICIARY INCENTIVE PROGRAMS.

  (a) Clarification of Requirement to Provide Explanation of Medicare 
Benefits.--The Secretary of Health and Human Services (in this section 
referred to as the ``Secretary'') shall provide an explanation of 
benefits under the medicare program under title XVIII of the Social 
Security Act with respect to each item or service for which payment may 
be made under the program which is furnished to an individual, without 
regard to whether or not a deductible or coinsurance may be imposed 
against the individual with respect to the item or service.
  (b) Program to Collect Information on Fraud and Abuse.--
          (1) Establishment of program.--Not later than 3 months after 
        the date of the enactment of this Act, the Secretary shall 
        establish a program under which the Secretary shall encourage 
        individuals to report to the Secretary information on 
        individuals and entities who are engaging or who have engaged 
        in acts or omissions which constitute grounds for the 
        imposition of a sanction under section 1128, section 1128A, or 
        section 1128B of the Social Security Act, or who have otherwise 
        engaged in fraud and abuse against the medicare program for 
        which there is a sanction provided under law. The program shall 
        discourage provision of, and not consider, information which is 
        frivolous or otherwise not relevant or material to the 
        imposition of such a sanction.
          (2) Payment of portion of amounts collected.--If an 
        individual reports information to the Secretary under the 
        program established under paragraph (1) which serves as the 
        basis for the collection by the Secretary or the Attorney 
        General of any amount of at least $100 (other than any amount 
        paid as a penalty under section 1128B of the Social Security 
        Act), the Secretary may pay a portion of the amount collected 
        to the individual (under procedures similar to those applicable 
        under section 7623 of the Internal Revenue Code of 1986 to 
        payments to individuals providing information on violations of 
        such Code).
  (c) Program to Collect Information on Program Efficiency.--
          (1) Establishment of program.--Not later than 3 months after 
        the date of the enactment of this Act, the Secretary shall 
        establish a program under which the Secretary shall encourage 
        individuals to submit to the Secretary suggestions on methods 
        to improve the efficiency of the medicare program.
          (2) Payment of portion of program savings.--If an individual 
        submits a suggestion to the Secretary under the program 
        established under paragraph (1) which is adopted by the 
        Secretary and which results in savings to the program, the 
        Secretary may make a payment to the individual of such amount 
        as the Secretary considers appropriate.

SEC. 204. APPLICATION OF CERTAIN HEALTH ANTI-FRAUD AND ABUSE SANCTIONS 
                    TO FRAUD AND ABUSE AGAINST FEDERAL HEALTH CARE 
                    PROGRAMS.

  (a) In General.--Section 1128B (42 U.S.C. 1320a-7b) is amended as 
follows:
          (1) In the heading, by striking ``medicare or state health 
        care programs'' and inserting ``federal health care programs''.
          (2) In subsection (a)(1), by striking ``a program under title 
        XVIII or a State health care program (as defined in section 
        1128(h))'' and inserting ``a Federal health care program''.
          (3) In subsection (a)(5), by striking ``a program under title 
        XVIII or a State health care program'' and inserting ``a 
        Federal health care program''.
          (4) In the second sentence of subsection (a)--
                  (A) by striking ``a State plan approved under title 
                XIX'' and inserting ``a Federal health care program'', 
                and
                  (B) by striking ``the State may at its option 
                (notwithstanding any other provision of that title or 
                of such plan)'' and inserting ``the administrator of 
                such program may at its option (notwithstanding any 
                other provision of such program)''.
          (5) In subsection (b), by striking ``title XVIII or a State 
        health care program'' each place it appears and inserting ``a 
        Federal health care program''.
          (6) In subsection (c), by inserting ``(as defined in section 
        1128(h))'' after ``a State health care program''.
          (7) By adding at the end the following new subsection:
  ``(f) For purposes of this section, the term `Federal health care 
program' means--
          ``(1) any plan or program that provides health benefits, 
        whether directly, through insurance, or otherwise, which is 
        funded directly, in whole or in part, by the United States 
        Government (other than the health insurance program under 
        chapter 89 of title 5, United States Code); or
          ``(2) any State health care program, as defined in section 
        1128(h).''.
  (b) Effective Date.--The amendments made by this section shall take 
effect on January 1, 1997.

SEC. 205. GUIDANCE REGARDING APPLICATION OF HEALTH CARE FRAUD AND ABUSE 
                    SANCTIONS.

  Title XI (42 U.S.C. 1301 et seq.), as amended by section 201, is 
amended by inserting after section 1128C the following new section:
    ``guidance regarding application of health care fraud and abuse 
                               sanctions
  ``Sec. 1128D. (a) Solicitation and Publication of Modifications to 
Existing Safe Harbors and New Safe Harbors.--
          ``(1) In general.--
                  ``(A) Solicitation of proposals for safe harbors.--
                Not later than January 1, 1997, and not less than 
                annually thereafter, the Secretary shall publish a 
                notice in the Federal Register soliciting proposals, 
                which will be accepted during a 60-day period, for--
                          ``(i) modifications to existing safe harbors 
                        issued pursuant to section 14(a) of the 
                        Medicare and Medicaid Patient and Program 
                        Protection Act of 1987 (42 U.S.C. 1320a-7b 
                        note);
                          ``(ii) additional safe harbors specifying 
                        payment practices that shall not be treated as 
                        a criminal offense under section 1128B(b) and 
                        shall not serve as the basis for an exclusion 
                        under section 1128(b)(7);
                          ``(iii) advisory opinions to be issued 
                        pursuant to subsection (b); and
                          ``(iv) special fraud alerts to be issued 
                        pursuant to subsection (c).
                  ``(B) Publication of proposed modifications and 
                proposed additional safe harbors.--After considering 
                the proposals described in clauses (i) and (ii) of 
                subparagraph (A), the Secretary, in consultation with 
                the Attorney General, shall publish in the Federal 
                Register proposed modifications to existing safe 
                harbors and proposed additional safe harbors, if 
                appropriate, with a 60-day comment period. After 
                considering any public comments received during this 
                period, the Secretary shall issue final rules modifying 
                the existing safe harbors and establishing new safe 
                harbors, as appropriate.
                  ``(C) Report.--The Inspector General of the 
                Department of Health and Human Services (in this 
                section referred to as the `Inspector General') shall, 
                in an annual report to Congress or as part of the year-
                end semiannual report required by section 5 of the 
                Inspector General Act of 1978 (5 U.S.C. App.), describe 
                the proposals received under clauses (i) and (ii) of 
                subparagraph (A) and explain which proposals were 
                included in the publication described in subparagraph 
                (B), which proposals were not included in that 
                publication, and the reasons for the rejection of the 
                proposals that were not included.
          ``(2) Criteria for modifying and establishing safe harbors.--
        In modifying and establishing safe harbors under paragraph 
        (1)(B), the Secretary may consider the extent to which 
        providing a safe harbor for the specified payment practice may 
        result in any of the following:
                  ``(A) An increase or decrease in access to health 
                care services.
                  ``(B) An increase or decrease in the quality of 
                health care services.
                  ``(C) An increase or decrease in patient freedom of 
                choice among health care providers.
                  ``(D) An increase or decrease in competition among 
                health care providers.
                  ``(E) An increase or decrease in the ability of 
                health care facilities to provide services in medically 
                underserved areas or to medically underserved 
                populations.
                  ``(F) An increase or decrease in the cost to Federal 
                health care programs (as defined in section 1128B(f)).
                  ``(G) An increase or decrease in the potential 
                overutilization of health care services.
                  ``(H) The existence or nonexistence of any potential 
                financial benefit to a health care professional or 
                provider which may vary based on their decisions of--
                          ``(i) whether to order a health care item or 
                        service; or
                          ``(ii) whether to arrange for a referral of 
                        health care items or services to a particular 
                        practitioner or provider.
                  ``(I) Any other factors the Secretary deems 
                appropriate in the interest of preventing fraud and 
                abuse in Federal health care programs (as so defined).
  ``(b) Advisory Opinions.--
          ``(1) Issuance of advisory opinions.--The Secretary shall 
        issue written advisory opinions as provided in this subsection.
          ``(2) Matters subject to advisory opinions.--The Secretary 
        shall issue advisory opinions as to the following matters:
                  ``(A) What constitutes prohibited remuneration within 
                the meaning of section 1128B(b).
                  ``(B) Whether an arrangement or proposed arrangement 
                satisfies the criteria set forth in section 1128B(b)(3) 
                for activities which do not result in prohibited 
                remuneration.
                  ``(C) Whether an arrangement or proposed arrangement 
                satisfies the criteria which the Secretary has 
                established, or shall establish by regulation for 
                activities which do not result in prohibited 
                remuneration.
                  ``(D) What constitutes an inducement to reduce or 
                limit services to individuals entitled to benefits 
                under title XVIII or title XIX or title XXI within the 
                meaning of section 1128B(b).
                  ``(E) Whether any activity or proposed activity 
                constitutes grounds for the imposition of a sanction 
                under section 1128, 1128A, or 1128B.
          ``(3) Matters not subject to advisory opinions.--Such 
        advisory opinions shall not address the following matters:
                  ``(A) Whether the fair market value shall be, or was 
                paid or received for any goods, services or property.
                  ``(B) Whether an individual is a bona fide employee 
                within the requirements of section 3121(d)(2) of the 
                Internal Revenue Code of 1986.
          ``(4) Effect of advisory opinions.--
                  ``(A) Binding as to secretary and parties involved.--
                Each advisory opinion issued by the Secretary shall be 
                binding as to the Secretary and the party or parties 
                requesting the opinion.
                  ``(B) Failure to seek opinion.--The failure of a 
                party to seek an advisory opinion may not be introduced 
                into evidence to prove that the party intended to 
                violate the provisions of sections 1128, 1128A, or 
                1128B.
          ``(5) Regulations.--
                  ``(A) In general.--Not later than 180 days after the 
                date of the enactment of this section, the Secretary 
                shall issue regulations to carry out this section. Such 
                regulations shall provide for--
                          ``(i) the procedure to be followed by a party 
                        applying for an advisory opinion;
                          ``(ii) the procedure to be followed by the 
                        Secretary in responding to a request for an 
                        advisory opinion;
                          ``(iii) the interval in which the Secretary 
                        shall respond;
                          ``(iv) the reasonable fee to be charged to 
                        the party requesting an advisory opinion; and
                          ``(v) the manner in which advisory opinions 
                        will be made available to the public.
                  ``(B) Specific contents.--Under the regulations 
                promulgated pursuant to subparagraph (A)--
                          ``(i) the Secretary shall be required to 
                        respond to a party requesting an advisory 
                        opinion by not later than 30 days after the 
                        request is received; and
                          ``(ii) the fee charged to the party 
                        requesting an advisory opinion shall be equal 
                        to the costs incurred by the Secretary in 
                        responding to the request.
  ``(c) Special Fraud Alerts.--
          ``(1) In general.--
                  ``(A) Request for special fraud alerts.--Any person 
                may present, at any time, a request to the Inspector 
                General for a notice which informs the public of 
                practices which the Inspector General considers to be 
                suspect or of particular concern under the medicare 
                program or a State health care program, as defined in 
                section 1128(h) (in this subsection referred to as a 
                `special fraud alert').
                  ``(B) Issuance and publication of special fraud 
                alerts.--Upon receipt of a request described in 
                subparagraph (A), the Inspector General shall 
                investigate the subject matter of the request to 
                determine whether a special fraud alert should be 
                issued. If appropriate, the Inspector General shall 
                issue a special fraud alert in response to the request. 
                All special fraud alerts issued pursuant to this 
                subparagraph shall be published in the Federal 
                Register.
          ``(2) Criteria for special fraud alerts.--In determining 
        whether to issue a special fraud alert upon a request described 
        in paragraph (1), the Inspector General may consider--
                  ``(A) whether and to what extent the practices that 
                would be identified in the special fraud alert may 
                result in any of the consequences described in 
                subsection (a)(2); and
                  ``(B) the volume and frequency of the conduct that 
                would be identified in the special fraud alert.''.

     Subtitle B--Revisions to Current Sanctions for Fraud and Abuse

SEC. 211. MANDATORY EXCLUSION FROM PARTICIPATION IN MEDICARE AND STATE 
                    HEALTH CARE PROGRAMS.

  (a) Individual Convicted of Felony Relating to Health Care Fraud.--
          (1) In general.--Section 1128(a) (42 U.S.C. 1320a-7(a)) is 
        amended by adding at the end the following new paragraph:
          ``(3) Felony conviction relating to health care fraud.--Any 
        individual or entity that has been convicted after the date of 
        the enactment of the Health Coverage Availability and 
        Affordability Act of 1996, under Federal or State law, in 
        connection with the delivery of a health care item or service 
        or with respect to any act or omission in a health care program 
        (other than those specifically described in paragraph (1)) 
        operated by or financed in whole or in part by any Federal, 
        State, or local government agency, of a criminal offense 
        consisting of a felony relating to fraud, theft, embezzlement, 
        breach of fiduciary responsibility, or other financial 
        misconduct.''.
          (2) Conforming amendment.--Paragraph (1) of section 1128(b) 
        (42 U.S.C. 1320a-7(b)) is amended to read as follows:
          ``(1) Conviction relating to fraud.--Any individual or entity 
        that has been convicted after the date of the enactment of the 
        Health Coverage Availability and Affordability Act of 1996, 
        under Federal or State law--
                  ``(A) of a criminal offense consisting of a 
                misdemeanor relating to fraud, theft, embezzlement, 
                breach of fiduciary responsibility, or other financial 
                misconduct--
                          ``(i) in connection with the delivery of a 
                        health care item or service, or
                          ``(ii) with respect to any act or omission in 
                        a health care program (other than those 
                        specifically described in subsection (a)(1)) 
                        operated by or financed in whole or in part by 
                        any Federal, State, or local government agency; 
                        or
                  ``(B) of a criminal offense relating to fraud, theft, 
                embezzlement, breach of fiduciary responsibility, or 
                other financial misconduct with respect to any act or 
                omission in a program (other than a health care 
                program) operated by or financed in whole or in part by 
                any Federal, State, or local government agency.''.
  (b) Individual Convicted of Felony Relating to Controlled 
Substance.--
          (1) In general.--Section 1128(a) (42 U.S.C. 1320a-7(a)), as 
        amended by subsection (a), is amended by adding at the end the 
        following new paragraph:
          ``(4) Felony conviction relating to controlled substance.--
        Any individual or entity that has been convicted after the date 
        of the enactment of the Health Coverage Availability and 
        Affordability Act of 1996, under Federal or State law, of a 
        criminal offense consisting of a felony relating to the 
        unlawful manufacture, distribution, prescription, or dispensing 
        of a controlled substance.''.
          (2) Conforming amendment.--Section 1128(b)(3) (42 U.S.C. 
        1320a-7(b)(3)) is amended--
                  (A) in the heading, by striking ``Conviction'' and 
                inserting ``Misdemeanor conviction''; and
                  (B) by striking ``criminal offense'' and inserting 
                ``criminal offense consisting of a misdemeanor''.

SEC. 212. ESTABLISHMENT OF MINIMUM PERIOD OF EXCLUSION FOR CERTAIN 
                    INDIVIDUALS AND ENTITIES SUBJECT TO PERMISSIVE 
                    EXCLUSION FROM MEDICARE AND STATE HEALTH CARE 
                    PROGRAMS.

  Section 1128(c)(3) (42 U.S.C. 1320a-7(c)(3)) is amended by adding at 
the end the following new subparagraphs:
  ``(D) In the case of an exclusion of an individual or entity under 
paragraph (1), (2), or (3) of subsection (b), the period of the 
exclusion shall be 3 years, unless the Secretary determines in 
accordance with published regulations that a shorter period is 
appropriate because of mitigating circumstances or that a longer period 
is appropriate because of aggravating circumstances.
  ``(E) In the case of an exclusion of an individual or entity under 
subsection (b)(4) or (b)(5), the period of the exclusion shall not be 
less than the period during which the individual's or entity's license 
to provide health care is revoked, suspended, or surrendered, or the 
individual or the entity is excluded or suspended from a Federal or 
State health care program.
  ``(F) In the case of an exclusion of an individual or entity under 
subsection (b)(6)(B), the period of the exclusion shall be not less 
than 1 year.''.

SEC. 213. PERMISSIVE EXCLUSION OF INDIVIDUALS WITH OWNERSHIP OR CONTROL 
                    INTEREST IN SANCTIONED ENTITIES.

  Section 1128(b) (42 U.S.C. 1320a-7(b)) is amended by adding at the 
end the following new paragraph:
          ``(15) Individuals controlling a sanctioned entity.--(A) Any 
        individual--
                  ``(i) who has a direct or indirect ownership or 
                control interest in a sanctioned entity and who knows 
                or should know (as defined in section 1128A(i)(6)) of 
                the action constituting the basis for the conviction or 
                exclusion described in subparagraph (B); or
                  ``(ii) who is an officer or managing employee (as 
                defined in section 1126(b)) of such an entity.
          ``(B) For purposes of subparagraph (A), the term `sanctioned 
        entity' means an entity--
                  ``(i) that has been convicted of any offense 
                described in subsection (a) or in paragraph (1), (2), 
                or (3) of this subsection; or
                  ``(ii) that has been excluded from participation 
                under a program under title XVIII or under a State 
                health care program.''.

SEC. 214. SANCTIONS AGAINST PRACTITIONERS AND PERSONS FOR FAILURE TO 
                    COMPLY WITH STATUTORY OBLIGATIONS.

  (a) Minimum Period of Exclusion for Practitioners and Persons Failing 
To Meet Statutory Obligations.--
          (1) In general.--The second sentence of section 1156(b)(1) 
        (42 U.S.C. 1320c-5(b)(1)) is amended by striking ``may 
        prescribe)'' and inserting ``may prescribe, except that such 
        period may not be less than 1 year)''.
          (2) Conforming amendment.--Section 1156(b)(2) (42 U.S.C. 
        1320c-5(b)(2)) is amended by striking ``shall remain'' and 
        inserting ``shall (subject to the minimum period specified in 
        the second sentence of paragraph (1)) remain''.
  (b) Repeal of ``Unwilling or Unable'' Condition for Imposition of 
Sanction.--Section 1156(b)(1) (42 U.S.C. 1320c-5(b)(1)) is amended--
          (1) in the second sentence, by striking ``and determines'' 
        and all that follows through ``such obligations,''; and
          (2) by striking the third sentence.

SEC. 215. INTERMEDIATE SANCTIONS FOR MEDICARE HEALTH MAINTENANCE 
                    ORGANIZATIONS.

  (a) Application of Intermediate Sanctions for any Program 
Violations.--
          (1) In general.--Section 1876(i)(1) (42 U.S.C. 1395mm(i)(1)) 
        is amended by striking ``the Secretary may terminate'' and all 
        that follows and inserting ``in accordance with procedures 
        established under paragraph (9), the Secretary may at any time 
        terminate any such contract or may impose the intermediate 
        sanctions described in paragraph (6)(B) or (6)(C) (whichever is 
        applicable) on the eligible organization if the Secretary 
        determines that the organization--
          ``(A) has failed substantially to carry out the contract;
          ``(B) is carrying out the contract in a manner substantially 
        inconsistent with the efficient and effective administration of 
        this section; or
          ``(C) no longer substantially meets the applicable conditions 
        of subsections (b), (c), (e), and (f).''.
          (2) Other intermediate sanctions for miscellaneous program 
        violations.--Section 1876(i)(6) (42 U.S.C. 1395mm(i)(6)) is 
        amended by adding at the end the following new subparagraph:
  ``(C) In the case of an eligible organization for which the Secretary 
makes a determination under paragraph (1) the basis of which is not 
described in subparagraph (A), the Secretary may apply the following 
intermediate sanctions:
          ``(i) Civil money penalties of not more than $25,000 for each 
        determination under paragraph (1) if the deficiency that is the 
        basis of the determination has directly adversely affected (or 
        has the substantial likelihood of adversely affecting) an 
        individual covered under the organization's contract.
          ``(ii) Civil money penalties of not more than $10,000 for 
        each week beginning after the initiation of procedures by the 
        Secretary under paragraph (9) during which the deficiency that 
        is the basis of a determination under paragraph (1) exists.
          ``(iii) Suspension of enrollment of individuals under this 
        section after the date the Secretary notifies the organization 
        of a determination under paragraph (1) and until the Secretary 
        is satisfied that the deficiency that is the basis for the 
        determination has been corrected and is not likely to recur.''.
          (3) Procedures for imposing sanctions.--Section 1876(i) (42 
        U.S.C. 1395mm(i)) is amended by adding at the end the following 
        new paragraph:
  ``(9) The Secretary may terminate a contract with an eligible 
organization under this section or may impose the intermediate 
sanctions described in paragraph (6) on the organization in accordance 
with formal investigation and compliance procedures established by the 
Secretary under which--
          ``(A) the Secretary first provides the organization with the 
        reasonable opportunity to develop and implement a corrective 
        action plan to correct the deficiencies that were the basis of 
        the Secretary's determination under paragraph (1) and the 
        organization fails to develop or implement such a plan;
          ``(B) in deciding whether to impose sanctions, the Secretary 
        considers aggravating factors such as whether an organization 
        has a history of deficiencies or has not taken action to 
        correct deficiencies the Secretary has brought to the 
        organization's attention;
          ``(C) there are no unreasonable or unnecessary delays between 
        the finding of a deficiency and the imposition of sanctions; 
        and
          ``(D) the Secretary provides the organization with reasonable 
        notice and opportunity for hearing (including the right to 
        appeal an initial decision) before imposing any sanction or 
        terminating the contract.''.
          (4) Conforming amendments.--Section 1876(i)(6)(B) (42 U.S.C. 
        1395mm(i)(6)(B)) is amended by striking the second sentence.
  (b) Agreements With Peer Review Organizations.--Section 1876(i)(7)(A) 
(42 U.S.C. 1395mm(i)(7)(A)) is amended by striking ``an agreement'' and 
inserting ``a written agreement''.
  (c) Effective Date.--The amendments made by this section shall apply 
with respect to contract years beginning on or after January 1, 1996.

SEC. 216. ADDITIONAL EXCEPTION TO ANTI-KICKBACK PENALTIES FOR 
                    DISCOUNTING AND MANAGED CARE ARRANGEMENTS.

  (a) In General.--Section 1128B(b)(3) (42 U.S.C. 1320a-7b(b)(3)) is 
amended--
          (1) by striking ``and'' at the end of subparagraph (D);
          (2) by striking the period at the end of subparagraph (E) and 
        inserting ``; and''; and
          (3) by adding at the end the following new subparagraph:
          ``(F) any remuneration between an organization and an 
        individual or entity providing items or services, or a 
        combination thereof, pursuant to a written agreement between 
        the organization and the individual or entity if the 
        organization is an eligible organization under section 1876 or 
        if the written agreement places the individual or entity at 
        substantial financial risk for the cost or utilization of the 
        items or services, or a combination thereof, which the 
        individual or entity is obligated to provide, whether through a 
        withhold, capitation, incentive pool, per diem payment, or any 
        other similar risk arrangement which places the individual or 
        entity at substantial financial risk.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to written agreements entered into on or after January 1, 1997.

SEC. 217. CRIMINAL PENALTY FOR FRAUDULENT DISPOSITION OF ASSETS IN 
                    ORDER TO OBTAIN MEDICAID BENEFITS.

  Section 1128B(a) (42 U.S.C. 1320a-7b(a)) is amended--
          (1) by striking ``or'' at the end of paragraph (4);
          (2) by adding ``or'' at the end of paragraph (5); and
          (3) by inserting after paragraph (5) the following new 
        paragraph:
          ``(6) knowingly and willfully disposes of assets (including 
        by any transfer in trust) in order for an individual to become 
        eligible for medical assistance under a State plan under title 
        XIX, if disposing of the assets results in the imposition of a 
        period of ineligibility for such assistance under section 
        1917(c),''.

SEC. 218. EFFECTIVE DATE.

  Except as otherwise provided, the amendments made by this subtitle 
shall take effect January 1, 1997.

                      Subtitle C--Data Collection

SEC. 221. ESTABLISHMENT OF THE HEALTH CARE FRAUD AND ABUSE DATA 
                    COLLECTION PROGRAM.

  (a) In General.--Title XI (42 U.S.C. 1301 et seq.), as amended by 
sections 201 and 205, is amended by inserting after section 1128D the 
following new section:
         ``health care fraud and abuse data collection program
  ``Sec. 1128E. (a) General Purpose.--Not later than January 1, 1997, 
the Secretary shall establish a national health care fraud and abuse 
data collection program for the reporting of final adverse actions (not 
including settlements in which no findings of liability have been made) 
against health care providers, suppliers, or practitioners as required 
by subsection (b), with access as set forth in subsection (c).
  ``(b) Reporting of Information.--
          ``(1) In general.--Each Government agency and health plan 
        shall report any final adverse action (not including 
        settlements in which no findings of liability have been made) 
        taken against a health care provider, supplier, or 
        practitioner.
          ``(2) Information to be reported.--The information to be 
        reported under paragraph (1) includes:
                  ``(A) The name and TIN (as defined in section 
                7701(a)(41) of the Internal Revenue Code of 1986) of 
                any health care provider, supplier, or practitioner who 
                is the subject of a final adverse action.
                  ``(B) The name (if known) of any health care entity 
                with which a health care provider, supplier, or 
                practitioner is affiliated or associated.
                  ``(C) The nature of the final adverse action and 
                whether such action is on appeal.
                  ``(D) A description of the acts or omissions and 
                injuries upon which the final adverse action was based, 
                and such other information as the Secretary determines 
                by regulation is required for appropriate 
                interpretation of information reported under this 
                section.
          ``(3) Confidentiality.--In determining what information is 
        required, the Secretary shall include procedures to assure that 
        the privacy of individuals receiving health care services is 
        appropriately protected.
          ``(4) Timing and form of reporting.--The information required 
        to be reported under this subsection shall be reported 
        regularly (but not less often than monthly) and in such form 
        and manner as the Secretary prescribes. Such information shall 
        first be required to be reported on a date specified by the 
        Secretary.
          ``(5) To whom reported.--The information required to be 
        reported under this subsection shall be reported to the 
        Secretary.
  ``(c) Disclosure and Correction of Information.--
          ``(1) Disclosure.--With respect to the information about 
        final adverse actions (not including settlements in which no 
        findings of liability have been made) reported to the Secretary 
        under this section respecting a health care provider, supplier, 
        or practitioner, the Secretary shall, by regulation, provide 
        for--
                  ``(A) disclosure of the information, upon request, to 
                the health care provider, supplier, or licensed 
                practitioner, and
                  ``(B) procedures in the case of disputed accuracy of 
                the information.
          ``(2) Corrections.--Each Government agency and health plan 
        shall report corrections of information already reported about 
        any final adverse action taken against a health care provider, 
        supplier, or practitioner, in such form and manner that the 
        Secretary prescribes by regulation.
  ``(d) Access to Reported Information.--
          ``(1) Availability.--The information in this database shall 
        be available to Federal and State government agencies and 
        health plans pursuant to procedures that the Secretary shall 
        provide by regulation.
          ``(2) Fees for disclosure.--The Secretary may establish or 
        approve reasonable fees for the disclosure of information in 
        this database (other than with respect to requests by Federal 
        agencies). The amount of such a fee shall be sufficient to 
        recover the full costs of operating the database. Such fees 
        shall be available to the Secretary or, in the Secretary's 
        discretion to the agency designated under this section to cover 
        such costs.
  ``(e) Protection From Liability for Reporting.--No person or entity, 
including the agency designated by the Secretary in subsection (b)(5) 
shall be held liable in any civil action with respect to any report 
made as required by this section, without knowledge of the falsity of 
the information contained in the report.
  ``(f) Definitions and Special Rules.--For purposes of this section:
          ``(1) Final adverse action.--
                  ``(A) In general.--The term `final adverse action' 
                includes:
                          ``(i) Civil judgments against a health care 
                        provider, supplier, or practitioner in Federal 
                        or State court related to the delivery of a 
                        health care item or service.
                          ``(ii) Federal or State criminal convictions 
                        related to the delivery of a health care item 
                        or service.
                          ``(iii) Actions by Federal or State agencies 
                        responsible for the licensing and certification 
                        of health care providers, suppliers, and 
                        licensed health care practitioners, including--
                                  ``(I) formal or official actions, 
                                such as revocation or suspension of a 
                                license (and the length of any such 
                                suspension), reprimand, censure or 
                                probation,
                                  ``(II) any other loss of license or 
                                the right to apply for, or renew, a 
                                license of the provider, supplier, or 
                                practitioner, whether by operation of 
                                law, voluntary surrender, non-
                                renewability, or otherwise, or
                                  ``(III) any other negative action or 
                                finding by such Federal or State agency 
                                that is publicly available information.
                          ``(iv) Exclusion from participation in 
                        Federal or State health care programs.
                          ``(v) Any other adjudicated actions or 
                        decisions that the Secretary shall establish by 
                        regulation.
                  ``(B) Exception.--The term does not include any 
                action with respect to a malpractice claim.
          ``(2) Practitioner.--The terms `licensed health care 
        practitioner', `licensed practitioner', and `practitioner' 
        mean, with respect to a State, an individual who is licensed or 
        otherwise authorized by the State to provide health care 
        services (or any individual who, without authority holds 
        himself or herself out to be so licensed or authorized).
          ``(3) Government agency.--The term `Government agency' shall 
        include:
                  ``(A) The Department of Justice.
                  ``(B) The Department of Health and Human Services.
                  ``(C) Any other Federal agency that either 
                administers or provides payment for the delivery of 
                health care services, including, but not limited to the 
                Department of Defense and the Veterans' Administration.
                  ``(D) State law enforcement agencies.
                  ``(E) State medicaid fraud control units.
                  ``(F) Federal or State agencies responsible for the 
                licensing and certification of health care providers 
                and licensed health care practitioners.
          ``(4) Health plan.--The term `health plan' has the meaning 
        given such term by section 1128C(c).
          ``(5) Determination of conviction.--For purposes of paragraph 
        (1), the existence of a conviction shall be determined under 
        paragraph (4) of section 1128(i).''.
  (b) Improved Prevention in Issuance of Medicare Provider Numbers.--
Section 1842(r) (42 U.S.C. 1395u(r)) is amended by adding at the end 
the following new sentence: ``Under such system, the Secretary may 
impose appropriate fees on such physicians to cover the costs of 
investigation and recertification activities with respect to the 
issuance of the identifiers.''.

                  Subtitle D--Civil Monetary Penalties

SEC. 231. SOCIAL SECURITY ACT CIVIL MONETARY PENALTIES.

  (a) General Civil Monetary Penalties.--Section 1128A (42 U.S.C. 
1320a-7a) is amended as follows:
          (1) In the third sentence of subsection (a), by striking 
        ``programs under title XVIII'' and inserting ``Federal health 
        care programs (as defined in section 1128B(f)(1))''.
          (2) In subsection (f)--
                  (A) by redesignating paragraph (3) as paragraph (4); 
                and
                  (B) by inserting after paragraph (2) the following 
                new paragraph:
          ``(3) With respect to amounts recovered arising out of a 
        claim under a Federal health care program (as defined in 
        section 1128B(f)), the portion of such amounts as is determined 
        to have been paid by the program shall be repaid to the 
        program, and the portion of such amounts attributable to the 
        amounts recovered under this section by reason of the 
        amendments made by the Health Coverage Availability and 
        Affordability Act of 1996 (as estimated by the Secretary) shall 
        be deposited into the Federal Hospital Insurance Trust Fund 
        pursuant to section 1817(k)(2)(C).''.
          (3) In subsection (i)--
                  (A) in paragraph (2), by striking ``title V, XVIII, 
                XIX, or XX of this Act'' and inserting ``a Federal 
                health care program (as defined in section 1128B(f))'',
                  (B) in paragraph (4), by striking ``a health 
                insurance or medical services program under title XVIII 
                or XIX of this Act'' and inserting ``a Federal health 
                care program (as so defined)'', and
                  (C) in paragraph (5), by striking ``title V, XVIII, 
                XIX, or XX'' and inserting ``a Federal health care 
                program (as so defined)''.
          (4) By adding at the end the following new subsection:
  ``(m)(1) For purposes of this section, with respect to a Federal 
health care program not contained in this Act, references to the 
Secretary in this section shall be deemed to be references to the 
Secretary or Administrator of the department or agency with 
jurisdiction over such program and references to the Inspector General 
of the Department of Health and Human Services in this section shall be 
deemed to be references to the Inspector General of the applicable 
department or agency.
  ``(2)(A) The Secretary and Administrator of the departments and 
agencies referred to in paragraph (1) may include in any action 
pursuant to this section, claims within the jurisdiction of other 
Federal departments or agencies as long as the following conditions are 
satisfied:
          ``(i) The case involves primarily claims submitted to the 
        Federal health care programs of the department or agency 
        initiating the action.
          ``(ii) The Secretary or Administrator of the department or 
        agency initiating the action gives notice and an opportunity to 
        participate in the investigation to the Inspector General of 
        the department or agency with primary jurisdiction over the 
        Federal health care programs to which the claims were 
        submitted.
  ``(B) If the conditions specified in subparagraph (A) are fulfilled, 
the Inspector General of the department or agency initiating the action 
is authorized to exercise all powers granted under the Inspector 
General Act of 1978 with respect to the claims submitted to the other 
departments or agencies to the same manner and extent as provided in 
that Act with respect to claims submitted to such departments or 
agencies.''.
  (b) Excluded Individual Retaining Ownership or Control Interest in 
Participating Entity.--Section 1128A(a) (42 U.S.C. 1320a-7a(a)) is 
amended--
          (1) by striking ``or'' at the end of paragraph (1)(D);
          (2) by striking ``, or'' at the end of paragraph (2) and 
        inserting a semicolon;
          (3) by striking the semicolon at the end of paragraph (3) and 
        inserting ``; or''; and
          (4) by inserting after paragraph (3) the following new 
        paragraph:
          ``(4) in the case of a person who is not an organization, 
        agency, or other entity, is excluded from participating in a 
        program under title XVIII or a State health care program in 
        accordance with this subsection or under section 1128 and who, 
        at the time of a violation of this subsection--
                  ``(A) retains a direct or indirect ownership or 
                control interest in an entity that is participating in 
                a program under title XVIII or a State health care 
                program, and who knows or should know of the action 
                constituting the basis for the exclusion; or
                  ``(B) is an officer or managing employee (as defined 
                in section 1126(b)) of such an entity;''.
  (c) Modifications of Amounts of Penalties and Assessments.--Section 
1128A(a) (42 U.S.C. 1320a-7a(a)), as amended by subsection (b), is 
amended in the matter following paragraph (4)--
          (1) by striking ``$2,000'' and inserting ``$10,000'';
          (2) by inserting ``; in cases under paragraph (4), $10,000 
        for each day the prohibited relationship occurs'' after ``false 
        or misleading information was given''; and
          (3) by striking ``twice the amount'' and inserting ``3 times 
        the amount''.
  (d) Claim for Item or Service Based on Incorrect Coding or Medically 
Unnecessary Services.--Section 1128A(a)(1) (42 U.S.C. 1320a-7a(a)(1)) 
is amended--
          (1) in subparagraph (A) by striking ``claimed,'' and 
        inserting ``claimed, including any person who engages in a 
        pattern or practice of presenting or causing to be presented a 
        claim for an item or service that is based on a code that the 
        person knows or should know will result in a greater payment to 
        the person than the code the person knows or should know is 
        applicable to the item or service actually provided,'';
          (2) in subparagraph (C), by striking ``or'' at the end; and
          (3) by inserting after subparagraph (D) the following new 
        subparagraph:
                  ``(E) is for a medical or other item or service that 
                a person knows or should know is not medically 
                necessary; or''.
  (e) Sanctions Against Practitioners and Persons for Failure To Comply 
With Statutory Obligations.--Section 1156(b)(3) (42 U.S.C. 1320c-
5(b)(3)) is amended by striking ``the actual or estimated cost'' and 
inserting ``up to $10,000 for each instance''.
  (f) Procedural Provisions.--Section 1876(i)(6) (42 U.S.C. 
1395mm(i)(6)), as amended by section 215(a)(2), is amended by adding at 
the end the following new subparagraph:
  ``(D) The provisions of section 1128A (other than subsections (a) and 
(b)) shall apply to a civil money penalty under subparagraph (B)(i) or 
(C)(i) in the same manner as such provisions apply to a civil money 
penalty or proceeding under section 1128A(a).''.
  (g) Prohibition Against Offering Inducements to Individuals Enrolled 
Under Programs or Plans.--
          (1) Offer of remuneration.--Section 1128A(a) (42 U.S.C. 
        1320a-7a(a)), as amended by subsection (b), is amended--
                  (A) by striking ``or'' at the end of paragraph (3);
                  (B) by striking the semicolon at the end of paragraph 
                (4) and inserting ``; or''; and
                  (D) by inserting after paragraph (4) the following 
                new paragraph:
          ``(5) offers to or transfers remuneration to any individual 
        eligible for benefits under title XVIII of this Act, or under a 
        State health care program (as defined in section 1128(h)) that 
        such person knows or should know is likely to influence such 
        individual to order or receive from a particular provider, 
        practitioner, or supplier any item or service for which payment 
        may be made, in whole or in part, under title XVIII, or a State 
        health care program (as so defined);''.
          (2) Remuneration defined.--Section 1128A(i) (42 U.S.C. 1320a-
        7a(i)) is amended by adding at the end the following new 
        paragraph:
          ``(6) The term `remuneration' includes the waiver of 
        coinsurance and deductible amounts (or any part thereof), and 
        transfers of items or services for free or for other than fair 
        market value. The term `remuneration' does not include--
                  ``(A) the waiver of coinsurance and deductible 
                amounts by a person, if--
                          ``(i) the waiver is not offered as part of 
                        any advertisement or solicitation;
                          ``(ii) the person does not routinely waive 
                        coinsurance or deductible amounts; and
                          ``(iii) the person--
                                  ``(I) waives the coinsurance and 
                                deductible amounts after determining in 
                                good faith that the individual is in 
                                financial need;
                                  ``(II) fails to collect coinsurance 
                                or deductible amounts after making 
                                reasonable collection efforts; or
                                  ``(III) provides for any permissible 
                                waiver as specified in section 
                                1128B(b)(3) or in regulations issued by 
                                the Secretary;
                  ``(B) differentials in coinsurance and deductible 
                amounts as part of a benefit plan design as long as the 
                differentials have been disclosed in writing to all 
                beneficiaries, third party payers, and providers, to 
                whom claims are presented and as long as the 
                differentials meet the standards as defined in 
                regulations promulgated by the Secretary not later than 
                180 days after the date of the enactment of the Health 
                Coverage Availability and Affordability Act of 1996; or
                  ``(C) incentives given to individuals to promote the 
                delivery of preventive care as determined by the 
                Secretary in regulations so promulgated.''.
  (h) Effective Date.--The amendments made by this section shall take 
effect January 1, 1997.

SEC. 232. CLARIFICATION OF LEVEL OF INTENT REQUIRED FOR IMPOSITION OF 
                    SANCTIONS.

  (a) Clarification of Level of Knowledge Required for Imposition of 
Civil Monetary Penalties.--
          (1) In general.--Section 1128A(a) (42 U.S.C. 1320a-7a(a)) is 
        amended--
                  (A) in paragraphs (1) and (2), by inserting 
                ``knowingly'' before ``presents'' each place it 
                appears; and
                  (B) in paragraph (3), by striking ``gives'' and 
                inserting ``knowingly gives or causes to be given''.
          (2) Definition of standard.--Section 1128A(i) (42 U.S.C. 
        1320a-7a(i)), as amended by section 231(g)(2), is amended by 
        adding at the end the following new paragraph:
          ``(7) The term `should know' means that a person, with 
        respect to information--
                  ``(A) acts in deliberate ignorance of the truth or 
                falsity of the information; or
                  ``(B) acts in reckless disregard of the truth or 
                falsity of the information,
        and no proof of specific intent to defraud is required.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to acts or omissions occurring on or after January 1, 1997.

SEC. 233. PENALTY FOR FALSE CERTIFICATION FOR HOME HEALTH SERVICES.

  (a) In General.--Section 1128A(b) (42 U.S.C. 1320a-7a(b)) is amended 
by adding at the end the following new paragraph:
  ``(3)(A) Any physician who executes a document described in 
subparagraph (B) with respect to an individual knowing that all of the 
requirements referred to in such subparagraph are not met with respect 
to the individual shall be subject to a civil monetary penalty of not 
more than the greater of--
          ``(i) $5,000, or
          ``(ii) three times the amount of the payments under title 
        XVIII for home health services which are made pursuant to such 
        certification.
  ``(B) A document described in this subparagraph is any document that 
certifies, for purposes of title XVIII, that an individual meets the 
requirements of section 1814(a)(2)(C) or 1835(a)(2)(A) in the case of 
home health services furnished to the individual.''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to certifications made on or after the date of the enactment of this 
Act.

                 Subtitle E--Revisions to Criminal Law

SEC. 241. DEFINITION OF FEDERAL HEALTH CARE OFFENSE.

  (a) In General.--Chapter 1 of title 18, United States Code, is 
amended by adding at the end the following:

``Sec. 24. Definition of Federal health care offense

  ``(a) As used in this title, the term `Federal health care offense' 
means a violation of, or a criminal conspiracy to violate--
          ``(1) section 669, 1035, or 1347 of this title; or
          ``(2) section 287, 371, 664, 666, 1001, 1027, 1341, 1343, or 
        1954 of this title, if the violation or conspiracy relates to a 
        health care benefit program.
  ``(b) As used in this title, the term `health care benefit program' 
has the meaning given such term in section 1347(b) of this title.''.
  (b) Clerical Amendment.--The table of sections at the beginning of 
chapter 2 of title 18, United States Code, is amended by inserting 
after the item relating to section 23 the following new item:

``24. Definition of Federal health care offense.''.

SEC. 242. HEALTH CARE FRAUD.

  (a) Offense.--
          (1) In general.--Chapter 63 of title 18, United States Code, 
        is amended by adding at the end the following:

``Sec. 1347. Health care fraud

  ``(a) Whoever knowingly executes, or attempts to execute, a scheme or 
artifice--
          ``(1) to defraud any health care benefit program; or
          ``(2) to obtain, by means of false or fraudulent pretenses, 
        representations, or promises, any of the money or property 
        owned by, or under the custody or control of, any health care 
        benefit program,
in connection with the delivery of or payment for health care benefits, 
items, or services, shall be fined under this title or imprisoned not 
more than 10 years, or both. If the violation results in serious bodily 
injury (as defined in section 1365 of this title), such person shall be 
fined under this title or imprisoned not more than 20 years, or both; 
and if the violation results in death, such person shall be fined under 
this title, or imprisoned for any term of years or for life, or both.
  ``(b) As used in this section, the term `health care benefit program' 
means any public or private plan or contract, affecting commerce, under 
which any medical benefit, item, or service is provided to any 
individual, and includes any individual or entity who is providing a 
medical benefit, item, or service for which payment may be made under 
the plan or contract.''.
          (2) Clerical amendment.--The table of sections at the 
        beginning of chapter 63 of title 18, United States Code, is 
        amended by adding at the end the following:

``1347. Health care fraud.''.

  (b) Criminal Fines Deposited in Federal Hospital Insurance Trust 
Fund.--The Secretary of the Treasury shall deposit into the Federal 
Hospital Insurance Trust Fund pursuant to section 1817(k)(2)(C) of the 
Social Security Act (42 U.S.C. 1395i) an amount equal to the criminal 
fines imposed under section 1347 of title 18, United States Code 
(relating to health care fraud).

SEC. 243. THEFT OR EMBEZZLEMENT.

  (a) In General.--Chapter 31 of title 18, United States Code, is 
amended by adding at the end the following:

``Sec. 669. Theft or embezzlement in connection with health care

  ``(a) Whoever embezzles, steals, or otherwise without authority 
willfully and unlawfully converts to the use of any person other than 
the rightful owner, or intentionally misapplies any of the moneys, 
funds, securities, premiums, credits, property, or other assets of a 
health care benefit program, shall be fined under this title or 
imprisoned not more than 10 years, or both; but if the value of such 
property does not exceed the sum of $100 the defendant shall be fined 
under this title or imprisoned not more than one year, or both.
  ``(b) As used in this section, the term `health care benefit program' 
has the meaning given such term in section 1347(b) of this title.''.
  (b) Clerical Amendment.--The table of sections at the beginning of 
chapter 31 of title 18, United States Code, is amended by adding at the 
end the following:

``669. Theft or embezzlement in connection with health care.''.

SEC. 244. FALSE STATEMENTS.

  (a) In General.--Chapter 47 of title 18, United States Code, is 
amended by adding at the end the following:

``Sec. 1035. False statements relating to health care matters

  ``(a) Whoever, in any matter involving a health care benefit program, 
knowingly--
          ``(1) falsifies, conceals, or covers up by any trick, scheme, 
        or device a material fact; or
          ``(2) makes any false, fictitious, or fraudulent statements 
        or representations, or makes or uses any false writing or 
        document knowing the same to contain any false, fictitious, or 
        fraudulent statement or entry,
in connection with the delivery of or payment for health care benefits, 
items, or services, shall be fined under this title or imprisoned not 
more than 5 years, or both.
  ``(b) As used in this section, the term `health care benefit program' 
has the meaning given such term in section 1347(b) of this title.''.
  (b) Clerical Amendment.--The table of sections at the beginning of 
chapter 47 of title 18, United States Code, is amended by adding at the 
end the following new item:

``1035. False statements relating to health care matters.''.

SEC. 245. OBSTRUCTION OF CRIMINAL INVESTIGATIONS OF HEALTH CARE 
                    OFFENSES.

  (a) In General.--Chapter 73 of title 18, United States Code, is 
amended by adding at the end the following:

``Sec. 1518. Obstruction of criminal investigations of health care 
                    offenses

  ``(a) Whoever willfully prevents, obstructs, misleads, delays or 
attempts to prevent, obstruct, mislead, or delay the communication of 
information or records relating to a violation of a Federal health care 
offense to a criminal investigator shall be fined under this title or 
imprisoned not more than 5 years, or both.
  ``(b) As used in this section the term `criminal investigator' means 
any individual duly authorized by a department, agency, or armed force 
of the United States to conduct or engage in investigations for 
prosecutions for violations of health care offenses.''.
  (b) Clerical Amendment.--The table of sections at the beginning of 
chapter 73 of title 18, United States Code, is amended by adding at the 
end the following new item:

``1518. Obstruction of criminal investigations of health care 
offenses.''.

SEC. 246. LAUNDERING OF MONETARY INSTRUMENTS.

  Section 1956(c)(7) of title 18, United States Code, is amended by 
adding at the end the following:
                  ``(F) Any act or activity constituting an offense 
                involving a Federal health care offense.''.

SEC. 247. INJUNCTIVE RELIEF RELATING TO HEALTH CARE OFFENSES.

  (a) In General.--Section 1345(a)(1) of title 18, United States Code, 
is amended--
          (1) by striking ``or'' at the end of subparagraph (A);
          (2) by inserting ``or'' at the end of subparagraph (B); and
          (3) by adding at the end the following:
          ``(C) committing or about to commit a Federal health care 
        offense.''.
  (b) Freezing of Assets.--Section 1345(a)(2) of title 18, United 
States Code, is amended by inserting ``or a Federal health care 
offense'' after ``title).''.

SEC. 248. AUTHORIZED INVESTIGATIVE DEMAND PROCEDURES.

  (a) In General.--Chapter 223 of title 18, United States Code, is 
amended by adding after section 3485 the following:

``Sec. 3486. Authorized investigative demand procedures

  ``(a) Authorization.--In any investigation relating to any act or 
activity involving a Federal health care offense, the Attorney General 
or the Attorney General's designee may issue in writing and cause to be 
served a subpoena requiring the production of any records (including 
any books, papers, documents, electronic media, or other objects or 
tangible things), which may be relevant to an authorized law 
enforcement inquiry, that a person or legal entity may possess or have 
care, custody, or control. A subpoena shall describe the objects 
required to be produced and prescribe a return date within a reasonable 
period of time within which the objects can be assembled and made 
available.
  ``(b) Service.--A subpoena issued under this section may be served by 
any person designated in the subpoena to serve it. Service upon a 
natural person may be made by personal delivery of the subpoena to him. 
Service may be made upon a domestic or foreign corporation or upon a 
partnership or other unincorporated association which is subject to 
suit under a common name, by delivering the subpoena to an officer, to 
a managing or general agent, or to any other agent authorized by 
appointment or by law to receive service of process. The affidavit of 
the person serving the subpoena entered on a true copy thereof by the 
person serving it shall be proof of service.
  ``(c) Enforcement.--In the case of contumacy by or refusal to obey a 
subpoena issued to any person, the Attorney General may invoke the aid 
of any court of the United States within the jurisdiction of which the 
investigation is carried on or of which the subpoenaed person is an 
inhabitant, or in which he carries on business or may be found, to 
compel compliance with the subpoena. The court may issue an order 
requiring the subpoenaed person to appear before the Attorney General 
to produce records, if so ordered, or to give testimony touching the 
matter under investigation. Any failure to obey the order of the court 
may be punished by the court as a contempt thereof. All process in any 
such case may be served in any judicial district in which such person 
may be found.
  ``(d) Immunity From Civil Liability.--Notwithstanding any Federal, 
State, or local law, any person, including officers, agents, and 
employees, receiving a summons under this section, who complies in good 
faith with the summons and thus produces the materials sought, shall 
not be liable in any court of any State or the United States to any 
customer or other person for such production or for nondisclosure of 
that production to the customer.
  ``(e) Limitation on Use.--(1) Health information about an individual 
that is disclosed under this section may not be used in, or disclosed 
to any person for use in, any administrative, civil, or criminal action 
or investigation directed against the individual who is the subject of 
the information unless the action or investigation arises out of and is 
directly related to receipt of health care or payment for health care 
or action involving a fraudulent claim related to health; or if 
authorized by an appropriate order of a court of competent 
jurisdiction, granted after application showing good cause therefor.
  ``(2) In assessing good cause, the court shall weigh the public 
interest and the need for disclosure against the injury to the patient, 
to the physician-patient relationship, and to the treatment services.
  ``(3) Upon the granting of such order, the court, in determining the 
extent to which any disclosure of all or any part of any record is 
necessary, shall impose appropriate safeguards against unauthorized 
disclosure.''.
  (b) Clerical Amendment.--The table of sections at the beginning of 
chapter 223 of title 18, United States Code, is amended by inserting 
after the item relating to section 3485 the following new item:

``3486. Authorized investigative demand procedures.''.

  (c) Conforming Amendment.--Section 1510(b)(3)(B) of title 18, United 
States Code, is amended by inserting ``or a Department of Justice 
subpoena (issued under section 3486 of title 18),'' after ``subpoena''.

SEC. 249. FORFEITURES FOR FEDERAL HEALTH CARE OFFENSES.

  (a) In General.--Section 982(a) of title 18, United States Code, is 
amended by adding after paragraph (5) the following new paragraph:
  ``(6) The court, in imposing sentence on a person convicted of a 
Federal health care offense, shall order the person to forfeit 
property, real or personal, that constitutes or is derived, directly or 
indirectly, from gross proceeds traceable to the commission of the 
offense.''.
  (b) Conforming Amendment.--Section 982(b)(1)(A) of title 18, United 
States Code, is amended by inserting ``or (a)(6)'' after ``(a)(1)''.
  (c) Property Forfeited Deposited in Federal Hospital Insurance Trust 
Fund.--
          (1) In general.--After the payment of the costs of asset 
        forfeiture has been made, and notwithstanding any other 
        provision of law, the Secretary of the Treasury shall deposit 
        into the Federal Hospital Insurance Trust Fund pursuant to 
        section 1817(k)(2)(C) of the Social Security Act, as added by 
        section 301(b), an amount equal to the net amount realized from 
        the forfeiture of property by reason of a Federal health care 
        offense pursuant to section 982(a)(6) of title 18, United 
        States Code.
          (2) Costs of asset forfeiture.--For purposes of paragraph 
        (1), the term ``payment of the costs of asset forfeiture'' 
        means--
                  (A) the payment, at the discretion of the Attorney 
                General, of any expenses necessary to seize, detain, 
                inventory, safeguard, maintain, advertise, sell, or 
                dispose of property under seizure, detention, or 
                forfeited, or of any other necessary expenses incident 
                to the seizure, detention, forfeiture, or disposal of 
                such property, including payment for--
                          (i) contract services,
                          (ii) the employment of outside contractors to 
                        operate and manage properties or provide other 
                        specialized services necessary to dispose of 
                        such properties in an effort to maximize the 
                        return from such properties; and
                          (iii) reimbursement of any Federal, State, or 
                        local agency for any expenditures made to 
                        perform the functions described in this 
                        subparagraph;
                  (B) at the discretion of the Attorney General, the 
                payment of awards for information or assistance leading 
                to a civil or criminal forfeiture involving any Federal 
                agency participating in the Health Care Fraud and Abuse 
                Control Account;
                  (C) the compromise and payment of valid liens and 
                mortgages against property that has been forfeited, 
                subject to the discretion of the Attorney General to 
                determine the validity of any such lien or mortgage and 
                the amount of payment to be made, and the employment of 
                attorneys and other personnel skilled in State real 
                estate law as necessary;
                  (D) payment authorized in connection with remission 
                or mitigation procedures relating to property 
                forfeited; and
                  (E) the payment of State and local property taxes on 
                forfeited real property that accrued between the date 
                of the violation giving rise to the forfeiture and the 
                date of the forfeiture order.

               Subtitle F--Administrative Simplification

             PART 1--GENERAL ADMINISTRATIVE SIMPLIFICATION

SEC. 251. PURPOSE.

  It is the purpose of this part to improve the medicare program under 
title XVIII of the Social Security Act, the medicaid program under 
title XIX of such Act, and the efficiency and effectiveness of the 
health care system, by encouraging the development of a health 
information system through the establishment of standards and 
requirements for the electronic transmission of certain health 
information.

SEC. 252. ADMINISTRATIVE SIMPLIFICATION.

  (a) In General.--Title XI (42 U.S.C. 1301 et seq.) is amended by 
adding at the end the following:

                ``PART C--ADMINISTRATIVE SIMPLIFICATION

``SEC. 1171. DEFINITIONS.

  ``For purposes of this part:
          ``(1) Clearinghouse.--The term `clearinghouse' means a public 
        or private entity that--
                  ``(A) processes or facilitates the processing of 
                nonstandard data elements of health information into 
                standard data elements; or
                  ``(B) provides the means by which persons may meet 
                the requirements of this part.
          ``(2) Code set.--The term `code set' means any set of codes 
        used for encoding data elements, such as tables of terms, 
        medical concepts, medical diagnostic codes, or medical 
        procedure codes.
          ``(3) Health care provider.--The term `health care provider' 
        includes a provider of services (as defined in section 
        1861(u)), a provider of medical or other health services (as 
        defined in section 1861(s)), and any other person furnishing 
        health care services or supplies.
          ``(4) Health information.--The term `health information' 
        means any information, whether oral or recorded in any form or 
        medium that--
                  ``(A) is created or received by a health care 
                provider, health plan, public health authority, 
                employer, life insurer, school or university, or 
                clearinghouse; and
                  ``(B) relates to the past, present, or future 
                physical or mental health or condition of an 
                individual, the provision of health care to an 
                individual, or the past, present, or future payment for 
                the provision of health care to an individual.
          ``(5) Health plan.--The term `health plan' means a plan which 
        provides, or pays the cost of, health benefits. Such term 
        includes the following, or any combination thereof:
                  ``(A) Part A or part B of the medicare program under 
                title XVIII.
                  ``(B) The medicaid program under title XIX.
                  ``(C) A medicare supplemental policy (as defined in 
                section 1882(g)(1)).
                  ``(D) Coverage issued as a supplement to liability 
                insurance.
                  ``(E) General liability insurance.
                  ``(F) Worker's compensation or similar insurance.
                  ``(G) Automobile or automobile medical-payment 
                insurance.
                  ``(H) A long-term care policy, including a nursing 
                home fixed indemnity policy (unless the Secretary 
                determines that such a policy does not provide 
                sufficiently comprehensive coverage of a benefit so 
                that the policy should be treated as a health plan).
                  ``(I) A hospital or fixed indemnity income-protection 
                policy.
                  ``(J) An employee welfare benefit plan, as defined in 
                section 3(1) of the Employee Retirement Income Security 
                Act of 1974 (29 U.S.C. 1002(1)), but only to the extent 
                the plan is established or maintained for the purpose 
                of providing health benefits and has 50 or more 
                participants (as defined in section 3(7) of such Act).
                  ``(K) An employee welfare benefit plan or any other 
                arrangement which is established or maintained for the 
                purpose of offering or providing health benefits to the 
                employees of 2 or more employers.
                  ``(L) The health care program for active military 
                personnel under title 10, United States Code.
                  ``(M) The veterans health care program under chapter 
                17 of title 38, United States Code.
                  ``(N) The Civilian Health and Medical Program of the 
                Uniformed Services (CHAMPUS), as defined in section 
                1073(4) of title 10, United States Code.
                  ``(O) The Indian health service program under the 
                Indian Health Care Improvement Act (25 U.S.C. 1601 et 
                seq.).
                  ``(P) The Federal Employees Health Benefit Plan under 
                chapter 89 of title 5, United States Code.
                  ``(Q) Such other plan or arrangement as the Secretary 
                determines is a health plan.
          ``(6) Individually identifiable health information.--The term 
        `individually identifiable health information' means any 
        information, including demographic information collected from 
        an individual, that--
                  ``(A) is created or received by a health care 
                provider, health plan, employer, or clearinghouse; and
                  ``(B) relates to the past, present, or future 
                physical or mental health or condition of an 
                individual, the provision of health care to an 
                individual, or the past, present, or future payment for 
                the provision of health care to an individual, and--
                          ``(i) identifies the individual; or
                          ``(ii) with respect to which there is a 
                        reasonable basis to believe that the 
                        information can be used to identify the 
                        individual.
          ``(7) Standard.--The term `standard', when used with 
        reference to a data element of health information or a 
        transaction referred to in section 1173(a)(1), means any such 
        data element or transaction that meets each of the standards 
        and implementation specifications adopted or established by the 
        Secretary with respect to the data element or transaction under 
        sections 1172 and 1173.
          ``(8) Standard setting organization.--The term `standard 
        setting organization' means a standard setting organization 
        accredited by the American National Standards Institute, 
        including the National Council for Prescription Drug Programs, 
        that develops standards for information transactions, data 
        elements, or any other standard that is necessary to, or will 
        facilitate, the implementation of this part.

``SEC. 1172. GENERAL REQUIREMENTS FOR ADOPTION OF STANDARDS.

  ``(a) Applicability.--Any standard or modification of a standard 
adopted under this part shall apply to the following persons:
          ``(1) A health plan.
          ``(2) A clearinghouse.
          ``(3) A health care provider who transmits any health 
        information in electronic form in connection with a transaction 
        referred to in section 1173(a)(1).
  ``(b) Reduction of Costs.--Any standard or modification of a standard 
adopted under this part shall be consistent with the objective of 
reducing the administrative costs of providing and paying for health 
care.
  ``(c) Role of Standard Setting Organizations.--
          ``(1) In general.--Except as provided in paragraph (2), any 
        standard or modification of a standard adopted under this part 
        shall be developed or modified by a standard setting 
        organization.
          ``(2) Special rules.--
                  ``(A) Different standards.--The Secretary may adopt a 
                standard or modification of a standard that is 
                different from any standard developed or modified by a 
                standard setting organization, if--
                          ``(i) the different standard or modification 
                        will substantially reduce administrative costs 
                        to health care providers and health plans 
                        compared to the alternatives; and
                          ``(ii) the standard or modification is 
                        promulgated in accordance with the rulemaking 
                        procedures of subchapter III of chapter 5 of 
                        title 5, United States Code.
                  ``(B) No standard by standard setting organization.--
                If no standard setting organization has adopted or 
                modified any standard relating to a standard, or a 
                modification of a standard, that the Secretary is 
                authorized or required to adopt under this part--
                          ``(i) paragraph (1) shall not apply; and
                          ``(ii) subsection (f) shall apply.
  ``(d) Implementation Specifications.--The Secretary shall establish 
specifications for implementing each of the standards and modifications 
adopted under this part.
  ``(e) Protection of Trade Secrets.--Except as otherwise required by 
law, a standard or modification of a standard adopted under this part 
shall not require disclosure of trade secrets or confidential 
commercial information by a person required to comply with this part.
  ``(f) Assistance to the Secretary.--In complying with the 
requirements of this part, the Secretary shall rely on the 
recommendations of the Health Information Advisory Committee 
established under section 1179 and shall consult with appropriate 
Federal and State agencies and private organizations. The Secretary 
shall publish in the Federal Register the recommendations of the Health 
Information Advisory Committee regarding the adoption of a standard or 
modification of a standard under this part.

``SEC. 1173. STANDARDS FOR INFORMATION TRANSACTIONS AND DATA ELEMENTS.

  ``(a) Standards To Enable Electronic Exchange.--
          ``(1) In general.--The Secretary shall adopt standards for 
        transactions, and data elements for such transactions, to 
        enable health information to be exchanged electronically, that 
        are--
                  ``(A) appropriate for the financial and 
                administrative transactions described in paragraph (2); 
                and
                  ``(B) related to other financial and administrative 
                transactions determined appropriate by the Secretary 
                consistent with the goals of improving the operation of 
                the health care system and reducing administrative 
                costs.
          ``(2) Transactions.--The transactions referred to in 
        paragraph (1)(A) are the following:
                  ``(A) Claims (including coordination of benefits) or 
                equivalent encounter information.
                  ``(B) Claims attachments.
                  ``(C) Enrollment and disenrollment.
                  ``(D) Eligibility.
                  ``(E) Health care payment and remittance advice.
                  ``(F) Premium payments.
                  ``(G) First report of injury.
                  ``(H) Claims status.
                  ``(I) Referral certification and authorization.
          ``(3) Accommodation of specific providers.--The standards 
        adopted by the Secretary under paragraph (1) shall accommodate 
        the needs of different types of health care providers.
  ``(b) Unique Health Identifiers.--
          ``(1) In general.--The Secretary shall adopt standards 
        providing for a standard unique health identifier for each 
        individual, employer, health plan, and health care provider for 
        use in the health care system. In carrying out the preceding 
        sentence for each health plan and health care provider, the 
        Secretary shall take into account multiple uses for identifiers 
        and multiple locations and specialty classifications for health 
        care providers.
          ``(2) Use of identifiers.--The standards adopted under 
        paragraphs (1) shall specify the purposes for which a unique 
        health identifier may be used.
  ``(c) Code Sets.--
          ``(1) In general.--The Secretary shall adopt standards that--
                  ``(A) select code sets for appropriate data elements 
                for the transactions referred to in subsection (a)(1) 
                from among the code sets that have been developed by 
                private and public entities; or
                  ``(B) establish code sets for such data elements if 
                no code sets for the data elements have been developed.
          ``(2) Distribution.--The Secretary shall establish efficient 
        and low-cost procedures for distribution (including electronic 
        distribution) of code sets and modifications made to such code 
        sets under section 1174(b).
  ``(d) Security Standards for Health Information.--
          ``(1) Security standards.--The Secretary shall adopt security 
        standards that--
                  ``(A) take into account--
                          ``(i) the technical capabilities of record 
                        systems used to maintain health information;
                          ``(ii) the costs of security measures;
                          ``(iii) the need for training persons who 
                        have access to health information;
                          ``(iv) the value of audit trails in 
                        computerized record systems; and
                          ``(v) the needs and capabilities of small 
                        health care providers and rural health care 
                        providers (as such providers are defined by the 
                        Secretary); and
                  ``(B) ensure that a clearinghouse, if it is part of a 
                larger organization, has policies and security 
                procedures which isolate the activities of the 
                clearinghouse with respect to processing information in 
                a manner that prevents unauthorized access to such 
                information by such larger organization.
          ``(2) Safeguards.--Each person described in section 1172(a) 
        who maintains or transmits health information shall maintain 
        reasonable and appropriate administrative, technical, and 
        physical safeguards--
                  ``(A) to ensure the integrity and confidentiality of 
                the information;
                  ``(B) to protect against any reasonably anticipated--
                          ``(i) threats or hazards to the security or 
                        integrity of the information; and
                          ``(ii) unauthorized uses or disclosures of 
                        the information; and
                  ``(C) otherwise to ensure compliance with this part 
                by the officers and employees of such person.
  ``(e) Privacy Standards for Health Information.--The Secretary shall 
adopt standards with respect to the privacy of individually 
identifiable health information. Such standards shall include standards 
concerning at least the following:
          ``(1) The rights of an individual who is a subject of such 
        information.
          ``(2) The procedures to be established for the exercise of 
        such rights.
          ``(3) The uses and disclosures of such information that are 
        authorized or required.
  ``(f) Electronic Signature.--
          ``(1) In general.--The Secretary, in coordination with the 
        Secretary of Commerce, shall adopt standards specifying 
        procedures for the electronic transmission and authentication 
        of signatures, compliance with which shall be deemed to satisfy 
        Federal and State statutory requirements for written signatures 
        with respect to the transactions referred to in subsection 
        (a)(1).
          ``(2) Payments for services and premiums.--Nothing in this 
        part shall be construed to prohibit payment for health care 
        services or health plan premiums by debit, credit, payment card 
        or numbers, or other electronic means.
  ``(g) Transfer of Information Between Health Plans.--The Secretary 
shall adopt standards for transferring among health plans appropriate 
standard data elements needed for the coordination of benefits, the 
sequential processing of claims, and other data elements for 
individuals who have more than one health plan.

``SEC. 1174. TIMETABLES FOR ADOPTION OF STANDARDS.

  ``(a) Initial Standards.--The Secretary shall carry out section 1173 
not later than 18 months after the date of the enactment of this part, 
except that standards relating to claims attachments shall be adopted 
not later than 30 months after such date.
  ``(b) Additions and Modifications to Standards.--
          ``(1) In general.--Except as provided in paragraph (2), the 
        Secretary shall review the standards adopted under section 
        1173, and shall adopt additional or modified standards, as 
        determined appropriate, but not more frequently than once every 
        6 months. Any addition or modification to a standard shall be 
        completed in a manner which minimizes the disruption and cost 
        of compliance.
          ``(2) Special rules.--
                  ``(A) First 12-month period.--Except with respect to 
                additions and modifications to code sets under 
                subparagraph (B), the Secretary may not adopt any 
                modification to a standard adopted under this part 
                during the 12-month period beginning on the date the 
                standard is initially adopted, unless the Secretary 
                determines that the modification is necessary in order 
                to permit compliance with the standard.
                  ``(B) Additions and modifications to code sets.--
                          ``(i) In general.--The Secretary shall ensure 
                        that procedures exist for the routine 
                        maintenance, testing, enhancement, and 
                        expansion of code sets.
                          ``(ii) Additional rules.--If a code set is 
                        modified under this subsection, the modified 
                        code set shall include instructions on how data 
                        elements of health information that were 
                        encoded prior to the modification may be 
                        converted or translated so as to preserve the 
                        informational value of the data elements that 
                        existed before the modification. Any 
                        modification to a code set under this 
                        subsection shall be implemented in a manner 
                        that minimizes the disruption and cost of 
                        complying with such modification.

``SEC. 1175. REQUIREMENTS.

  ``(a) Conduct of Transactions by Plans.--
          ``(1) In general.--If a person desires to conduct a 
        transaction referred to in section 1173(a)(1) with a health 
        plan as a standard transaction--
                  ``(A) the health plan may not refuse to conduct such 
                transaction as a standard transaction;
                  ``(B) the health plan may not delay such transaction, 
                or otherwise adversely affect, or attempt to adversely 
                affect, the person or the transaction on the ground 
                that the transaction is a standard transaction; and
                  ``(C) the information transmitted and received in 
                connection with the transaction shall be in the form of 
                standard data elements of health information.
          ``(2) Satisfaction of requirements.--A health plan may 
        satisfy the requirements under paragraph (1) by--
                  ``(A) directly transmitting and receiving standard 
                data elements of health information; or
                  ``(B) submitting nonstandard data elements to a 
                clearinghouse for processing into standard data 
                elements and transmission by the clearinghouse, and 
                receiving standard data elements through the 
                clearinghouse.
          ``(3) Timetable for compliance.--Paragraph (1) shall not be 
        construed to require a health plan to comply with any standard, 
        implementation specification, or modification to a standard or 
        specification adopted or established by the Secretary under 
        sections 1172 and 1173 at any time prior to the date on which 
        the plan is required to comply with the standard or 
        specification under subsection (b).
  ``(b) Compliance With Standards.--
          ``(1) Initial compliance.--
                  ``(A) In general.--Not later than 24 months after the 
                date on which an initial standard or implementation 
                specification is adopted or established under sections 
                1172 and 1173, each person to whom the standard or 
                implementation specification applies shall comply with 
                the standard or specification.
                  ``(B) Special rule for small health plans.--In the 
                case of a small health plan, paragraph (1) shall be 
                applied by substituting `36 months' for `24 months'. 
                For purposes of this subsection, the Secretary shall 
                determine the plans that qualify as small health plans.
          ``(2) Compliance with modified standards.--If the Secretary 
        adopts a modification to a standard or implementation 
        specification under this part, each person to whom the standard 
        or implementation specification applies shall comply with the 
        modified standard or implementation specification at such time 
        as the Secretary determines appropriate, taking into account 
        the time needed to comply due to the nature and extent of the 
        modification. The time determined appropriate under the 
        preceding sentence may not be earlier than the last day of the 
        180-day period beginning on the date such modification is 
        adopted. The Secretary may extend the time for compliance for 
        small health plans, if the Secretary determines that such 
        extension is appropriate.

``SEC. 1176. GENERAL PENALTY FOR FAILURE TO COMPLY WITH REQUIREMENTS 
                    AND STANDARDS.

  ``(a) General Penalty.--
          ``(1) In general.--Except as provided in subsection (b), the 
        Secretary shall impose on any person who violates a provision 
        of this part a penalty of not more than $100 for each such 
        violation, except that the total amount imposed on the person 
        for all violations of an identical requirement or prohibition 
        during a calendar year may not exceed $25,000.
          ``(2) Procedures.--The provisions of section 1128A (other 
        than subsections (a) and (b) and the second sentence of 
        subsection (f)) shall apply to the imposition of a civil money 
        penalty under this subsection in the same manner as such 
        provisions apply to the imposition of a penalty under such 
        section 1128A.
  ``(b) Limitations.--
          ``(1) Offenses otherwise punishable.--A penalty may not be 
        imposed under subsection (a) with respect to an act if the act 
        constitutes an offense punishable under section 1177.
          ``(2) Noncompliance not discovered.--A penalty may not be 
        imposed under subsection (a) with respect to a provision of 
        this part if it is established to the satisfaction of the 
        Secretary that the person liable for the penalty did not know, 
        and by exercising reasonable diligence would not have known, 
        that such person violated the provision.
          ``(3) Failures due to reasonable cause.--
                  ``(A) In general.--Except as provided in subparagraph 
                (B), a penalty may not be imposed under subsection (a) 
                if--
                          ``(i) the failure to comply was due to 
                        reasonable cause and not to willful neglect; 
                        and
                          ``(ii) the failure to comply is corrected 
                        during the 30-day period beginning on the first 
                        date the person liable for the penalty knew, or 
                        by exercising reasonable diligence would have 
                        known, that the failure to comply occurred.
                  ``(B) Extension of period.--
                          ``(i) No penalty.--The period referred to in 
                        subparagraph (A)(ii) may be extended as 
                        determined appropriate by the Secretary based 
                        on the nature and extent of the failure to 
                        comply.
                          ``(ii) Assistance.--If the Secretary 
                        determines that a person failed to comply 
                        because the person was unable to comply, the 
                        Secretary may provide technical assistance to 
                        the person during the period described in 
                        subparagraph (A)(ii). Such assistance shall be 
                        provided in any manner determined appropriate 
                        by the Secretary.
          ``(4) Reduction.--In the case of a failure to comply which is 
        due to reasonable cause and not to willful neglect, any penalty 
        under subsection (a) that is not entirely waived under 
        paragraph (3) may be waived to the extent that the payment of 
        such penalty would be excessive relative to the compliance 
        failure involved.

``SEC. 1177. WRONGFUL DISCLOSURE OF INDIVIDUALLY IDENTIFIABLE HEALTH 
                    INFORMATION.

  ``(a) Offense.--A person who knowingly and in violation of this 
part--
          ``(1) uses or causes to be used a unique health identifier;
          ``(2) obtains individually identifiable health information 
        relating to an individual; or
          ``(3) discloses individually identifiable health information 
        to another person,
shall be punished as provided in subsection (b).
  ``(b) Penalties.--A person described in subsection (a) shall--
          ``(1) be fined not more than $50,000, imprisoned not more 
        than 1 year, or both;
          ``(2) if the offense is committed under false pretenses, be 
        fined not more than $100,000, imprisoned not more than 5 years, 
        or both; and
          ``(3) if the offense is committed with intent to sell, 
        transfer, or use individually identifiable health information 
        for commercial advantage, personal gain, or malicious harm, 
        fined not more than $250,000, imprisoned not more than 10 
        years, or both.

``SEC. 1178. EFFECT ON STATE LAW.

  ``(a) General Effect.--
          ``(1) General rule.--Except as provided in paragraph (2), a 
        provision or requirement under this part, or a standard or 
        implementation specification adopted or established under 
        sections 1172 and 1173, shall supersede any contrary provision 
        of State law, including a provision of State law that requires 
        medical or health plan records (including billing information) 
        to be maintained or transmitted in written rather than 
        electronic form.
          ``(2) Exceptions.--A provision or requirement under this 
        part, or a standard or implementation specification adopted or 
        established under sections 1172 and 1173, shall not supersede a 
        contrary provision of State law, if the provision of State 
        law--
                  ``(A) imposes requirements, standards, or 
                implementation specifications that are more stringent 
                than the requirements, standards, or implementation 
                specifications under this part with respect to the 
                privacy of individually identifiable health 
                information; or
                  ``(B) is a provision the Secretary determines--
                          ``(i) is necessary to prevent fraud and 
                        abuse, or for other purposes; or
                          ``(ii) addresses controlled substances.
  ``(b) Public Health Reporting.--Nothing in this part shall be 
construed to invalidate or limit the authority, power, or procedures 
established under any law providing for the reporting of disease or 
injury, child abuse, birth, or death, public health surveillance, or 
public health investigation or intervention.

``SEC. 1179. HEALTH INFORMATION ADVISORY COMMITTEE.

  ``(a) Establishment.--There is established a committee to be known as 
the Health Information Advisory Committee (in this section referred to 
as the `committee').
  ``(b) Duties.--The committee shall--
          ``(1) provide assistance to the Secretary in complying with 
        the requirements imposed on the Secretary under this part;
          ``(2) study the issues related to the adoption of uniform 
        data standards for patient medical record information and the 
        electronic exchange of such information;
          ``(3) report to the Secretary not later than 4 years after 
        the date of the enactment of this part recommendations and 
        legislative proposals for such standards and electronic 
        exchange; and
          ``(4) generally be responsible for advising the Secretary and 
        the Congress on the status of the implementation of this part.
  ``(c) Membership.--
          ``(1) In general.--The committee shall consist of 15 members 
        of whom--
                  ``(A) 3 shall be appointed by the President;
                  ``(B) 6 shall be appointed by the Speaker of the 
                House of Representatives after consultation with the 
                minority leader of the House of Representatives; and
                  ``(C) 6 shall be appointed by the President pro 
                tempore of the Senate after consultation with the 
                minority leader of the Senate.
        The appointments of the members shall be made not later than 60 
        days after the date of the enactment of this part. The 
        President shall designate 1 member as the Chair.
          ``(2) Expertise.--The membership of the committee shall 
        consist of individuals who are of recognized standing and 
        distinction in the areas of information systems, information 
        networking and integration, consumer health, health care 
        financial management, or privacy, and who possess the 
        demonstrated capacity to discharge the duties imposed on the 
        committee.
          ``(3) Terms.--Each member of the committee shall be appointed 
        for a term of 5 years, except that the members first appointed 
        shall serve staggered terms such that the terms of not more 
        than 3 members expire at one time.
          ``(4) Initial meeting.--Not later than 30 days after the date 
        on which a majority of the members have been appointed, the 
        committee shall hold its first meeting.
  ``(d) Reports.--Not later than 1 year after the date of the enactment 
of this part, and annually thereafter, the committee shall submit to 
the Congress, and make public, a report regarding--
          ``(1) the extent to which persons required to comply with 
        this part are cooperating in implementing the standards adopted 
        under this part;
          ``(2) the extent to which such entities are meeting the 
        privacy and security standards adopted under this part and the 
        types of penalties assessed for noncompliance with such 
        standards;
          ``(3) whether the Federal and State Governments are receiving 
        information of sufficient quality to meet their 
        responsibilities under this part;
          ``(4) any problems that exist with respect to implementation 
        of this part; and
          ``(5) the extent to which timetables under this part are 
        being met.''.
  (b) Conforming Amendments.--
          (1) Requirement for medicare providers.--Section 1866(a)(1) 
        (42 U.S.C. 1395cc(a)(1)) is amended--
                  (A) by striking ``and'' at the end of subparagraph 
                (P);
                  (B) by striking the period at the end of subparagraph 
                (Q) and inserting ``; and''; and
                  (C) by inserting immediately after subparagraph (Q) 
                the following new subparagraph:
          ``(R) to contract only with a clearinghouse (as defined in 
        section 1171) that meets each standard and implementation 
        specification adopted or established under sections 1172 and 
        1173 on or after the date on which the clearinghouse is 
        required to comply with the standard or specification.''.
          (2) Title heading.--Title XI (42 U.S.C. 1301 et seq.) is 
        amended by striking the title heading and inserting the 
        following:

    ``TITLE XI--GENERAL PROVISIONS, PEER REVIEW, AND ADMINISTRATIVE 
                           SIMPLIFICATION''.

     PART 2--ADMINISTRATIVE SIMPLIFICATION FOR LABORATORY SERVICES

SEC. 261. ADMINISTRATIVE SIMPLIFICATION FOR LABORATORY SERVICES.

  (a) In General.--Not later than 1 year after the date of the 
enactment of this Act, the Secretary of Health and Human Services (in 
accordance with the process described in subsection (b)) shall adopt 
uniform coverage, administration, and payment policies for clinical 
diagnostic laboratory tests under part B of the medicare program.
  (b) Process for Adoption of Policies.--The Secretary shall adopt 
uniform policies under subsection (a) in accordance with the following 
process:
          (1) The Secretary shall select from carriers with whom the 
        Secretary has a contract under part B during 1996 15 medical 
        directors, who will meet and develop recommendations for such 
        uniform policies. The medical directors selected shall 
        represent various geographic areas and have a varied range of 
        experience in relevant medical fields, including pathology and 
        clinical laboratory practice.
          (2) The medical directors selected under paragraph (1) shall 
        consult with independent experts in each major discipline of 
        clinical laboratory medicine including clinical laboratory 
        personnel, bioanalysts, pathologists, and practicing 
        physicians. The medical directors shall also solicit comments 
        from other individuals and groups who wish to participate, 
        including consumers and other affected parties. This process 
        shall be conducted as a negotiated rulemaking under title 5, 
        United States Code.
          (3) Under the negotiated rulemaking, the recommendations for 
        uniform policies shall be designed to simplify and reduce 
        unnecessary administrative burdens in connection with the 
        following:
                  (A) Beneficiary information required to be submitted 
                with each claim.
                  (B) Physicians' obligations regarding documentation 
                requirements and recordkeeping.
                  (C) Procedures for filing claims and for providing 
                remittances by electronic media.
                  (D) The performance of post-payment review of test 
                claims.
                  (E) The prohibition of the documentation of medical 
                necessity except when determined to be appropriate 
                after identification of aberrant utilization pattern 
                through focused medical review.
                  (F) Beneficiary responsibility for payment.
          (4) During the pendency of the adoption by the Secretary of 
        the uniform policies, fiscal intermediaries and carriers under 
        the Medicare program may not implement any new requirement 
        relating to the submission of a claim for clinical diagnostic 
        laboratory tests retroactive to January 1, 1996, and carriers 
        may not initiate any new coverage, administrative, or payment 
        policy unless the policy promotes the goal of administrative 
        simplification of requirements imposed on clinical laboratories 
        in accordance with the Secretary's promulgation of the 
        negotiated rulemaking.
          (5) Not later than 6 months after the date of the enactment 
        of this Act, the medical directors shall submit their 
        recommendations to the Secretary, and the Secretary shall 
        publish the recommendations and solicit public comment using 
        negotiated rulemaking in accordance with title 5, United States 
        Code. The Secretary shall publish final uniform policies for 
        coverage, administration, and payment of claims for clinical 
        diagnostic laboratory tests, effective after the expiration of 
        the 180-day period which begins on the date of publication.
          (6) After the publication of the final uniform policies, the 
        Secretary shall implement identical uniform documentation and 
        processing policies for all clinical diagnostic laboratory 
        tests paid under the Medicare program through fiscal 
        intermediaries or carriers.
  (c) Optional Selection of Single Carrier.--Effective for claims 
submitted after the expiration of the 90-day period which begins on the 
date of the enactment of this Act, an independent laboratory may select 
a single carrier for the processing of all of its claims for payment 
under part B of the medicare program, without regard to the location 
where the laboratory or the patient or provider involved resides or 
conducts business. Such election of a single carrier shall be made by 
the clinical laboratory and an agreement made between the carrier and 
the laboratory shall be forwarded to the Secretary of Health and Human 
Services. Nothing in this subsection shall be construed to require a 
laboratory to select a single carrier under this subsection.
  (d) Consistency With General Administrative Simplification.--In 
complying with this section, the Secretary shall ensure that the 
policies adopted under subsection (a) are consistent, to the maximum 
extent practicable, with part C of title XI of the Social Security Act.

   Subtitle G--Duplication and Coordination of Medicare-Related Plans

SEC. 271. DUPLICATION AND COORDINATION OF MEDICARE-RELATED PLANS.

  (a) Treatment of Certain Health Insurance Policies as 
Nonduplicative.--Effective as if included in the enactment of section 
4354 of the Omnibus Budget Reconciliation Act of 1990, section 
1882(d)(3)(A) (42 U.S.C. 1395ss(d)(3)(A)) is amended--
          (1) by amending clause (i) to read as follows:
  ``(i) It is unlawful for a person to sell or issue to an individual 
entitled to benefits under part A or enrolled under part B of this 
title--
          ``(I) a health insurance policy with knowledge that the 
        policy duplicates health benefits to which the individual is 
        otherwise entitled under this title or title XIX,
          ``(II) a medicare supplemental policy with knowledge that the 
        individual is entitled to benefits under another medicare 
        supplemental policy, or
          ``(III) a health insurance policy (other than a medicare 
        supplemental policy) with knowledge that the policy duplicates 
        health benefits to which the individual is otherwise entitled, 
        other than benefits to which the individual is entitled under a 
        requirement of State or Federal law.
Subclause (I) or (III) shall not apply with respect to the sale or 
issuance of a health insurance policy or plan under which all the 
benefits are fully payable directly to or on behalf of the individual 
without regard to other health benefit coverage of the individual.'';
          (2) in clause (iii), by striking ``clause (i)'' and inserting 
        ``clause (i)(II)''; and
          (3) by adding at the end of subparagraph (A) the following:
  ``(iv) For purposes of this subparagraph, a health insurance policy 
shall be considered to `duplicate' benefits only when, under its terms, 
the policy provides specific reimbursement for identical items and 
services to the extent paid for under other coverage of such 
individual, and a health insurance policy providing for benefits which 
are payable to or on behalf of an individual without regard to other 
health benefit coverage of such individual is not considered to 
`duplicate' any health benefits.
  ``(v) For purposes of this subparagraph, a health insurance policy 
(or a rider to an insurance contract which is not a health insurance 
policy), providing benefits for long-term care, nursing home care, home 
health care, or community-based care, or a contract with a health 
maintenance organization that provides comprehensive health benefits, 
and that coordinates against or excludes items and services available 
or paid for under this title and (for policies other than contracts 
with health maintenance organizations sold or issued on or after 90 
days after the date of enactment of this provision) that discloses such 
coordination or exclusion in the policy's outline of coverage, is not 
considered to `duplicate' health benefits under this title. For 
purposes of this clause, the terms `coordinates' and `coordination' 
mean, with respect to a policy in relation to health benefits under 
this title, that the policy under its terms is secondary to, or 
excludes from payment, items and services to the extent available or 
paid for under this title.
  ``(vi) Notwithstanding any other provision of law, no criminal or 
civil penalty may be imposed at any time under this subparagraph and no 
legal action may be brought or continued at any time in any Federal or 
State court if the penalty or action is based on an act or omission 
that occurred after November 5, 1991, and before the date of the 
enactment of this clause, and relates to the sale, issuance, or renewal 
of any health insurance policy or rider during such period, if such 
policy or rider meets the nonduplication requirements of clause (iv) or 
(v).
  ``(vii) A State may not impose, in the case of the sale, issuance, or 
renewal of a health insurance policy (other than a medicare 
supplemental policy) or rider to an insurance contract which is not a 
health insurance policy, that meets the nonduplication requirements of 
this section pursuant to clause (iv) or (v) to an individual entitled 
to benefits under part A or enrolled under part B, any requirement with 
respect to the duplication or nonduplication of health benefits to 
which the individual is otherwise entitled to under this title.''.
  (b) Conforming Amendments.--Section 1882(d)(3) (42 U.S.C. 
1395ss(d)(3)) is amended--
          (1) in subparagraph (C)--
                  (A) by striking ``with respect to (i)'' and inserting 
                ``with respect to'', and
                  (B) by striking ``, (ii) the sale'' and all that 
                follows up to the period at the end; and
          (2) by striking subparagraph (D).

                TITLE III--TAX-RELATED HEALTH PROVISIONS

SEC. 300. AMENDMENT OF 1986 CODE.

  Except as otherwise expressly provided, whenever in this title an 
amendment or repeal is expressed in terms of an amendment to, or repeal 
of, a section or other provision, the reference shall be considered to 
be made to a section or other provision of the Internal Revenue Code of 
1986.

                  Subtitle A--Medical Savings Accounts

SEC. 301. MEDICAL SAVINGS ACCOUNTS.

  (a) In General.--Part VII of subchapter B of chapter 1 (relating to 
additional itemized deductions for individuals) is amended by 
redesignating section 220 as section 221 and by inserting after section 
219 the following new section:

``SEC. 220. MEDICAL SAVINGS ACCOUNTS.

  ``(a) Deduction Allowed.--In the case of an individual who is an 
eligible individual for any month during the taxable year, there shall 
be allowed as a deduction for the taxable year an amount equal to the 
aggregate amount paid in cash during such taxable year by such 
individual to a medical savings account of such individual.
  ``(b) Limitations.--
          ``(1) In general.--Except as otherwise provided in this 
        subsection, the amount allowable as a deduction under 
        subsection (a) to an individual for the taxable year shall not 
        exceed--
                  ``(A) except as provided in subparagraph (B), the 
                lesser of--
                          ``(i) $2,000, or
                          ``(ii) the annual deductible limit for any 
                        individual covered under the high deductible 
                        health plan, or
                  ``(B) in the case of a high deductible health plan 
                covering the taxpayer and any other eligible individual 
                who is the spouse or any dependent (as defined in 
                section 152) of the taxpayer, the lesser of--
                          ``(i) $4,000, or
                          ``(ii) the annual limit under the plan on the 
                        aggregate amount of deductibles required to be 
                        paid by all individuals.
        The preceding sentence shall not apply if the spouse of such 
        individual is covered under any other high deductible health 
        plan.
          ``(2) Special rule for married individuals.--
                  ``(A) In general.--This subsection shall be applied 
                separately for each married individual.
                  ``(B) Special rule.--If individuals who are married 
                to each other are covered under the same high 
                deductible health plan, then the amounts applicable 
                under paragraph (1)(B) shall be divided equally between 
                them unless they agree on a different division.
          ``(3) Coordination with exclusion for employer 
        contributions.--No deduction shall be allowed under this 
        section for any amount paid for any taxable year to a medical 
        savings account of an individual if--
                  ``(A) any amount is paid to any medical savings 
                account of such individual which is excludable from 
                gross income under section 106(b) for such year, or
                  ``(B) in a case described in paragraph (2)(B), any 
                amount is paid to any medical savings account of either 
                spouse which is so excludable for such year.
          ``(4) Proration of limitation.--
                  ``(A) In general.--The limitation under paragraph (1) 
                shall be the sum of the monthly limitations for months 
                during the taxable year that the individual is an 
                eligible individual if--
                          ``(i) such individual is not an eligible 
                        individual for all months of the taxable year,
                          ``(ii) the deductible under the high 
                        deductible health plan covering such individual 
                        is not the same throughout such taxable year, 
                        or
                          ``(iii) such limitation is determined under 
                        paragraph (1)(B) for some but not all months 
                        during such taxable year.
                  ``(B) Monthly limitation.--The monthly limitation for 
                any month shall be an amount equal to \1/12\ of the 
                limitation which would (but for this paragraph and 
                paragraph (3)) be determined under paragraph (1) if the 
                facts and circumstances as of the first day of such 
                month that such individual is covered under a high 
                deductible health plan were true for the entire taxable 
                year.
          ``(5) Denial of deduction to dependents.--No deduction shall 
        be allowed under this section to any individual with respect to 
        whom a deduction under section 151 is allowable to another 
        taxpayer for a taxable year beginning in the calendar year in 
        which such individual's taxable year begins.
  ``(c) Definitions.--For purposes of this section--
          ``(1) Eligible individual.--
                  ``(A) In general.--The term `eligible individual' 
                means, with respect to any month, any individual--
                          ``(i) who is covered under a high deductible 
                        health plan as of the 1st day of such month, 
                        and
                          ``(ii) who is not, while covered under a high 
                        deductible health plan, covered under any 
                        health plan--
                                  ``(I) which is not a high deductible 
                                health plan, and
                                  ``(II) which provides coverage for 
                                any benefit which is covered under the 
                                high deductible health plan.
                  ``(B) Certain coverage disregarded.--Subparagraph 
                (A)(ii) shall be applied without regard to--
                          ``(i) coverage for any benefit provided by 
                        permitted insurance, and
                          ``(ii) coverage (whether through insurance or 
                        otherwise) for accidents, disability, dental 
                        care, vision care, or long-term care.
          ``(2) High deductible health plan.--The term `high deductible 
        health plan' means a health plan which--
                  ``(A) has an annual deductible limit for each 
                individual covered by the plan which is not less than 
                $1,500, and
                  ``(B) has an annual limit on the aggregate amount of 
                deductibles required to be paid with respect to all 
                individuals covered by the plan which is not less than 
                $3,000.
        Such term does not include a health plan if substantially all 
        of its coverage is coverage described in paragraph (1)(B). A 
        plan shall not fail to be treated as a high deductible health 
        plan by reason of failing to have a deductible for preventive 
        care if the absence of a deductible for such care is required 
        by State law.
          ``(3) Permitted insurance.--The term `permitted insurance' 
        means--
                  ``(A) Medicare supplemental insurance,
                  ``(B) insurance if substantially all of the coverage 
                provided under such insurance relates to--
                          ``(i) liabilities incurred under workers' 
                        compensation laws,
                          ``(ii) tort liabilities,
                          ``(iii) liabilities relating to ownership or 
                        use of property, or
                          ``(iv) such other similar liabilities as the 
                        Secretary may specify by regulations,
                  ``(C) insurance for a specified disease or illness, 
                and
                  ``(D) insurance paying a fixed amount per day (or 
                other period) of hospitalization.
  ``(d) Medical Savings Account.--For purposes of this section--
          ``(1) Medical savings account.--The term `medical savings 
        account' means a trust created or organized in the United 
        States exclusively for the purpose of paying the qualified 
        medical expenses of the account holder, but only if the written 
        governing instrument creating the trust meets the following 
        requirements:
                  ``(A) Except in the case of a rollover contribution 
                described in subsection (f)(5), no contribution will be 
                accepted--
                          ``(i) unless it is in cash, or
                          ``(ii) to the extent such contribution, when 
                        added to previous contributions to the trust 
                        for the calendar year, exceeds $4,000.
                  ``(B) The trustee is a bank (as defined in section 
                408(n)), an insurance company (as defined in section 
                816), or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                such person will administer the trust will be 
                consistent with the requirements of this section.
                  ``(C) No part of the trust assets will be invested in 
                life insurance contracts.
                  ``(D) The assets of the trust will not be commingled 
                with other property except in a common trust fund or 
                common investment fund.
                  ``(E) The interest of an individual in the balance in 
                his account is nonforfeitable.
          ``(2) Qualified medical expenses.--
                  ``(A) In general.--The term `qualified medical 
                expenses' means, with respect to an account holder, 
                amounts paid by such holder for medical care (as 
                defined in section 213(d)) for such individual, the 
                spouse of such individual, and any dependent (as 
                defined in section 152) of such individual, but only to 
                the extent such amounts are not compensated for by 
                insurance or otherwise.
                  ``(B) Health insurance may not be purchased from 
                account.--
                          ``(i) In general.--Subparagraph (A) shall not 
                        apply to any payment for insurance.
                          ``(ii) Exceptions.--Clause (i) shall not 
                        apply to any expense for coverage under--
                                  ``(I) a health plan during any period 
                                of continuation coverage required under 
                                any Federal law,
                                  ``(II) a qualified long-term care 
                                insurance contract (as defined in 
                                section 7702B(b)), or
                                  ``(III) a health plan during a period 
                                in which the individual is receiving 
                                unemployment compensation under any 
                                Federal or State law.
          ``(3) Account holder.--The term `account holder' means the 
        individual on whose behalf the medical savings account was 
        established.
          ``(4) Certain rules to apply.--Rules similar to the following 
        rules shall apply for purposes of this section:
                  ``(A) Section 219(d)(2) (relating to no deduction for 
                rollovers).
                  ``(B) Section 219(f)(3) (relating to time when 
                contributions deemed made).
                  ``(C) Except as provided in section 106(b), section 
                219(f)(5) (relating to employer payments).
                  ``(D) Section 408(g) (relating to community property 
                laws).
                  ``(E) Section 408(h) (relating to custodial 
                accounts).
  ``(e) Tax Treatment of Accounts.--
          ``(1) In general.--A medical savings account is exempt from 
        taxation under this subtitle unless such account has ceased to 
        be a medical savings account by reason of paragraph (2) or (3). 
        Notwithstanding the preceding sentence, any such account is 
        subject to the taxes imposed by section 511 (relating to 
        imposition of tax on unrelated business income of charitable, 
        etc. organizations).
          ``(2) Account terminations.--Rules similar to the rules of 
        paragraphs (2) and (4) of section 408(e) shall apply to medical 
        savings accounts, and any amount treated as distributed under 
        such rules shall be treated as not used to pay qualified 
        medical expenses.
  ``(f) Tax Treatment of Distributions.--
          ``(1) Amounts used for qualified medical expenses.--
                  ``(A) In general.--Any amount paid or distributed out 
                of a medical savings account which is used exclusively 
                to pay qualified medical expenses of any account holder 
                (or any spouse or dependent of the holder) shall not be 
                includible in gross income.
                  ``(B) Treatment after death of account holder.--
                          ``(i) Treatment if holder is spouse.--If, 
                        after the death of the account holder, the 
                        account holder's interest is payable to (or for 
                        the benefit of) the holder's spouse, the 
                        medical savings account shall be treated as if 
                        the spouse were the account holder.
                          ``(ii) Treatment if designated holder is not 
                        spouse.--In the case of an account holder's 
                        interest in a medical savings account which is 
                        payable to (or for the benefit of) any person 
                        other than such holder's spouse upon the death 
                        of such holder--
                                  ``(I) such account shall cease to be 
                                a medical savings account as of the 
                                date of death, and
                                  ``(II) an amount equal to the fair 
                                market value of the assets in such 
                                account on such date shall be 
                                includible if such person is not the 
                                estate of such holder, in such person's 
                                gross income for the taxable year which 
                                includes such date, or if such person 
                                is the estate of such holder, in such 
                                holder's gross income for the last 
                                taxable year of such holder.
          ``(2) Inclusion of amounts not used for qualified medical 
        expenses.--
                  ``(A) In general.--Any amount paid or distributed out 
                of a medical savings account which is not used 
                exclusively to pay the qualified medical expenses of 
                the account holder or of the spouse or dependents of 
                such holder shall be included in the gross income of 
                such holder.
                  ``(B) Special rules.--For purposes of subparagraph 
                (A)--
                          ``(i) all medical savings accounts of the 
                        account holder shall be treated as 1 account,
                          ``(ii) all payments and distributions during 
                        any taxable year shall be treated as 1 
                        distribution, and
                          ``(iii) any distribution of property shall be 
                        taken into account at its fair market value on 
                        the date of the distribution.
          ``(3) Excess contributions returned before due date of 
        return.--If the aggregate contributions (other than rollover 
        contributions) for a taxable year to the medical savings 
        accounts of an individual exceed the amount allowable as a 
        deduction under this section for such contributions, paragraph 
        (2) shall not apply to distributions from such accounts (in an 
        amount not greater than such excess) if--
                  ``(A) such distribution is received by the individual 
                on or before the last day prescribed by law (including 
                extensions of time) for filing such individual's return 
                for such taxable year, and
                  ``(B) such distribution is accompanied by the amount 
                of net income attributable to such excess contribution.
        Any net income described in subparagraph (B) shall be included 
        in the gross income of the individual for the taxable year in 
        which it is received.
          ``(4) Penalty for distributions not used for qualified 
        medical expenses.--
                  ``(A) In general.--The tax imposed by this chapter on 
                the account holder for any taxable year in which there 
                is a payment or distribution from a medical savings 
                account of such holder which is includible in gross 
                income under paragraph (2) shall be increased by 10 
                percent of the amount which is so includible.
                  ``(B) Exception for disability or death.--
                Subparagraph (A) shall not apply if the payment or 
                distribution is made after the account holder becomes 
                disabled within the meaning of section 72(m)(7) or 
                dies.
                  ``(C) Exception for distributions after age 59\1/
                2\.--Subparagraph (A) shall not apply to any payment or 
                distribution after the date on which the account holder 
                attains age 59\1/2\.
          ``(5) Rollover contribution.--An amount is described in this 
        paragraph as a rollover contribution if it meets the 
        requirements of subparagraphs (A) and (B).
                  ``(A) In general.--Paragraph (2) shall not apply to 
                any amount paid or distributed from a medical savings 
                account to the account holder to the extent the amount 
                received is paid into a medical savings account for the 
                benefit of such holder not later than the 60th day 
                after the day on which the holder receives the payment 
                or distribution.
                  ``(B) Limitation.--This paragraph shall not apply to 
                any amount described in subparagraph (A) received by an 
                individual from a medical savings account if, at any 
                time during the 1-year period ending on the day of such 
                receipt, such individual received any other amount 
                described in subparagraph (A) from a medical savings 
                account which was not includible in the individual's 
                gross income because of the application of this 
                paragraph.
          ``(6) Coordination with medical expense deduction.--For 
        purposes of determining the amount of the deduction under 
        section 213, any payment or distribution out of a medical 
        savings account for qualified medical expenses shall not be 
        treated as an expense paid for medical care.
          ``(7)  Transfer of account incident to divorce.--The transfer 
        of an individual's interest in a medical savings account to an 
        individual's spouse or former spouse under a divorce or 
        separation instrument described in subparagraph (A) of section 
        71(b)(2) shall not be considered a taxable transfer made by 
        such individual notwithstanding any other provision of this 
        subtitle, and such interest shall, after such transfer, be 
        treated as a medical savings account with respect to which the 
        spouse is the account holder.
  ``(g) Cost-of-Living Adjustment.--
          ``(1) In general.--In the case of any taxable year beginning 
        in a calendar year after 1997, each dollar amount in subsection 
        (b)(1), (c)(2), or (d)(1)(A) shall be increased by an amount 
        equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the medical care cost adjustment for such 
                calendar year.
        If any increase under the preceding sentence is not a multiple 
        of $50, such increase shall be rounded to the nearest multiple 
        of $50.
          ``(2) Medical care cost adjustment.--For purposes of 
        paragraph (1), the medical care cost adjustment for any 
        calendar year is the percentage (if any) by which--
                  ``(A) the medical care component of the Consumer 
                Price Index (as defined in section 1(f)(5)) for August 
                of the preceding calendar year, exceeds
                  ``(B) such component for August of 1996.
  ``(h) Reports.--The Secretary may require the trustee of a medical 
savings account to make such reports regarding such account to the 
Secretary and to the account holder with respect to contributions, 
distributions, and such other matters as the Secretary determines 
appropriate. The reports required by this subsection shall be filed at 
such time and in such manner and furnished to such individuals at such 
time and in such manner as may be required by those regulations.''
  (b) Deduction Allowed Whether or Not Individual Itemizes Other 
Deductions.--Subsection (a) of section 62 is amended by inserting after 
paragraph (15) the following new paragraph:
          ``(16) Medical savings accounts.--The deduction allowed by 
        section 220.''
  (c) Exclusions for Employer Contributions to Medical Savings 
Accounts.--
          (1) Exclusion from income tax.--The text of section 106 
        (relating to contributions by employer to accident and health 
        plans) is amended to read as follows:
  ``(a) General Rule.--Except as otherwise provided in this section, 
gross income of an employee does not include employer-provided coverage 
under an accident or health plan.
  ``(b) Contributions to Medical Savings Accounts.--
          ``(1) In general.--In the case of an employee who is an 
        eligible individual, gross income does not include amounts 
        contributed by such employee's employer to any medical savings 
        account of such employee.
          ``(2) Coordination with deduction limitation.--The amount 
        excluded from the gross income of an employee under this 
        subsection for any taxable year shall not exceed the limitation 
        under section 220(b)(1) (determined without regard to this 
        subsection) which is applicable to such employee for such 
        taxable year.
          ``(3) No constructive receipt.--No amount shall be included 
        in the gross income of any employee solely because the employee 
        may choose between the contributions referred to in paragraph 
        (1) and employer contributions to another health plan of the 
        employer.
          ``(4) Special rule for deduction of employer contributions.--
        Any employer contribution to a medical savings account, if 
        otherwise allowable as a deduction under this chapter, shall be 
        allowed only for the taxable year in which paid.
          ``(5) Definitions.--For purposes of this subsection, the 
        terms `eligible individual' and `medical savings account' have 
        the respective meanings given to such terms by section 220.''
          (2) Exclusion from employment taxes.--
                  (A) Social security taxes.--
                          (i) Subsection (a) of section 3121 is amended 
                        by striking ``or'' at the end of paragraph 
                        (20), by striking the period at the end of 
                        paragraph (21) and inserting ``; or'', and by 
                        inserting after paragraph (21) the following 
                        new paragraph:
          ``(22) any payment made to or for the benefit of an employee 
        if at the time of such payment it is reasonable to believe that 
        the employee will be able to exclude such payment from income 
        under section 106(b).''
                          (ii) Subsection (a) of section 209 of the 
                        Social Security Act is amended by striking 
                        ``or'' at the end of paragraph (17), by 
                        striking the period at the end of paragraph 
                        (18) and inserting ``; or'', and by inserting 
                        after paragraph (18) the following new 
                        paragraph:
          ``(19) any payment made to or for the benefit of an employee 
        if at the time of such payment it is reasonable to believe that 
        the employee will be able to exclude such payment from income 
        under section 106(b) of the Internal Revenue Code of 1986.''
                  (B) Railroad retirement tax.--Subsection (e) of 
                section 3231 is amended by adding at the end the 
                following new paragraph:
          ``(10) Medical savings account contributions.--The term 
        `compensation' shall not include any payment made to or for the 
        benefit of an employee if at the time of such payment it is 
        reasonable to believe that the employee will be able to exclude 
        such payment from income under section 106(b).''
                  (C) Unemployment tax.--Subsection (b) of section 3306 
                is amended by striking ``or'' at the end of paragraph 
                (15), by striking the period at the end of paragraph 
                (16) and inserting ``; or'', and by inserting after 
                paragraph (16) the following new paragraph:
          ``(17) any payment made to or for the benefit of an employee 
        if at the time of such payment it is reasonable to believe that 
        the employee will be able to exclude such payment from income 
        under section 106(b).''
                  (D) Withholding tax.--Subsection (a) of section 3401 
                is amended by striking ``or'' at the end of paragraph 
                (19), by striking the period at the end of paragraph 
                (20) and inserting ``; or'', and by inserting after 
                paragraph (20) the following new paragraph:
          ``(21) any payment made to or for the benefit of an employee 
        if at the time of such payment it is reasonable to believe that 
        the employee will be able to exclude such payment from income 
        under section 106(b).''
  (d) Medical Savings Account Contributions Not Available Under 
Cafeteria Plans.--Subsection (f) of section 125 of such Code is amended 
by inserting ``106(b),'' before ``117''.
  (e) Exclusion of Medical Savings Accounts From Estate Tax.--Part IV 
of subchapter A of chapter 11 is amended by adding at the end the 
following new section:

``SEC. 2057. MEDICAL SAVINGS ACCOUNTS.

  ``For purposes of the tax imposed by section 2001, the value of the 
taxable estate shall be determined by deducting from the value of the 
gross estate an amount equal to the value of any medical savings 
account (as defined in section 220(d)) included in the gross estate.''
  (f) Tax on Excess Contributions.--Section 4973 (relating to tax on 
excess contributions to individual retirement accounts, certain section 
403(b) contracts, and certain individual retirement annuities) is 
amended--
          (1) by inserting ``medical savings accounts,'' after 
        ``accounts,'' in the heading of such section,
          (2) by striking ``or'' at the end of paragraph (1) of 
        subsection (a),
          (3) by redesignating paragraph (2) of subsection (a) as 
        paragraph (3) and by inserting after paragraph (1) the 
        following:
          ``(2) a medical savings account (within the meaning of 
        section 220(d)), or'', and
          (4) by adding at the end the following new subsection:
  ``(d) Excess Contributions to Medical Savings Accounts.--For purposes 
of this section, in the case of a medical savings accounts (within the 
meaning of section 220(d)), the term `excess contributions' means the 
sum of--
          ``(1) the amount by which the amount contributed for the 
        taxable year to the accounts (other than rollover contributions 
        described in section 220(f)(5)) exceeds the amount allowable as 
        a deduction under section 220 for such contributions, and
          ``(2) the amount determined under this subsection for the 
        preceding taxable year, reduced by the sum of distributions out 
        of the account included in gross income under section 220(f) 
        (2) or (3) and the excess (if any) of the maximum amount 
        allowable as a deduction under section 220 for the taxable year 
        over the amount contributed to the accounts.
For purposes of this subsection, any contribution which is distributed 
out of the medical savings account in a distribution to which section 
220(f)(3) applies shall be treated as an amount not contributed.''
  (g) Tax on Prohibited Transactions.--
          (1) Section 4975 (relating to tax on prohibited transactions) 
        is amended by adding at the end of subsection (c) the following 
        new paragraph:
          ``(4) Special rule for medical savings accounts.--An 
        individual for whose benefit a medical savings account (within 
        the meaning of section 220(d)) is established shall be exempt 
        from the tax imposed by this section with respect to any 
        transaction concerning such account (which would otherwise be 
        taxable under this section) if, with respect to such 
        transaction, the account ceases to be a medical savings account 
        by reason of the application of section 220(e)(2) to such 
        account.''
          (2) Paragraph (1) of section 4975(e) is amended to read as 
        follows:
          ``(1) Plan.--For purposes of this section, the term `plan' 
        means--
                  ``(A) a trust described in section 401(a) which forms 
                a part of a plan, or a plan described in section 
                403(a), which trust or plan is exempt from tax under 
                section 501(a),
                  ``(B) an individual retirement account described in 
                section 408(a),
                  ``(C) an individual retirement annuity described in 
                section 408(b),
                  ``(D) a medical savings account described in section 
                220(d), or
                  ``(E) a trust, plan, account, or annuity which, at 
                any time, has been determined by the Secretary to be 
                described in any preceding subparagraph of this 
                paragraph.''
  (h) Failure To Provide Reports on Medical Savings Accounts.--
          (1) Subsection (a) of section 6693 (relating to failure to 
        provide reports on individual retirement accounts or annuities) 
        is amended to read as follows:
  ``(a) Reports.--
          ``(1) In general.--If a person required to file a report 
        under a provision referred to in paragraph (2) fails to file 
        such report at the time and in the manner required by such 
        provision, such person shall pay a penalty of $50 for each 
        failure unless it is shown that such failure is due to 
        reasonable cause.
          ``(2) Provisions.--The provisions referred to in this 
        paragraph are--
                  ``(A) subsections (i) and (l) of section 408 
                (relating to individual retirement plans), and
                  ``(B) section 220(h) (relating to medical savings 
                accounts).''
  (i) Exception From Capitalization of Policy Acquisition Expenses.--
Subparagraph (B) of section 848(e)(1) (defining specified insurance 
contract) is amended by striking ``and'' at the end of clause (ii), by 
striking the period at the end of clause (iii) and inserting ``, and'', 
and by adding at the end the following new clause:
                          ``(iv) any contract which is a medical 
                        savings account (as defined in section 
                        220(d)).''.
  (j) Clerical Amendments.--
          (1) The table of sections for part VII of subchapter B of 
        chapter 1 is amended by striking the last item and inserting 
        the following:

                              ``Sec. 220. Medical savings accounts.
                              ``Sec. 221. Cross reference.''

          (2) The table of sections for part IV of subchapter A of 
        chapter 11 is amended by adding at the end the following new 
        item:

                              ``Sec. 2057. Medical savings accounts.''

  (k) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1996.

 Subtitle B--Increase in Deduction for Health Insurance Costs of Self-
                          Employed Individuals

SEC. 311. INCREASE IN DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
                    EMPLOYED INDIVIDUALS.

  (a) In General.--Paragraph (1) of section 162(l) is amended to read 
as follows:
          ``(1) Allowance of deduction.--
                  ``(A) In general.--In the case of an individual who 
                is an employee within the meaning of section 401(c)(1), 
                there shall be allowed as a deduction under this 
                section an amount equal to the applicable percentage of 
                the amount paid during the taxable year for insurance 
                which constitutes medical care for the taxpayer, his 
                spouse, and dependents.
                  ``(B) Applicable percentage.--For purposes of 
                subparagraph (A), the applicable percentage shall be 
                determined under the following table:

                  ``For taxable years beginning
                                                         The applicable
                    in calendar year--
                                                        percentage is--
                          1998.......................       35 percent 
                          1999, 2000, or 2001........       40 percent 
                          2002.......................       45 percent 
                          2003 or thereafter.........     50 percent.''

  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1997.

           Subtitle C--Long-Term Care Services and Contracts

                       PART I--GENERAL PROVISIONS

SEC. 321. TREATMENT OF LONG-TERM CARE INSURANCE.

  (a) General Rule.--Chapter 79 (relating to definitions) is amended by 
inserting after section 7702A the following new section:

``SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE INSURANCE.

  ``(a) In General.--For purposes of this title--
          ``(1) a qualified long-term care insurance contract shall be 
        treated as an accident and health insurance contract,
          ``(2) amounts (other than policyholder dividends, as defined 
        in section 808, or premium refunds) received under a qualified 
        long-term care insurance contract shall be treated as amounts 
        received for personal injuries and sickness and shall be 
        treated as reimbursement for expenses actually incurred for 
        medical care (as defined in section 213(d)),
          ``(3) any plan of an employer providing coverage under a 
        qualified long-term care insurance contract shall be treated as 
        an accident and health plan with respect to such coverage,
          ``(4) except as provided in subsection (e)(3), amounts paid 
        for a qualified long-term care insurance contract providing the 
        benefits described in subsection (b)(2)(A) shall be treated as 
        payments made for insurance for purposes of section 
        213(d)(1)(D), and
          ``(5) a qualified long-term care insurance contract shall be 
        treated as a guaranteed renewable contract subject to the rules 
        of section 816(e).
  ``(b) Qualified Long-Term Care Insurance Contract.--For purposes of 
this title--
          ``(1) In general.--The term `qualified long-term care 
        insurance contract' means any insurance contract if--
                  ``(A) the only insurance protection provided under 
                such contract is coverage of qualified long-term care 
                services,
                  ``(B) such contract does not pay or reimburse 
                expenses incurred for services or items to the extent 
                that such expenses are reimbursable under title XVIII 
                of the Social Security Act or would be so reimbursable 
                but for the application of a deductible or coinsurance 
                amount,
                  ``(C) such contract is guaranteed renewable,
                  ``(D) such contract does not provide for a cash 
                surrender value or other money that can be--
                          ``(i) paid, assigned, or pledged as 
                        collateral for a loan, or
                          ``(ii) borrowed,
                other than as provided in subparagraph (E) or paragraph 
                (2)(C),
                  ``(E) all refunds of premiums, and all policyholder 
                dividends or similar amounts, under such contract are 
                to be applied as a reduction in future premiums or to 
                increase future benefits, and
                  ``(F) such contract meets the requirements of 
                subsection (f).
          ``(2) Special rules.--
                  ``(A) Per diem, etc. payments permitted.--A contract 
                shall not fail to be described in subparagraph (A) or 
                (B) of paragraph (1) by reason of payments being made 
                on a per diem or other periodic basis without regard to 
                the expenses incurred during the period to which the 
                payments relate.
                  ``(B) Special rules relating to medicare.--
                          ``(i) Paragraph (1)(B) shall not apply to 
                        expenses which are reimbursable under title 
                        XVIII of the Social Security Act only as a 
                        secondary payor.
                          ``(ii) No provision of law shall be construed 
                        or applied so as to prohibit the offering of a 
                        qualified long-term care insurance contract on 
                        the basis that the contract coordinates its 
                        benefits with those provided under such title.
                  ``(C) Refunds of premiums.--Paragraph (1)(E) shall 
                not apply to any refund on the death of the insured, or 
                on a complete surrender or cancellation of the 
                contract, which cannot exceed the aggregate premiums 
                paid under the contract. Any refund on a complete 
                surrender or cancellation of the contract shall be 
                includible in gross income to the extent that any 
                deduction or exclusion was allowable with respect to 
                the premiums.
  ``(c) Qualified Long-Term Care Services.--For purposes of this 
section--
          ``(1) In general.--The term `qualified long-term care 
        services' means necessary diagnostic, preventive, therapeutic, 
        curing, treating, mitigating, and rehabilitative services, and 
        maintenance or personal care services, which--
                  ``(A) are required by a chronically ill individual, 
                and
                  ``(B) are provided pursuant to a plan of care 
                prescribed by a licensed health care practitioner.
          ``(2) Chronically ill individual.--
                  ``(A) In general.--The term `chronically ill 
                individual' means any individual who has been certified 
                by a licensed health care practitioner as--
                          ``(i) being unable to perform (without 
                        substantial assistance from another individual) 
                        at least 2 activities of daily living for a 
                        period of at least 90 days due to a loss of 
                        functional capacity,
                          ``(ii) having a level of disability similar 
                        (as determined by the Secretary in consultation 
                        with the Secretary of Health and Human 
                        Services) to the level of disability described 
                        in clause (i), or
                          ``(iii) requiring substantial supervision to 
                        protect such individual from threats to health 
                        and safety due to severe cognitive impairment.
                Such term shall not include any individual otherwise 
                meeting the requirements of the preceding sentence 
                unless within the preceding 12-month period a licensed 
                health care practitioner has certified that such 
                individual meets such requirements.
                  ``(B) Activities of daily living.--For purposes of 
                subparagraph (A), each of the following is an activity 
                of daily living:
                          ``(i) Eating.
                          ``(ii) Toileting.
                          ``(iii) Transferring.
                          ``(iv) Bathing.
                          ``(v) Dressing.
                          ``(vi) Continence.
                Nothing in this section shall be construed to require a 
                contract to take into account all of the preceding 
                activities of daily living.
          ``(3) Maintenance or personal care services.--The term 
        `maintenance or personal care services' means any care the 
        primary purpose of which is the provision of needed assistance 
        with any of the disabilities as a result of which the 
        individual is a chronically ill individual (including the 
        protection from threats to health and safety due to severe 
        cognitive impairment).
          ``(4) Licensed health care practitioner.--The term `licensed 
        health care practitioner' means any physician (as defined in 
        section 1861(r)(1) of the Social Security Act) and any 
        registered professional nurse, licensed social worker, or other 
        individual who meets such requirements as may be prescribed by 
        the Secretary.
  ``(d) Aggregate Payments in Excess of Limits.--
          ``(1) In general.--If the aggregate amount of periodic 
        payments under all qualified long-term care insurance contracts 
        with respect to an insured for any period exceeds the dollar 
        amount in effect for such period under paragraph (3), such 
        excess payments shall be treated as made for qualified long-
        term care services only to the extent of the costs incurred by 
        the payee (not otherwise compensated for by insurance or 
        otherwise) for qualified long-term care services provided 
        during such period for such insured.
          ``(2) Periodic payments.--For purposes of paragraph (1), the 
        term `periodic payment' means any payment (whether on a 
        periodic basis or otherwise) made without regard to the extent 
        of the costs incurred by the payee for qualified long-term care 
        services.
          ``(3) Dollar amount.--The dollar amount in effect under this 
        subsection shall be $175 per day (or the equivalent amount in 
        the case of payments on another periodic basis).
          ``(4) Inflation adjustment.--In the case of a calendar year 
        after 1997, the dollar amount contained in paragraph (3) shall 
        be increased at the same time and in the same manner as amounts 
        are increased pursuant to section 213(d)(10).
  ``(e) Treatment of Coverage Provided as Part of a Life Insurance 
Contract.--Except as otherwise provided in regulations prescribed by 
the Secretary, in the case of any long-term care insurance coverage 
(whether or not qualified) provided by a rider on or as part of a life 
insurance contract--
          ``(1) In general.--This section shall apply as if the portion 
        of the contract providing such coverage is a separate contract.
          ``(2) Application of 7702.--Section 7702(c)(2) (relating to 
        the guideline premium limitation) shall be applied by 
        increasing the guideline premium limitation with respect to a 
        life insurance contract, as of any date--
                  ``(A) by the sum of any charges (but not premium 
                payments) against the life insurance contract's cash 
                surrender value (within the meaning of section 
                7702(f)(2)(A)) for such coverage made to that date 
                under the contract, less
                  ``(B) any such charges the imposition of which 
                reduces the premiums paid for the contract (within the 
                meaning of section 7702(f)(1)).
          ``(3) Application of section 213.--No deduction shall be 
        allowed under section 213(a) for charges against the life 
        insurance contract's cash surrender value described in 
        paragraph (2), unless such charges are includible in income as 
        a result of the application of section 72(e)(10) and the rider 
        is a qualified long-term care insurance contract under 
        subsection (b).
          ``(4) Portion defined.--For purposes of this subsection, the 
        term `portion' means only the terms and benefits under a life 
        insurance contract that are in addition to the terms and 
        benefits under the contract without regard to the coverage 
        under a qualified long-term care insurance contract.''
  (b) Long-Term Care Insurance Not Permitted Under Cafeteria Plans or 
Flexible Spending Arrangements.--
          (1) Cafeteria plans.--Section 125(f) is amended by adding at 
        the end the following new sentence: ``Such term shall not 
        include any long-term care insurance contract (as defined in 
        section 4980C).''
          (2) Flexible spending arrangements.--Section 106 (relating to 
        contributions by employer to accident and health plans), as 
        amended by section 301(c), is amended by adding at the end the 
        following new subsection:
  ``(c) Inclusion of Long-Term Care Benefits Provided Through Flexible 
Spending Arrangements.--
          ``(1) In general.--Effective on and after January 1, 1997, 
        gross income of an employee shall include employer-provided 
        coverage for qualified long-term care services (as defined in 
        section 7702B(c)) to the extent that such coverage is provided 
        through a flexible spending or similar arrangement.
          ``(2) Flexible spending arrangement.--For purposes of this 
        subsection, a flexible spending arrangement is a benefit 
        program which provides employees with coverage under which--
                  ``(A) specified incurred expenses may be reimbursed 
                (subject to reimbursement maximums and other reasonable 
                conditions), and
                  ``(B) the maximum amount of reimbursement which is 
                reasonably available to a participant for such coverage 
                is less than 500 percent of the value of such coverage.
        In the case of an insured plan, the maximum amount reasonably 
        available shall be determined on the basis of the underlying 
        coverage.''
  (c) Continuation Coverage Excise Tax Not To Apply.--Subsection (f) of 
section 4980B is amended by adding at the end the following new 
paragraph:
          ``(9) Continuation of long-term care coverage not required.--
        A group health plan shall not be treated as failing to meet the 
        requirements of this subsection solely by reason of failing to 
        provide coverage under any qualified long-term care insurance 
        contract (as defined in section 7702B(b)).''
  (d) Clerical Amendment.--The table of sections for chapter 79 is 
amended by inserting after the item relating to section 7702A the 
following new item:

                              ``Sec. 7702B. Treatment of qualified 
                                        long-term care insurance.''.

  (e) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        apply to contracts issued after December 31, 1996.
          (2) Continuation of existing policies.--In the case of any 
        contract issued before January 1, 1997, which met the long-term 
        care insurance requirements of the State in which the contract 
        was sitused at the time the contract was issued--
                  (A) such contract shall be treated for purposes of 
                the Internal Revenue Code of 1986 as a qualified long-
                term care insurance contract (as defined in section 
                7702B(b) of such Code), and
                  (B) services provided under, or reimbursed by, such 
                contract shall be treated for such purposes as 
                qualified long-term care services (as defined in 
                section 7702B(c) of such Code).
          (3) Exchanges of existing policies.--If, after the date of 
        enactment of this Act and before January 1, 1998, a contract 
        providing for long-term care insurance coverage is exchanged 
        solely for a qualified long-term care insurance contract (as 
        defined in section 7702B(b) of such Code), no gain or loss 
        shall be recognized on the exchange. If, in addition to a 
        qualified long-term care insurance contract, money or other 
        property is received in the exchange, then any gain shall be 
        recognized to the extent of the sum of the money and the fair 
        market value of the other property received. For purposes of 
        this paragraph, the cancellation of a contract providing for 
        long-term care insurance coverage and reinvestment of the 
        cancellation proceeds in a qualified long-term care insurance 
        contract within 60 days thereafter shall be treated as an 
        exchange.
          (4) Issuance of certain riders permitted.--For purposes of 
        applying sections 101(f), 7702, and 7702A of the Internal 
        Revenue Code of 1986 to any contract--
                  (A) the issuance of a rider which is treated as a 
                qualified long-term care insurance contract under 
                section 7702B, and
                  (B) the addition of any provision required to conform 
                any other long-term care rider to be so treated,
        shall not be treated as a modification or material change of 
        such contract.

SEC. 322. QUALIFIED LONG-TERM CARE SERVICES TREATED AS MEDICAL CARE.

  (a) General Rule.--Paragraph (1) of section 213(d) (defining medical 
care) is amended by striking ``or'' at the end of subparagraph (B), by 
redesignating subparagraph (C) as subparagraph (D), and by inserting 
after subparagraph (B) the following new subparagraph:
                  ``(C) for qualified long-term care services (as 
                defined in section 7702B(c)), or''.
  (b) Technical Amendments.--
          (1) Subparagraph (D) of section 213(d)(1) (as redesignated by 
        subsection (a)) is amended by inserting before the period ``or 
        for any qualified long-term care insurance contract (as defined 
        in section 7702B(b))''.
          (2)(A) Paragraph (1) of section 213(d) is amended by adding 
        at the end the following new flush sentence:
        ``In the case of a qualified long-term care insurance contract 
        (as defined in section 7702B(b)), only eligible long-term care 
        premiums (as defined in paragraph (10)) shall be taken into 
        account under subparagraph (D).''
          (B) Subsection (d) of section 213 is amended by adding at the 
        end the following new paragraphs:
          ``(10) Eligible long-term care premiums.--
                  ``(A) In general.--For purposes of this section, the 
                term `eligible long-term care premiums' means the 
                amount paid during a taxable year for any qualified 
                long-term care insurance contract (as defined in 
                section 7702B(b)) covering an individual, to the extent 
                such amount does not exceed the limitation determined 
                under the following table:

                  ``In the case of an individual
                                                                       
                    with an attained age before the
                                                         The limitation
                    close of the taxable year of:
                                                                is:    
                          40 or less.................         $  200   
                          More than 40 but not more              375   
                            than 50.
                          More than 50 but not more              750   
                            than 60.
                          More than 60 but not more            2,000   
                            than 70.
                          More than 70...............          2,500.  

                  ``(B) Indexing.--
                          ``(i) In general.--In the case of any taxable 
                        year beginning in a calendar year after 1997, 
                        each dollar amount contained in subparagraph 
                        (A) shall be increased by the medical care cost 
                        adjustment of such amount for such calendar 
                        year. If any increase determined under the 
                        preceding sentence is not a multiple of $10, 
                        such increase shall be rounded to the nearest 
                        multiple of $10.
                          ``(ii) Medical care cost adjustment.--For 
                        purposes of clause (i), the medical care cost 
                        adjustment for any calendar year is the 
                        percentage (if any) by which--
                                  ``(I) the medical care component of 
                                the Consumer Price Index (as defined in 
                                section 1(f)(5)) for August of the 
                                preceding calendar year, exceeds
                                  ``(II) such component for August of 
                                1996.
                        The Secretary shall, in consultation with the 
                        Secretary of Health and Human Services, 
                        prescribe an adjustment which the Secretary 
                        determines is more appropriate for purposes of 
                        this paragraph than the adjustment described in 
                        the preceding sentence, and the adjustment so 
                        prescribed shall apply in lieu of the 
                        adjustment described in the preceding sentence.
          ``(11) Certain payments to relatives treated as not paid for 
        medical care.--An amount paid for a qualified long-term care 
        service (as defined in section 7702B(c)) provided to an 
        individual shall be treated as not paid for medical care if 
        such service is provided--
                  ``(A) by the spouse of the individual or by a 
                relative (directly or through a partnership, 
                corporation, or other entity) unless the service is 
                provided by a licensed professional with respect to 
                such service, or
                  ``(B) by a corporation or partnership which is 
                related (within the meaning of section 267(b) or 
                707(b)) to the individual.
        For purposes of this paragraph, the term `relative' means an 
        individual bearing a relationship to the individual which is 
        described in any of paragraphs (1) through (8) of section 
        152(a). This paragraph shall not apply for purposes of section 
        105(b) with respect to reimbursements through insurance.''
          (3) Paragraph (6) of section 213(d) is amended--
                  (A) by striking ``subparagraphs (A) and (B)'' and 
                inserting ``subparagraphs (A), (B), and (C)'', and
                  (B) by striking ``paragraph (1)(C)'' in subparagraph 
                (A) and inserting ``paragraph (1)(D)''.
          (4) Paragraph (7) of section 213(d) is amended by striking 
        ``subparagraphs (A) and (B)'' and inserting ``subparagraphs 
        (A), (B), and (C)''.
  (c) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 1996.
          (2) Deduction for long-term care services.--Amounts paid for 
        qualified long-term care services (as defined in section 
        7702B(c) of the Internal Revenue Code of 1986, as added by this 
        Act) furnished in any taxable year beginning before January 1, 
        1998, shall not be taken into account under section 213 of the 
        Internal Revenue Code of 1986.

SEC. 323. REPORTING REQUIREMENTS.

  (a) In General.--Subpart B of part III of subchapter A of chapter 61 
is amended by adding at the end the following new section:

``SEC. 6050Q. CERTAIN LONG-TERM CARE BENEFITS.

  ``(a) Requirement of Reporting.--Any person who pays long-term care 
benefits shall make a return, according to the forms or regulations 
prescribed by the Secretary, setting forth--
          ``(1) the aggregate amount of such benefits paid by such 
        person to any individual during any calendar year, and
          ``(2) the name, address, and TIN of such individual.
  ``(b) Statements To Be Furnished to Persons With Respect to Whom 
Information Is Required.--Every person required to make a return under 
subsection (a) shall furnish to each individual whose name is required 
to be set forth in such return a written statement showing--
          ``(1) the name of the person making the payments, and
          ``(2) the aggregate amount of long-term care benefits paid to 
        the individual which are required to be shown on such return.
The written statement required under the preceding sentence shall be 
furnished to the individual on or before January 31 of the year 
following the calendar year for which the return under subsection (a) 
was required to be made.
  ``(c) Long-Term Care Benefits.--For purposes of this section, the 
term `long-term care benefit' means--
          ``(1) any amount paid under a long-term care insurance policy 
        (within the meaning of section 4980C(e)), and
          ``(2) payments which are excludable from gross income by 
        reason of section 101(g).''.
  (b) Penalties.--
          (1) Subparagraph (B) of section 6724(d)(1) is amended by 
        redesignating clauses (ix) through (xiv) as clauses (x) through 
        (xv), respectively, and by inserting after clause (viii) the 
        following new clause:
                          ``(ix) section 6050Q (relating to certain 
                        long-term care benefits),''.
          (2) Paragraph (2) of section 6724(d) is amended by 
        redesignating subparagraphs (Q) through (T) as subparagraphs 
        (R) through (U), respectively, and by inserting after 
        subparagraph (P) the following new subparagraph:
                  ``(Q) section 6050Q(b) (relating to certain long-term 
                care benefits),''.
  (c) Clerical Amendment.--The table of sections for subpart B of part 
III of subchapter A of chapter 61 is amended by adding at the end the 
following new item:

                              ``Sec. 6050Q. Certain long-term care 
                                        benefits.''

  (d) Effective Date.--The amendments made by this section shall apply 
to benefits paid after December 31, 1996.
                PART II--CONSUMER PROTECTION PROVISIONS
SEC. 325. POLICY REQUIREMENTS.

  Section 7702B (as added by section 321) is amended by adding at the 
end the following new subsection:
  ``(f) Consumer Protection Provisions.--
          ``(1) In general.--The requirements of this subsection are 
        met with respect to any contract if any long-term care 
        insurance policy issued under the contract meets--
                  ``(A) the requirements of the model regulation and 
                model Act described in paragraph (2),
                  ``(B) the disclosure requirement of paragraph (3), 
                and
                  ``(C) the requirements relating to nonforfeitability 
                under paragraph (4).
          ``(2) Requirements of model regulation and act.--
                  ``(A) In general.--The requirements of this paragraph 
                are met with respect to any policy if such policy 
                meets--
                          ``(i) Model regulation.--The following 
                        requirements of the model regulation:
                                  ``(I) Section 7A (relating to 
                                guaranteed renewal or 
                                noncancellability), and the 
                                requirements of section 6B of the model 
                                Act relating to such section 7A.
                                  ``(II) Section 7B (relating to 
                                prohibitions on limitations and 
                                exclusions).
                                  ``(III) Section 7C (relating to 
                                extension of benefits).
                                  ``(IV) Section 7D (relating to 
                                continuation or conversion of 
                                coverage).
                                  ``(V) Section 7E (relating to 
                                discontinuance and replacement of 
                                policies).
                                  ``(VI) Section 8 (relating to 
                                unintentional lapse).
                                  ``(VII) Section 9 (relating to 
                                disclosure), other than section 9F 
                                thereof.
                                  ``(VIII) Section 10 (relating to 
                                prohibitions against post-claims 
                                underwriting).
                                  ``(IX) Section 11 (relating to 
                                minimum standards).
                                  ``(X) Section 12 (relating to 
                                requirement to offer inflation 
                                protection), except that any 
                                requirement for a signature on a 
                                rejection of inflation protection shall 
                                permit the signature to be on an 
                                application or on a separate form.
                                  ``(XI) Section 23 (relating to 
                                prohibition against preexisting 
                                conditions and probationary periods in 
                                replacement policies or certificates).
                          ``(ii) Model act.--The following requirements 
                        of the model Act:
                                  ``(I) Section 6C (relating to 
                                preexisting conditions).
                                  ``(II) Section 6D (relating to prior 
                                hospitalization).
                  ``(B) Definitions.--For purposes of this paragraph--
                          ``(i) Model provisions.--The terms `model 
                        regulation' and `model Act' mean the long-term 
                        care insurance model regulation, and the long-
                        term care insurance model Act, respectively, 
                        promulgated by the National Association of 
                        Insurance Commissioners (as adopted as of 
                        January 1993).
                          ``(ii) Coordination.--Any provision of the 
                        model regulation or model Act listed under 
                        clause (i) or (ii) of subparagraph (A) shall be 
                        treated as including any other provision of 
                        such regulation or Act necessary to implement 
                        the provision.
                          ``(iii) Determination.--For purposes of this 
                        section and section 4980C, the determination of 
                        whether any requirement of a model regulation 
                        or the model Act has been met shall be made by 
                        the Secretary.
          ``(3) Disclosure requirement.--The requirement of this 
        paragraph is met with respect to any policy if such policy 
        meets the requirements of section 4980C(d)(1).
          ``(4) Nonforfeiture requirements.--
                  ``(A) In general.--The requirements of this paragraph 
                are met with respect to any level premium long-term 
                care insurance policy, if the issuer of such policy 
                offers to the policyholder, including any group 
                policyholder, a nonforfeiture provision meeting the 
                requirements of subparagraph (B).
                  ``(B) Requirements of provision.--The nonforfeiture 
                provision required under subparagraph (A) shall meet 
                the following requirements:
                          ``(i) The nonforfeiture provision shall be 
                        appropriately captioned.
                          ``(ii) The nonforfeiture provision shall 
                        provide for a benefit available in the event of 
                        a default in the payment of any premiums and 
                        the amount of the benefit may be adjusted 
                        subsequent to being initially granted only as 
                        necessary to reflect changes in claims, 
                        persistency, and interest as reflected in 
                        changes in rates for premium paying policies 
                        approved by the Secretary for the same policy 
                        form.
                          ``(iii) The nonforfeiture provision shall 
                        provide at least one of the following:
                                  ``(I) Reduced paid-up insurance.
                                  ``(II) Extended term insurance.
                                  ``(III) Shortened benefit period.
                                  ``(IV) Other similar offerings 
                                approved by the Secretary.
          ``(5) Long-term care insurance policy defined.--For purposes 
        of this subsection, the term `long-term care insurance policy' 
        has the meaning given such term by section 4980C(e).''.

SEC. 326. REQUIREMENTS FOR ISSUERS OF LONG-TERM CARE INSURANCE 
                    POLICIES.

  (a) In General.--Chapter 43 is amended by adding at the end the 
following new section:

``SEC. 4980C. REQUIREMENTS FOR ISSUERS OF LONG-TERM CARE INSURANCE 
                    POLICIES.

  ``(a) General Rule.--There is hereby imposed on any person failing to 
meet the requirements of subsection (c) or (d) a tax in the amount 
determined under subsection (b).
  ``(b) Amount.--
          ``(1) In general.--The amount of the tax imposed by 
        subsection (a) shall be $100 per policy for each day any 
        requirements of subsection (c) or (d) are not met with respect 
        to each long-term care insurance policy.
          ``(2) Waiver.--In the case of a failure which is due to 
        reasonable cause and not to willful neglect, the Secretary may 
        waive part or all of the tax imposed by subsection (a) to the 
        extent that payment of the tax would be excessive relative to 
        the failure involved.
  ``(c) Responsibilities.--The requirements of this subsection are as 
follows:
          ``(1) Requirements of model provisions.--
                  ``(A) Model regulation.--The following requirements 
                of the model regulation must be met:
                          ``(i) Section 13 (relating to application 
                        forms and replacement coverage).
                          ``(ii) Section 14 (relating to reporting 
                        requirements), except that the issuer shall 
                        also report at least annually the number of 
                        claims denied during the reporting period for 
                        each class of business (expressed as a 
                        percentage of claims denied), other than claims 
                        denied for failure to meet the waiting period 
                        or because of any applicable preexisting 
                        condition.
                          ``(iii) Section 20 (relating to filing 
                        requirements for marketing).
                          ``(iv) Section 21 (relating to standards for 
                        marketing), including inaccurate completion of 
                        medical histories, other than sections 21C(1) 
                        and 21C(6) thereof, except that--
                                  ``(I) in addition to such 
                                requirements, no person shall, in 
                                selling or offering to sell a long-term 
                                care insurance policy, misrepresent a 
                                material fact; and
                                  ``(II) no such requirements shall 
                                include a requirement to inquire or 
                                identify whether a prospective 
                                applicant or enrollee for long-term 
                                care insurance has accident and 
                                sickness insurance.
                          ``(v) Section 22 (relating to appropriateness 
                        of recommended purchase).
                          ``(vi) Section 24 (relating to standard 
                        format outline of coverage).
                          ``(vii) Section 25 (relating to requirement 
                        to deliver shopper's guide).
                  ``(B) Model act.--The following requirements of the 
                model Act must be met:
                          ``(i) Section 6F (relating to right to 
                        return), except that such section shall also 
                        apply to denials of applications and any refund 
                        shall be made within 30 days of the return or 
                        denial.
                          ``(ii) Section 6G (relating to outline of 
                        coverage).
                          ``(iii) Section 6H (relating to requirements 
                        for certificates under group plans).
                          ``(iv) Section 6I (relating to policy 
                        summary).
                          ``(v) Section 6J (relating to monthly reports 
                        on accelerated death benefits).
                          ``(vi) Section 7 (relating to 
                        incontestability period).
                  ``(C) Definitions.--For purposes of this paragraph, 
                the terms `model regulation' and `model Act' have the 
                meanings given such terms by section 7702B(f)(2)(B).
          ``(2) Delivery of policy.--If an application for a long-term 
        care insurance policy (or for a certificate under a group long-
        term care insurance policy) is approved, the issuer shall 
        deliver to the applicant (or policyholder or certificateholder) 
        the policy (or certificate) of insurance not later than 30 days 
        after the date of the approval.
          ``(3) Information on denials of claims.--If a claim under a 
        long-term care insurance policy is denied, the issuer shall, 
        within 60 days of the date of a written request by the 
        policyholder or certificateholder (or representative)--
                  ``(A) provide a written explanation of the reasons 
                for the denial, and
                  ``(B) make available all information directly 
                relating to such denial.
  ``(d) Disclosure.--The requirements of this subsection are met if the 
issuer of a long-term care insurance policy discloses in such policy 
and in the outline of coverage required under subsection (c)(1)(B)(ii) 
that the policy is intended to be a qualified long-term care insurance 
contract under section 7702B(b).
  ``(e) Long-Term Care Insurance Policy Defined.--For purposes of this 
section, the term `long-term care insurance policy' means any product 
which is advertised, marketed, or offered as long-term care 
insurance.''.
  (b) Conforming Amendment.--The table of sections for chapter 43 is 
amended by adding at the end the following new item:

                              ``Sec. 4980C. Requirements for issuers of 
                                        long-term care insurance 
                                        policies.''.

SEC. 327. COORDINATION WITH STATE REQUIREMENTS.

  Nothing in this part shall prevent a State from establishing, 
implementing, or continuing in effect standards related to the 
protection of policyholders of long-term care insurance policies (as 
defined in section 4980C(e) of the Internal Revenue Code of 1986), if 
such standards are not in conflict with or inconsistent with the 
standards established under such Code.

SEC. 328. EFFECTIVE DATES.

  (a) In General.--The provisions of, and amendments made by, this part 
shall apply to contracts issued after December 31, 1996. The provisions 
of section 321(g) (relating to transition rule) shall apply to such 
contracts.
  (b) Issuers.--The amendments made by section 326 shall apply to 
actions taken after December 31, 1996.

          Subtitle D--Treatment of Accelerated Death Benefits

SEC. 331. TREATMENT OF ACCELERATED DEATH BENEFITS BY RECIPIENT.

  (a) In General.--Section 101 (relating to certain death benefits) is 
amended by adding at the end the following new subsection:
  ``(g) Treatment of Certain Accelerated Death Benefits.--
          ``(1) In general.--For purposes of this section, the 
        following amounts shall be treated as an amount paid by reason 
        of the death of an insured:
                  ``(A) Any amount received under a life insurance 
                contract on the life of an insured who is a terminally 
                ill individual.
                  ``(B) Any amount received under a life insurance 
                contract on the life of an insured who is a chronically 
                ill individual (as defined in section 7702B(c)(2)) but 
                only if such amount is received under a rider or other 
                provision of such contract which is treated as a 
                qualified long-term care insurance contract under 
                section 7702B and such amount is treated under section 
                7702B (after the application of subsection (d) thereof) 
                as a payment for qualified long-term care services (as 
                defined in such section).
          ``(2) Treatment of viatical settlements.--
                  ``(A) In general.--In the case of a life insurance 
                contract on the life of an insured described in 
                paragraph (1), if--
                          ``(i) any portion of such contract is sold to 
                        any viatical settlement provider, or
                          ``(ii) any portion of the death benefit is 
                        assigned to such a provider,
                the amount paid for such sale or assignment shall be 
                treated as an amount paid under the life insurance 
                contract by reason of the death of such insured.
                  ``(B) Viatical settlement provider.--The term 
                `viatical settlement provider' means any person 
                regularly engaged in the trade or business of 
                purchasing, or taking assignments of, life insurance 
                contracts on the lives of insureds described in 
                paragraph (1) if--
                          ``(i) such person is licensed for such 
                        purposes in the State in which the insured 
                        resides, or
                          ``(ii) in the case of an insured who resides 
                        in a State not requiring the licensing of such 
                        persons for such purposes--
                                  ``(I) such person meets the 
                                requirements of sections 8 and 9 of the 
                                Viatical Settlements Model Act of the 
                                National Association of Insurance 
                                Commissioners, and
                                  ``(II) meets the requirements of the 
                                Model Regulations of the National 
                                Association of Insurance Commissioners 
                                (relating to standards for evaluation 
                                of reasonable payments) in determining 
                                amounts paid by such person in 
                                connection with such purchases or 
                                assignments.
          ``(3) Definitions.--For purposes of this subsection--
                  ``(A) Terminally ill individual.--The term 
                `terminally ill individual' means an individual who has 
                been certified by a physician as having an illness or 
                physical condition which can reasonably be expected to 
                result in death in 24 months or less after the date of 
                the certification.
                  ``(B) Physician.--The term `physician' has the 
                meaning given to such term by section 1861(r)(1) of the 
                Social Security Act (42 U.S.C. 1395x(r)(1)).
          ``(4) Exception for business-related policies.--This 
        subsection shall not apply in the case of any amount paid to 
        any taxpayer other than the insured if such taxpayer has an 
        insurable interest with respect to the life of the insured by 
        reason of the insured being a director, officer, or employee of 
        the taxpayer or by reason of the insured being financially 
        interested in any trade or business carried on by the 
        taxpayer.''
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to amounts received after December 31, 1996.

SEC. 332. TAX TREATMENT OF COMPANIES ISSUING QUALIFIED ACCELERATED 
                    DEATH BENEFIT RIDERS.

  (a) Qualified Accelerated Death Benefit Riders Treated as Life 
Insurance.--Section 818 (relating to other definitions and special 
rules) is amended by adding at the end the following new subsection:
  ``(g) Qualified Accelerated Death Benefit Riders Treated as Life 
Insurance.--For purposes of this part--
          ``(1) In general.--Any reference to a life insurance contract 
        shall be treated as including a reference to a qualified 
        accelerated death benefit rider on such contract.
          ``(2) Qualified accelerated death benefit riders.--For 
        purposes of this subsection, the term `qualified accelerated 
        death benefit rider' means any rider on a life insurance 
        contract if the only payments under the rider are payments 
        meeting the requirements of section 101(g).
          ``(3) Exception for long-term care riders.--Paragraph (1) 
        shall not apply to any rider which is treated as a long-term 
        care insurance contract under section 7702B.''
  (b) Effective Date.--
          (1) In general.--The amendment made by this section shall 
        take effect on January 1, 1997.
          (2) Issuance of rider not treated as material change.--For 
        purposes of applying sections 101(f), 7702, and 7702A of the 
        Internal Revenue Code of 1986 to any contract--
                  (A) the issuance of a qualified accelerated death 
                benefit rider (as defined in section 818(g) of such 
                Code (as added by this Act)), and
                  (B) the addition of any provision required to conform 
                an accelerated death benefit rider to the requirements 
                of such section 818(g),
        shall not be treated as a modification or material change of 
        such contract.

                      Subtitle E--High-Risk Pools

SEC. 341. EXEMPTION FROM INCOME TAX FOR STATE-SPONSORED ORGANIZATIONS 
                    PROVIDING HEALTH COVERAGE FOR HIGH-RISK 
                    INDIVIDUALS.

  (a) In General.--Subsection (c) of section 501 (relating to list of 
exempt organizations) is amended by adding at the end the following new 
paragraph:
          ``(26) Any membership organization if--
                  ``(A) such organization is established by a State 
                exclusively to provide coverage for medical care (as 
                defined in section 213(d)) on a not-for-profit basis to 
                individuals described in subparagraph (B) through--
                          ``(i) insurance issued by the organization, 
                        or
                          ``(ii) a health maintenance organization 
                        under an arrangement with the organization,
                  ``(B) the only individuals receiving such coverage 
                through the organization are individuals--
                          ``(i) who are residents of such State, and
                          ``(ii) who, by reason of the existence or 
                        history of a medical condition, are unable to 
                        acquire medical care coverage for such 
                        condition through insurance or from a health 
                        maintenance organization or are able to acquire 
                        such coverage only at a rate which is 
                        substantially in excess of the rate for such 
                        coverage through the membership organization,
                  ``(C) the composition of the membership in such 
                organization is specified by such State, and
                  ``(D) no part of the net earnings of the organization 
                inures to the benefit of any private shareholder or 
                individual.''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1996.

            Subtitle F--Organizations Subject to Section 833

SEC. 351. ORGANIZATIONS SUBJECT TO SECTION 833.

  (a) In General.--Section 833(c) (relating to organization to which 
section applies) is amended by adding at the end the following new 
paragraph:
          ``(4) Treatment as existing blue cross or blue shield 
        organization.--
                  ``(A) In general.--Paragraph (2) shall be applied to 
                an organization described in subparagraph (B) as if it 
                were a Blue Cross or Blue Shield organization.
                  ``(B) Applicable organization.--An organization is 
                described in this subparagraph if it--
                          ``(i) is organized under, and governed by, 
                        State laws which are specifically and 
                        exclusively applicable to not-for-profit health 
                        insurance or health service type organizations, 
                        and
                          ``(ii) is not a Blue Cross or Blue Shield 
                        organization or health maintenance 
                        organization.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years ending after December 31, 1996.

                       TITLE IV--REVENUE OFFSETS

SEC. 400. AMENDMENT OF 1986 CODE.

  Except as otherwise expressly provided, whenever in this title an 
amendment or repeal is expressed in terms of an amendment to, or repeal 
of, a section or other provision, the reference shall be considered to 
be made to a section or other provision of the Internal Revenue Code of 
1986.

   Subtitle A--Repeal of Bad Debt Reserve Method for Thrift Savings 
                              Associations

SEC. 401. REPEAL OF BAD DEBT RESERVE METHOD FOR THRIFT SAVINGS 
                    ASSOCIATIONS.

  (a) In General.--Section 593 (relating to reserves for losses on 
loans) is amended by adding at the end the following new subsections:
  ``(f) Termination of Reserve Method.--Subsections (a), (b), (c), and 
(d) shall not apply to any taxable year beginning after December 31, 
1995.
  ``(g) 6-Year Spread of Adjustments.--
          ``(1) In general.--In the case of any taxpayer who is 
        required by reason of subsection (f) to change its method of 
        computing reserves for bad debts--
                  ``(A) such change shall be treated as a change in a 
                method of accounting,
                  ``(B) such change shall be treated as initiated by 
                the taxpayer and as having been made with the consent 
                of the Secretary, and
                  ``(C) the net amount of the adjustments required to 
                be taken into account by the taxpayer under section 
                481(a)--
                          ``(i) shall be determined by taking into 
                        account only applicable excess reserves, and
                          ``(ii) as so determined, shall be taken into 
                        account ratably over the 6-taxable year period 
                        beginning with the first taxable year beginning 
                        after December 31, 1995.
          ``(2) Applicable excess reserves.--
                  ``(A) In general.--For purposes of paragraph (1), the 
                term `applicable excess reserves' means the excess (if 
                any) of--
                          ``(i) the balance of the reserves described 
                        in subsection (c)(1) (other than the 
                        supplemental reserve) as of the close of the 
                        taxpayer's last taxable year beginning before 
                        December 31, 1995, over
                          ``(ii) the lesser of--
                                  ``(I) the balance of such reserves as 
                                of the close of the taxpayer's last 
                                taxable year beginning before January 
                                1, 1988, or
                                  ``(II) the balance of the reserves 
                                described in subclause (I), reduced in 
                                the same manner as under section 
                                585(b)(2)(B)(ii) on the basis of the 
                                taxable years described in clause (i) 
                                and this clause.
                  ``(B) Special rule for thrifts which become small 
                banks.--In the case of a bank (as defined in section 
                581) which was not a large bank (as defined in section 
                585(c)(2)) for its first taxable year beginning after 
                December 31, 1995--
                          ``(i) the balance taken into account under 
                        subparagraph (A)(ii) shall not be less than the 
                        amount which would be the balance of such 
                        reserves as of the close of its last taxable 
                        year beginning before such date if the 
                        additions to such reserves for all taxable 
                        years had been determined under section 
                        585(b)(2)(A), and
                          ``(ii) the opening balance of the reserve for 
                        bad debts as of the beginning of such first 
                        taxable year shall be the balance taken into 
                        account under subparagraph (A)(ii) (determined 
                        after the application of clause (i) of this 
                        subparagraph).
                The preceding sentence shall not apply for purposes of 
                paragraphs (5) and (6) or subsection (e)(1).
          ``(3) Recapture of pre-1988 reserves where taxpayer ceases to 
        be bank.--If, during any taxable year beginning after December 
        31, 1995, a taxpayer to which paragraph (1) applied is not a 
        bank (as defined in section 581), paragraph (1) shall apply to 
        the reserves described in paragraph (2)(A)(ii) and the 
        supplemental reserve; except that such reserves shall be taken 
        into account ratably over the 6-taxable year period beginning 
        with such taxable year.
          ``(4) Suspension of recapture if residential loan requirement 
        met.--
                  ``(A) In general.--In the case of a bank which meets 
                the residential loan requirement of subparagraph (B) 
                for the first taxable year beginning after December 31, 
                1995, or for the following taxable year--
                          ``(i) no adjustment shall be taken into 
                        account under paragraph (1) for such taxable 
                        year, and
                          ``(ii) such taxable year shall be disregarded 
                        in determining--
                                  ``(I) whether any other taxable year 
                                is a taxable year for which an 
                                adjustment is required to be taken into 
                                account under paragraph (1), and
                                  ``(II) the amount of such adjustment.
                  ``(B) Residential loan requirement.--A taxpayer meets 
                the residential loan requirement of this subparagraph 
                for any taxable year if the principal amount of the 
                residential loans made by the taxpayer during such year 
                is not less than the base amount for such year.
                  ``(C) Residential loan.--For purposes of this 
                paragraph, the term `residential loan' means any loan 
                described in clause (v) of section 7701(a)(19)(C) but 
                only if such loan is incurred in acquiring, 
                constructing, or improving the property described in 
                such clause.
                  ``(D) Base amount.--For purposes of subparagraph (B), 
                the base amount is the average of the principal amounts 
                of the residential loans made by the taxpayer during 
                the 6 most recent taxable years beginning on or before 
                December 31, 1995. At the election of the taxpayer who 
                made such loans during each of such 6 taxable years, 
                the preceding sentence shall be applied without regard 
                to the taxable year in which such principal amount was 
                the highest and the taxable year in such principal 
                amount was the lowest. Such an election may be made 
                only for the first taxable year beginning after such 
                date, and, if made for such taxable year, shall apply 
                to the succeeding taxable year unless revoked with the 
                consent of the Secretary.
                  ``(E) Controlled groups.--In the case of a taxpayer 
                which is a member of any controlled group of 
                corporations described in section 1563(a)(1), 
                subparagraph (B) shall be applied with respect to such 
                group.
          ``(5) Continued application of fresh start under section 585 
        transitional rules.--In the case of a taxpayer to which 
        paragraph (1) applied and which was not a large bank (as 
        defined in section 585(c)(2)) for its first taxable year 
        beginning after December 31, 1995:
                  ``(A) In general.--For purposes of determining the 
                net amount of adjustments referred to in section 
                585(c)(3)(A)(iii), there shall be taken into account 
                only the excess (if any) of the reserve for bad debts 
                as of the close of the last taxable year before the 
                disqualification year over the balance taken into 
                account by such taxpayer under paragraph (2)(A)(ii) of 
                this subsection.
                  ``(B) Treatment under elective cut-off method.--For 
                purposes of applying section 585(c)(4)--
                          ``(i) the balance of the reserve taken into 
                        account under subparagraph (B) thereof shall be 
                        reduced by the balance taken into account by 
                        such taxpayer under paragraph (2)(A)(ii) of 
                        this subsection, and
                          ``(ii) no amount shall be includible in gross 
                        income by reason of such reduction.
          ``(6) Suspended reserve included as section 381(c) items.--
        The balance taken into account by a taxpayer under paragraph 
        (2)(A)(ii) of this subsection and the supplemental reserve 
        shall be treated as items described in section 381(c).
          ``(7) Conversions to credit unions.--In the case of a 
        taxpayer to which paragraph (1) applied which becomes a credit 
        union described in section 501(c) and exempt from taxation 
        under section 501(a)--
                  ``(A) any amount required to be included in the gross 
                income of the credit union by reason of this subsection 
                shall be treated as derived from an unrelated trade or 
                business (as defined in section 513), and
                  ``(B) for purposes of paragraph (3), the credit union 
                shall not be treated as if it were a bank.
          ``(8) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out this subsection 
        and subsection (e), including regulations providing for the 
        application of such subsections in the case of acquisitions, 
        mergers, spin-offs, and other reorganizations.''
  (b) Conforming Amendments.--
          (1) Subsection (d) of section 50 is amended by adding at the 
        end the following new sentence:
``Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) referred to 
in paragraph (1) of this subsection shall not apply to any taxable year 
beginning after December 31, 1995.''
          (2) Subsection (e) of section 52 is amended by striking 
        paragraph (1) and by redesignating paragraphs (2) and (3) as 
        paragraphs (1) and (2), respectively.
          (3) Subsection (a) of section 57 is amended by striking 
        paragraph (4).
          (4) Section 246 is amended by striking subsection (f).
          (5) Clause (i) of section 291(e)(1)(B) is amended by striking 
        ``or to which section 593 applies''.
          (6) Subparagraph (A) of section 585(a)(2) is amended by 
        striking ``other than an organization to which section 593 
        applies''.
          (7)(A) The material preceding subparagraph (A) of section 
        593(e)(1) is amended by striking ``by a domestic building and 
        loan association or an institution that is treated as a mutual 
        savings bank under section 591(b)'' and inserting ``by a 
        taxpayer having a balance described in subsection 
        (g)(2)(A)(ii)''.
          (B) Subparagraph (B) of section 593(e)(1) is amended to read 
        as follows:
                  ``(B) then out of the balance taken into account 
                under subsection (g)(2)(A)(ii) (properly adjusted for 
                amounts charged against such reserves for taxable years 
                beginning after December 31, 1987),''.
          (C) Paragraph (1) of section 593(e) is amended by adding at 
        the end the following new sentence: ``This paragraph shall not 
        apply to any distribution of all of the stock of a bank (as 
        defined in section 581) to another corporation if, immediately 
        after the distribution, such bank and such other corporation 
        are members of the same affiliated group (as defined in section 
        1504) and the provisions of section 5(e) of the Federal Deposit 
        Insurance Act (as in effect on December 31, 1995) or similar 
        provisions are in effect.''
          (8) Section 595 is hereby repealed.
          (9) Section 596 is hereby repealed.
          (10) Subsection (a) of section 860E is amended--
                  (A) by striking ``Except as provided in paragraph 
                (2), the'' in paragraph (1) and inserting ``The'',
                  (B) by striking paragraphs (2) and (4) and 
                redesignating paragraphs (3) and (5) as paragraphs (2) 
                and (3), respectively, and
                  (C) by striking in paragraph (2) (as so redesignated) 
                all that follows ``subsection'' and inserting a period.
          (11) Paragraph (3) of section 992(d) is amended by striking 
        ``or 593''.
          (12) Section 1038 is amended by striking subsection (f).
          (13) Clause (ii) of section 1042(c)(4)(B) is amended by 
        striking ``or 593''.
          (14) Subsection (c) of section 1277 is amended by striking 
        ``or to which section 593 applies''.
          (15) Subparagraph (B) of section 1361(b)(2) is amended by 
        striking ``or to which section 593 applies''.
          (16) The table of sections for part II of subchapter H of 
        chapter 1 is amended by striking the items relating to sections 
        595 and 596.
  (c) Effective Dates.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 1995.
          (2) Subsection (b)(7).--The amendments made by subsection 
        (b)(7) shall not apply to any distribution with respect to 
        preferred stock if--
                  (A) such stock is outstanding at all times after 
                October 31, 1995, and before the distribution, and
                  (B) such distribution is made before the date which 
                is 1 year after the date of the enactment of this Act 
                (or, in the case of stock which may be redeemed, if 
                later, the date which is 30 days after the earliest 
                date that such stock may be redeemed).
          (3) Subsection (b)(8).--The amendment made by subsection 
        (b)(8) shall apply to property acquired in taxable years 
        beginning after December 31, 1995.
          (4) Subsection (b)(10).--The amendments made by subsection 
        (b)(10) shall not apply to any residual interest held by a 
        taxpayer if such interest has been held by such taxpayer at all 
        times after October 31, 1995.

             Subtitle B--Reform of the Earned Income Credit

SEC. 411. EARNED INCOME CREDIT DENIED TO INDIVIDUALS NOT AUTHORIZED TO 
                    BE EMPLOYED IN THE UNITED STATES.

  (a) In General.--Section 32(c)(1) (relating to individuals eligible 
to claim the earned income credit) is amended by adding at the end the 
following new subparagraph:
                  ``(F) Identification number requirement.--The term 
                `eligible individual' does not include any individual 
                who does not include on the return of tax for the 
                taxable year--
                          ``(i) such individual's taxpayer 
                        identification number, and
                          ``(ii) if the individual is married (within 
                        the meaning of section 7703), the taxpayer 
                        identification number of such individual's 
                        spouse.''.
  (b) Special Identification Number.--Section 32 is amended by adding 
at the end the following new subsection:
  ``(l) Identification Numbers.--Solely for purposes of subsections 
(c)(1)(F) and (c)(3)(D), a taxpayer identification number means a 
social security number issued to an individual by the Social Security 
Administration (other than a social security number issued pursuant to 
clause (II) (or that portion of clause (III) that relates to clause 
(II)) of section 205(c)(2)(B)(i) of the Social Security Act).''.
  (c) Extension of Procedures Applicable to Mathematical or Clerical 
Errors.--Section 6213(g)(2) (relating to the definition of mathematical 
or clerical errors) is amended by striking ``and'' at the end of 
subparagraph (D), by striking the period at the end of subparagraph (E) 
and inserting a comma, and by inserting after subparagraph (E) the 
following new subparagraphs:
                  ``(F) an omission of a correct taxpayer 
                identification number required under section 32 
                (relating to the earned income credit) to be included 
                on a return, and
                  ``(G) an entry on a return claiming the credit under 
                section 32 with respect to net earnings from self-
                employment described in section 32(c)(2)(A) to the 
                extent the tax imposed by section 1401 (relating to 
                self-employment tax) on such net earnings has not been 
                paid.''.
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1995.

Subtitle C--Treatment of Individuals Who Lose United States Citizenship

SEC. 421. REVISION OF INCOME, ESTATE, AND GIFT TAXES ON INDIVIDUALS WHO 
                    LOSE UNITED STATES CITIZENSHIP.

  (a) In General.--Subsection (a) of section 877 is amended to read as 
follows:
  ``(a) Treatment of Expatriates.--
          ``(1) In general.--Every nonresident alien individual who, 
        within the 10-year period immediately preceding the close of 
        the taxable year, lost United States citizenship, unless such 
        loss did not have for 1 of its principal purposes the avoidance 
        of taxes under this subtitle or subtitle B, shall be taxable 
        for such taxable year in the manner provided in subsection (b) 
        if the tax imposed pursuant to such subsection exceeds the tax 
        which, without regard to this section, is imposed pursuant to 
        section 871.
          ``(2) Certain individuals treated as having tax avoidance 
        purpose.--For purposes of paragraph (1), an individual shall be 
        treated as having a principal purpose to avoid such taxes if--
                  ``(A) the average annual net income tax (as defined 
                in section 38(c)(1)) of such individual for the period 
                of 5 taxable years ending before the date of the loss 
                of United States citizenship is greater than $100,000, 
                or
                  ``(B) the net worth of the individual as of such date 
                is $500,000 or more.
        In the case of the loss of United States citizenship in any 
        calendar year after 1996, such $100,000 and $500,000 amounts 
        shall be increased by an amount equal to such dollar amount 
        multiplied by the cost-of-living adjustment determined under 
        section 1(f)(3) for such calendar year by substituting `1994' 
        for `1992' in subparagraph (B) thereof. Any increase under the 
        preceding sentence shall be rounded to the nearest multiple of 
        $1,000.''
  (b) Exceptions.--
          (1) In general.--Section 877 is amended by striking 
        subsection (d), by redesignating subsection (c) as subsection 
        (d), and by inserting after subsection (b) the following new 
        subsection:
  ``(c) Tax Avoidance Not Presumed in Certain Cases.--
          ``(1) In general.--Subsection (a)(2) shall not apply to an 
        individual if--
                  ``(A) such individual is described in a subparagraph 
                of paragraph (2) of this subsection, and
                  ``(B) within the 1-year period beginning on the date 
                of the loss of United States citizenship, such 
                individual submits a ruling request for the Secretary's 
                determination as to whether such loss has for 1 of its 
                principal purposes the avoidance of taxes under this 
                subtitle or subtitle B.
          ``(2) Individuals described.--
                  ``(A) Dual citizenship, etc.--An individual is 
                described in this subparagraph if--
                          ``(i) the individual became at birth a 
                        citizen of the United States and a citizen of 
                        another country and continues to be a citizen 
                        of such other country, or
                          ``(ii) the individual becomes (not later than 
                        the close of a reasonable period after loss of 
                        United States citizenship) a citizen of the 
                        country in which--
                                  ``(I) such individual was born,
                                  ``(II) if such individual is married, 
                                such individual's spouse was born, or
                                  ``(III) either of such individual's 
                                parents were born.
                  ``(B) Long-term foreign residents.--An individual is 
                described in this subparagraph if, for each year in the 
                10-year period ending on the date of loss of United 
                States citizenship, the individual was present in the 
                United States for 30 days or less. The rule of section 
                7701(b)(3)(D)(ii) shall apply for purposes of this 
                subparagraph.
                  ``(C) Renunciation upon reaching age of majority.--An 
                individual is described in this subparagraph if the 
                individual's loss of United States citizenship occurs 
                before such individual attains age 18\1/2\.
                  ``(D) Individuals specified in regulations.--An 
                individual is described in this subparagraph if the 
                individual is described in a category of individuals 
                prescribed by regulation by the Secretary.''
          (2) Technical amendment.--Paragraph (1) of section 877(b) of 
        such Code is amended by striking ``subsection (c)'' and 
        inserting ``subsection (d)''.
  (c) Treatment of Property Disposed of in Nonrecognition Transactions; 
Treatment of Distributions From Certain Controlled Foreign 
Corporations.--Subsection (d) of section 877, as redesignated by 
subsection (b), is amended to read as follows:
  ``(d) Special Rules for Source, Etc.--For purposes of subsection 
(b)--
          ``(1) Source rules.--The following items of gross income 
        shall be treated as income from sources within the United 
        States:
                  ``(A) Sale of property.--Gains on the sale or 
                exchange of property (other than stock or debt 
                obligations) located in the United States.
                  ``(B) Stock or debt obligations.--Gains on the sale 
                or exchange of stock issued by a domestic corporation 
                or debt obligations of United States persons or of the 
                United States, a State or political subdivision 
                thereof, or the District of Columbia.
                  ``(C) Income or gain derived from controlled foreign 
                corporation.--Any income or gain derived from stock in 
                a foreign corporation but only--
                          ``(i) if the individual losing United States 
                        citizenship owned (within the meaning of 
                        section 958(a)), or is considered as owning (by 
                        applying the ownership rules of section 
                        958(b)), at any time during the 2-year period 
                        ending on the date of the loss of United States 
                        citizenship, more than 50 percent of--
                                  ``(I) the total combined voting power 
                                of all classes of stock entitled to 
                                vote of such corporation, or
                                  ``(II) the total value of the stock 
                                of such corporation, and
                          ``(ii) to the extent such income or gain does 
                        not exceed the earnings and profits 
                        attributable to such stock which were earned or 
                        accumulated before the loss of citizenship and 
                        during periods that the ownership requirements 
                        of clause (i) are met.
          ``(2) Gain recognition on certain exchanges.--
                  ``(A) In general.--In the case of any exchange of 
                property to which this paragraph applies, 
                notwithstanding any other provision of this title, such 
                property shall be treated as sold for its fair market 
                value on the date of such exchange, and any gain shall 
                be recognized for the taxable year which includes such 
                date.
                  ``(B) Exchanges to which paragraph applies.--This 
                paragraph shall apply to any exchange during the 10-
                year period described in subsection (a) if--
                          ``(i) gain would not (but for this paragraph) 
                        be recognized on such exchange in whole or in 
                        part for purposes of this subtitle,
                          ``(ii) income derived from such property was 
                        from sources within the United States (or, if 
                        no income was so derived, would have been from 
                        such sources), and
                          ``(iii) income derived from the property 
                        acquired in the exchange would be from sources 
                        outside the United States.
                  ``(C) Exception.--Subparagraph (A) shall not apply if 
                the individual enters into an agreement with the 
                Secretary which specifies that any income or gain 
                derived from the property acquired in the exchange (or 
                any other property which has a basis determined in 
                whole or part by reference to such property) during 
                such 10-year period shall be treated as from sources 
                within the United States. If the property transferred 
                in the exchange is disposed of by the person acquiring 
                such property, such agreement shall terminate and any 
                gain which was not recognized by reason of such 
                agreement shall be recognized as of the date of such 
                disposition.
                  ``(D) Secretary may extend period.--To the extent 
                provided in regulations prescribed by the Secretary, 
                subparagraph (B) shall be applied by substituting the 
                15-year period beginning 5 years before the loss of 
                United States citizenship for the 10-year period 
                referred to therein.
                  ``(E) Secretary may require recognition of gain in 
                certain cases.--To the extent provided in regulations 
                prescribed by the Secretary--
                          ``(i) the removal of appreciated tangible 
                        personal property from the United States, and
                          ``(ii) any other occurrence which (without 
                        recognition of gain) results in a change in the 
                        source of the income or gain from property from 
                        sources within the United States to sources 
                        outside the United States,
                shall be treated as an exchange to which this paragraph 
                applies.
          ``(3) Substantial diminishing of risks of ownership.--For 
        purposes of determining whether this section applies to any 
        gain on the sale or exchange of any property, the running of 
        the 10-year period described in subsection (a) shall be 
        suspended for any period during which the individual's risk of 
        loss with respect to the property is substantially diminished 
        by--
                  ``(A) the holding of a put with respect to such 
                property (or similar property),
                  ``(B) the holding by another person of a right to 
                acquire the property, or
                  ``(C) a short sale or any other transaction.''
  (d) Credit for Foreign Taxes Imposed on United States Source 
Income.--
          (1) Subsection (b) of section 877 is amended by adding at the 
        end the following new sentence: ``The tax imposed solely by 
        reason of this section shall be reduced (but not below zero) by 
        the amount of any income, war profits, and excess profits taxes 
        (within the meaning of section 903) paid to any foreign country 
        or possession of the United States on any income of the 
        taxpayer on which tax is imposed solely by reason of this 
        section.''
          (2) Subsection (a) of section 877, as amended by subsection 
        (a), is amended by inserting ``(after any reduction in such tax 
        under the last sentence of such subsection)'' after ``such 
        subsection''.
  (e) Comparable Estate and Gift Tax Treatment.--
          (1) Estate tax.--
                  (A) In general.--Subsection (a) of section 2107 is 
                amended to read as follows:
  ``(a) Treatment of Expatriates.--
          ``(1) Rate of tax.--A tax computed in accordance with the 
        table contained in section 2001 is hereby imposed on the 
        transfer of the taxable estate, determined as provided in 
        section 2106, of every decedent nonresident not a citizen of 
        the United States if, within the 10-year period ending with the 
        date of death, such decedent lost United States citizenship, 
        unless such loss did not have for 1 of its principal purposes 
        the avoidance of taxes under this subtitle or subtitle A.
          ``(2) Certain individuals treated as having tax avoidance 
        purpose.--
                  ``(A) In general.--For purposes of paragraph (1), an 
                individual shall be treated as having a principal 
                purpose to avoid such taxes if such individual is so 
                treated under section 877(a)(2).
                  ``(B) Exception.--Subparagraph (A) shall not apply to 
                a decedent meeting the requirements of section 
                877(c)(1).''
                  (B) Credit for foreign death taxes.--Subsection (c) 
                of section 2107 is amended by redesignating paragraph 
                (2) as paragraph (3) and by inserting after paragraph 
                (1) the following new paragraph:
          ``(2) Credit for foreign death taxes.--
                  ``(A) In general.--The tax imposed by subsection (a) 
                shall be credited with the amount of any estate, 
                inheritance, legacy, or succession taxes actually paid 
                to any foreign country in respect of any property which 
                is included in the gross estate solely by reason of 
                subsection (b).
                  ``(B) Limitation on credit.--The credit allowed by 
                subparagraph (A) for such taxes paid to a foreign 
                country shall not exceed the lesser of--
                          ``(i) the amount which bears the same ratio 
                        to the amount of such taxes actually paid to 
                        such foreign country in respect of property 
                        included in the gross estate as the value of 
                        the property included in the gross estate 
                        solely by reason of subsection (b) bears to the 
                        value of all property subjected to such taxes 
                        by such foreign country, or
                          ``(ii) such property's proportionate share of 
                        the excess of--
                                  ``(I) the tax imposed by subsection 
                                (a), over
                                  ``(II) the tax which would be imposed 
                                by section 2101 but for this section.
                  ``(C) Proportionate share.--For purposes of 
                subparagraph (B), a property's proportionate share is 
                the percentage of the value of the property which is 
                included in the gross estate solely by reason of 
                subsection (b) bears to the total value of the gross 
                estate.''
                  (C) Expansion of inclusion in gross estate of stock 
                of foreign corporations.--Paragraph (2) of section 
                2107(b) is amended by striking ``more than 50 percent 
                of'' and all that follows and inserting ``more than 50 
                percent of--
                  ``(A) the total combined voting power of all classes 
                of stock entitled to vote of such corporation, or
                  ``(B) the total value of the stock of such 
                corporation,''.
          (2) Gift tax.--
                  (A) In general.--Paragraph (3) of section 2501(a) is 
                amended to read as follows:
          ``(3) Exception.--
                  ``(A) Certain individuals.--Paragraph (2) shall not 
                apply in the case of a donor who, within the 10-year 
                period ending with the date of transfer, lost United 
                States citizenship, unless such loss did not have for 1 
                of its principal purposes the avoidance of taxes under 
                this subtitle or subtitle A.
                  ``(B) Certain individuals treated as having tax 
                avoidance purpose.--For purposes of subparagraph (A), 
                an individual shall be treated as having a principal 
                purpose to avoid such taxes if such individual is so 
                treated under section 877(a)(2).
                  ``(C) Exception for certain individuals.--
                Subparagraph (B) shall not apply to a decedent meeting 
                the requirements of section 877(c)(1).
                  ``(D) Credit for foreign gift taxes.--The tax imposed 
                by this section solely by reason of this paragraph 
                shall be credited with the amount of any gift tax 
                actually paid to any foreign country in respect of any 
                gift which is taxable under this section solely by 
                reason of this paragraph.''
  (f) Comparable Treatment of Lawful Permanent Residents Who Cease To 
Be Taxed as Residents.--
          (1) In general.--Section 877 is amended by redesignating 
        subsection (e) as subsection (f) and by inserting after 
        subsection (d) the following new subsection:
  ``(e) Comparable Treatment of Lawful Permanent Residents Who Cease To 
Be Taxed as Residents.--
          ``(1) In general.--Any long-term resident of the United 
        States who--
                  ``(A) ceases to be a lawful permanent resident of the 
                United States (within the meaning of section 
                7701(b)(6)), or
                  ``(B) commences to be treated as a resident of a 
                foreign country under the provisions of a tax treaty 
                between the United States and the foreign country and 
                who does not waive the benefits of such treaty 
                applicable to residents of the foreign country,
        shall be treated for purposes of this section and sections 
        2107, 2501, and 6039F in the same manner as if such resident 
        were a citizen of the United States who lost United States 
        citizenship on the date of such cessation or commencement.
          ``(2) Long-term resident.--For purposes of this subsection, 
        the term `long-term resident' means any individual (other than 
        a citizen of the United States) who is a lawful permanent 
        resident of the United States in at least 8 taxable years 
        during the period of 15 taxable years ending with the taxable 
        year during which the event described in subparagraph (A) or 
        (B) of paragraph (1) occurs. For purposes of the preceding 
        sentence, an individual shall not be treated as a lawful 
        permanent resident for any taxable year if such individual is 
        treated as a resident of a foreign country for the taxable year 
        under the provisions of a tax treaty between the United States 
        and the foreign country and does not waive the benefits of such 
        treaty applicable to residents of the foreign country.
          ``(3) Special rules.--
                  ``(A) Exceptions not to apply.--Subsection (c) shall 
                not apply to an individual who is treated as provided 
                in paragraph (1).
                  ``(B) Step-up in basis.--Solely for purposes of 
                determining any tax imposed by reason of this 
                subsection, property which was held by the long-term 
                resident on the date the individual first became a 
                resident of the United States shall be treated as 
                having a basis on such date of not less than the fair 
                market value of such property on such date. The 
                preceding sentence shall not apply if the individual 
                elects not to have such sentence apply. Such an 
                election, once made, shall be irrevocable.
          ``(4) Authority to exempt individuals.--This subsection shall 
        not apply to an individual who is described in a category of 
        individuals prescribed by regulation by the Secretary.
          ``(5) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out this subsection, 
        including regulations providing for the application of this 
        subsection in cases where an alien individual becomes a 
        resident of the United States during the 10-year period after 
        being treated as provided in paragraph (1).''
          (2) Conforming amendments.--
                  (A) Section 2107 is amended by striking subsection 
                (d), by redesignating subsection (e) as subsection (d), 
                and by inserting after subsection (d) (as so 
                redesignated) the following new subsection:
  ``(e) Cross Reference.--

                  ``For comparable treatment of long-term lawful 
permanent residents who ceased to be taxed as residents, see section 
877(e).''

                  (B) Paragraph (3) of section 2501(a) (as amended by 
                subsection (e)) is amended by adding at the end the 
                following new subparagraph:
                  ``(E) Cross reference.--

                  ``For comparable treatment of long-term lawful 
permanent residents who ceased to be taxed as residents, see section 
877(e).''

  (g) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        apply to--
                  (A) individuals losing United States citizenship 
                (within the meaning of section 877 of the Internal 
                Revenue Code of 1986) on or after February 6, 1995, and
                  (B) long-term residents of the United States with 
                respect to whom an event described in subparagraph (A) 
                or (B) of section 877(e)(1) of such Code occurs on or 
                after February 6, 1995.
          (2) Special rule.--
                  (A) In general.--In the case of an individual who 
                performed an act of expatriation specified in paragraph 
                (1), (2), (3), or (4) of section 349(a) of the 
                Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-
                (4)) before February 6, 1995, but who did not, on or 
                before such date, furnish to the United States 
                Department of State a signed statement of voluntary 
                relinquishment of United States nationality confirming 
                the performance of such act, the amendments made by 
                this section and section 11349 shall apply to such 
                individual except that--
                          (i) the 10-year period described in section 
                        877(a) of such Code shall not expire before the 
                        end of the 10-year period beginning on the date 
                        such statement is so furnished, and
                          (ii) the 1-year period referred to in section 
                        877(c) of such Code, as amended by this 
                        section, shall not expire before the date which 
                        is 1 year after the date of the enactment of 
                        this Act.
                  (B) Exception.--Subparagraph (A) shall not apply if 
                the individual establishes to the satisfaction of the 
                Secretary of the Treasury that such loss of United 
                States citizenship occurred before February 6, 1994.

SEC. 422. INFORMATION ON INDIVIDUALS LOSING UNITED STATES CITIZENSHIP.

  (a) In General.--Subpart A of part III of subchapter A of chapter 61 
is amended by inserting after section 6039E the following new section:

``SEC. 6039F. INFORMATION ON INDIVIDUALS LOSING UNITED STATES 
                    CITIZENSHIP.

  ``(a) In General.--Notwithstanding any other provision of law, any 
individual who loses United States citizenship (within the meaning of 
section 877(a)) shall provide a statement which includes the 
information described in subsection (b). Such statement shall be--
          ``(1) provided not later than the earliest date of any act 
        referred to in subsection (c), and
          ``(2) provided to the person or court referred to in 
        subsection (c) with respect to such act.
  ``(b) Information To Be Provided.--Information required under 
subsection (a) shall include--
          ``(1) the taxpayer's TIN,
          ``(2) the mailing address of such individual's principal 
        foreign residence,
          ``(3) the foreign country in which such individual is 
        residing,
          ``(4) the foreign country of which such individual is a 
        citizen,
          ``(5) in the case of an individual having a net worth of at 
        least the dollar amount applicable under section 877(a)(2)(B), 
        information detailing the assets and liabilities of such 
        individual, and
          ``(6) such other information as the Secretary may prescribe.
  ``(c) Acts Described.--For purposes of this section, the acts 
referred to in this subsection are--
          ``(1) the individual's renunciation of his United States 
        nationality before a diplomatic or consular officer of the 
        United States pursuant to paragraph (5) of section 349(a) of 
        the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
          ``(2) the individual's furnishing to the United States 
        Department of State a signed statement of voluntary 
        relinquishment of United States nationality confirming the 
        performance of an act of expatriation specified in paragraph 
        (1), (2), (3), or (4) of section 349(a) of the Immigration and 
        Nationality Act (8 U.S.C. 1481(a)(1)-(4)),
          ``(3) the issuance by the United States Department of State 
        of a certificate of loss of nationality to the individual, or
          ``(4) the cancellation by a court of the United States of a 
        naturalized citizen's certificate of naturalization.
  ``(d) Penalty.--Any individual failing to provide a statement 
required under subsection (a) shall be subject to a penalty for each 
year (of the 10-year period beginning on the date of loss of United 
States citizenship) during any portion of which such failure continues 
in an amount equal to the greater of--
          ``(1) 5 percent of the tax required to be paid under section 
        877 for the taxable year ending during such year, or
          ``(2) $1,000,
unless it is shown that such failure is due to reasonable cause and not 
to willful neglect.
  ``(e) Information To Be Provided to Secretary.--Notwithstanding any 
other provision of law--
          ``(1) any Federal agency or court which collects (or is 
        required to collect) the statement under subsection (a) shall 
        provide to the Secretary--
                  ``(A) a copy of any such statement, and
                  ``(B) the name (and any other identifying 
                information) of any individual refusing to comply with 
                the provisions of subsection (a),
          ``(2) the Secretary of State shall provide to the Secretary a 
        copy of each certificate as to the loss of American nationality 
        under section 358 of the Immigration and Nationality Act which 
        is approved by the Secretary of State, and
          ``(3) the Federal agency primarily responsible for 
        administering the immigration laws shall provide to the 
        Secretary the name of each lawful permanent resident of the 
        United States (within the meaning of section 7701(b)(6)) whose 
        status as such has been revoked or has been administratively or 
        judicially determined to have been abandoned.
Notwithstanding any other provision of law, not later than 30 days 
after the close of each calendar quarter, the Secretary shall publish 
in the Federal Register the name of each individual losing United 
States citizenship (within the meaning of section 877(a)) with respect 
to whom the Secretary receives information under the preceding sentence 
during such quarter.
  ``(f) Reporting by Long-Term Lawful Permanent Residents Who Cease To 
Be Taxed as Residents.--In lieu of applying the last sentence of 
subsection (a), any individual who is required to provide a statement 
under this section by reason of section 877(e)(1) shall provide such 
statement with the return of tax imposed by chapter 1 for the taxable 
year during which the event described in such section occurs.
  ``(g) Exemption.--The Secretary may by regulations exempt any class 
of individuals from the requirements of this section if he determines 
that applying this section to such individuals is not necessary to 
carry out the purposes of this section.''
  (b) Clerical Amendment.--The table of sections for such subpart A is 
amended by inserting after the item relating to section 6039E the 
following new item:

                              ``Sec. 6039F. Information on individuals 
                                        losing United States 
                                        citizenship.''

  (c) Effective Date.--The amendments made by this section shall apply 
to--
          (1) individuals losing United States citizenship (within the 
        meaning of section 877 of the Internal Revenue Code of 1986) on 
        or after February 6, 1995, and
          (2) long-term residents of the United States with respect to 
        whom an event described in subparagraph (A) or (B) of section 
        877(e)(1) of such Code occurs on or after such date.
In no event shall any statement required by such amendments be due 
before the 90th day after the date of the enactment of this Act.

SEC. 423. REPORT ON TAX COMPLIANCE BY UNITED STATES CITIZENS AND 
                    RESIDENTS LIVING ABROAD.

  Not later than 90 days after the date of the enactment of this Act, 
the Secretary of the Treasury shall prepare and submit to the Committee 
on Ways and Means of the House of Representatives and the Committee on 
Finance of the Senate a report--
          (1) describing the compliance with subtitle A of the Internal 
        Revenue Code of 1986 by citizens and lawful permanent residents 
        of the United States (within the meaning of section 7701(b)(6) 
        of such Code) residing outside the United States, and
          (2) recommending measures to improve such compliance 
        (including improved coordination between executive branch 
        agencies).

                         A. Purpose and Summary

    H.R. 3103 (the ``Health Coverage Availability and 
Affordability Act of 1996''), as amended, includes titles 
relating to improving the availability and portability of 
health insurance coverage (Title I), preventing health care 
fraud and health care administrative simplification (Title II), 
tax-related health provisions (Title III), and providing 
certain revenue offsets for the bill (Title IV).

Title I. Improved Availability and Portability of Health Insurance 
        Coverage

    Title I of the bill provides for portability of coverage 
for previously covered individuals, eliminates or reduces 
preexisting condition limitation periods, prohibits exclusions 
based on health status, gives States flexibility to provide 
greater health care protection, and extends the excise tax for 
failure to satisfy the health care continuation rules to 
failures to comply with the rules.

Title II. Preventing Health Care Fraud and Abuse; Administrative 
        Simplification

    Title II of the bill establishes a national health care 
fraud and abuse control program to coordinate Federal, State 
and local law enforcement to combat health care plan fraud, 
extends certain criminal penalties for violations, increases 
funding for investigations, reviews and prosecutions relating 
to health care plans, and improves the efficiency and 
effectiveness of the health care system by encouraging the 
development of a health care network through the establishment 
of standards and requirements for the electronic transmission 
of certain health information.

Title III. Tax-Related Health Provisions

    Title III of the bill provides the following tax-related 
health provisions:
    Medical savings accounts.--The bill allows, within certain 
limits, individuals covered by a high deductible health plan to 
make tax deductible contributions to a medical savings account 
(``MSA''). Within the same limits, contributions to an MSA are 
excludable from income (and wages for social security purposes) 
if made by the employer of an eligible individual. Earnings on 
amounts in an MSA are not currently taxable. Distributions from 
an MSA for medical expenses are not taxable.
    Deduction for health insurance costs of self-employed 
individuals.--The bill increases the deduction for health 
insurance costs of self-employed individuals from the current 
30 percent to 35 percent for 1998, 40 percent for 1999-2001, 45 
percent for 2002, and 50 percent for 2003 and thereafter.
    Long-term care insurance provisions.--Under the bill, 
amounts received under a long-term care insurance contract are 
excludable from gross income (subject to an annual dollar limit 
in the case of per diem type contracts). Unreimbursed expenses 
for qualified long-term care services and long-term care 
insurance premiums not exceeding specified dollar limits (based 
on the individual's age) are treated as medical expenses for 
purposes of the itemized deduction for medical expenses. 
Employer-provided long-term care insurance is excludable from 
income, except if provided through a cafeteria plan. In 
addition, long-term care insurance contracts (and issuers of 
contracts) are required to satisfy certain consumer protection 
provisions.
    Accelerated benefits under life insurance contracts.--The 
bill extends the present-law exclusion from income for amounts 
paid under a life insurance contract by reason of the death of 
the insured to accelerated death benefits and viatical 
settlements paid with respect to certain terminally ill and 
chronically ill insured individuals.
    High-risk pools.--The bill provides tax-exempt status to 
membership organizations that are established by a State 
exclusively to provide coverage for medical care on a nonprofit 
basis to certain high-risk individuals.
    Health insurance organizations under Code section 833.--The 
bill allows certain group health insurance organizations to be 
treated as ``Blue Cross/Blue Shield'' organizations for 
purposes of Code section 833.

Title IV. Revenue Offsets

    Title IV of the bill provides certain revenue offsets for 
the bill to avoid increasing the budget deficit:
    Bad debt deduction for thrift institutions.--The bill 
repeals the Code section 593 deduction for bad debt reserves 
for thrift institutions, effective for taxable years beginning 
after 1995. Thrift institutions required to change their method 
of accounting for bad debt reserves will not be required to 
recapture the portion of their bad debt reserves accumulated 
before 1988.
    Earned income credit provisions.--The bill denies the 
earned income credit (EIC) to individuals not authorized to be 
employed in the United States, and also if the individual does 
not include a taxpayer identification number on the tax return. 
The bill also applies the math error procedures to failures to 
provide a correct tax identification number and in the case of 
a taxpayer who claims the EIC with respect to net earnings from 
self-employment and fails to pay the proper amount of self-
employment tax on such net earnings.
    Revision of expatriation tax rules.--The bill expands and 
substantially strengthens the present-law provisions that 
subject U.S. citizens who lose their citizenship for tax 
avoidance purposes to special tax rules for 10 years after such 
loss of citizenship. The bill extends the expatriation tax 
provisions to apply to certain long-term residents of the 
United States whose U.S. residency is terminated, subjects 
certain individuals to the expatriation tax provisions without 
inquiry as to their motive for losing their U.S. citizenship or 
residency, expands the categories of income and gains that are 
taxed under the expatriation tax provisions, and provides 
relief from double taxation in circumstances where another 
country imposes tax on items that would be taxed under the 
expatriation tax provisions. The bill also contains information 
reporting and sharing rules to enhance compliance with the 
expatriation tax provisions, and directs the Treasury 
Department to undertake a study of U.S. tax compliance by 
individuals living abroad.

                 B. Background and Need for Legislation

    Today, over 39 million Americans lack health insurance 
coverage. From 1965 to 1995, health care spending has grown at 
an average annual rate of 11.2% over twice the average annual 
rate of growth in spending as measured in the Consumer Price 
Index for all items and services. Largely because of the cost 
factor, which is harder for many small firms to absorb, the 
rate of employment-based coverage ranges from 92% of workers in 
firms of 1,000-plus employees to only 67% in the smallest firms 
of 10 or fewer workers. Any effort to maintain the employer-
based health insurance system, while increasing coverage, 
necessarily must focus on increasing health insurance coverage 
among those who own and work for small businesses.
    One specific concern of the public about employer-based 
health insurance is that breadwinners may lose their coverage 
or the coverage for a dependent if they change jobs. 
Frequently, employees will require that new employees go 
through a pre-existing condition waiting period when they 
become eligible for an employer's group health plan. The fear 
that many have of losing coverage during a pre-existing waiting 
period because of the health status of the worker or one of 
their dependents, results in ``job-lock'' for many Americans. 
They simply cannot afford to lose health insurance coverage for 
even a short time, and thus are not able to consider changes in 
employment. In periods of downsizing and other changes in the 
employment market, this problem becomes even more compelling 
because many will have no choice but to switch jobs thereby 
risking pre-existing condition limitation rules, even at the 
risk of great personal cost.
    Separately, with respect to long-term care, Americans spend 
over $70 billion a year on nursing home care. Medicaid covers 
over half of all spending for nursing homes and many of those 
covered by Medicaid ``spent down'' their personal savings and 
other resources in order to qualify for assistance. In 
addition, many Americans who are not in nursing homes require 
assistance simply to perform basic activities of daily living. 
If they had purchased long-term care insurance, many of those 
Americans could have remained more independent instead of being 
forced to rely on Medicaid or family members who may have to 
pay all or part of the costs of their long-term care.
    Additionally, in their efforts to contain the health 
insurance premium costs for their employees, employers have 
chosen two major strategies. Employers are either turning to 
managed care plans to provide coverage of their employees, or 
increasing employee cost sharing in their health insurance. For 
employers and employees who want to make more of their own 
health care decisions, these alternatives do not offer the 
choices many Americans want. An alternative for employers and 
employees would be combining a high deductible health insurance 
plan with a medical savings account (MSA). The personal 
management of the funds in the MSA allows the plan participants 
to take a more active role in their health care spending, and 
provides them greater freedom in making cost effective 
decisions about their medical care. This option, however, does 
not currently have favored tax consideration comparable to that 
of conventionally purchased employer-based health coverage, so 
the use of this alternative has not spread widely.
    In order to address the problem of health care cost 
inflation and make insurance more affordable, it is important 
to focus on key sources affecting levels of the underlying 
health care costs. Two key sources of excessive cost are 
medical fraud and abuse, and the current medical paperwork 
burden.
    According to the General Accounting Office (GAO), as much 
as 10 percent of total health care costs are lost to fraudulent 
or abusive practices by unscrupulous health care providers. The 
GAO reports that only a small fraction of the fraud and abuse 
committed in the health care system is identified and dealt 
with. Federal funding for prevention, detection, and 
prosecutions of the perpetrators of health care fraud and abuse 
has not kept pace with the problem. Coordination of the various 
law enforcement agencies at the federal and state levels has 
been insufficient, and law enforcement agencies agree that 
penalties for health care fraud and abuse should be increased.
    The demand by third party payers and others involved in 
reviewing medical claims for documentation regarding claims has 
increased the paperwork burden on those payers, health care 
providers, employers, and enrollees in health plans. As health 
care claims information moves to a ``paperless'' system it is 
critical for efficiency and cost saving that uniform standards 
for that information be adopted. The lack of uniform data 
standards for financial and administrative information is a 
barrier of modernizing health care information systems as well 
as obtaining the savings that moderation can provide.
    In response to these specific problems of availability and 
affordability of health insurance in the United States, the 
Ways and Means Committee has targeted the reforms it has 
adopted in H.R. 3103. H.R. 3103 specifically addresses the 
concerns outlined here including promoting coverage in the 
small employer group coverage, ensuring portability of health 
insurance from one job to the next, providing for a new tax 
consideration of medical savings accounts, clarifying tax 
consideration of long-term care insurance and expenses, 
providing additional funding, coordination and penalties 
against fraud and abuse, and establishing a process for 
administrative simplification. The bill further makes these 
reforms in a budget neutral manner with savings from increased 
federal fraud and abuse efforts and revenue provisions.
    H.R. 3103 is the culmination of the Committee's work in the 
current Congress on health care reform. The Committees on 
Commerce, Economic and Educational Opportunities, and Judiciary 
are developing health care reform measures to complement the 
Ways and Means Committee's efforts to increase the availability 
and affordability of health insurance.

                         C. Legislative History

    H.R. 3103 was introduced by Chairman Archer and Mr. Thomas 
on March 18, 1996, and was amended by the Committee in a markup 
on March 19, 1996. The bill, as amended, was ordered favorably 
reported on March 19, 1996, by a roll call vote of 25-11.
    Provisions substantially similar to the tax-related 
provisions of the bill (except for the provision relating to 
the COBRA tax sanctions and the high-risk pool provision) were 
previously included in legislation approved by the Committee 
and passed by the Congress in H.R. 2491, the ``Balanced Budget 
Act of 1995'' (see conference report, H. Rept. 104-350, 
November 16, 1995), which was vetoed by the President. The 
revenue provision relating to bad debt deductions of thrift 
institutions also was reported by the Committee in H.R. 2494 
(H. Rept. 104-324, November 7, 1995). A substantially similar 
revenue provision relating to expatriation tax rules also was 
reported by the Committee in H.R. 1812 (H. Rept. 104-145, June 
16, 1995).
    Provisions substantially similar to the fraud and abuse 
provisions of the bill were previously included in legislation 
approved by the Committee and passed by the Congress in H.R. 
2425, the ``Medicare Preservation Act of 1995'' (see conference 
report H. Rept. 104-276, October 16, 1995), and H.R. 2491, 
``The Balanced Budget Act of 1995'' (see conference report, H. 
Rept. 104-350, November 16, 1995), which was vetoed by the 
President. Provisions substantially similar to the 
administrative simplification provisions of the bill were also 
reported by the Committee in H.R. 2425 (H. Rept. 104-276), and 
H.R. 2491 (H. Rept. 104-350).
    The Health Subcommittee held hearings on several 
substantially similar provisions of the bill in 1995 including: 
Long Term Care Provisions in the ``Contract with America'' 
(Rept. 104-1, January 20, 1995), Health Insurance Premium Tax 
Deductions for the Self-Employed, (January 17, 1995), Health 
Insurance Portability (Rept. 104-32, May 12, 1995), and H.R. 
1818, The Family Medical Savings and Investment Act (June 27, 
1995).
    In addition to the roll call votes on amendments (as shown 
in Part III of this report), the Committee approved the 
following provisions by voice vote as amendments to Chairman 
Archer's amendment in the nature of a substitute: En bloc 
amendments by Mrs. Johnson to Title I relating to (1) shorter 
look-back period for determination of preexisting condition, 
(2) shorter eligibility periods, (3) nondiscrimination on the 
basis of genetic information, (4) shorter look-back periods for 
State preemption, and (5) counting government programs as 
qualifying previous coverage.
    Amendment to Title I by Mr. English to state that the scope 
of health insurance coverage includes conditions arising out of 
acts of domestic violence.
    Amendment to Title III by Mr. Houghton to add a new section 
relating to the tax treatment of certain health insurance 
organizations under Code section 833.
    Amendment by Mr. Ensign to (1) Title III to treat qualified 
long-term care expenses as deductible medical expenses and (2) 
Title IV to add provisions regarding expatriation tax rules as 
a revenue offset to (1).
    Amendment by Mr. Shaw to strike section 412 of the bill 
(relating to increases in tax return preparer penalties).
    Further, the Committee approved by voice vote the 
Chairman's amendment in the nature of a substitute, as amended.

                      II. EXPLANATION OF THE BILL

  TITLE I.--IMPROVED AVAILABILITY AND PORTABILITY OF HEALTH INSURANCE 
                                COVERAGE

             subtitle a--coverage under group health plans

Present law

    Group health plans often exclude coverage for a period of 
time for services related to a preexisting medical condition of 
a newly covered employee or his or her dependents regardless of 
previous health insurance coverage. As a result, individuals 
changing jobs may face gaps in insurance coverage for 
themselves or family members with ongoing health problems, even 
when both jobs provide similar health benefits. Coverage gaps 
are even more likely in the individual market. Most individual 
insurance policies impose pre-existing condition exclusions or 
limitations; individuals with chronic health conditions may be 
entirely denied coverage.
    Current federal law does not impose any requirements on 
employers to provide or contribute toward the health insurance 
coverage of their employees or their employees' dependents. 
However, specific Federal requirements do apply to existing 
employer-sponsored health plans.
    The Employee Retirement Income Security Act of 1974 (ERISA) 
imposes Federal requirements on most employer-sponsored health 
plans. Exempt from ERISA are health benefit plans that are 
provided by Federal, State and local governments, churches, and 
certain educational organization plans. The ERISA requirements 
on health benefit plans relate to reporting and disclosure 
obligations, and fiduciary standards. Also applicable to health 
plans are ERISA provisions relating to claims review and 
enforcement. In addition, ERISA extends certain 
nondiscrimination protections to participants in employer-
sponsored health plans.
    OBRA of 1993 (P.L. 103-66) amended ERISA to require 
existing employer health plans to comply with State laws 
relating to medical child support orders. The 1993 law also 
amended ERISA to require employers with existing plans 
providing dependent coverage to cover adopted children. In 
addition, employer plans were prohibited from reducing coverage 
for the cost of pediatric vaccines below that provided on May 
1, 1993.
    ERISA does not regulate the content and design of health 
plans provided by employers. This is up to the employer in 
negotiation with the employer's workforce. Moreover, under 
section 514 of ERISA, States are preempted from regulating 
employee health benefit plans. Accordingly, while plans 
purchased by employers from insurers must comply with State 
insurance law and regulations, self-insured employers are 
relatively free to structure their plans as they desire, or 
through the collective bargaining process, if their employees 
are represented by a union. (Self-insured plans are those in 
which the employer assumes all or some of the risk for paying 
claims, instead of paying premiums to an insurance company 
which in turn assumes the risk.)
    Employer sponsored health plans (be they insured or self-
insured) must also comply with the health insurance 
continuation provisions of the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (COBRA, P.L. 99-272). COBRA requires 
that employers with 20 or more employees offer employees and 
their dependents continued coverage under the employer's group 
health plan in the case of certain qualifying events, such as 
termination from employment, reduction in hours, or a change in 
family status. The duration of coverage is 18 to 36 months 
depending on the qualifying event. The employer may require the 
eligible participant or beneficiary to pay 102% of the total 
premium. The requirements under COBRA are enforced through the 
Internal Revenue Code (section 4980B), ERISA, and for State and 
local government plans, the Public Health Service (PHS) Act. 
Under the Internal Revenue Code provisions, noncomplying 
employers are subject to an excise tax. Under ERISA, 
individuals may bring a civil action against the plan or the 
employer to recover benefits due, enforce rights, or to clarify 
rights to future benefits. Noncomplying plans may also be fined 
by the Department of Labor. Under the PHS Act, an individual 
who is aggrieved may bring an action for appropriate equitable 
relief. In OBRA of 1993 (P.L. 103-66), Congress provided for 
the COBRA tax penalties to apply to plans that failed to 
continue paying as much for the costs of pediatric 
immunizations as they had prior to May 1, 1993.
    Additional federal laws also apply. For example, self-
insured employer health plans must comply with 
nondiscrimination requirements under section 105(h) of the 
Internal Revenue Code. Under a 1978 amendment to the Civil 
Rights Act (P.L. 95-555), it is unlawful for an employer to 
discriminate between men and women with regard to fringe 
benefits. The effect of this law is to prohibit existing 
employer health plans covering 15 or more employees from 
discriminating on the basis of pregnancy, child birth, or 
related conditions. Finally, under a series of amendments to 
the Social Security Act, (beginning with the Omnibus Budget 
Reconciliation Act of 1981), employer health plans must be the 
first payer of health services in the event that an employee or 
other eligible beneficiary is also eligible for Medicare.
    Regulation of the business of insurance has traditionally 
been left to the states and presently there is no Federal law 
regulating the terms of sale of private insurance by insurers 
sold to small or large employers. One exception is that the 
federal government regulates certain health maintenance 
organizations (HMOs) that have elected to meet certain federal 
financial, organizational, and operational standards and become 
a ``qualified HMO'' under title XIII of the Public Health 
Service Act. Non-federally qualified HMOs are regulated under 
state law.
    In recent years, most states have adopted small group 
health insurance market reform laws that are identical or 
similar to a model law issued by the National Association of 
Insurance Commissioners (NAIC) in 1992, and revised in 1995. 
These laws seek to ensure greater availability, portability, 
and more affordable coverage in the small group market. A much 
smaller number of states have enacted laws providing for reform 
of the individual (nongroup) health insurance market. These too 
are aimed at expanding the availability of coverage and making 
it more portable and affordable. However, under the federal 
preemption provision of ERISA (section 514), these state laws 
do not apply to employer-sponsored health plans. They only 
apply to insurance that is sold to employers and directly to 
individuals. As a result, employees covered under self-insured 
(i.e., self-funded) employer plans are not subject to state 
insurance laws.

  Sec. 101. Portability of Coverage for Previously Covered Individuals

Reasons for change

    One of the most compelling issues faced by workers and 
their families is the problem referred to as ``job-lock.'' Job-
lock occurs when breadwinners are reluctant to take new jobs or 
pursue new career opportunities because doing so could result 
in a loss of health insurance coverage because they or one of 
their dependents have medical conditions that existed prior to 
their change in employment. Further, if a breadwinner is facing 
lay-offs, involuntary transfers or other types of employment 
dislocations, they still must cope with the potential loss of 
health insurance coverage, even if the worker seeks and secures 
a new position. This occurs because employers or insurers may 
choose to impose preexisting condition exclusions on 
individuals (or their dependents, if family coverage is 
offered), when the worker changes jobs. Such exclusions can be 
time-limited, but sometimes they are permanent, causing the 
potential of genuine hardship for some.
    To place this problem in context, it is important to 
understand that employer-based health insurance is the 
principal source of health insurance protection in the United 
States. After paid vacations, health insurance is the most 
common fringe benefit offered by employers to employees. 
According to recent data, over 62% of all Americans are covered 
by employment-based health insurance. Therefore, the practices 
of employers and insurers with respect to the administration of 
group health plans are of considerable significance to all 
workers and their families, and have been receiving the careful 
attention of members of this Committee.
    In designing the portability provisions, it was the 
Committee's intent to both encourage workers to maintain health 
insurance coverage whenever it is offered through their 
employers and to require group health plans to credit such 
coverage towards any preexisting condition limitation the plan 
would otherwise be permitted to impose. The Committee views 
this as an important step to correcting the practice that some 
employers and insurers engage in of repeatedly screening 
individuals and their dependents whenever workers change jobs, 
even when the individual has ``played by the rules'' and 
continuously maintained health insurance.
    In addition, in order to facilitate portability of 
benefits, it is important for plans to certify to the coverage 
that a worker has previously carried to assist coverage 
determinations as the worker enrolls in a new plan. The 
Committee views these requirements on employers and insurers to 
be relatively modest and necessary if employers are going to be 
required to forgo imposition of preexisting condition 
limitations based on a new employee's prior group coverage.
    The bill would offer group health plans two options for 
judging the scope of prior coverage carried by an individual. 
It is the Committee's hope and expectation that the standard 
option will become routine operating procedure for most or all 
group health plans. This option simply accepts prior group 
health plan coverage as being bona-fide, ``qualified'' coverage 
for crediting purposes towards any otherwise applicable 
preexisting condition exclusion. However, currently many plans 
make judgments about the scope of prior coverage on a benefit-
by-benefit basis to determine whether there were important gaps 
in the prior coverage that, if not addressed in the new plan, 
would be a source of costly adverse selection to the new plan. 
These are benefit-specific judgments that are permitted to lead 
to time-limited exclusions from coverage in the new plan. The 
Committee was reluctant to propose immediately halting a 
practice that may have some validity in discouraging 
individuals from skimping on coverage until they have a medical 
reason for seeking more comprehensive coverage. However, as 
stated earlier, it is the Committee's preference and 
expectation that the employer-based insurance system will 
evolve towards the more administratively simple, primary 
standard described in the bill.

Explanation of provision

    Group health plans, and insurers and health maintenance 
organizations offering health insurance coverage in connection 
with a group health plan, would be required to credit periods 
of qualified previous coverage toward the fulfillment of a 
preexisting condition exclusion period when an individual moved 
from one source of group health coverage to another. 
Specifically, a preexisting condition limitation period would 
be reduced by the length of the aggregate period of any 
qualified prior coverage. Prior coverage would not have to be 
credited toward a preexisting condition limitation period if 
the individual experienced a break in qualified group coverage 
of more than 60 days. (Qualified group coverage means any 
period of coverage of the individual under a group health-plan, 
health insurance coverage, Medicaid.) A waiting period for any 
coverage under a group health plan (or for health insurance 
coverage offered in connection with a group health plan) would 
not be considered a break in coverage.
    Presentation of a certification of prior coverage would 
establish an individual's eligibility for credit against a 
preexisting condition limitation period. Group health plan 
administrators, insurers, HMOs, and state Medicaid programs 
would be required to provide such certifications of coverage 
upon request of the individual.
    In determining whether an individual has met qualified 
coverage periods, a group health plan, insurer, or HMO offering 
group coverage could elect one of two methods. Under the 
standard method, first, it could include all periods, without 
regard to the specific benefits offered during the period of 
prior coverage. Under the second alternative method, it could 
look at periods of prior coverage on a benefit-specific basis 
and not include as a qualified coverage period a specific 
benefit unless coverage for that benefit was included at the 
end of the most recent period of coverage. Entities electing 
the second method would have to state prominently in any 
disclosure statements concerning the plan or coverage and to 
each enrollee at the time of enrollment or sale that the plan 
or coverage had made such an election and would have to include 
a description of the effect of this election. Upon the request 
of the plan, insurer, or HMO, the entity providing the 
certification would have to promptly disclose information on 
benefits under its plan. It could charge the reasonable cost 
for providing this information.

     Sec. 102. Limitation of Preexisting Conditions Exclusions; No 
    Application to Certain Newborns, Adopted Children, and Pregnancy

Reasons for change

    It was the Committee's intent to set a ceiling on the 
extent to which group health plans could exclude preexisting 
conditions of otherwise eligible individuals from coverage. 
Plans may choose to not exclude preexisting conditions or 
impose shorter exclusion periods. However, consistent with the 
Committee's intent to encourage workers to maintain coverage, 
the bill would permit group health plans to impose a longer 
exclusion period, not to exceed 18 months, if the individual 
refuses coverage when it is initially offered but subsequently 
enrolls late.
    Note that nothing here is intended to define the benefits 
offered by employers and that an employer can choose to impose 
waiting periods between initial employment and eligibility for 
enrollment in the employer's group health plan. Such waiting 
periods are not counted as a lapse in coverage for purposes of 
determining whether an individual has maintained qualified 
prior coverage.

Explanation of provision

    Group health plans, and insurers and health maintenance 
organization offering health insurance coverage in connection 
with a group health plan, would be prohibited from imposing a 
preexisting condition exclusion that exceeded 12 months for 
conditions for which medial advice, diagnosis, or treatment was 
received or recommended within the previous 6 months prior to 
becoming insured. In the event that the individual was a late 
enrollee, the preexisting condition exclusion could not exceed 
18 months for conditions arising within 6 months prior to 
becoming insured.
    Preexisting condition exclusions or limitations could not 
be applied to newborns and adopted children so long as these 
individuals became insured within 30 days of birth or placement 
for adoption. Pregnancy could not be treated as a pre-existing 
condition.

 Sec. 103. Prohibiting Exclusions Based on Health Status and Providing 
                         for Enrollment Periods

Explanation of provision

    This section would ensure that individuals in group health 
plans could not be excluded from coverage or from renewing 
their coverage based on their health status. Health status is 
defined to include, with respect to an individual, medical 
condition, claims experience, receipt of health care, medical 
history, evidence of insurability, or disability.
    The Committee notes that the inclusion of evidence of 
insurability in the definition of ``health status'' is intended 
to ensure, among other things, the individuals are not excluded 
from health care coverage due to their participation in 
activities such as motorcycling, snowmobiling, all-terrain 
vehicle riding, horseback riding, skiing and other similar 
activities.
    Group health plans would be required to provide for special 
enrollment periods for eligible individuals who lose other 
sources of coverage if certain conditions were met. An 
individual would have to be allowed to enroll under at least 
one benefit option if: (1) the employee (or dependent) had been 
covered under another group health plan at the time coverage 
was previously offered, (2) that this was the reason for 
declining enrollment, (3) that the individual lost their 
coverage as a result of certain event (loss of eligibility for 
coverage, termination or employment, or reduction in the number 
of hours of employment), and (4) the employee requested such 
enrollment within 30 days of termination of the coverage.
    In the event that a group health plan provided family 
coverage, the plan could not require, as a condition of 
coverage of a beneficiary or participant in the plan, a waiting 
period applicable to the coverage of a beneficiary who is a 
newborn, an adopted child or child placed for adoption, or a 
spouse, at the time of marriage, if the participant has met any 
waiting period applicable to that participant. The bill defines 
timely enrollment as being within 30 days of the birth, 
adoption, or marriage if family coverage was available as of 
that date.

                         Sec. 104. Enforcement

Explanation of provision

    The above provisions would be enforced through penalties 
assessed through the Internal Revenue Code (IRC), ERISA, or 
through civil money penalties assessed by the Secretary of 
Health and Human Services. The Secretaries of Treasury, Labor, 
and HHS would be required to issue regulations that were 
nonduplicative and in a manner that assured coordination and 
nonduplication in their activities as provided for under this 
Act.
            Enforcement through the IRC
    IRC enforcement would be done through the COBRA health 
insurance continuation provisions (section 4980B). In general, 
a noncomplying plan would be subject to an excise tax of $100 
per day per violation. Penalties would not be assessed in the 
event that the failure was determined to be unintentional or a 
correction was made within 30 days. For purposes of applying 
the COBRA enforcement language, special rules would apply:
    No tax could be imposed by this provision on a noncomplying 
insurer or HMO subject to state insurance regulation if the 
Secretary of HHS determined that the state had an effective 
enforcement mechanism.
    In the case of a group health plan of a small employer the 
provided coverage solely through a contract with an insurer or 
HMO, no tax would be imposed upon the employer if the failure 
was solely because of the product offered by the insurer or 
HMO.
    No tax penalty would be assessed for a failure under this 
provision if a sanction had been imposed under ERISA or by the 
Secretary of HHS with respect to such failure.
            Enforcement through ERISA
    Enforcement on certain group health plans would also be 
through ERISA sanctions. Such sanctions would only apply to an 
insurer or HMO that was subject to state law in the event that 
the Secretary of Labor determined that the state had not 
provided for effective enforcement of the above provisions of 
this Act. Sanctions would not apply in the event that the 
Secretary of Labor established that none of the persons against 
whom the liability would be imposed knew, or exercising 
reasonable diligence, would have known that a failure existed, 
or if the noncomplying entity acted within 30 days to correct 
the failure. In no case would a civil money penalty be imposed 
under ERISA for a violation for which an excise tax under the 
COBRA enforcement provisions was imposed or for which a civil 
money penalty was imposed by the Secretary of HHS.
            Enforcement through civil money penalties
    A group health plan, insurer, or HMO that failed to meet 
the above requirements would be subject to civil money penalty. 
Rules similar to those imposed under the COBRA penalties would 
apply. The maximum amount of penalty would be $100 for each day 
for each individual with respect to which a failure occurred. 
In determining the penalty amount, the Secretary would be 
required to take into account the previous record of compliance 
of the person being assessed with the applicable requirements 
of the bill, the gravity of the violation, and the overall 
limitations for unintentional failures provided under the IRC 
COBRA provisions. No penalty could be assessed if the failure 
was not intentional or if the failure was corrected within 30 
days. A procedure would be available for administrative and 
judicial review of a penalty assessment. Any penalties 
collected would be paid to the Secretary and would be available 
without appropriation for the purpose of enforcing the 
provisions with respect to which the penalty was imposed.
    The authority for the Secretary of HHS to impose civil 
money penalties would not apply to enforcement with respect to 
any entity which offered health insurance coverage and which 
was an insurer or HMO subject to state regulation by an 
applicable state authority if the Secretary of HHS determined 
that the state had established an effective enforcement plan. 
In no case would a civil money penalty be imposed under this 
provision for a violation for which an excise tax under COBRA 
or civil money penalty under ERISA was assessed.

              subtitle b--definitions; general provisions

Present law

    See Subtitle A.

                Sec. 191. Definitions; Scope of Coverage

Explanation of provision

    Definitions are provided for these terms: group health 
plan, church plans, governmental plans, bona fide association, 
health insurance coverage, health maintenance organization, 
health status, individual health insurance coverage, insurer, 
medical care, network plan, waiting period, individual market, 
large group market, small employer, and small group market.

       Sec. 192. State Flexibility to Provide Greater Protection

Explanation of provision

    This provides for state flexibility to provide greater 
protection than required under the Act. Specifically, nothing 
in this bill should be construed to preempt state laws that 
require insurers or HMOs to impose a limitation or exclusion of 
benefits relating to the treatment of a preexisting condition 
period for a period that is shorter than the applicable period 
provided under this Act; to allow individuals, participants, 
and beneficiaries to be considered to be in a period of 
previous qualifying coverage if such individual, participant, 
or beneficiary experiences a lapse in coverage that is greater 
than the 60-day periods provided for under this Act, or to 
impose shorter look-back periods for determining whether a 
preexisting condition period exists.
    Nothing in this Act shall be construed to affect or modify 
the provisions of section 514 of ERISA (relating to federal 
preemption of laws regulating employee benefit plans).

                        Sec. 193. Effective Date

Explanation of provision

    In general, except as otherwise provided for in this title, 
the provisions of this title would apply with respect to: (1) 
group health plans and health insurance coverage offered in 
connection with group health plans, for plan years beginning on 
or after January 1, 1998; and (2) individual insurance coverage 
issued, renewed, in effect, or operated on or after January 1, 
1998.
    The Secretaries of HHS, Treasury, and Labor would be 
required to issue regulations on a timely basis as may be 
required to carry out this title.

                     Sec. 194. Rule of Construction

Explanation of provision

    Nothing in this title or any amendment made thereby may be 
construed to require the coverage of any specific procedure, 
treatment, or service as part of a group health plan or health 
insurance coverage under this title or through regulation.

   TITLE II--PREVENTING HEALTH CARE FRAUD AND ABUSE; ADMINISTRATIVE 
                             SIMPLIFICATION

              subtitle a--fraud and abuse control program

               Sec. 201. Fraud and Abuse Control Program

Present law

    Currently Medicare's program integrity functions are 
subsumed under Medicare's general administrative budget. These 
functions are performed, along with general claims processing 
functions, by insurance companies under contract with the 
Health Care Financing Administration.

Reasons for change

    A multiplicity of Federal, State and local law enforcement 
agencies, as well as private health insurers and health plans, 
are involved in various aspects of the investigation and 
prosecution of health care fraud. It is crucial that these 
efforts be as coordinated as possible in order to detect, 
prevent, and successfully prosecute health care fraud and 
abuse.

Explanation of provision

    The Secretary of the Department of Health and Human 
Services (acting through the Office of the Inspector General) 
and the Attorney General would be required to jointly establish 
a national health care fraud and abuse control program to 
coordinate Federal, State and local law enforcement to combat 
fraud with respect to health plans. To facilitate the 
enforcement of this fraud and abuse control program the 
Secretary and Attorney General would be authorized to conduct 
investigations, audits, evaluations and inspections relating to 
the delivery of and payment for health care, and would be 
required to arrange for the sharing of data with 
representatives of public and private third party payers. This 
program, implemented by guidelines issued by the Secretary and 
the Attorney General, would also facilitate the enforcement of 
applicable Federal statutes relating to health care fraud and 
abuse, and would provide for the provision of guidance to 
health care providers through the issuance of safe harbors, 
interpretive rulings and special fraud alerts.
    The Secretary and Attorney General would consult with and 
share data with representatives of health plans. Guidelines 
issued by the Secretary and Attorney General would ensure the 
confidentiality of information furnished by health plans, 
providers and others, as well as the privacy of individuals 
receiving health care services. The Inspector General would 
retain all current authorities and would receive reimbursement 
for costs of investigations, audits and other functions under 
this section.
    For purposes of this section the term ``health plan'' means 
a plan or program that provides health benefits through 
insurance or otherwise. Such plans include health insurance 
policies, contracts of service benefit organizations, and 
membership agreements with health maintenance organizations or 
other prepaid health plans.
            Establishment of Health Care Fraud and Abuse Control 
                    Account in Federal Hospital Insurance Trust Fund
    The Health Care Fraud and Abuse Control Account would be 
established as an expenditure account within the Federal 
Hospital Insurance (HI) Trust Fund. Monies derived from the 
coordinated health care anti-fraud and abuse programs from the 
imposition of civil money penalties, fines, forfeitures and 
damages assessed in criminal, civil or administrative health 
care cases, along with any gifts or bequests would be 
transferred into the Medicare HI trust fund. There are 
appropriated from the HI trust fund to the Account such sums as 
the Secretary and the Attorney General certify are necessary to 
carry out certain functions, subject to specified limits for 
each fiscal year beginning with 1996.
    There are also appropriated from the general fund of the 
U.S. Treasury to the Fraud and Abuse Account for transfer to 
the FBI certain funds, subject to fiscal year limitations, for 
specified functions. These functions include prosecuting health 
care matters, investigations, audits of health care programs 
and operations, inspections and other evaluations, and provider 
and consumer education regarding compliance with fraud and 
abuse provisions. Amounts in the Account would also be 
available to the various State Medicaid fraud control units to 
reimburse such units for the costs of certain activities. The 
Secretary and the Attorney General are required to submit a 
joint annual report to Congress on the revenues and 
expenditures, and the justification for such disbursements from 
the Health Care Fraud and Abuse Control Account.

                  Sec. 202. Medicare Integrity Program

Present law

    Currently Medicare's program integrity functions are 
subsumed under Medicare's general administrative budget. These 
functions are performed, along with general claims processing 
functions, by insurance companies under contract with the 
Health Care Financing Administration.

Reasons for change

    Federal spending for the prevention, detection, and 
enforcement of health care fraud and abuse has not kept pace 
with the growth in Medicare or other health care expenditures. 
As a result, today, Medicare spends 30 percent less per claim 
on fraud and abuse activities of what was spent in 1989, 
despite strong evidence that fraud and abuse is on the rise. 
These provisions provide a mandatory funding stream to 
modernize Medicare's fraud and abuse detection and prevention 
capacities, and give Medicare greater flexibility to contract 
with firms that have demonstrated expertise in the area of 
claims review and fraud and abuse detection and prevention. The 
overall commitment by the federal government to fighting 
Medicare fraud and abuse will also be increased dramatically. 
The HHS Office of the Inspector General (IG) and the FBI will 
receive fixed increases in funding over the next six years with 
funding not less than $150 million a year after 2002 for the IG 
and funding of $114 million a year after 2002 for the FBI.

Explanation of provision

            Establishment of Medicare Integrity Program
    This provision would establish a Medicare Integrity Program 
under which the Secretary would promote the integrity of the 
Medicare program by entering into contracts with eligible 
private entities to carry out certain activities. These 
activities would include the following: (1) review of 
activities of providers of services or other individuals and 
entities furnishing items and services for which payment may be 
made under the Medicare program, including medical and 
utilization review and fraud review, (2) audit of cost reports, 
(3) determinations as to whether payment should not be, or 
should not have been, made by reason of Medicare as secondary 
payor provisions and recovery of payments that should not have 
been made, (4) education of providers of services, 
beneficiaries, and other persons with respect to payment 
integrity and benefit quality assurance issues, and (5) 
developing and updating a list of durable medical equipment 
pursuant to section 1834(a)(15) of the Social Security Act.
            Eligibility of entities
    The Secretary would impose certain eligibility requirements 
on entities entering into contracts under this Medicare 
Integrity Program, including conflict of interest requirements.
    The Secretary would be authorized to establish, by 
regulation, procedures for entering into contracts, with 
eligible entities including procedures relating to the number 
of contracts and the timing of contracts, competitive 
procedures for new contracts, and waiver of competitive 
procedures for renewed contracts under certain circumstances.
    The Secretary would be required to provide, by regulation, 
for the limitation of a contractor's liability under the 
Medicare Integrity Program. The Secretary would employ, to the 
extent he finds appropriate, the same or comparable standards 
and other substantive and procedural provisions as are 
contained in section 1157 of the Social Security Act.
            Elimination of fiscal intermediary and carrier 
                    responsibility for carrying out activities subject 
                    to program
    This provision prohibits any agency, organization, or 
carrier, from carrying out (or receiving payment for carrying 
out) any activity pursuant to an agreement under this section 
to the extent that the activity is carried out pursuant to a 
contract under the Medicare Integrity Program.

                Sec. 203. Beneficiary Incentive Programs

Present law

    No provision.

Reasons for change

    Medicare beneficiaries are in the best position to identify 
potentially fraudulent or abusive practices or excessive 
charges. The Committee believes they should be given incentives 
to provide information to the Medicare program concerning such 
suspect practices. Moreover, the Committee believes that the 
Medicare beneficiaries and the medical providers and suppliers 
should have an incentive to identify opportunities to improve 
the efficiency of the Medicare program and reduce fraud and 
abuse.

Explanation of provision

            Clarification of requirement to provide explanation of 
                    Medicare benefits
    The Secretary would be required to provide an explanation 
of Medicare benefits with respect to each item or service for 
which payment may be made, without regard to whether a 
deductible or coinsurance may be imposed with respect to the 
item or service.
            Program to collect information on fraud and abuse
    This provision would require the Secretary, within three 
months after enactment of this bill, to establish a program to 
encourage individuals to report to the Secretary information on 
individuals and entities who are engaging or who have engaged 
in acts or omissions that constitute grounds for sanctions 
under sections 1128, 1128A, or 1128B of the Social Security 
Act, or who have otherwise engaged in fraud and abuse against 
the Medicare program. If an individual reports information to 
the Secretary under this program that serves as a basis for the 
collection by the Secretary or the Attorney General of any 
amount of at least $100 (other than amounts paid as a penalty 
under section 1128B), the Secretary may pay a portion of the 
amount collected to the individual, under procedures similar to 
those applicable under section 7623 of the Internal Revenue 
Code of 1986.
            Program to collect information on program efficiency
    The Secretary would be required, within three months after 
enactment of this bill, to establish a program to encourage 
individuals to submit to the Secretary suggestions on methods 
to improve the efficiency of the Medicare program. If the 
Secretary adopts a suggestion and savings to the program 
result, the Secretary could make a payment to the individual of 
an amount the Secretary considers appropriate.

Sec. 204. Application of Certain Health Anti-Fraud and Abuse Sanctions 
        to Fraud and Abuse Against Federal Health Care Programs

Present law

    Section 1128B provides for certain criminal penalties for 
convictions of Medicare and Medicaid (and other state health 
care programs) program-related fraud.

Reasons for change

    The Committee felt that greater deterrence was needed 
against fraud and abuse in all of the traditional fee-for-
service federal programs in addition to Medicare and Medicaid.
    However, the Committee decided that the current anti-
kickback statute is not well suited to the Federal Employee 
Health Benefit Program (FEHBP) which operates more like a 
private sector program with a wide range of primarily managed 
care options for federal employees. The fee-for-service and 
entitlement nature of the Medicare program and other federal 
health programs give rise to potentially fraudulent or abusive 
practices that are not present in an environment with managed 
care coverage.

Explanation of provision

    This section would extend certain criminal penalties for 
fraud and abuse violations under the Medicare and Medicaid 
programs to similar violations in Federal health care programs 
generally. The term ``Federal health care program'' would mean 
any plan or program that provides health benefits, whether 
directly, through insurance, or otherwise which is funded 
directly, in whole or in part by the United States Government 
(other than the health insurance program under chapter 89 of 
title 5, United States Code). The term also would include any 
state health care program, which under section 1228(h), 
includes Medicaid, the Maternal and Child Health Services Block 
Grant Program and the Social Services Block Grant Program.

Sec. 205. Guidance Regarding Application of Health Care Fraud and Abuse 
                               Sanctions

Present law

    The 1987 Medicare and Medicaid Patient and Program 
Protection Act specified various payment practices which, 
although potentially capable of including referrals of business 
under Medicare or State health care programs, are protected 
from criminal prosecution or civil sanction under the anti-
kickback provisions of the law. The 1987 law also established 
authority for the Secretary to promulgate regulations 
specifying additional payment practices, known as ``safe 
harbors,'' which will not be subject to sanctions under the 
fraud and abuse provisions.

Reasons for change

    Greater public involvement in the process for identifying 
changes or additions to safe harbors, and fraud alerts will 
stimulate more timely and responsive information for assisting 
providers and suppliers in understanding Medicare requirements, 
as well as, enabling federal and state criminal justice 
agencies to focus on the most deliberate cases of fraudulent 
and abusive practices.

Explanation of provision

    The Secretary would publish an annual notice in the Federal 
Register soliciting proposals for modifications to existing 
safe harbors and new safe harbors. After considering such 
proposals the Secretary, in consultation with the Attorney 
General, would issue final rules modifying existing safe 
harbors and establishing new safe harbors, as appropriate. The 
Inspector General would submit an annual report to Congress 
describing the proposals received, as well as the action taken 
regarding the proposals. The Secretary, in considering 
proposals, may consider a number of factors including the 
extent to which the proposals would affect access to health 
care services, quality of care services, patient freedom of 
choice among health care providers, competition among health 
care providers, ability of health care facilities to provide 
services in medically underserved areas or to medically 
underserved populations, and the like.
    The Secretary of Health and Human Services would publish 
the first notice in the Federal Register soliciting proposals 
for new or modified safe harbors no later than January 1, 1997.

                           ADVISORY OPINIONS

Present law

    No provision.

Reasons for change

    Providers want to comply with the fraud and abuse statute, 
but many are unsure of how the statute affects them. These 
providers should be able to receive guidance from the 
government regarding financial arrangements. Little or no 
guidance is currently provided because there are no regulations 
and only insufficient safe harbors. Without this ability, a 
chilling effect is placed on legitimate arrangements, 
particularly when providers are attempting to structure new and 
innovative health care delivery systems to contain health care 
cost.

Explanation of provision

    The Secretary shall issue written advisory opinions 
regarding (i) what constitutes prohibited remuneration under 
section 1128B(b); (ii) whether an arrangement or proposed 
arrangement satisfies the criteria for activities which do not 
result in prohibited remuneration; (iii) what constitutes an 
inducement to reduce or limit services to individuals entitled 
to benefits; and (iv) whether an activity constitutes grounds 
for the imposition of a sanction under section 1128, 1128A, or 
1128B(b). Advisory opinions shall be binding as to the 
Secretary and the party requesting the opinion.

                          SPECIAL FRAUD ALERTS

Present law

    No provision.

Reasons for change

    Providers should be able to receive information and 
warnings on practices that the government has determined are 
suspect and are of particular concern.

Explanation of provision

    Any person may request the Inspector General to issue a 
special fraud alert informing the public of practices which the 
Inspector General considers to be suspect or of particular 
concern under the Medicare program or a State health care 
program, as defined in section 1128(h) of the Social Security 
Act. After investigation of the subject matter of the request, 
and, if appropriate, the Inspector General shall issue a 
special fraud alert in response to the request, published in 
the Federal Register.

     SUBTITLE B--REVISIONS TO CURRENT SANCTIONS FOR FRAUD AND ABUSE

Sec. 211. Mandatory Exclusion From Participation in Medicare and State 
                          Health Care Programs

Present law

    Section 1128 of the Social Security Act authorizes the 
Secretary to impose mandatory and permissive exclusions of 
individuals and entities from participation in the Medicare 
program, Medicaid program and programs receiving funds under 
the Maternal and Child Health Services Block Grant, or the 
Social Services Block Grant. Mandatory exclusions are 
authorized for convictions of criminal offenses related to the 
delivery of health care services under Medicare and State 
health care programs, as well as for convictions relating to 
patient abuse in connection with the delivery of a health care 
item or service. In the case of an exclusion under the 
mandatory exclusion authority the minimum period of exclusion 
could be no less than five years, with certain exceptions. 
Permissive exclusions are authorized for a number of offenses 
relating to fraud, kickbacks, obstruction of an investigation, 
and controlled substances, and activities relating to license 
revocations or suspensions, claims for excessive charges or 
unnecessary services, and the like.

Reasons for change

    The Committee felt that greater deterrence was needed to 
protect the Medicare program from providers who have been 
convicted of health care, fraud felonies and felonies relating 
to controlled substances.

Explanation of provision

            Individual convicted of felony relating to health care 
                    fraud
    This section would require the Secretary to exclude 
individuals and entities from Medicare and State health care 
programs who have been convicted of felony offenses relating to 
health care fraud for a minimum five year period. The Secretary 
would also retain the discretionary authority to exclude 
individuals from Medicare and State health care programs who 
have been convicted of misdemeanor criminal health care fraud 
offense, or who have been convicted of a criminal offense 
relating to fraud, theft, embezzlement, breach of fiduciary 
responsibility, or other financial misconduct in programs 
(other than health care programs) funded in whole or part by 
any Federal, State or local agency.
            Individual convicted of felony relating to controlled 
                    substance
    This section would require the Secretary to exclude 
individuals and entities from Medicare and State health care 
programs who have been convicted of felony offenses relating to 
controlled substances for a minimum five year period. The 
Secretary would retain the discretionary authority to exclude 
individual from Medicare and State health care programs who 
have been convicted of misdemeanor offenses relating to 
controlled substances.

Effective date

    This section would apply to convictions after the date of 
the enactment of this statute.

  Sec. 212. Establishment of Minimum Period of Exclusion for Certain 
Individuals and Entities Subject to Permissive Exclusion From Medicare 
                     and State Health Care Programs

Present law

    Section 1128 of the Social Security Act authorizes the 
Secretary to impose mandatory and permissive exclusions of 
individuals and entities from participation in Medicare 
program, Medicaid program and programs receiving funds under 
the Maternal and Child Health Service Block Grant, or the 
Social Services Block Grant. Mandatory exclusions are 
authorized for convictions of criminal offenses related to the 
delivery of health care services under Medicare and State 
health care programs, as well as for convictions relating to 
patient abuse in connection with the delivery of a health care 
item or service. In the case of an exclusion under the 
mandatory exclusion authority the minimum period of exclusion 
could be no less than five years, with certain exceptions. 
Permissive exclusions are authorized for a number of offenses 
relating to fraud, kickbacks, obstruction of an investigation, 
and controlled substances, and activities relating to license 
revocations or suspensions, claims for excessive charges or 
unnecessary services, and the like.

Reason for change

    The Committee felt that greater deterrence was needed to 
protect the Medicare program from providers who have been 
convicted of misdemeanor health care fraud offenses, 
obstructing an investigation, or whose health care license has 
been suspended or revoked.

Explanation of provision

    This section would establish a minimum period of exclusion 
for certain permissive exclusions from participation in 
Medicare and State health care programs.
    For convictions of misdemeanor criminal health care fraud 
offenses, criminal offenses relating to fraud in non-health 
care Federal or State programs, convictions relating to 
obstruction of an investigation of health care fraud offenses, 
and convictions of misdemeanor offenses relating to controlled 
substances the minimum period of exclusion would be three 
years, unless the Secretary determines that a longer or shorter 
period is appropriate, due to aggravating or mitigating 
circumstances.
    For permissive exclusions from Medicare or State health 
care programs due to the revocation or suspension of a health 
care license of an individual or entity, the minimum period of 
exclusion would not be less than the period during which the 
individual's or entity's license was revoked or suspended.
    For permissive exclusions from Medicare or State health 
care programs due to exclusions from any Federal health care 
program or State health care program for reasons bearing on an 
individual's or entity's professional competence or financial 
integrity, the minimum period of exclusion would not be less 
than the period the individual or entity is excluded or 
suspended from a Federal or State health care program.
    For permissive exclusions from Medicare or State health 
care programs due to a determination by the Secretary that an 
individual or entity has furnished items or services to 
patients substantially in excess of the needs of such patients 
or of a quality which fails to meet professionally recognized 
standards of health care, the period of exclusion would be not 
less than one year.

Sec. 213. Permissive Exclusion of Individuals With Ownership or Control 
                    Interest in Sanctioned Entities

Present law

    Section 1128 of the Social Security Act authorizes the 
Secretary to impose mandatory and permissive exclusions of 
individuals and entities from participation in the Medicare 
program, Medicaid program and programs receiving funds under 
the Maternal and Child Health Services Block Grant, or the 
Social Services Block Grant. Mandatory exclusions are 
authorized for convictions of criminal offenses related to the 
delivery of health care services under Medicare and State 
health care programs, as well as for convictions relating to 
patient abuse in connection with the delivery of a health care 
item or service. In the case of an exclusion under the 
mandatory exclusion authority the minimum period of exclusion 
could be no less than five years, with certain exceptions. 
Permissive exclusions are authorized for a number of offenses 
relating to fraud, kickbacks, obstruction of an investigation, 
and controlled substances, and activities relating to license 
revocations or suspensions, claims for excessive charges or 
unnecessary services, and the like.

Reasons for change

    The Committee felt that greater deterrence against fraud 
and abuse was needed in the Medicare program.

Explanation of provision

    Entities owned, controlled, or managed by a sanctioned 
individual are already subject to permissive exclusion from 
participation in Medicare and State health programs by the 
Secretary. Under this new authority an individual who has a 
direct or indirect ownership or control interest in a 
sanctioned entity and who knows or should know of the action 
constituting the basis for the conviction or exclusion, or who 
is an officer or managing employee of such an entity, may also 
be excluded from participation in Medicare and State health 
care programs by the Secretary if the entity has previously 
been convicted of an offense listed in Section 1129(a) or 
(b)(1), (2) or (3) or otherwise excluded from program 
participation. Under the new provision, the culpable individual 
would also be subject to program exclusion, even if not 
initially convicted or excluded.

 Sec. 214. Sanctions Against Practitioners and Persons for Failure to 
                   Comply With Statutory Obligations

Present law

    The Secretary has the authority to impose administrative 
sanctions against practitioners and persons who have failed to 
comply with certain statutory obligations relating to the 
quality of medical care rendered. Under this section the 
Secretary may require, in cases involving medically improper or 
unnecessary health care services, that the practitioner or 
person pay the United States an amount up to $10,000 for each 
instance of medically improper or unnecessary health care 
services. In such cases the practitioner or person would be 
permitted to continue to be eligible to receive reimbursement 
for health care services rendered to program beneficiaries.

Reasons for change

    The Committee felt that greater deterrence was needed to 
protect Medicare beneficiaries from providers who have failed 
to comply with certain statutory obligations relating to the 
quality of medical care rendered.

Explanation of provision

            Minimum period of exclusion for practitioners and persons 
                    failing to meet statutory obligations
    Under this section, the Secretary may exclude a 
practitioner or person for such period as the Secretary may 
prescribe, except that such period shall not be less than one 
year.
            Repeal of ``unwilling or unable'' conditions for imposition 
                    of sanction
    The Secretary, in making his determination that a 
practitioner or person should be sanctioned for failure to 
comply with certain statutory obligations relating to quality 
of health care, will no longer be required to prove that the 
individual was either unwilling or unable to comply with such 
obligations.

   Sec. 215. Intermediate Sanctions for Medicare Health Maintenance 
                             Organizations

Present law

    A contract between the Secretary and a Medicare Health 
Maintenance Organization (HMO) is generally for a one year 
term, with an option for automatic renewal. However, the 
Secretary may terminate any such contract at any time, after 
reasonable notice and an opportunity for a hearing, if the 
Medicare HMO has failed substantially to carry out the 
contract, or is carrying out the contract in a manner 
inconsistent with the efficient and effective administration of 
the requirements of section 1876 of the Social Security Act, or 
if the Medicare HMO no longer substantially meets the statutory 
requirements contained in Section 1876(b), (c), (e) and (f) of 
the Social Security Act.

Reasons for change

    The Committee determined that there could be situations 
where a Medicare HMO has failed substantially to carry out its 
contract, however, the offense is not sufficiently egregious to 
warrant termination of an HMO's contract with Medicare. In 
those situations, intermediate sanctions such as civil monetary 
penalties should be available to be imposed by the Secretary.

Explanation of provision

            Application of intermediate sanctions for any program 
                    violations
    Under this section the Secretary may terminate a contract 
with a Medicare Health Maintenance Organization (HMO) or may 
impose certain intermediate sanctions on the organization if 
the Secretary determines that the Medicare HMO has failed 
substantially to carry out the contract; is carrying out the 
contract in a manner substantially inconsistent with the 
efficient and effective administration of this section; or, if 
the Medicare HMO no longer substantially meets the statutory 
requirements contained in Section 1876(b), (c), (e) and (f) the 
Social Security Act.
    If the basis for the determination by the Secretary that 
intermediate sanctions should be imposed on an eligible 
organization is other than that the organization has failed 
substantially to carry out its contract with the Secretary, 
then the Secretary may apply intermediate sanctions as follows: 
civil money penalties of not more than $25,000 for each 
determination if the deficiency that is the basis of the 
determination has directly adversely affected (or has the 
substantial likelihood of adversely affecting) an individual 
covered under the organization's contract; civil money 
penalties or not more than $10,000 for each week of a 
continuing violation; and suspension of enrollment of 
individuals until the Secretary is satisfied that the 
deficiency has been corrected and is not likely to recur.
    Whenever the Secretary seeks to either terminate a Medicare 
HMO contract or impose intermediate sanctions on such an 
organization, the Secretary must do so pursuant to a formal 
investigation and under compliance procedures which provide the 
organization with a reasonable opportunity to develop and 
implement a corrective action plan to correct the deficiencies 
that were the basis of the Secretary's adverse determination. 
In making a decision whether to impose sanctions the Secretary 
is required to consider aggravating factors such as whether an 
entity has a history of deficiencies or has not taken action to 
correct deficiencies the Secretary has brought to their 
attention. The Secretary's compliance procedures must also 
include notice and opportunity for a hearing (including the 
right to appeal an initial decision) before the Secretary 
imposes any sanction or terminates the contract of a Medicare 
HMO, and there must not be any unreasonable or unnecessary 
delay between the finding of a deficiency and the imposition of 
sanctions.
            Agreements With Peer Review Organizations
    Under this section each risk-sharing contract with a 
Medicare HMO must provide that the organization will maintain a 
written agreement with a utilization and quality control peer 
review organization or similar organization for quality review 
functions.

Effective date

    The amendments made by this section shall apply to the 
contract years beginning on or after January 1, 1997.

     Sec. 216. Additional Exception to Anti-Kickback Penalties for 
               Discounting and Managed Care Arrangements

Present law

    The anti-kickback provision in Section 1128(b) contains 
several exceptions. These exceptions include discounts or other 
reductions in price obtained by a provider of services or other 
entity under Medicare or a State health care program if the 
reduction in price is properly disclosed and appropriately 
reflected in the costs claimed or charges made by the provider 
or entity under Medicare or a State health care program; any 
amount paid by an employer to an employee for employment in the 
provision of covered items or services; any amount paid by a 
vendor of goods or services to a person authorized to act as a 
purchasing agent for a group of individuals or entities under 
specified conditions; a waiver of any coinsurance under Part B 
of Medicare by a Federally qualified health care center with 
respect to an individual who qualifies for subsidized services 
under a provision of the Public Health Service Act; and any 
payment practice specified by the Secretary as a Safe Harbor 
exception.

Reasons for change

    Absent this exception, nearly all managed care arrangements 
(except those that comply with the current safe harbors for 
HMO's that contract with Medicare and Medicaid) could 
potentially be deemed unlawful. This is because an essential 
feature of managed care is the offer of remuneration (in the 
form of discounting or risk sharing arrangements in exchange 
for provider access to the health plan's enrollee population. 
Another common feature of managed care is the offer by health 
plans to providers of incentives to encourage adherence to 
cost-saving measures and practice protocols. There is no 
assurance that either of these (as well as other arrangements 
inherent in managed care) are permissible under the anti-
kickback law. In addition, without the discount exception, cost 
saving measures such as combined products like procedure kits 
which contain all items needed to perform a specific procedure 
or provide a specific treatment, and aggregate discounts for a 
group of products purchased, such as radiology supplies could 
be prohibited. The current statute places a chilling effect 
even on cost saving measures because manufacturers are steering 
away from this discounting arrangements such as combined 
products and aggregate discounts within the Medicare program 
for fear of acting in violation of the current statute.
    It is the intent of the Committee that the managed care 
exception apply to waiver of any deductible amount under Part A 
of Title XVIII as part of a price reduction agreement between a 
provider and a third-party payor that is part of a contract for 
the furnishing of items and services to a beneficiary of a 
Medicare supplemental policy approved by a state and issued 
under the terms of Section 1882(t)(1) of the Social Security 
Act. This provision would apply to hospitals providing services 
under Title XVIII, including PPS-exempt hospitals and units 
such as psychiatric, rehabilitation, and long-term care 
facilities.

Explanation of provision

    This section would add a new exception to the anti-kickback 
provisions allowing remuneration between an eligible 
organization under Section 1876 and an individual or entity 
providing items or services pursuant to a written agreement 
between an eligible organization under Section 1876 and the 
individual or entity. Remuneration would also be allowed 
between an organization and an individual or entity if a 
written agreement places the individual or entity at 
substantial financial risk for the cost or utilization of the 
items or services which the individual or entity is obligated 
to provide. The risk arrangement may be provided through a 
withhold, capitation, incentive pool, per diem payment or other 
similar risk arrangement. This amendment would apply to acts or 
omissions occurring after January 1, 1997.

Sec. 217. Criminal Penalty for the Fraudulent Disposition of Assets in 
                   Order to Obtain Medicaid Benefits

Present law

    Under section 1128B, upon conviction of a program-related 
felony, an individual may be fined not more than $25,000 or 
imprisoned for not more than five years or both.

Explanation of provision

    This section would add a new crime to the list of 
prohibited activities under section 1128B of the Social 
Security Act for cases where a person knowingly and willfully 
disposes of assets by transferring assets in order to become 
eligible for benefits under a state health care program, 
including the Medicaid program, if disposing of the assets 
results in the imposition of a period of ineligibility.

                        Sec. 218. Effective Date

Explanation of provision

    Except as otherwise provided, the amendments made by this 
chapter shall take effect January 1, 1997.

                      Subtitle C--Data Collection

    Sec. 221. Establishment of the Health Care Fraud and Abuse Data 
                           Collection Program

Present law

    No provision.

Reasons for change

    Beside the current lack of a coordinated effort between 
Federal agencies and state agencies on fraud and abuse 
prevention, detection, and prosecution, there is an 
insufficient lack of uniform data on providers and suppliers 
who have had adverse actions against them. This data bank would 
provide a source for up-to-date information on adverse actions 
against providers and suppliers that can be used in 
investigating fraud and abuse cases, and used when providers or 
suppliers are seeking new licenses, renewal of licenses, or 
hospital privileges.

Explanation of provision

            In general
    The Secretary of Health and Human Services is required to 
establish a national health care fraud and abuse data 
collection program for reporting final adverse actions (not 
including settlements in which no findings of liability have 
been made) against health care providers, suppliers, or 
practioners.
    Each government agency and health plan would, on a monthly 
basis, report any final adverse action taken against a health 
care provider, supplier, or practitioner. Certain information 
would be included in the report, including a description of the 
acts or omissions and injuries upon which the final adverse 
action was taken. The Secretary would, however, protect the 
privacy of individuals receiving health care services.
    The Secretary would, by regulation, provide for disclosure 
of the information about adverse actions, upon request to the 
health care provider, supplier, or licensed practitioner and 
provide procedures in the case of disputed accuracy of the 
information. Each government agency and health plan is required 
to report corrections of information already reported about any 
final adverse action taken against a health care provider, 
supplier, or practitioner in such form and manner that the 
Secretary prescribes by regulation.
    The information in the database would be available to 
Federal and State government agencies and health plans. The 
Secretary may approve reasonable fees for the disclosure of 
information in the database (other than with respect to 
requests by Federal agencies). The amount of such a fee shall 
be sufficient to recover the full costs of operating the data 
base.
    No person or entity would be held liable in a civil action 
with respect to any report made as required by this section, 
unless the person or entity knows the information is false. The 
definition for ``final adverse action'' and other related terms 
are specified in this section.
            Improved prevention in issuance of Medicare provider 
                    numbers
    The Secretary may impose appropriate fees on physicians to 
cover the cost of investigation and recertification activities 
with respect to the issuance of identifiers for physicians who 
furnish services for which Medicare payments are made.

                  SUBTITLE D--CIVIL MONETARY PENALTIES

         Sec. 231. Social Security Act Civil Monetary Penalties

Present law

    Section 1128 of the Social Security Act authorizes the 
Secretary to impose mandatory and permissive exclusions of 
individuals and entities from participation in the Medicare 
program, Medicaid program and programs receiving funds under 
the Maternal and Child Health Services Block Grant, or the 
Social Services Block Grant. Mandatory exclusions are 
authorized for convictions of criminal offenses related to the 
delivery of health care services under Medicare and State 
health care program, as well as for convictions relating to 
patient abuse in connection with the delivery of a health care 
item or service. In the case of an exclusion under the 
mandatory exclusion authority the minimum period of exclusion 
could be no less than five years, with certain exceptions. 
Permissive exclusions are authorized for a number of offenses 
relating to fraud, kickbacks, obstruction of an investigation, 
and controlled substances, and activities relating to license 
revocations or suspensions, claims for excessive charges or 
unnecessary services, and the like.
    Under Section 1128A of the Social Security Act civil 
monetary penalties may be imposed for false and fraudulent 
claims for reimbursement under the Medicare and State health 
care programs.
    Under section 1128B, upon conviction of a program-related 
felony, an individual may be fined not more than $25,000 or 
imprisoned for not more than five years, or both.

Reason for change

    The Committee determined that greater deterrence was needed 
to protect the Medicare program from providers who have been 
convicted of defrauding Medicare and other federal programs.

Explanation of provision

            General civil monetary penalties
    The provisions under the Medicare and Medicaid programs 
which provide for civil money penalties for specified fraud and 
abuse violations would apply to similar violations involving 
other Federal health care programs. Federal health care 
programs would include any health insurance plans or programs 
funded, in whole or part, by the Federal government, such as 
CHAMPUS and FEHBP.
    Civil money penalties and assessments received by the 
Secretary would be deposited into the Health Care Fraud and 
Abuse Control Account established under this Act.
            Excluded individual retaining ownership or control interest 
                    in participating entity
    Any person who has been excluded from participating in 
Medicare or a State health care program and who retains a 
direct or indirect ownership or control interest in an entity 
that is participating in a program under Medicare or a State 
health care program, and who knows or should know of the action 
constituting the basis for the exclusion, or who is an officer 
or managing employee of such an entity would be subject to a 
civil money penalty of not more than $10,000 for each day the 
prohibited relationship occurs.
            Modification of amounts of penalties and assessments
    This section would amend the civil money penalty provisions 
of Section 1128A(a) by increasing the amount of a civil money 
penalty from $2,000 to $10,000 for each item or service 
involved. This section also increases the assessment which a 
person may be subject to from ``not more than twice the 
amount'' to ``not more than three times the amount'' claimed 
for each such item or service in lieu of damages sustained by 
the United States or a State agency because of such claim.
            Claim for item or service based on incorrect coding or 
                    medically unnecessary services
    This section would add two practices to the list of 
prohibited practices for which civil money penalties may be 
assessed. The first occurs when a person engages in a pattern 
or practice of presenting a claim for an item or service based 
on a code that the person knows or should know will result in 
greater payments than appropriate. The second is the practice 
whereby a person submits a claim that the person knows or 
should know is for a medical item or service which is not 
medically necessary.
    The sanction against practitioners and person who fail to 
comply with certain statutory obligations is changed from an 
amount equal to ``the actual or estimated cost'' of the 
medically improper or unnecessary services provided, to ``up to 
$10,000 for each instance of medical improper or unnecessary 
services provided.
            Procedural provisions
    The procedural provisions outlined in Section 1128A, such 
as notice, hearings, and judicial review rights shall apply to 
civil money penalties assessed against Medicare Health 
Maintenance Organizations in the same manner as they apply to 
civil money penalties assessed against health care providers 
generally.
            Prohibition against offering inducements to individuals 
                    enrolled under programs or plans
    This section would add a new practice to the list of 
prohibited practices for which civil money penalties may be 
assessed. Any person who offers remuneration to an individual 
eligible for benefits under Medicare or a State health program 
that such individual knows or should know is likely to 
influence such individual to order or receive from a particular 
provider, practitioner or supplier any item or service 
reimbursable under Medicare or a State health care program, 
shall be subject to the various civil money penalties, 
assessments and exclusion provisions of Section 1128A of the 
Social Security Act.
    The term ``remuneration'' is defined to include the waiver 
of part or all of coinsurance and deductible amounts, as well 
as transfers of items or services for free, or for other than 
fair market value. There are exceptions to this definition. The 
waiver of part or all of coinsurance and deductible amounts 
would not be considered remuneration under this section if the 
waiver is not offered as part of any advertisement or 
solicitation, the person does not routinely waive coinsurance 
or deductible amounts, and the person either waives the 
coinsurance and deductible amounts because the individual is in 
financial need, or fails to collect the amounts after 
reasonable collection efforts, or provides for a permissible 
waiver under regulations issued by the Secretary. In addition, 
the term remuneration would not include differentials in 
coinsurance and deductible amounts as part of a benefit plan 
design if the differentials have been disclosed in writing to 
all beneficiaries, third party payors, and providers, and if 
the differentials meet the standards defined in the Secretary's 
regulations. Remuneration would also not include incentives 
given to individuals to promote the delivery of preventive care 
under the Secretary's regulations.

Effective date

    January 1, 1997.

 Sec. 232. Clarification of Level of Intent Required for Imposition of 
                        Civil Monetary Penalties

Present law

    Civil money penalties may be imposed for seeking 
reimbursement under the Medicare and Medicaid programs for 
items or services not provided or for services provided by 
someone who is not a licensed physician, whose license was 
obtained through misrepresentation, or who misrepresented his 
or her qualification as a specialist, or where the claim is 
otherwise fraudulent. Civil penalties may also be sought for 
presenting a claim due for payments which are in violation of 
(1) contracts limiting payment due to assignment of a patient 
(2) agreements with state agencies limiting permitted charges, 
(3) agreement with participating physicians or supplier, and 
(4) agreements with providers of service. Civil penalties may 
also be sought against persons who provide false or misleading 
information that could reasonably be expected to influence a 
decision to discharge a person from a hospital. A person is 
subject to these provisions if they presented a claim and he or 
she ``knows or should have known'' that the claim fell into one 
of the categories listed above.

Reasons for change

    The current standard of ``knows or should know'' is 
inconsistent with the Civil False Claims Act which applies to 
all other federal programs. Additionally, concerns have been 
raised that the standard currently applied by the Health and 
Human Services Department Office of the Inspector General may 
be less specific, and can result in the pursuit of allegation 
based on honest and simple mistakes where a provider had no 
knowledge of an alleged violation. The IG reports that the 
providers they generally pursue have shown deliberate patterns 
of abuse. Therefore, a modification in the intent standard 
should have no impact on the IG's ability to pursue offenders 
under this Act.

Explanation of provision

    This section adds a requirement, similar to the False 
Claims Act, that a person is subject to this provision when the 
person ``knowingly'' presents a claim that the person ``knows 
or should know'' fell into one of the prohibited categories. 
Thus, an assessment under this provision would only be made 
where a person had actual knowledge that he or she had 
submitted a claim or had actual knowledge that he or she had 
submitted a claim or had provided false or misleading 
information, and where the person had actual knowledge of the 
fraudulent nature of the claim, acted in deliberate ignorance, 
or acted in reckless disregard. The requirement that a person 
``knowingly'' presents a claim or ``knowingly'' makes a false 
or misleading statement which influences discharge would 
prevent charging persons who inadvertently perform these acts.

   Sec. 233. Penalty for False Certification for Home Health Services

Present law

    No provision.

Reasons for change

    Expert testimony has indicated that physicians sometimes do 
not adequately review statements certifying patients' 
eligibility for home health care.

Explanation of provision

            In general
    This provision would add an additional civil monetary 
penalty of not more than three times the amount of the 
payments, or $5,000, whichever is greater, for a physician who 
certifies that an individual meets all of Medicare's 
requirements to receive home health care while knowing that the 
individual does not meet all such requirements.

Effective date

    The amendment by this section would apply to certifications 
made on or after the date of enactment of this Act.

               subtitle f--administrative simplification

             Part 1. General Administrative Simplification

                           Sec. 251. Purpose

Present law

    No provision.

 Reason for change

    One of the primary barriers to cost-effective health 
information is the lack of uniform standards for financial 
administrative health information. Uniform standards for health 
information would reduce health care spending by enabling the 
public and private sectors to reduce paperwork, expose fraud 
and abuse, provide consumers with the information they need to 
compare health plans and services, and would be less burdensome 
for providers. It is estimated that an electronic health 
information system could produce net savings to health care 
spending of over $29 billion over a five year period to health 
plans and providers.

Explanation of provision

    Provides the purpose of the subtitle as improving the 
Medicare and Medicaid programs, and the efficiency and 
effectiveness of the health care system, by encouraging the 
development of a health information system through the 
establishment of standards and requirements for the electronic 
transmission of certain health information.

Sec. 252. Amends Title XI of the Social Security Act by Adding Part C--
                     Administrative Simplification

Explanation of provision

    Amends title XI of the Social Security Act by adding Part 
C--Administrative Simplification.

          Sec. 1171. Administrative Simplification Definitions

Present law

    No provision.

Explanation of provision

    Provides definitions for the part including the following: 
clearinghouse, code set, health care provider, health 
information, health plan, individually identifiable health 
information, standard, and standard setting organization. A 
clearinghouse would be a public or private entity that 
processes or facilitates the processing of nonstandard data 
elements of health information into standard data elements, or 
provides the means by which persons may meet the requirements 
of this part. A health plan would include Medicare, Medicaid, a 
Medicare supplemental policy, supplemental liability insurance, 
general liability insurance, worker's compensation or similar 
insurance, automobile or automobile medical-payment insurance, 
a long-term care policy, a hospital or fixed indemnity income-
protection policy, and employee welfare benefit plan provided 
for 50 or more participants, an employee welfare benefit plan 
provided for 2 or more employers, the health care program for 
active military personnel, the veterans health care program, 
the Civilian Health and Medical Program of the Uniformed 
Services (CHAMPUS), the Indian health service program, the 
Federal Employees Health Benefits Plan, and such other plan or 
arrangement as the Secretary determines is a health plan

       Sec. 1172. General Requirements for Adoption of Standards

Present law

    No provision.

Reasons for change

    Most health plans already transmit data electronically, but 
the data is transmitted in a non-standard or incomplete form, 
and generally cannot be used to transfer information between 
health plans or be used to effectively track fraud and abuse. 
These provisions build upon the public/private framework 
originally established by HHS Secretary Louis Sullivan through 
the private sector industry group, the Workgroup for Electronic 
Data Interchange (WEDI). Despite the fact, under current law, 
that HCFA has the authority to adopt government standards for 
health information, and to mandate the use of those standards 
by the private sector, current law provisions do not extend 
HCFA's authority to allow it to adopt standards that have been 
developed by a voluntary, consensus process of private and 
public sector payors. This bill establishes such a process for 
the standardization of health data that builds on the progress 
in the private sector. This process would ensure that the 
Secretary integrates Medicare's standards with the standards 
developed by the private sector.

Explanation of provision

    Requires that any standard or modification of a standard 
adopted applies to the following persons: (1) a health plan, 
(2) a clearinghouse, or (3) a health care provider, but only to 
the extent that the provider was conducting transactions 
referred to in the bill. The bill would require that any 
standard or modification of a standard adopted must reduce the 
administrative cost of providing and paying for health care. 
The standard setting organization would be required to develop 
or modify any standard or modification adopted. The Secretary 
could adopt a standard or modification of a standard that was 
different from any standard developed by such organization if 
the different standard or modification was promulgated in 
accordance with rule-making procedures and would substantially 
reduce administrative costs to providers and plans. The 
Secretary would be required to establish specifications for 
implementing each of the standards and modifications adopted. 
The standards adopted would be prohibited from requiring 
disclosure of trade secrets or confidential commercial 
information by a participant in the health information network. 
In complying with the requirements of this part, the Secretary 
would be required to rely on the recommendations of the Health 
Information Advisory Committee established by the bill, and 
consult with appropriate Federal and State agencies and private 
organizations. If no standard-setting organization has adopted 
or modified any standard relating to a standard, the Secretary 
would be required to rely on recommendations of the Health 
Information Advisory Committee, and would be required to 
consult with appropriate Federal and State agencies and private 
organizations.

  Sec. 1173. Standards for Information Transactions and Data Elements

Present law

    No provision.

Reasons for change

    This section provides uniformity for health plans providing 
health benefits in the area of information transactions, 
limited to financial and administrative transactions. The 
Committee does not intend for these requirements apply to 
information collected that is beyond this scope such as, for 
example, but not limited to, personnel records of employers who 
provide health plan benefits or medical records of patients. 
While requiring standardization of data transmitted 
electronically among persons governed by this part, the 
provisions in this part would not impose any requirement for 
information collection or reporting. Health plans only, and not 
providers, are required to comply with these standards.
    The Committee recognizes the role of the private sector in 
establishing innovative data transaction systems relating to 
electronic exchange, unique health identifiers, code sets, 
security standards, privacy standards, and electronic 
signatures. The standards adopted would protect the privacy and 
confidentiality of health information. Health information is 
considered relatively ``safe'' today, not because it is secure, 
but because it is difficult to access. These standards improve 
access and establish strict privacy protections. The term 
``equivalent encounter information'' pertains to health plans 
such as HMO's, that do not generate a claims form at the time a 
medical professional renders a service. At the time, an 
enrollee has contact with a medical professional, a notation is 
made which includes the name of the provider, and the treatment 
rendered.
    This section further directs the Secretary to adopt 
standards relating to the privacy of individually identifiable 
health information concerning the rights of individuals who are 
the subject of such information, the procedures for exercising 
such rights, and the authorized uses and disclosures of such 
information. Protecting the privacy of individuals is 
paramount. However, the Committee recognizes that certain uses 
of individually identifiable information are appropriate, and 
do not compromise the privacy of an individual. Examples of 
such use of information include the transfer of information 
when making referrals from primary care to specialty care, and 
the transfer of information from a health plan to an 
organization for the sole purpose of conducting health care-
related research. As health care plans and providers continue 
to focus on outcomes research and innovation, it is important 
that the exchange and aggregate use of health care research be 
allowed.

Explanation of provisions

    Requires the Secretary to adopt appropriate standards for 
financial and administrative transactions and data elements 
exchanged electronically that are consistent with the goals of 
improving the operation of the health care system and reducing 
administrative costs. Financial and administrative transactions 
would include claims, claims attachments, enrollment and 
disenrollment, eligibility, health care payment and remittance 
advice, premium payments, first report of injury, claims 
status, and referral certification and authorization. Standards 
adopted by the Secretary would be required to accommodate the 
needs of different types of health care providers.
    The Secretary would be required to adopt standards 
providing for a standard unique health identifier for each 
individual, employer, health plan, and health care provider for 
use in the health care system. The Secretary would be required 
to adopt standards that select code sets for appropriate data 
elements or establish such code sets, and establish efficient 
and low-cost procedures for the distribution of code sets and 
modifications.
    The Secretary would be required to establish security 
standards that (1) take into account the technical capabilities 
of record systems to maintain health information, the costs of 
security measures, the need for training persons with access to 
health information, the value of audit trails in computerized 
record systems used, and the needs and capabilities of small 
health care providers and rural health care providers; and (2) 
ensure that a clearinghouse, if it is part of a larger 
organization, has policies and security procedures which 
isolate the activities of such service to prevent unauthorized 
access to such information by such larger organization. Each 
person who maintains or transmits health information or data 
elements of health information would be required to maintain 
reasonable and appropriate administrative, technical and 
physical safeguards to (1) ensure the integrity and 
confidentiality of the information, (2) protect against any 
reasonably anticipated threats or hazards to the security or 
integrity of the information and the unauthorized uses or 
disclosures of the information, and (3) otherwise ensure 
compliance with these requirements by the officers and 
employees of such person.
    The Secretary would be required to establish standards and 
modifications to such standards regarding the privacy of 
individually identifiable health information that is in the 
health information network. Such standards would be required to 
include at least (1) the rights of an individual who is subject 
to such information, (2) the procedures to be established for 
the exercise of such rights, and (3) the uses and disclosures 
of such information that are authorized or required. The 
Secretary, in coordination with the Secretary of Commerce, 
would be required to adopt standards specifying procedures for 
the electronic transmission and authentication of signatures, 
compliance with which would be deemed to satisfy Federal and 
State statutory requirements for written signatures with 
respect to the transactions specified by the bill. This part 
would not be construed to prohibit the payment of health care 
services or health plan premiums by debit, credit, payment card 
or numbers, or other electronics means. The Secretary would be 
required to adopt standards for determining the financial 
liability of health plans when health benefits are payable 
under two or more health plans, and for transferring among 
health plans appropriate standard elements needed for the 
coordination of benefits, the sequential processing of claims, 
and other data elements for individuals who have more than one 
health plan.

            Sec. 1174. Timetables for Adoption of Standards

                        Sec. 1175. Requirements

Present law

    No provision.

Reasons for change

    The Committee determined that it is necessary to place the 
Secretary on a rapid timetable in order that the new electronic 
transactions system is put into place as soon as possible.

Explanation of provisions

    Requires the Secretary to adopt standards relating to the 
transactions, data elements of health information, security and 
privacy by not later than 18 months after the date of enactment 
of the part, except that standards relating to claims 
attachments would be required to be adopted not later than 30 
months after enactment. The Secretary would be required to 
review the adopted standards and adopt additional or modified 
standard as appropriate, but not more frequently than once 
every 6 months, except during the first 12-month period after 
the standards are adopted unless the Secretary determines that 
a modification is necessary in order to permit compliance with 
the standards. The Secretary would also be required to ensure 
that procedures exist for the routine maintenance, testing, 
enhancement, and expansion of code sets.

Present law

    No provision.

Explanation of provision

    Establish that if a person desires to conduct a financial 
or administrative transaction with a health plan as a standard 
transaction, (1) the health plan may not refuse to conduct such 
transaction as a standard transaction, (2) the health plan many 
not delay such transaction, or otherwise adversely affect, or 
attempt to adversely affect, the person or the transaction on 
the grounds that the transaction is a standard transaction, and 
(3) the information transmitted and received in connection with 
the transaction would be required to be in a form of standard 
data elements for health information. Health plans could 
satisfy the transmission of information by directly 
transmitting standard data elements of health information, or 
submitting nonstandard data elements to a clearinghouse for 
processing in to standard data elements and transmission. Not 
later than 24 months after the date on which standard or 
implementation specification was adopted or established under 
this part, each person to which the standard applied would be 
required to comply with the standard or specification. Small 
health plans, determined by the Secretary, would be required to 
comply not later than 36 months after standards were adopted. 
If the Secretary modified a standard or implementation 
specification, each person to whom it applied would be required 
to comply with the modified standard at such time as the 
Secretary determine appropriate, but no earlier than 180 days 
after such modification was adopted.

Sec. 1176. General Penalty for Failure to Comply With Requirements and 
                               Standards

Present law

    No provision.

Explanation of provision

    Requires the Secretary to impose on any person who violates 
a provision under the bill a penalty of not more than $100 for 
each such violation of a specific standard or requirement, 
except that the total amount imposed on the person for all such 
violations during a calendar year would not exceed $25,000. A 
penalty would not be imposed if it was established that the 
person liable for the penalty did not know, and by exercising 
reasonable diligence would not have known, that such person 
violated the provision. A penalty would not be imposed if (1) 
the failure to comply was due to reasonable cause and not 
willful neglect, and (2) the failure to comply was corrected 
during the 30-day period beginning on the first date the person 
liable for the penalty know, or would have known, that the 
failure to comply occurred. The Secretary would be permitted to 
extend the 30-day period when appropriate, and could provide 
technical assistance to the person that failed to comply 
because they were unable to comply. In cases of a failure to 
comply due to reasonable cause and not to willful neglect, any 
penalty that was not entirely waived, could be waived to the 
extent that the payment of such penalty would be excessive 
relative to the compliance failure involved.

  Sec. 1177. Wrongful Disclosure of Individually Identifiable Health 
                              Information

    No provision.

Reasons for change

    This section reflects the Committee's concern that an 
individual's privacy be protected.

Explanation of provision

    Defines the offense of wrongful disclosure of individually 
identifiable health information as instances when a person who 
knowingly (1) uses or causes to be used a unique health 
identifier in violation of a provision in this part, (2) 
obtains individually identifiable health information for 
relating to an individual in violation of a provision in this 
part, or (3) discloses individually identifiable health 
information to another person in violation of this part. A 
person committing such an offense would be required to (1) be 
fined not more than $50,000, imprisoned not more than 1 year, 
or both; (2) if the offense was committed under false 
pretenses, be fined not more than $100,000, imprisoned not more 
than 5 years, or both; and (3) if the offense was committed 
with intent to sell, transfer, or use individually identifiable 
health information for commercial advantage, personal gain, or 
malicious harm, fined not more than $250,000, imprisoned not 
more than 10 years, or both.

                     Sec. 1178. Effect on State Law

    No provision.

Reasons for change

    The intent of this section is to ensure that state privacy 
laws that are more stringent than the requirements and 
standards contained in the bill are not superseded.

Explanation of provision

    Requires that a provision, requirement, or standard 
provided by the bill supersede any contrary provision of state 
law, including a provision of state law that required medical 
or health plan records (including billing information) to be 
maintained or transmitted in written rather than electronic 
form. A provision under the bill would not supersede a contrary 
provision of state law if the provision of state law (1) was 
more stringent than the requirements of the bill with respect 
to privacy or individually identifiable health information, or 
(2) was a provision the Secretary determined was necessary to 
prevent fraud and abuse with respect to controlled substances 
or for other purposes. Nothing in this section would be 
construed to invalidate or limit the authority, power, or 
procedures established under any law providing for the 
reporting of disease or injury, child abuse, birth or death, 
public health surveillance, or public health investigation or 
intervention.

            Sec. 1179. Health Information Advisory Committee

Present law

    No provision.

Reasons for change

    This section directs the Secretary to rely on 
recommendations of the Health Information Advisory Committee, 
the membership of which will consist of individuals who are of 
recognized standing and distinction in the areas of information 
systems, information networking and integration, consumer 
health, health care financial management, or privacy. This 
development process depends on expert advice from individuals 
in the private sector, and it is imperative that the Secretary 
consult with the Advisory Committee on issues related to the 
adoption of uniform transaction standards.

Explanation of provision

    Provides for the establishment of a committee known as the 
Health Information Advisory Committee, consisting of 15 
members. The committee would be required to (1) provide 
assistance to the Secretary with complying with the 
requirements of the bill; (2) study the issues related to the 
adoption of uniform data standards for patient medical record 
information and electronic exchange of such information; (3) 
report to the Secretary not later than 4 years after enactment 
recommendations and legislative proposals for such standards 
and electronic exchange; and (4) be generally responsible for 
advising the Secretary and the Congress on the status of the 
future of the health information network. The committee would 
be required, not later than 1 year after enactment, to report 
to Congress, health care providers, health plans, and other 
entities using the health information network regarding (1) the 
extent to which entities using the network were meeting the 
standards adopted and working together to form an integrated 
network that meets the needs of its users; (2) the extent to 
which entities were meeting the privacy and security standards, 
and the types of penalties assessed for noncompliance; (3) 
whether the federal and state governments were receiving 
information of sufficient quality to met their 
responsibilities; (4) any problems that exist with 
implementation of the network; and (5) the extent to which 
timetables established under this part of the bill were being 
met.

     Part 2. Administrative Simplification for Laboratory Services

     Sec. 261 Administrative Simplification for Laboratory Services

Present law

    No provision.

Reasons for change

    Concerns have been raised about the widely varying 
documentation required by Medicare carriers regarding claims 
for clinical laboratory tests. The resulting significant 
administrative costs associated with this documentation, 
particularly for laboratories which send claims to multiple 
carriers.

Explanation of provision

    Requires the Secretary to adopt uniform coverage, 
administration and payment policies for clinical diagnostic 
laboratory tests within one year of enactment. The Secretary 
would be required to select 15 carrier medical directors to 
develop recommendations to the Secretary for such policies. The 
directors would be representative of geographic areas and have 
a varied range of interest in relevant fields including 
pathology and clinical laboratory practice. The directors would 
be required to consult with independent experts in each major 
discipline of clinical laboratory medicine (including clinical 
laboratory personnel, bioanalysts, pathologists, and practicing 
physicians). The medical directors would also solicit comments 
from other individuals and groups wishing to participate. The 
provision would provide that the process would be conducted as 
negotiated rule-making as provided under the Administrative 
Procedure Act.
    Provide that the negotiated rule-making would result in 
recommendations for uniform policies in the following areas: 
(i) beneficiary information required to be submitted with each 
claim; (ii) physicians' obligations regarding documentation and 
record keeping; (iii) procedures for filing claims and for 
providing remittances electronically; (iv) performance of post-
payment review; (v) prohibition of documentation of medical 
necessity except where determined to be appropriate after 
identification of aberrant medical patterns through focused 
medical review; and beneficiary responsibility for payment.
    Prohibits carriers and intermediaries from implementing any 
new requirements for submission of claims retroactive to 
January 1, 1995 during the period when the Secretary is 
adopting new policies. Further, carriers would be prohibited 
from issuing new coverage, administration or payment policies 
unless they promote the goal of administrative simplification.
    Requires the medical directors to forward their 
recommendations to the Secretary within six months of 
enactment. The Secretary would provide for publication of 
recommendations for public comment using negotiated rule-
making. The Secretary would publish final uniform policies 
which would become effective 180 days following publication. 
Following publication, the Secretary would implement uniform 
documentation and processing policies.
    Permits any independent laboratory to select one carrier 
for processing all of its claims for payment regardless of 
where the laboratory, patient, or provider resides or conducts 
business. The election would be made by the laboratories and an 
agreement between the carrier and the laboratory would be 
forwarded to the Secretary. No laboratory would be required to 
select a single carrier.

       Duplication and Coordination of Medicare-Related Products

Present law

    Many Medicare beneficiaries purchase private health 
insurance to supplement their Medicare coverage. These 
individually purchased policies are commonly known as Medigap 
policies. OBRA 90, P.L. 101-508 provided for a standardization 
of Medigap policies. OBRA 90 also substantially modified the 
antiduplication provision contained in law. The intent of the 
OBRA 90 anti-duplication provision was to prohibit sales of 
duplicative Medigap policies. However, the statutory language 
applied, with very limited exceptions, to all ``health 
insurance policies'' sold to Medicare beneficiaries. Observers 
noted that this provision could thus apply to a broad range of 
policies including hospital indemnity plans, dread disease 
policies, and long-term care insurance policies.
    The Social Security Amendments of 1994 (P.L. 103-432) 
included a number of technical modifications to the Medigap 
statute, including modifications to the anti-duplication 
provisions. Under the revised language, it is illegal to sell 
or issue the following policies to Medicare beneficiaries: (i) 
a health insurance policy with knowledge that it duplicates 
Medicare or Medicaid benefits to which a beneficiary is 
otherwise entitled; (ii) a Medigap policy, with knowledge that 
the beneficiary already has a Medigap policy, or (iii) a health 
insurance policy (other than Medigap) with knowledge that it 
duplicates private health benefits to which the beneficiary is 
already entitled. A number of exceptions to these prohibitions 
are established. The sale of a Medigap policy is not in 
violation of the provisions relating to duplication of Medicaid 
coverage if: (i) the State Medicaid program pays the premiums 
for the policy; (ii) in the case of qualified Medicare 
beneficiaries (QMBs), the policy includes prescription drug 
coverage; or (iii) the only Medicaid assistance the individual 
is entitled to is payment of Medicare Part B premiums.
    The sale of a health insurance policy (other than a Medigap 
policy) that duplicates private coverage is not prohibited if 
the policy pays benefits directly to the individual without 
regard to other coverage. Further, the sale of a health 
insurance policy (other than a Medigap policy to an individual 
entitled to Medicaid) is not in violation of the prohibition 
relating to selling of a policy duplicating Medicare or 
Medicaid, if the benefits are paid without regard to the 
duplication in coverage. This exception is conditional on the 
prominent disclosure of the extent of the duplication, as part 
of or together with, the application statement.
    P.L. 103-432 provided for the development by the National 
Association of Insurance Commissioners (NAIC) of disclosure 
statements describing the extent of duplication for each of the 
types of private health insurance policies. Statements were to 
be developed, at a minimum, for policies paying fixed cash 
benefits directly to the beneficiary and policies limiting 
benefits to specific diseases. The NAIC identified 10 types of 
health insurance policies requiring disclosure statements and 
developed statements for them. These were approved by the 
Secretary and published in the Federal Register on June 12, 
1995.

Reasons for change

    The enactment of H.R. 5252, the Social Security Act 
Amendments of 1994 (P.L. 103-432) has created confusion in the 
market regarding the sale of Medigap polices and other health 
insurance policies to individuals on Medicare. This has 
resulted because the new law is confusing and unclear, and 
imposes a nearly impossible requirement that is misleading, 
contradictory and potentially harmful to the very population it 
is intended to serve. First, the statute does not define the 
term ``duplication'' and, as a result the NAIC has declared 
that all policies are duplicative of Medicare without findings 
of any factual duplication. Second, the extent of duplication 
cannot be determined except on a case by case basis after 
application of Medicare's medical necessity determination, 
exclusions, and other limitations to a specific beneficiaries 
circumstance. The disclosure statements developed by the NAIC 
do not offer any helpful assistance to beneficiaries by 
declaring all policies are duplicative.
    With respect to long-term care policies, the NAIC has 
recommended a disclosure statement which declares the long-term 
care policies duplicate some Medicare benefits, and significant 
issues are raised with respect to long-term care policies that 
coordinate against Medicare. The Secretary's approval and 
publication of the disclosure statements in the Federal 
Register on June 12, 1995 has resulted in the adoption of a 
position which is adverse to long-term care policies that 
coordinate against Medicare. The Secretary has essentially 
taken the position that such policies are technically illegal 
as of October 31, 1994, which is the effective date of H.R. 
5252. However, the agency has not issued a written legal 
explanation or rule stating its position. The HCFA position on 
long-term care policies assumes that duplication exists and 
therefore policies must pay regardless of other coverage.
    Concerns have been expressed to the Committee that HCFA's 
unofficial pronouncements are having a significant chilling 
effect on the long-term care insurance industry and the 
industry has no benefit of a written legal rulemaking or 
explanation of HCFA's rationale.
    In addition, HCFA appears to be arguing that coordination 
is not good public policy. However, coordination against 
Medicare by long-term care policies is consistent with current 
public policy. Both State and Congressional policy is 
supportive of long-term care policies coordinating against 
Medicare. The Robert Wood Johnson State Medicaid and private 
long-term care policy partnership program requires coordination 
with Medicare. The bill includes provisions to clarify the tax 
treatment of long-term care insurance contracts. The Committee 
has determined that clarifying the tax treatment of long-term 
care insurance will help contribute to the development of the 
private long-term care insurance market. Therefore, it is 
imperative that Medicare plans are able to coordinate with 
long-term care insurance plans.
    The developed statements far exceed the intent of Congress 
in both allowing coordination of long-term care policies and 
providing clear understandable information to Medicare 
beneficiaries regarding the choice of health insurance.
    Finally, the current provisions are preventing the sale of 
individual major medical insurance policies to Medicare-
eligible disabled persons.

Explanation of provision

            Duplication and coordination of Medicare-related products
    The Provision would modify the anti-duplication provisions. 
It would be unlawful to sell to a Medicare beneficiary a health 
insurance policy (other than a Medigap policy) with knowledge 
that it duplicated benefits under Medicare or Medicaid. It 
would be unlawful to sell, to persons not electing 
MedicarePlus, a Medigap policy with knowledge that the person 
is entitled to benefits under another Medigap policy. A policy 
would be considered duplicative if the policy provided specific 
reimbursement for identical items and services to the extent 
paid for under Medicare. A policy would not be considered 
duplicative if it provided for payment of benefits without 
regard to other health benefits coverage of the individual. The 
provision would change the disclosure requirements contained in 
P.L. 103-432 to require plans to disclose the extent to which 
they may coordinate benefits with Medicare as part of their 
separate outline of coverage.
    A health insurance policy (or a rider to an insurance 
contract which is not a health insurance policy) that 
coordinates against or excludes items and services covered 
under Medicare, and for policies sold after January 1, 1996, 
discloses such coordination or exclusion in the policy's 
outline of coverage would not be considered duplicative. For 
this purpose, health insurance policies would include policies 
providing benefits for long-term care, nursing home care, home 
health care, or community-based care; or a contract with an HMO 
providing comprehensive health benefits.
    The provision would prohibit the imposition of criminal or 
civil penalties or the bringing or continuing of legal action 
relating to selling duplicative policies if the penalty or 
action was based on actions occurring after November 1, 1991 
and before enactment of OBRA of 1995 and if the policy was not 
duplicative under the revised language. The provision would 
also prohibit a State from imposing any requirement related to 
the sale or issuance of a policy (or rider) to a Medicare 
beneficiary based on the premise that the policy or rider was 
duplicative of Medicare.

Effective date

    The provisions of this section are effective as if they 
were included in the enactment of section 4354 of the Omnibus 
Budget Reconciliation Act of 1990.

                TITLE III. TAX-RELATED HEALTH PROVISIONS

  A. Application of COBRA Sanctions (sec. 104(b) of the bill and sec. 
                           4980B of the Code)

Present law

    The health care continuation rules (referred to as 
``COBRA,'' after the name of the law that imposed the rules \1\ 
require that most employer-sponsored group health plans must 
offer qualified beneficiaries the opportunity to continue to 
participate for a specified period of the employer's group 
health plan after the occurrence of certain qualifying events 
(such as termination for employment) that otherwise would have 
terminated such participation.
    \1\ The Consolidated Omnibus Budget Reconciliation Act of 1985.
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    A tax is imposed on the failure of a plan to satisfy the 
health care continuation rules. The tax may be imposed on the 
employer sponsoring the plan in the case of a plan other than a 
multiemployer plan, on the plan in the case of a multiemployer 
plan, or on each person who is responsible for administering or 
providing benefits under the plan if such person has, by 
written agreement, assumed responsibility for performing the 
act pursuant to which the violation occurs.
    The amount of the tax is equal to $100 dollars a day for 
each day for each day on which here is noncompliance. The 
maximum tax that can be imposed for a year with respect to 
violations occurring during the year generally is the lesser of 
(1) 10 percent of the employer's payments under group health 
plans (or under the trust funding the plan in the case of a 
multiemployer plan), or (2) $500,000. If the tax is imposed on 
another person responsible for administering the plan, the 
maximum penalty for failures during the year is $2 million. The 
Secretary of the Treasury may waive all or part of the tax to 
the extent that payment of the tax would be excessive relative 
to the failure involved.

Reasons for change

    The Committee believes that the present-law sanctions for 
violations of the health care continuation rules will be an 
effective enforcement mechanism with the respect to the 
provisions of the bill relating to portability, limitations on 
exclusion of preexisting conditions, and prohibitions on 
excluding individuals from coverage based on health status.

Explanation of provision

    Under the bill, group health plus, insurers, and health 
maintenance organizations are subject to certain requirements 
regarding portability, limitations on exclusion of preexisting 
conditions, and prohibitions on excluding individuals from 
coverage based on health status. The provision extends the tax 
for failure to satisfy the health care continuation rules to 
failures to comply with these requirements. No tax is imposed 
on an insurer that is governed under a State law that the 
Secretary of Health and Human Services has determined to 
provide similar enforcement. In addition, no tax is impose if 
here has been enforcement by the Secretary of Labor or the 
Secretary of Health and Human Services.

Effective date

    The provision generally is effective with respect to plan 
years beginning on or after January 1, 1998.

 B. Medical Savings Accounts (sec. 301 of the bill and new sec. 220 of 
                               the Code)

Present law

    The tax treatment of health expenses depends on whether the 
individual is an employee or self-employed, and whether the 
individual is covered under an employer-sponsored health plan. 
Employer contributions to a health plan for coverage for the 
employee and the employee's spouse and dependents are 
excludable from the employee's income and wages for social 
security tax purposes. Self-employed individuals are entitled 
to deduct 30 percent of the amount paid for health insurance 
for the self-employed individual and his or her spouse or 
dependents. The 30-percent deduction is available with respect 
to self insurance, as well as commercial insurance. The self-
insured plan must in fact be insurance (e.g., there must be 
appropriate risk shifting) and not merely a reimbursement 
arrangement. Individuals who itemize their tax deductions may 
deduct unreimbursed medical expenses (including expenses for 
medical insurance) paid during the year to the extent that the 
total of such expenses exceeds 7.5 percent of the individual's 
adjusted gross income (``AGI''). Present law does not contain 
any special rules for medical savings accounts.

Reasons for change

    The fact that Americans with low-deductible health 
insurance have few incentives to lower their health costs or 
benefit from staying well is a major factor affecting health 
care cost growth. One approach to providing incentives for 
Americans to be more cost conscious purchasers of medical 
services is to make available alternatives to low-deductible 
insurance such as medical savings accounts (``MSAs''). MSAs 
will give people more control over their health care dollars. 
Because MSAs afford people the opportunity to save unspent MSA 
funds for future health and long-term care needs, the Committee 
believes that people will be more prudent in their purchase of 
health care services.

Explanation of provision

            In general
    Under the bill, within limits, individuals covered by a 
high deductible health plan may make tax deductible 
contributions to an MSA. Similarly, within limits, 
contributions to an MSA are excludable from income (and wages 
for social security purposes) if made by the employer of an 
individual covered under a high deductible health plan. 
Earnings on amounts in an MSA are not currently taxable. 
Distributions from an MSA for medical expenses are not taxable. 
Distributions not used for medical expenses are taxable. In 
addition, distributions not used for medical expenses are 
subject to an additional 10-percent tax unless the distribution 
is made after age 59\1/2\, death, or disability.
            Eligible individuals
    An individual (including a self-employed individual) is 
eligible to make a deductible contribution to an MSA (or to 
have employer contributions made on his or her behalf) if the 
individual is covered under a high deductible health plan and 
is not covered under another health plan (other than a plan 
that provides certain permitted coverage).\2\ An individual is 
not eligible to make contributions to an MSA for a year if any 
employer contributions are made to an MSA or behalf of the 
individual for the year.
    \2\ An individual with other coverage in addition to a high 
deductible plan is still eligible for an MSA if such other coverage is 
certain permitted insurance or is coverage (whether provided through 
insurance or otherwise) for accidents, disability, dental care, vision 
care, or long-term care. Permitted insurance is: (1) Medicare 
supplemental insurance, (2) insurance if substantially all of the 
coverage provided under such insurance relates to (a) liabilities 
incurred under worker's compensation law, (b) tort liabilities, (c) 
liabilities relating to ownership or use of property (e.g., auto 
insurance), or (d) such other similar liabilities as the Secretary may 
prescribe by regulations; (3) insurance for a specified disease or 
illness; and (4) insurance that provides a fixed payment for 
hospitalization.
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            Tax treatment of and limits on contributions
    Under the bill, individual contributions to an MSA are 
deductible (within limits) in determining AGI. Subject to the 
same limits, employer contributions to an MSA are excludable 
from gross income and wages for employment tax purposes, except 
that this exclusion does not apply to contributions made 
through a cafeteria plan. If the high deductible plan covers 
only the individual, the maximum amount of contributions that 
may be deducted or excluded for a year is equal to the lesser 
of (1) the deductible under the high deductible plan or (2) 
$2,000. If the high deductible plan covers the individual and a 
spouse or a dependent, the maximum that may be excluded or 
deducted for a year is the lesser of (1) the annual limit under 
the plan on the aggregate amount of deductibles required to be 
paid with respect to all individuals, and (2) $4,000. The 
annual limit is the sum of the limits determined separately for 
each month based on the individual's status as of the first day 
of the month. The maximum contribution limit to an MSA is 
determined separately for each spouse in a married couple. In 
no event may the maximum contribution limit for a year exceed 
$4,000 for a family. The dollar limits are indexed for medical 
inflation and rounded to the nearest multiple of $50.
            Definition of high deductible plan
    A high deductible health plan is a health insurance plan, 
whether self-insured or provided through commercial insurance, 
with a deductible of at least $1,500 in the case of single 
coverage and $3,000 in the case of coverage of more than one 
individual. These dollar limits are indexed for medical 
inflation, rounded to the nearest multiple of $50. A plan does 
not fail to be considered a high deductible plan merely 
because, under state law, the plan is required to provide that 
there is no deductible for preventive care. In the case of a 
self-insured plan, the plan must in fact be insurance (e.g., 
there must be appropriate risk shifting) and not merely a 
reimbursement arrangement.
            Tax treatment of MSAs
    MSAs are exempt from tax. Thus, earnings on amounts in an 
MSA are not currently includible in income.
            Taxation of distributions
    Under the bill, distributions from an MSA for the 
unreimbursed medical expenses of the individual (including a 
self-employed individual) and his or her spouse or dependents 
are excludable from income. The exclusion applies regardless of 
whether the payment is made directly from the MSA to the 
service provider, the MSA distribution reimburses the 
individual for expenses already incurred, or the individual 
uses the MSA distribution to pay the service provider. The 
exclusion also applies regardless of whether the individual is 
eligible to make MSA contributions at the time of the 
distribution.
    Medical expenses are defined as defined as under the rules 
relating to the itemized deduction for medical expenses, except 
that medical expenses for this purpose do not include insurance 
premiums other than (1) premiums for long-term care insurance; 
(2) premiums for health care continuation coverage under any 
Federal law; and (3) premiums while the individual is receiving 
unemployment compensation.\3\ Thus, for example, amounts in an 
MSA can be used, at the account holder's discretion, for 
services performed by a variety of health care professionals 
either licensed, certified, or otherwise credentialed to 
provide health care services under State law (or under a State 
regulatory mechanism provided by State law, to the extent such 
services are treated as medical expenses under the rules 
relating to the itemized deduction for medical expenses.
    \3\ The long-term care provisions of the bill (see part D., below) 
provide that expenses for long-term care services are treated as 
medical expenses for purposes of the itemized deduction for medical 
expenses. Thus, an individual could use amounts in an MSA to pay 
expenses for long-term care insurance or services.
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    Distributions that are not for medical expenses are 
included in income. In addition, such distributions are subject 
to an additional 10-percent tax unless made after age 59\1/2\, 
death, or disability.
    Upon death, if the beneficiary of the MSA is the 
individual's surviving spouse, the spouse may continue the MSA 
as his or her own. If the beneficiary is not the surviving 
spouse, the beneficiary must include the MSA balance in income 
in the year of death. If there is no beneficiary, the MSA 
balance includible on the final return of the decedent. In all 
cases, no estate tax applies.
            Definition of an MSA
    In general, an MSA is a trust or custodial account created 
exclusively for the benefit of the account holder and is 
subject to rules similar to those applicable to individual 
retirement arrangements. An MSA trustee (or custodian) may be a 
bank, insurance company, or other person who demonstrates to 
the satisfaction of the Secretary that the manner in which such 
person will administer the trust will be consistent with 
applicable requirements. The MSA trustee (or custodian) is 
required to make such reports as may be required by the 
Secretary. The acquisition expenses of an insurance company 
relating to the establishment of an MSA is not subject to the 
rules relating to the capitalization of policy acquisition 
costs.

Effective date

    The provision is effective for taxable years beginning 
after December 31, 1996.

C. Deduction for Health Insurance Expenses of Self-Employed Individuals 
           (sec. 311 of the bill and sec. 162(I) of the Code)

Present law

    Under present law, self-employed individuals are entitled 
to deduct 30 percent of the amount paid for health insurance 
for the self-employed individual and the individual's spouse 
and dependents. The deduction is not available for any month in 
which the taxpayer is eligible to participate in a subsidized 
health plan maintained by the employer of the taxpayer or the 
taxpayer's spouse. The 30-percent deduction is available in the 
case of self insurance as well as commercial insurance. The 
self-insured plan must in fact be insurance (e.g., there must 
be appropriate risk shifting) and not merely a reimbursement 
arrangement.

Reasons for change

    The Committee believes it appropriate to increase the 
deduction for health insurance expenses of self-employed 
individuals in order to reduce the disparity of treatment of 
such expenses and employer-provided health insurance and to 
help make health insurance more affordable for self-employed 
individuals.

Explanation of provision

    Under the provision, the deduction for health insurance for 
self-employed individuals is phased up to 50 percent as 
follows: for taxable years beginning in 1998, the amount of the 
deduction is 35 percent of health insurance expenses; for 
taxable years beginning in 1999, 2000, and 2001, 40 percent; 
for taxable years beginning in 2002, 45 percent; and for 
taxable years beginning in 2003 and thereafter, 50 percent.

Effective date

    The provision is effective for taxable years beginning 
after December 31, 1997.

D. Treatment of Long-Term Care Insurance and Services (secs. 321-328 of 
  the bill, and secs. 106, 125, 213, 4980B of the Code, and new secs. 
                  4980C, 6050Q, and 7702B of the Code)

Present law

            In general
    Present law generally does not provide explicit rules 
relating to the tax treatment of long-term care insurance 
contracts or long-term care services. Thus, the treatment of 
long-term care contracts and services is unclear. Present law 
does provide rules relating to medical expenses and accident or 
health insurance.
            Itemized deduction for medical expenses
    In determining taxable income for Federal income tax 
purposes, a taxpayer is allowed an itemized deduction for 
unreimbursed expenses that are paid by the taxpayer during the 
taxable year for medical care of the taxpayer, the taxpayer's 
spouse, or a dependent of the taxpayer, to the extent that such 
expenses exceed 7.5 percent of the adjusted gross income of the 
taxpayer for such year (sec. 213). For this purpose, expenses 
paid for medical care generally are defined as amounts paid: 
(1) for the diagnosis, cure, mitigation, treatment, or 
prevention of disease (including prescription medicines or 
drugs and insulin), or for the purpose of affecting any 
structure or function of the body (other than cosmetic surgery 
not related to disease, deformity, or accident); (2) for 
transportation primarily for, and essential to, medical care 
referred to in (1); (3) for insurance (including Part B 
Medicare premiums) covering medical care referred to in (1) and 
(2).
            Exclusion for amounts received under accident or health 
                    insurance
    Amounts received by a taxpayer under accident or health 
insurance for personal injuries or sickness generally are 
excluded from gross income to the extent that the amounts 
received are not attributable to medical expenses that were 
allowed as a deduction for a prior taxable year (sec. 104).
            Treatment of accident or health plans maintained by 
                    employers
    Contributions of an employer to an accident or health plan 
that provides compensation (through insurance or otherwise) to 
an employee for personal injuries or sickness of the employee, 
the employee's spouse, or a dependent of the employee, are 
excluded from the gross income of the employee (sec. 106). In 
addition, amounts received by an employee under such a plan 
generally are excluded from gross income to the extent that the 
amounts received are paid, directly or indirectly, to reimburse 
the employee for expenses for the medical care of the employee, 
the employee's spouse, or a dependent of the employee (sec. 
105). For this purpose, expenses incurred for medical care are 
defined in the same manner as under the rules regarding the 
deduction for medical expenses.
    A cafeteria plan is an employer-sponsored arrangement under 
which employees can elect among cash and certain employer-
provided qualified benefits. No amount is included in the gross 
income of a participant in a cafeteria plan merely because the 
participant has the opportunity to make such an election (sec. 
125). Employer-provided accident or health coverage is one of 
the benefits that may be offered under a cafeteria plan.
    A flexible spending arrangement (FSA) is an arrangement 
under which an employee is reimbursed for medical expenses or 
other nontaxable employer-provided benefits, such as dependent 
care, and under which the maximum amount of reimbursement that 
is reasonably available to a participant for a period of 
coverage is not substantially in excess of the total premium 
(including both employee-paid and employer-paid portions of the 
premium) for such participant's coverage. Under proposed 
Treasury regulations, a maximum amount of reimbursement is not 
substantially in excess of the total premium if such maximum 
amount is less than 500 percent of the premium. An FSA may be 
part of a cafeteria plan or provided by an employer outside a 
cafeteria plan. FSAs are commonly used to reimburse employees 
for medical expenses not covered by insurance. If certain 
requirements are satisfied,\4\ amounts reimbursed for 
nontaxable benefits from an FSA are excludable from income.
    \4\ These requirements include a requirement that a health FSA can 
only provide reimbursement for medical expenses (as defined in sec. 
213) and cannot provide reimbursement for premium payments for other 
health coverage and that the maximum amount of reimbursement under a 
health FSA must be available at all times during the period of 
coverage.
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            Health care continuation rules
    The health care continuation rules require that an employer 
must provide qualified beneficiaries the opportunity to 
continue to participate for a specified period in the 
employer's health plan after the occurrence of certain events 
(such as termination of employment) that would have terminated 
such participation (sec. 4980B). Individuals electing 
continuation coverage can be required to pay for such coverage.

Reasons for change

    The long-term care rules of the bill provide an incentive 
for individuals to take financial responsibility for their 
long-term care needs. The bill therefore generally provides 
favorable tax treatment with respect to long-term care 
insurance contracts and services meeting the bill's 
requirements.

Explanation of provision

            Tax treatment and definition of long-term care insurance 
                    contracts and qualified long-term care services

                  Exclusion of long-term care proceeds

    A long-term care insurance contract generally is treated as 
an accident and health insurance contract. Amounts (other than 
policyholder dividends or premium refunds) received under a 
long-term care insurance contract generally are excludable as 
amounts received for personal injuries and sickness, subject to 
a cap of $175 per day, or $63,875 annually, on per diem 
contracts only. If the aggregate payments under all per diem 
contracts with respect to any one insured exceed $175 per day, 
then the excess is not excludable from gross income. The dollar 
cap is indexed by the medical care cost component of the 
consumer price index.

        Exclusion for employer-provided long-term care coverage

    A plan of an employer providing coverage under a long-term 
care insurance contract generally is treated as an accident and 
health plan. Employer-provided coverage under a long-term care 
insurance contract is not, however, excludable by an employee 
if provided through a cafeteria plan; similarly, expenses for 
long-term care services cannot be reimbursed under an FSA.\5\
    \5\ The bill does not otherwise modify the requirements relating to 
FSAs. An FSA is defined as a benefit program providing employees with 
coverage under which specified incurred expenses may be reimbursed 
(subject to maximums and other reasonable conditions), and the maximum 
amount of reimbursement that is reasonably available to a participant 
is less than 500 percent of the value of the coverage.
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            Definition of long-term care insurance contract

    A long-term care insurance contract is defined as any 
insurance contract that provides only coverage of qualified 
long-term care services and that meets other requirements. The 
other requirements are that (1) the contract is guaranteed 
renewable, (2) the contract does not provide for a cash 
surrender value or other money that can be paid, assigned, 
pledged or borrowed, (3) refunds (other than refunds on the 
death of the insured or complete surrender or cancellation of 
the contract) and dividends under the contract may be used only 
to reduce future premiums or increase future benefits, and (4) 
the contract generally does not pay or reimburse expenses 
reimbursable under Medicare (except where Medicare is a 
secondary payor, or the contract makes per diem or other 
periodic payments without regard to expenses).
    A contract does not fail to be treated as a long-term care 
insurance contract solely because it provides for payments on a 
per diem or other periodic basis without regard to expenses 
incurred during the period.

                       Medicare duplication rules

    The bill provides that no provision of law shall be 
construed or applied so as to prohibit the offering of a long-
term care insurance contract on the basis that the contract 
coordinates its benefits with those provided under Medicare. 
Thus, long-term care insurance contracts are not subject to the 
rules requiring duplication of Medicare benefits.

            Definition of qualified long-term care services

    Qualified long-term care services means necessary 
diagnostic, preventive, therapeutic, curing, treating, 
mitigating and rehabilitative services, and maintenance or 
personal care services that are required by a chronically ill 
individual and that are provided pursuant to a plan of care 
prescribed by a licensed health care practitioner.
    A chronically ill individual is one who has been certified 
within the previous 12 months by a licensed health care 
practitioner as (1) being unable to perform (without 
substantial assistance) at least 2 activities of daily living 
for at least 90 days \6\ due to a loss of functional capacity, 
(2) having a similar level of disability as determined by the 
Secretary of the Treasury in consultation with the Secretary of 
Health and Human Services, or (3) requiring substantial 
supervision to protect such individual from threats to health 
and safety due to severe cognitive impairment. Activities of 
daily living are eating, toileting, transferring, bathing, 
dressing and continence.\7\
    \6\ The 90-day period is not a waiting period. Thus, for example, 
an individual can be certified as chronically ill if the licensed 
health care practitioner certifies that the individual will be unable 
to perform at least 2 activities of daily living for at least 90 days.
    \7\ Nothing in the bill requires the contract to take into account 
all of the activities of daily living. For example, a contract could 
require that an individual be unable to perform (without substantial 
assistance) 2 out of any 5 such activities, or for another example, 3 
out of the 6 activities.
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    It is intended that an individual who is physically able 
but has a cognitive impairment such as Alzheimer's disease or 
another form of irreversible loss of mental capacity be treated 
similarly to an individual who is unable to perform (without 
substantial assistance) at least 2 activities of daily living. 
Because of the concern that eligibility for the medical expense 
deduction not be diagnosis-driven, the provision requires the 
cognitive impairment to be severe. It is intended that severe 
cognitive impairment mean a deterioration or loss in 
intellectual capacity that is measured by clinical evidence and 
standardized tests which reliably measure impairment in: (1) 
short- or long-term memory; (2) orientation to people, places 
or time; and (3) deductive or abstract reasoning. In addition, 
it is intended that such deterioration or loss place the 
individual in jeopardy of harming self or others and therefore 
require substantial supervision by another individual.
    A licensed health care practitioner is a physician (as 
defined in sec. 1861(r)(1) of the Social Security Act) and any 
registered professional nurse, licensed social worker, or other 
individual who meets such requirements as may be prescribed by 
the Secretary of the Treasury.

    Expenses for long-term care services treated as medical expenses

    Unreimbursed expenses for qualified long-term care services 
provided to the taxpayer or the taxpayer's spouse or dependent 
are treated as medical expenses for purposes of the itemized 
deduction for medical expenses (subject to the present-law 
floor of 7.5 percent of adjusted gross income). For this 
purpose, amounts received under a long-term care insurance 
contract (regardless of whether the contract reimburses 
expenses or pays benefits on a per diem or other periodic 
basis) are treated as reimbursement for expenses actually 
incurred for medical care.
    For purposes for the deduction for medical expenses, 
qualified, long-term care services do not include services 
provided to an individual by a relative or spouse (directly, or 
through a partnership, corporation, or other entity), unless 
the relative is a licensed professional with respect to such 
services, or by a related corporation (within the meaning of 
Code section 267(b) or 707(b)).\8\
    \8\ The rule limiting such services provided by a relative or a 
related corporation does not apply for purposes of the exclusion for 
amounts received under a long term-care insurance contract, whether the 
contract is employer-provided or purchased by an individual. The 
limitation is unnecessary in such cases because it is anticipated that 
the insurer will monitor reimbursements to limit opportunities for 
fraud in connection with the performance of services by the taxpayer's 
relative or a related corporation.
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     Long-term care insurance premiums treated as medical expenses

    Long-term care insurance premiums that do not exceed 
specified dollar limits are treated as medical expenses for 
purposes of the itemized deduction for medical expenses.\9\ The 
limits are as follows:
    \9\ Similarly, within certain limits, in the case of a rider to a 
life insurance contract, charges against the life insurance contract's 
cash surrender value that are includible in income are treated as 
medical expenses (provided the rider constitutes a long-term care 
insurance contract).

In the case of an individual with an attained age beforThe limitation on
  the close of the taxable year opremiums paid for such taxable year is:
Not more than 40..................................................  $200
More than 40 but not more than 50.................................   375
More than 50 but not more than 60.................................   750
More than 60 but not more than 70................................. 2,000
More than 70...................................................... 2,500

    For taxable years beginning after 1997, these dollar limits 
are indexed for increases in the medical care component of the 
consumer price index. The Secretary of the Treasury, in 
consultation with the Secretary of Health and Human Services, 
is directed to develop a more appropriate index to be applied 
in lieu of the foregoing. Such an alternative might 
appropriately be based on increases in skilled nursing facility 
and home health care costs. It is intended that the Treasury 
Secretary annually publish the indexed amount of the limits as 
early in the year as they can be calculated.

  Deduction for long-term care insurance of self-employed individuals

    The present-law 30 percent deduction for health insurance 
expenses of self-employed individuals is phased up to 50 
percent under the bill. Because the bill treats payments of 
eligible long-term care insurance premiums in the same manner 
as medical insurance premiums, the self-employed health 
insurance deduction applies to eligible long-term care 
insurance premiums under the bill.

           Long-term care riders on life insurance contracts

    In the case of long-term care insurance coverage provided 
by a rider on or as part of a life insurance contract, the 
requirements applicable to long-term care insurance contracts 
apply as if the portion of the contract providing such coverage 
were a separate contract. The term ``portion'' means only the 
terms and benefits that are in addition to the terms and 
benefits under the life insurance contract without regard to 
long-term care coverage. As a result, if the applicable 
requirements are met by the long-term care portion of the 
contract, amounts received under the contract as provided by 
the rider are treated in the same manner as long-term insurance 
benefits, whether or not the payment of such amounts causes a 
reduction in the contract's death benefit or cash surrender 
value. The guideline premium limitation applicable under 
section 7702(c)(2) is increased by the sum of charges (but not 
premium payments) against the life insurance contract's cash 
surrender value, the imposition of which reduces premiums paid 
for the contract (within the meaning of sec. 7702(f)(1)). In 
addition, it is anticipated that Treasury regulations will 
provide for appropriate reduction in premiums paid (within the 
meaning of sec. 7702(f)(1)) to reflect the payment of benefits 
under the rider that reduce the cash surrender value of the 
life insurance contract. A similar rule should apply in the 
case of a contract governed by section 101(f) and in the case 
of the payments under a rider that are excludable under section 
101(g) of the Code (as added by this bill).

                     Health care continuation rules

    The health care continuation rules do not apply to coverage 
under a long-term care insurance contract.
            Inclusion of excess long-term care benefits
    In general, the bill provides that the maximum annual 
amount of long-term care benefits under a per diem type 
contract that is excludable from income with respect to an 
insured who is chronically ill (not including amounts received 
by reason of the individual being terminally ill) \10\ cannot 
exceed the equivalent of $175 per day for each day the 
individual is chronically ill. Thus, for per diem type 
contracts, the maximum annual exclusion for long-term care 
benefits with respect to any chronically ill individual (not 
including amounts received by reason of the individual being 
terminally ill) is $63,875 (for 1997). If payments under such 
contracts exceed the dollar limit, then the excess is 
excludable only to the extent the individual has incurred 
actual costs for long-term care services. If the insured is not 
the same as the holder of the contract, the insured may assign 
some or all of this limit to the contract holder at the time 
and manner prescribed by the Secretary.
    \10\ Terminally ill is defined as under the provision of the bill 
relating to accelerated death benefits. In general, under that 
provision, an individual is considered to be terminally ill if he or 
she is certified as having an illness or physical condition that 
reasonably can be expected to result in death within 24 months of the 
date of the certification.
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    This $175 per day limit is indexed for inflation after 1997 
for increases in the medical care component of the consumer 
price index. The Treasury Secretary, in consultation with the 
Secretary of Health and Human Services, is directed to develop 
a more appropriate index, to be applied in lieu of the 
foregoing. Such an alternative might appropriately be based on 
increases in skilled nursing facility and home health care 
costs. It is intended that the Treasury Secretary annually 
publish the indexed amount of the limit as early in the year as 
it can be calculated.
    A payor of long-term care benefits (defined for this 
purpose to include any amount paid under a product advertised, 
marketed or offered as long-term care insurance) is required to 
report to the IRS the aggregate amount of such benefits paid to 
any individual during any calendar year, and the name, address 
and taxpayer identification number of such individual. A copy 
of the report must be provided to the payee by January 31 
following the year of payment, showing the name of the payor 
and the aggregate amount of benefits paid to the individual 
during the calendar year. Failure to file the report or provide 
the copy to the payee is subject to the generally applicable 
penalties for failure to file similar information reports.
            Consumer protection provisions
    Under the bill, long-term care insurance contracts, and 
issuers of contracts, are required to satisfy certain 
provisions of the long-term care insurance model Act and model 
regulations promulgated by the National Association of 
Insurance Commissioners (as adopted as of January 1993). The 
policy requirements relate to disclosure, nonforfeitability, 
guaranteed renewal or noncancellability, prohibitions on 
limitations and exclusions, extension of benefits, continuation 
or conversion of coverage, discontinuance and replacement of 
policies, unintentional lapse, post-claims underwriting, 
minimum standards, inflation protection, preexisting 
conditions, and prior hospitalization. The bill also provides 
disclosure and nonforfeiture requirements. The nonforfeiture 
provision gives consumers the option of selecting reduced paid-
up insurance, extended term insurance, or a shortened benefit 
period in the event a policyholder who elects a nonforfeiture 
provision is unable to continue to pay premiums. The 
requirements for issuers of long-term care insurance contracts 
relate to application forms, reporting requirements, marketing, 
appropriateness of purchase, format, delivering a shopper's 
guide, right to return, outline of coverage, group plans, 
policy summary, monthly reports on accelerated death benefits, 
and incontestability period. A tax is imposed equal to $100 per 
policy per day for failure to satisfy these requirements.
    Nothing in the proposal prevents a State from establishing, 
implementing or continuing standards related to the protection 
of policyholders of long-term care insurance policies, if such 
standards are not inconsistent with standards established under 
the bill.

Effective date

    The provisions defining long-term care insurance contracts 
and qualified long-term care services apply to contracts issued 
after December 31, 1996. Any contract issued before January 1, 
1997, that met the long-term care insurance requirements in the 
State in which the policy was sitused at the time it was issued 
is treated as a long-term care insurance contract, and services 
provided under or reimbursed by the contract are treated as 
qualified long-term care services.
    A contract providing for long-term care insurance may be 
exchanged for a long-term care insurance contract (or the 
former cancelled and the proceeds reinvested in the latter 
within 60 days) tax free between the date of enactment and 
January 1, 1998. Taxable gain would be recognized to the extent 
money or other property is received in the exchange.
    The issuance or conformance of a rider to a life insurance 
contract providing long-term care insurance coverage is not 
treated as a modification or a material change for purposes of 
applying sections 101(f), 7702 and 7702A of the Code.
    The provisions relating to treatment of eligible long-term 
care premiums and long-term care services as a medical expense 
generally are effective for taxable years beginning after 
December 31, 1996, however, amounts paid for long-term care 
services furnished in any taxable year beginning before January 
1, 1998 are not deductible as medical expenses.
    The provisions relating to the maximum exclusion for 
certain long-term care benefits and reporting are effective for 
taxable years beginning after December 31, 1996. Thus, the 
initial year in which reports will be filed with the IRS and 
copies provided to the payee will be 1988, with respect to 
long-term care benefits paid in 1997.

  E. Tax Treatment of Accelerated Death Benefits Under Life Insurance 
Contracts (secs. 323 and 331-332 of the bill and secs. 101(g), 818(g), 
                      605Q, and 7702B of the Code)

Present law

            Treatment of amounts received under a life insurance 
                    contract
    If a contract meets the definition of a life insurance 
contract, gross income does not include insurance proceeds that 
are paid pursuant to the contract by reason of the death of the 
insured (sec. 101(a)). In addition, the undistributed 
investment income (``inside buildup'') earned on premiums 
credited under the contract is not subject to current taxation 
to the owner of the contract. The exclusion under section 101 
applies regardless of whether the death benefits are paid as a 
lump sum or otherwise.
    Amounts received under a life insurance contract (other 
than a modified endowment contract) prior to the death of the 
insured are includible in the gross income of the recipient to 
the extent that the amount received constitutes cash value in 
excess of the taxpayer's investment in the contract (generally, 
the investment in the contract is the aggregate amount of 
premiums paid less amounts previously received that were 
excluded from gross income).
    If a contract fails to be treated as a life insurance 
contract under section 7702(a), inside buildup on the contract 
is generally subject to tax (sec. 7702(g)).
            Requirements for a life insurance contract
    To qualify as a life insurance contract for Federal income 
tax purposes, a contract must be a life insurance contract 
under the applicable State or foreign law and must satisfy 
either of two alternative tests: (1) cash value accumulation 
test or (2) a test consisting of a guideline premium 
requirement and a cash value corridor requirement (sec. 
7702(a)). A contract satisfies the cash value accumulation test 
if the cash surrender value of the contract may not at any time 
exceed the net single premium that would have to be paid at 
such time to fund future benefits under the contract. A 
contract satisfies the guideline premium and cash value 
corridor tests if the premiums paid under the contract do not 
at any time exceed the greater of the guideline single premium 
or the sum of the guideline level premiums, and if the death 
benefit under the contract is not less than a varying statutory 
percentage of the cash surrender value of the contract.
            Proposed regulations on accelerated death benefits
    The Treasury Department has issued proposed regulations 
\11\ under which certain ``qualified accelerated death 
benefits'' paid by reason of the terminal illness of an insured 
would be treated as paid by reason of the death of the insured 
and therefore qualify for exclusion under section 101. In 
addition, the proposed regulations would permit an insurance 
contact that includes a qualified accelerated death benefit 
rider to qualify as a life insurance contract under section 
7702. Thus, the proposed regulations provide that including 
this benefit would not cause an insurance contract to fail to 
meet the definition of a life insurance contract.
    \11\ Prop. Treas. Reg. Secs. 1.108-8, 1.7702-0, 1.7702-2, and 
1.7702A-1 (December 15, 1992).
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    Under the proposed regulations, a benefit would qualify as 
a qualified accelerated death benefit only if it meets three 
requirements. First, the accelerated death benefit can be 
payable only if the insured becomes terminally ill. Second, the 
amount of the benefit must equal or exceed the present value of 
the reduction in the death benefit otherwise payable.\12\ 
Third, the cash surrender value and the death benefit payable 
under the policy must be reduced proportionately as a result of 
the accelerated death benefit.
    \12\ For purposes of determining the present value under the 
proposed regulations, the maximum permissible discount rate would be 
the greater of (1) the applicable Federal rate that applies under the 
discounting rules for property and casualty insurance loss reserves, 
and (2) the interest rate applicable to policy loans under the 
contract. Also, the present value would be determined assuming that the 
death benefit would have been paid twelve months after payment of the 
accelerated death benefit.
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    For purposes of the proposed regulations, an insured would 
be treated as terminally ill if he or she has an illness that, 
despite appropriate medical care, the insurer reasonably 
expects to result in death within twelve months from the 
payment of the accelerated death benefit. The proposed 
regulations would apply to viatical settlements.

Reasons for change

    The Committee wishes to extend the present-law rule 
permitting an exclusion from income for amounts paid under a 
life insurance contract by reason of the death of the insured 
to accelerated death benefits paid with respect to certain 
terminally ill and chronically ill insured individuals. In 
addition, the Committee believes that this exclusion from 
income should be extended to certain sales or assignments of 
all or a portion of a life insurance contract to a viatical 
settlement provider. The Committee believes that a single set 
of rules should apply to benefit received with respect to a 
chronically ill individual. To provide parity in treatment, the 
same definition of a chronically ill individual applies for 
purposes of the rules under this provision and the rules 
governing long-term care insurance contracts. Further the $175 
per day ($63,875 annual) limit on excludability of benefits 
under per diem type long-term care insurance contracts applies 
for chronically ill individuals.

Explanation of provision

    The bill provides an exclusion from gross income as an 
amount paid by reason of the death of an insured for (1) 
amounts received under a life insurance contract and (2) amount 
received for the sale or assignment of a life insurance 
contract to a qualified viatical settlement provider, provided 
that the insured under the life insurance contract is either 
terminally ill or chronically ill.\13\
    \13\ The exclusion for amounts received under a life insurance 
contract on the life of an insured who is chronically ill applies if 
the amount is received under a rider or other provision of the contract 
that is treated as a long-term care insurance contract under section 
7702B (as added by the bill), and the amount is excludable as a payment 
for long-term care services under section 7702B.
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    The provision does not apply in the case of an amount paid 
to any taxpayer other than the insured, if such taxpayer has an 
insurable interest by reason of the insured being a director, 
officer or employee of the taxpayer, or by reason of the 
insured being financially interested in any trade or business 
carried on by the taxpayer.
    A terminally ill individual is defined as one who has been 
certified by a physician as having an illness or physical 
condition that reasonably can be expected to result in death 
within 24 months of the date of certification. A physician is 
defined for this purpose in the same manner as under the long-
term care insurance rules of the bill.\14\
    \14\ A physician is defined for these purposes as in section 
1861(r)(1) of the Social Security Act, which provides that a physician 
means a doctor of medicine or osteopathy legally authorized to practice 
medicine and surgery by the State in which he performs such function or 
action (including a physician within the meaning of section 1101(a)(7) 
of that Act). Section 1101(a)(7) of that Act provides that the term 
physician includes osteopathic practitioners within the scope of their 
practice as defined by State law.
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    A chronically ill individual is defined under the long-term 
care provisions of the bill.\15\ In the case of amounts 
received with respect to a chronically ill individual (but not 
amounts received by reason of the individual being terminally 
ill), the $175 per day ($63,875 annual) limitation on 
excludable benefits that applies for per diem type long-term 
care insurance contracts also limits amounts that are 
excludable with respect to such contracts under this provision. 
The payor of a payment with respect to an individual who is 
chronically ill is required to report to the IRS the aggregate 
amount of such benefits paid to any individual during any 
calendar year, and the name, address and taxpayer 
identification number of such individual. A copy of the report 
must be provided to the payee by January 31 following the year 
of payment, showing the name of the payer and the aggregate 
amount of such benefits paid to the individual during the 
calendar year. Failure to file the report or provide the copy 
to the payee is subject to the generally applicable penalties 
for failure to file similar information reports.
    \15\ Thus, a chronically ill individual is one who has been 
certified within the previous 12 months by a licensed health care 
practitioner as (1) being unable to perform (without substantial 
assistance) at least 2 activities of daily living for at least 90 days 
due to a loss of functional capacity, (2) having a similar level of 
disability as determined by the Secretary of the Treasury in 
consultation with the Secretary of Health and Human Services, or (3) 
requiring substantial supervision to protect such individual from 
threats to health and safety due to severe cognitive impairment. 
Activities of daily living are eating, toileting, transferring, 
bathing, dressing and continence. Nothing in the bill requires the 
contract to take into account all of the activities of daily living.
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    A qualified viatical settlement provider is any person that 
regularly purchases or takes assignments of life insurance 
contracts on the lives of the terminally ill individuals and 
either: (1) is licensed for such purposes in the State in which 
the insured resides; or (2) if the person is not required to be 
licensed by that State, meets the requirements of the sections 
8 and 9 of the Viatical Settlements Model Act (issued by the 
National Association of Insurance Commissioners (NAIC)), and 
also meets the section of the NAIC Viatical Settlements Model 
Regulation relating to standards for evaluation of reasonable 
payments, including discount rates, in determining amounts paid 
by the viatical settlement provider.
    For life insurance company tax purposes, the bill provides 
that a life insurance contract is treated as including a 
reference to a qualified accelerated death benefit rider to a 
life insurance contract (except in the case of any rider that 
is treated as a long-term care insurance contract under section 
7702B, as added by the bill). A qualified accelerated death 
benefit rider is any rider on a life insurance contract that 
provides only for payments of a type that are excludable under 
this provision.

Effective date

    The provision applies to amounts received after December 
31, 1996. The provision treating a qualified accelerated death 
benefit rider as life insurance for life insurance company tax 
purposes takes effect on January 1, 1997. The issuance of 
qualified accelerated death benefit rider to a life insurance 
contract, or the addition of any provision required to conform 
an accelerated death benefit rider to these provisions, is not 
treated as a modification or material change of the contract 
(and is not intended to affect the issue date of any contract 
under section 101(f)).

    F. Exemption From Income Tax for State-Sponsored Organizations 
 Providing Health Coverage for High-Risk Individuals (sec. 341 of the 
              bill and new section 501(c)(26) of the Code)

Present law

    In general, the Internal Revenue Service (``IRS'') takes 
the position that organizations that provide insurance for 
their members or other individuals are not considered to be 
engaged in a tax-exempt activity. The IRS maintains that such 
insurance activity is either (1) a regular business of a kind 
ordinarily carried on for profit, or (2) an economy or 
convenience in the conduct of members' businesses because it 
relieves the members from obtaining insurance on an individual 
basis.
    Certain insurance risk pools have qualified for tax 
exemption under Code section 501(c)(6). In general, these 
organizations (1) assign any insurance policies and 
administrative functions to their member organizations 
(although they may reimburse their members for amounts paid and 
expenses); (2) serve an important common business interest of 
their members; and (3) must be membership organizations 
financed, at least in part, by membership dues.
    State insurance risk pools may also qualify for tax exempt 
status under section 501(c)(4) as social welfare organizations 
or under section 115 as serving an essential governmental 
function of a State. In seeking qualification under section 
501(c)(4), insurance organizations generally are constrained by 
the restrictions on the provision of ``commercial-type 
insurance'' contained in section 501(m). Section 115 generally 
provides that gross income does not include income derived from 
the exercise of any essential governmental function and 
accruing to a State or any political subdivision thereof. 
However, the IRS may be reluctant to rule that particular State 
risk-pooling entities satisfy the section 501(c)(4) or 115 
requirements for tax-exempt status.

Reasons for change

    The Committee believes that eliminating the uncertainty 
concerning the eligibility of certain State health insurance 
risk pools for tax-exempt status will assist States in 
providing medical care coverage for their uninsured high-risk 
residents.

Explanation of provision

    The bill provides tax-exempt status to any membership 
organization that is established by a State exclusively to 
provide coverage for medical care on a nonprofit basis to 
certain high-risk individuals, provided certain criteria are 
satisfied.\16\ The organization may provide coverage for 
medical care either by issuing insurance itself or by entering 
into an arrangement with a health maintenance organization 
(``HMO'').
    \16\ No inference is intended as to the tax treatment of other 
types of State-sponsored organizations.
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    High-risk individuals eligible to receive medical care 
coverage from the organization must be residents of the State 
who, due to a pre-existing medical condition, are unable to 
obtain health coverage for such condition through insurance or 
an HMO, or are able to acquire such coverage only at a rate 
that is substantially higher than the rate charged for such 
coverage by the organization. The State must determine the 
composition of membership in the organization. For example, a 
State could mandate that all organizations that are subject to 
insurance regulation by the State must be members of the 
organization.
    The bill further requires the State or members of the 
organization to fund the liabilities of the organization to the 
extent that premiums charged to eligible individuals are 
insufficient to cover such liabilities. Finally, no part of the 
net earnings of the organization can inure to the benefit of 
any private shareholder or individual.

Effective date

    The provision applies to taxable years beginning after 
December 31, 1996.

G. Health Insurance Organizations Eligible for Benefits of Section 833 
            (sec. 351 of the bill and sec. 833 of the Code)

Present law

    An organization described in sections 501(c)(3) or (4) of 
the Code is exempt from tax only if no substantial part of its 
activities consists of providing commercial-type insurance 
(sec. 501(m)). Special rules apply to certain eligible health 
insurance organizations. Eligible health insurance 
organizations are (1) Blue Cross and Blue Shield organizations 
existing on August 16, 1986, which have not experienced a 
material change in structure or operations since that date, and 
(2) other organizations that meet certain community-service-
related requirements and substantially all of whose activities 
involve the providing of health insurance. Section 833 provides 
that eligible organizations are generally treated as stock 
property and casualty insurance companies.
    Section 833 provides a special deduction for eligible 
organizations, equal to 25 percent of the claims and expenses 
incurred during the year, less the adjusted surplus at the 
beginning of the year. This deduction is calculated by 
computing surplus, taxable income, claims incurred, expenses 
incurred, tax-exempt income, net operating loss carryovers, and 
other items attributable to health business. The deduction may 
not exceed taxable income attributable to health business for 
the year (calculated without regard to this deduction).
    In addition, section 833 eliminates, for eligible 
organizations, the 20 percent reduction in unearned premium 
reserves that applies generally to all property and casualty 
insurance companies.

Reasons for change

    The Committee believes fairness dictates that the special 
rules benefitting Blue Cross and Blue Shield organizations 
under section 833 should apply to certain organizations that 
became taxable by reason of the same provision of the Tax 
Reform Act of 1986 that made Blue Cross and Blue Shield 
organizations taxable, if such organizations are not Blue Cross 
or Blue Shield organizations, but otherwise meet the 
eligibility requirements.

Explanation of provision

    The bill applies the special rules under section 833 to the 
same extent they are provided to certain existing Blue Cross or 
Blue Shield organizations, in the case of any organization that 
(1) is not a Blue Cross or Blue Shield organization existing on 
August 16, 1986, and (2) otherwise meets the requirements of 
section 833(c)(2) (including the requirement of no material 
change in operations or structure since August 16, 1986). Under 
the provision, an organization qualifies for this treatment 
only if (1) it is not a health maintenance organization and (2) 
it is organized under and governed by State laws which are 
specifically and exclusively applicable to not-for-profit 
health insurance or health service type organizations.

Effective date

    The provision is effective for taxable years ending after 
December 31, 1996.

                       TITLE IV. REVENUE OFFSETS

A. Treatment of Bad Debt Deductions of Thrift Institutions (sec. 401 of 
                   the bill and sec. 593 of the Code)

Present law and background

            Reserve method of accounting for bad debts of thrift 
                    institutions
    Generally, a taxpayer engaged in a trade or business may 
deduct the amount of any debt that becomes wholly or partially 
worthless during the year (the ``specific charge-off'' method 
of sec. 166). Certain thrift institutions (building and loan 
associations, mutual savings banks, or cooperative banks) are 
allowed deductions for bad debts under rules more favorable 
than those granted to other taxpayers (and more favorable than 
the rules applicable to other financial institutions). 
Qualified thrift institutions may compute deductions for bad 
debts using either the specific charge-off method or the 
reserve method of section 593. To qualify for this reserve 
method, a thrift institution must meet an asset test, requiring 
that 60 percent of its assets consist of ``qualifying assets'' 
(generally cash, government obligations, and loans secured by 
residential real property). This percentage must be computed at 
the close of the taxable year, or at the option of the 
taxpayer, as the annual average of monthly, quarterly, or 
semiannual computations of similar percentages.
    If a thrift institution uses the reserve method of 
accounting, it must establish and maintain a reserve for bad 
debts and charge actual losses against the reserve, and is 
allowed a deduction for annual additions to restore the reserve 
to its permitted balance. Under section 593, a thrift 
institution annually may elect to calculate its addition to its 
bad debt reserve under either (1) the ``percentage of taxable 
income'' method applicable only to thrift institutions, or (2) 
the ``experience'' method that also is available to small 
banks.
    Under the ``percentage of taxable income'' method, a thrift 
institution generally is allowed a deduction for an addition to 
its bad debt reserve equal to 8 percent of its taxable income 
(determined without regard to this deduction and with 
additional adjustments). Under the experience method, a thrift 
institution generally is allowed a deduction for an addition to 
its bad debt reserve equal to the greater of: (1) an amount 
based on its actual average experience for losses in the 
current and five preceding taxable years, or (2) an amount 
necessary to restore the reserve to its balance as of the close 
of the base year. For taxable years beginning before 1988, the 
``base year'' was the last taxable year before the most recent 
adoption of the experience method (i.e., generally, the last 
year the taxpayer was on the percentage of taxable income 
method). For taxable years beginning after 1987, the base year 
is the last taxable year beginning before 1988. Prior to 1988, 
computing bad debts under a ``base year'' rule allowed a thrift 
institution to claim a deduction for bad debts for an amount at 
least equal to the institution's actual losses that were 
charged off during the taxable year.
            Bad debt methods of commercial banks
    A small commercial bank (i.e., one with adjusted bases of 
assets of $500 million or less) may use the experience method 
or the specific charge-off method for purposes of computing its 
deduction for bad debts. A large commercial bank only may use 
the specific charge-off method of section 166. If a small bank 
becomes a large bank, it must recapture its existing bad debt 
reserve (i.e., include the amount of the reserve in income) 
through one of two elective methods. Under the 4-year recapture 
method, the bank generally includes 10 percent of the reserve 
in income in the first taxable year 20 percent in the second 
year, 30 percent in the third year, and 40 percent in the 
fourth year. Under the cut-off method, the bank generally 
neither restores its bad debt reserve to income nor may it 
deduct losses relating to loans held by the bank as of the date 
of the required change in the method of accounting. Rather, the 
amount of such losses are charged against and reduce the 
existing bad debt reserve; any losses in excess of the reserve 
are deductible. Any reserve balance in excess of the balance of 
related loans is includable in income.
            Recapture of bad debt reserves by thrift institutions
    If a thrift institution becomes a commercial bank, or if 
the institution fails to satisfy the 60-percent qualified asset 
test, it is required to change its method of accounting for bad 
debts and, under proposed Treasury regulations,\17\ is required 
to recapture its bad debt reserve. The percentage-of-taxable-
income portion of the reserve generally is included in income 
ratably over a 6-taxable year period. The experience method 
portion of the reserve is not restored to income if the former 
thrift institution qualifies as a small bank. If the former 
thrift institution is treated as a large bank, the experience 
method portion of the reserve is restored to income ratably 
over a 6-taxable year period, or under the 4-year recapture 
method or the cut-off method described above.
    \17\ Prop. Treas. reg. sec. 1.593-13.
---------------------------------------------------------------------------
    In addition, a thrift institution may be subject to a form 
of reserve recapture even if the institution continues to 
qualify for the percentage of taxable income method. 
Specifically, if a thrift institution distributes to its 
shareholders an amount in excess of its post-1951 earnings and 
profits, such excess is deemed to be distributed from the 
nonexperience potion of the institution's bad debt reserve and 
is restored to income. In the case of any distribution in 
redemption of stock or in partial or complete liquidation of an 
institution, the distribution is treated as first coming from 
the nonexperience potion of the bad debt reserves of the 
institution (sec. 593(e)).
            Financial accounting treatment of tax reserves of bad debts 
                    of thrift institutions
    The recapture of a bad debt reserve for Federal income tax 
purposes may have significant financial and regulatory 
accounting implications for a thrift institution. In general, 
for financial accounting purposes, a corporation must record a 
deferred tax liability with respect to items that are deducted 
for tax purposes in a period earlier than they are expensed for 
book purposes. The deferred tax liability signifies that, 
although a corporation may be reducing its current tax expense 
because of the accelerated tax deduction, the corporation will 
become liable for tax in a future period when the timing item 
``reverses'' (i.e., when the item is expensed for book purposes 
but for which the tax deduction had already been allowed). 
Under the applicable accounting standard (Accounting Principles 
Board Opinion 23), deferred tax liabilities generally were not 
required for pre-1988 tax deductions attributable to the bad 
debt reserve method of thrift institutions because the 
potential reversal of the bad debt reserve was indefinite 
(i.e., generally, a reversal only would occur by operation of 
sec. 593(e), a condition within the control of a thrift 
institution). However, the establishment of 1987 as a base year 
increased the likelihood of bad debt reserve reversals with 
respect to post-1987 additions to the reserve and it appears 
that thrift institutions generally have recorded additional 
deferred tax liabilities for these additions under the current 
generally accepted accounting principles.\18\
    \18\ For taxable years beginning before 1988, the base year balance 
of a thrift institution was the reserve balance whenever the 
institution changed from one bad debt method to another (e.g., from the 
percentage of taxable income method to the experience method). How the 
establishment of 1987 as a permanent base year changed the nature of 
the bad reserves of thrift institutions between pre-1988 years and 
post-1987 years (which, in turn, contributed to the change in the 
financial accounting treatment of such reserves) can be illustrated by 
the following example.
    Assume that thrift institution (``T'') always had used the 
percentage of taxable income (``PTI'') method to deduct bad debts 
through 1986 when its reserve balance was $10,000. Further assume that 
in 1987, T: (1) has insufficient taxable income to use the PTI method, 
(2) has actual bad debt losses of $1,000, and (3) under the six-year 
average formula of the experience method, would be allowed a deduction 
of $900. Under these facts, T would be allowed a bad debt deduction of 
$1,000 (rather than $900) in 1987 because $1,000 is the amount 
necessary to restore the reserve to its base year (PTI) level. 
Specifically, in 1987, T would charge the year-end 1986 reserve of 
$10,000 for the $1,000 actual loss and then add (and deduct) $1,000 to 
the reserve so that the balance of the reserve at year end 1987 is once 
again 10,000. Thus, T's former PTI deductions, which gave rise to the 
$10,000 reserve balance, generally would not be restored to income 
(unless subject to sec. 593(e)).
    Further assume that in 1988, T has sufficient taxable income to be 
allowed a PTI deduction of $1,500, increasing the balance of the 
reserve to $11,500 at year-end 1988. Further assume that in 1989, T: 
(1) again has insufficient taxable income to use the PTI method, (2) 
has actual bad debts of $2,500, and (3) under the six-year average 
formula of the experience method would be allowed a deduction of $900. 
Under these facts, T would be allowed a deduction of $1,000 (i.e., the 
amount necessary to restore the reserve to its base year (year-end 
1987) level). Specifically, T would charge the year-end 1988 reserve 
balance of $11,500 for the $2,500 actual loss and then add (and deduct) 
$1,000 to the reserve to restore the balance to the $10,000 base year 
amount. Thus, T's post-1987 PTI deduction of $1,500 is restored to 
income (i.e., T actually had losses of $2,500 in 1989, but only was 
allowed to deduct $1,000).
    A thrift institution also may record a current or deferred tax 
liability in cases where the institution's deduction for bad debts may 
be limited under section 585(b)(2)(B)(ii) because the amount of 
institution's loans outstanding diminished from the close of the base 
year to the close of the current year.
---------------------------------------------------------------------------
    Under proposed Treasury regulations, if a thrift 
institution becomes a commercial bank (or is otherwise 
ineligible to use the bad debt reserve method of section 593), 
the institution would be required to recapture all or a portion 
of its bad debt reserve. As described in detail below, it 
appears that such recapture would require the institution 
immediately to record, for financial accounting purposes, a 
current or deferred tax liability for the amount of bad debt 
recapture for which liabilities previously had not be recorded 
(generally, with respect to the pre-1988 reserves), regardless 
of when such recapture is taken into account for Federal income 
tax purposes. To the extent regulatory accounting principles 
follow these financial accounting principles, the recording of 
this liability generally would decrease the regulatory capital 
of the institution.

Reasons for change

    The Committee believes that the reserve method of bad debts 
accorded to qualified thrift institutions under present law 
results in a mismeasurement of economic income and provides 
those institutions with a tax benefit not provided to 
similarly-situated depository institutions.
    The Committee also believes that whenever a taxpayer 
changes its method of accounting, it is appropriate to 
implement such change in a manner such that items of income or 
expense are not taken into account twice--once under the old 
method and again under the new method. Thus, under present law, 
most accounting method changes are implemented under section 
481 which requires that calculation of an adjustment that 
reflects the cumulative effect of the method change and is 
restored to income over a specified period of time. 
Specifically, under present law, whenever a thrift institution 
no longer qualifies for the reserve method of accounting for 
bad debts, the bad debt reserve of the thrift institution must 
be restored to income.
    The Committee believes that in order to further national 
banking policy, certain changes to the Internal Revenue Code 
are warranted. First, the Committee believes that, in order to 
provide similar treatment to similarly-situated depository 
institutions, the special bad debt reserve methods available to 
qualified thrift institutions should be repealed. However, the 
Committee understands that requiring full recapture of the bad 
debt reserves of thrift institutions in implementing this 
change in accounting method may impose significant financial 
accounting and regulatory capital burdens on institutions that 
have not recorded the appropriate amount of deferred tax 
liabilities with respect to such recapture. Thus, the Committee 
believes it is appropriate to provide relief from the recapture 
of the portion of the bad debt reserves that arose prior to 
1988. The Committee believes that this relief should not 
directly benefit the shareholders of the institutions in a 
manner similar to the way in which present-law section 593(e) 
provides a limitation on the direct enjoyment of the benefits 
of section 593 by shareholders of thrift institutions.
    Further, the Committee is concerned that the repeal of 
section 593 may cause a change in thrift institutions' 
traditional roles as home mortgage lenders and may result in a 
temporary shortage in the availability of mortgage loans in 
some regions. The Committee bill addresses this issue by 
providing an incentive for institutions to continue to provide 
a level of residential mortgage financing for a period of time. 
The Committee recognizes that it may be appropriate to 
reexamine, in the future, this and other issues raised by the 
bill.

Explanation of provision

            Repeal of section 593
    The bill repeals the section 593 reserve method of 
accounting for bad debts by thrift institutions, effective for 
taxable years beginning after 1995. Thrift institutions that 
would be treated as ``small banks'' are allowed to utilize the 
experience method applicable to such institutions, while thrift 
institutions that are treated as ``large banks'' are required 
to use only the specific charge-off method.\19\ Thus, the 
percentage of taxable income method of accounting for bad debts 
is no longer available for any financial institution. The bill 
also repeals the following present-law provisions that only 
apply to thrift institutions to which section 593 applies: (1) 
the denial of a portion of certain tax credits to a thrift 
institution (sec. 50(d)(1)); (2) the special rules with respect 
to the foreclosure of property securing loans of a thrift 
institution (sec. 595); (3) the reduction in the dividends 
received reduction of a thrift institution (sec. 596); and (4) 
the ability of a thrift institution to use a net operating loss 
to offset its income from a residual interest in a REMIC (sec. 
860E(a)(2)).
    \19\ Under present-law section 581, the definition of a ``bank'' 
includes a thrift institution. Whether an institution is a ``large'' or 
``small'' bank is determined under section 585(c)(2).
---------------------------------------------------------------------------

              Treatment of recapture of bad debt reserves

In general

    A thrift institution required to change its method of 
computing reserves for bad debts will treat such change as a 
change in a method of accounting, initiated by the taxpayer, 
and having been made with the consent of the Secretary of the 
Treasury.\20\ Any section 481(a) adjustment required to be 
taken into account with respect to such change generally will 
be determined solely with respect to the ``applicable excess 
reserves'' of the taxpayer. The amount of applicable excess 
reserves shall be taken into account ratably over a six-taxable 
year period, beginning with the first taxable year beginning 
after 1995, subject to the residential loan requirement 
described below. In the case of a thrift institution that 
becomes a ``large bank'' (as determined under sec. 585(c)(2)), 
the amount of the institution's applicable excess reserves 
generally is the excess of (1) the balance of its reserves 
described in section 593(c)(1) other than its supplemental 
reserve for losses on loans (i.e., its reserve for losses on 
qualifying real property loans and its reserve for losses on 
nonqualifying loans) as of the close of its last taxable year 
beginning before January 1, 1996, over (2) the balance of such 
reserves (i.e., its reserve for losses on qualifying real 
property loans and its reserve for losses on nonqualifying 
loans) as of the close of its last taxable year beginning 
before January 1, 1988 (i.e., the ``pre-1988 reserves'').\21\ 
Thus, a thrift institution that is treated as a large bank 
generally is required to recapture its post-1987 additions to 
its bad debt reserves, whether such additions are made pursuant 
to the percentage of taxable income method or the experience 
method. The timing of this recapture may be delayed for a two-
year period to the extent the residential loan requirement 
described below applies.
    \20\ A thrift institution that uses a reserve method described in 
section 593 will be deemed to have changed its method of computing 
reserves for bad debts even though such institution will be allowed to 
use the reserve method of section 585. Similarly, a large thrift 
institution will be deemed to have changed its method of computing 
reserves for bad debts even though such institution used the 
experience-method portion of section 593 in lieu of the percentage-of-
taxable-income method of section 593.
    \21\ The balance of a taxpayer's pre-1988 reserves is reduced if 
the taxpayer's loan portfolio had decreased since 1988. The permitted 
balance of a taxpayer's pre-1988 reserves is reduced by multiplying 
such balance by the ratio of the balance of the taxpayer's loans 
outstanding at the close of the last taxable beginning before 1996, to 
the balance of the taxpayer's loans outstanding at the close of the 
last taxable beginning before 1988. This reduction is required for both 
large and small banks.
---------------------------------------------------------------------------
    In the case of a thrift institution that becomes a ``small 
bank'' (as determined under sec. 582(c)(2)), the amount of the 
institution's excess reserves will be the excess of (1) the 
balance of its reserves described in section 593(c)(1) as of 
the close of its last taxable year beginning before January 1, 
1996, over (2) the greater of the balance of: (a) its pre-1988 
reserves or (b) what the institution's reserves would have been 
at the close of its last taxable year beginning before January 
1, 1996, has the institution always used the experience method 
described in section 585(b)(2)(A) (i.e., the six-year average 
method). For purposes of the future application of section 585, 
the beginning balance of the small bank's reserve for its first 
taxable year beginning after December 31, 1995, will be the 
greater of the two amounts described in (2) in the preceding 
sentence, and the balance of the reserve at the close of the 
base year (for purposes of sec. 585(b)(2)(B)) will be the 
amount of its pre-1988 reserves. The residential loan 
requirement described below also applies to small banks. If 
such small bank later becomes a large bank, any section 481(a) 
adjustment amount required to be taken into account under 
section 585(c)(3) will not include any portion of the bank's 
pre-1988 reserve. Similarly, if the bank elects the cut-off 
method to implement its conversion to large bank status, the 
amount of the reserve against which the bank charges its actual 
losses will not include any portion of the bank's pre-1988 
reserve and the amount by which the pre-1988 reserve exceeds 
actual losses will not be included in gross income.
    The balance of the pre-1988 reserves is subject to the 
provisions of present-law section 593(e) (requiring recapture 
in the case of certain excess distributions to, and redemptions 
of, shareholders). Thus, section 593(e) will continue to apply 
to an institution regardless of whether the institution becomes 
a commercial bank or remain a thrift institution. In addition, 
the balances of the pre-1988 reserve and the supplemental 
reserve will be treated as tax attributes to which section 381 
applies. The Committee expects that Treasury regulations will 
provide rules for the continued application of section 593(e) 
in the case of mergers, acquisitions, spin-offs, and other 
reorganizations of thrift and other institutions. The Committee 
believes that any such regulations should provide that, if the 
stock of an institution with a pre-1988 reserve is acquired by 
another depository institution, the pre-1988 reserve will not 
be restored to income by reason of the acquisition. Similarly, 
if an institution with a pre-1988 reserve is merged or 
liquidated tax-free into a commercial bank that never was a 
thrift institution, the pre-1988 reserve should not be restored 
to income by reason of the merger or liquidation.\22\ Rather, 
the surviving institution will inherit the pre-1988 reserve and 
the post-1951 earnings and profits of the former thrift 
institution and section 593(e) will apply to the surviving 
institution as if it were a thrift institution. That is, the 
pre-1988 reserve will be restored into income in the case of 
any distribution in redemption of the stock of the surviving 
institution or in partial or complete liquidation of the 
institution following the merger or liquidation. In the case of 
any other distribution, the pre-1988 reserve will not be 
restored to income unless the distribution is in excess of the 
sum of the post-1951 earnings and profits inherited from the 
thrift institution and the post-1913 earnings and profits of 
the acquiring bank.\22\ The Committee expects that Treasury 
regulations will address the case where the shareholders of an 
institution with a pre-1988 reserve are ``cashed out'' in a 
taxable merger of the institution and a commercial bank. Such 
regulations may provide that the pre-1988 reserve may be 
restored to income if such redemption represents a concealed 
distribution from the former thrift institution. For example, 
cash received by former thrift shareholders pursuant to a 
taxable reverse merger may represent a concealed distribution 
if, immediately preceding the merger, the acquiring bank had no 
available resources to distribute and its existing debt 
structure, indenture restrictions, financial condition, or 
regulatory capital requirements precluded it from borrowing 
money for purposes of making the cash payment to the former 
thrift shareholders. No inference is intended by the Committee 
as to the application of section 593(e) to these and similar 
transactions under present law.
    \22\ The issue of whether section 593(e) applies in cases where a 
thrift institution is merged into a bank generally does not arise under 
present law because such merger results in a charter change and, under 
proposed Treasury regulations, requires full bad debt reserve 
recapture.
    \23\ If the acquiring bank is a former thrift institution itself 
and the pre-1988 reserves of neither institution are restored to income 
pursuant to the merger, the Committee expects that the pre-1988 
reserves and the post-1951 earnings and profits of the two institutions 
will be combined for purposes of the continued application of section 
593(e) with respect to the combined institution.
---------------------------------------------------------------------------
    Further, if a taxpayer no longer qualifies as a bank (as 
defined by sec. 581), the balances of the taxpayer's pre-1988 
reserve and supplement reserves are restored to income ratably 
over a six-year period, beginning in the taxable year the 
taxpayer no longer qualifies as a bank.
            Residential loan requirement
    Under a special rule, if the taxpayer meets the 
``residential loan requirement'' for a taxable year, the 
recapture of the applicable excess reserves otherwise required 
to be taken into account as a section 481(a) adjustment for 
such year will be suspended. A taxpayer meets the residential 
loan requirement if, for the taxable year, the principal amount 
of residential loans made by the taxpayer during the year is 
not less than its base amount. The residential loan requirement 
is applicable only for taxable years that begin after December 
31, 1995, and before January 1, 1998, and must be applied 
separately with respect to each such year. Thus, all taxpayers 
are required to recapture their applicable excess reserves 
within six, seven, or eight years after the effective date of 
the provision.
    The ``base amount'' of a taxpayer means the average of the 
principal amounts of the residential loans made by the taxpayer 
during the six most recent taxable years beginning before 
January 1, 1996. At the election of the taxpayer, the base 
amount may be computed by disregarding the taxable years within 
that six-year period in which the principal amounts of loans 
made during such years were highest and lowest. This election 
must be made for the first taxable year beginning after 
December 31, 1995, and applies to the succeeding taxable year 
unless revoked with the consent of the Secretary of the 
Treasury or his delegate.
    For purposes of the residential loan requirement, a loan 
will be deemed to be ``made'' by a financial institution to the 
extent the institution is, in fact, the principal source of the 
loan financing. Thus, any loan only can be ``made'' once. The 
Committee expects that loans ``made'' by a financial 
institution may include, but are not limited to, loans (1) 
originated directly by the institution through its place of 
business or its employees, (2) closed in the name of the 
institution, (3) originated by a broker that acts as an agent 
for the institution, and (4) originated by another person 
(other than a financial institution) and that are acquired by 
the institution pursuant to a pre-existing, enforceable 
agreement to acquire such loans. In addition, Treasury 
regulations also may provide that loans ``made'' by a financial 
institution may include loans originated by another person 
(other than a financial institution) acquired by the 
institution soon after origination if such acquisition is 
pursuant to a customary practice of acquiring such loans from 
such person. A loan acquired by a financial institution from 
another financial institution generally will be considered to 
be made by the transferor rather than the transferee of the 
loan; however, such loan may be completely disregarded if a 
principal purpose of the transfer was to allow the transferor 
to meet the residential loan requirement. A loan may be 
considered to be made by a financial institution even if such 
institution has an arrangement to transfer such loan to the 
Federal National Mortgage Association or the Federal Home Loan 
Mortgage Corporation.
    For purposes of the residential loan requirement, a 
``residential loan'' is a loan described in section 
7701(a)(19)(C)(v) (generally, loans secured by residential real 
and church property and certain mobile homes),\24\ but only to 
the extent the loan is made to the owner of the property to 
acquire, construct, or improve the property. Thus, mortgage 
refinancings and home equity loans are not considered to be 
residential loans, except to the extent the proceeds of the 
loan are used to acquire, construct, or improve qualified 
residential real property. The Committee understands that 
pursuant to the Home Mortgage Disclosure Act, financial 
institutions are required to disclose the purpose for which 
loans are made. The Committee further understands that for 
purposes of this disclosure, institutions are required to 
classify loans as home purchase loans, home improvement loans, 
refinancings, and multifamily dwelling loans (whether for 
purchase, improvement or refinancing of such property). The 
Committee expects that taxpayers (and the Secretary of the 
Treasury in promulgating guidance) may take such reporting into 
account, and make such adjustments as are appropriate,\25\ in 
determining: (1) whether or not a loan qualifies as a 
``residential loan'' and (2) whether the institution ``made'' 
the loan. A taxpayer must use consistent standards for 
determining whether loans qualify as residential loans made by 
the institution both for purposes of determining its base 
amount and for purposes of determining whether it met the 
residential loan requirement for a taxable year.
    \24\ For this purpose, as under present law, if a multifamily 
structure securing a loan is used in part for nonresidential purposes, 
the entire loan will be deemed a residential real property loan if the 
planned residential use exceeds 80 percent of the property's planned 
use (determined as of the time the loan is made). In addition, loans 
made to finance the acquisition or development of land will be deemed 
to be loans secured by an interest in residential real property if, 
under regulations prescribed by the Secretary of the Treasury, there is 
a reasonable assurance that the property will become residential real 
property within a period of three years from the date of acquisition of 
the land.
    \25\ For example, adjustments will be required with respect to the 
reporting of multifamily dwellings in order to distinguish home 
purchase, home improvement, and refinancing loans.
---------------------------------------------------------------------------
    The residential loan requirement is determined on a 
controlled group basis. Thus, for example, if a controlled 
group consists of two thrift institutions with applicable 
excess reserves that are wholly-owned by a bank, the 
residential loan requirement will be met (or not met) with 
respect to both thrift institutions by comparing the principal 
amount of the residential loans made by all three members of 
the group during the taxable year to the group's base amount. 
The group's base amount will be the average principal amount of 
residential loans made by all three members of the group during 
the base period. The election to disregard the high and low 
taxable years during the 6-year base period also would be 
applied on a controlled group basis (i.e., generally by 
treating the members of the group as one taxpayer so that all 
members of the group must join in the election, and the same 
corresponding years of each member would be so disregarded).
    Treasury regulations may provide rules for the application 
of the residential loan requirement in the case of mergers, 
acquisitions, and other reorganizations of thrift and other 
institutions. The Committee expects that the balance of a 
taxpayer's applicable excess reserve will be treated as a tax 
attribute to which section 381 applies. Thus, if an institution 
with an applicable excess reserve is acquired in a tax-free 
reorganization, the balance of such reserve will not be 
immediately restored to income but will continue to be subject 
to the residential loan requirement in the hands of the 
acquirer. The Committees further expect that if a financial 
institution joins or merges into (or leaves) a group of 
financial institutions, the base amount of the acquiring (or 
remaining) group will be appropriately adjusted to reflect the 
base amount of the acquired (or departing) institution for 
purposes of determining whether the group meets the residential 
loan requirement for the year of the acquisition (or departure) 
and subsequent years. Similarly, if a controlled group of 
institutions had made an election to disregard its high and low 
years in computing its base amount, it is anticipated that such 
election shall be binding on any institution that subsequently 
joins the group and the election shall be applied to the new 
member by disregarding the high and low years of the new member 
even if such years do not correspond to the years applicable to 
the other members of the group.
            Treatment of conversions to credit unions
    The bill provides that if a thrift institution to which the 
repeal of section 593 applies becomes a credit union, the 
credit union will be treated as an institution that is not a 
bank and any section 481(a) adjustment required to be included 
in gross income will be treated as derived from an unrelated 
trade or business. Thus, if a thrift institution becomes a 
credit union in its first taxable year beginning after December 
31, 1995, the entire balance of the institution's bad debt 
reserve will be included in income, and subject to tax, over a 
six-year period beginning with such taxable year. No inference 
is intended as to the Federal income tax treatment of any other 
aspect of the conversion of a financial institution to a credit 
union.

Effective date

    The repeal of section 593 is effective for taxable years 
beginning after December 31, 1995. The repeal of section 595 is 
effective for property acquired in taxable years beginning 
after December 31, 1995. The amendment to section 860E does not 
apply to any residual interest in a REMIC held by the taxpayer 
on October 31, 1995, and at all times thereafter.
    The amendments to section 593(e) do not apply to any 
distributions with respect to preferred stock if (1) such stock 
is issued and outstanding on October 31, 1995, and at all times 
thereafter before the distribution and (2) such distribution is 
made within the later of (a) one year after the date of 
enactment of this Act or (b) if the stock is redeemable by the 
issuer or a related party, 30 days after the date such stock 
first may be redeemed. For this purpose, the first date a 
preferred stock may be redeemed is the day upon which the 
issuer or a related party has the right to call the stock, 
regardless of the amount of call premium.

 B. Earned Income Credit Provisions (sec. 411 of the bill and secs. 32 
                      and 6213(g)(2) of the Code)

Present law

            In general
    Certain eligible low-income workers are entitled to claim a 
refundable credit on their income tax return. The amount of the 
credit an eligible taxpayer may claim depends upon whether the 
taxpayer has one, more than one, or no qualifying children and 
is determined by multiplying the credit rate by the taxpayer's 
earned income up to an earned income threshold. The maximum 
amount of the credit is the product of the credit rate and the 
earned income threshold. For taxpayers with earned income (or 
adjusted gross income (AGI), if greater) in excess of the 
phaseout threshold, the maximum credit amount is reduced by the 
phaseout rate multiplied by the amount of earned income (or 
AGI, if greater) in excess of the phaseout threshold. For 
taxpayers with earned income (or AGI, if greater) in excess of 
the phaseout limit, no credit is allowed.
    The parameters for the credit depend upon the number of 
qualifying children the taxpayer claims. For 1996, the 
parameters are given in the following table:

----------------------------------------------------------------------------------------------------------------
                                                                    Two or more                                 
                                                                    qualifying    One qualifying   No qualifying
                                                                     children          child         children   
----------------------------------------------------------------------------------------------------------------
Credit rate.....................................................          40.00%          34.00%           7.65%
Phaseout rate...................................................          21.06%          15.98%           7.65%
Earned income threshold.........................................          $8,890          $6,330          $4,220
Maximum credit..................................................           3,556           2,152             323
Phaseout threshold..............................................          11,610          11,610           5,280
Phaseout limit..................................................          28,495          25,078           9,500
----------------------------------------------------------------------------------------------------------------

    For years after 1996, the credit rates and the phaseout 
rates will be the same as in the preceding table. The earned 
income threshold and the phaseout threshold are indexed for 
inflation; because the phaseout limit will also increase if 
there is inflation.
    In order to claim the credit, a taxpayer must either have 
an qualifying child or meet other requirements. A qualifying 
child must meet a relationship test, an age test, an 
indentification test, and a residence test. In order to claim 
the credit without a qualifyng child, a taxpayer must not be a 
dependent and must be over age 24 and under age 65.
    To satisfy the identification test, taxpayers must include 
on their tax return the name and age of each qualifying child. 
For returns filed with respect to tax year 1996, taxpayers must 
provide a taxpayer identification number (TIN) for all 
qualifying children born on or before November 30, 1996. For 
returns filed with respect to tax year 1997 and all subsequent 
years, taxpayers must provide TINs for all qualifying children, 
regardless of their age. A taxpayer's TIN is generally that 
taxpayer's social security number.
            Mathematical errors
    The Internal Revenue Service may summarily assess 
additional tax due as a result of a mathematical error without 
sending the taxpayer a notice of deficiency and giving the 
taxpayer an opportunity to petition the Tax Court. Where the 
IRS uses the summary assessment procedure for mathematical or 
clerical errors, the taxpayer must be given an explanation of 
the asserted error and a period of 60 days to request that the 
IRS abate its assessment. The IRS may not proceed to collect 
the amount of the assessment until the taxpayer has agreed to 
it or has allowed the 60-day period for objecting to expire. If 
the taxpayer files a request for abatement of the assessment 
specified in the notice, the IRS must abate the assessment. Any 
reassessment of the abated amount is subject to the ordinary 
deficiency procedures. The request for abatement of the 
assessment is the only procedure a taxpayer may use prior to 
paying the assessed amount in order to contest an assessment 
arising out of a mathematical or clerical error. Once the 
assessment is satisfied, however, the taxpayer may file a claim 
for refund if he believes the assessment was made in error.

Reasons for change

    The Committee does not believe that individuals who are not 
authorized to work in the United States should be able to claim 
the credit. To enforce the requiremnt that credit claimants and 
their qualifying children have proper social security numbers 
and to insure that credit claimants have paid self-employment 
taxes on any self=employment income used to qualify for the 
credit, the Committee believes the IRS should be able to use 
the streamlined procedures it currently uses for mathematical 
and clerical errors.

Explanation of provision

            Deny credit to individuals not authorized to be employed in 
                    the United States
    Under the bill, taxpayers are not eligible for the credit 
if they do not include their taxpayer identification number 
(and, if married, their spouse's taxpayer identification number 
on their tax return. Solely for these purposes and for purposes 
of the present-law identification test for a qualifying child, 
a taxpayer identification number is defined as a social 
security number issued to an individual by the Social Security 
Administration other than a number issued under section 
205(c)(2)(B)(i)(II) (or that portion of sec. 
205(c)(2)(B)(i)(III) relating to it) of the Social Security Act 
(regarding the issuance of a number to an individual applying 
for or receiving Federally funded benefits).
            Use mathematical error procedures for certain omissions
    If a taxpayer fails to provide a correct taxpayer 
identification number, such omission will be treated as a 
mathematical or clerical error. If a taxpayer who claims the 
credit with respect to net earnings from self-employment fails 
to pay the proper amount of self-employment tax on such net 
earnings, the failure will be treated as a mathematical or 
clerical error. Thus, any notification that the taxpayer owes 
additional tax because of these omissions will not be treated 
as a notice of deficiency.

 Effective date

    The provision is effective for taxable years beginning 
after December 31, 1995.

 C. Revision of Expatriation Tax Rules (secs. 421-322 of the bill and 
         secs. 877, 2107, 2501 and new sec. 6039F of the Code)

Present law

   1. Taxation of United States citizens, residents, and nonresidents

    a. Individual income taxation.

Income taxation of U.S. citizens and residents

            In general
    A United States citizen generally is subject to the U.S. 
individual income tax on his or her worldwide taxable 
income.\26\ All income earned by a U.S. citizen, from sources 
inside and outside the United States, is taxable, whether or 
not the individual lives within the United States. A non-U.S. 
citizen who resides in the United States generally is taxed in 
the same manner as a U.S. citizen if the individual meets the 
definition of a ``resident alien,'' described below.
    \26\ The determination of who is a U.S. citizen for tax purposes, 
and when such citizenship is lost, is governed by the provisions of the 
Immigration and Nationality Act, 8 U.S.C. section 1401, et seq. See 
Treas. Reg. section 1.1-1(c).
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    The taxable income of a U.S. citizen or resident is equal 
to the taxpayer's total income less certain exclusions, 
exemptions, and deductions. The appropriate tax rates are then 
applied to a taxpayer's taxable income to determine his or her 
individual income tax liability. A taxpayer may reduce his or 
her income tax liability by any applicable tax credits. When an 
individual disposes of property, any gain or loss on the 
disposition is determined by reference to the taxpayer's cost 
basis in the property, regardless of whether the property was 
acquired during the period in which the taxpayer was a citizen 
or resident of the United States.
    If a U.S. citizen or resident earns income from sources 
outside the United States, and that income is subject to 
foreign income taxes, the individual generally is permitted a 
foreign tax credit against his or her U.S. income tax liability 
to the extent of foreign income taxes paid on that income.\27\ 
In addition, a United States citizen who lives and works in a 
foreign country generally is permitted to exclude up to $70,000 
of annual compensation from being subject to U.S. income taxes, 
and is permitted an exclusion or deduction for certain housing 
expenses.\28\
    \27\ See sections 901-907.
    \28\ Section 911.
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            Resident aliens
    In general, a non-U.S. citizen is considered a resident of 
the United States if the individual (1) has entered the United 
States as a lawful permanent U.S. resident (the ``green card 
test''); or (2) is present in the United States for 31 or more 
days during the current calendar year and has been present in 
the United States for a substantial period of time--183 or more 
days during a 3-year period weighted toward the present year 
(the ``substantial presence test'').\29\
    \29\ The definitions of resident and nonresident aliens are set 
forth in section 7701(b). The substantial presence test will compare 
183 days to the sum of (1) the days present during the current calendar 
year, (2) one-third of the days present during the preceding calendar 
year, and (3) one-sixth of the days present during the second preceding 
calendar year. Presence for 122 days (or more) per year over the 3-year 
period would constitute substantial presence under the test.
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    If an individual is present in the United States for fewer 
than 183 days during the calendar year, and if the individual 
establishes that he or she has a closer connection with a 
foreign country than with the United States and has a tax home 
in that country for the year, the individual generally is not 
subject to U.S. tax as a resident on account of the substantial 
presence test. If an individual is present for as many as 183 
days during a calendar year, this closer connections/tax home 
exception is not available. An alien who has an application 
pending to change his or her status to permanent resident or 
who has taken other steps to apply for status as a lawful 
permanent U.S. resident is not eligible for the closer 
connections/tax home exception.
    For purposes of applying the substantial presence test, any 
days that an individual is present as an ``exempt individual'' 
are not counted. Except individuals include certain foreign 
government-related individuals, teachers, trainees, students, 
and professional athletes temporarily in the United States to 
complete in charitable sports events. In addition, the 
substantial presence test does not count days of presence of an 
individual who is physically unable to leave the United States 
because of a medical condition that arose while he or she was 
present in the United States, if the individual can establish 
to the satisfaction of the Secretary of the Treasury that he or 
she qualifies for this special medical exception.
    In some circumstances, an individual who meets the 
definition of a U.S. resident (as described above) could also 
be defined as a resident of another country under the internal 
laws of that country. In order to avoid the double taxation of 
such individuals, most income tax treaties include a set of 
``tie-breaker'' rules to determine the individual's country of 
residence for income tax purposes. In general, a dual resident 
is deemed to be a resident of the country in which such person 
has a permanent home. If the individual has a permanent home 
available in both countries, the individual's residence is 
deemed to be the country with which his or her personal and 
economic relations are closer (i.e., the ``center of vital 
interests.'') If the country in which such individual has his 
or her center or vital interests cannot be determined, or if 
such individual does not have a permanent home available in 
either country, he or she is deemed to be a resident of the 
country in which he or she has an habitual abode. If the 
individual has an habitual abode in both countries or in 
neither country, he or she is deemed to be a resident of the 
country of which he or she is a citizen. If each country 
considers the person to be its citizen or if he or she is a 
citizen of neither country, the competent authorities of the 
countries are to settle the question of residence by mutual 
agreement.
            Income taxation of nonresident aliens
    Non-U.S. citizens who do not meet the definition of 
``resident aliens'' are considered to be nonresident aliens for 
tax purposes. Nonresident aliens are subject to U.S. tax only 
to the extent their income is from U.S. sources or is 
effectively connected with the conduct of a trade or business 
within the United States. Bilateral income tax treaties may 
modify the U.S. taxation of a nonresident alien.
    A nonresident alien is taxed at regular graduated rates on 
net profits derived from a U.S. business.\30\ Nonresident 
aliens also are taxed at a flat rate of 30 percent on certain 
types of passive income derived from U.S. sources, although a 
lower rate may be provided by treaty (e.g., dividends are 
frequently taxed at a reduced rate of 15 percent). Such passive 
income includes interest, dividends, rents, salaries, wages, 
premiums, annuities, compensations, remunerations, emoluments, 
and other fixed or determinable annual or periodical gains, 
profits and income. There is no U.S. tax imposed, however, on 
interest earned by nonresident aliens with respect to deposits 
with U.S. banks and certain types of portfolio debt 
investments.\31\ Gains on the sale of stocks or securities 
issued by U.S. persons generally are not taxable to a 
nonresident alien because they are considered to be foreign 
source income.\32\
    \30\ Section 871.
    \31\ See sections 871(h) and 871(i)(3).
    \32\ Section 865(a).
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    Nonresident aliens are subject to U.S. income taxation on 
any gain recognized on the disposition of an interest in U.S. 
real property.\33\ Such gains generally are subject to tax at 
the same rates that apply to similar income received by U.S. 
persons. If a U.S. real property interest is acquired from a 
foreign person, the purchaser generally is required to withhold 
10 percent of the amount realized (gross sales price). 
Alternatively, either party may request that the Internal 
Revenue Service (``IRS'') determine the transferor's maximum 
tax liability and issue a certificate prescribing a reduced 
amount of withholding (not to exceed the transferor's maximum 
tax liability).\34\
    \33\ Sections 897, 1445, 6039C, and 6652(f), known as the Foreign 
Investment in Real Property Tax Act (``FIRPTA''). Under the FIRPTA, 
provisions, tax is imposed on gains from the disposition of an interest 
(other than an interest solely as a creditor) in real property 
(including an interest in a mine, well, or other natural deposit) 
located in the United States or the U.S. Virgin Islands. Also included 
in the definition of a U.S. real property interest in any interest 
(other than an interest solely as a creditor) in any domestic 
corporation unless the taxpayer establishes that the corporation was 
not a U.S. real property holding corporation (``USRPHC'') at any time 
during the five-year period ending on the date of the disposition of 
the interest (sec. 897(c)(1)(A)(ii). A USRPHC is any corporation, the 
fair market value of whose U.S. real property interests equals or 
exceeds 50 percent of the sum of the fair market values of (1) its U.S. 
real property interests, (2) its interests in foreign real property, 
plus (3) any other of its assets which are used or held for use in a 
trade or business (sec. 897(c)(2)).
    \34\ Section 1445.
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    b. Estate and gift taxation.
    The United States imposes a gift tax on any transfer of 
property by gift made by a U.S. citizen or resident,\35\ 
whether made directly or indirectly and whether made in trust 
or otherwise. Nonresident aliens are subject to the gift tax 
with respect to transfers of tangible real or personal property 
where the property is located in the United States at the time 
of the gift. No gift tax is imposed, however, on gifts made by 
nonresident aliens of intangible property having a situs within 
the United States (e.g., stocks and bonds).\36\
    \35\ Section 2501.
    \36\ Section 2501(a)(2).
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    The United States also imposes an estate tax on the 
worldwide ``gross estate'' of any person who was a citizen or 
resident of the United States at the time of death, and on 
certain property belonging to a nonresident of the United 
States that is located in the United States at the time of 
death.\37\
    \37\ Sections 2001, 2031, 2101, and 2103.
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    Since 1976, the gift tax and the estate tax have been 
unified so that a single graduated rate schedule applies to 
cumulative taxable transfers made by a U.S. citizen or resident 
during his or her lifetime and at death. Under this rate 
schedule, the unified estate and gift tax rates begin at 18 
percent on the first $10,000 in cumulative taxable transfers 
and reach 55 percent on cumulative taxable transfers over $3 
million.\38\ A unified credit of $192,800 is available with 
respect to taxable transfers by gift and at death. The unified 
credit effectively exempts a total of $600,000 in cumulative 
taxable transfers from the estate and gift tax.
    \38\ Section 2001(c).
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    Residency for purposes of estate and gift taxation is 
determined under different rules than those applicable for 
income tax purposes. In general, an individual is considered to 
be a resident of the United States for estate and gift tax 
purposes if the individual is ``domiciled'' in the United 
States. An individual is domiciled in the United States if the 
individual (a) is living in the United States and has the 
intention to remain in the United States indefinitely; or (b) 
has lived in the United States with such an intention and has 
not formed the intention to remain indefinitely in another 
country. In the case of a U.S. citizen who resided in a U.S. 
possession at the time of death, if the individual acquired 
U.S. citizenship solely on account of his birth or residence in 
a U.S. possession, that individual is not treated as a U.S. 
citizen or resident for estate tax purposes.\39\
    \39\ Section 2209.
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    In addition to the estate and gift taxes, a separate 
transfer tax is imposed on certain ``generation-skipping'' 
transfers.

   2. Special tax rules with respect to the movement of persons and 
               property into or out of the United States

Individuals who relinquish U.S. citizenship with a principal purpose of 
                           avoiding U.S. tax

    An individual who relinquishes his or her U.S. citizenship 
with a principal purpose of avoiding U.S. taxes is subject to 
an alternative method of income taxation for 10 years after 
expatriation under section 877.\40\ Under this provision, if 
the Treasury Department establishes that it is reasonable to 
believe that the expatriate's loss of U.S. citizenship would, 
but for the application of this provision, result in a 
substantial reduction in U.S. tax based on the expatriate's 
probable income for the taxable year, then the expatriate has 
the burden of proving that the loss of citizenship did not have 
as one of its principal purposes the avoidance of U.S. income, 
estate or gift taxes. Section 877 does not apply to resident 
aliens who terminate their U.S. residency.
    \40\ Treasury regulations provide that an individual's citizenship 
status is governed by the provisions of the Immigration and Nationality 
Act, specifically referring to the ``rules governing loss of 
citizenship [set forth in] sections 349 to 357, inclusive, of such Act 
(8 U.S.C. 1481-1489).'' Treas. Reg. section 1.1-1(c). Under the 
Immigration and Nationality Act, an individual is generally considered 
to lose U.S. citizenship on the date that an expatriating act is 
committed. The present-law rules governing the loss of citizenship, and 
a description of the types of expatriating acts that lead to a loss of 
citizenship, are discussed more fully below.
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    The alternative method modifies the rules generally 
applicable to the taxation of nonresident aliens in two ways. 
First, the expatriate is subject to tax on his or her U.S. 
source income at the rates applicable to U.S. citizens rather 
than the rates applicable to other nonresident aliens. (Unlike 
U.S. citizens, however, individuals subject to section 877 are 
not taxed on any foreign source income.) Second, the scope of 
items treated as U.S. source income for section 877 purposes is 
broader than those items generally considered to be U.S. source 
income under the Code. For example, gains on the sale of 
personal property located in the United States and gains on the 
sale or exchange of stocks and securities issued by U.S. 
persons, generally are not considered to be U.S. source income 
under the Code. However, if an individual is subject to the 
alternative taxing method of section 877, such gains are 
treated as U.S. source income with respect to that individual. 
The alternative method applies only if it results in a higher 
U.S. tax liability than would otherwise be determined if the 
individual were taxed as a nonresident alien.
    Because section 877 alters the sourcing rules generally 
used to determine the country having primary taxing 
jurisdiction over certain items of income, there is an 
increased potential for such items to be subject to double 
taxation. For example, a former U.S. citizen subject to the 
section 877 rules may have capital gains derived from stock in 
a U.S. corporation. Under section 877, such gains are treated 
as U.S. source income, and are, therefore, subject to U.S. tax. 
Under the internal laws of the individual's new country of 
residence, however, that country may provide that all capital 
gains realized by a resident of that country are subject to 
taxation in that country, and thus the individual's gain from 
the sale of U.S. stock also would be taxable in his or her 
country of residence. If the individual's new country of 
residence has an income tax treaty with the United States, the 
treaty may provide for the amelioration of this potential 
double tax.
    Similar rules apply in the context of estate and gift 
taxation if the transferor relinquished U.S. citizenship with a 
principal purpose of avoiding U.S. taxes within the 10-year 
period ending on the date of the transfer. A special rule is 
applied to the estate tax treatment of any decedent who 
relinquished his or her U.S. citizenship within 10 years of 
death, if the decedent's loss of U.S. citizenship had as one of 
its principal purposes a tax avoidance motive.\41\ Once the 
Secretary of the Treasury establishes a reasonable belief that 
the expatriate's loss of U.S. citizenship would result in a 
substantial reduction in estate, inheritance, legacy and 
succession taxes, the burden of proving that one of the 
principal purposes of the loss of U.S. citizenship was not 
avoidance of U.S. income or estate tax is on the executor of 
the decedent's estate.
    \41\ Section 2107.
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    In general, the estates of individuals who have 
relinquished U.S. citizenship are taxed in accordance with the 
rules generally applicable to the estates of nonresident aliens 
(i.e., the gross estate includes all U.S.-situs property held 
by the decedent at death, is subject to U.S. estate tax at the 
rates generally applicable to the estates of U.S. citizens, and 
is allowed a unified credit of $13,000, as well as credits for 
State death taxes, gift taxes, and prior transfers). However, a 
special rule provides that the individual's gross estate also 
includes his or her pro-rata share of any U.S.-situs property 
held through a foreign corporation in which the decedent had a 
10-percent or greater voting interest, provided that the 
decedent and related parties together owned more than 50 
percent of the voting power of the corporation. Similarly, 
gifts of intangible property having a situs within the United 
States (e.g., stocks and bonds) made by a nonresident alien who 
relinquished his or her U.S. citizenship within the 10-year 
period ending on the date of transfer are subject to U.S. gift 
tax, if the loss of U.S. citizenship had as one of its 
principal purposes a tax avoidance motive.\42\
    \42\ Section 2501(a)(3).
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            Aliens having a break in residency status
    A special rule applies in the case of an individual who has 
been treated as a resident of the United States for at least 
three consecutive years, if the individual becomes a 
nonresident but regains residency status within a three-year 
period.\43\ In such cases, the individual is subject to U.S. 
tax for all intermediate years under the section 877 rules 
described above (i.e., the individual is taxed in the same 
manner as a U.S. citizen who renounced U.S. citizenship with a 
principal purpose of avoiding U.S. taxes). The special rule for 
a break in residency status applies regardless of the 
subjective intent of the individual.
    \43\ Section 7701(b)(10).
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            Transfers to foreign corporations
    Certain transfers of property by shareholders to a 
controlled corporation are generally tax-free if the persons 
transferring the property own at least 80 percent of the 
corporation after the transfer.\44\ Also, in certain corporate 
reorganizations, including qualifying acquisitions and 
dispositions, shareholders of one corporation may exchange 
their stock or securities for stock or securities of another 
corporation that is a party to the reorganization without a 
taxable event except to the extent they receive cash or other 
property that is not permitted stock or securities. In 
addition, a corporation may transfer property to another 
corporation that is a party to the reorganization without a 
taxable event, except to the extent certain non-permitted 
consideration is received.\45\ A liquidation of an 80-percent 
owned corporate subsidiary into its parent corporation is also 
generally tax-free.\46\
    \44\ Section 351.
    \45\ Sections 368, 354, 356, and 361. (See also sec. 355.)
    \46\ Section 332.
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    Under the rules applicable to these types of transfers, 
property transferred to a corporation retains its basis, to the 
extent the transfer was tax-free, so that any appreciation 
(i.e., built-in gain) will be subject to tax if the property is 
subsequently sold by the recipient corporation. Similarly, a 
shareholder who exchanges stock of one corporation for stock of 
another retains his or her original basis so that a subsequent 
sale of the acquired stock can produce a taxable gain.
    Section 367 applies special rules, however, if property is 
transferred by a U.S. person to a foreign corporation in a 
transaction that would otherwise be tax-free under these 
provisions. These special rules are generally directed at 
situations where property is transferred to a foreign 
corporation, outside of the U.S. taxing jurisdiction, so that a 
subsequent sale by that corporation could escape U.S. tax 
notwithstanding the carryover basis of the asset. In some 
instances, such a transfer causes an immediate taxable event so 
that the generally applicable tax-free rules are overridden. In 
other instances, the taxpayer may escape immediate tax by 
entering a gain recognition agreement (``GRA'') obligating the 
taxpayer to pay tax if the property is disposed of within a 
specified time period after the transfer. The GRA rules 
generally require the taxpayer to agree to file an amended 
return for the year of the original transfer if the property is 
disposed of by the transferee (including payment of interest 
from the due date of the return for the year of the original 
transfer to the time the additional tax under the agreement is 
actually paid following the disposition).
    Section 367 also imposes rules directed at situations where 
a U.S. person has an interest in a foreign corporation, such as 
a controlled foreign corporation (``CFC'') meeting the specific 
U.S. shareholder ownership requirements, that could result in 
the U.S. person being taxed on its share of certain foreign 
corporate earnings. These rules are designed to prevent the 
avoidance of tax in circumstances where a reorganization or 
other nonrecognition transaction restructures the stock or 
asset ownership of the foreign corporation so that the 
technical requirements for imposition of U.S. tax on foreign 
earnings under the CFC or other rules are no longer met and 
there is therefore potential for removing the earnings of the 
original CFC from current or future U.S. tax, or changing the 
character of the earnings for U.S. tax purposes (e.g., from 
dividend to capital gain).
    The rules of section 367 do not generally apply unless 
there is a transfer by a U.S. person to a foreign corporation, 
or unless a foreign corporation of which a U.S. person is a 
shareholder engages in certain transactions. Because an 
individual who expatriates is no longer a U.S. person, section 
367 has no effect on actions taken by such individuals after 
expatriation. The Treasury Department has considerable 
regulatory authority under section 367 to address situations 
that may result in U.S. tax avoidance. For example, section 
367(b) provides that any of certain tax-free corporate 
transactions that do not involve a transfer of property from a 
U.S. person (described in section 367(a)(1)) can be 
recharacterized as taxable ``to the extent provided in 
regulations prescribed by the Secretary which are necessary or 
appropriate to prevent the avoidance of Federal income taxes.'' 
The legislative history of this provision suggests that it was 
directed principally at situations involving avoidance of U.S. 
tax on foreign earnings and profits; \47\ however, the 
statutory language is quite broad and was provided in 
conjunction with the general rules taxing certain transfers by 
U.S. persons.
    \47\ See, e.g., H. Rept. No. 94-658, pp. 239-248 (94th Cong. 1st 
Sess, 1975); S. Rept. No. 94-938, pp. 261-271 (94th Cong., 2d Sess, 
1976); H. Rept. No. 94-1515, p. 463 (94th Cong., 2d Sess., 1976)
---------------------------------------------------------------------------
    Under the existing section 367 regulations and the relevant 
expatriation sections of the Code, a U.S. person who 
expatriates, even for a principal purpose of avoiding U.S. tax, 
may subsequently engage in transactions that involve the 
transfer of property to a foreign corporation without any 
adverse consequences under section 367, since expatriation 
(even for a principal purpose of tax avoidance) is not an event 
covered by section 367 or the current regulations under that 
section. Similarly, a U.S. person who has expatriated is not 
considered a U.S. shareholder for purposes of applying the 
rules that address restructurings of foreign corporations with 
U.S. shareholders. By engaging in such a transaction, a 
taxpayer that has expatriated could transfer assets that would 
otherwise generate income which would be subject to tax under 
section 877 into a foreign corporation, thus transforming the 
income into non-U.S. source income not subject to tax under 
section 877. For example, under section 877, if a principal 
purpose of tax avoidance existed, an expatriate would be taxed 
for 10 years on any sale of U.S. corporate stock. However, 
after expatriation, the person would no longer be a U.S. person 
for purposes of section 367, and thus could transfer U.S. 
corporate stock to a foreign corporation controlled by the 
expatriate under section 351 without any section 367 effect. 
The foreign corporation could then sell the U.S. corporate 
stock within the 10-year period, but the gain would not be 
subject to U.S. tax.
    In addition, the IRS or Treasury might encounter 
difficulties enforcing a gain recognition agreement if a U.S. 
person who has entered into such an agreement to pay tax on a 
later disposition of an asset subject to the agreement and then 
expatriates. The GRA regulations contain provisions requiring 
security arrangements if a U.S. natural person who has entered 
an agreement dies (or if a U.S. entity goes out of existence) 
but these provisions do not apply if a U.S. natural person 
expatriates.\48\
    \48\ See, e.g., Temp. Reg. section 1.367(a)-3T(g)(9) and (10), 
Notice 87-85, 1987-2 C.B. 395.
---------------------------------------------------------------------------
    Even if an individual is subject to the alternative taxing 
method of section 877 (because the person expatriated with a 
principal purpose of avoiding U.S. tax), section 877 does not 
impose a tax on foreign source income. Thus, such an individual 
could expatriate and subsequently transfer appreciated property 
to a foreign corporation or other entity beyond the U.S. taxing 
jurisdiction, without any U.S. tax being imposed on the 
appreciation under section 877.
    Similar issues exist under section 1491 of the Code. 
Section 1491 imposes a 35-percent tax on otherwise untaxed 
appreciation when appreciated property is transferred by a U.S. 
citizen or resident, or by a domestic corporation, partnership, 
estate or trust, to certain foreign entities in a transaction 
not covered by section 367. In some cases, taxpayers may elect 
to enter into a gain recognition agreement (rather than pay 
immediate tax) pursuant to section 1492.\49\ As in the case of 
section 367, an individual who has expatriated is no longer a 
U.S. citizen and may also no longer be a U.S. resident, thus a 
transfer by such a person would be unaffected by section 1491.
    \49\ See, e.g., PLR 9103033.
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 3. Requirements for United States citizenship, immigration, and visas

            United States citizenship
    An individual may acquire U.S. citizenship in one of three 
ways: (1) being born within the geographical boundaries of the 
United States; (2) being born outside the United States to at 
least one U.S. citizen parent (as long as that parent had 
previously been resident in the United States for a requisite 
period of time); or (3) through the naturalization process. All 
U.S. citizens are required to pay U.S. income taxes on their 
worldwide income. The State Department estimates that there are 
approximately 3 million U.S. citizens living abroad, although 
thousands of these individuals may not even know that they are 
U.S. citizens.
    A U.S. Citizen may voluntarily give up his or her U.S. 
citizenship at any time by performing one of the following acts 
(``expatriating acts'') with the intention of relinquishing 
U.S. nationality: (1) becoming naturalized in another country; 
(2) formally declaring allegiance to another country; (3) 
serving in a foreign army; (4) serving in certain types of 
foreign government employment; (5) making a formal renunciation 
of nationality before a U.S. diplomatic or consular officer in 
a foreign country; (6) making a formal renunciation of 
nationality in the United States during a time of war; or (7) 
committing an act of treason.\50\ An individual who wishes 
formally to renounce citizenship (item (5), above) must execute 
an Oath of Renunciation before a consular officer, and the 
individual's loss of citizenship is effective on the date the 
oath is executed. In all other cases, the loss of citizenship 
is effective on the date that the expatriating act is 
committed, even though the loss may not be documented until a 
later date. The State Department generally documents loss in 
such cases when the individual acknowledges to a consular 
officer that the act was taken with the requisite intent. In 
all cases, the consular officer abroad submits a certificate of 
loss of nationality (``CLN'') to the State Department in 
Washington, D.C. for approval.\51\ Upon approval, a copy of the 
CLN is issued to the affected individual. However, the date 
upon which the CLN is approved is not the effective date for 
loss of citizenship.
    \50\ 8 U.S.C. section 1481.
    \51\ 8 U.S.C. section 1501.
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    Before a CLN is issued, the State Department reviews the 
individual's files to confirm that: (1) the individual was a 
U.S. citizen; (2) an expatriating act was committed; (3) the 
act was undertaken voluntarily; and (4) the individual had the 
intent of relinquishing citizenship when the expatriating act 
was committed. If the expatriating act involved an action of a 
foreign government (for example, if the individual was 
naturalized in a foreign country or joined a foreign army), the 
State Department will not issue a CLN until it has obtained an 
official statement from the foreign government confirming the 
expatriating act. If a CLN is not issued because the State 
Department does not believe that an expatriating act has 
occurred (for example, if the requisite intent appears to be 
lacking), the issue is likely to be resolved through 
litigation. Whenever the loss of U.S. nationality is put in 
issue, the burden of proof is on the person or party claiming 
that a loss of citizenship has occurred to establish, by a 
preponderance of the evidence, that the loss occurred.\52\ 
Similarly, if a CLN has been issued, but the State Department 
later discovers that such issuance was improper (for example, 
because fraudulent documentation was submitted, or the 
requisite intent appears to be lacking), the State Department 
could initiate proceedings to revoke the CLN. If the recipient 
is unable to establish beyond a preponderance of the evidence 
that citizenship was lost on the date claimed, the CLN would be 
revoked. To the extent that the IRS believes a CLN was 
improperly issued, the IRS could present such evidence to the 
State Department and request that revocation proceedings be 
commenced. If it is determined that the individual has indeed 
committed an expatriating act, the date for loss of citizenship 
will be the date of the expatriating act.
    \52\ 8 U.S.C. sec. 1481(b).
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    A child under the age of 18 cannot lose U.S. citizenship by 
naturalizing in a foreign state or by taking an oath of 
allegiance to a foreign state. A child under 18 can, however, 
lose U.S. citizenship by serving in a foreign military or by 
formally renouncing citizenship, but such individuals my regain 
their citizenship by asserting a claim of citizenship before 
reaching the age of eighteen years and six months.
    A naturalized U.S. citizen can have his or her citizenship 
involuntarily revoked if a U.S. court determines that the 
certificate of naturalization was illegally procured, or was 
procured by concealment of a material fact or by willful 
misrepresentation (for example, if the individual concealed the 
fact that he served as a concentration camp guard during World 
Ware II).\53\ In such cases, the individual's certificate of 
naturalization is cancelled, effective as of the original date 
of the certificate; in other words, it is as if the individual 
were never a U.S. citizen at all.
    \53\ See Section 340(a) of the Immigration and Nationality Act, 8 
U.S.C. section 1451(a). See also, U.S. v. Demjanjuk, 680 F.2d 32, cert. 
denied, 459 U.S. 1036 (1982).
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            United States immigration and visas
    In general, a non-U.S. citizen who enters the United States 
is required to obtain a visa.\54\ An immigrant visa (also known 
as a ``green card'') is issued to an individual who intends to 
relocate to the United States permanently. Various types of 
nonimmigrant visas are issued to individuals who come to the 
United States on a temporary basis and intend to return home 
after a certain period of time. The type of nonimmigrant visa 
issued to such individuals is dependent upon the purpose of the 
visit and its duration. An individual holding a nonimmigrant 
visa is prohibited from engaging in activities that are 
inconsistent with the purpose of the visa (for example, an 
individual holding a tourist visa is not permitted to obtain 
employment in the United States).
    \54\ Under the Visa Waiver Pilot Program, nationals of most 
European countries are not required to obtain a visa to enter the 
United States if they are coming as tourists and staying a maximum of 
90 days. Also, citizen of Canada, Mexico, and certain islands in close 
proximity to the United States do not need visas to enter the United 
States, although other types of travel documents may be required.
---------------------------------------------------------------------------
    Foreign business people and investors often obtain ``E'' 
visas to come into the United States. Generally an ``E'' visa 
is initially granted for a one-year period, but it can be 
routinely extended for additional two-year periods. There is no 
overall limit on the amount of time an individual may retain an 
``E'' visa. There are two types of ``E'' visas: an ``E-1'' 
visa, for ``treaty traders'' and an ``E-2'' visa, for ``treaty 
investors.''
            Relinquishment of green cards
    There are several ways in which a green card can be 
relinquished. First, an individual who wishes to terminate his 
or her permanent residency may simply mails his or her green 
card back to the INS. Second, an individual may be 
involuntarily deported from the United States (through a 
judicial or administrative proceeding), and the green card must 
be relinquished at that time. Third, a green card holder who 
leaves the United States and attempts to re-enter more than a 
year later may have his or her green card taken away by the INS 
border examiner, although the individual may appeal to an 
immigration judge to have the green card reinstated. A green-
card holder may permanently leave the United States without 
relinquishing his or her green card, although such individuals 
would continue to be taxed as U.S. residents.\55\
    \55\ Section 7701(b)(6)(B) provides that an individual who has 
obtained the status of residing permanently in the United States as an 
immigrant (i.e., an individual who has obtained a green card) will 
continue to be taxed as a lawful permanent resident of the United 
States until such status is revoked, or is administratively or 
judicially determined to have been abandoned.
---------------------------------------------------------------------------

Reasons for change

    The Committee has been informed that a small number of very 
wealthy individuals each year relinquish their U.S. citizenship 
for the purpose of avoiding U.S. income, estate, and gift tax. 
By so doing, such individuals may reduce their annual U.S. 
income tax liability and their eventual U.S. estate tax 
liability.
    The Committee recognizes that citizens of the United States 
clearly have a basic right under both U.S. and international 
law not only to leave the United States to live elsewhere, but 
also to relinquish their U.S. citizenship. The Committee does 
not believe that the Internal Revenue Code should be used to 
stop U.S. citizens or residents from expatriating; however, the 
Committee also does not believe that the Code should provide a 
tax incentive for expatriating.
    The Committee is concerned that present law, which bases 
the application of the alternative method of taxation under 
sections 877, 2107 and 2501(a)(3) (``expatriation tax 
provisions'') to former citizens on proof of a tax-avoidance 
purpose, may be difficult to administer. Thus, the bill 
generally subjects certain former citizens to the expatriation 
tax provisions without inquiry as to their motive for losing 
their U.S. citizenship, but allows certain individuals to 
request a ruling from the Secretary of Treasury as to whether 
the loss of citizenship had a principal purpose of tax 
avoidance. The Committee believes that long-term permanent 
residents of the United States (i.e., green-card holders) 
should similarly be taxed under the expatriation tax provisions 
for 10 years after their U.S. residency is terminated.
    The Committee is aware that taxpayers may circumvent 
present-laws section 877 by converting U.S. source income to 
foreign source income. To eliminate taxpayers' ability to 
escape U.S. tax by such conversions, the bill substantially 
expands the scope of section 877 to apply to foreign property 
acquired in nonrecognition transactions. In addition, for 
purposes of determining the tax liability under section 877, 
the 10-year period is suspended with respect to any property 
during the period in which the individual's risk of loss with 
respect to such property is substantially diminished.
    The Committee further believes that it is appropriate to 
tax amounts earned by formed U.S. citizens and residents 
through certain controlled foreign corporations where the 
taxation of such amounts have been deferred during the period 
of U.S. citizenship or residency. Therefore, income or gains 
derived from stock in a foreign corporation that is more than 
50-percent owned by a former citizen or resident is taxable 
under the bill to the extent of the earnings and profits 
attributable to such stock if the income or gains are realized 
within the 10-year period after the relinquishment of U.S. 
citizenship or termination of U.S. residency. This rule applies 
to earnings and profits attributable to such stock but only to 
the extent earned during the pre-expatiation period.
    The Committee understands that amounts taxed under the 
expatriation tax provisions could be subject to double taxation 
(e.g., taxed by both the United States and the country of 
residence of the expatriate). Therefore, the bill provides 
relief from double taxation in circumstances where another 
country also taxes the same items that is subject to tax under 
the expatriation tax provisions.
    The Committee is also aware that certain existing U.S. 
Income tax treaties may not permit the Untied States to assert 
its taxing jurisdiction on former citizens or long-term 
residents who are residents of such countries. the Committee 
believes that the modified expatriation tax provisions are 
generally consistent with the underlying principles of income 
tax treaties to the extent the bill provides a foreign tax 
credit for items that are taxed by another country, thus ceding 
primary taxing jurisdiction to the foreign country. To the 
extent that the modified expatriation provisions do conflict 
with the provisions of tax treaties, the Committees expects 
that the Treasury Department will renegotiate those treaties to 
eliminate any such conflicts. In the interim, the new 
provisions take precedence over the treaties for a period of 10 
years.
    In order to enhance compliance with the expatriation tax 
provisions, and to assist the IRS in identifying former U.S. 
citizens and residents who are subject to the expatriation tax 
provisions, the bill imposes an information reporting 
obligation on former citizens and long-term residents at the 
time of expatriation and requires the State Department and 
other governmental entities to share certain information with 
the IRS with respect to such individuals.

Explanation of provision

            Overview
    The bill expands and substantially strengthens in several 
ways the present-law provisions that subject U.S. citizens who 
lose their citizenship for tax avoidance purposes to special 
tax rules for 10 years after such loss of citizenship (secs. 
877, 2107, and 2501(a)(3)). First, the bill extends the 
expatriation tax provisions to apply not only to U.S. citizens 
who lose their citizenship but also to certain long-term 
residents of the United States whose U.S. residency is 
terminated. Second, the bill subjects certain individuals to 
the expatriation tax provisions without inquiry as to their 
motive for losing their U.S. citizenship or residency, but 
allows certain categories of citizens to show an absence of 
tax-avoidance motives if they request a ruling from the 
Secretary of the Treasury as to whether the loss of citizenship 
had a principal purpose of tax avoidance. Third, the bill 
expands the categories of income and gains that are treated as 
U.S. source (and therefore subject to U.S. income tax under 
section 877) if earned by an individual who is subject to the 
expatriation tax provisions and includes provisions designed to 
eliminate the ability to engage in certain transactions that 
under current law partially or completely circumvent the 10-
year reach of section 877. Further, the bill provides relief 
from double taxation in circumstances where another country 
imposes tax on items that would be subject to U.S. tax under 
the expatriation tax provisions.
    The bill also contains provisions to enhance compliance 
with the expatriation tax provisions. The bill imposes 
information reporting obligations on U.S. citizens who lose 
their citizenship and long-term residents whose U.S. residency 
is terminated at the time of expatriation. In addition, the 
bill directs the Treasury Department to undertake a study 
regarding compliance by individuals living abroad with their 
U.S. tax reporting obligations and to make recommendations with 
respect to improving such compliance.
            Individuals covered
    The present-law expatriation tax provisions apply only to 
certain U.S. citizens who lose their citizenship. The bill 
extends these expatriation tax provisions to apply also to 
long-term residents of the United States whose U.S. residency 
is terminated. For this purpose, a long-term resident is any 
individual who was a lawful permanent resident of the United 
States for at least 8 out of the 15 taxable years ending with 
the year in which such termination occurs. In applying this 8-
year test, an individual is not considered to be a lawful 
permanent resident for any year in which the individual is 
taxed as a resident of another country under a treaty tie-
breaker rule. An individual's U.S. residency is considered to 
be terminated when either the individual ceases to be a lawful 
permanent resident pursuant to section 7701(b)(6) (i.e., the 
individual loses his or her green-card status) or the 
individual is treated as a resident of another country under a 
tie-breaker provision of a tax treaty (and the individual does 
not elect to waive the benefits of such treaty). Furthermore, a 
long-term resident may elect to use the fair market value basis 
of property on the date the individual became a U.S. resident 
(rather than the property's historical basis) to determine the 
amount of gain subject to the expatriation tax provision if the 
asset is sold within the 10-year period.
    Under the present law, the expatriation tax provisions are 
applicable to a U.S. citizen who loses his or her citizenship 
unless such loss did not have as a principal purpose the 
avoidance of taxes. Under the bill, U.S. citizens who lose 
their citizenship and long-term residents whose U.S. residency 
is terminated are generally treated as having lost such 
citizenship or terminated such residency with a principal 
purpose of the avoidance of taxes if either: (1) the 
individual's average annual U.S. Federal income tax liability 
for the 5 taxable years ending before the date of such loss or 
termination is greater than $100,000 (the ``tax liability 
test''), or (2) the individual's net worth as of the date of 
such loss of termination is $500,000 or more (the ``net worth 
test''). The dollar amount thresholds contained in the tax 
liability test and the net worth test are indexed for inflation 
in the case of a loss of citizenship or termination of 
residency occurring in any calendar year of 1996. An individual 
who falls below the thresholds specified in both the tax 
liability test and the net worth test is subject to the 
expatriation tax provisions unless the individual's loss of 
citizenship or termination of residency did not have as a 
principal purpose the avoidance of tax (as under present law in 
the case of U.S. citizens).
    A U.S. citizen, who loses his or her citizenship and who 
satisfies either the tax liability test or the net worth test, 
is not subject to the expatriation tax provisions if such 
individual can demonstrate that he or she did not have a 
principal purpose of tax avoidance and the individual is within 
one of the following categories: (1) the individual was born 
with dual citizenship and retains only the non-U.S. 
citizenship; (2) the individual becomes a citizen of the 
country in which the individual, the individual's spouse, or 
one of the individual's parents, was born; (3) the individual 
was present in the United States for no more than 30 days 
during any year in the 10-year period immediately preceding the 
date of his or her loss of citizenship; (4) the individual 
relinquishes his of her citizenship before reaching age 18-\1/
2\; or (5) any other category of individuals prescribed by 
Treasury regulations. In all of these situations, the 
individual would have been subject to tax on his or her 
worldwide income (as are all U.S. citizens) until the time of 
expatriation. In order to qualify for one of these exceptions, 
the former U.S. citizen must, within one year from the date of 
loss of citizenship, submit a ruling request for a 
determination by the Secretary of the Treasury as to whether 
such loss had as one of its principal purposes the avoidance of 
taxes. A former U.S. citizen who submits such a ruling request 
is entitled to challenge an adverse determination by the 
Secretary of the Treasury. However, a former U.S. citizen who 
fails to submit a timely ruling request is not eligible for 
these exceptions. It is expected that in making a determination 
as to the presence of a principal purpose of tax avoidance, the 
Secretary of the Treasury will take into account factors such 
as the substantiality of the former citizen's ties to the 
United States (including ownership of U.S. assets) prior to 
expatriation, the retention of U.S. citizenship by the former 
citizen's spouse, and the extent to which the former citizen 
resides in a country that imposes little or no tax.
    The foregoing exception are not available to long-term 
residents whose U.S. residency is terminated. However, the bill 
authorizes the Secretary of the Treasury to prescribe 
regulations to exempt certain categories of long-term residents 
from the bill's provisions.
            Items subject to section 877
    Under section 877, an individual covered by the 
expatriation tax is subject to tax on U.S. source income and 
gains for a 10-year period after expatriation at the graduated 
rates applicable to U.S. citizens.\56\ The tax under section 
877 applies to U.S. source income and gains of the individual 
for the 10-year period, without regard to whether the property 
giving rise to such income or gains was acquired before or 
after the date the individual became subject to the 
expatriation tax provisions. For example, a U.S. citizen who 
inherits an appreciated asset immediately before losing 
citizenship and disposes of the asset immediately after such 
loss would not recognize any taxable gain on such disposition 
(because of the date of death fair market value basis accorded 
to inherited assets), but the individual would continue to be 
subject to tax under section 877 on the income or gain derived 
from any U.S. property acquired with the proceeds from such 
disposition.
    \56\ Under present law, all nonresident aliens (including 
expatriates) are subject to U.S. income tax at graduated rates on 
certain types of income. Such income includes income effectively 
connected with a U.S. trade or business and gains from the disposition 
of interests in U.S. real property. For example, compensation 
(including deferred compensation) paid with respect to services 
performed in the United States is subject to such tax. Thus, under 
current law, a U.S. citizen who earns a stock option while employed in 
the United States and delays the exercise of such option until after 
such individual loses his or her citizenship is subject to U.S. tax on 
the compensation income recognized upon exercise of the stock option 
(even if the stock received upon the exercise is stock in a foreign 
corporation).
---------------------------------------------------------------------------
    In addition, section 877 currently recharacterizes as U.S. 
source income certain gains of individuals who are subject to 
the expatriation tax provisions, thereby subjecting such 
individuals to U.S. income tax on such gains. Under this rule, 
gain on the sale or exchange of stock of a U.S. corporation or 
debt of a U.S. person is treated as U.S. source income. In this 
regard, under current law, the substitution of a foreign 
obligor for a U.S. obligor is generally treated as a taxable 
exchange of the debt instrument, and therefore any gain on such 
exchange is subject to tax under section 877. The bill extends 
this recharacterization to income and gains derived from 
property obtained in certain transactions on which gain or loss 
is not recognized under present law. An individual covered by 
section 877 who exchanges property that would produce U.S. 
source income for property that would produce foreign source 
income is required to recognize immediately as U.S. source 
income any gain on such exchange (determined as if the property 
had been sold for its fair market value on such date). To the 
extent gain is recognized under this provision, the property 
would be accorded the step-up in basis provided under current 
law. This rule requiring immediate gain recognition does not 
apply if the individual enters into an agreement with the 
Secretary of the Treasury specifying that any income or gains 
derived from the property received in the exchange during the 
10-year period after the loss of citizenship (or termination of 
U.S. residency, as applicable) would be treated as U.S. source 
income. Such a gain recognition agreement terminates if the 
property transferred in the exchange is disposed of by the 
acquiror, and any gain that had not been recognized by reason 
of such agreement is recognized as U.S. source as of such date. 
It is expected that a gain recognition agreement would be 
entered into not later than the due date for the tax return for 
the year of the exchange. In this regard, the Secretary of the 
Treasury is authorized to issue regulations providing similar 
treatment for nonrecognition transactions that occur within 5 
years immediately prior to the date of loss of citizenship (or 
termination of U.S. residency, as applicable).
    The Secretary of Treasury is authorized to issue 
regulations to treat removal of tangible personal property from 
the United States, and other circumstances that result in a 
conversion of U.S. source income to foreign source income 
without recognition of any unrealized gain, as exchanges for 
purposes of computing gain subject to section 877. The taxpayer 
may defer the recognition of the gain if he or she enters into 
a gain recognition agreement as described above. For example, a 
former citizen who removes appreciated artwork that he or she 
owns from the United States could be subject to immediate tax 
on the appreciation under this provision unless the individual 
enters into a gain recognition agreement.
    The foregoing rules regarding the treatment under section 
877 of nonrecognition transactions are illustrated by the 
following examples: Ms. A loses her U.S. citizenship on January 
1, 1996, and is subject to section 877. On June 30, 1997, Ms. A 
transfers the stock she owns in a U.S. corporation, USCo, to a 
wholly-owned foreign corporation, FCo, in a transaction that 
qualifies for tax-free treatment under section 351. At the time 
of such transfer, A's basis in the stock of USCo is $100,000 
and the fair market value of the stock is $150,000. Under 
present law, Ms. A would not be subject to U.S. tax on the 
$50,000 of gain realized on the exchange. Moreover, Ms. A would 
not be subject to U.S. tax on any distribution of the proceeds 
from a subsequent disposition of the USCo stock by FCo. Under 
the bill, if Ms. A does not enter into a gain recognition 
agreement with the Secretary of the Treasury, Ms. A would be 
deemed to have sold the USCo stock for $150,000 on the date of 
the transfer, and would be subject to U.S. tax in 1997 on the 
$50,000 of gain realized. Alternatively, if Ms. A enters into a 
gain recognition agreement, she would not be required to 
recognize for U.S. tax purposes in 1997 the $50,000 of gain 
realized upon the transfer of the USCo stock to FCo. However, 
under the gain recognition agreement, for the 10-year period 
ending on December 31, 2005, any income (e.g., dividends) or 
gain with respect to the FCo stock would be treated as U.S. 
source, and therefore Ms. A would be subject to tax on such 
income or gain under section 877. If FCo disposes of the USCo 
stock on January 1, 2002, Ms. A's gain recognition agreement 
would terminate on such date, and Ms. A would be required to 
recognize as U.S. source income at that time the $50,000 of 
gain that she previously deferred under the gain recognition 
agreement. (The amount of gain required to be recognized by Ms. 
A in this situation would not be affected by any changes in the 
value of the USCo stock since her June 30, 1997 transfer of 
such stock to FCo.)
    The bill also extends the recharacterization rules of 
section 877 to treat as U.S. source any income and gains 
derived from stock in a foreign corporation if the individual 
losing citizenship or terminating residency owns, directly or 
indirectly, more than 50 percent of the vote or value of the 
stock of the corporation on the date of such loss or 
termination or at any time during the 2 years preceding such 
date. Such income and gains are recharacterized as U.S. source 
only to the extent of the amount of earnings and profits 
attributable to such stock earned or accumulated prior to the 
date of loss of citizenship (or termination of residency, as 
applicable) and while such ownership requirement is satisfied.
    The following example illustrates this rule: Mr. B loses 
his U.S. citizenship on July 1, 1996 and is subject to section 
877. Mr. B has owned all of the stock of a foreign corporation, 
FCo, since its incorporation in 1991. As of FCo's December 31, 
1995 year-end, FCo has accumulated earnings and profits of 
$500,000. FCo has earnings and profits of $100,000 for 1996 and 
does not have any subpart F income (as defined in sec. 952). 
FCo makes a $100,000 distribution to Mr. B in each of 1997 and 
1998. On January 1, 1999, Mr. B disposes of all his stock of 
FCo and realizes $400,000 of gain. Under present law, neither 
the distributions from FCo nor the gain on the disposition of 
the FCo stock would be subject to U.S. tax. Under the bill, the 
distributions from FCo and the gain on the sale of the stock of 
FCo would be treated as U.S. source income and would be taxed 
to Mr. B under section 877, subject to the earnings and profits 
limitation. For this purpose, the amount of FCo's earnings and 
profits for 1996 is prorated based on the number of days during 
1996 that Mr. B is a U.S. citizen. Thus, the amount of FCo's 
earnings and profits earned or accumulated before Mr. B's loss 
of citizenship is $550,000. Accordingly, the $100,000 
distributions from FCo in 1997 and 1998 would be treated as 
U.S. source income taxable to Mr. B under section 877 in such 
years. In addition, $350,000 of the gain realized from the sale 
of the stock of FCo in 1999 would be treated as U.S. source 
income taxable to Mr. B under section 877 in that year.
            Special rule for shift in risks of ownership
    Section 877 applies to income and gains for the 10-year 
period following the loss of citizenship (or termination of 
residency, as applicable). For purposes of applying section 
877, the bill suspends this 10-year period for gains derived 
from a particular property during any period in which the 
individual's risk of loss with respect to such property is 
substantially diminished. For example, Ms. C loses her 
citizenship on January 1, 1996 and is subject to section 877. 
On that date Ms. C owns 10,000 shares of stock of a U.S. 
corporation, USCo, with a value of $1 million. On the same date 
Ms. C enters into an equity swap with respect to such USCo 
stock with a 5-year term. Under the transaction, Ms. C will 
transfer to the counter-party an amount equal to the dividends 
on the USCo stock and any increase in the value of the USCo 
stock for the 5-year period. The counter-party will transfer to 
Ms. C an amount equal to a market rate of interest on $1 
million and any decrease in the value of the USCo stock for the 
same period. Ms. C's risk of loss with respect to the USCo 
stock is substantially diminished during the 5-year period in 
which the equity swap is in effect, and therefore, under the 
bill, the 10-year period under section 877 is suspended during 
such period. Accordingly, under the bill, if Ms. C sells her 
USCo stock for a gain on January 1, 2010, such gain would be 
treated as U.S. source income taxable to Ms. C under section 
877. Such gain would not be subject to U.S. tax under present 
law.
            Double tax relief
    In order to avoid the double taxation of individuals 
subject to the expatriation tax provisions, the bill provides a 
credit against the U.S. tax imposed under such provisions for 
any foreign income, gift, estate or similar taxes paid with 
respect to the items subject to such taxation. This credit is 
available only against the tax imposed solely as a result of 
the expatriation tax provisions, and is not available to be 
used to offset any other U.S. tax liability. For example, Mr. D 
loses his citizenship on January 1, 1996 and is subject to 
section 877. Mr. D becomes a resident of Country X. During 
1996, Mr. D recognizes a $100,000 gain upon the sale of stock a 
U.S. corporation, USCo. Country X imposes $20,000 tax on this 
capital gain. But for the double tax relief provision, Mr. D 
would be subject to tax of $28,000 on this gain under section 
877. However, Mr. D's U.S. tax under section 877 would be 
reduced by the $20,000 of foreign tax paid, and Mr. D's 
resulting U.S. tax on this gain would be $8,000.
            Effect on tax treaties
    While it is believed that the expatriation tax provisions, 
as amended by the bill, are generally consistent with the 
underlying principles of income tax treaties to the extent the 
bill provides a foreign tax credit for items taxed by another 
country, it is intended that the purpose of the expatriation 
tax provisions, as amended, not be defeated by any treaty 
provision. The Treasury Department is expected to review all 
outstanding treaties to determine whether the expatriation tax 
provisions, as revised, potentially conflict with treaty 
provisions and to eliminate any such potential conflicts 
through renegotiation of the affected treaties as necessary. 
Beginning on the tenth anniversary of the enactment of the 
bill, any conflicting treaty provisions that remain in force 
would take precedence over the expatriation tax provisions as 
revised.
            Required information reporting and sharing
    Under the bill, a U.S. citizen who loses his or her 
citizenship is required to provide a statement to the State 
Department (or other designated government entity) which 
includes the individual's social security number, forwarding 
foreign address, new country of residence and citizenship and, 
in the case of individuals with a net worth of at least 
$500,000, a balance sheet. The entity to which such statement 
is to be provided is required to provide to the Secretary of 
the Treasury copies of all statements received and the names of 
individuals who refuse to provide such statements. A long-term 
resident whose U.S. residency is terminated is required to 
attach a similar statement to his or her U.S. income tax return 
for the year of such termination. An individual's failure to 
provide the required statement results in the imposition of a 
penalty for each year the failure continues equal to the 
greater of (1) 5 percent of the individual's expatriation tax 
liability for such year, or (2) $1,000.
    The bill requires the State Department to provide the 
Secretary of the Treasury with a copy of each certificate of 
loss of nationality (CLN) approved by the State Department. 
Similarly, the bill requires the agency administering the 
immigration laws to provide the Secretary of the Treasury with 
the name of each individual whose status as a lawful permanent 
resident has been revoked or has been determined to have been 
abandoned.
    Further, the bill requires the Secretary of the Treasury to 
publish in the Federal Register the names of all former U.S. 
citizens from whom it receives the required statements or whose 
names it receives under the foregoing information-sharing 
provisions.
            Treasury report on tax compliance by U.S. citizens and 
                    residents living abroad
    The Treasury Department is directed to undertake a study on 
the tax compliance of U.S. citizens and green-card holders 
residing outside the United States and to make recommendations 
regarding the improvement of such compliance. The findings of 
such study and such recommendations are required to be reported 
to the house Committee on Ways and Means and the Senate 
Committee on Finance within 90 days of the date of enactment.
    During the course of the 1995 Joint Committee on Taxation 
staff study on expatriation (see Joint Committee on Taxation, 
Issues Presented by proposals to Modify the Tax Treatment of 
Expatriation (JCS-17-95), June 1, 1995), a specific issue was 
identified regarding the difficulty in determining when a U.S. 
citizen has committed an expatriating act with the requisite 
intent, and thus no longer has the obligation to continue to 
pay U.S. taxes on his or her worldwide income due to the fact 
that the individual is no longer a U.S. citizen. Neither the 
Immigration and Nationality Act nor any other Federal law 
requires an individual to request a CLN within a specified 
amount of time after an expatriating act has been committed, 
even though the expatriating act terminates the status of the 
individual as a U.S. citizen for all purposes, including the 
status of being subject to U.S. tax on worldwide income. 
Accordingly, it is anticipated that the Treasury report, in 
evaluating whether improved coordination between executive 
branch agencies could improve compliance with the requirements 
of the Internal Revenue Code, will review the process through 
which the State Department determines when citizenship has been 
lost, and make recommendations regarding changes to such 
process to recognize the importance of such date for tax 
purposes. In particular, it is anticipated that the Treasury 
Department will explore ways of working with the State 
Department to insure that the State Department will not issue a 
CLN confirming the commission of an expatriating act with the 
requisite intent necessary to terminate citizenship in the 
absence of adequate evidence of both the occurrence of the 
expatriating act (e.g., the joining of a foreign army) and the 
existence of the requisite intent.

Effective date

    The expatriation tax provisions as modified by the bill 
generally apply to any individual who loses U.S. citizenship, 
and any long-term resident whose U.S. residency is terminated, 
on or after February 6, 1995. For citizens, the determination 
of the date of loss of citizenship remains the same as under 
present law (i.e., the date of loss of citizenship is the date 
of the expatriating act). However, a special transition rule 
applies to individuals who committed an expatriating act within 
one year prior to February 6, 1995, but had not applied for a 
CLN as of such date. Such an individual is subject to the 
expatriation tax provisions as amended by the bill as of the 
date of application for the CLN, but is not retroactively 
liable for U.S. income taxes on his or her worldwide income. In 
order to qualify for the exceptions provided for individuals 
who fall within one of the specified categories, such 
individual is required to submit a ruling request within 1 year 
after the date of enactment of the bill.
    The special transition rule is illustrated by the following 
example. Mr. E joined a foreign army on October 1, 1994 with 
the intent to relinquish his U.S. citizenship, but Mr. E does 
not apply for a CLN until October 1, 1995. Mr. E would be 
subject to the expatriation tax provisions (as amended) for the 
10-year period beginning on October 1, 1995. Moreover, if Mr. E 
falls within one of the specified categories (i.e., Mr. E is 
age 18 when he joins the foreign army), in order to qualify for 
the exception provided for such individuals, Mr. E would be 
required to submit his ruling request within 1 year after the 
date of enactment of the bill. Mr. E would not, however, be 
liable for U.S. income taxes on his worldwide income for any 
period after October 1, 1994.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 2(l)(2)(B) of Rule XI of the 
Rules of the House of Representatives, the following statement 
is made concerning the roll call votes of the Committee in its 
consideration of the bill, H.R. 3103.
            Motion to Report the Bill
    The bill, as amended, was ordered favorably reported on 
March 19, 1996, by a roll call vote of 25 yeas and 11 nays, 
with a quorum present.
    The roll call vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................        X   ........  .........  Mr. Gibbons......  ........        X   .........
Mr. Crane......................        X   ........  .........  Mr. Rangel.......  ........  ........  .........
Mr. Thomas.....................        X   ........  .........  Mr. Stark........  ........        X   .........
Mr. Shaw.......................        X   ........  .........  Mr. Jacobs.......        X   ........  .........
Mrs. Johnson...................        X   ........  .........  Mr. Ford.........  ........        X   .........
Mr. Bunning....................        X   ........  .........  Mr. Matsui.......  ........        X   .........
Mr. Houghton...................        X   ........  .........  Mrs. Kennelly....  ........        X   .........
Mr. Herger.....................        X   ........  .........  Mr. Coyne........  ........        X   .........
Mr. McCrery....................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Hancock....................        X   ........  .........  Mr. Cardin.......        X   ........  .........
Mr.Camp........................        X   ........  .........  Mr. McDermott....  ........        X   .........
Mr. Ramstad....................        X   ........  .........  Mr. Kleczka......        X   ........  .........
Mr. Zimmer.....................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Nussle.....................        X   ........  .........  Mr. Payne........        X   ........  .........
Mr. Johnson....................        X   ........  .........  Mr. Neal.........  ........        X   .........
Ms. Dunn.......................        X   ........  .........  Mr. McNulty......  ........        X   .........
Mr. Collins....................        X   ........  .........                                                  
Mr. Portman....................        X   ........  .........                                                  
Mr. Hayes......................  ........  ........  .........                                                  
Mr. Laughlin...................  ........  ........  .........                                                  
Mr. English....................        X   ........  .........                                                  
Mr. Ensign.....................        X   ........  .........                                                  
Mr. Christensen................        X   ........  .........                                                  
----------------------------------------------------------------------------------------------------------------

            Votes on Amendments
    Roll call votes were conducted on the following amendments 
to the Chairman's substitute markup amendment.
    An amendment by Mr. Rangel to Title II on duplication and 
coordination of Medicare plans, which would modify the anti-
duplication provisions contained in the 1990 Medigap law, was 
defeated by a roll call vote of 18 yeas to 19 nays. The vote 
was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Gibbons......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mr. Jacobs.......        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Ford.........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Houghton...................        X   ........  .........  Mrs. Kennelly....        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Hancock....................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr.Camp........................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. Ramstad....................        X   ........  .........  Mr. Kleczka......        X   ........  .........
Mr. Zimmer.....................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. Payne........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Collins....................  ........        X   .........                                                  
Mr. Portman....................  ........        X   .........                                                  
Mr. Hayes......................  ........  ........  .........                                                  
Mr. Laughlin...................  ........  ........  .........                                                  
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Collins to Title II to add a new 
Subtitle G on duplication and coordination of Medicare-related 
plans was approved by a roll call vote of 28 yeas to 9 nays. 
The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................        X   ........  .........  Mr. Gibbons......  ........        X            
Mr. Crane......................        X   ........  .........  Mr. Rangel.......        X   ........  .........
Mr. Thomas.....................        X   ........  .........  Mr. Stark........  ........        X   .........
Mr. Shaw.......................        X   ........  .........  Mr. Jacobs.......        X   ........  .........
Mrs. Johnson...................        X   ........  .........  Mr. Ford.........  ........        X   .........
Mr. Bunning....................        X   ........  .........  Mr. Matsui.......  ........        X   .........
Mr. Houghton...................        X   ........  .........  Mrs. Kennelly....        X   ........  .........
Mr. Herger.....................        X   ........  .........  Mr. Coyne........  ........        X   .........
Mr. McCrery....................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Hancock....................        X   ........  .........  Mr Cardin........  ........        X   .........
Mr. Camp.......................        X   ........  .........  Mr. McDermott....  ........        X   .........
Mr. Ramstad....................        X   ........  .........  Mr. Kleczka......  ........        X   .........
Mr. Zimmer.....................        X   ........  .........  Mr. Lewis........        X   ........  .........
Mr. Nussle.....................        X   ........  .........  Mr. Payne........        X   ........  .........
Mr. Johnson....................        X   ........  .........  Mr. Neal.........        X   ........  .........
Ms. Dunn.......................        X   ........  .........  Mr. McNulty......        X   ........  .........
Mr. Collins....................        X   ........  .........  .................  ........  ........  .........
Mr. Portman....................        X   ........  .........  .................  ........  ........  .........
Mr. Hayes......................  ........  ........  .........  .................  ........  ........  .........
Mr. Laughlin...................  ........  ........  .........  .................  ........  ........  .........
Mr. English....................        X   ........  .........  .................  ........  ........  .........
Mr. Ensign.....................        X   ........  .........  .................  ........  ........  .........
Mr. Christensen................        X   ........  .........  .................  ........  ........  .........
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Cardin to Title II to strike Section 
205 on advisory opinions was defeated by a roll call vote of 16 
yeas to 21 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
       Representatives            Yea       Nay     Present    Representatives      Yea         Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer...................  ........        X   .........  Mr. Gibbons.....           X   ........  .........
Mr. Crane....................  ........        X   .........  Mr. Rangel......           X   ........  .........
Mr. Thomas...................  ........        X   .........  Mr. Stark.......           X   ........  .........
Mr. Shaw.....................  ........        X   .........  Mr. Jacobs......           X   ........  .........
Mrs. Johnson.................  ........        X   .........  Mr. Ford........           X   ........  .........
Mr. Bunning..................  ........        X   .........  Mr. Matsui......           X   ........  .........
Mr. Houghton.................  ........        X   .........  Mrs. Kennelly...           X   ........  .........
Mr. Herger...................  ........        X   .........  Mr. Coyne.......           X   ........  .........
Mr. McCrery..................  ........        X   .........  Mr. Levin.......           X   ........  .........
Mr. Hancock..................  ........        X   .........  Mr Cardin.......           X   ........  .........
Mr. Camp.....................  ........        X   .........  Mr. McDermott...           X   ........  .........
Mr. Ramstad..................  ........        X   .........  Mr. Kleczka.....           X   ........  .........
Mr. Zimmer...................  ........        X   .........  Mr. Lewis.......           X   ........  .........
Mr. Nussle...................  ........        X   .........  Mr. Payne.......           X   ........  .........
Mr. Johnson..................  ........        X   .........  Mr. Neal........           X   ........  .........
Ms. Dunn.....................  ........        X   .........  Mr. McNulty.....           X   ........  .........
Mr. Collins..................  ........        X   .........  ................  ...........  ........  .........
Mr. Portman..................  ........        X   .........  ................  ...........  ........  .........
Mr. Hayes....................  ........  ........  .........  ................  ...........  ........  .........
Mr. Laughlin.................  ........  ........  .........  ................  ...........  ........  .........
Mr. English..................  ........        X   .........  ................  ...........  ........  .........
Mr. Ensign...................  ........        X   .........  ................  ...........  ........  .........
Mr. Christensen..............  ........        X   .........  ................  ...........  ........  .........
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Levin to Title II to strike Section 232 
on the clarification of level of intent required for imposition 
of sanctions was defeated by a roll call vote of 15 yeas to 21 
nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Gibbons......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mr. Jacobs.......  ........  ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Ford.........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Hancock....................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Zimmer.....................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. Payne........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Collins....................  ........        X   .........                                                  
Mr. Portman....................  ........        X   .........                                                  
Mr. Hayes......................  ........  ........  .........                                                  
Mr. Laughlin...................  ........  ........  .........                                                  
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    A substitute amendment to the Chairman's amendment, in the 
nature of a substitute, by Mr. Gibbons was defeated by a roll 
call vote of 15 yeas to 21 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Gibbons......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Rangel.......  ........  ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mr. Jacobs.......        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Ford.........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Hancock....................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Zimmer.....................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. Payne........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Collins....................  ........        X   .........                                                  
Mr. Portman....................  ........        X   .........                                                  
Mr. Hayes......................  ........  ........  .........                                                  
Mr. Laughlin...................  ........  ........  .........                                                  
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL

               A. Committee Estimate of Budgetary Effects

    In compliance with clause 7(a) of Rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the bill, H.R. 3103, as 
reported.
    The bill, as amended, is estimated to have the following 
effects on the budget for fiscal years 1996-2002:

                      ESTIMATED REVENUE EFFECTS OF PROVISIONS CONTAINED IN H.R. 3103 AS APPROVED BY THE COMMITTEE ON WAYS AND MEANS                     
                                                                  [Millions of Dollars]                                                                 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                Fiscal years                                            
                                                  ------------------------------------------------------------------------------------------------------
           Provision                Effective                                                                                     1996 to      1996 to  
                                                      1996       1997       1998       1999       2000       2001       2002        2000         2002   
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. COBRA tax penalties........  1/1/98...........                                                                                                       
(8)Negligible Revenue Effect                                                                                                                            
2. Medical savings accounts:    tyba 12/31/96....  .........       -134       -246       -290       -340       -369       -399       -1,010       -1,778
 (a) maximum contribution                                                                                                                               
 limit ($2,000 single and                                                                                                                               
 $4,000 family); (b) tax-free                                                                                                                           
 build up of earnings; (c)                                                                                                                              
 definition of qualified                                                                                                                                
 medical expenses; (d) post-                                                                                                                            
 death distribution rules; and                                                                                                                          
 (e) clarification relating to                                                                                                                          
 capitalization of policy                                                                                                                               
 acquisition costs.                                                                                                                                     
3. Increase the self-employed   tyba 12/31/97....  .........  .........        -36       -153       -250       -272       -347         -439       -1,058
 health insurance deduction                                                                                                                             
 (35% in 1998; 40% in 1999                                                                                                                              
 through 2001; 45% in 2002;                                                                                                                             
 and 50% in 2003 and                                                                                                                                    
 thereafter.                                                                                                                                            
4. Long-term care provisions:   tyba 12/13/96....  .........        -35       -227       -266       -305       -341       -377         -833       -1,551
 (a) deduction for long-term                                                                                                                            
 care premiums; (b) exclude                                                                                                                             
 employer contributions for                                                                                                                             
 long-term care insurance from                                                                                                                          
 gross income; and (c) allow                                                                                                                            
 long-term care premiums to be                                                                                                                          
 deducted subject to the self-                                                                                                                          
 employed health care rules.                                                                                                                            
5. Deduction for long-term      tyba 12/31/97....  .........  .........        -78       -265       -291       -326       -363         -634       -1,323
 care expenses.                                                                                                                                         
6. Tax treatment of             tyba 12/31/96....  .........        -10       -107       -166       -214       -265       -316         -497       -1,077
 accelerated death benefits                                                                                                                             
 under life insurance                                                                                                                                   
 contracts.                                                                                                                                             
7. Exemption from income tax    tyba 12/31/96....  .........         -1         -1         -1         -2         -2         -2           -5           -8
 for State-sponsored                                                                                                                                    
 organizations providing                                                                                                                                
 health coverage for high-risk                                                                                                                          
 individuals.                                                                                                                                           
8. Health insurance             tyea 12/31/96....  .........         -1         -1         -1         -1         -1         -1           -4           -7
 organizations eligible for                                                                                                                             
 benefits of section 833.                                                                                                                               
9. Repeal bad debt reserve      tyba 12/31/95....         63         95        216        280        277        272        260          931        1,462
 deduction for thrift                                                                                                                                   
 institutions, with                                                                                                                                     
 residential loan test for                                                                                                                              
 1996 and 1997.                                                                                                                                         
10. Earned income credit                                                                                                                                
 (``EIC'') provisions:                                                                                                                                  
    a. Require Social Security                                                                                                                          
     numbers for primary and                                                                                                                            
     secondary taxpayers,                                                                                                                               
     treat omission of a                                                                                                                                
     correct Social Security                                                                                                                            
     number as a math error:.                                                                                                                           
        Revenue...............  tyba 12/31/95....          1         24         24         25         25         25         26           99          150
        Outlay reduction......  tyba 12/31/95....         10        195        203        205        210        212        217          823        1,251
    b. Treat omission of the                                                                                                                            
     proper self-employment                                                                                                                             
     tax by an EIC recipient                                                                                                                            
     with self-employment                                                                                                                               
     income as a math error:.                                                                                                                           
        Revenue...............  tyba 12/31/95....        \1\          4          4          5          5          5          5           18           28
        Outlay reduction......  tyba 12/31/95....          1         28         30         31         31         33         35          122          190
11. Expatriation tax            2/6/95...........         52         97        146        199        254        289        304          748        1,341
 provisions.                                                                                                                                            
                                                  ------------------------------------------------------------------------------------------------------
    TOTAL REVENUE EFFECT......  .................        127        262        -73       -397       -600       -740       -958         -681       -2,380
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Details may not add to totals due to rounding.                                                                                                    
Legend for ``Effective'' column: tyba=taxable years beginning after; tyea=taxable years ending after.                                                   
\1\ Gain of less than $500,000.                                                                                                                         

    B. Statement Regarding New Budget Authority and Tax Expenditures

    In compliance with subdivision (B) of clause 2(l)(3) of 
Rule XI of the Rules of the House of Representatives, the 
Committee makes the following statements concerning budget 
authority and tax expenditures.

Budget authority

    The Committee states that Titles I and II of the bill 
(relating to availability and portability of health insurance 
coverage, prevention of health care fraud and abuse, and 
administrative simplification) are estimated to reduce budget 
authority (outlays) by $2.2 billion over the fiscal year period 
1996-2002. (See Part IV.C., above). Also, the outlay reduction 
portions of the earned income credit changes in Title IV 
involve reduced budget authority (reduction in outlays).

Tax expenditures

    The Committee states that the revenue-reducing provisions 
of Title III involve increased tax expenditures. (For amounts 
for fiscal years 1996-2002, see table in Part IV.A., above.) 
The deduction for health insurance expenses of self-employed 
individuals involves an increase in an existing tax 
expenditure, while the other revenue-reducing provisions 
involve new tax expenditures (except for the COBRA tax penalty 
provision, which is not a tax expenditure provision).
    The revenue offset provisions (in Title IV) relating to bad 
debt deductions of thrift institutions and the earned income 
credit (revenue-increase portion) involve reductions in 
existing tax expenditures. The expatriation tax provisions (in 
Title IV) do not affect tax expenditures during the fiscal year 
1996-2002 period.

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with subdivision (C) of clause 2(l)(3) of 
Rule XI of the Rules of the House of Representatives, requiring 
a cost estimate prepared by the Congressional Budget Office 
(CBO), the following statement by CBO is provided.
                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, March 25, 1996.
Hon. Bill Archer,
Chairman, Committee on Ways and Means
Washington, D.C. 20515
    Dear Mr. Chairman: The Congressional Budget Office (CBO) 
has reviewed H.R. 3103, the Health Coverage Availability and 
Affordability Act of 1996, as ordered reported by the House 
Committee on Ways and Means on March 19, 1996. Enclosed are 
CBO's federal cost estimate and estimates of the costs of 
intergovernmental and private sector mandates.
    If you wish further details on these estimates, we will be 
pleased to provide them. The CBO staff contacts are identified 
in the separate estimates.
            Sincerely,
                                           June E. O'Neill,
                                                          Director.

           Congressional Budget Office Federal Cost Estimate

    1. Bill number: H.R. 3103.
    2. Bill title: Health Coverage Availability and 
Affordability Act of 1996.
    3. Bill status: As ordered reported by the House Committee 
Ways and Means on March 19, 1996.
    4. Bill purpose: Title I would make it easier for people 
who change jobs to maintain health insurance coverage by 
limiting exclusions for preexisting conditions and increasing 
portability of coverage.
    Title II would prevent health care fraud and abuse and 
would simplify the administration of health insurance.
    Titles III and IV would change the tax treatment of Medical 
Savings Accounts (MSAs), increase the deductibility of health 
insurance costs of self-employed individuals, and make other 
changes to the tax code.
    5. Estimated cost to the Federal Government: CBO and the 
Joint Committee on Taxation (JCT) estimate that H.R. 3103 would 
increase the federal deficit by about $300 million over seven 
years, with outlays falling by $2.2 billion and revenues 
falling by $2.5 billion over the period (see the attached 
table).
    CBO estimates that title I, concerning portability of group 
health coverage, would increase private group health premiums 
by a small amount, resulting in a slight increase in employer-
paid premiums. A portion of this increase would be passed on to 
employees as reduced wages and salaries. Federal income and 
payroll taxes, therefore, would be reduced slightly as well. 
CBO and JCT estimate that revenues would be reduced by $0.2 
billion over seven years as a result of this section.
    CBO estimates that title II, concerning the prevention of 
fraud and abuse and other matters, would reduce Federal outlays 
for Medicare by approximately $2.2 billion over seven years.
    JCT estimates that the tax changes in titles III and IV 
would reduce revenues by $2.4 billion over seven years. The 
provision to increase tax deductions for MSAs would reduce 
revenues by $1,778 million; the provision to increase the 
deduction for health costs of the self-employed would reduce 
revenues by $1,058 million; and other tax changes would 
increase revenues by $457 million over the period.
    6. Basis of the estimate:

                  title i, group insurance portability

    H.R. 3103 addresses health insurance purchased in large and 
small groups--usually by employers and employees. The bill does 
not regulate individually-purchased insurance or state and 
local government employers.
    The bill would create uniform national standards to govern 
the portability of private group health insurance policies. For 
example, these standards would allow workers with employment-
based policies to continue their coverage more easily when 
changing or leaving jobs. Because private insurance plans often 
require a waiting period before new employees become eligible 
for coverage, especially for those with preexisting medical 
conditions, workers with chronic conditions or other potential 
health risks may face gaps in their coverage when they change 
jobs. Alternatively, such workers may be hesitant to change 
jobs because they fear the temporary loss of coverage--a 
situation know as job-lock.
    H.R. 3103 would reduce the effective length of exclusions 
for preexisting conditions by crediting enrollees for 
continuous coverage by a previous insurer. Plans would be 
prohibited from denying coverage based on an employee's health 
status. The bill would allow workers to change their enrollment 
status under certain conditions without being subject to 
penalties for late enrollment. To the extent that states have 
not already implemented similar rules, these changes would 
clarify the insurance situation for many people.
    Because the bill would not regulate the premiums that plans 
could charge, the number of people covered by health insurance 
and the premiums that they pay would continue to be influenced 
primarily by market forces. Although this provision would make 
insurance more portable for some people, it would not 
dramatically increase the availability of insurance in general.

Budgetary impact

    Title I could affect the federal budget in two ways. First, 
if the bill changed the amount of employer-paid health 
premiums, total federal tax revenues could change. For example, 
if the total amount employers paid for premiums fell, cash 
wages would rise, thereby increasing income and payroll tax 
revenues. Second, if the bill caused people insured by 
government health programs to obtain private coverage, then 
federal outlays for those programs could change.
            Impact on federal revenues
    According to the General Accounting Office (GAO), 38 states 
have enacted legislation to improve the portability and 
renewability of health plans among small employers. State laws 
do not apply to employees of firms with self-funded insurance 
plans, although large employer plans--those most likely to 
self-insure--generally have fewer long exclusions for 
preexisting conditions than smaller firms. Health maintenance 
organizations and other health plans that use organized 
networks of health providers use few exclusions for preexisting 
conditions within their networks. Most group insurance is now 
provided through these managed care networks. The new standards 
for insurance portability created by H.R. 3103 would increase 
the price of health insurance for group plans, with a 
corresponding reduction in coverage. Because many insurance 
reforms have already been implemented by the states, however, 
and because most health plans tend not to use long exclusions 
for preexisting conditions, these changes would be relatively 
small.
    CBO estimates that the portability requirements of H.R. 
3103 would initially increase group premiums by approximately 
$300 million a year, beginning in 1998. This increase would 
consist of $200 million from shortening exclusions for 
preexisting conditions to 12 months and $100 from the crediting 
of coverage in a previous group. Employers and employees would 
react to these costs by reducing health benefits or other 
fringe benefits or by lowering cash wages. CBO assumes that 
cash wages would fall by about $100 million, one-third of the 
initial $300 million cost increase. JCT estimates that income 
and payroll tax revenues would fall by about $35 million a year 
and by $164 million over seven years.
            Impact on federal outlays
    CBO assumes that federal outlays for Medicaid would not 
change because any persons eligible for free coverage from 
Medicaid under current law would still seek Medicaid coverage 
if H.R. 3103 was enacted. CBO also estimates that the bill 
would cause no appreciable changes to federal outlays for 
Medicare, Federal Employees Health Benefits,or other government 
programs.

  title ii, limiting fraud and abuse and administrative simplification

Limiting fraud and abuse

    The proposal includes several proposals to limit fraud and 
abuse in Medicare.
            Payment safeguards and enforcement
    The bill would establish mandatory appropriations for 
Medicare payment safeguards and for the anti-fraud activities 
of the Inspector General (IG) of the Department of Health and 
Human Services (HHS) and the Federal Bureau of Investigation 
(FBI). It would also increase the resources devoted to these 
two activities. After a few years, reduced Medicare spending 
and additional fines and penalties would more than offset the 
added administrative costs. Over the 1996-2002 period, the net 
savings would total $2,900 million.
    CBO's estimate attributes savings only to the projected 
increase in resources, not to the base level itself. The 
estimate assumes that the Health Care Financing Administration 
(HCFA), the IG, and the FBI could productively use only limited 
additional resources each year, and that additional resources 
would be subject to diminishing marginal returns. Based on 
studies by the General Accounting Office and HCFA, the estimate 
assumes that an additional dollar devoted to HCFA payment 
safeguard activities would at first return eight dollars in 
lower benefit payments. Data from the IG indicate that an 
additional dollar devoted to its enforcement efforts would 
initially return seven dollars in recoveries. The estimate 
assumes that the marginal benefit-to-cost ratio in each case 
would decline to approximately four-to-one by 2002. Data on 
recoveries from the FBI's Health Care Fraud Unit indicate an 
initial nine-to-one ratio of recoveries to cost. As with HHS, 
the estimate assumes that the ratio at the margin would decay 
over time to seven-to-one by 2002. If this proposal is adopted, 
CBO expects that the savings would be documented and subject to 
an independent audit. These documented savings would then be 
used to make any estimates of new proposals and provide a basis 
for updating projections of spending under current law.
            Additional health care fraud and abuse guidance
    The bill would require the Secretary to create a program 
enabling providers of health care to seek advisory opinions 
regarding the application of health care fraud and abuse 
sanctions. According to the IG, such a provision would 
substantially hinder its ability to prosecute fraud and abuse 
cases successfully. It would also require the IG to hire 
additional legal staff. Based on data provided by the IG, CBO 
estimates that this provision would cost $390 million in lost 
recoveries and additional staff over the 1996-2002 period.
            New and increased civil monetary penalties
    The bill would increase current law civil monetary 
penalties for fraudulent claims for reimbursement under 
Medicare and Medicaid and apply these penalties to all federal 
health care programs. New civil monetary penalties would apply 
to individuals who retained control of a provider entity while 
they were excluded from Medicare or a State health care 
program, coded billed procedures incorrectly, prescribed 
services that were not medically necessary, offered kickbacks 
for using particular providers, or falsely certified home 
health services, and to Medicare health maintenance 
organizations (HMOs) that failed to fulfill their contracts. 
Based on an analysis of the recoveries generated by the IG's 
current caseload and expectations of the impact of the new 
penalties, CBO estimates that these provisions would generate 
$320 million in savings over the 1996-2002 period.
            Additional exclusion authorities
    The bill would require the Secretary of HHS to exclude 
providers from program participation for three years following 
felony convictions for fraud, obstructing an investigation, and 
controlled substance violations. Providers would be excluded 
for one year following the provision of substandard or 
unnecessary services and for the term of a provider's loss of 
license for violations of state law. The Secretary could also 
exclude individuals in control of a sanctioned entity. CBO 
estimates that these provisions would result in $190 million in 
fraud avoided over six years. The estimate is based on the IG's 
data on program savings resulting from provider convictions and 
expectations for additional successful actions.
            Criminal provisions
    The bill would make certain offenses involving health care 
fraud federal crimes. The bill would also grant the Attorney 
General the authority to subpoena information relating to 
suspected health care fraud. Based on conversations with 
officials of the Department of Justice, CBO assumes that these 
provisions would modestly increase successful prosecutions and 
result in recovery of $70 million in fraudulent Medicare 
payments over the next seven years.
    In addition, the bill would create an additional exception 
to anti-kickback penalties for discounting and managed care 
arrangements. Based on recoveries data and conversations with 
the IG, CBO estimates that this would result in $580 million 
lost in anti-kickback recoveries.
            Other items
    The bill would require the Secretary of HHS to establish a 
fraud and abuse data collection program to report the final 
settlements from adverse actions against health care providers, 
suppliers, or practitioners. The bill would also require the 
Secretary to establish a hotline and provide incentives for 
beneficiaries to report suspected fraud and to provide 
suggestions to improve the Medicare program. Based on an 
examination of a similar program operated by the Department of 
Defense, CBO estimates that this program would produce a net 
benefit of $30 million from additional recoveries over six 
years.

Administrative simplification

    This provision would require the Secretary to adopt uniform 
standards and data elements for the electronic transmission of 
health information and claims. The Secretary would adopt 
standards developed by standard-setting organizations, or a 
modification of these standards, with the goal of reducing 
administrative costs. A Health Information Advisory Committee 
would assist the Secretary with this task and would make 
recommendations regarding standards and electronic data 
exchange. The proposal would also require the Secretary to take 
measures to protect the privacy and security of electronically 
transmitted health information. CBO estimates that this 
provision would cost the federal government $60 million over 
seven years. Because this spending would require appropriations 
action, these costs are not included in the attached table.
    These new standards would apply to health plans, claims 
clearinghouses, and providers transmitting health information 
electronically, and would supersede existing state laws and 
regulations. Large health plans, clearinghouses and providers 
must conform to these standards within 24 months of their 
adoption, while small plans would have 36 months to comply. 
Penalties would be levied against those who violated the 
standards or improperly used or distributed individually 
identifiable health information. However, these penalties would 
be waived if violators demonstrated reasonable cause of 
diligence.
            Laboratory services
    The provision relating to laboratory services would cost 
the federal government approximately $330 million over seven 
years. This provision would mandate that, within a year of the 
enactment of H.R. 3063, the Secretary develop standardized 
coverage, payment, and administrative policies for clinical 
laboratory tests reimbursed under Medicare Part B. The 
Secretary would select medical directors from various carriers 
to develop recommendations regarding these policies, in 
consultation with affected groups. The purpose of these 
recommendations would be to simplify the processes of reporting 
beneficiary information, filing claims, and record keeping.
    The bill would also excuse labs from documenting the 
medical necessity of tests unless reviews indicate aberrant 
utilization patterns. In fiscal year 1995, 17 Medicare carriers 
saved $41 million through localized policies requiring labs to 
document medical necessity. Therefore, repealing the 
requirement would cost a similar amount. These costs would not 
accrue immediately because the bill prohibits intermediaries 
and carriers from implementing new requirements for claims 
submission for lab tests pending the implementation of the 
uniform policies retroactive to January 1996. Since most 
carriers' local policies regarding the documentation of medical 
necessity were established by 1995, these policies could remain 
in place until the uniform policies were fully implemented. 
Thus, this proposal would cost the federal government about 
$240 million over seven years.
    An independent lab would also be allowed to select a single 
carrier to process its Medicare claims under this proposal; 
currently, labs use multiple carriers to process claims. This 
provision would increase costs to the federal government for 
independent lab services, although the magnitude of these costs 
is difficult to estimate. If independent labs were permitted to 
select a single carrier, carriers would face incentives to 
adopt more lenient policies to attract a higher volume of 
business. Also, the carrier processing lab test claims for a 
beneficiary might not be the same carrier handling other claims 
for that person. This fragmentation could make it more 
difficult for the Health Care Financing Administration to 
determine the medical necessity of tests performed by 
independent labs. If this provision were to increase Medicare 
costs for independent lab services by one-half of one percent 
annually, it would cost the federal government an additional 
$90 million over seven years.

                   Titles III and IV, Tax Provisions

Medical savings accounts (MSAs)

    Under the legislation, individuals covered by high-
deductible health insurance plans could make deductible 
contributions to MSAs, or their employers could make 
contributions on their behalf that would be excluded from 
earnings for income and payroll tax purposes. Investment 
earnings of amounts in the MSA would also be excluded from 
taxable income in the year earned. Withdrawals from MSAs for 
medical expenses would be tax-free, but withdrawals for other 
purposes would be included in taxable income and subject to an 
additional tax of 10 percent. The additional tax would be 
waived if the account holder were over age 59\1/2\, disabled, 
or had died.
    High-deductible insurance would be defined as insurance 
having a deductible of at least $1,500 per person covered, and 
a deductible of at least $3,000 per family. Contributions would 
be limited to the lesser of the deductible of the insurance 
plan or $2,000 for individual coverage and $4,000 for family 
coverage. To be eligible for an MSA, individuals and families 
could not have other insurance policies that covered the 
deductible of the high-deductible policy. Allowable medical 
expenses would be those permitted under the itemized deduction 
for medical expenses, except for certain insurance premiums. 
Expenses for long-term care would also qualify as medical 
expenses.
    The proposal would be effective for taxable years beginning 
after December 31, 1996, and is projected by the Joint 
Committee on Taxation to reduce income tax revenues by $1.778 
billion in 1997-2002.

Deduction for health insurance expenses of self-employed individuals

    Under current law, self-employed individuals are allowed to 
deduct 30 percent of the cost of health insurance premiums they 
pay for coverage of themselves, their spouse, and dependents, 
as long as they are not eligible for insurance provided by an 
employer. The proposal would increase the fraction deductible 
to 50 percent in the following steps: 35 percent for 1998; 40 
percent for 1999, 2000, and 2001; 45 percent for 2002; and 50 
percent for 2003 and years thereafter.
    The Joint Committee on Taxation estimates that this 
proposal would reduce revenue by $1.058 billion between fiscal 
years 1998 and 2002.

Other tax provisions

    The Joint Committee on Taxation estimates that the combined 
effect of other provisions in Titles III and IV of H.R. 3103 
would increase revenues by $457 million over seven years.
    7. Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act of 1985 sets up pay-as-you-go 
procedures for legislation affecting direct spending or 
receipts through 1998. The bill would have the following pay-
as-you-go impact:

----------------------------------------------------------------------------------------------------------------
                                                                       1996            1997            1998     
----------------------------------------------------------------------------------------------------------------
Change in Outlays...............................................               0             340             -40
Change in Revenues..............................................             127             262             -97
----------------------------------------------------------------------------------------------------------------

    8. Previous CBO estimate: CBO has prepared cost estimates 
for several health care reform bills--S. 1028 as reported by 
the Senate Committee on Labor and Human Resources, H.R. 995 as 
reported by the House Committee on Economic and Educational 
Opportunities, H.R. 3070 as reported by the House Committee on 
Commerce, and H.R. 3103 as reported by the House Committee on 
Ways and Means. All four bills contain provisions restricting 
preexisting conditions and increasing portability of health 
insurance. In addition, H.R. 3070 and H.R. 3103 contain 
provisions designed to reduce fraud and abuse in Medicare and 
simplify the administration of health insurance.
    9. Estimate prepared by: Jeff Lemieux (insurance reform), 
Anne Hunt (administrative simplification), Cynthia Dudzinski 
(fraud and abuse).
    10. Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

                                    ESTIMATED BUDGETARY EFFECTS OF H.R. 3103                                    
                                    [By fiscal year, in billions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                           1996     1997     1998     1999     2000     2001     2002     Total 
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
Title I................................        0        0        0        0        0        0        0         0
Title II:                                                                                                       
    Fraud and Abuse:                                                                                            
        A. Recoveries from Payment                                                                              
         Safeguards and Law Enforcement        0      330     -110     -490     -780     -890     -960    -2,900
        B. Cost of Additional Health                                                                            
         Care Fraud and Abuse Guidance.        0       60       60       60       70       70       70       390
        C. New and Increased Civil                                                                              
         Monetary Penalties............        0      -30      -50      -50      -60      -60      -70      -320
        D. Additional Exclusion                                                                                 
         Authorities...................        0      -10      -10      -40      -40      -50      -50      -190
        E. Criminal Provisions.........        0      -10       10       40       90      190      190       510
        F. Other Items.................        0    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       -30
                                        ------------------------------------------------------------------------
          Total, Fraud and Abuse.......        0      330     -100     -480     -730     -740     -810    -2,540
                                        ========================================================================
    Administrative Simplification:                                                                              
        A. Administrative                                                                                       
         Simplification Standards \2\..        0        0        0        0        0        0        0         0
        B. Administrative                                                                                       
         Simplification for Labs.......        0       10       60       60       60       70       70       330
                                        ------------------------------------------------------------------------
          Total, Administrative                                                                                 
           Simplification..............        0       10       60       60       60       70       70       330
                                        ========================================================================
          Total, Title II..............        0      340      -40     -420     -670     -670     -740    -2,200
Titles III and IV......................        0        0        0        0        0        0        0         0
                                        ------------------------------------------------------------------------
          Total, Outlays...............        0      340      -40     -420     -670     -670     -740    -2,200
                                        ========================================================================
                                                    REVENUES                                                    
Title I................................        0        0      -24      -35      -35      -35      -35      -164
Title II...............................        0        0        0        0        0        0        0         0
Titles III and IV:                                                                                              
    A. Medical Savings Accounts........        0     -134     -246     -290     -340     -369     -399    -1,778
    B. Deduction for the Self-Employed.        0        0      -36     -153     -250     -272     -347    -1,058
    C. Other...........................      127      396      209       46      -10      -99     -212       457
                                        ------------------------------------------------------------------------
          Total, Titles III and IV.....      127      262      -73     -397     -600     -740     -958    -2,379
                                        ------------------------------------------------------------------------
          Total, Revenues..............      127      262      -97     -432     -635     -775     -993    -2,543
                                        ========================================================================
                                                     DEFICIT                                                    
          Total........................     -127       78       57       12      -35      105      253       343
----------------------------------------------------------------------------------------------------------------
\1\ Savings or cost of less than $10 million.                                                                   
\2\ Costs of about $10 million per year for this provision would be discretionary spending.                     
                                                                                                                
Note: Estimate based on CBO December 1995 baseline assumptions.                                                 

  Congressional Budget Office Estimate of Costs of Intergovernmental 
                                Mandates

    1. Bill number: H.R. 3103.
    2. Bill title: Health Coverage Availability and 
Affordability Act of 1996.
    3. Bill status: As ordered reported by the House Committee 
on Ways and Means on March 19, 1996.
    4. Bill purpose: Title I would make it easier for people 
who change jobs to maintain adequate coverage by limiting 
preexisting condition exclusions and increasing portability of 
coverage. State and local governments could elect to be exempt 
from these requirements.
    Title II would require the Secretary of Health and Human 
Services and the Attorney General to establish a program to 
control health care fraud. The program would include a national 
data base of criminal actions, civil actions, and license 
revocations against health care providers, practitioners, and 
suppliers. State and local governments would be required to 
provide this information for the data base.
    Title II would also require the Secretary of Health and 
Human Services to establish national standards for health care 
transactions, such as claims and eligibility, that are 
transmitted electronically. Health care plans would be required 
to have the capability of receiving and transmitting this 
information three and one-half years after enactment.
    Title III and Title IV would make numerous changes to 
federal tax law, many of which deal with health care.
    5. Intergovernmental mandates contained in bill: H.R. 3103 
contains various mandates, two of which have budgetary 
implications. First, state and local agencies would be required 
to report criminal and civil actions and license revocations 
against health care providers, practitioners, and suppliers. 
Second, state and local governments, as providers of health 
insurance or health care, would have to transmit health care 
transactions under new national standards.
    6. Estimated Direct Costs to State, Local, and Tribal 
Governments:
    (a) Is the $50 Million Threshold Exceeded? No
    (b) Total Direct Costs of Mandates: Not significant.
    (c) Estimate of Necessary Budget Authority: None
    7. Basis of estimate:
    Reporting requirements. State and local agencies would be 
required to report criminal and civil actions and license 
revocations against health care providers, practitioners, and 
suppliers. Based on the information from the National 
Association of Attorneys General and the National Health Care 
Anti-Fraud Association, CBO expects that this requirement would 
not impose a significant administrative burden on state and 
local governments. Most health care fraud cases carried out by 
states deal with Medicaid. Under current law, states are 
already required to report criminal and civil actions relating 
to Medicaid to the Department of Health and Human Services.
    National standards. The bill would require state and local 
governments, as providers of health insurance to their 
employees, to have the capability to receive and transmit 
transactions electronically under the national standards. Such 
transactions include enrollment, eligibility, and claims. 
Because the Secretary of Health and Human services would be 
required to adopt standards only if they reduce the 
administrative costs of providing and paying for health care, 
this mandate should save states and local governments money in 
the long run. Some state and local governments would face one-
time costs as they purchase computer hardware and software and 
reconfigure their computer systems. Because many of these 
health plans already have the hardware to transmit information 
electronically and many more will acquire the hardware over the 
next the three and one-half years under current law, however, 
additional costs would be negligible.
    The national standards would also apply to state and local 
government agencies that provide health care, for example, 
through public hospitals or clinics, and that transmit any 
health information electronically. CBO estimates that the 
additional costs faced by these providers would be negligible.
    8. Appropriation or other Federal financial assistance 
provided in bill to cover mandate costs: None
    9. Other impacts on State, local, and tribal governments:
    National standards. The capability to transmit health 
information electronically would also apply to the Medicaid 
program. States are already in the forefront in administering 
the Medicaid program electronically; the only costs--which 
should not be significant--would involve bringing the software 
and computer systems for the Medicaid programs into compliance 
with the new standards. Moreover, under Public Law 104-4 
increases in requirements for large entitlement programs are 
not considered mandates if the states have the programmatic 
flexibility to reduce their financial responsibilities. States 
have the ability to reduce their coverage of optional services 
or benefits.
    Preexisting condition and portability. H.R. 3103 also would 
require state and local governments, as providers of health 
coverage to their employees, to comply with the preexisting 
condition and portability requirements unless they specifically 
opt out in a form and manner determined by the Secretary of 
Health and Human Services. If state and local governments 
decide to comply with these requirements, they would face an 
increase in health care costs of less than $50 million, a 0.1 
percent increase in such costs. CBO estimates that state and 
local governments spend about $40 billion annually on health 
insurance for their employees. CBO assumes that state and local 
governments would pass these costs onto their employees in the 
form of adjustments to pay or other benefits.
    Enforcement. States would have the option of enforcing the 
requirements of H.R. 3103 on issuers of group health insurance. 
If a state decides not to enforce the new requirements, the 
federal government would do so. States currently regulate the 
group insurance market, and CBO does not expect any state to 
give up this authority and responsibility. States would thus 
incur additional costs as they enforce the new requirements. In 
1995, according to the National Association of Insurance 
Commissioners, states spent $650 million regulating all form of 
insurance (health and others). CBO expects that H.R. 3103 would 
increase these costs only marginally.
    Other impacts. H.R. 3103 would also require state and local 
governments to pay a fee if they want to access information 
from the national data base of health care fraud; these costs 
would not be significant. In addition, to the extent that the 
private sector mandates result in an increase in health care 
premiums collected by insurance companies and health 
maintenance organizations, state premium taxes would increase. 
Such increases would be offset by lower income tax revenues if 
higher premiums are passed onto employees in the form of lower 
wages. The net effect of the premium tax increase and income 
tax decrease should be no more than a few million dollars. 
Finally, to the extent that state and local governments 
piggyback their income tax systems on the federal tax system, 
they would face changes in revenue as result of the changes to 
federal tax law contained in this bill. CBO is unable to 
determine the net effect of these changes.
    10. Previous CBO estimate: CBO has prepared cost estimates 
of various other health care reform bills--S. 1028 as reported 
by the Senate Committee on Labor and Human Resources on October 
12, 1995, H.R. 995 as ordered reported by the House Committee 
on Economic and Educational Opportunities on March 6, 1995, and 
H.R. 3070 as ordered reported by the House Committee on 
Commerce on March 20, 1996. All three bills have preexisting 
condition and portability provisions similar to those in H.R. 
3103, but only under S. 1028 do these provisions constitute a 
mandate on state and local governments. The House bills allow 
state and local governments to opt out of these requirements. 
All for bills differ with respect to other provisions, but H.R. 
3103 and H.R. 3070 would impose similar data reporting and 
electronic transmission requirements on state and local 
governments.
    11. Estimate prepared by: John Patterson.
    12. Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

    Congressional Budget Office Estimate of Costs of Private Sector 
                                Mandates

    1. Bill number: H.R. 3103.
    2. Bill title: The Health Coverage Availability and 
Affordability Act of 1996.
    3. Bill status: As ordered reported by the House Committee 
on Ways and Means on March 19, 1996.
    4. Bill purpose: The purpose of H.R. 3103 is to improve 
portability of health insurance coverage, to simplify 
administration of health insurance, to reduce waste, fraud, and 
abuse in health insurance and health care delivery, to promote 
the use of medical savings accounts, and to improve access to 
long-term care coverage. It would also modify certain 
provisions of the Internal Revenue Code.
    5. Private sector mandates contained in the bill: H.R. 3103 
contains several private sector mandates as defined in P.L. 
104-4. Provisions in Title I would affect the private group and 
employer-sponsored health insurance industry. They would apply 
both to sellers of group insurance and to employee health 
benefit plans that are ``self-insured'' by firms.
    The bill would limit the use of pre-existing condition 
exclusions--clauses that exempt the plan from paying for 
expenses related to a medical condition that already existed 
when an enrollee first joined the plan. Under its provisions, 
twelve months would be the maximum allowable duration of a pre-
existing condition exclusion (eighteen months for employees who 
did not join the plan at their first enrollment opportunity). 
In addition, month-for-month credit against that exclusion 
would have to be given to enrollees for continuous coverage (as 
specified in the bill) that they had prior to joining a new 
plan. A break in coverage of 60 days or less would not be 
counted against the prior continuous coverage requirement. 
(Insurers and health benefit plans would be required to 
disclose information that would facilitate the administration 
of those ``portability'' requirements.) In addition, pregnancy 
could not be excluded by a pre-existing condition clause, and 
children who were signed up with a plan within thirty days of 
birth could not have any existing conditions excluded from 
coverage. (A similar provision applies for adopted children.)
    Health maintenance organizations would be allowed to use 
``eligibility'' periods, in which new enrollees would not be 
eligible for benefits, as long as pre-existing condition 
exclusions were not part of the plan. However, such periods 
would be limited to sixty days (ninety days for late 
enrollees).
    Finally, a health plan could not exclude an employee or his 
or her beneficiary from the plan on the basis of health status. 
The bill would require that group health plans offer special 
enrollment periods during which enrollment in at least one 
benefit option would be possible for participants or family 
members, for various changes in family or employment status 
that resulted in a loss of insurance coverage.
    Title II of the bill would impose a mandate on all private 
sector insurers and those providers who submit claims 
electronically. It would require that certain specified health-
related electronic transmittals conform to standards adopted by 
the Secretary of Health and Human Services. The bill states 
that any standards adopted must reduce the administrative costs 
of providing and paying for health care. Title II would also 
establish a health care fraud and abuse data collection 
program, with a mandate on each government agency and private 
health plan to report any final adverse action taken against a 
health care provider, supplier, or practitioner.
    Title IV includes revenue provisions that would raise 
private-sector costs. Those provisions would repeal the bad 
debt reserve method for thrift savings associations, modify 
eligibility for the earned income credit, and revise tax 
provisions relating to individuals who give up U.S. 
citizenship.
    In addition to these mandates, Title III includes 
provisions that would reduce tax payments. Those provisions 
would establish or amend tax rules for medical savings 
accounts, long-term care insurance, accelerated death benefits 
under life insurance contracts, and some health insurance 
organizations. They would also increase the percentage of 
health insurance costs that can be deducted by self-employed 
individuals.
    6. Estimated direct cost to the private sector: This 
section provides estimates of the direct private-sector costs 
of the non-tax and tax mandates in the bill. It also provides 
information on tax reductions the bill contains. CBO estimated 
the cost of the non-tax provisions, while the Joint Committee 
on Taxation (JCT) estimated the effects of the other provisions 
(See the attached letter for more details on the JCT 
estimates.)
    CBO estimates that the direct cost of the main non-tax 
private sector mandates in H.R. 3103 would total about $300 
million in each full year that the provisions would be 
effective, as shown below:

----------------------------------------------------------------------------------------------------------------
                                        1996       1997       1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
Direct cost of non-tax mandates....  .........  .........        225        300        300        300        300
----------------------------------------------------------------------------------------------------------------

    The specific mandates examined in this estimate are 
contained in Title I of the bill, and include: (1) limiting the 
length of time employer-sponsored and group insurance plans 
could withhold coverage for pre-existing conditions, and (2) 
requiring that periods of continuous prior health plan coverage 
be credited against pre-existing condition exclusions of a new 
plan.
    The $300 million annual direct cost is approximately 0.2 
percent of the total premium payments in the group and 
employer-sponsored market, although their distribution among 
health insurance plans would be uneven. (Plans that cover 
public sector employees are not included in this analysis.) 
This estimate is subject to considerable uncertainty because a 
number of underlying assumptions rely on limited data or 
judgements about future changes in health insurance markets.
    CBO estimates that the direct cost of the mandates in Title 
II of the bill would be negligible. Health plans (and those 
providers who choose to submit claims electronically) would be 
required to modify their computer software to incorporate new 
standards as they are adopted or modified, but modifications 
could not be made more frequently than once every six months. 
Uniform standards would generate offsetting savings for plans 
and providers by simplifying the claims process and 
coordination of benefits. Data reporting requirements for the 
health care fraud and abuse data collection program would be 
negligible.
    The JCT estimates that the direct mandate cost of tax 
increases in H.R. 3103 would total $116 million in 1996, 
growing to $590 million in 2002, as shown below:

----------------------------------------------------------------------------------------------------------------
                                        1996       1997       1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
Direct cost of tax increases.......        116        216        386        504        556        586        590
----------------------------------------------------------------------------------------------------------------

    These tax increases are contained in Title IV of the bill.
    In addition to these mandates, the bill also provides for 
reductions in taxes. At this point, it is unclear to CBO 
whether these tax reductions should be viewed as offsets to the 
direct costs of the mandates in the bill in determining whether 
the $100 million threshold in P.L. 104-4 is exceeded. JCT 
estimates that the saving associated with the tax reductions in 
H.R. 3103 would total about $180 million in 1997, growing to 
about $1.8 billion in 2002, as shown below:

----------------------------------------------------------------------------------------------------------------
                                        1996       1997       1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
Reductions in taxes................  .........       -181       -696      -1142      -1403      -1576      -1805
----------------------------------------------------------------------------------------------------------------

    These tax reductions are contained in Title III of the 
bill.
    Basis of the estimate: The remainder of this analysis 
discusses the basis for CBO's estimate of the direct cost of 
the main non-tax private sector mandates in H.R. 3103. The 
direct costs of those mandates consist of the additional health 
expenses that would be covered by insurance as a direct result 
of their implementation. Expenses for pre-existing conditions 
that would have to be paid by insurers under the bill but would 
not have been insured under current law, for example, are 
included in aggregate direct costs. In contrast, insured 
expenses that would be transferred among different insurers 
bases of the bill are not included in aggregate direct costs.
    In making this estimate, CBO did not attempt to value any 
social benefits that might result from expansions in insurance 
coverage. That is, the estimate accounts only for the 
additional insurance costs of the mandates, not the value of 
additional insurance coverage to beneficiaries. Nor was there 
an attempt to quantify any indirect costs or benefits. Such 
indirect effects could include, for example, loss of coverage 
if an employer ceases to offer group coverage when premiums 
rise, or increases in worker mobility (or reduced ``job lock'') 
with greater portability of benefits. It would be important to 
weigh all such factors in considering the bill, but only 
estimates of the direct costs of the mandates in the bill are 
required by P.L. 104-4, the Unfunded Mandates Reform Act.

Limiting the maximum length of an exclusion

    The mandate to limit exclusions for pre-existing conditions 
to 12 months (18 months for late enrollees) is estimated to 
have a direct private-sector cost of about $200 million per 
year. This estimate is based on two components: (1) the number 
of people who would have more of their medical expenses covered 
by insurance if exclusions were limited to one year or less, 
and (2) the average cost to insurers of that newly insured 
medical care.
    CBO used data from the Survey of Employee Benefits in the 
April 1993 Current Population Survey (CPS) to estimate the 
number of people with conditions that are not now covered 
because of a pre-existing condition exclusion of more than one 
year. The survey asks respondents whether they or a family 
member have a medical condition that their employment-based 
plan is not covering because of a pre-existing condition 
exclusion. It also asks respondents how long they have been 
with their present firm. For people with medical conditions 
excluded by a pre-existing condition clause, responses to the 
second question are used to estimate whether the exclusion 
period exceeds one year.
    A number of adjustments were made to the data. In 
particular, CBO's estimate of the number of people affected by 
H.R. 3103 excluded people who said they were limited by a pre-
existing restriction but who also had other health insurance 
coverage, because the other insurance plan might have covered 
their pre-existing condition. Under those circumstances, the 
limitation imposed on employment-based plans by H.R. 3103 would 
not raise their aggregate costs.
    The second modification to the CPS data adjusted for 
changes in the insurance market that have occurred since the 
survey date of 1993. In particular, since that time, about 40 
states have implemented laws affecting the small group 
insurance market that would limit pre-existing condition 
exclusions to one year or less and require that previous 
coverage be credited against those exclusions. Those laws 
generally apply to groups of 50 or fewer employees and do not 
include self-funded health benefit plans. Because plans covered 
by such state laws would not have to change their provisions as 
a result of H.R. 3103, CBO lowered its initial estimate of the 
number of people affected by the bill.
    CBO's analysis led to the conclusion that approximately 
300,000 people would gain coverage under H.R. 3103 for some 
condition that would otherwise be excluded by a long (more than 
one year) pre-existing condition clause. This estimate 
represents less than 0.3 percent of people with private 
employment-based coverage.
    The other component of the estimated private-sector cost is 
the average cost of the coverage that would become available 
under H.R. 3103. A recent monograph from the American Academy 
of Actuaries (referred to as the academy) indicated a surge in 
claims costs of 40 to 60 percent when a pre-existing condition 
exclusion period expired for a sample of people with high 
expected medical costs.\1\ That range is consistent with 
information from Spencer and Associates indicating that the 
costs of policies for former employees who have chosen to take 
extended COBRA coverage are 55 percent higher than those of 
active employees.\2\ Applying those percentages to the average 
premium cost in the employer-sponsored market yields additional 
costs of about $900 a year per person who would gain coverage 
under H.R. 3103.
    \1\ See American Academy of Actuaries, ``Providing Universal Access 
in a Voluntary Private-Sector Market,'' February 1996.
    \2\ Charles D. Spencer and Associates, Inc. ``1995 COBRA Survey: 
Almost One in Five Elect Coverage, Cost is 155% of Actives' Cost,'' 
Spencer's Research Reports (August 25, 1995).
---------------------------------------------------------------------------

Crediting prior coverage against current exclusions

    Another provision in H.R. 3103 would require insurers under 
certain circumstances to credit previous continuous health 
insurance coverage against pre-existing condition periods. That 
provision is estimated to have a private sector cost of about 
$100 million per year. The key components of this estimate are: 
(1) the number of people who would receive some added coverage, 
and (2) the additional full-year cost of coverage, adjusted to 
reflect the estimated number of months of that coverage.
    CPS data were used to estimate the number of people who 
would receive some added coverage under this mandate. These are 
people who would otherwise face some denial of coverage under a 
pre-existing condition exclusion period of one year or less, 
and who would qualify for a shortened exclusion period based on 
prior continuous coverage. CBO estimates that about 100,000 
people would receive some added coverage under this provision 
of the bill. The relatively small size of this estimate is due 
largely to the difficulty of meeting the restrictive 
eligibility criteria for the reduction in the exclusion 
period--particularly the requirement that at most a 60-day gap 
separate prior periods of insurance coverage from the 
enrollment in the new plan.
    The average number of months of coverage these people would 
gain is constraint by the one-year limit on the exclusion 
period that would be required under the bill. Based on 
information from a 1995 study by KPMG Peat Marwick, CBO 
estimates that people who would qualify would gain coverage for 
an average of 10 months.\3\
    \3\ Based on unpublished tabulations from KPMG Peat Marwick, LLP, 
Survey of Employer-Sponsored Benefits, 1995.
---------------------------------------------------------------------------
    CBO's estimates of the additional insured costs per person 
is based on evidence from the Academy, which suggested that 
people with pre-existing condition exclusions may not seek 
treatment during the exclusion period but have rapid increases 
in expenses when that period expire. That behavior would reduce 
the effectiveness of exclusion periods in protecting insurers 
from treatment costs. The shorter the exclusion period, the 
less effective the pre-existing exclusion is at reducing the 
insurer's costs. CBO consequently assumed that full-year 
insured costs of people getting coverage for pre-existing 
conditions under this provision would rise by less than 40 
percent.

Other considerations

    The estimated direct cost of the mandate to limit the 
length of pre-existing condition exclusions is about $200 
million annually, and the cost of the mandate to credit 
previous coverage against pre-existing condition exclusions is 
about $100 million. Together, those mandate costs amount to 
about 0.2 percent of total premium payments in the group and 
employer-sponsored market.
    Those estimates are subject to considerable uncertainty for 
several reasons. First, they are based on individual's 
responses to surveys, which should be treated with caution. In 
addition, unforeseen changes in health insurance markets could 
result in the estimates being too low or too high. Larger than 
expected increases in medical costs would result in higher 
direct costs than estimated. On the other hand, the growth of 
managed care plans would lower the direct costs of the bill. 
The magnitude of this effect would depend on the relative 
growth of HMOs, which generally do not use pre-existing 
conditions, as compared to PPO and POS plans, many of which do 
use pre-existing condition exclusions.
    The distribution of the direct costs of the mandates would 
be uneven across health plans. Only plans that currently use 
pre-existing condition exclusion of more than 12 months would 
face the $200 million direct cost of the first mandate. Data 
from the Peat Marwick survey indicate that 2.5 percent of 
employees are in such heath plans. Consequently, the costs to 
health plans that use long pre-existing exclusions would be 
about 4.5 percent of their premium costs. Likewise, only health 
plans that use pre-existing condition exclusions would face the 
direct cost of the mandate to credit previous coverage against 
the pre-existing exclusion. The data indicate that almost half 
of employees are in such plans--implying that the plans 
directly affected by this mandate would have direct costs equal 
to about one-tenth of one percent of their premiums under 
current law.
    Employers could respond in a number of ways to the 
additional insured costs that would arise under these 
provisions of the bill. They could reduce other insurance 
benefits, increase employees' premium contributions, or reduce 
other components of employee compensation. Employers would be 
likely to respond in different ways, and these changes could 
take time. Some employers that currently offer health insurance 
to their employees might drop that coverage if the costs became 
too large, although the magnitude of such a reaction would 
probably be modest. These employer responses, which would 
offset the costs of the mandates, are indirect effects and do 
not enter into our estimates of the direct costs to the private 
sector of the insurance mandates.
    7. Appropriations or other Federal financial assistance: 
None.
    8. Previous CBO estimate: CBO has prepared cost estimates 
of various other health care reform bills--S. 1028 as reported 
by the Senate Committee on Labor and Human Resources on October 
12, 1995, and H.R. 3070 as reported by the House Committee on 
Commerce on March 20, 1996. All three bills have similar pre-
existing conditions and portability provisions affecting the 
group health insurance market, but they differ in other 
respects. For example, the Senate and Commerce Committee bills 
both include provisions for group-to-individual portability, HR 
3103 does not have. In addition, S. 1028 includes provisions to 
guarantee the availability of insurance to employers, and H.R. 
3070 has provisions to guarantee availability in the small 
group market only. The Ways and Means Committee bill, by 
contrast, has no provisions to guarantee availability. It is 
also the only one of the three bills to include provisions 
promoting the use of medical savings accounts and modifying the 
Internal Revenue Code in various other ways.
    9. Estimate prepared by: James Baumgardner (non-tax items) 
and Rick Kasten (tax items).
    10. Estimate approved by: Joseph Antos, Assistance Director 
for Health and Human Resources.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

          A. Committee Oversight Findings and Recommendations

    With respect to subdivision (A) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives (relating to 
oversight findings), the Committee advises that it was a result 
of the Committee's oversight activities concerning improved 
availability and portability of health insurance coverage, 
prevention of health care fraud and abuse, health care 
administrative simplification, certain tax-related health 
provisions to improve health care accessibility and coverage, 
and certain revenue offsets needed to pay for the other 
provisions in the bill that the Committee concluded that it is 
appropriate to enact the provisions contained in the bill as 
amended.

    B. Summary of Findings and Recommendations of the Committee on 
                      Government Reform Oversight

    With respect to subdivision (D) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives, the Committee 
advises that no oversight findings or recommendations have been 
submitted to this Committee by the Committee on Government 
Reform and Oversight with respect to the provisions of the 
bill.

                    C. Inflationary Impact Statement

    In compliance with clause 2(l)(4) of rule XI of the Rules 
of the House of Representatives, the Committee states that the 
provisions of the bill are not expected to have an overall 
inflationary impact on prices and costs in the operation of the 
national economy.

              D. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Public Law 104-4).

Non-revenue provisions

    The Committee has determined that the following provisions 
of the bill contain Federal mandates on the private sector: (1) 
limiting the length of time employer-sponsored and group 
insurance plans could withhold coverage for pre-existing 
conditions, and (2) requiring that periods of continuous prior 
health plan coverage be credited against pre-existing condition 
exclusions of a new plan, (3) imposing a mandate on all private 
sector insurers and those providers who submit claims 
electronically by requiring that certain specified health-
related electronic transmittals conform to standards adopted by 
the Secretary of Health and Human Services (the bill states 
that any standards adopted must reduce the administrative costs 
of providing and paying for health care), and (4) requiring the 
establishment of a health care fraud and abuse data collection 
program, with a mandate on each Government agency and private 
health plan to report any final adverse action taken against a 
health care provider, supplier, or practitioner.
    The direct cost of the administrative simplification and 
fraud and abuse provisions (items #3 and #4 above) are 
negligible. Benefits from the administrative simplification 
provisions include improved administration and reduced costs 
for the millions of health care claims and other related 
informational transactions in the health care system. Data 
reporting requirements for the health care fraud and abuse data 
collection program would be negligible and benefit the entire 
system by contributing to the identification of fraudulent 
behavior and enforcement actions taken to address such 
behavior.
    The provisions limiting pre-existing condition exclusions 
and requiring crediting of prior qualified coverage (items #1 
and #2 above) have important social benefits because they 
expand the availability of health insurance and increase the 
value of insurance coverage to beneficiaries. In addition, by 
improving portability of health insurance benefits from one 
group health plan to another, the bill's provisions promote 
mobility of workers by easing ``job-lock'', which in turn could 
create more efficient employment markets. Finally, since all 
group health plans would be required to comply with these 
standards, the bill's provisions help level the field because 
no employer or insurer gains a competitive advantage from a 
cost standpoint, attributable to restricting benefits through 
lengthy pre-existing condition exclusions.
    Separately, the Committee has determined that the following 
provisions of the bill contain Federal mandates on the public 
sector. First, State and local agencies would be required to 
report criminal and civil actions and license revocations 
against health care providers, practitioners, and suppliers. 
Second, State and local governments, as providers of health 
insurance or health care, would have to transmit health care 
transactions under new national standards. The national 
standards would also apply to State and local government 
agencies that provide health care, for example, through public 
hospitals or clinics, and that transmit any health information 
electronically. Third, the bill's provisions also would require 
State and local governments, as providers of health coverage to 
their employees, to comply with the pre-existing condition and 
portability requirements unless they specifically opt out in a 
form and manner determined by the Secretary of Health and Human 
Services.
    The Committee has determined that the direct costs of all 
of these provisions are negligible. As in the private sector, 
the national standards would improve administration and reduce 
the costs of informational transactions in the public sector. 
Second, the reporting of criminal and civil actions, and 
license revocations against entities guilty of fraudulent 
actions has the broad social benefit of aiding in reducing 
fraud and abuse and the excessive costs such actions create in 
the health care sector. Although state and local governments 
could choose to opt out of the pre-existing condition and 
portability requirements, the application of those requirements 
would ensure that public sector workers enjoy the same 
protections and opportunities for career mobility as workers in 
the private sector.
    The non-revenue provisions of the bill uniformly affect 
activities engaged in by both the private and public sectors. 
Therefore, they do not affect the competitive balance between 
state, local or tribal governments and the private sector.

Revenue provisions

    The Committee has determined that three of the revenue 
provisions of the bill contain Federal mandates on the private 
sector: (1) the provision relating to treatment of bad debt 
deductions of thrift institutions (repeal of Internal Revenue 
Code section 593); (2) the earned income credit (``EIC'') 
compliance provision; and (3) the provision relating to 
expatriation.\57\ In general, the first provision repeals a 
special rule regarding the treatment of bad debt reserves by 
thrift institutions and conforms the treatment of such reserves 
to the manner in which such reserves are required to be treated 
by banks. The provision relating to EIC compliance denies the 
EIC to individuals not authorized to be employed in the United 
States. The provision relating to expatriation expands and 
substantially strengthens the present-law provisions that 
subject U.S. citizens who relinquish their citizenship for tax 
avoidance purposes to special tax rules. These provisions will 
increase the Federal tax liabilities of certain taxpayers.
    \57\ The bill also amends the so-called COBRA tax sanctions. These 
provisions are integrally related to the effects of the health care 
provisions, and the discussion of the mandates in the health care 
provisions takes into account the additional COBRA tax sanctions.
---------------------------------------------------------------------------
    The cost required to comply with each mandate generally is 
no greater than the revenue estimate for the provision. 
Benefits from the provisions include improved administration of 
the Federal income tax laws and greater availability of and 
more affordable health care insurance. The Committee believes 
that the benefits of the provisions are greater than the cost 
required to comply with the mandates.
    The provision relating to bad debt reserves of thrift 
institutions corrects a present-law provision that results in a 
mismeasurement of economic income and provides thrift 
institutions with a tax benefit not provided to similarly 
situated depository institutions. It also facilitates national 
banking policy. The provision relating to the EIC will in 
effect reduce Federal tax expenditures by denying the credit to 
individuals who are not legally working in the United States. 
The expatriation provision helps to ensure that the Federal tax 
laws do not provide individuals with an incentive to 
expatriate.
    These revenue-raising provisions offset the revenue loss of 
the tax provisions in the bill relating to health care, 
including provisions relating to long-term care, medical 
savings accounts, and an increase in the deduction for health 
insurance costs of self-employed individuals. These latter 
provisions will help make health care insurance more 
affordable, will encourage individuals to take control of their 
health care expenses and reward individuals for reducing health 
costs, and encourage individuals to provide for their long-term 
care needs. The revenue offsets are critical to achieving these 
goals.
    The revenue provisions of the bill do not contain any 
intergovernmental mandates.
    The revenue provisions of the bill affect activities that 
are only engaged in by the private sector and thus do not 
affect the competitive balance between State, local, or tribal 
governments and the private sector.

           E. Applicability of Federal Advisory Committee Act

    Pursuant to the Federal Advisory Committee Act (5 U.S.C., 
App., section 5(b)), the Committee states that any advisory 
bodies created by the bill, such as the Health Information 
Advisory Committee created by section 1179, are consciously 
created, and are deemed appropriate and necessary to carry out 
the purposes of the bill. It is the view of the Committee that 
the functions of any such advisory bodies are not being and 
could not be performed by one or more agencies or by an 
advisory committee already in existence, or by enlarging the 
mandate of an existing advisory committee under the Social 
Security Act.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In compliance with clause 3 of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, existing law in which no change 
is proposed is shown in roman):

                     INTERNAL REVENUE CODE OF 1986

          * * * * * * *

                        Subtitle A--Income Taxes

                  CHAPTER 1--NORMAL TAXES AND SURTAXES

              Subchapter A--Determination of Tax Liability

          * * * * * * *

                     PART IV--CREDITS AGAINST TAXES

          * * * * * * *

                     Subpart C--Refundable Credits

          * * * * * * *

SEC. 32. EARNED INCOME.

    (a)  * * *
          * * * * * * *
    (c) Definitions and Special Rules.--For purposes of this 
section--
          (1) Eligible individual.--
                  (A)  * * *
          * * * * * * *
                  (F) Identification number requirement.--The 
                term ``eligible individual'' does not include 
                any individual who does not include on the 
                return of tax for the taxable year--
                          (i) such individual's taxpayer 
                        identification number, and
                          (ii) if the individual is married 
                        (within the meaning of section 7703), 
                        the taxpayer identification number of 
                        such individual's spouse.
          * * * * * * *
    (l) Identification Numbers.--Solely for purposes of 
subsections (c)(1)(F) and (c)(3)(D), a taxpayer identification 
number means a social security number issued to an individual 
by the Social Security Administration (other than a social 
security number issued pursuant to clause (II) (or that portion 
of clause (III) that relates to clause (II)) of section 
205(c)(2)(B)(i) of the Social Security Act).
          * * * * * * *

            Subpart E--Rules for Computing Investment Credit

          * * * * * * *

SEC. 50. OTHER SPECIAL RULES.

      (a)  * * *
          * * * * * * *
    (d) Certain Rules Made Applicable.--For purposes of this 
subpart, rules similar to the rules of the following provisions 
(as in effect of the day before the date of the enactment of 
the Revenue Reconciliation Act of 1990) shall apply:
          (1) Section 46(e) (relating to limitations with 
        respect to certain persons).
          (2) Section 46(f) (relating to limitation in case of 
        certain regulated companies).
          (3) Section 46(h) (relating to special rules for 
        cooperatives).
          (4) Paragraphs (2) and (3) of section 48(b) (relating 
        to special rule for sale-leasebacks).
          (5) Section 48(d) (relating to certain leased 
        property).
          (6) Section 48(f) (relating to estates and trusts).
          (7) Section 48(r) (relating to certain 501(d) 
        organizations.
Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) 
referred to in paragraph (1) of this subsection shall not apply 
to any taxable year beginning after December 31, 1995.
          * * * * * * *

          Subpart F--Rules for Computing Targeted Jobs Credit

          * * * * * * *

SEC. 52. SPECIAL RULES.

    (a)  * * *
          * * * * * * *
    (e) Limitations With Respect to Certain Persons.--Under 
regulations prescribed by the Secretary, in the case of--
          [(1) an organization to which section 593 (relating 
        to reserves for losses on loans) applies,
          [(2)] (1) a regulated investment company or a real 
        estate investment trust subject to taxation under 
        subchapter M (section 851 and following), and
          [(3)] (2) a cooperative organization described in 
        section 1381(a),
rules similar to the rules provided in subsections (e) and (h) 
of section 46 (as in effect on the day before the date of the 
enactment of the Revenue Reconciliation Act of 1990) shall 
apply in determining the amount of the credit under this 
subpart.
          * * * * * * *

                    PART VI--ALTERNATIVE MINIMUM TAX

          * * * * * * *

SEC. 57. ITEMS OF TAX PREFERENCE.

    (a) General Rule.--For purposes of this part, the items of 
tax preference determined under this section are--
          (1)  * * *
          * * * * * * *
          [(4) Reserves for losses on bad debts of financial 
        institutions.--In the case of a financial institution 
        to which section 593 applies, the amount by which the 
        deduction allowable for the taxable year for a 
        reasonable addition to a reserve for bad debts exceeds 
        the amount that would have been allowable had the 
        institution maintained its bad debt reserve for all 
        taxable years on the basis of actual experience.]
          * * * * * * *

              Subchapter B--Computation of Taxable Income

  PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE 
                              INCOME, ETC.

          * * * * * * *

SEC. 62. ADJUSTED GROSS INCOME DEFINED.

    (a) General Rule.--For purposes of this subtitle, the term 
``adjusted gross income'' means, in the case of an individual, 
gross income minus the following deductions:
          (1)  * * *
          * * * * * * *
          (16) Medical savings accounts.--The deduction allowed 
        by section 220.
          * * * * * * *

        PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

          * * * * * * *

SEC. 101. CERTAIN DEATH BENEFITS.

    (a)  * * *
          * * * * * * *
    (g) Treatment of Certain Accelerated Death Benefits.--
          (1) In general.--For purposes of this section, the 
        following amounts shall be treated as an amount paid by 
        reason of the death of an insured:
                  (A) Any amount received under a life 
                insurance contract on the life of an insured 
                who is a terminally ill individual.
                  (B) Any amount received under a life 
                insurance contract on the life of an insured 
                who is a chronically ill individual (as defined 
                in section 7702B(c)(2)) but only if such amount 
                is received under a rider or other provision of 
                such contract which is treated as a qualified 
                long-term care insurance contract under section 
                7702B and such amount is treated under section 
                7702B (after the application of subsection (d) 
                thereof) as a payment for qualified long-term 
                care services (as defined in such section).
          (2) Treatment of viatical settlements.--
                  (A) In general.--In the case of a life 
                insurance contract on the life of an insured 
                described in paragraph (1), if--
                          (i) any portion of such contract is 
                        sold to any viatical settlement 
                        provider, or
                          (ii) any portion of the death benefit 
                        is assigned to such a provider,
                the amount paid for such sale or assignment 
                shall be treated as an amount paid under the 
                life insurance contract by reason of the death 
                of such insured.
                  (B) Viatical settlement provider.--The term 
                ``viatical settlement provider'' means any 
                person regularly engaged in the trade or 
                business of purchasing, or taking assignments 
                of, life insurance contracts on the lives of 
                insureds described in paragraph (1) if--
                          (i) such person is licensed for such 
                        purposes in the State in which the 
                        insured resides, or
                          (ii) in the case of an insured who 
                        resides in a State not requiring the 
                        licensing of such persons for such 
                        purposes--
                                  (I) such person meets the 
                                requirements of sections 8 and 
                                9 of the Viatical Settlements 
                                Model Act of the National 
                                Association of Insurance 
                                Commissioners, and
                                  (II) meets the requirements 
                                of the Model Regulations of the 
                                National Association of 
                                Insurance Commissioners 
                                (relating to standards for 
                                evaluation of reasonable 
                                payments) in determining 
                                amounts paid by such person in 
                                connection with such purchases 
                                or assignments.
          (3) Definitions.--For purposes of this subsection--
                  (A) Terminally ill individual.--The term 
                ``terminally ill individual'' means an 
                individual who has been certified by a 
                physician as having an illness or physical 
                condition which can reasonably be expected to 
                result in death in 24 months or less after the 
                date of the certification.
                  (B) Physician.--The term ``physician'' has 
                the meaning given to such term by section 
                1861(r)(1) of the Social Security Act (42 
                U.S.C. 1395x(r)(1)).
          (4) Exception for business-related policies.--This 
        subsection shall not apply in the case of any amount 
        paid to any taxpayer other than the insured if such 
        taxpayer has an insurable interest with respect to the 
        life of the insured by reason of the insured being a 
        director, officer, or employee of the taxpayer or by 
        reason of the insured being financially interested in 
        any trade or business carried on by the taxpayer.
          * * * * * * *

SEC. 106. CONTRIBUTIONS BY EMPLOYER TO ACCIDENT AND HEALTH PLANS.

    [Gross income of an employee does not include employer-
provided coverage under an accident or health plan.]
    (a) General Rule.--Except as otherwise provided in this 
section, gross income of an employee does not include employer-
provided coverage under an accident or health plan.
    (b) Contributions to Medical Savings Accounts.--
          (1) In general.--In the case of an employee who is an 
        eligible individual, gross income does not include 
        amounts contributed by such employee's employer to any 
        medical savings account of such employee.
          (2) Coordination with deduction limitation.--The 
        amount excluded from the gross income of an employee 
        under this subsection for any taxable year shall not 
        exceed the limitation under section 220(b)(1) 
        (determined without regard to this subsection) which is 
        applicable to such employee for such taxable year.
          (3) No constructive receipt.--No amount shall be 
        included in the gross income of any employee solely 
        because the employee may choose between the 
        contributions referred to in paragraph (1) and employer 
        contributions to another health plan of the employer.
          (4) Special rule for deduction of employer 
        contributions.--Any employer contribution to a medical 
        savings account, if otherwise allowable as a deduction 
        under this chapter, shall be allowed only for the 
        taxable year in which paid.
          (5) Definitions.--For purposes of this subsection, 
        the terms ``eligible individual'' and ``medical savings 
        account'' have the respective meanings given to such 
        terms by section 220.
    (c) Inclusion of Long-Term Care Benefits Provided Through 
Flexible Spending Arrangements.--
          (1) In general.--Effective on and after January 1, 
        1997, gross income of an employee shall include 
        employer-provided coverage for qualified long-term care 
        services (as defined in section 7702B(c)) to the extent 
        that such coverage is provided through a flexible 
        spending or similar arrangement.
          (2) Flexible spending arrangement.--For purposes of 
        this subsection, a flexible spending arrangement is a 
        benefit program which provides employees with coverage 
        under which--
                  (A) specified incurred expenses may be 
                reimbursed (subject to reimbursement maximums 
                and other reasonable conditions), and
                  (B) the maximum amount of reimbursement which 
                is reasonably available to a participant for 
                such coverage is less than 500 percent of the 
                value of such coverage.
        In the case of an insured plan, the maximum amount 
        reasonably available shall be determined on the basis 
        of the underlying coverage.
          * * * * * * *

SEC. 125. CAFETERIA PLANS.

    (a)  * * *
          * * * * * * *
    (f) Qualified Benefits Defined.--For purposes of this 
section, the term ``qualified benefit'' means any benefit 
which, with the application of subsection (a), is not 
includible in the gross income of the employee by reason of an 
express provision of this chapter (other than section 106(b), 
117, 127, or 132). Such term includes any group term life 
insurance which is includible in gross income only because it 
exceeds the dollar limitation of section 79 and such term 
includes any other benefit permitted under regulations. Such 
term shall not include any long-term care insurance contract 
(as defined in section 4980C).
          * * * * * * *

     PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

          * * * * * * *

SEC. 162. TRADE OR BUSINESS EXPENSES.

    (a)  * * *
          * * * * * * *
    (l) Special Rules for Health Insurance Costs of Self-
Employed Individuals.--
          [(1) In general.--In the case of an individual who is 
        an employee within the meaning of section 401(c)(1), 
        there shall be allowed as a deduction under this 
        section an amount equal to 30 percent of the amount 
        paid during the taxable year for insurance which 
        constitutes medical care for the taxpayer, his spouse, 
        and dependents.]
          (1) Allowance of deduction.--
                  (A) In general.--In the case of an individual 
                who is an employee within the meaning of 
                section 401(c)(1), there shall be allowed as a 
                deduction under this section an amount equal to 
                the applicable percentage of the amount paid 
                during the taxable year for insurance which 
                constitutes medical care for the taxpayer, his 
                spouse, and dependents.
                  (B) Applicable percentage.--For purposes of 
                subparagraph (A), the applicable percentage 
                shall be determined under the following table:

            For taxable years beginning                   The applicable
              in calendar year--                         percentage is--
                1998....................................     35 percent 
                1999, 2000, or 2001.....................     40 percent 
                2002....................................     45 percent 
                2003 or thereafter......................     50 percent.

          * * * * * * *

        PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

Sec. 211. Allowance of deductions.
     * * * * * * *
[Sec. 220. Cross references.]
Sec. 220. Medical savings accounts.
Sec. 221. Cross reference.

          * * * * * * *

SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES.

      (a)  * * *
          * * * * * * *
      (d) Definitions.--For purposes of this section--
          (1) The term ``medical care'' means amounts paid--
                  (A) for the diagnosis, cure, mitigation, 
                treatment, or prevention of disease, or for the 
                purpose of affecting any structure or function 
                of the body,
                  (B) for transportation primarily for and 
                essential to medical care referred to in 
                subparagraph (A), [or]
                  (C) for qualified long-term care services (as 
                defined in section 7702B(c)), or
                  [(C)] (D) for insurance (including amounts 
                paid as premiums under part B of title XVIII of 
                the Social Security Act, relating to 
                supplementary medical insurance for the aged) 
                covering medical care referred to in 
                subparagraphs (A) and (B) or for any qualified 
                long-term care insurance contract (as defined 
                in section 7702B(b)).
        In the case of a qualified long-term care insurance 
        contract (as defined in section 7702B(b)), only 
        eligible long-term care premiums (as defined in 
        paragraph (10)) shall be taken into account under 
        subparagraph (D).
          * * * * * * *
          (6) In the case of an insurance contract under which 
        amounts are payable for other than medical care 
        referred to in [subparagraphs (A) and (B)] 
        subparagraphs (A), (B), and (C) of paragraph (1)--
                  (A) no amount shall be treated as paid for 
                insurance to which [paragraph (1)(C)] paragraph 
                (1)(D) applies unless the charge for such 
                insurance is either separately stated in the 
                contract, or furnished to the policyholder by 
                the insurance company in a separate statement,
          * * * * * * *
          (7) Subject to the limitations of paragraph (6), 
        premiums paid during the taxable year by a taxpayer 
        before he attains the age of 65 for insurance covering 
        medical care (within the meaning of [subparagraphs (A) 
        and (B)] subparagraphs (A), (B), and (C) of paragraph 
        (1)) for the taxpayer, his spouse, or a dependent after 
        the taxpayer attains the age of 65 shall be treated as 
        expenses paid during the taxable year for insurance 
        which constitutes medical care if premiums for such 
        insurance are payable (on a level payment basis) under 
        the contract for a period of 10 years or more or until 
        the year in which the taxpayer attains the age of 65 
        (but in no case for a period of less than 5 years).
          * * * * * * *
          (10) Eligible long-term care premiums.--
                  (A) In general.--For purposes of this 
                section, the term ``eligible long-term care 
                premiums'' means the amount paid during a 
                taxable year for any qualified long-term care 
                insurance contract (as defined in section 
                7702B(b)) covering an individual, to the extent 
                such amount does not exceed the limitation 
                determined under the following table:

            In the case of an individual                                
              with an attained age before the             The limitation
              close of the taxable year of:                    is:      
            40 or less..................................        $  200  
            More than 40 but not more than 50...........           375  
            More than 50 but not more than 60...........           750  
            More than 60 but not more than 70...........         2,000  
            More than 70................................        2,500.  

                  (B) Indexing.--
                          (i) In general.--In the case of any 
                        taxable year beginning in a calendar 
                        year after 1997, each dollar amount 
                        contained in subparagraph (A) shall be 
                        increased by the medical care cost 
                        adjustment of such amount for such 
                        calendar year. If any increase 
                        determined under the preceding sentence 
                        is not a multiple of $10, such increase 
                        shall be rounded to the nearest 
                        multiple of $10.
                          (ii) Medical care cost adjustment.--
                        For purposes of clause (i), the medical 
                        care cost adjustment for any calendar 
                        year is the percentage (if any) by 
                        which--
                                  (I) the medical care 
                                component of the Consumer Price 
                                Index (as defined in section 
                                1(f)(5)) for August of the 
                                preceding calendar year, 
                                exceeds
                                  (II) such component for 
                                August of 1996.
                        The Secretary shall, in consultation 
                        with the Secretary of Health and Human 
                        Services, prescribe an adjustment which 
                        the Secretary determines is more 
                        appropriate for purposes of this 
                        paragraph than the adjustment described 
                        in the preceding sentence, and the 
                        adjustment so prescribed shall apply in 
                        lieu of the adjustment described in the 
                        preceding sentence.
          (11) Certain payments to relatives treated as not 
        paid for medical care.--An amount paid for a qualified 
        long-term care service (as defined in section 7702B(c)) 
        provided to an individual shall be treated as not paid 
        for medical care if such service is provided--
                  (A) by the spouse of the individual or by a 
                relative (directly or through a partnership, 
                corporation, or other entity) unless the 
                service is provided by a licensed professional 
                with respect to such service, or
                  (B) by a corporation or partnership which is 
                related (within the meaning of section 267(b) 
                or 707(b)) to the individual.
        For purposes of this paragraph, the term ``relative'' 
        means an individual bearing a relationship to the 
        individual which is described in any of paragraphs (1) 
        through (8) of section 152(a). This paragraph shall not 
        apply for purposes of section 105(b) with respect to 
        reimbursements through insurance.
          * * * * * * *

SEC. 220. MEDICAL SAVINGS ACCOUNTS.

  (a) Deduction Allowed.--In the case of an individual who is 
an eligible individual for any month during the taxable year, 
there shall be allowed as a deduction for the taxable year an 
amount equal to the aggregate amount paid in cash during such 
taxable year by such individual to a medical savings account of 
such individual.
  (b) Limitations.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amount allowable as a deduction under 
        subsection (a) to an individual for the taxable year 
        shall not exceed--
                  (A) except as provided in subparagraph (B), 
                the lesser of--
                          (i) $2,000, or
                          (ii) the annual deductible limit for 
                        any individual covered under the high 
                        deductible health plan, or
                  (B) in the case of a high deductible health 
                plan covering the taxpayer and any other 
                eligible individual who is the spouse or any 
                dependent (as defined in section 152) of the 
                taxpayer, the lesser of--
                          (i) $4,000, or
                          (ii) the annual limit under the plan 
                        on the aggregate amount of deductibles 
                        required to be paid by all individuals.
        The preceding sentence shall not apply if the spouse of 
        such individual is covered under any other high 
        deductible health plan.
          (2) Special rule for married individuals.--
                  (A) In general.--This subsection shall be 
                applied separately for each married individual.
                  (B) Special rule.--If individuals who are 
                married to each other are covered under the 
                same high deductible health plan, then the 
                amounts applicable under paragraph (1)(B) shall 
                be divided equally between them unless they 
                agree on a different division.
          (3) Coordination with exclusion for employer 
        contributions.--No deduction shall be allowed under 
        this section for any amount paid for any taxable year 
        to a medical savings account of an individual if--
                  (A) any amount is paid to any medical savings 
                account of such individual which is excludable 
                from gross income under section 106(b) for such 
                year, or
                  (B) in a case described in paragraph (2), any 
                amount is paid to any medical savings account 
                of either spouse which is so excludable for 
                such year.
          (4) Proration of limitation.--
                  (A) In general.--The limitation under 
                paragraph (1) shall be the sum of the monthly 
                limitations for months during the taxable year 
                that the individual is an eligible individual 
                if--
                          (i) such individual is not an 
                        eligible individual for all months of 
                        the taxable year,
                          (ii) the deductible under the high 
                        deductible health plan covering such 
                        individual is not the same throughout 
                        such taxable year, or
                          (iii) such limitation is determined 
                        under paragraph (1)(B) for some but not 
                        all months during such taxable year.
                  (B) Monthly limitation.--The monthly 
                limitation for any month shall be an amount 
                equal to \1/12\ of the limitation which would 
                (but for this paragraph and paragraph (3)) be 
                determined under paragraph (1) if the facts and 
                circumstances as of the first day of such month 
                that such individual is covered under a high 
                deductible health plan were true for the entire 
                taxable year.
          (5) Denial of deduction to dependents.--No deduction 
        shall be allowed under this section to any individual 
        with respect to whom a deduction under section 151 is 
        allowable to another taxpayer for a taxable year 
        beginning in the calendar year in which such 
        individual's taxable year begins.
  (c) Definitions.--For purposes of this section--
          (1) Eligible individual.--
                  (A) In general.--The term ``eligible 
                individual'' means, with respect to any month, 
                any individual--
                          (i) who is covered under a high 
                        deductible health plan as of the 1st 
                        day of such month, and
                          (ii) who is not, while covered under 
                        a high deductible health plan, covered 
                        under any health plan--
                                  (I) which is not a high 
                                deductible health plan, and
                                  (II) which provides coverage 
                                for any benefit which is 
                                covered under the high 
                                deductible health plan.
                  (B) Certain coverage disregarded.--
                Subparagraph (A)(ii) shall be applied without 
                regard to--
                          (i) coverage for any benefit provided 
                        by permitted insurance, and
                          (ii) coverage (whether through 
                        insurance or otherwise) for accidents, 
                        disability, dental care, vision care, 
                        or long-term care.
          (2) High deductible health plan.--The term ``high 
        deductible health plan'' means a health plan which--
                  (A) has an annual deductible limit for each 
                individual covered by the plan which is not 
                less than $1,500, and
                  (B) has an annual limit on the aggregate 
                amount of deductibles required to be paid with 
                respect to all individuals covered by the plan 
                which is not less than $3,000.
        Such term does not include a health plan if 
        substantially all of its coverage is coverage described 
        in paragraph (1)(B). A plan shall not fail to be 
        treated as a high deductible health plan by reason of 
        failing to have a deductible for preventive care if the 
        absence of a deductible for such care is required by 
        State law.
          (3) Permitted insurance.--The term ``permitted 
        insurance'' means--
                  (A) Medicare supplemental insurance,
                  (B) insurance if substantially all of the 
                coverage provided under such insurance relates 
                to--
                          (i) liabilities incurred under 
                        workers' compensation laws,
                          (ii) tort liabilities,
                          (iii) liabilities relating to 
                        ownership or use of property, or
                          (iv) such other similar liabilities 
                        as the Secretary may specify by 
                        regulations,
                  (C) insurance for a specified disease or 
                illness, and
                  (D) insurance paying a fixed amount per day 
                (or other period) of hospitalization.
  (d) Medical Savings Account.--For purposes of this section--
          (1) Medical savings account.--The term ``medical 
        savings account'' means a trust created or organized in 
        the United States exclusively for the purpose of paying 
        the qualified medical expenses of the account holder, 
        but only if the written governing instrument creating 
        the trust meets the following requirements:
                  (A) Except in the case of a rollover 
                contribution described in subsection (f)(5), no 
                contribution will be accepted--
                          (i) unless it is in cash, or
                          (ii) to the extent such contribution, 
                        when added to previous contributions to 
                        the trust for the calendar year, 
                        exceeds $4,000.
                  (B) The trustee is a bank (as defined in 
                section 408(n)), an insurance company (as 
                defined in section 816), or another person who 
                demonstrates to the satisfaction of the 
                Secretary that the manner in which such person 
                will administer the trust will be consistent 
                with the requirements of this section.
                  (C) No part of the trust assets will be 
                invested in life insurance contracts.
                  (D) The assets of the trust will not be 
                commingled with other property except in a 
                common trust fund or common investment fund.
                  (E) The interest of an individual in the 
                balance in his account is nonforfeitable.
          (2) Qualified medical expenses.--
                  (A) In general.--The term ``qualified medical 
                expenses'' means, with respect to an account 
                holder, amounts paid by such holder for medical 
                care (as defined in section 213(d)) for such 
                individual, the spouse of such individual, and 
                any dependent (as defined in section 152) of 
                such individual, but only to the extent such 
                amounts are not compensated for by insurance or 
                otherwise.
                  (B) Health insurance may not be purchased 
                from account.--
                          (i) In general.--Subparagraph (A) 
                        shall not apply to any payment for 
                        insurance.
                          (ii) Exceptions.--Clause (i) shall 
                        not apply to any expense for coverage 
                        under--
                                  (I) a health plan during any 
                                period of continuation coverage 
                                required under any Federal law,
                                  (II) a qualified long-term 
                                care insurance contract (as 
                                defined in section 7702B(b)), 
                                or
                                  (III) a health plan during a 
                                period in which the individual 
                                is receiving unemployment 
                                compensation under any Federal 
                                or State law.
          (3) Account holder.--The term ``account holder'' 
        means the individual on whose behalf the medical 
        savings account was established.
          (4) Certain rules to apply.--Rules similar to the 
        following rules shall apply for purposes of this 
        section:
                  (A) Section 219(d)(2) (relating to no 
                deduction for rollovers).
                  (B) Section 219(f)(3) (relating to time when 
                contributions deemed made).
                  (C) Except as provided in section 106(b), 
                section 219(f)(5) (relating to employer 
                payments).
                  (D) Section 408(g) (relating to community 
                property laws).
                  (E) Section 408(h) (relating to custodial 
                accounts).
  (e) Tax Treatment of Accounts.--
          (1) In general.--A medical savings account is exempt 
        from taxation under this subtitle unless such account 
        has ceased to be a medical savings account by reason of 
        paragraph (2) or (3). Notwithstanding the preceding 
        sentence, any such account is subject to the taxes 
        imposed by section 511 (relating to imposition of tax 
        on unrelated business income of charitable, etc. 
        organizations).
          (2) Account terminations.--Rules similar to the rules 
        of paragraphs (2) and (4) of section 408(e) shall apply 
        to medical savings accounts, and any amount treated as 
        distributed under such rules shall be treated as not 
        used to pay qualified medical expenses.
  (f) Tax Treatment of Distributions.--
          (1) Amounts used for qualified medical expenses.--
                  (A) In general.--Any amount paid or 
                distributed out of a medical savings account 
                which is used exclusively to pay qualified 
                medical expenses of any account holder (or any 
                spouse or dependent of the holder) shall not be 
                includible in gross income.
                  (B) Treatment after death of account 
                holder.--
                          (i) Treatment if holder is spouse.--
                        If, after the death of the account 
                        holder, the account holder's interest 
                        is payable to (or for the benefit of) 
                        the holder's spouse, the medical 
                        savings account shall be treated as if 
                        the spouse were the account holder.
                          (ii) Treatment if designated holder 
                        is not spouse.--In the case of an 
                        account holder's interest in a medical 
                        savings account which is payable to (or 
                        for the benefit of) any person other 
                        than such holder's spouse upon the 
                        death of such holder--
                                  (I) such account shall cease 
                                to be a medical savings account 
                                as of the date of death, and
                                  (II) an amount equal to the 
                                fair market value of the assets 
                                in such account on such date 
                                shall be includible if such 
                                person is not the estate of 
                                such holder, in such person's 
                                gross income for the taxable 
                                year which includes such date, 
                                or if such person is the estate 
                                of such holder, in such 
                                holder's gross income for the 
                                last taxable year of such 
                                holder.
          (2) Inclusion of amounts not used for qualified 
        medical expenses.--
                  (A) In general.--Any amount paid or 
                distributed out of a medical savings account 
                which is not used exclusively to pay the 
                qualified medical expenses of the account 
                holder or of the spouse or dependents of such 
                holder shall be included in the gross income of 
                such holder.
                  (B) Special rules.--For purposes of 
                subparagraph (A)--
                          (i) all medical savings accounts of 
                        the account holder shall be treated as 
                        1 account,
                          (ii) all payments and distributions 
                        during any taxable year shall be 
                        treated as 1 distribution, and
                          (iii) any distribution of property 
                        shall be taken into account at its fair 
                        market value on the date of the 
                        distribution.
          (3) Excess contributions returned before due date of 
        return.--If the aggregate contributions (other than 
        rollover contributions) for a taxable year to the 
        medical savings accounts of an individual exceed the 
        amount allowable as a deduction under this section for 
        such contributions, paragraph (2) shall not apply to 
        distributions from such accounts (in an amount not 
        greater than such excess) if--
                  (A) such distribution is received by the 
                individual on or before the last day prescribed 
                by law (including extensions of time) for 
                filing such individual's return for such 
                taxable year, and
                  (B) such distribution is accompanied by the 
                amount of net income attributable to such 
                excess contribution.
        Any net income described in subparagraph (B) shall be 
        included in the gross income of the individual for the 
        taxable year in which it is received.
          (4) Penalty for distributions not used for qualified 
        medical expenses.--
                  (A) In general.--The tax imposed by this 
                chapter on the account holder for any taxable 
                year in which there is a payment or 
                distribution from a medical savings account of 
                such holder which is includible in gross income 
                under paragraph (2) shall be increased by 10 
                percent of the amount which is so includible.
                  (B) Exception for disability or death.--
                Subparagraph (A) shall not apply if the payment 
                or distribution is made after the account 
                holder becomes disabled within the meaning of 
                section 72(m)(7) or dies.
                  (C) Exception for distributions after age 
                59\1/2\.--Subparagraph (A) shall not apply to 
                any payment or distribution after the date on 
                which the account holder attains age 59\1/2\.
          (5) Rollover contribution.--An amount is described in 
        this paragraph as a rollover contribution if it meets 
        the requirements of subparagraphs (A) and (B).
                  (A) In general.--Paragraph (2) shall not 
                apply to any amount paid or distributed from a 
                medical savings account to the account holder 
                to the extent the amount received is paid into 
                a medical savings account for the benefit of 
                such holder not later than the 60th day after 
                the day on which the holder receives the 
                payment or distribution.
                  (B) Limitation.--This paragraph shall not 
                apply to any amount described in subparagraph 
                (A) received by an individual from a medical 
                savings account if, at any time during the 1-
                year period ending on the day of such receipt, 
                such individual received any other amount 
                described in subparagraph (A) from a medical 
                savings account which was not includible in the 
                individual's gross income because of the 
                application of this paragraph.
          (6) Coordination with medical expense deduction.--For 
        purposes of determining the amount of the deduction 
        under section 213, any payment or distribution out of a 
        medical savings account for qualified medical expenses 
        shall not be treated as an expense paid for medical 
        care.
          (7)  Transfer of account incident to divorce.--The 
        transfer of an individual's interest in a medical 
        savings account to an individual's spouse or former 
        spouse under a divorce or separation instrument 
        described in subparagraph (A) of section 71(b)(2) shall 
        not be considered a taxable transfer made by such 
        individual notwithstanding any other provision of this 
        subtitle, and such interest shall, after such transfer, 
        be treated as a medical savings account with respect to 
        which the spouse is the account holder.
      (g) Cost-of-Living Adjustment.--
          (1) In general.--In the case of any taxable year 
        beginning in a calendar year after 1997, each dollar 
        amount in subsection (b)(1), (c)(2), or (d)(1)(A) shall 
        be increased by an amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the medical care cost adjustment for such 
                calendar year.
If any increase under the preceding sentence is not a multiple 
of $50, such increase shall be rounded to the nearest multiple 
of $50.
          (2) Medical care cost adjustment.--For purposes of 
        paragraph (1), the medical care cost adjustment for any 
        calendar year is the percentage (if any) by which--
                  (A) the medical care component of the 
                Consumer Price Index (as defined in section 
                1(f)(5)) for August of the preceding calendar 
                year, exceeds
                  (B) such component for August of 1996.
      (h) Reports.--The Secretary may require the trustee of a 
medical savings account to make such reports regarding such 
account to the Secretary and to the account holder with respect 
to contributions, distributions, and such other matters as the 
Secretary determines appropriate. The reports required by this 
subsection shall be filed at such time and in such manner and 
furnished to such individuals at such time and in such manner 
as may be required by those regulations.

SEC. [220.] 221. CROSS REFERENCE.

        For deductions in respect of a decedent, see section 691.
          * * * * * * *

             PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS

          * * * * * * *

SEC. 246. RULES APPLYING TO DEDUCTIONS FOR DIVIDENDS RECEIVED.

    (a)  * * *
          * * * * * * *
    [(f) Cross Reference.--
          [For special rule relating to mutual savings banks, etc., to 
        which section 593 applies, see section 596.]
          * * * * * * *

     PART XI--SPECIAL RULES RELATING TO CORPORATE PREFERENCE ITEMS

          * * * * * * *

SEC. 291. SPECIAL RULES RELATING TO CORPORATE PREFERENCE ITEMS.

    (a)  * * *
          * * * * * * *
    (e) Definitions.--For purposes of this section--
          (1) Financial institution preference item.--The term 
        ``financial institution preference item'' includes the 
        following:
                  (A)  * * *
                  (B) Interest on debt to carry tax-exempt 
                obligations acquired after december 31, 1982, 
                and before august 8, 1986.--
                          (i) In general.--In the case of a 
                        financial institution which is a bank 
                        (as defined in section 585(a)(2)) [or 
                        to which section 593 applies], the 
                        amount of interest on indebtedness 
                        incurred or continued to purchase or 
                        carry obligations acquired after 
                        December 31, 1982, and before August 8, 
                        1986, the interest on which is exempt 
                        from taxes for the taxable year, to the 
                        extent that a deduction would (but for 
                        this paragraph or section 265(b)) be 
                        allowable with respect to such interest 
                        for such taxable year.
          * * * * * * *

                   Subchapter F--Exempt Organizations

          * * * * * * *

                          PART I--GENERAL RULE

          * * * * * * *

SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.

    (a)  * * *
          * * * * * * *
    (c) List of Exempt Organizations.--The following 
organizations are referred to in subsection (a):
          (1)  * * *
          * * * * * * *
          (26) Any membership organization if--
                  (A) such organization is established by a 
                State exclusively to provide coverage for 
                medical care (as defined in section 213(d)) on 
                a not-for-profit basis to individuals described 
                in subparagraph (B) through--
                          (i) insurance issued by the 
                        organization, or
                          (ii) a health maintenance 
                        organization under an arrangement with 
                        the organization,
                  (B) the only individuals receiving such 
                coverage through the organization are 
                individuals--
                          (i) who are residents of such State, 
                        and
                          (ii) who, by reason of the existence 
                        or history of a medical condition, are 
                        unable to acquire medical care coverage 
                        for such condition through insurance or 
                        from a health maintenance organization 
                        or are able to acquire such coverage 
                        only at a rate which is substantially 
                        in excess of the rate for such coverage 
                        through the membership organization,
                  (C) the composition of the membership in such 
                organization is specified by such State, and
                  (D) no part of the net earnings of the 
                organization inures to the benefit of any 
                private shareholder or individual.
          * * * * * * *

                   Subchapter H--Banking Institutions

          * * * * * * *

                           PART I--DEDUCTIONS

          * * * * * * *

SEC. 585. RESERVES FOR LOSSES ON LOANS OF BANKS.

    (a) Reserve for Bad Debts.--
          (1)  * * *
          (2) Bank.--For purposes of this section--
                  (A) In general.--The term ``bank'' means any 
                bank (as defined in section 581) [other than an 
                organization to which section 593 applies].
          * * * * * * *

                  PART II--MUTUAL SAVINGS BANKS, ETC.

Sec. 591. Deduction for dividends paid on deposits.
     * * * * * * *
[Sec. 595. Foreclosure on property securing loans.]
[Sec. 596. Limitation on dividends received deduction.]
          * * * * * * *

SEC. 593. RESERVES FOR LOSSES ON LOANS.

  (a)  * * *
          * * * * * * *
  (e) Distributions to Shareholders.--
          (1) In general.--For purposes of this chapter, any 
        distribution of property (as defined in section 317(a)) 
        [by a domestic building and loan association or an 
        institution that is treated as a mutual savings bank 
        under section 591(b)] by a taxpayer having a balance 
        described in subsection (g)(2)(A)(ii) to a shareholder 
        with respect to its stock, if such distribution is not 
        allowable as a deduction under section 591, shall be 
        treated as made--
                  (A) first out of its earnings and profits 
                accumulated in taxable years beginning after 
                December 31, 1951, to the extent thereof,
                  [(B) then out of the reserve for losses on 
                qualifying real property loans, to the extent 
                additions to such reserve exceed the additions 
                which would have been allowed under subsection 
                (b)(3),]
                  (B) then out of the balance taken into 
                account under subsection (g)(2)(A)(ii) 
                (properly adjusted for amounts charged against 
                such reserves for taxable years beginning after 
                December 31, 1987),
          * * * * * * *
This paragraph shall apply in the case of any distribution in 
redemption of stock or in partial or complete liquidation of 
the association, or an institution that is treated as a mutual 
savings bank under section 591(b), except that any such 
distribution shall be treated as made first out of the amount 
referred to in subparagraph (B), second out of the amount 
referred to in subparagraph (C), third out of the amount 
referred to in subparagraph (A), and then out of such other 
accounts as may be proper. This paragraph shall not apply to 
any transaction to which section 381 applies, or to any 
distribution to the Federal Savings and Loan Insurance 
Corporation (or any successor thereof) or the Federal Deposit 
Insurance Corporation in redemption of an interest in an 
association, if such interest was originally received by any 
such entity in exchange for assistance provided under a 
provision of law referred to in section 597(c). This paragraph 
shall not apply to any distribution of all of the stock of a 
bank (as defined in section 581) to another corporation if, 
immediately after the distribution, such bank and such other 
corporation are members of the same affiliated group (as 
defined in section 1504) and the provisions of section 5(e) of 
the Federal Deposit Insurance Act (as in effect on December 31, 
1995) or similar provisions are in effect.
          * * * * * * *
  (f) Termination of Reserve Method.--Subsections (a), (b), 
(c), and (d) shall not apply to any taxable year beginning 
after December 31, 1995.
  (g) 6-Year Spread of Adjustments.--
          (1) In general.--In the case of any taxpayer who is 
        required by reason of subsection (f) to change its 
        method of computing reserves for bad debts--
                  (A) such change shall be treated as a change 
                in a method of accounting,
                  (B) such change shall be treated as initiated 
                by the taxpayer and as having been made with 
                the consent of the Secretary, and
                  (C) the net amount of the adjustments 
                required to be taken into account by the 
                taxpayer under section 481(a)--
                          (i) shall be determined by taking 
                        into account only applicable excess 
                        reserves, and
                          (ii) as so determined, shall be taken 
                        into account ratably over the 6-taxable 
                        year period beginning with the first 
                        taxable year beginning after December 
                        31, 1995.
          (2) Applicable excess reserves.--
                  (A) In general.--For purposes of paragraph 
                (1), the term ``applicable excess reserves'' 
                means the excess (if any) of--
                          (i) the balance of the reserves 
                        described in subsection (c)(1) (other 
                        than the supplemental reserve) as of 
                        the close of the taxpayer's last 
                        taxable year beginning before December 
                        31, 1995, over
                          (ii) the lesser of--
                                  (I) the balance of such 
                                reserves as of the close of the 
                                taxpayer's last taxable year 
                                beginning before January 1, 
                                1988, or
                                  (II) the balance of the 
                                reserves described in subclause 
                                (I), reduced in the same manner 
                                as under section 
                                585(b)(2)(B)(ii) on the basis 
                                of the taxable years described 
                                in clause (i) and this clause.
                  (B) Special rule for thrifts which become 
                small banks.--In the case of a bank (as defined 
                in section 581) which was not a large bank (as 
                defined in section 585(c)(2)) for its first 
                taxable year beginning after December 31, 
                1995--
                          (i) the balance taken into account 
                        under subparagraph (A)(ii) shall not be 
                        less than the amount which would be the 
                        balance of such reserves as of the 
                        close of its last taxable year 
                        beginning before such date if the 
                        additions to such reserves for all 
                        taxable years had been determined under 
                        section 585(b)(2)(A), and
                          (ii) the opening balance of the 
                        reserve for bad debts as of the 
                        beginning of such first taxable year 
                        shall be the balance taken into account 
                        under subparagraph (A)(ii) (determined 
                        after the application of clause (i) of 
                        this subparagraph).
                The preceding sentence shall not apply for 
                purposes of paragraphs (5) and (6) or 
                subsection (e)(1).
          (3) Recapture of pre-1988 reserves where taxpayer 
        ceases to be bank.--If, during any taxable year 
        beginning after December 31, 1995, a taxpayer to which 
        paragraph (1) applied is not a bank (as defined in 
        section 581), paragraph (1) shall apply to the reserves 
        described in paragraph (2)(A)(ii) and the supplemental 
        reserve; except that such reserves shall be taken into 
        account ratably over the 6-taxable year period 
        beginning with such taxable year.
          (4) Suspension of recapture if residential loan 
        requirement met.--
                  (A) In general.--In the case of a bank which 
                meets the residential loan requirement of 
                subparagraph (B) for the first taxable year 
                beginning after December 31, 1995, or for the 
                following taxable year--
                          (i) no adjustment shall be taken into 
                        account under paragraph (1) for such 
                        taxable year, and
                          (ii) such taxable year shall be 
                        disregarded in determining--
                                  (I) whether any other taxable 
                                year is a taxable year for 
                                which an adjustment is required 
                                to be taken into account under 
                                paragraph (1), and
                                  (II) the amount of such 
                                adjustment.
                  (B) Residential loan requirement.--A taxpayer 
                meets the residential loan requirement of this 
                subparagraph for any taxable year if the 
                principal amount of the residential loans made 
                by the taxpayer during such year is not less 
                than the base amount for such year.
                  (C) Residential loan.--For purposes of this 
                paragraph, the term ``residential loan'' means 
                any loan described in clause (v) of section 
                7701(a)(19)(C) but only if such loan is 
                incurred in acquiring, constructing, or 
                improving the property described in such 
                clause.
                  (D) Base amount.--For purposes of 
                subparagraph (B), the base amount is the 
                average of the principal amounts of the 
                residential loans made by the taxpayer during 
                the 6 most recent taxable years beginning on or 
                before December 31, 1995. At the election of 
                the taxpayer who made such loans during each of 
                such 6 taxable years, the preceding sentence 
                shall be applied without regard to the taxable 
                year in which such principal amount was the 
                highest and the taxable year in such principal 
                amount was the lowest. Such an election may be 
                made only for the first taxable year beginning 
                after such date, and, if made for such taxable 
                year, shall apply to the succeeding taxable 
                year unless revoked with the consent of the 
                Secretary.
                  (E) Controlled groups.--In the case of a 
                taxpayer which is a member of any controlled 
                group of corporations described in section 
                1563(a)(1), subparagraph (B) shall be applied 
                with respect to such group.
          (5) Continued application of fresh start under 
        section 585 transitional rules.--In the case of a 
        taxpayer to which paragraph (1) applied and which was 
        not a large bank (as defined in section 585(c)(2)) for 
        its first taxable year beginning after December 31, 
        1995:
                  (A) In general.--For purposes of determining 
                the net amount of adjustments referred to in 
                section 585(c)(3)(A)(iii), there shall be taken 
                into account only the excess (if any) of the 
                reserve for bad debts as of the close of the 
                last taxable year before the disqualification 
                year over the balance taken into account by 
                such taxpayer under paragraph (2)(A)(ii) of 
                this subsection.
                  (B) Treatment under elective cut-off 
                method.--For purposes of applying section 
                585(c)(4)--
                          (i) the balance of the reserve taken 
                        into account under subparagraph (B) 
                        thereof shall be reduced by the balance 
                        taken into account by such taxpayer 
                        under paragraph (2)(A)(ii) of this 
                        subsection, and
                          (ii) no amount shall be includible in 
                        gross income by reason of such 
                        reduction.
          (6) Suspended reserve included as section 381(c) 
        items.--The balance taken into account by a taxpayer 
        under paragraph (2)(A)(ii) of this subsection and the 
        supplemental reserve shall be treated as items 
        described in section 381(c).
          (7) Conversions to credit unions.--In the case of a 
        taxpayer to which paragraph (1) applied which becomes a 
        credit union described in section 501(c) and exempt 
        from taxation under section 501(a)--
                  (A) any amount required to be included in the 
                gross income of the credit union by reason of 
                this subsection shall be treated as derived 
                from an unrelated trade or business (as defined 
                in section 513), and
                  (B) for purposes of paragraph (3), the credit 
                union shall not be treated as if it were a 
                bank.
          (8) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out this 
        subsection and subsection (e), including regulations 
        providing for the application of such subsections in 
        the case of acquisitions, mergers, spin-offs, and other 
        reorganizations.
          * * * * * * *

[SEC. 595. FORECLOSURE ON PROPERTY SECURING LOANS.

  [(a) Nonrecognition of Gain or Loss as a Result of 
Foreclosure.--In the case of a creditor which is an 
organization described in section 593(a), no gain or loss shall 
be recognized, and no debt shall be considered as becoming 
worthless or partially worthless, as the result of such 
organization having bid in at foreclosure, or having otherwise 
reduced to ownership or possession by agreement or process of 
law, any property which was security for the payment of any 
indebtedness.
    [(b) Character of Property.--For purposes of sections 166 
and 1221, any property acquired in a transaction with respect 
to which gain or loss to an organization was not recognized by 
reason of subsection (a) shall be considered as property having 
the same characteristics as the indebtedness for which such 
property was security. Any amount realized by such organization 
with respect to such property shall be treated for purposes of 
this chapter as a payment on account of such indebtedness, and 
any loss with respect thereto shall be treated as a bad debt to 
which the provisions of section 166 (relating to allowance of a 
deduction for bad debts) apply.
    [(c) Basis.--The basis of any property to which subsection 
(a) applies shall be the basis of the indebtedness for which 
such property was security (determined as of the date of the 
acquisition of such property), properly increased for costs of 
acquisition.
    [(d) Regulatory Authority.--The Secretary shall prescribe 
such regulations as he may deem necessary to carry out the 
purposes of this section.

[SEC. 596. LIMITATION ON DIVIDENDS RECEIVED DEDUCTION.

    [In the case of an organization to which section 593 
applies and which computes additions to the reserve for losses 
on loans for the taxable year under section 593(b)(2), the 
total amount allowed under sections 243, 244, and 245 
(determined without regard to this section) for the taxable 
year as a deduction with respect to dividends received shall be 
reduced by an amount equal to 8 percent of such total amount.]
          * * * * * * *

                   Subchapter L--Insurance Companies

          * * * * * * *

                    PART I--LIFE INSURANCE COMPANIES

          * * * * * * *

                Subpart E--Definitions and Special Rules

          * * * * * * *

SEC. 818. OTHER DEFINITIONS AND SPECIAL RULES.

    (a)  * * *
          * * * * * * *
    (g) Qualified Accelerated Death Benefit Riders Treated as 
Life Insurance.--For purposes of this part--
          (1) In general.--Any reference to a life insurance 
        contract shall be treated as including a reference to a 
        qualified accelerated death benefit rider on such 
        contract.
          (2) Qualified accelerated death benefit riders.--For 
        purposes of this subsection, the term ``qualified 
        accelerated death benefit rider'' means any rider on a 
        life insurance contract if the only payments under the 
        rider are payments meeting the requirements of section 
        101(g).
          (3) Exception for long-term care riders.--Paragraph 
        (1) shall not apply to any rider which is treated as a 
        long-term care insurance contract under section 7702B.
          * * * * * * *

                   PART II--OTHER INSURANCE COMPANIES

          * * * * * * *

SEC. 833. TREATMENT OF BLUE CROSS AND BLUE SHIELD ORGANIZATIONS, ETC.

    (a)  * * *
          * * * * * * *
    (c) Organizations to Which Section Applies.--
          (1)  * * *
          * * * * * * *
          (4) Treatment as existing blue cross or blue shield 
        organization.--
                  (A) In general.--Paragraph (2) shall be 
                applied to an organization described in 
                subparagraph (B) as if it were a Blue Cross or 
                Blue Shield organization.
                  (B) Applicable organization.--An organization 
                is described in this subparagraph if it--
                          (i) is organized under, and governed 
                        by, State laws which are specifically 
                        and exclusively applicable to not-for-
                        profit health insurance or health 
                        service type organizations, and
                          (ii) is not a Blue Cross or Blue 
                        Shield organization or health 
                        maintenance organization.
          * * * * * * *

              PART III--PROVISIONS OF GENERAL APPLICATION

          * * * * * * *

SEC. 848. CAPITALIZATION OF CERTAIN POLICY ACQUISITION EXPENSES.

    (a)  * * *
          * * * * * * *
    (e) Classification of Contracts.--For purposes of this 
section--
          (1) Specified insurance contract.--
                  (A)  * * *
                  (B) Exceptions.--The term ``specified 
                insurance contract'' shall not include--
                          (i) any pension plan contract (as 
                        defined in section 818(a)),
                          (ii) any flight insurance or similar 
                        contract, [and]
                          (iii) any qualified foreign contract 
                        (as defined in section 807(e)(4) 
                        without regard to paragraph (5) of this 
                        subsection)[.], and
                          (iv) any contract which is a medical 
                        savings account (as defined in section 
                        220(d)).
          * * * * * * *

Subchapter M--Regulated Investment Companies and Real Estate Investment 
                                 Trusts

          * * * * * * *

           PART IV--REAL ESTATE MORTGAGE INVESTMENT CONDUITS

          * * * * * * *

SEC. 860E. TREATMENT OF INCOME IN EXCESS OF DAILY ACCRUALS ON RESIDUAL 
                    INTERESTS.

    (a) Excess Inclusions May Not Be Offset By Net Operating 
Losses.--
          (1) In general.--[Except as provided in paragraph 
        (2), the] The taxable income of any holder of a 
        residual interest in a REMIC for any taxable year shall 
        in no event be less than the excess inclusion for such 
        taxable year.
          [(2) Exception for certain financial institutions.--
        Paragraph (1) shall not apply to any organization to 
        which section 593 applies. The Secretary may by 
        regulations provide that the preceding sentence shall 
        not apply where necessary or appropriate to prevent 
        avoidance of tax imposed by this chapter.
          [(3)] (2) Special rule for affiliated groups.--All 
        members of an affiliated group filing a consolidated 
        return shall be treated as 1 taxpayer for purposes of 
        this subsection[, except that paragraph (2) shall be 
        applied separately with respect to each corporation 
        which is a member of such group and to which section 
        593 applies].
          [(4) Treatment of certain subsidiaries.--
                  [(A) In general.--For purposes of this 
                subsection, a corporation to which section 593 
                applies and each qualified subsidiary of such 
                corporation shall be treated as a single 
                corporation to which section 593 applies.
                  [(B) Qualified subsidiary.--For purposes of 
                this subsection, the term ``qualified 
                subsidiary'' means any corporation--
                          [(i) all the stock of which, and 
                        substantially all the indebtedness of 
                        which, is held directly by the 
                        corporation to which section 593 
                        applies, and
                          [(ii) which is organized and operated 
                        exclusively in connection with the 
                        organization and operation of 1 or more 
                        REMIC's.
          [(5)] (3) Coordination with section 172.--Any excess 
        inclusion for any taxable year shall not be taken into 
        account--
                  (A) in determining under section 172 the 
                amount of any net operating loss for such 
                taxable year, and
                  (B) in determining taxable income for such 
                taxable year for purposes of the 2nd sentence 
                of section 172(b)(2).
          * * * * * * *

 Subchapter N--Tax Based on Income From Sources Within or Without the 
                             United States

          * * * * * * *

          PART II--NONRESIDENT ALIENS AND FOREIGN CORPORATIONS

                Subpart A--Nonresident Alien Individuals

          * * * * * * *

SEC. 877. EXPATRIATION TO AVOID TAX.

    [(a) In General.--Every nonresident alien individual who at 
any time after March 8, 1965, and within the 10-year period 
immediately preceding the close of the taxable year lost United 
States citizenship, unless such loss did not have for one of 
its principal purposes the avoidance of taxes under this 
subtitle or subtitle B, shall be taxable for such taxable year 
in the manner provided in subsection (b) if the tax imposed 
pursuant to such subsection exceeds the tax which, without 
regard to this section, is imposed pursuant to section 871.]
    (a) Treatment of Expatriates.--
          (1) In general.--Every nonresident alien individual 
        who, within the 10-year period immediately preceding 
        the close of the taxable year, lost United States 
        citizenship, unless such loss did not have for 1 of its 
        principal purposes the avoidance of taxes under this 
        subtitle or subtitle B, shall be taxable for such 
        taxable year in the manner provided in subsection (b) 
        if the tax imposed pursuant to such subsection (after 
        any reduction in such tax under the last sentence of 
        such subsection) exceeds the tax which, without regard 
        to this section, is imposed pursuant to section 871.
          (2) Certain individuals treated as having tax 
        avoidance purpose.--For purposes of paragraph (1), an 
        individual shall be treated as having a principal 
        purpose to avoid such taxes if--
                  (A) the average annual net income tax (as 
                defined in section 38(c)(1)) of such individual 
                for the period of 5 taxable years ending before 
                the date of the loss of United States 
                citizenship is greater than $100,000, or
                  (B) the net worth of the individual as of 
                such date is $500,000 or more.
        In the case of the loss of United States citizenship in 
        any calendar year after 1996, such $100,000 and 
        $500,000 amounts shall be increased by an amount equal 
        to such dollar amount multiplied by the cost-of-living 
        adjustment determined under section 1(f)(3) for such 
        calendar year by substituting ``1994'' for ``1992'' in 
        subparagraph (B) thereof. Any increase under the 
        preceding sentence shall be rounded to the nearest 
        multiple of $1,000.
      (b) Alternative Tax.--A nonresident alien individual 
described in subsection (a) shall be taxable for the taxable 
year as provided in section 1, 55, or 402(d)(1), except that--
          (1) the gross income shall include only the gross 
        income described in section 872(a) (as modified by 
        subsection [(c)] (d) of this section), and
          (2) the deductions shall be allowed if and to the 
        extent that they are connected with the gross income 
        included under this section, except that the capital 
        loss carryover provided by section 1212(b) shall not be 
        allowed; and the proper allocation and apportionment of 
        the deductions for this purpose shall be determined as 
        provided under regulations prescribed by the Secretary.
For purposes of paragraph (2), the deductions allowed by 
section 873(b) shall be allowed; and the deduction (for losses 
not connected with the trade or business if incurred in 
transactions entered into for profit) allowed by section 
165(c)(2) shall be allowed, but only if the profit, if such 
transaction had resulted in a profit, would be included in 
gross income under this section. The tax imposed solely by 
reason of this section shall be reduced (but not below zero) by 
the amount of any income, war profits, and excess profits taxes 
(within the meaning of section 903) paid to any foreign country 
or possession of the United States on any income of the 
taxpayer on which tax is imposed solely by reason of this 
section.
    (c) Tax Avoidance Not Presumed in Certain Cases.--
          (1) In general.--Subsection (a)(2) shall not apply to 
        an individual if--
                  (A) such individual is described in a 
                subparagraph of paragraph (2) of this 
                subsection, and
                  (B) within the 1-year period beginning on the 
                date of the loss of United States citizenship, 
                such individual submits a ruling request for 
                the Secretary's determination as to whether 
                such loss has for 1 of its principal purposes 
                the avoidance of taxes under this subtitle or 
                subtitle B.
          (2) Individuals described.--
                  (A) Dual citizenship, etc.--An individual is 
                described in this subparagraph if--
                          (i) the individual became at birth a 
                        citizen of the United States and a 
                        citizen of another country and 
                        continues to be a citizen of such other 
                        country, or
                          (ii) the individual becomes (not 
                        later than the close of a reasonable 
                        period after loss of United States 
                        citizenship) a citizen of the country 
                        in which--
                                  (I) such individual was born,
                                  (II) if such individual is 
                                married, such individual's 
                                spouse was born, or
                                  (III) either of such 
                                individual's parents were born.
                  (B) Long-term foreign residents.--An 
                individual is described in this subparagraph 
                if, for each year in the 10-year period ending 
                on the date of loss of United States 
                citizenship, the individual was present in the 
                United States for 30 days or less. The rule of 
                section 7701(b)(3)(D)(ii) shall apply for 
                purposes of this subparagraph.
                  (C) Renunciation upon reaching age of 
                majority.--An individual is described in this 
                subparagraph if the individual's loss of United 
                States citizenship occurs before such 
                individual attains age 18\1/2\.
                  (D) Individuals specified in regulations.--An 
                individual is described in this subparagraph if 
                the individual is described in a category of 
                individuals prescribed by regulation by the 
                Secretary.
      [(c) Special Rules of Source.--For purposes of subsection 
(b), the following items of gross income shall be treated as 
income from sources within the United States:
          [(1) Sale of property.--Gains on the sale or exchange 
        of property (other than stock or debt obligations) 
        located in the United States.
          [(2) Stock or debt obligations.--Gains on the sale or 
        exchange of stock issued by a domestic corporation or 
        debt obligations of United States persons or of the 
        United States, a State or political subdivision 
        thereof, or the District of Columbia.
[For purposes of this section, gain on the sale or exchange of 
property which has a basis determined in whole or in part by 
reference to property described in paragraph (1) or (2) shall 
be treated as gain described in paragraph (1) or (2).]
  (d) Special Rules for Source, Etc.--For purposes of 
subsection (b)--
          (1) Source rules.--The following items of gross 
        income shall be treated as income from sources within 
        the United States:
                  (A) Sale of property.--Gains on the sale or 
                exchange of property (other than stock or debt 
                obligations) located in the United States.
                  (B) Stock or debt obligations.--Gains on the 
                sale or exchange of stock issued by a domestic 
                corporation or debt obligations of United 
                States persons or of the United States, a State 
                or political subdivision thereof, or the 
                District of Columbia.
                  (C) Income or gain derived from controlled 
                foreign corporation.--Any income or gain 
                derived from stock in a foreign corporation but 
                only--
                          (i) if the individual losing United 
                        States citizenship owned (within the 
                        meaning of section 958(a)), or is 
                        considered as owning (by applying the 
                        ownership rules of section 958(b)), at 
                        any time during the 2-year period 
                        ending on the date of the loss of 
                        United States citizenship, more than 50 
                        percent of--
                                  (I) the total combined voting 
                                power of all classes of stock 
                                entitled to vote of such 
                                corporation, or
                                  (II) the total value of the 
                                stock of such corporation, and
                          (ii) to the extent such income or 
                        gain does not exceed the earnings and 
                        profits attributable to such stock 
                        which were earned or accumulated before 
                        the loss of citizenship and during 
                        periods that the ownership requirements 
                        of clause (i) are met.
          (2) Gain recognition on certain exchanges.--
                  (A) In general.--In the case of any exchange 
                of property to which this paragraph applies, 
                notwithstanding any other provision of this 
                title, such property shall be treated as sold 
                for its fair market value on the date of such 
                exchange, and any gain shall be recognized for 
                the taxable year which includes such date.
                  (B) Exchanges to which paragraph applies.--
                This paragraph shall apply to any exchange 
                during the 10-year period described in 
                subsection (a) if--
                          (i) gain would not (but for this 
                        paragraph) be recognized on such 
                        exchange in whole or in part for 
                        purposes of this subtitle,
                          (ii) income derived from such 
                        property was from sources within the 
                        United States (or, if no income was so 
                        derived, would have been from such 
                        sources), and
                          (iii) income derived from the 
                        property acquired in the exchange would 
                        be from sources outside the United 
                        States.
                  (C) Exception.--Subparagraph (A) shall not 
                apply if the individual enters into an 
                agreement with the Secretary which specifies 
                that any income or gain derived from the 
                property acquired in the exchange (or any other 
                property which has a basis determined in whole 
                or part by reference to such property) during 
                such 10-year period shall be treated as from 
                sources within the United States. If the 
                property transferred in the exchange is 
                disposed of by the person acquiring such 
                property, such agreement shall terminate and 
                any gain which was not recognized by reason of 
                such agreement shall be recognized as of the 
                date of such disposition.
                  (D) Secretary may extend period.--To the 
                extent provided in regulations prescribed by 
                the Secretary, subparagraph (B) shall be 
                applied by substituting the 15-year period 
                beginning 5 years before the loss of United 
                States citizenship for the 10-year period 
                referred to therein.
                  (E) Secretary may require recognition of gain 
                in certain cases.--To the extent provided in 
                regulations prescribed by the Secretary--
                          (i) the removal of appreciated 
                        tangible personal property from the 
                        United States, and
                          (ii) any other occurrence which 
                        (without recognition of gain) results 
                        in a change in the source of the income 
                        or gain from property from sources 
                        within the United States to sources 
                        outside the United States,
                shall be treated as an exchange to which this 
                paragraph applies.
          (3) Substantial diminishing of risks of ownership.--
        For purposes of determining whether this section 
        applies to any gain on the sale or exchange of any 
        property, the running of the 10-year period described 
        in subsection (a) shall be suspended for any period 
        during which the individual's risk of loss with respect 
        to the property is substantially diminished by--
                  (A) the holding of a put with respect to such 
                property (or similar property),
                  (B) the holding by another person of a right 
                to acquire the property, or
                  (C) a short sale or any other transaction.
      [(d) Exception for Loss of Citizenship for Certain 
Causes.--Subsection (a) shall not apply to a nonresident alien 
individual whose loss of United States citizenship resulted 
from the application of section 301(b), 350, or 355 of the 
Immigration and Nationality Act, as amended (8 U.S.C. 1401(b), 
1482, or 1487).]
  (e) Comparable Treatment of Lawful Permanent Residents Who 
Cease To Be Taxed as Residents.--
          (1) In general.--Any long-term resident of the United 
        States who--
                  (A) ceases to be a lawful permanent resident 
                of the United States (within the meaning of 
                section 7701(b)(6)), or
                  (B) commences to be treated as a resident of 
                a foreign country under the provisions of a tax 
                treaty between the United States and the 
                foreign country and who does not waive the 
                benefits of such treaty applicable to residents 
                of the foreign country,
        shall be treated for purposes of this section and 
        sections 2107, 2501, and 6039F in the same manner as if 
        such resident were a citizen of the United States who 
        lost United States citizenship on the date of such 
        cessation or commencement.
          (2) Long-term resident.--For purposes of this 
        subsection, the term ``long-term resident'' means any 
        individual (other than a citizen of the United States) 
        who is a lawful permanent resident of the United States 
        in at least 8 taxable years during the period of 15 
        taxable years ending with the taxable year during which 
        the event described in subparagraph (A) or (B) of 
        paragraph (1) occurs. For purposes of the preceding 
        sentence, an individual shall not be treated as a 
        lawful permanent resident for any taxable year if such 
        individual is treated as a resident of a foreign 
        country for the taxable year under the provisions of a 
        tax treaty between the United States and the foreign 
        country and does not waive the benefits of such treaty 
        applicable to residents of the foreign country.
          (3) Special rules.--
                  (A) Exceptions not to apply.--Subsection (c) 
                shall not apply to an individual who is treated 
                as provided in paragraph (1).
                  (B) Step-up in basis.--Solely for purposes of 
                determining any tax imposed by reason of this 
                subsection, property which was held by the 
                long-term resident on the date the individual 
                first became a resident of the United States 
                shall be treated as having a basis on such date 
                of not less than the fair market value of such 
                property on such date. The preceding sentence 
                shall not apply if the individual elects not to 
                have such sentence apply. Such an election, 
                once made, shall be irrevocable.
          (4) Authority to exempt individuals.--This subsection 
        shall not apply to an individual who is described in a 
        category of individuals prescribed by regulation by the 
        Secretary.
          (5) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out this 
        subsection, including regulations providing for the 
        application of this subsection in cases where an alien 
        individual becomes a resident of the United States 
        during the 10-year period after being treated as 
        provided in paragraph (1).
    [(e)] (f) Burden of Proof.--If the Secretary establishes 
that it is reasonable to believe that an individual's loss of 
United States citizenship would, but for this section, result 
in a substantial reduction for the taxable year in the taxes on 
his probable income for such year, the burden of proving for 
such taxable year that such loss of citizenship did not have 
for one of its principal purposes the avoidance of taxes under 
this subtitle or subtitle B shall be on such individual.
          * * * * * * *

           PART IV--DOMESTIC INTERNATIONAL SALES CORPORATION

          * * * * * * *

            Subpart A--Treatment of Qualifying Corporations

          * * * * * * *

SEC. 992. REQUIREMENTS OF A DOMESTIC INTERNATIONAL SALES CORPORATION.

    (a) * * *
          * * * * * * *
    (d) Ineligible Corporations.--The following corporations 
shall not be eligible to be treated as a DISC--
          (1) * * *
          * * * * * * *
          (3) a financial institution to which section 581 [or 
        593] applies,
          * * * * * * *

         Subchapter O--Gain or Loss on Disposition of Property

          * * * * * * *

                 PART III--COMMON NONTAXABLE EXCHANGES

          * * * * * * *

SEC. 1038. CERTAIN REACQUISITIONS OF REAL PROPERTY.

    (a) * * *
          * * * * * * *
    [(f) Reacquisitions by Domestic Building and Loan 
Associations.--This section shall not apply to a reacquisition 
of real property by an organization described in section 593(a) 
(relating to domestic building and loan associations, etc.).]
          * * * * * * *

SEC. 1042. SALES OF STOCK TO EMPLOYEE STOCK OWNERSHIP PLANS OR CERTAIN 
                    COOPERATIVES.

    (a) * * *
          * * * * * * *
    (c) Definitions; Special Rules.--For purposes of this 
section--
          (1) * * *
          * * * * * * *
          (4) Qualified replacement property.--
                  (A) * * *
                  (B) Operating corporation.--For purposes of 
                this paragraph--
                          (i) * * *
                          (ii) Financial institutions and 
                        insurance companies.--The term 
                        ``operating corporation'' shall 
                        include--
                                  (I) any financial institution 
                                described in section 581 [or 
                                593], and
                                  (II) an insurance company 
                                subject to tax under subchapter 
                                L.
          * * * * * * *

                 Subchapter P--Capital Gains and Losses

          * * * * * * *

      PART V--SPECIAL RULES FOR BONDS AND OTHER DEBIT INSTRUMENTS

          * * * * * * *

                  Subpart B--Market Discount on Bonds

          * * * * * * *

SEC. 1277. DEFERRAL OF INTEREST DEDUCTION ALLOCABLE TO ACCRUED MARKET 
                    DISCOUNT.

    (a) * * *
          * * * * * * *
    (c) Net Direct Interest Expense.--For purposes of this 
section, the term ``net direct interest expense'' means, with 
respect to any market discount bond, the excess (if any) of--
          (1) the amount of interest paid or accrued during the 
        taxable year on indebtedness which is incurred or 
        continued to purchase or carry such bond, over
          (2) the aggregate amount of interest (including 
        original issue discount) includible in gross income for 
        the taxable year with respect to such bond.
    In the case of any financial institution which is a bank 
(as defined in section 585(a)(2)) [or to which section 593 
applies], the determination of whether interest is described in 
paragraph (1) shall be made under principles similar to the 
principles of section 291(e)(1)(B)(ii). Under rules similar to 
the rules of section 265(a)(5), short sale expenses shall be 
treated as interest for purposes of determining net direct 
interest expense.
          * * * * * * *

  Subchapter S--Tax Treatment of S Corporations and Their Shareholders

          * * * * * * *

                           PART I--IN GENERAL

          * * * * * * *

SEC. 1361. S CORPORATION DEFINED.

    (a) * * *
    (b) Small business corporation.--
          (1) * * *
          (2) Ineligible corporation defined.--For purposes of 
        paragraph (1), the term ``ineligible corporation'' 
        means any corporation which is--
                  (A) a member of an affiliated group 
                (determined under section 1504 without regard 
                to the exceptions contained in subsection (b) 
                thereof),
                  (B) a financial institution to which section 
                585 applies (or would apply but for subsection 
                (c) thereof) [or to which section 593 applies],
                  (C) an insurance company subject to tax under 
                subchapter L,
          * * * * * * *

                   Subtitle B--Estate and Gift Taxes

          * * * * * * *

                         CHAPTER 11--ESTATE TAX

             Subchapter A--Estates of Citizens or Residents

          * * * * * * *

                        PART IV--TAXABLE ESTATE

Sec. 2051. Definition of taxable estate.
     * * * * * * *
Sec. 2057. Medical savings account.
          * * * * * * *

SEC. 2057. MEDICAL SAVINGS ACCOUNTS.

    For purposes of the tax imposed by section 2001, the value 
of the taxable estate shall be determined by deducting from the 
value of the gross estate an amount equal to the value of any 
medical savings account (as defined in section 220(d)) included 
in the gross estate.
          * * * * * * *

           Subchapter B--Estates of Nonresidents Not Citizens

          * * * * * * *

SEC. 2107. EXPATRIATION TO AVOID TAX.

    [(a) Rate of Tax.-- A tax computed in accordance with the 
table contained in section 2001 is hereby imposed on the 
transfer of the taxable estate, determined as provided in 
section 2106, of every decedent nonresident not a citizen of 
the United States dying after November 13, 1966, if after March 
8, 1965, and within the 10-year period ending with the date of 
death such decedent lost United States citizenship, unless such 
loss did not have for one of its principal purposes the 
avoidance of taxes under this subtitle or subtitle A.]
    (a) Treatment of Expatriates.--
          (1) Rate of tax.--A tax computed in accordance with 
        the table contained in section 2001 is hereby imposed 
        on the transfer of the taxable estate, determined as 
        provided in section 2106, of every decedent nonresident 
        not a citizen of the United States if, within the 10-
        year period ending with the date of death, such 
        decedent lost United States citizenship, unless such 
        loss did not have for 1 of its principal purposes the 
        avoidance of taxes under this subtitle or subtitle A.
          (2) Certain individuals treated as having tax 
        avoidance purpose.--
                  (A) In general.--For purposes of paragraph 
                (1), an individual shall be treated as having a 
                principal purpose to avoid such taxes if such 
                individual is so treated under section 
                877(a)(2).
                  (B) Exception.--Subparagraph (A) shall not 
                apply to a decedent meeting the requirements of 
                section 877(c)(1).
    (b) Gross Estate.--For purposes of the tax imposed by 
subsection (a), the value of the gross estate of every decedent 
to whom subsection (a) applies shall be determined as provided 
in section 2103, except that--
          (1) if such decedent owned (within the meaning of 
        section 958(a)) at the time of his death 10 percent or 
        more of the total combined voting power of all classes 
        of stock entitled to vote of a foreign corporation, and
          (2) if such decedent owned (within the meaning of 
        section 958(a)), or is considered to have owned (by 
        applying the ownership rules of section 958(b)), at the 
        time of his death, [more than 50 percent of the total 
        combined voting power of all classes of stock entitled 
        to vote of such foreign corporation,] more than 50 
        percent of--
                  (A) the total combined voting power of all 
                classes of stock entitled to vote of such 
                corporation, or
                  (B) the total value of the stock of such 
                corporation,
        then that proportion of the fair market value of the 
        stock of such foreign corporation owned (within the 
        meaning of section 958(a)) by such decedent at the time 
        of his death, which the fair market value of any assets 
        owned by such foreign corporation and situated in the 
        United States, at the time of his death, bears to the 
        total fair market value of all assets owned by such 
        foreign corporation at the time of his death, shall be 
        included in the gross estate of such decedent. For 
        purposes of the preceding sentence, a decedent shall be 
        treated as owning stock of a foreign corporation at the 
        time of his death if, at the time of a transfer, by 
        trust or otherwise, within the meaning of sections 2035 
        to 2038, inclusive, he owned such stock.
  (c) Credits.--
          (1) * * *
          (2) Credit for foreign death taxes.--
                  (A) In general.--The tax imposed by 
                subsection (a) shall be credited with the 
                amount of any estate, inheritance, legacy, or 
                succession taxes actually paid to any foreign 
                country in respect of any property which is 
                included in the gross estate solely by reason 
                of subsection (b).
                  (B) Limitation on credit.--The credit allowed 
                by subparagraph (A) for such taxes paid to a 
                foreign country shall not exceed the lesser 
                of--
                          (i) the amount which bears the same 
                        ratio to the amount of such taxes 
                        actually paid to such foreign country 
                        in respect of property included in the 
                        gross estate as the value of the 
                        property included in the gross estate 
                        solely by reason of subsection (b) 
                        bears to the value of all property 
                        subjected to such taxes by such foreign 
                        country, or
                          (ii) such property's proportionate 
                        share of the excess of--
                                  (I) the tax imposed by 
                                subsection (a), over
                                  (II) the tax which would be 
                                imposed by section 2101 but for 
                                this section.
                  (C) Proportionate share.--For purposes of 
                subparagraph (B), a property's proportionate 
                share is the percentage of the value of the 
                property which is included in the gross estate 
                solely by reason of subsection (b) bears to the 
                total value of the gross estate.
          [(2)] (3) Other credits.--The tax imposed by 
        subsection (a) shall be credited with the amounts 
        determined in accordance with subsections (a) and (b) 
        of section 2102. For purposes of subsection (a) of 
        section 2102, sections 2011 to 2013, inclusive, shall 
        be applied as if the credit allowed under paragraph (1) 
        were allowed under section 2010.
  [(d) Exception for Loss of Citizenship for Certain Causes.--
Subsection (a) shall not apply to the transfer of the estate of 
a decedent whose loss of United States citizenship resulted 
from the application of section 301(b), 350, or 355 of the 
Immigration and Nationality Act, as amended (8 U.S.C. 1401(b), 
1482, or 1487).]
  [(e)] (d) Burden of Proof.--If the Secretary establishes that 
it is reasonable to believe that an individual's loss of United 
States citizenship would, but for this section, result in a 
substantial reduction in the estate, inheritance, legacy, and 
succession taxes in respect of the transfer of his estate, the 
burden of proving that such loss of citizenship did not have 
for one of its principal purposes the avoidance of taxes under 
this subtitle or subtitle A shall be on the executor of such 
individual's estate.
  (e) Cross Reference.--
        For comparable treatment of long-term lawful permanent 
        residents who ceased to be taxed as residents, see section 
        877(e).
          * * * * * * *

                          CHAPTER 12--GIFT TAX

          * * * * * * *

              Subchapter A--Determination of Tax Liability

          * * * * * * *

SEC. 2501. IMPOSITION OF TAX.

  (a) Taxable Transfers.--
          (1)  * * *
          * * * * * * *
          [(3) Exceptions.--Paragraph (2) shall not apply in 
        the case of a donor who at any time after March 8, 
        1965, and within the 10-year period ending with the 
        date of transfer lost United States citizenship 
        unless--
                  [(A) such donor's loss of United States 
                citizenship resulted from the application of 
                section 301(b), 350, or 355 of the Immigration 
                and Nationality Act, as amended (8 U.S.C. 
                1401(b), 1482, or 1487), or
                  [(B) such loss did not have for one of its 
                principal purposes the avoidance of taxes under 
                this subtitle or subtitle A.]
          (3) Exception.--
                  (A) Certain individuals.--Paragraph (2) shall 
                not apply in the case of a donor who, within 
                the 10-year period ending with the date of 
                transfer, lost United States citizenship, 
                unless such loss did not have for 1 of its 
                principal purposes the avoidance of taxes under 
                this subtitle or subtitle A.
                  (B) Certain individuals treated as having tax 
                avoidance purpose.--For purposes of 
                subparagraph (A), an individual shall be 
                treated as having a principal purpose to avoid 
                such taxes if such individual is so treated 
                under section 877(a)(2).
                  (C) Exception for certain individuals.--
                Subparagraph (B) shall not apply to a decedent 
                meeting the requirements of section 877(c)(1).
                  (D) Credit for foreign gift taxes.--The tax 
                imposed by this section solely by reason of 
                this paragraph shall be credited with the 
                amount of any gift tax actually paid to any 
                foreign country in respect of any gift which is 
                taxable under this section solely by reason of 
                this paragraph.
                  (E) Cross reference.--
          For comparable treatment of long-term lawful permanent 
        residents who ceased to be taxed as residents, see section 
        877(e).
          * * * * * * *

                      Subtitle C--Employment Taxes

          * * * * * * *

            CHAPTER 21--FEDERAL INSURANCE CONTRIBUTIONS ACT

          * * * * * * *

                    Subchapter C--General Provisions

          * * * * * * *

SEC. 3121. DEFINITIONS.

  (a) Wages.--For purposes of this chapter, the term ``wages'' 
means all remuneration for employment, including the cash value 
of all remuneration (including benefits) paid in any medium 
other than cash; except that such term shall not include--
          (1) * * *
          * * * * * * *
          (20) any benefit provided to or on behalf of an 
        employee if at the time such benefit is provided it is 
        reasonable to believe that the employee will be able to 
        exclude such benefit from income under section 74(c), 
        117, or 132; [or]
          (21) in the case of a member of an Indian tribe, any 
        remuneration on which no tax is imposed by this chapter 
        by reason of section 7873 (relating to income derived 
        by Indians from exercise of fishing rights)[.]; or
          (22) any payment made to or for the benefit of an 
        employee if at the time of such payment it is 
        reasonable to believe that the employee will be able to 
        exclude such payment from income under section 106(b).
Nothing in the regulations prescribed for purposes of chapter 
24 (relating to income tax withholding) which provides an 
exclusion from ``wages'' as used in such chapter shall be 
construed to require a similar exclusion from ``wages'' in the 
regulations prescribed for purposes of this chapter. Except as 
otherwise provided in regulations prescribed by the Secretary, 
any third party which makes a payment included in wages solely 
by reason of the parenthetical matter contained in subparagraph 
(A) of paragraph (2) shall be treated for purposes of this 
chapter and chapter 22 as the employer with respect to such 
wages.

                  CHAPTER 22--RAILROAD RETIREMENT ACT

          * * * * * * *

                     Subchapter C--Tax on Employees

          * * * * * * *

SEC. 3231. DEFINITIONS.

  (a) * * *
          * * * * * * *
  (e) Compensation.--For purposes of this chapter--
          (1) * * *
          * * * * * * *
          (10) Medical savings account contributions.--The term 
        ``compensation'' shall not include any payment made to 
        or for the benefit of an employee if at the time of 
        such payment it is reasonable to believe that the 
        employee will be able to exclude such payment from 
        income under section 106(b).
          * * * * * * *

                CHAPTER 23--FEDERAL UNEMPLOYMENT TAX ACT

          * * * * * * *

SEC. 3306. DEFINITIONS.

  (a) * * *
  (b) Wages.--For purposes of this chapter, the term ``wages'' 
means all remuneration for employment, including the cash value 
of all remuneration (including benefits) paid in any medium 
other than cash; except that such term shall not include--
          (1) * * *
          * * * * * * *
          (15) any payment made by an employer to a survivor or 
        the estate of a former employee after the calendar year 
        in which such employee died; [or]
          (16) any benefit provided to or on behalf of an 
        employee if at the time such benefit is provided it is 
        reasonable to believe that the employee will be able to 
        exclude such benefit from income under section 74(c), 
        117, or 132[.]; or
          (17) any payment made to or for the benefit of an 
        employee if at the time of such payment it is 
        reasonable to believe that the employee will be able to 
        exclude such payment from income under section 106(b).
          * * * * * * *

        CHAPTER 24--COLLECTION ON INCOME TAX AT SOURCE ON WAGES

          * * * * * * *

                  Subchapter A--Withholding From Wages

          * * * * * * *

SEC. 3401. DEFINITIONS.

    (a) Wages. For purposes of this chapter, the term ``wages'' 
means all remuneration (other than fees paid to a public 
official) for services performed by an employee for his 
employer, including the cash value of all remuneration 
(including benefits) paid in any medium other than cash; except 
that such term shall not include remuneration paid--
          (1) * * *
          * * * * * * *
          (19) any benefit provided to or on behalf of an 
        employee if at the time such benefit is provided it is 
        reasonable to believe that the employee will be able to 
        exclude such benefit from income under section 74(c), 
        117, or 132; [or]
          (20) for any medical care reimbursement made to or 
        for the benefit of an employee under a self-insured 
        medical reimbursement plan (within the meaning of 
        section 105(h)(6))[.]; or
          (21) any payment made to or for the benefit of an 
        employee if at the time of such payment it is 
        reasonable to believe that the employee will be able to 
        exclude such payment from income under section 106(b).
          * * * * * * *

                 Subtitle D--Miscellaneous Excise Taxes

          * * * * * * *

               CHAPTER 43--QUALIFIED PENSION, ETC., PLANS

Sec. 4971. Taxes on failure to meet minimum funding standards.
     * * * * * * *
Sec. 4980C. Requirements for issuers of long-term care insurance 
          policies.

SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO INDIVIDUAL RETIREMENT 
                    ACCOUNTS, MEDICAL SAVINGS ACCOUNTS, CERTAIN SECTION 
                    403(b) CONTRACTS, AND CERTAIN INDIVIDUAL RETIREMENT 
                    ANNUITIES.

    (a) Tax Imposed.--In the case of--
          (1) an individual retirement account (within the 
        meaning of section 408(a)), [or]
          (2) a medical savings account (within the meaning of 
        section 220(d)), or
          [(2)] (3) an individual retirement annuity (within 
        the meaning of section 408(b)), a custodial account 
        treated as an annuity contract under section 
        403(b)(7)(A) (relating to custodial accounts for 
        regulated investment company stock),
there is imposed for each taxable year a tax in an amount equal 
to 6 percent of the amount of the excess contributions to such 
individual's accounts or annuities (determined as of the close 
of the taxable year). The amount of such tax for any taxable 
year shall not exceed 6 percent of the value of the account or 
annuity (determined as of the close of the taxable year). In 
the case of an endowment contract described in section 408(b), 
the tax imposed by this section does not apply to any amount 
allocable to life, health, accident, or other insurance under 
such contract. The tax imposed by this subsection shall be paid 
by such individual.
          * * * * * * *
    (d) Excess Contributions to Medical Savings Accounts.--For 
purposes of this section, in the case of a medical savings 
accounts (within the meaning of section 220(d)), the term 
`excess contributions' means the sum of--
          ``(1) the amount by which the amount contributed for 
        the taxable year to the accounts (other than rollover 
        contributions described in section 220(f)(5)) exceeds 
        the amount allowable as a deduction under section 220 
        for such contributions, and
          (2) the amount determined under this subsection for 
        the preceding taxable year, reduced by the sum of 
        distributions out of the account included in gross 
        income under section 220(f) (2) or (3) and the excess 
        (if any) of the maximum amount allowable as a deduction 
        under section 220 for the taxable year over the amount 
        contributed.
For purposes of this subsection, any contribution which is 
distributed out of the medical savings account in a 
distribution to which section 220(f)(3) applies shall be 
treated as an amount not contributed.
          * * * * * * *

SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.

    (a) * * *
          * * * * * * *
    (c) Prohibited Transaction.--
          (1) General rule.--For purposes of this section, the 
        term ``prohibited transaction'' means any direct or 
        indirect--
                  (A) * * *
          * * * * * * *
          (4) Special rule for medical savings accounts.--An 
        individual for whose benefit a medical savings account 
        (within the meaning of section 220(d)) is established 
        shall be exempt from the tax imposed by this section 
        with respect to any transaction concerning such account 
        (which would otherwise be taxable under this section) 
        if, with respect to such transaction, the account 
        ceases to be a medical savings account by reason of the 
        application of section 220(e)(2) to such account.
          * * * * * * *
    (e) Definitions.--
          [(1) Plan.--For purposes of this section, the term 
        ``plan'' means a trust described in section 401(a) 
        which forms a part of a plan, or a plan described in 
        section 403(a), which trust or plan is exempt from tax 
        under section 501(a), an individual retirement account 
        described in section 408(a) or an individual retirement 
        annuity described in section 408(b) (or a trust, plan, 
        account, or annuity which, at any time, has been 
        determined by the Secretary to be such a trust, plan, 
        or account).]
          (1) Plan.--For purposes of this section, the term 
        ``plan'' means--
                  (A) a trust described in section 401(a) which 
                forms a part of a plan, or a plan described in 
                section 403(a), which trust or plan is exempt 
                from tax under section 501(a),
                  (B) an individual retirement account 
                described in section 408(a),
                  (C) an individual retirement annuity 
                described in section 408(b),
                  (D) a medical savings account described in 
                section 220(d), or
                  (E) a trust, plan, account, or annuity which, 
                at any time, has been determined by the 
                Secretary to be described in any preceding 
                subparagraph of this paragraph.
          * * * * * * *

SEC. 4980B. FAILURE TO SATISFY CONTINUATION COVERAGE REQUIREMENTS OF 
                    GROUP HEALTH PLANS.

    (a) General Rule.--There is hereby imposed a tax on the 
failure of a group health plan to meet [the requirements of 
subsection (f) with respect to any qualified beneficiary.] the 
requirements of--
          (1) subsection (f) with respect to any qualified 
        beneficiary, or
          (2) subject to subsection (h)--
                  (A) section 101 or 102 of the Health Coverage 
                Availability and Affordability Act of 1996 with 
                respect to any individual covered under the 
                group health plan, or
                  (B) section 103 of such Act with respect to 
                any individual.
          * * * * * * *
      (f) Continuation Coverage Requirements of Group Health 
Plans.--
          (1) * * *
          * * * * * * *
          (6) Notice requirement.--In accordance with 
        regulations prescribed by the secretary--
                  (A) The group health plan shall provide, at 
                the time of commencement of coverage under the 
                plan, written notice to each covered employee 
                and spouse of the employee (if any) of the 
                rights provided under this subsection and 
                subtitle A of title I of the Health Coverage 
                Availability and Affordability Act of 1996.
          * * * * * * *
          (9) Continuation of long-term care coverage not 
        required.--A group health plan shall not be treated as 
        failing to meet the requirements of this subsection 
        solely by reason of failing to provide coverage under 
        any qualified long-term care insurance contract (as 
        defined in section 7702B(b)).
          * * * * * * *
    (h) Special Rules.--For purposes of applying this section 
in the case of requirements described in subsection (a)(2) 
relating to section 101, section 102, or section 103 of the 
Health Coverage Availability and Affordability Act of 1996--
          (1) In general.--
                  (A) Definition of group health plan.--The 
                term ``group health plan'' has the meaning 
                given such term in section 191(a) of the Health 
                Coverage Availability and Affordability Act of 
                1996.
                  (B) Qualified beneficiary.--Subsections (b), 
                (c), and (e) shall be applied by substituting 
                the term ``individual'' for the term 
                ``qualified beneficiary'' each place it 
                appears.
                  (C) Noncompliance period.--Clause (ii) of 
                subsection (b)(2)(B) and the second sentence of 
                subsection (b)(2) shall not apply.
                  (D) Limitation on tax.--Subparagraph (B) of 
                subsection (c)(3) shall not apply.
                  (E)  Liability for tax.--Paragraph (2) of 
                subsection (e) shall not apply.
          (2) Deferral to state regulation.--No tax shall be 
        imposed by this section on any failure to meet the 
        requirements of such section by any entity which offers 
        health insurance coverage and which is an insurer or 
        health maintenance organization (as defined in section 
        191(c) of the Health Coverage Availability and 
        Affordability Act of 1996) regulated by a State unless 
        the Secretary of Health and Human Services has made the 
        determination described in section 104(c)(2) of such 
        Act with respect to such State, section, and entity.
          (3) Limitation for insured plans.--In the case of a 
        group health plan of a small employer (as defined in 
        section 191 of the Health Coverage Availability and 
        Affordability Act of 1996) that provides health care 
        benefits solely through a contract with an insurer or 
        health maintenance organization (as defined in such 
        section), no tax shall be imposed by this section upon 
        the employer on a failure to meet such requirements if 
        the failure is solely because of the product offered by 
        the insurer or organization under such contract.
          (4) Limitation on imposition of tax.--In no case 
        shall a tax be imposed by this section for a failure to 
        meet such a requirement if--
                  (A) a civil money penalty has been imposed by 
                the Secretary of Labor under part 5 of subtitle 
                A of title I of the Employee Retirement Income 
                Security Act of 1974 with respect to such 
                failure, or
                  (B) a civil money penalty has been imposed by 
                the Secretary of Health and Human Services 
                under section 104(c) of the Health Coverage 
                Availability and Affordability Act of 1996 with 
                respect to such failure.
          * * * * * * *

SEC. 4980C. REQUIREMENTS FOR ISSUERS OF LONG-TERM CARE INSURANCE 
                    POLICIES.

      (a) General Rule.--There is hereby imposed on any person 
failing to meet the requirements of subsection (c) or (d) a tax 
in the amount determined under subsection (b).
      (b) Amount.--
          (1) In general.--The amount of the tax imposed by 
        subsection (a) shall be $100 per policy for each day 
        any requirements of subsection (c) or (d) are not met 
        with respect to each long-term care insurance policy.
          (2) Waiver.--In the case of a failure which is due to 
        reasonable cause and not to willful neglect, the 
        Secretary may waive part or all of the tax imposed by 
        subsection (a) to the extent that payment of the tax 
        would be excessive relative to the failure involved.
    (c) Responsibilities.--The requirements of this subsection 
are as follows:
          (1) Requirements of model provisions.--
                  (A) Model regulation.--The following 
                requirements of the model regulation must be 
                met:
                          (i) Section 13 (relating to 
                        application forms and replacement 
                        coverage).
                          (ii) Section 14 (relating to 
                        reporting requirements), except that 
                        the issuer shall also report at least 
                        annually the number of claims denied 
                        during the reporting period for each 
                        class of business (expressed as a 
                        percentage of claims denied), other 
                        than claims denied for failure to meet 
                        the waiting period or because of any 
                        applicable preexisting condition.
                          (iii) Section 20 (relating to filing 
                        requirements for marketing).
                          (iv) Section 21 (relating to 
                        standards for marketing), including 
                        inaccurate completion of medical 
                        histories, other than sections 21C(1) 
                        and 21C(6) thereof, except that--
                                  (I) in addition to such 
                                requirements, no person shall, 
                                in selling or offering to sell 
                                a long-term care insurance 
                                policy, misrepresent a material 
                                fact; and
                                  (II) no such requirements 
                                shall include a requirement to 
                                inquire or identify whether a 
                                prospective applicant or 
                                enrollee for long-term care 
                                insurance has accident and 
                                sickness insurance.
                          (v) Section 22 (relating to 
                        appropriateness of recommended 
                        purchase).
                          (vi) Section 24 (relating to standard 
                        format outline of coverage).
                          (vii) Section 25 (relating to 
                        requirement to deliver shopper's 
                        guide).
                  (B) Model act.--The following requirements of 
                the model Act must be met:
                          (i) Section 6F (relating to right to 
                        return), except that such section shall 
                        also apply to denials of applications 
                        and any refund shall be made within 30 
                        days of the return or denial.
                          (ii) Section 6G (relating to outline 
                        of coverage).
                          (iii) Section 6H (relating to 
                        requirements for certificates under 
                        group plans).
                          (iv) Section 6I (relating to policy 
                        summary).
                          (v) Section 6J (relating to monthly 
                        reports on accelerated death benefits).
                          (vi) Section 7 (relating to 
                        incontestability period).
                  (C) Definitions.--For purposes of this 
                paragraph, the terms ``model regulation'' and 
                ``model Act'' have the meanings given such 
                terms by section 7702B(f)(2)(B).
          (2) Delivery of policy.--If an application for a 
        long-term care insurance policy (or for a certificate 
        under a group long-term care insurance policy) is 
        approved, the issuer shall deliver to the applicant (or 
        policyholder or certificateholder) the policy (or 
        certificate) of insurance not later than 30 days after 
        the date of the approval.
          (3) Information on denials of claims.--If a claim 
        under a long-term care insurance policy is denied, the 
        issuer shall, within 60 days of the date of a written 
        request by the policyholder or certificateholder (or 
        representative)--
                  (A) provide a written explanation of the 
                reasons for the denial, and
                  (B) make available all information directly 
                relating to such denial.
    (d) Disclosure.--The requirements of this subsection are 
met if the issuer of a long-term care insurance policy 
discloses in such policy and in the outline of coverage 
required under subsection (c)(1)(B)(ii) that the policy is 
intended to be a qualified long-term care insurance contract 
under section 7702B(b).
    (e) Long-Term Care Insurance Policy Defined.--For purposes 
of this section, the term ``long-term care insurance policy'' 
means any product which is advertised, marketed, or offered as 
long-term care insurance.
          * * * * * * *

                Subtitle F--Procedure and Administration

          * * * * * * *

                  CHAPTER 61--INFORMATION AND RETURNS

                   Subchapter A--Returns and Records

          * * * * * * *

                     PART III--INFORMATION RETURNS

          * * * * * * *

Subpart A--Information Concerning Persons Subject to Special Provisions

Sec. 6031. Return of partnership income.
     * * * * * * *
Sec. 6039F. Information on individuals losing United States citizenship.
     * * * * * * *

SEC. 6039F. INFORMATION ON INDIVIDUALS LOSING UNITED STATES 
                    CITIZENSHIP.

    (a) In General.--Notwithstanding any other provision of 
law, any individual who loses United States citizenship (within 
the meaning of section 877(a)) shall provide a statement which 
includes the information described in subsection (b). Such 
statement shall be--
          (1) provided not later than the earliest date of any 
        act referred to in subsection (c), and
          (2) provided to the person or court referred to in 
        subsection (c) with respect to such act.
    (b) Information To Be Provided.--Information required under 
subsection (a) shall include--
          (1) the taxpayer's TIN,
          (2) the mailing address of such individual's 
        principal foreign residence,
          (3) the foreign country in which such individual is 
        residing,
          (4) the foreign country of which such individual is a 
        citizen,
          (5) in the case of an individual having a net worth 
        of at least the dollar amount applicable under section 
        877(a)(2)(B), information detailing the assets and 
        liabilities of such individual, and
          (6) such other information as the Secretary may 
        prescribe.
    (c) Acts Described.--For purposes of this section, the acts 
referred to in this subsection are--
          (1) the individual's renunciation of his United 
        States nationality before a diplomatic or consular 
        officer of the United States pursuant to paragraph (5) 
        of section 349(a) of the Immigration and Nationality 
        Act (8 U.S.C. 1481(a)(5)),
          (2) the individual's furnishing to the United States 
        Department of State a signed statement of voluntary 
        relinquishment of United States nationality confirming 
        the performance of an act of expatriation specified in 
        paragraph (1), (2), (3), or (4) of section 349(a) of 
        the Immigration and Nationality Act (8 U.S.C. 
        1481(a)(1)-(4)),
          (3) the issuance by the United States Department of 
        State of a certificate of loss of nationality to the 
        individual, or
          (4) the cancellation by a court of the United States 
        of a naturalized citizen's certificate of 
        naturalization.
    (d) Penalty.--Any individual failing to provide a statement 
required under subsection (a) shall be subject to a penalty for 
each year (of the 10-year period beginning on the date of loss 
of United States citizenship) during any portion of which such 
failure continues in an amount equal to the greater of--
          (1) 5 percent of the tax required to be paid under 
        section 877 for the taxable year ending during such 
        year, or
          (2) $1,000,
unless it is shown that such failure is due to reasonable cause 
and not to willful neglect.
    (e) Information To Be Provided to Secretary.--
Notwithstanding any other provision of law--
          (1) any Federal agency or court which collects (or is 
        required to collect) the statement under subsection (a) 
        shall provide to the Secretary--
                  (A) a copy of any such statement, and
                  (B) the name (and any other identifying 
                information) of any individual refusing to 
                comply with the provisions of subsection (a),
          (2) the Secretary of State shall provide to the 
        Secretary a copy of each certificate as to the loss of 
        American nationality under section 358 of the 
        Immigration and Nationality Act which is approved by 
        the Secretary of State, and
          (3) the Federal agency primarily responsible for 
        administering the immigration laws shall provide to the 
        Secretary the name of each lawful permanent resident of 
        the United States (within the meaning of section 
        7701(b)(6)) whose status as such has been revoked or 
        has been administratively or judicially determined to 
        have been abandoned.
Notwithstanding any other provision of law, not later than 30 
days after the close of each calendar quarter, the Secretary 
shall publish in the Federal Register the name of each 
individual losing United States citizenship (within the meaning 
of section 877(a)) with respect to whom the Secretary receives 
information under the preceding sentence during such quarter.
    (f) Reporting by Long-Term Lawful Permanent Residents Who 
Cease To Be Taxed as Residents.--In lieu of applying the last 
sentence of subsection (a), any individual who is required to 
provide a statement under this section by reason of section 
877(e)(1) shall provide such statement with the return of tax 
imposed by chapter 1 for the taxable year during which the 
event described in such section occurs.
    (g) Exemption.--The Secretary may by regulations exempt any 
class of individuals from the requirements of this section if 
he determines that applying this section to such individuals is 
not necessary to carry out the purposes of this section.
          * * * * * * *

   Subpart B--Information Concerning Transactions With Other Persons

          * * * * * * *
Sec. 6041. Information at source.
            * * * * * * *
Sec. 6050Q. Certain long-term care benefits.
            * * * * * * *

SEC. 6050Q. CERTAIN LONG-TERM CARE BENEFITS.

    (a) Requirement of Reporting.--Any person who pays long-
term care benefits shall make a return, according to the forms 
or regulations prescribed by the Secretary, setting forth--
          (1) the aggregate amount of such benefits paid by 
        such person to any individual during any calendar year, 
        and
          (2) the name, address, and TIN of such individual.
    (b) Statements To Be Furnished to Persons With Respect to 
Whom Information Is Required.--Every person required to make a 
return under subsection (a) shall furnish to each individual 
whose name is required to be set forth in such return a written 
statement showing--
          (1) the name of the person making the payments, and
          (2) the aggregate amount of long-term care benefits 
        paid to the individual which are required to be shown 
        on such return.
The written statement required under the preceding sentence 
shall be furnished to the individual on or before January 31 of 
the year following the calendar year for which the return under 
subsection (a) was required to be made.
  (c) Long-Term Care Benefits.--For purposes of this section, 
the term ``long-term care benefit'' means any amount paid under 
a long-term care insurance policy (within the meaning of 
section 4980C(e)).
          * * * * * * *

                         CHAPTER 63--ASSESSMENT

          * * * * * * *

  Subchapter B--Deficiency Procedures in the Case of Income, Estate, 
                     Gift, and Certain Excise Taxes

          * * * * * * *

SEC. 6213. RESTRICTIONS APPLICABLE TO DEFICIENCIES; PETITION TO TAX 
                    COURT.

    (a) * * *
          * * * * * * *
    (g) Definitions.--For purposes of this section--
          (1) Return.--The term ``return'' includes any return, 
        statement, schedule, or list, and any amendment or 
        supplement thereto, filed with respect to any tax 
        imposed by subtitle A or B, or chapter 41, 42, 43, or 
        44.
          (2) Mathematical or clerical error.--The term 
        ``mathematical or clerical error'' means--
                  (A) an error in addition, subtraction, 
                multiplication, or division shown on any 
                return,
                  (B) an incorrect use of any table provided by 
                the Internal Revenue Service with respect to 
                any return if such incorrect use is apparent 
                from the existence of other information on the 
                return,
                  (C) an entry on a return of an item which is 
                inconsistent with another entry of the same or 
                another item on such return,
                  (D) an omission of information which is 
                required to be supplied on the return to 
                substantiate an entry on the return, [and]
                  (E) an entry on a return of a deduction or 
                credit in an amount which exceeds a statutory 
                limit imposed by subtitle A or B, or chapter 
                41, 42, 43, or 44, if such limit is expressed--
                          (i) as a specified monetary amount, 
                        or
                          (ii) as a percentage, ratio, or 
                        fraction,
                and if the items entering into the application 
                of such limit appear on such return[.],
                  (F) an omission of a correct taxpayer 
                identification number required under section 32 
                (relating to the earned income credit) to be 
                included on a return, and
                  (G) an entry on a return claiming the credit 
                under section 32 with respect to net earnings 
                from self-employment described in section 
                32(c)(2)(A) to the extent the tax imposed by 
                section 1401 (relating to self-employment tax) 
                on such net earnings has not been paid.
          * * * * * * *

 CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE 
                               PENALTIES

          * * * * * * *

                   Subchapter B--Assessable Penalties

          * * * * * * *

                       PART I--GENERAL PROVISIONS

          * * * * * * *

SEC. 6693. FAILURE TO PROVIDE REPORTS ON INDIVIDUAL RETIREMENT ACCOUNTS 
                    OR ANNUITIES; PENALTIES RELATING TO DESIGNATED 
                    NONDEDUCTIBLE CONTRIBUTIONS.

  [(a) The person required by subsection (i) or (l) of section 
408 to file a report regarding an individual retirement account 
or individual retirement annuity at the time and in the manner 
required by such subsection shall pay a penalty of $50 for each 
failure unless it is shown that such failure is due to 
reasonable cause.]
    (a) Reports.--
          (1) In general.--If a person required to file a 
        report under a provision referred to in paragraph (2) 
        fails to file such report at the time and in the manner 
        required by such provision, such person shall pay a 
        penalty of $50 for each failure unless it is shown that 
        such failure is due to reasonable cause.
          (2) Provisions.--The provisions referred to in this 
        paragraph are--
                  (A) subsections (i) and (l) of section 408 
                (relating to individual retirement plans), and
                  (B) section 220(h) (relating to medical 
                savings accounts).
          * * * * * * *

     PART II--FAILURE TO COMPLY WITH CERTAIN INFORMATION REPORTING 
                              REQUIREMENTS

          * * * * * * *

SEC. 6724. WAIVER; DEFINITIONS AND SPECIAL RULES.

    (a) * * *
          * * * * * * *
    (d) Definitions.--For purposes of this part--
          (1) Information return.--The term `information 
        return' means--
                  (A) * * *
                  (B) any return required by--
                          (i) * * *
          * * * * * * *
                          (ix) section 6050Q (relating to 
                        certain long-term care benefits),
                          [(ix)] (x) section 6052(a) (relating 
                        to reporting payment of wages in the 
                        form of group-life insurance),
                          [(x)] (xi) section 6053(c)(1) 
                        (relating to reporting with respect to 
                        certain tips),
                          [(xi)] (xii) subsection (b) or (e) of 
                        section 1060(b) (relating to reporting 
                        requirements of transferors and 
                        transferees in certain asset 
                        acquisitions),
                          [(xii)] (xiii) subparagraph (A) or 
                        (C) of subsection (c)(4), or section 
                        4093 (relating to information reporting 
                        with respect to tax on diesel and 
                        aviation fuels), or
                          [(xiii)] (xiv) section 4101(d) 
                        (relating to information reporting with 
                        respect to fuels taxes)
                          [(xiv)] (xv) subparagraph (C) of 
                        section 338(h)(10)(relating to 
                        information required to be furnished to 
                        the Secretary in case of elective 
                        recognition of gain or loss).
        Such term also includes any form, statement, or 
        schedule required to be filed with the Secretary with 
        respect to any amount from which tax was required to be 
        deducted and withheld under chapter 3 (or from which 
        tax would be required to be so deducted and withheld 
        but for an exemption under this title or any treaty 
        obligation of the United States).
          (2) Payee statement.--The term `payee statement' 
        means any statement required to be furnished under--
                  (A) * * *
          * * * * * * *
                  (Q) section 6050Q(b) (relating to certain 
                long-term care benefits),
                  [(Q)] (R) section 6051 (relating to receipts 
                for employees),
                  [(R)] (S) section 6052(b) (relating to 
                returns regarding payment of wages in the form 
                of group-term life insurance),
                  [(S)] (T) section 6053(b) or (c) (relating to 
                reports of tips), or
                  [(T)] (U) section 4093(c)(4)(B) (relating to 
                certain purchasers of diesel and aviation 
                fuels).
        Such term also includes any form, statement, or 
        schedule required to be furnished to the recipient of 
        any amount from which tax was required to be deducted 
        and withheld under chapter 3 (or from which tax would 
        be required to be so deducted and withheld but for an 
        exemption under this title or any treaty obligation of 
        the United States).
          * * * * * * *

                        CHAPTER 79--DEFINITIONS

    Sec. 7701. Definitions.
          * * * * * * *
    Sec. 7702B. Treatment of qualified long-term care 
insurance.
          * * * * * * *

SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE INSURANCE.

    (a) In General.--For purposes of this title--
          (1) a qualified long-term care insurance contract 
        shall be treated as an accident and health insurance 
        contract,
          (2) amounts (other than policyholder dividends, as 
        defined in section 808, or premium refunds) received 
        under a qualified long-term care insurance contract 
        shall be treated as amounts received for personal 
        injuries and sickness and shall be treated as 
        reimbursement for expenses actually incurred for 
        medical care (as defined in section 213(d)),
          (3) any plan of an employer providing coverage under 
        a qualified long-term care insurance contract shall be 
        treated as an accident and health plan with respect to 
        such coverage,
          (4) except as provided in subsection (e)(3), amounts 
        paid for a qualified long-term care insurance contract 
        providing the benefits described in subsection 
        (b)(2)(A) shall be treated as payments made for 
        insurance for purposes of section 213(d)(1)(D), and
          (5) a qualified long-term care insurance contract 
        shall be treated as a guaranteed renewable contract 
        subject to the rules of section 816(e).
    (b) Qualified Long-Term Care Insurance Contract.--For 
purposes of this title--
          (1) In general.--The term ``qualified long-term care 
        insurance contract'' means any insurance contract if--
                  (A) the only insurance protection provided 
                under such contract is coverage of qualified 
                long-term care services,
                  (B) such contract does not pay or reimburse 
                expenses incurred for services or items to the 
                extent that such expenses are reimbursable 
                under title XVIII of the Social Security Act or 
                would be so reimbursable but for the 
                application of a deductible or coinsurance 
                amount,
                  (C) such contract is guaranteed renewable,
                  (D) such contract does not provide for a cash 
                surrender value or other money that can be--
                          (i) paid, assigned, or pledged as 
                        collateral for a loan, or
                          (ii) borrowed,
                other than as provided in subparagraph (E) or 
                paragraph (2)(C),
                  (E) all refunds of premiums, and all 
                policyholder dividends or similar amounts, 
                under such contract are to be applied as a 
                reduction in future premiums or to increase 
                future benefits, and
                  (F) such contract meets the requirements of 
                subsection (f).
          (2) Special rules.--
                  (A) Per diem, etc. payments permitted.--A 
                contract shall not fail to be described in 
                subparagraph (A) or (B) of paragraph (1) by 
                reason of payments being made on a per diem or 
                other periodic basis without regard to the 
                expenses incurred during the period to which 
                the payments relate.
                  (B) Special rules relating to medicare.--
                          (i) Paragraph (1)(B) shall not apply 
                        to expenses which are reimbursable 
                        under title XVIII of the Social 
                        Security Act only as a secondary payor.
                          (ii) No provision of law shall be 
                        construed or applied so as to prohibit 
                        the offering of a qualified long-term 
                        care insurance contract on the basis 
                        that the contract coordinates its 
                        benefits with those provided under such 
                        title.
                  (C) Refunds of premiums.--Paragraph (1)(E) 
                shall not apply to any refund on the death of 
                the insured, or on a complete surrender or 
                cancellation of the contract, which cannot 
                exceed the aggregate premiums paid under the 
                contract. Any refund on a complete surrender or 
                cancellation of the contract shall be 
                includible in gross income to the extent that 
                any deduction or exclusion was allowable with 
                respect to the premiums.
      (c) Qualified Long-Term Care Services.--For purposes of 
this section--
          (1) In general.--The term ``qualified long-term care 
        services'' means necessary diagnostic, preventive, 
        therapeutic, curing, treating, mitigating, and 
        rehabilitative services, and maintenance or personal 
        care services, which--
                  (A) are required by a chronically ill 
                individual, and
                  (B) are provided pursuant to a plan of care 
                prescribed by a licensed health care 
                practitioner.
          (2) Chronically ill individual.--
                  (A) In general.--The term ``chronically ill 
                individual'' means any individual who has been 
                certified by a licensed health care 
                practitioner as--
                          (i) being unable to perform (without 
                        substantial assistance from another 
                        individual) at least 2 activities of 
                        daily living for a period of at least 
                        90 days due to a loss of functional 
                        capacity,
                          (ii) having a level of disability 
                        similar (as determined by the Secretary 
                        in consultation with the Secretary of 
                        Health and Human Services) to the level 
                        of disability described in clause (i), 
                        or
                          (iii) requiring substantial 
                        supervision to protect such individual 
                        from threats to health and safety due 
                        to severe cognitive impairment.
                Such term shall not include any individual 
                otherwise meeting the requirements of the 
                preceding sentence unless within the preceding 
                12-month period a licensed health care 
                practitioner has certified that such individual 
                meets such requirements.
                  (B) Activities of daily living.--For purposes 
                of subparagraph (A), each of the following is 
                an activity of daily living:
                          (i) Eating.
                          (ii) Toileting.
                          (iii) Transferring.
                          (iv) Bathing.
                          (v) Dressing.
                          (vi) Continence.
                Nothing in this section shall be construed to 
                require a contract to take into account all of 
                the preceding activities of daily living.
          (3) Maintenance or personal care services.--The term 
        ``maintenance or personal care services'' means any 
        care the primary purpose of which is the provision of 
        needed assistance with any of the disabilities as a 
        result of which the individual is a chronically ill 
        individual (including the protection from threats to 
        health and safety due to severe cognitive impairment).
          (4) Licensed health care practitioner.--The term 
        ``licensed health care practitioner'' means any 
        physician (as defined in section 1861(r)(1) of the 
        Social Security Act) and any registered professional 
        nurse, licensed social worker, or other individual who 
        meets such requirements as may be prescribed by the 
        Secretary.
    (d) Aggregate Payments in Excess of Limits.--
          (1) In general.--If the aggregate amount of periodic 
        payments under all qualified long-term care insurance 
        contracts with respect to an insured for any period 
        exceeds the dollar amount in effect for such period 
        under paragraph (3), such excess payments shall be 
        treated as made for qualified long-term care services 
        only to the extent of the costs incurred by the payee 
        (not otherwise compensated for by insurance or 
        otherwise) for qualified long-term care services 
        provided during such period for such insured.
          (2) Periodic payments.--For purposes of paragraph 
        (1), the term ``periodic payment'' means any payment 
        (whether on a periodic basis or otherwise) made without 
        regard to the extent of the costs incurred by the payee 
        for qualified long-term care services.
          (3) Dollar amount.--The dollar amount in effect under 
        this subsection shall be $175 per day (or the 
        equivalent amount in the case of payments on another 
        periodic basis).
          (4) Inflation adjustment.--In the case of a calendar 
        year after 1997, the dollar amount contained in 
        paragraph (3) shall be increased at the same time and 
        in the same manner as amounts are increased pursuant to 
        section 213(d)(10).
    (e) Treatment of Coverage Provided as Part of a Life 
Insurance Contract.--Except as otherwise provided in 
regulations prescribed by the Secretary, in the case of any 
long-term care insurance coverage (whether or not qualified) 
provided by a rider on or as part of a life insurance 
contract--
          (1) In general.--This section shall apply as if the 
        portion of the contract providing such coverage is a 
        separate contract.
          (2) Application of 7702.--Section 7702(c)(2) 
        (relating to the guideline premium limitation) shall be 
        applied by increasing the guideline premium limitation 
        with respect to a life insurance contract, as of any 
        date--
                  (A) by the sum of any charges (but not 
                premium payments) against the life insurance 
                contract's cash surrender value (within the 
                meaning of section 7702(f)(2)(A)) for such 
                coverage made to that date under the contract, 
                less
                  (B) any such charges the imposition of which 
                reduces the premiums paid for the contract 
                (within the meaning of section 7702(f)(1)).
          (3) Application of section 213.--No deduction shall 
        be allowed under section 213(a) for charges against the 
        life insurance contract's cash surrender value 
        described in paragraph (2), unless such charges are 
        includible in income as a result of the application of 
        section 72(e)(10) and the rider is a qualified long-
        term care insurance contract under subsection (b).
          (4) Portion defined.--For purposes of this 
        subsection, the term ``portion'' means only the terms 
        and benefits under a life insurance contract that are 
        in addition to the terms and benefits under the 
        contract without regard to the coverage under a 
        qualified long-term care insurance contract.
  (f) Consumer Protection Provisions.--
          (1) In general.--The requirements of this subsection 
        are met with respect to any contract if any long-term 
        care insurance policy issued under the contract meets--
                  (A) the requirements of the model regulation 
                and model Act described in paragraph (2),
                  (B) the disclosure requirement of paragraph 
                (3), and
                  (C) the requirements relating to 
                nonforfeitability under paragraph (4).
          (2) Requirements of model regulation and act.--
                  (A) In general.--The requirements of this 
                paragraph are met with respect to any policy if 
                such policy meets--
                          (i) Model regulation.--The following 
                        requirements of the model regulation:
                                  (I) Section 7A (relating to 
                                guaranteed renewal or 
                                noncancellability), and the 
                                requirements of section 6B of 
                                the model Act relating to such 
                                section 7A.
                                  (II) Section 7B (relating to 
                                prohibitions on limitations and 
                                exclusions).
                                  (III) Section 7C (relating to 
                                extension of benefits).
                                  (IV) Section 7D (relating to 
                                continuation or conversion of 
                                coverage).
                                  (V) Section 7E (relating to 
                                discontinuance and replacement 
                                of policies).
                                  (VI) Section 8 (relating to 
                                unintentional lapse).
                                  (VII) Section 9 (relating to 
                                disclosure), other than section 
                                9F thereof.
                                  (VIII) Section 10 (relating 
                                to prohibitions against post-
                                claims underwriting).
                                  (IX) Section 11 (relating to 
                                minimum standards).
                                  (X) Section 12 (relating to 
                                requirement to offer inflation 
                                protection), except that any 
                                requirement for a signature on 
                                a rejection of inflation 
                                protection shall permit the 
                                signature to be on an 
                                application or on a separate 
                                form.
                                  (XI) Section 23 (relating to 
                                prohibition against preexisting 
                                conditions and probationary 
                                periods in replacement policies 
                                or certificates).
                          (ii) Model act.--The following 
                        requirements of the model Act:
                                  (I) Section 6C (relating to 
                                preexisting conditions).
                                  (II) Section 6D (relating to 
                                prior hospitalization).
                  (B) Definitions.--For purposes of this 
                paragraph--
                          (i) Model provisions.--The terms 
                        ``model regulation'' and ``model Act'' 
                        mean the long-term care insurance model 
                        regulation, and the long-term care 
                        insurance model Act, respectively, 
                        promulgated by the National Association 
                        of Insurance Commissioners (as adopted 
                        as of January 1993).
                          (ii) Coordination.--Any provision of 
                        the model regulation or model Act 
                        listed under clause (i) or (ii) of 
                        subparagraph (A) shall be treated as 
                        including any other provision of such 
                        regulation or Act necessary to 
                        implement the provision.
                          (iii) Determination.--For purposes of 
                        this section and section 4980C, the 
                        determination of whether any 
                        requirement of a model regulation or 
                        the model Act has been met shall be 
                        made by the Secretary.
          (3) Disclosure requirement.--The requirement of this 
        paragraph is met with respect to any policy if such 
        policy meets the requirements of section 4980C(d)(1).
          (4) Nonforfeiture requirements.--
                  (A) In general.--The requirements of this 
                paragraph are met with respect to any level 
                premium long-term care insurance policy, if the 
                issuer of such policy offers to the 
                policyholder, including any group policyholder, 
                a nonforfeiture provision meeting the 
                requirements of subparagraph (B).
                  (B) Requirements of provision.--The 
                nonforfeiture provision required under 
                subparagraph (A) shall meet the following 
                requirements:
                          (i) The nonforfeiture provision shall 
                        be appropriately captioned.
                          (ii) The nonforfeiture provision 
                        shall provide for a benefit available 
                        in the event of a default in the 
                        payment of any premiums and the amount 
                        of the benefit may be adjusted 
                        subsequent to being initially granted 
                        only as necessary to reflect changes in 
                        claims, persistency, and interest as 
                        reflected in changes in rates for 
                        premium paying policies approved by the 
                        Secretary for the same policy form.
                          (iii) The nonforfeiture provision 
                        shall provide at least one of the 
                        following:
                                  (I) Reduced paid-up 
                                insurance.
                                  (II) Extended term insurance.
                                  (III) Shortened benefit 
                                period.
                                  (IV) Other similar offerings 
                                approved by the Secretary.
          (5) Long-term care insurance policy defined.--For 
        purposes of this subsection, the term ``long-term care 
        insurance policy'' has the meaning given such term by 
        section 4980C(e).
          * * * * * * *
                              ----------                              


                          SOCIAL SECURITY ACT

          * * * * * * *

                          definition of wages

    Sec. 209. (a) For the purposes of this title, the term 
``wages'' means remuneration paid prior to 1951 which was wages 
for the purposes of this title under the law applicable to the 
payment of such remuneration, and remuneration paid after 1950 
for employment, including the cash value of all remuneration 
(including benefits) paid in any medium other than cash; except 
that, in the case of remuneration paid after 1950, such term 
shall not include--
          (1) * * *
          * * * * * * *
          (17) Any benefit provided to or on behalf of an 
        employee if at the time such benefit is provided it is 
        reasonable to believe that the employee will be able to 
        exclude such benefit from income under section 74(c), 
        117, or 132 of the Internal Revenue Code of 1986; [or]
          (18) Remuneration consisting of income excluded from 
        taxation under section 7873 of the Internal Revenue 
        Code of 1986 (relating to income derived by Indians 
        from exercise of fishing rights)[.]; or
          (19) any payment made to or for the benefit of an 
        employee if at the time of such payment it is 
        reasonable to believe that the employee will be able to 
        exclude such payment from income under section 106(b) 
        of the Internal Revenue Code of 1986.
          * * * * * * *

   [TITLE XI--GENERAL PROVISIONS AND PEER REVIEW] TITLE XI--GENERAL 
       PROVISIONS, PEER REVIEW, AND ADMINISTRATIVE SIMPLIFICATION

                       Part A--General Provisions

  exclusion of certain individuals and entities from participation in 
                medicare and state health care programs

    Sec. 1128. (a) Mandatory Exclusion.--The Secretary shall 
exclude the following individuals and entities from 
participation in any program under title XVIII and shall direct 
that the following individuals and entities be excluded from 
participation in any State health care program (as defined in 
subsection (h)):
          (1) * * *
          * * * * * * *
          (3) Felony conviction relating to health care 
        fraud.--Any individual or entity that has been 
        convicted after the date of the enactment of the Health 
        Coverage Availability and Affordability Act of 1996, 
        under Federal or State law, in connection with the 
        delivery of a health care item or service or with 
        respect to any act or omission in a health care program 
        (other than those specifically described in paragraph 
        (1)) operated by or financed in whole or in part by any 
        Federal, State, or local government agency, of a 
        criminal offense consisting of a felony relating to 
        fraud, theft, embezzlement, breach of fiduciary 
        responsibility, or other financial misconduct.
          (4) Felony conviction relating to controlled 
        substance.--Any individual or entity that has been 
        convicted after the date of the enactment of the Health 
        Coverage Availability and Affordability Act of 1996, 
        under Federal or State law, of a criminal offense 
        consisting of a felony relating to the unlawful 
        manufacture, distribution, prescription, or dispensing 
        of a controlled substance.
          (b) Permissive Exclusion.--The Secretary may exclude 
        the following individuals and entities from 
        participation in any program under title XVIII and may 
        direct that the following individuals and entities be 
        excluded from participation in any State health care 
        program:
          [(1) Conviction relating to fraud.--Any individual or 
        entity that has been convicted, under Federal or State 
        law, in connection with the delivery of a health care 
        item or service or with respect to any act or omission 
        in a program operated by or financed in whole or in 
        part by any Federal, State, or local government agency, 
        of a criminal offense relating to fraud, theft, 
        embezzlement, breach of fiduciary responsibility, or 
        other financial misconduct.]
          (1) Conviction relating to fraud.--Any individual or 
        entity that has been convicted after the date of the 
        enactment of the Health Coverage Availability and 
        Affordability Act of 1996, under Federal or State law--
                  (A) of a criminal offense consisting of a 
                misdemeanor relating to fraud, theft, 
                embezzlement, breach of fiduciary 
                responsibility, or other financial misconduct--
                          (i) in connection with the delivery 
                        of a health care item or service, or
                          (ii) with respect to any act or 
                        omission in a health care program 
                        (other than those specifically 
                        described in subsection (a)(1)) 
                        operated by or financed in whole or in 
                        part by any Federal, State, or local 
                        government agency; or
                  (B) of a criminal offense relating to fraud, 
                theft, embezzlement, breach of fiduciary 
                responsibility, or other financial misconduct 
                with respect to any act or omission in a 
                program (other than a health care program) 
                operated by or financed in whole or in part by 
                any Federal, State, or local government agency.
          * * * * * * *
          (3) [Conviction] Misdemeanor conviction relating to 
        controlled substance.--Any individual or entity that 
        has been convicted, under Federal or State law, of a 
        [criminal offense] criminal offense consisting of a 
        misdemeanor relating to the unlawful manufacture, 
        distribution, prescription, or dispensing of a 
        controlled substance.
          * * * * * * *
            (15) Individuals controlling a sanctioned entity.--
        (A) Any individual--
                    (i) who has a direct or indirect ownership 
                or control interest in a sanctioned entity and 
                who knows or should know (as defined in section 
                1128A(i)(6)) of the action constituting the 
                basis for the conviction or exclusion described 
                in subparagraph (B); or
                    (ii) who is an officer or managing employee 
                (as defined in section 1126(b)) of such an 
                entity.
            (B) For purposes of subparagraph (A), the term 
        ``sanctioned entity'' means an entity--
                    (i) that has been convicted of any offense 
                described in subsection (a) or in paragraph 
                (1), (2), or (3) of this subsection; or
                    (ii) that has been excluded from 
                participation under a program under title XVIII 
                or under a State health care program.
    (c) Notice, Effective Date, and Period of Exclusion.--(1) * 
* *
          * * * * * * *
    (3)(A) * * *
          * * * * * * *
    (D) In the case of an exclusion of an individual or entity 
under paragraph (1), (2), or (3) of subsection (b), the period 
of the exclusion shall be 3 years, unless the Secretary 
determines in accordance with published regulations that a 
shorter period is appropriate because of mitigating 
circumstances or that a longer period is appropriate because of 
aggravating circumstances.
    (E) In the case of an exclusion of an individual or entity 
under subsection (b)(4) or (b)(5), the period of the exclusion 
shall not be less than the period during which the individual's 
or entity's license to provide health care is revoked, 
suspended, or surrendered, or the individual or the entity is 
excluded or suspended from a Federal or State health care 
program.
    (F) In the case of an exclusion of an individual or entity 
under subsection (b)(6)(B), the period of the exclusion shall 
be not less than 1 year.
          * * * * * * *

                        civil monetary penalties

    Sec. 1128A. (a) Any person (including an organization, 
agency, or other entity, but excluding a beneficiary, as 
defined in subsection (i)(5)) that--
            (1) knowingly presents or causes to be presented to 
        an officer, employee, or agent of the United States, or 
        of any department or agency thereof, or of any State 
        agency (as defined in subsection (i)(1)), a claim (as 
        defined in subsection (i)(2)) that the Secretary 
        determines--
                    (A) is for a medical or other item or 
                service that the person knows or should know 
                was not provided as [claimed], claimed, 
                including any person who engages in a pattern 
                or practice of presenting or causing to be 
                presented a claim for an item or service that 
                is based on a code that the person knows or 
                should know will result in a greater payment to 
                the person than the code the person knows or 
                should know is applicable to the item or 
                service actually provided,
                  (C) is presented for a physician's service 
                (or an item or service incident to a 
                physician's service) by a person who knows or 
                should know that the individual who furnished 
                (or supervised the furnishing of) the service--
                          (i) was not licensed as a physician,
                          (ii) was licensed as a physician, but 
                        such license had been obtained through 
                        a misrepresentation of material fact 
                        (including cheating on an examination 
                        required for licensing), or
                          (iii) represented to the patient at 
                        the time the service was furnished that 
                        the physician was certified in a 
                        medical specialty by a medical 
                        specialty board when the individual was 
                        not so certified, [or]
                  (D) is for a medical or other item or service 
                furnished during a period in which the person 
                was excluded from the program under which the 
                claim was made pursuant to a determination by 
                the Secretary under this section or under 
                section 1128, 1156, 1160(b) (as in effect on 
                September 2, 1982), 1862(d) (as in effect on 
                the date of the enactment of the Medicare and 
                Medicaid Patient and Program Protection Act of 
                1987), or 1866(b) or as a result of the 
                application of the provisions of section 
                1842(j)(2); [or],or
                  (E) is for a medical or other item or service 
                that a person knows or should know is not 
                medically necessary; or
          (2) knowlingly presents or causes to be presented to 
        any person a request for payment which is in violation 
        of the terms of (A) an assignment under section 
        1842(b)(3)(B)(ii), or (B) an agreement with a State 
        agency (or other requirement of a State plan under 
        title XIX) not to charge a person for an item or 
        service in excess of the amount permitted to be 
        charged, or (c) an agreement to be a participating 
        physician or supplier under section 1842(h)(1), or (D) 
        an agreement pursuant to section 1866(a)(1)(G), [or];
          (3) [gives] knowingly gives or causes to be given to 
        any person, with respect to coverage under title XVIII 
        of inpatient hospital services subject to the 
        provisions of section 1886, information that he knows 
        or should know is false or misleading, and that could 
        reasonably be expected to influence the decision when 
        to discharge such person or another individual from the 
        hospital[;];
          (4) in the case of a person who is not an 
        organization, agency, or other entity, is excluded from 
        participating in a program under title XVIII or a State 
        health care program in accordance with this subsection 
        or under section 1128 and who, at the time of a 
        violation of this subsection--
                  (A) retains a direct or indirect ownership or 
                control interest in an entity that is 
                participating in a program under title XVIII or 
                a State health care program, and who knows or 
                should know of the action constituting the 
                basis for the exclusion; or
                  (B) is an officer or managing employee (as 
                defined in section 1126(b) of such an entity; 
                or
          (5) offers to or transfers remuneration to any 
        individual eligible for benefits under title XVIII of 
        this Act, or under a State health care program (as 
        defined in section 1128(h)) that such person knows or 
        should know is likely to influence such individual to 
        order or receive from a particular provider, 
        practitioner, or supplier any item or service for which 
        payment may be made, in whole or in part, under title 
        XVIII, or a State health care program (as so defined);
shall be subject, in addition to any other penalties that may 
be prescribed by law, to a civil money penalty of not more than 
[$2,000] $10,000 for each item or service (or, in cases under 
paragraph (3) $15,000 for each individual with respect to whom 
false or misleading information was given; in cases under 
paragraph (4), $10,000 for each day the prohibited relationship 
occurs). In addition, such a person shall be subject to an 
assessment of not more than [twice the amount] 3 times the 
amount claimed for each such item or service in lieu of damages 
sustained by the United States or a State agency because of 
such claim. In addition the Secretary may make a determination 
in the same proceeding to exclude the person from participation 
in the [programs under title XVIII] Federal health care 
programs (as defined in section 1128B(f)(1)) and to direct the 
appropriate State agency to exclude the person from 
participation in any State health care program.
    (b)(1) * * *
          * * * * * * *
    (3)(A) Any physician who executes a document described in 
subparagraph (B) with respect to an individual knowing that all 
of the requirements referred to in such subparagraph are not 
met with respect to the individual shall be subject to a civil 
monetary penalty of not more than the greater of--
          (i) $5,000, or
          (ii) three times the amount of the payments under 
        title XVIII for home health services which are made 
        pursuant to such certification.
    (B) A document described in this subparagraph is any 
document that certifies, for purposes of title XVIII, that an 
individual meets the requirements of section 1814(a)(2)(C) or 
1835(a)(2)(A) in the case of home health services furnished to 
the individual.
    (f) Civil money penalties and assessments imposed under 
this section may be compromised by the Secretary and may be 
recovered in a civil action in the name of the United States 
brought in United States district court for the district where 
the claim was presented, or where the claimant resides, as 
determined by the Secretary. Amounts recovered under this 
section shall be paid to the Secretary and disposed of as 
follows:
        (1) * * *
          * * * * * * *
          (3) With respect to amounts recovered arising out of 
        a claim under a Federal health care program (as defined 
        in section 1128B(f)), the portion of such amounts as is 
        determined to have been paid by the program shall be 
        repaid to the program, and the portion of such amounts 
        attributable to the amounts recovered under this 
        section by reason of the amendments made by the Health 
        Coverage Availability and Affordability Act of 1996 (as 
        estimated by the Secretary) shall be deposited into the 
        Federal Hospital Insurance Trust Fund pursuant to 
        section 1817(k)(2)(C).
          [(3)] (4) The remainder of the amounts recovered 
        shall be deposited as miscellaneous receipts of the 
        Treasury of the United States.
The amount of such penalty or assessment, when finally 
determined, or the amount agreed upon in compromise, may be 
deducted from any sum then or later owing by the United States 
or a State agency to the person against whom the penalty or 
assessment has been assessed.
          * * * * * * *
    (i) For the purposes of this section:
          (1) The term ``State agency'' means the agency 
        established or designated to administer or supervise 
        the administration of the State plan under title XIX of 
        this Act or designed to administer the State's program 
        under title V or XX of this Act.
          (2) The term ``claim'' means an application for 
        payments for items and services under [title V, XVIII, 
        XIX, or XX of this Act] a Federal health care program 
        (as defined in section 1128B(f)).
          * * * * * * *
          (4) The term ``agency of the United States'' includes 
        any contractor acting as a fiscal intermediary, 
        carrier, or fiscal agent or any other claims processing 
        agent for [a health insurance or medical services 
        program under title XVIII or XIX of this Act] a Federal 
        health care program (as so defined).
          (5) The term ``beneficiary'' means an individual who 
        is eligible to receive items or services for which 
        payment may be made under [title V, XVIII, XIX, or XX] 
        but does not include a provider, supplier, or 
        practitioner.
          (6) The term ``remuneration'' includes the waiver of 
        coinsurance and deductible amounts (or any part 
        thereof), and transfers of items or services for free 
        or for other than fair market value. The term 
        ``remuneration'' does not include--
                  (A) the waiver of coinsurance and deductible 
                amounts by a person, if--
                          (i) the waiver is not offered as part 
                        of any advertisement or solicitation;
                          (ii) the person does not routinely 
                        waive coinsurance or deductible 
                        amounts; and
                          (iii) the person--
                                  (I) waives the coinsurance 
                                and deductible amounts after 
                                determining in good faith that 
                                the individual is in financial 
                                need;
                                  (II) fails to collect 
                                coinsurance or deductible 
                                amounts after making reasonable 
                                collection efforts; or
                                  (III) provides for any 
                                permissible waiver as specified 
                                in section 1128B(b)(3) or in 
                                regulations issued by the 
                                Secretary;
                  (B) differentials in coinsurance and 
                deductible amounts as part of a benefit plan 
                design as long as the differentials have been 
                disclosed in writing to all beneficiaries, 
                third party payers, and providers, to whom 
                claims are presented and as long as the 
                differentials meet the standards as defined in 
                regulations promulgated by the Secretary not 
                later than 180 days after the date of the 
                enactment of the Health Coverage Availability 
                and Affordability Act of 1996; or
                  (C) incentives given to individuals to 
                promote the delivery of preventive care as 
                determined by the Secretary in regulations so 
                promulgated.
          (7) The term ``should know'' means that a person, 
        with respect to information--
                  (A) acts in deliberate ignorance of the truth 
                or falsity of the information; or
                  (B) acts in reckless disregard of the truth 
                or falsity of the information,
        and no proof of specific intent to defraud is required.
          * * * * * * *
    (m)(1) For purposes of this section, with respect to a 
Federal health care program not contained in this Act, 
references to the Secretary in this section shall be deemed to 
be references to the Secretary or Administrator of the 
department or agency with jurisdiction over such program and 
references to the Inspector General of the Department of Health 
and Human Services in this section shall be deemed to be 
references to the Inspector General of the applicable 
department or agency.
    (2)(A) The Secretary and Administrator of the departments 
and agencies referred to in paragraph (1) may include in any 
action pursuant to this section, claims within the jurisdiction 
of other Federal departments or agencies as long as the 
following conditions are satisfied:
          (i) The case involves primarily claims submitted to 
        the Federal health care programs of the department or 
        agency initiating the action.
          (ii) The Secretary or Administrator of the department 
        or agency initiating the action gives notice and an 
        opportunity to participate in the investigation to the 
        Inspector General of the department or agency with 
        primary jurisdiction over the Federal health care 
        programs to which the claims were submitted.
    (B) If the conditions specified in subparagraph (A) are 
fulfilled, the Inspector General of the department or agency 
initiating the action is authorized to exercise all powers 
granted under the Inspector General Act of 1978 with respect to 
the claims submitted to the other departments or agencies to 
the same manner and extent as provided in that Act with respect 
to claims submitted to such departments or agencies.

 criminal penalties for acts involving [medicare or state health care 
                 programs] federal health care programs

    Sec. 1128B. (a) Whoever--
          (1) knowingly and willfully makes or causes to be 
        made any false statement or representation of a 
        material fact in any application for any benefit or 
        payment under [a program under title XVIII or a State 
        health care program (as defined in section 1128(h))] a 
        Federal health care program,
            (4) having made application to receive any such 
        benefit or payment for the use and benefit of another 
        and having received it, knowingly and willfully 
        converts such benefit or payment or any part thereof to 
        a use other than for the use and benefit of such other 
        person, [or]
            (5) presents or causes to be presented a claim for 
        a physician's service for which payment may be made 
        under [a program under title XVIII or a State health 
        care program] and knows that the individual who 
        furnished the service was not licensed as a physician, 
        or a Federal health care program,]
            (6) knowingly and willfully disposes of assets 
        (including by any transfer in trust) in order for an 
        individual to become eligible for medical assistance 
        under a State plan under title XIX, if disposing of the 
        assets results in the imposition of a period of 
        ineligibility for such assistance under section 
        1917(c),
shall (i) in the case of such a statement, representation, 
concealment, failure, or conversion by any person in connection 
with the furnishing (by that person) of items or services for 
which payment is or may be made under the program, be guilty of 
a felony and upon conviction thereof fined not more than 
$25,000 or imprisoned for not more than five years or both, or 
(ii) in the case of such a statement, representation, 
concealment, failure, or conversion by any other person, be 
guilty of a misdemeanor and upon conviction thereof fined not 
more than $10,000 or imprisoned for not more than one year, or 
both. In addition, in any case where an individual who is 
otherwise eligible for assistance under [a State plan approved 
under title XIX] a Federal health care program is convicted of 
an offense under the preceding provisions of this subsection, 
[the State may at its option (notwithstanding any other 
provision of that title or of such plan)] the administrator of 
such program may at its option (notwithstanding any other 
provision of such program) limit, restrict or suspend the 
eligibility of that individual for such period (not exceeding 
one year) as it deems appropriate; but the imposition of a 
limitation, restriction, or suspension with respect to the 
eligibility of any individual under this sentence shall not 
affect the eligibility of any other person for assistance under 
the plan, regardless of the relationship between that 
individual and such other person.
    (b)(1) Whoever knowingly and willfully solicits or receives 
any remuneration (including any kickback, bribe, or rebate) 
directly or indirectly, overtly or covertly, in cash or in 
kind--
          (A) in return for referring an individual to a person 
        for the furnishing or arranging for the furnishing of 
        any item or service for which payment may be made in 
        whole or in part under title XVIII or a State health 
        care program, or
          (B) in return for purchasing, leasing, ordering, or 
        arranging for or recommending purchasing, leasing, or 
        ordering any good, facility, service, or item for which 
        payment may be made in whole or in part under [title 
        XVIII or a State health care program] a Federal health 
        care program,
shall be guilty of a felony and upon conviction thereof, shall 
be fined not more than $25,000 or imprisoned for not more than 
five years, or both.
    (2) Whoever knowingly and willfully offers or pays any 
remuneration (including any kickback, bribe, or rebate) 
directly or indirectly, overtly or covertly, in cash or in kind 
to any person to induce such person--
          (A) to refer an individual to a person for the 
        furnishing or arranging for the furnishing of any item 
        or service for which payment may be made in whole or in 
        part under [title XVIII or a State health care program] 
        a Federal health care program, or
          (B) to purchase, lease, order, or arrange for or 
        recommend purchasing, leasing, or ordering any good, 
        facility, service, or item for which payment may be 
        made in whole or in part under [title XVIII or a State 
        health care program] a Federal health care program,
shall be guilty of a felony and upon conviction thereof, shall 
be fined not more than $25,000 or imprisoned for not more than 
five years, or both.
    (3) Paragraphs (1) and (2) shall not apply to--
          (A) a discount or other reduction in price obtained 
        by a provider of services or other entity under [title 
        XVIII or a State health care program] a Federal health 
        care program if the reduction in price is properly 
        disclosed and appropriately reflected in the costs 
        claimed or charges made by the provider or entity under 
        [title XVIII or a State health care program] a Federal 
        health care program;
          * * * * * * *
          (C) any amount paid by a vendor of goods or services 
        to a person authorized to act as a purchasing agent for 
        a group of individuals or entities who are furnishing 
        services reimbursed under [title XVIII or a State 
        health care program] a Federal health care program if--
                  (i) * * *
          * * * * * * *
          (D) a waiver of any coinsurance under part B of title 
        XVIII by a Federally qualified health care center with 
        respect to an individual who qualifies for subsidized 
        services under a provision of the Public Health Service 
        Act; [and]
          (E) any payment practice specified by the Secretary 
        in regulations promulgated pursuant to section 14(a) of 
        the Medicare and Medicaid Patient and Program 
        Protection Act of 1987[.]; and
          (F) any remuneration between an organization and an 
        individual or entity providing items or services, or a 
        combination thereof, pursuant to a written agreement 
        between the organization and the individual or entity 
        if the organization is an eligible organization under 
        section 1876 or if the written agreement places the 
        individual or entity at substantial financial risk for 
        the cost or utilization of the items or services, or a 
        combination thereof, which the individual or entity is 
        obligated to provide, whether through a withhold, 
        capitation, incentive pool, per diem payment, or any 
        other similar risk arrangement which places the 
        individual or entity at substantial financial risk.
    (c) Whoever knowingly and willfully makes or causes to be 
made, or induces or seeks to induce the making of, any false 
statement or representation of a material fact with respect to 
the conditions or operation of any institution, facility, or 
entity in order that such institution, facility, or entity may 
qualify (either upon initial certification or upon 
recertification) as a hospital, rural primary care hospital, 
skilled nursing facility, nursing facility, intermediate care 
facility for the mentally retarded, or other entity (including 
an eligible organization under section 1876(b)) for which 
certification is required under title XVIII or a State health 
care program (as defined in section 1128(h)), or with respect 
to information required to be provided under section 1124A, 
shall be guilty of a felony and upon conviction thereof shall 
be fined not more than $25,000 or imprisoned for not more than 
five years, or both.
          * * * * * * *
    (f) For purposes of this section, the term ``Federal health 
care program'' means--
          (1) any plan or program that provides health 
        benefits, whether directly, through insurance, or 
        otherwise, which is funded directly, in whole or in 
        part, by the United States Government (other than the 
        health insurance program under chapter 89 of title 5, 
        United States Code); or
          (2) any State health care program, as defined in 
        section 1128(h).


                    fraud and abuse control program


  Sec. 1128C. (a) Establishment of Program.--
          (1) In general.--Not later than January 1, 1997, the 
        Secretary, acting through the Office of the Inspector 
        General of the Department of Health and Human Services, 
        and the Attorney General shall establish a program--
                  (A) to coordinate Federal, State, and local 
                law enforcement programs to control fraud and 
                abuse with respect to health plans,
                  (B) to conduct investigations, audits, 
                evaluations, and inspections relating to the 
                delivery of and payment for health care in the 
                United States,
                  (C) to facilitate the enforcement of the 
                provisions of sections 1128, 1128A, and 1128B 
                and other statutes applicable to health care 
                fraud and abuse,
                  (D) to provide for the modification and 
                establishment of safe harbors and to issue 
                advisory opinions and special fraud alerts 
                pursuant to section 1128D, and
                  (E) to provide for the reporting and 
                disclosure of certain final adverse actions 
                against health care providers, suppliers, or 
                practitioners pursuant to the data collection 
                system established under section 1128E.
          (2) Coordination with health plans.--In carrying out 
        the program established under paragraph (1), the 
        Secretary and the Attorney General shall consult with, 
        and arrange for the sharing of data with 
        representatives of health plans.
          (3) Guidelines.--
                  (A) In general.--The Secretary and the 
                Attorney General shall issue guidelines to 
                carry out the program under paragraph (1). The 
                provisions of sections 553, 556, and 557 of 
                title 5, United States Code, shall not apply in 
                the issuance of such guidelines.
                  (B) Information guidelines.--
                          (i) In general.--Such guidelines 
                        shall include guidelines relating to 
                        the furnishing of information by health 
                        plans, providers, and others to enable 
                        the Secretary and the Attorney General 
                        to carry out the program (including 
                        coordination with health plans under 
                        paragraph (2)).
                          (ii) Confidentiality.--Such 
                        guidelines shall include procedures to 
                        assure that such information is 
                        provided and utilized in a manner that 
                        appropriately protects the 
                        confidentiality of the information and 
                        the privacy of individuals receiving 
                        health care services and items.
                          (iii) Qualified immunity for 
                        providing information.--The provisions 
                        of section 1157(a) (relating to 
                        limitation on liability) shall apply to 
                        a person providing information to the 
                        Secretary or the Attorney General in 
                        conjunction with their performance of 
                        duties under this section.
          (4) Ensuring access to documentation.--The Inspector 
        General of the Department of Health and Human Services 
        is authorized to exercise such authority described in 
        paragraphs (3) through (9) of section 6 of the 
        Inspector General Act of 1978 (5 U.S.C. App.) as 
        necessary with respect to the activities under the 
        fraud and abuse control program established under this 
        subsection.
          (5) Authority of inspector general.--Nothing in this 
        Act shall be construed to diminish the authority of any 
        Inspector General, including such authority as provided 
        in the Inspector General Act of 1978 (5 U.S.C. App.).
  (b) Additional Use of Funds by Inspector General.--
          (1) Reimbursements for investigations.--The Inspector 
        General of the Department of Health and Human Services 
        is authorized to receive and retain for current use 
        reimbursement for the costs of conducting 
        investigations and audits and for monitoring compliance 
        plans when such costs are ordered by a court, 
        voluntarily agreed to by the payor, or otherwise.
          (2) Crediting.--Funds received by the Inspector 
        General under paragraph (1) as reimbursement for costs 
        of conducting investigations shall be deposited to the 
        credit of the appropriation from which initially paid, 
        or to appropriations for similar purposes currently 
        available at the time of deposit, and shall remain 
        available for obligation for 1 year from the date of 
        the deposit of such funds.
  (c) Health Plan Defined.--For purposes of this section, the 
term ``health plan'' means a plan or program that provides 
health benefits, whether directly, through insurance, or 
otherwise, and includes--
          (1) a policy of health insurance;
          (2) a contract of a service benefit organization; and
          (3) a membership agreement with a health maintenance 
        organization or other prepaid health plan.


guidance regarding application of health care fraud and abuse sanctions


  Sec. 1128D. (a) Solicitation and Publication of Modifications 
to Existing Safe Harbors and New Safe Harbors.--
          (1) In general.--
                  (A) Solicitation of proposals for safe 
                harbors.--Not later than January 1, 1997, and 
                not less than annually thereafter, the 
                Secretary shall publish a notice in the Federal 
                Register soliciting proposals, which will be 
                accepted during a 60-day period, for--
                          (i) modifications to existing safe 
                        harbors issued pursuant to section 
                        14(a) of the Medicare and Medicaid 
                        Patient and Program Protection Act of 
                        1987 (42 U.S.C. 1320a-7b note);
                          (ii) additional safe harbors 
                        specifying payment practices that shall 
                        not be treated as a criminal offense 
                        under section 1128B(b) and shall not 
                        serve as the basis for an exclusion 
                        under section 1128(b)(7);
                          (iii) advisory opinions to be issued 
                        pursuant to subsection (b); and
                          (iv) special fraud alerts to be 
                        issued pursuant to subsection (c).
                  (B) Publication of proposed modifications and 
                proposed additional safe harbors.--After 
                considering the proposals described in clauses 
                (i) and (ii) of subparagraph (A), the 
                Secretary, in consultation with the Attorney 
                General, shall publish in the Federal Register 
                proposed modifications to existing safe harbors 
                and proposed additional safe harbors, if 
                appropriate, with a 60-day comment period. 
                After considering any public comments received 
                during this period, the Secretary shall issue 
                final rules modifying the existing safe harbors 
                and establishing new safe harbors, as 
                appropriate.
                  (C) Report.--The Inspector General of the 
                Department of Health and Human Services (in 
                this section referred to as the ``Inspector 
                General'') shall, in an annual report to 
                Congress or as part of the year-end semiannual 
                report required by section 5 of the Inspector 
                General Act of 1978 (5 U.S.C. App.), describe 
                the proposals received under clauses (i) and 
                (ii) of subparagraph (A) and explain which 
                proposals were included in the publication 
                described in subparagraph (B), which proposals 
                were not included in that publication, and the 
                reasons for the rejection of the proposals that 
                were not included.
          (2) Criteria for modifying and establishing safe 
        harbors.--In modifying and establishing safe harbors 
        under paragraph (1)(B), the Secretary may consider the 
        extent to which providing a safe harbor for the 
        specified payment practice may result in any of the 
        following:
                  (A) An increase or decrease in access to 
                health care services.
                  (B) An increase or decrease in the quality of 
                health care services.
                  (C) An increase or decrease in patient 
                freedom of choice among health care providers.
                  (D) An increase or decrease in competition 
                among health care providers.
                  (E) An increase or decrease in the ability of 
                health care facilities to provide services in 
                medically underserved areas or to medically 
                underserved populations.
                  (F) An increase or decrease in the cost to 
                Federal health care programs (as defined in 
                section 1128B(f)).
                  (G) An increase or decrease in the potential 
                overutilization of health care services.
                  (H) The existence or nonexistence of any 
                potential financial benefit to a health care 
                professional or provider which may vary based 
                on their decisions of--
                          (i) whether to order a health care 
                        item or service; or
                          (ii) whether to arrange for a 
                        referral of health care items or 
                        services to a particular practitioner 
                        or provider.
                  (I) Any other factors the Secretary deems 
                appropriate in the interest of preventing fraud 
                and abuse in Federal health care programs (as 
                so defined).
    (b) Advisory Opinions.--
          (1) Issuance of advisory opinions.--The Secretary 
        shall issue written advisory opinions as provided in 
        this subsection.
          (2) Matters subject to advisory opinions.--The 
        Secretary shall issue advisory opinions as to the 
        following matters:
                  (A) What constitutes prohibited remuneration 
                within the meaning of section 1128B(b).
                  (B) Whether an arrangement or proposed 
                arrangement satisfies the criteria set forth in 
                section 1128B(b)(3) for activities which do not 
                result in prohibited remuneration.
                  (C) Whether an arrangement or proposed 
                arrangement satisfies the criteria which the 
                Secretary has established, or shall establish 
                by regulation for activities which do not 
                result in prohibited remuneration.
                  (D) What constitutes an inducement to reduce 
                or limit services to individuals entitled to 
                benefits under title XVIII or title XIX or 
                title XXI within the meaning of section 
                1128B(b).
                  (E) Whether any activity or proposed activity 
                constitutes grounds for the imposition of a 
                sanction under section 1128, 1128A, or 1128B.
          (3) Matters not subject to advisory opinions.--Such 
        advisory opinions shall not address the following 
        matters:
                  (A) Whether the fair market value shall be, 
                or was paid or received for any goods, services 
                or property.
                  (B) Whether an individual is a bona fide 
                employee within the requirements of section 
                3121(d)(2) of the Internal Revenue Code of 
                1986.
          (4) Effect of advisory opinions.--
                  (A) Binding as to secretary and parties 
                involved.--Each advisory opinion issued by the 
                Secretary shall be binding as to the Secretary 
                and the party or parties requesting the 
                opinion.
                  (B) Failure to seek opinion.--The failure of 
                a party to seek an advisory opinion may not be 
                introduced into evidence to prove that the 
                party intended to violate the provisions of 
                sections 1128, 1128A, or 1128B.
          (5) Regulations.--
                  (A) In general.--Not later than 180 days 
                after the date of the enactment of this 
                section, the Secretary shall issue regulations 
                to carry out this section. Such regulations 
                shall provide for--
                          (i) the procedure to be followed by a 
                        party applying for an advisory opinion;
                          (ii) the procedure to be followed by 
                        the Secretary in responding to a 
                        request for an advisory opinion;
                          (iii) the interval in which the 
                        Secretary shall respond;
                          (iv) the reasonable fee to be charged 
                        to the party requesting an advisory 
                        opinion; and
                          (v) the manner in which advisory 
                        opinions will be made available to the 
                        public.
                  (B) Specific contents.--Under the regulations 
                promulgated pursuant to subparagraph (A)--
                          (i) the Secretary shall be required 
                        to respond to a party requesting an 
                        advisory opinion by not later than 30 
                        days after the request is received; and
                          (ii) the fee charged to the party 
                        requesting an advisory opinion shall be 
                        equal to the costs incurred by the 
                        Secretary in responding to the request.
  (c) Special Fraud Alerts.--
          (1) In general.--
                  (A) Request for special fraud alerts.--Any 
                person may present, at any time, a request to 
                the Inspector General for a notice which 
                informs the public of practices which the 
                Inspector General considers to be suspect or of 
                particular concern under the medicare program 
                or a State health care program, as defined in 
                section 1128(h) (in this subsection referred to 
                as a ``special fraud alert'').
                  (B) Issuance and publication of special fraud 
                alerts.--Upon receipt of a request described in 
                subparagraph (A), the Inspector General shall 
                investigate the subject matter of the request 
                to determine whether a special fraud alert 
                should be issued. If appropriate, the Inspector 
                General shall issue a special fraud alert in 
                response to the request. All special fraud 
                alerts issued pursuant to this subparagraph 
                shall be published in the Federal Register.
          (2) Criteria for special fraud alerts.--In 
        determining whether to issue a special fraud alert upon 
        a request described in paragraph (1), the Inspector 
        General may consider--
                  (A) whether and to what extent the practices 
                that would be identified in the special fraud 
                alert may result in any of the consequences 
                described in subsection (a)(2); and
                  (B) the volume and frequency of the conduct 
                that would be identified in the special fraud 
                alert.


          health care fraud and abuse data collection program


  Sec. 1128E. (a) General Purpose.--Not later than January 1, 
1997, the Secretary shall establish a national health care 
fraud and abuse data collection program for the reporting of 
final adverse actions (not including settlements in which no 
findings of liability have been made) against health care 
providers, suppliers, or practitioners as required by 
subsection (b), with access as set forth in subsection (c).
  (b) Reporting of Information.--
          (1) In general.--Each Government agency and health 
        plan shall report any final adverse action (not 
        including settlements in which no findings of liability 
        have been made) taken against a health care provider, 
        supplier, or practitioner.
          (2) Information to be reported.--The information to 
        be reported under paragraph (1) includes:
                  (A) The name and TIN (as defined in section 
                7701(a)(41) of the Internal Revenue Code of 
                1986) of any health care provider, supplier, or 
                practitioner who is the subject of a final 
                adverse action.
                  (B) The name (if known) of any health care 
                entity with which a health care provider, 
                supplier, or practitioner is affiliated or 
                associated.
                  (C) The nature of the final adverse action 
                and whether such action is on appeal.
                  (D) A description of the acts or omissions 
                and injuries upon which the final adverse 
                action was based, and such other information as 
                the Secretary determines by regulation is 
                required for appropriate interpretation of 
                information reported under this section.
          (3) Confidentiality.--In determining what information 
        is required, the Secretary shall include procedures to 
        assure that the privacy of individuals receiving health 
        care services is appropriately protected.
          (4) Timing and form of reporting.--The information 
        required to be reported under this subsection shall be 
        reported regularly (but not less often than monthly) 
        and in such form and manner as the Secretary 
        prescribes. Such information shall first be required to 
        be reported on a date specified by the Secretary.
          (5) To whom reported.--The information required to be 
        reported under this subsection shall be reported to the 
        Secretary.
    (c) Disclosure and Correction of Information.--
          (1) Disclosure.--With respect to the information 
        about final adverse actions (not including settlements 
        in which no findings of liability have been made) 
        reported to the Secretary under this section respecting 
        a health care provider, supplier, or practitioner, the 
        Secretary shall, by regulation, provide for--
                  (A) disclosure of the information, upon 
                request, to the health care provider, supplier, 
                or licensed practitioner, and
                  (B) procedures in the case of disputed 
                accuracy of the information.
          (2) Corrections.--Each Government agency and health 
        plan shall report corrections of information already 
        reported about any final adverse action taken against a 
        health care provider, supplier, or practitioner, in 
        such form and manner that the Secretary prescribes by 
        regulation.
    (d) Access to Reported Information.--
          (1) Availability.--The information in this database 
        shall be available to Federal and State government 
        agencies and health plans pursuant to procedures that 
        the Secretary shall provide by regulation.
          (2) Fees for disclosure.--The Secretary may establish 
        or approve reasonable fees for the disclosure of 
        information in this database (other than with respect 
        to requests by Federal agencies). The amount of such a 
        fee shall be sufficient to recover the full costs of 
        operating the database. Such fees shall be available to 
        the Secretary or, in the Secretary's discretion to the 
        agency designated under this section to cover such 
        costs.
    (e) Protection From Liability for Reporting.--No person or 
entity, including the agency designated by the Secretary in 
subsection (b)(5) shall be held liable in any civil action with 
respect to any report made as required by this section, without 
knowledge of the falsity of the information contained in the 
report.
    (f) Definitions and Special Rules.--For purposes of this 
section:
          (1) Final adverse action.--
                  (A) In general.--The term ``final adverse 
                action'' includes:
                          (i) Civil judgments against a health 
                        care provider, supplier, or 
                        practitioner in Federal or State court 
                        related to the delivery of a health 
                        care item or service.
                          (ii) Federal or State criminal 
                        convictions related to the delivery of 
                        a health care item or service.
                          (iii) Actions by Federal or State 
                        agencies responsible for the licensing 
                        and certification of health care 
                        providers, suppliers, and licensed 
                        health care practitioners, including--
                                  (I) formal or official 
                                actions, such as revocation or 
                                suspension of a license (and 
                                the length of any such 
                                suspension), reprimand, censure 
                                or probation,
                                  (II) any other loss of 
                                license or the right to apply 
                                for, or renew, a license of the 
                                provider, supplier, or 
                                practitioner, whether by 
                                operation of law, voluntary 
                                surrender, non-renewability, or 
                                otherwise, or
                                  (III) any other negative 
                                action or finding by such 
                                Federal or State agency that is 
                                publicly available information.
                          (iv) Exclusion from participation in 
                        Federal or State health care programs.
                          (v) Any other adjudicated actions or 
                        decisions that the Secretary shall 
                        establish by regulation.
                  (B) Exception.--The term does not include any 
                action with respect to a malpractice claim.
          (2) Practitioner.--The terms ``licensed health care 
        practitioner'', ``licensed practitioner'', and 
        ``practitioner'' mean, with respect to a State, an 
        individual who is licensed or otherwise authorized by 
        the State to provide health care services (or any 
        individual who, without authority holds himself or 
        herself out to be so licensed or authorized).
          (3) Government agency.--The term ``Government 
        agency'' shall include:
                  (A) The Department of Justice.
                  (B) The Department of Health and Human 
                Services.
                  (C) Any other Federal agency that either 
                administers or provides payment for the 
                delivery of health care services, including, 
                but not limited to the Department of Defense 
                and the Veterans' Administration.
                  (D) State law enforcement agencies.
                  (E) State medicaid fraud control units.
                  (F) Federal or State agencies responsible for 
                the licensing and certification of health care 
                providers and licensed health care 
                practitioners.
          (4) Health plan.--The term ``health plan'' has the 
        meaning given such term by section 1128C(c).
          (5) Determination of conviction.--For purposes of 
        paragraph (1), the existence of a conviction shall be 
        determined under paragraph (4) of section 1128(i).''.
          * * * * * * *

   PART B--PEER REVIEW OF THE UTILIZATION AND QUALITY OF HEALTH CARE 
                                SERVICES

          * * * * * * *

 obligations of health care practitioners and providers of health care 
         services; sanctions and penalties; hearings and review

    Sec. 1156. (a) * * *
    (b)(1) If after reasonable notice and opportunity for 
discussion with the practitioner or person concerned, and, if 
appropriate, after the practitioner or person has been given a 
reasonable opportunity to enter into and complete a corrective 
action plan (which may include remedial education) agreed to by 
the organization, and has failed successfully to complete such 
plan, any organization having a contract with the Secretary 
under this part determines that such practitioner or person 
has--
          (A) failed in a substantial number of cases 
        substantially to comply with any obligation imposed on 
        him under subsection (a), or
          (B) grossly and flagrantly violated any such 
        obligation in one or more instances,
such organization shall submit a report and recommendations to 
the Secretary. If the Secretary agrees with such determination, 
[and determines that such practitioner or person, in providing 
health care services over which such organization has review 
responsibility and for which payment (in whole or in part) may 
be made under this Act, has demonstrated an unwillingness or a 
lack of ability substantially to comply with such obligations,] 
the Secretary (in addition to any other sanction provided under 
law) may exclude (permanently or for such period as the 
Secretary [may prescribe)] may prescribe, except that such 
period may not be less than 1 year) such practitioner or person 
from eligibility to provide services under this Act on a 
reimbursable basis. [In determining whether a practitioner or 
person has demonstrated an unwillingness or lack of ability 
substantially to comply with such obligations, the Secretary 
shall consider the practitioner's or person's willingness or 
lack of ability, during the period before the organization 
submits its report and recommendations, to enter into and 
successfully complete a corrective action plan.] If the 
Secretary fails to act upon the recommendations submitted to 
him by such organization within 120 days after such submission, 
such practitioner or person shall be excluded from eligibility 
to provide services on a reimbursable basis until such time as 
the Secretary determines otherwise.
    (2) A determination made by the Secretary under this 
subsection to exclude a practitioner or person shall be 
effective on the same date and in the same manner as an 
exclusion from participation under the programs under this Act 
becomes effective under section 1128(c), and [shall remain] 
shall (subject to the minimum period specified in the second 
sentence of paragraph (1)) remain in effect until the Secretary 
finds and gives reasonable notice to the public that the basis 
for such determination has been removed and that there is 
reasonable assurance that it will not recur.
    (3) In lieu of the sanction authorized by paragraph (1), 
the Secretary may require that (as a condition to the continued 
eligibility of such practitioner or person to provide such 
health care services on a reimbursable basis) such practitioner 
or person pays to the United States, in case such acts or 
conduct involved the provision or ordering by such practitioner 
or person of health care services which were medically improper 
or unnecessary, an amount not in excess of [the actual or 
estimated cost] up to $10,000 for each instance of the 
medically improper or unnecessary services so provided. Such 
amount may be deducted from any sums owing by the United States 
(or any instrumentality thereof) to the practitioner or person 
from whom such amount is claimed.
          * * * * * * *

                 PART C--ADMINISTRATIVE SIMPLIFICATION

``SEC. 1171. DEFINITIONS.

    For purposes of this part:
          ``(1) Clearinghouse.--The term ``clearinghouse'' 
        means a public or private entity that--
                  (A) processes or facilitates the processing 
                of nonstandard data elements of health 
                information into standard data elements; or
                  (B) provides the means by which persons may 
                meet the requirements of this part.
          (2) Code set.--The term ``code set'' means any set of 
        codes used for encoding data elements, such as tables 
        of terms, medical concepts, medical diagnostic codes, 
        or medical procedure codes.
          (3) Health care provider.--The term ``health care 
        provider'' includes a provider of services (as defined 
        in section 1861(u)), a provider of medical or other 
        health services (as defined in section 1861(s)), and 
        any other person furnishing health care services or 
        supplies.
          (4) Health information.--The term ``health 
        information'' means any information, whether oral or 
        recorded in any form or medium that--
                  (A) is created or received by a health care 
                provider, health plan, public health authority, 
                employer, life insurer, school or university, 
                or clearinghouse; and
                  (B) relates to the past, present, or future 
                physical or mental health or condition of an 
                individual, the provision of health care to an 
                individual, or the past, present, or future 
                payment for the provision of health care to an 
                individual.
          (5) Health plan.--The term ``health plan'' means a 
        plan which provides, or pays the cost of, health 
        benefits. Such term includes the following, or any 
        combination thereof:
                  (A) Part A or part B of the medicare program 
                under title XVIII.
                  (B) The medicaid program under title XIX.
                  (C) A medicare supplemental policy (as 
                defined in section 1882(g)(1)).
                  (D) Coverage issued as a supplement to 
                liability insurance.
                  (E) General liability insurance.
                  (F) Worker's compensation or similar 
                insurance.
                  (G) Automobile or automobile medical-payment 
                insurance.
                  (H) A long-term care policy, including a 
                nursing home fixed indemnity policy (unless the 
                Secretary determines that such a policy does 
                not provide sufficiently comprehensive coverage 
                of a benefit so that the policy should be 
                treated as a health plan).
                  (I) A hospital or fixed indemnity income-
                protection policy.
                  (J) An employee welfare benefit plan, as 
                defined in section 3(1) of the Employee 
                Retirement Income Security Act of 1974 (29 
                U.S.C. 1002(1)), but only to the extent the 
                plan is established or maintained for the 
                purpose of providing health benefits and has 50 
                or more participants (as defined in section 
                3(7) of such Act).
                  (K) An employee welfare benefit plan or any 
                other arrangement which is established or 
                maintained for the purpose of offering or 
                providing health benefits to the employees of 2 
                or more employers.
                  (L) The health care program for active 
                military personnel under title 10, United 
                States Code.
                  (M) The veterans health care program under 
                chapter 17 of title 38, United States Code.
                  (N) The Civilian Health and Medical Program 
                of the Uniformed Services (CHAMPUS), as defined 
                in section 1073(4) of title 10, United States 
                Code.
                  (O) The Indian health service program under 
                the Indian Health Care Improvement Act (25 
                U.S.C. 1601 et seq.).
                  (P) The Federal Employees Health Benefit Plan 
                under chapter 89 of title 5, United States 
                Code.
                  (Q) Such other plan or arrangement as the 
                Secretary determines is a health plan.
          (6) Individually identifiable health information.--
        The term ``individually identifiable health 
        information'' means any information, including 
        demographic information collected from an individual, 
        that--
                  (A) is created or received by a health care 
                provider, health plan, employer, or 
                clearinghouse; and
                  (B) relates to the past, present, or future 
                physical or mental health or condition of an 
                individual, the provision of health care to an 
                individual, or the past, present, or future 
                payment for the provision of health care to an 
                individual, and--
                          (i) identifies the individual; or
                          (ii) with respect to which there is a 
                        reasonable basis to believe that the 
                        information can be used to identify the 
                        individual.
          (7) Standard.--The term ``standard'', when used with 
        reference to a data element of health information or a 
        transaction referred to in section 1173(a)(1), means 
        any such data element or transaction that meets each of 
        the standards and implementation specifications adopted 
        or established by the Secretary with respect to the 
        data element or transaction under sections 1172 and 
        1173.
          (8) Standard setting organization.--The term 
        ``standard setting organization'' means a standard 
        setting organization accredited by the American 
        National Standards Institute, including the National 
        Council for Prescription Drug Programs, that develops 
        standards for information transactions, data elements, 
        or any other standard that is necessary to, or will 
        facilitate, the implementation of this part.

SEC. 1172. GENERAL REQUIREMENTS FOR ADOPTION OF STANDARDS.

  (a) Applicability.--Any standard or modification of a 
standard adopted under this part shall apply to the following 
persons:
          (1) A health plan.
          (2) A clearinghouse.
          (3) A health care provider who transmits any health 
        information in electronic form in connection with a 
        transaction referred to in section 1173(a)(1).
  (b) Reduction of Costs.--Any standard or modification of a 
standard adopted under this part shall be consistent with the 
objective of reducing the administrative costs of providing and 
paying for health care.
  (c) Role of Standard Setting Organizations.--
          (1) In general.--Except as provided in paragraph (2), 
        any standard or modification of a standard adopted 
        under this part shall be developed or modified by a 
        standard setting organization.
          (2) Special rules.--
                  (A) Different standards.--The Secretary may 
                adopt a standard or modification of a standard 
                that is different from any standard developed 
                or modified by a standard setting organization, 
                if--
                          (i) the different standard or 
                        modification will substantially reduce 
                        administrative costs to health care 
                        providers and health plans compared to 
                        the alternatives; and
                          (ii) the standard or modification is 
                        promulgated in accordance with the 
                        rulemaking procedures of subchapter III 
                        of chapter 5 of title 5, United States 
                        Code.
                  (B) No standard by standard setting 
                organization.--If no standard setting 
                organization has adopted or modified any 
                standard relating to a standard, or a 
                modification of a standard, that the Secretary 
                is authorized or required to adopt under this 
                part--
                          (i) paragraph (1) shall not apply; 
                        and
                          (ii) subsection (f) shall apply.
    (d) Implementation Specifications.--The Secretary shall 
establish specifications for implementing each of the standards 
and modifications adopted under this part.
    (e) Protection of Trade Secrets.--Except as otherwise 
required by law, a standard or modification of a standard 
adopted under this part shall not require disclosure of trade 
secrets or confidential commercial information by a person 
required to comply with this part.
    (f) Assistance to the Secretary.--In complying with the 
requirements of this part, the Secretary shall rely on the 
recommendations of the Health Information Advisory Committee 
established under section 1179 and shall consult with 
appropriate Federal and State agencies and private 
organizations. The Secretary shall publish in the Federal 
Register the recommendations of the Health Information Advisory 
Committee regarding the adoption of a standard or modification 
of a standard under this part.

SEC. 1173. STANDARDS FOR INFORMATION TRANSACTIONS AND DATA ELEMENTS.

    (a) Standards To Enable Electronic Exchange.--
          (1) In general.--The Secretary shall adopt standards 
        for transactions, and data elements for such 
        transactions, to enable health information to be 
        exchanged electronically, that are--
                  (A) appropriate for the financial and 
                administrative transactions described in 
                paragraph (2); and
                  (B) related to other financial and 
                administrative transactions determined 
                appropriate by the Secretary consistent with 
                the goals of improving the operation of the 
                health care system and reducing administrative 
                costs.
          (2) Transactions.--The transactions referred to in 
        paragraph (1)(A) are the following:
                  (A) Claims (including coordination of 
                benefits) or equivalent encounter information.
                  (B) Claims attachments.
                  (C) Enrollment and disenrollment.
                  (D) Eligibility.
                  (E) Health care payment and remittance 
                advice.
                  (F) Premium payments.
                  (G) First report of injury.
                  (H) Claims status.
                  (I) Referral certification and authorization.
          (3) Accommodation of specific providers.--The 
        standards adopted by the Secretary under paragraph (1) 
        shall accommodate the needs of different types of 
        health care providers.
    (b) Unique Health Identifiers.--
          (1) In general.--The Secretary shall adopt standards 
        providing for a standard unique health identifier for 
        each individual, employer, health plan, and health care 
        provider for use in the health care system. In carrying 
        out the preceding sentence for each health plan and 
        health care provider, the Secretary shall take into 
        account multiple uses for identifiers and multiple 
        locations and specialty classifications for health care 
        providers.
          (2) Use of identifiers.--The standards adopted under 
        paragraphs (1) shall specify the purposes for which a 
        unique health identifier may be used.
    (c) Code Sets.--
          (1) In general.--The Secretary shall adopt standards 
        that--
                  (A) select code sets for appropriate data 
                elements for the transactions referred to in 
                subsection (a)(1) from among the code sets that 
                have been developed by private and public 
                entities; or
                  (B) establish code sets for such data 
                elements if no code sets for the data elements 
                have been developed.
          (2) Distribution.--The Secretary shall establish 
        efficient and low-cost procedures for distribution 
        (including electronic distribution) of code sets and 
        modifications made to such code sets under section 
        1174(b).
    (d) Security Standards for Health Information.--
          (1) Security standards.--The Secretary shall adopt 
        security standards that--
                  (A) take into account--
                          (i) the technical capabilities of 
                        record systems used to maintain health 
                        information;
                          (ii) the costs of security measures;
                          (iii) the need for training persons 
                        who have access to health information;
                          (iv) the value of audit trails in 
                        computerized record systems; and
                          (v) the needs and capabilities of 
                        small health care providers and rural 
                        health care providers (as such 
                        providers are defined by the 
                        Secretary); and
                  (B) ensure that a clearinghouse, if it is 
                part of a larger organization, has policies and 
                security procedures which isolate the 
                activities of the clearinghouse with respect to 
                processing information in a manner that 
                prevents unauthorized access to such 
                information by such larger organization.
          (2) Safeguards.--Each person described in section 
        1172(a) who maintains or transmits health information 
        shall maintain reasonable and appropriate 
        administrative, technical, and physical safeguards--
                  (A) to ensure the integrity and 
                confidentiality of the information;
                  (B) to protect against any reasonably 
                anticipated--
                          (i) threats or hazards to the 
                        security or integrity of the 
                        information; and
                          (ii) unauthorized uses or disclosures 
                        of the information; and
                  (C) otherwise to ensure compliance with this 
                part by the officers and employees of such 
                person.
    (e) Privacy Standards for Health Information.--The 
Secretary shall adopt standards with respect to the privacy of 
individually identifiable health information. Such standards 
shall include standards concerning at least the following:
          (1) The rights of an individual who is a subject of 
        such information.
          (2) The procedures to be established for the exercise 
        of such rights.
          (3) The uses and disclosures of such information that 
        are authorized or required.
    (f) Electronic Signature.--
          (1) In general.--The Secretary, in coordination with 
        the Secretary of Commerce, shall adopt standards 
        specifying procedures for the electronic transmission 
        and authentication of signatures, compliance with which 
        shall be deemed to satisfy Federal and State statutory 
        requirements for written signatures with respect to the 
        transactions referred to in subsection (a)(1).
          (2) Payments for services and premiums.--Nothing in 
        this part shall be construed to prohibit payment for 
        health care services or health plan premiums by debit, 
        credit, payment card or numbers, or other electronic 
        means.
    (g) Transfer of Information Between Health Plans.--The 
Secretary shall adopt standards for transferring among health 
plans appropriate standard data elements needed for the 
coordination of benefits, the sequential processing of claims, 
and other data elements for individuals who have more than one 
health plan.

SEC. 1174. TIMETABLES FOR ADOPTION OF STANDARDS.

    (a) Initial Standards.--The Secretary shall carry out 
section 1173 not later than 18 months after the date of the 
enactment of this part, except that standards relating to 
claims attachments shall be adopted not later than 30 months 
after such date.
    (b) Additions and Modifications to Standards.--
          (1) In general.--Except as provided in paragraph (2), 
        the Secretary shall review the standards adopted under 
        section 1173, and shall adopt additional or modified 
        standards, as determined appropriate, but not more 
        frequently than once every 6 months. Any addition or 
        modification to a standard shall be completed in a 
        manner which minimizes the disruption and cost of 
        compliance.
          (2) Special rules.--
                  (A) First 12-month period.--Except with 
                respect to additions and modifications to code 
                sets under subparagraph (B), the Secretary may 
                not adopt any modification to a standard 
                adopted under this part during the 12-month 
                period beginning on the date the standard is 
                initially adopted, unless the Secretary 
                determines that the modification is necessary 
                in order to permit compliance with the 
                standard.
                  (B) Additions and modifications to code 
                sets.--
                          (i) In general.--The Secretary shall 
                        ensure that procedures exist for the 
                        routine maintenance, testing, 
                        enhancement, and expansion of code 
                        sets.
                          (ii) Additional rules.--If a code set 
                        is modified under this subsection, the 
                        modified code set shall include 
                        instructions on how data elements of 
                        health information that were encoded 
                        prior to the modification may be 
                        converted or translated so as to 
                        preserve the informational value of the 
                        data elements that existed before the 
                        modification. Any modification to a 
                        code set under this subsection shall be 
                        implemented in a manner that minimizes 
                        the disruption and cost of complying 
                        with such modification.

SEC. 1175. REQUIREMENTS.

    (a) Conduct of Transactions by Plans.--
          (1) In general.--If a person desires to conduct a 
        transaction referred to in section 1173(a)(1) with a 
        health plan as a standard transaction--
                  (A) the health plan may not refuse to conduct 
                such transaction as a standard transaction;
                  (B) the health plan may not delay such 
                transaction, or otherwise adversely affect, or 
                attempt to adversely affect, the person or the 
                transaction on the ground that the transaction 
                is a standard transaction; and
                  (C) the information transmitted and received 
                in connection with the transaction shall be in 
                the form of standard data elements of health 
                information.
          (2) Satisfaction of requirements.--A health plan may 
        satisfy the requirements under paragraph (1) by--
                  (A) directly transmitting and receiving 
                standard data elements of health information; 
                or
                  (B) submitting nonstandard data elements to a 
                clearinghouse for processing into standard data 
                elements and transmission by the clearinghouse, 
                and receiving standard data elements through 
                the clearinghouse.
          (3) Timetable for compliance.--Paragraph (1) shall 
        not be construed to require a health plan to comply 
        with any standard, implementation specification, or 
        modification to a standard or specification adopted or 
        established by the Secretary under sections 1172 and 
        1173 at any time prior to the date on which the plan is 
        required to comply with the standard or specification 
        under subsection (b).
    (b) Compliance With Standards.--
          (1) Initial compliance.--
                  (A) In general.--Not later than 24 months 
                after the date on which an initial standard or 
                implementation specification is adopted or 
                established under sections 1172 and 1173, each 
                person to whom the standard or implementation 
                specification applies shall comply with the 
                standard or specification.
                  (B) Special rule for small health plans.--In 
                the case of a small health plan, paragraph (1) 
                shall be applied by substituting ``36 months'' 
                for ``24 months''. For purposes of this 
                subsection, the Secretary shall determine the 
                plans that qualify as small health plans.
          (2) Compliance with modified standards.--If the 
        Secretary adopts a modification to a standard or 
        implementation specification under this part, each 
        person to whom the standard or implementation 
        specification applies shall comply with the modified 
        standard or implementation specification at such time 
        as the Secretary determines appropriate, taking into 
        account the time needed to comply due to the nature and 
        extent of the modification. The time determined 
        appropriate under the preceding sentence may not be 
        earlier than the last day of the 180-day period 
        beginning on the date such modification is adopted. The 
        Secretary may extend the time for compliance for small 
        health plans, if the Secretary determines that such 
        extension is appropriate.

SEC. 1176. GENERAL PENALTY FOR FAILURE TO COMPLY WITH REQUIREMENTS AND 
                    STANDARDS.

    (a) General Penalty.--
          (1) In general.--Except as provided in subsection 
        (b), the Secretary shall impose on any person who 
        violates a provision of this part a penalty of not more 
        than $100 for each such violation, except that the 
        total amount imposed on the person for all violations 
        of an identical requirement or prohibition during a 
        calendar year may not exceed $25,000.
          (2) Procedures.--The provisions of section 1128A 
        (other than subsections (a) and (b) and the second 
        sentence of subsection (f)) shall apply to the 
        imposition of a civil money penalty under this 
        subsection in the same manner as such provisions apply 
        to the imposition of a penalty under such section 
        1128A.
    (b) Limitations.--
          (1) Offenses otherwise punishable.--A penalty may not 
        be imposed under subsection (a) with respect to an act 
        if the act constitutes an offense punishable under 
        section 1177.
          (2) Noncompliance not discovered.--A penalty may not 
        be imposed under subsection (a) with respect to a 
        provision of this part if it is established to the 
        satisfaction of the Secretary that the person liable 
        for the penalty did not know, and by exercising 
        reasonable diligence would not have known, that such 
        person violated the provision.
          (3) Failures due to reasonable cause.--
                  (A) In general.--Except as provided in 
                subparagraph (B), a penalty may not be imposed 
                under subsection (a) if--
                          (i) the failure to comply was due to 
                        reasonable cause and not to willful 
                        neglect; and
                          (ii) the failure to comply is 
                        corrected during the 30-day period 
                        beginning on the first date the person 
                        liable for the penalty knew, or by 
                        exercising reasonable diligence would 
                        have known, that the failure to comply 
                        occurred.
                  (B) Extension of period.--
                          (i) No penalty.--The period referred 
                        to in subparagraph (A)(ii) may be 
                        extended as determined appropriate by 
                        the Secretary based on the nature and 
                        extent of the failure to comply.
                          (ii) Assistance.--If the Secretary 
                        determines that a person failed to 
                        comply because the person was unable to 
                        comply, the Secretary may provide 
                        technical assistance to the person 
                        during the period described in 
                        subparagraph (A)(ii). Such assistance 
                        shall be provided in any manner 
                        determined appropriate by the 
                        Secretary.
          (4) Reduction.--In the case of a failure to comply 
        which is due to reasonable cause and not to willful 
        neglect, any penalty under subsection (a) that is not 
        entirely waived under paragraph (3) may be waived to 
        the extent that the payment of such penalty would be 
        excessive relative to the compliance failure involved.

SEC. 1177. WRONGFUL DISCLOSURE OF INDIVIDUALLY IDENTIFIABLE HEALTH 
                    INFORMATION.

    (a) Offense.--A person who knowingly and in violation of 
this part--
          (1) uses or causes to be used a unique health 
        identifier;
          (2) obtains individually identifiable health 
        information relating to an individual; or
          (3) discloses individually identifiable health 
        information to another person,
shall be punished as provided in subsection (b).
      (b) Penalties.--A person described in subsection (a) 
shall--
          (1) be fined not more than $50,000, imprisoned not 
        more than 1 year, or both;
          (2) if the offense is committed under false 
        pretenses, be fined not more than $100,000, imprisoned 
        not more than 5 years, or both; and
          (3) if the offense is committed with intent to sell, 
        transfer, or use individually identifiable health 
        information for commercial advantage, personal gain, or 
        malicious harm, fined not more than $250,000, 
        imprisoned not more than 10 years, or both.

SEC. 1178. EFFECT ON STATE LAW.

    (a) General Effect.--
          (1) General rule.--Except as provided in paragraph 
        (2), a provision or requirement under this part, or a 
        standard or implementation specification adopted or 
        established under sections 1172 and 1173, shall 
        supersede any contrary provision of State law, 
        including a provision of State law that requires 
        medical or health plan records (including billing 
        information) to be maintained or transmitted in written 
        rather than electronic form.
          (2) Exceptions.--A provision or requirement under 
        this part, or a standard or implementation 
        specification adopted or established under sections 
        1172 and 1173, shall not supersede a contrary provision 
        of State law, if the provision of State law--
                  (A) imposes requirements, standards, or 
                implementation specifications that are more 
                stringent than the requirements, standards, or 
                implementation specifications under this part 
                with respect to the privacy of individually 
                identifiable health information; or
                  (B) is a provision the Secretary determines--
                          (i) is necessary to prevent fraud and 
                        abuse, or for other purposes; or
                          (ii) addresses controlled substances.
    (b) Public Health Reporting.--Nothing in this part shall be 
construed to invalidate or limit the authority, power, or 
procedures established under any law providing for the 
reporting of disease or injury, child abuse, birth, or death, 
public health surveillance, or public health investigation or 
intervention.

SEC. 1179. HEALTH INFORMATION ADVISORY COMMITTEE.

    (a) Establishment.--There is established a committee to be 
known as the Health Information Advisory Committee (in this 
section referred to as the ``committee'').
    (b) Duties.--The committee shall--
          (1) provide assistance to the Secretary in complying 
        with the requirements imposed on the Secretary under 
        this part;
          (2) study the issues related to the adoption of 
        uniform data standards for patient medical record 
        information and the electronic exchange of such 
        information;
          (3) report to the Secretary not later than 4 years 
        after the date of the enactment of this part 
        recommendations and legislative proposals for such 
        standards and electronic exchange; and
          (4) generally be responsible for advising the 
        Secretary and the Congress on the status of the 
        implementation of this part.
    (c) Membership.--
          (1) In general.--The committee shall consist of 15 
        members of whom--
                  (A) 3 shall be appointed by the President;
                  (B) 6 shall be appointed by the Speaker of 
                the House of Representatives after consultation 
                with the minority leader of the House of 
                Representatives; and
                  (C) 6 shall be appointed by the President pro 
                tempore of the Senate after consultation with 
                the minority leader of the Senate.
        The appointments of the members shall be made not later 
        than 60 days after the date of the enactment of this 
        part. The President shall designate 1 member as the 
        Chair.
          (2) Expertise.--The membership of the committee shall 
        consist of individuals who are of recognized standing 
        and distinction in the areas of information systems, 
        information networking and integration, consumer 
        health, health care financial management, or privacy, 
        and who possess the demonstrated capacity to discharge 
        the duties imposed on the committee.
          (3) Terms.--Each member of the committee shall be 
        appointed for a term of 5 years, except that the 
        members first appointed shall serve staggered terms 
        such that the terms of not more than 3 members expire 
        at one time.
          (4) Initial meeting.--Not later than 30 days after 
        the date on which a majority of the members have been 
        appointed, the committee shall hold its first meeting.
    (d) Reports.--Not later than 1 year after the date of the 
enactment of this part, and annually thereafter, the committee 
shall submit to the Congress, and make public, a report 
regarding--
          (1) the extent to which persons required to comply 
        with this part are cooperating in implementing the 
        standards adopted under this part;
          (2) the extent to which such entities are meeting the 
        privacy and security standards adopted under this part 
        and the types of penalties assessed for noncompliance 
        with such standards;
          (3) whether the Federal and State Governments are 
        receiving information of sufficient quality to meet 
        their responsibilities under this part;
          (4) any problems that exist with respect to 
        implementation of this part; and
          (5) the extent to which timetables under this part 
        are being met.
          * * * * * * *

        TITLE XVIII--HEALTH INSURANCE FOR THE AGED AND DISABLED

          * * * * * * *

     Part A--Hospital Insurance Benefits for the Aged and Disabled

          * * * * * * *

 USE OF PUBLIC AGENCIES OR PRIVATE ORGANIZATIONS TO FACILITATE PAYMENT 
                        TO PROVIDERS OF SERVICES

    Sec. 1816. (a) * * *
          * * * * * * *
    (l) No agency or organization may carry out (or receive 
payment for carrying out) any activity pursuant to an agreement 
under this section to the extent that the activity is carried 
out pursuant to a contract under the Medicare Integrity Program 
under section 1893.

                 FEDERAL HOSPITAL INSURANCE TRUST FUND

    Sec. 1817. (a) * * *
          * * * * * * *
    (k) Health Care Fraud and Abuse Control Account.--
          (1) Establishment.--There is hereby established in 
        the Trust Fund an expenditure account to be known as 
        the ``Health Care Fraud and Abuse Control Account'' (in 
        this subsection referred to as the ``Account'').
          (2) Appropriated amounts to trust fund.--
                  (A) In general.--There are hereby 
                appropriated to the Trust Fund--
                          (i) such gifts and bequests as may be 
                        made as provided in subparagraph (B);
                          (ii) such amounts as may be deposited 
                        in the Trust Fund as provided in 
                        sections 242(b) and 249(c) of the 
                        Health Coverage Availability and 
                        Affordability Act of 1996, and title 
                        XI; and
                          (iii) such amounts as are transferred 
                        to the Trust Fund under subparagraph 
                        (C).
                  (B) Authorization to accept gifts.--The Trust 
                Fund is authorized to accept on behalf of the 
                United States money gifts and bequests made 
                unconditionally to the Trust Fund, for the 
                benefit of the Account or any activity financed 
                through the Account.
                  (C) Transfer of amounts.--The Managing 
                Trustee shall transfer to the Trust Fund, under 
                rules similar to the rules in section 9601 of 
                the Internal Revenue Code of 1986, an amount 
                equal to the sum of the following:
                          (i) Criminal fines recovered in cases 
                        involving a Federal health care offense 
                        (as defined in section 982(a)(6)(B) of 
                        title 18, United States Code).
                          (ii) Civil monetary penalties and 
                        assessments imposed in health care 
                        cases, including amounts recovered 
                        under titles XI, XVIII, and XIX, and 
                        chapter 38 of title 31, United States 
                        Code (except as otherwise provided by 
                        law).
                          (iii) Amounts resulting from the 
                        forfeiture of property by reason of a 
                        Federal health care offense.
                          (iv) Penalties and damages obtained 
                        and otherwise creditable to 
                        miscellaneous receipts of the general 
                        fund of the Treasury obtained under 
                        sections 3729 through 3733 of title 31, 
                        United States Code (known as the False 
                        Claims Act), in cases involving claims 
                        related to the provision of health care 
                        items and services (other than funds 
                        awarded to a relator, for restitution 
                        or otherwise authorized by law).
          (3) Appropriated amounts to account for fraud and 
        abuse control program, etc.--
                  (A) Departments of health and human services 
                and justice.--
                          (i) In general.--There are hereby 
                        appropriated to the Account from the 
                        Trust Fund such sums as the Secretary 
                        and the Attorney General certify are 
                        necessary to carry out the purposes 
                        described in subparagraph (C), to be 
                        available without further 
                        appropriation, in an amount not to 
                        exceed--
                                  (I) for fiscal year 1997, 
                                $104,000,000,
                                  (II) for each of the fiscal 
                                years 1998 through 2003, the 
                                limit for the preceding fiscal 
                                year, increased by 15 percent; 
                                and
                                  (III) for each fiscal year 
                                after fiscal year 2003, the 
                                limit for fiscal year 2003.
                          (ii) Medicare and medicaid 
                        activities.--For each fiscal year, of 
                        the amount appropriated in clause (i), 
                        the following amounts shall be 
                        available only for the purposes of the 
                        activities of the Office of the 
                        Inspector General of the Department of 
                        Health and Human Services with respect 
                        to the medicare and medicaid programs--
                                  (I) for fiscal year 1997, not 
                                less than $60,000,000 and not 
                                more than $70,000,000;
                                  (II) for fiscal year 1998, 
                                not less than $80,000,000 and 
                                not more than $90,000,000;
                                  (III) for fiscal year 1999, 
                                not less than $90,000,000 and 
                                not more than $100,000,000;
                                  (IV) for fiscal year 2000, 
                                not less than $110,000,000 and 
                                not more than $120,000,000;
                                  (V) for fiscal year 2001, not 
                                less than $120,000,000 and not 
                                more than $130,000,000;
                                  (VI) for fiscal year 2002, 
                                not less than $140,000,000 and 
                                not more than $150,000,000; and
                                  (VII) for each fiscal year 
                                after fiscal year 2002, not 
                                less than $150,000,000 and not 
                                more than $160,000,000.
                  (B) Federal bureau of investigation.--There 
                are hereby appropriated from the general fund 
                of the United States Treasury and hereby 
                appropriated to the Account for transfer to the 
                Federal Bureau of Investigation to carry out 
                the purposes described in subparagraph (C), to 
                be available without further appropriation--
                          (i) for fiscal year 1997, 
                        $47,000,000;
                          (ii) for fiscal year 1998, 
                        $56,000,000;
                          (iii) for fiscal year 1999, 
                        $66,000,000;
                          (iv) for fiscal year 2000, 
                        $76,000,000;
                          (v) for fiscal year 2001, 
                        $88,000,000;
                          (vi) for fiscal year 2002, 
                        $101,000,000; and
                          (vii) for each fiscal year after 
                        fiscal year 2002, $114,000,000.
                  (C) Use of funds.--The purposes described in 
                this subparagraph are to cover the costs 
                (including equipment, salaries and benefits, 
                and travel and training) of the administration 
                and operation of the health care fraud and 
                abuse control program established under section 
                1128C(a), including the costs of--
                          (i) prosecuting health care matters 
                        (through criminal, civil, and 
                        administrative proceedings);
                          (ii) investigations;
                          (iii) financial and performance 
                        audits of health care programs and 
                        operations;
                          (iv) inspections and other 
                        evaluations; and
                          (v) provider and consumer education 
                        regarding compliance with the 
                        provisions of title XI.
          (4) Appropriated amounts to account for medicare 
        integrity program.--
                  (A) In general.--There are hereby 
                appropriated to the Account from the Trust Fund 
                for each fiscal year such amounts as are 
                necessary to carry out the Medicare Integrity 
                Program under section 1893, subject to 
                subparagraph (B) and to be available without 
                further appropriation.
                  (B) Amounts specified.--The amount 
                appropriated under subparagraph (A) for a 
                fiscal year is as follows:
                          (i) For fiscal year 1997, such amount 
                        shall be not less than $430,000,000 and 
                        not more than $440,000,000.
                          (ii) For fiscal year 1998, such 
                        amount shall be not less than 
                        $490,000,000 and not more than 
                        $500,000,000.
                          (iii) For fiscal year 1999, such 
                        amount shall be not less than 
                        $550,000,000 and not more than 
                        $560,000,000.
                          (iv) For fiscal year 2000, such 
                        amount shall be not less than 
                        $620,000,000 and not more than 
                        $630,000,000.
                          (v) For fiscal year 2001, such amount 
                        shall be not less than $670,000,000 and 
                        not more than $680,000,000.
                          (vi) For fiscal year 2002, such 
                        amount shall be not less than 
                        $690,000,000 and not more than 
                        $700,000,000.
                          (vii) For each fiscal year after 
                        fiscal year 2002, such amount shall be 
                        not less than $710,000,000 and not more 
                        than $720,000,000.
          (5) Annual report.--The Secretary and the Attorney 
        General shall submit jointly an annual report to 
        Congress on the amount of revenue which is generated 
        and disbursed, and the justification for such 
        disbursements, by the Account in each fiscal year.
          * * * * * * *

   Part B--Supplementary Medical Insurance Benefits for the Aged and 
                                Disabled

          * * * * * * *

             use of carriers for administration of benefits

    Sec. 1842. (a) * * *
          * * * * * * *
    (c)(1) * * *
          * * * * * * *
    (6) No carrier may carry out (or receive payment for 
carrying out) any activity pursuant to a contract under this 
subsection to the extent that the activity is carried out 
pursuant to a contract under the Medicare Integrity Program 
under section 1893. The previous sentence shall not apply with 
respect to the activity described in section 1893(b)(5) 
(relating to prior authorization of certain items of durable 
medical equipment under section 1834(a)(15)).
          * * * * * * *
    (r) The Secretary shall establish a system which provides 
for a unique identifier for each physician who furnishes 
services for which payment may be made under this title. Under 
such system, the Secretary may impose appropriate fees on such 
physicians to cover the costs of investigation and 
recertification activities with respect to the issuance of the 
identifiers.
          * * * * * * *

                    Part C--Miscellaneous Provisions

          * * * * * * *

                 agreements with providers of services

    Sec. 1866. (a)(1) Any provider of services (except a fund 
designated for purposes of section 1814(g) and section 1835(e)) 
shall be qualified to participate under this title and shall be 
eligible for payments under this title if it files with the 
Secretary an agreement--
          (A) * * *
          * * * * * * *
          (P) in the case of home health agencies which provide 
        home health services to individuals entitled to 
        benefits under this title who require catheters, 
        catheter supplies, ostomy bags, and supplies related to 
        ostomy car (described in section 1861(m)(5)), to offer 
        to furnish such supplies to such an individual as part 
        of their furnishing of home health services, [and]
          (Q) in the case of hospitals, skilled nursing 
        facilities, home health agencies, and hospice programs, 
        to comply with the requirement of subsection (f) 
        (relating to maintaining written policies and 
        procedures respecting advance directives)[.]; and
          (R) to contract only with a clearinghouse (as defined 
        in section 1171) that meets each standard and 
        implementation specification adopted or established 
        under sections 1172 and 1173 on or after the date on 
        which the clearinghouse is required to comply with the 
        standard or specification.
In the case of a hospital which has an agreement in effect with 
an organization described in subparagraph (F), which 
organization's contract with the Secretary under part B of 
title XI is terminated on or after October 1, 1984, the 
hospital shall not be determined to be out of compliance with 
the requirement of such subparagraph during the six month 
period beginning on the date of the termination of that 
contract.
          * * * * * * *

 payments to health maintenance organizations and competitive medical 
                                 plans

    Sec. 1876. (a) * * *
          * * * * * * *
    (i)(1) Each contract under this section shall be for a term 
of at least one year, as determined by the Secretary, and may 
be made automatically renewable from term to term in the 
absence of notice by either party of intention to terminate at 
the end of the current term; except that [the Secretary may 
terminate any such contract at any time (after such reasonable 
notice and opportunity for hearing to the eligible organization 
involved as he may provide in regulations), if he finds that 
the organization--
          [(A) has failed substantially to carry out the 
        contract,
          [(B) is carrying out the contract in a manner 
        inconsistent with the efficient and effective 
        administration of this section, or
          [(C) no longer substantially meets the applicable 
        conditions of subsections (b), (c), (e), and (f).] in 
        accordance with procedures established under paragraph 
        (9), the Secretary may at any time terminate any such 
        contract or may impose the intermediate sanctions 
        described in paragraph (6)(B) or (6)(C) (whichever is 
        applicable) on the eligible organization if the 
        Secretary determines that the organization--
          (A) has failed substantially to carry out the 
        contract;
          (B) is carrying out the contract in a manner 
        substantially inconsistent with the efficient and 
        effective administration of this section; or
          (C) no longer substantially meets the applicable 
        conditions of subsections (b), (c), (e), and (f).
          * * * * * * *
    (6)(A) * * *
    (B) The remedies described in this subparagraph are--
          (i) civil money penalties of not more than $25,000 
        for each determination under subparagraph (A) or, with 
        respect to a determination under clause (iv) or (v)(I) 
        of such subparagraph, of not more than $100,000 for 
        each such determination, plus, with respect to a 
        determination under subparagraph (A)(ii), double the 
        excess amount charged in violation of such subparagraph 
        (and the excess amount charged shall be deducted from 
        the penalty and returned to the individual concerned), 
        and plus, with respect to a determination under 
        subparagraph (A)(iv), $15,000 for each individual not 
        enrolled as a result of the practice involved,
          (ii) suspension of enrollment of individuals under 
        this section after the date the Secretary notifies the 
        organization of a determination under subparagraph (A) 
        and until the Secretary is satisfied that the basis for 
        such determination has been corrected and is not likely 
        to recur, or
          (iii) suspension of payment to the organization under 
        this section for individuals enrolled after the date 
        the Secretary notifies the organization of a 
        determination under subparagraph (A) and until the 
        Secretary is satisfied that the basis for such 
        determination has been corrected and is not likely to 
        recur.
[The provisions of section 1128A (other than subsections (a) 
and (b)) shall apply to a civil money penalty under clause (i) 
in the same manner as they apply to a civil money penalty or 
proceeding under section 1128A(a).]
    (C) In the case of an eligible organization for which the 
Secretary makes a determination under paragraph (1) the basis 
of which is not described in subparagraph (A), the Secretary 
may apply the following intermediate sanctions:
          (i) Civil money penalties of not more than $25,000 
        for each determination under paragraph (1) if the 
        deficiency that is the basis of the determination has 
        directly adversely affected (or has the substantial 
        likelihood of adversely affecting) an individual 
        covered under the organization's contract.
          (ii) Civil money penalties of not more than $10,000 
        for each week beginning after the initiation of 
        procedures by the Secretary under paragraph (9) during 
        which the deficiency that is the basis of a 
        determination under paragraph (1) exists.
          (iii) Suspension of enrollment of individuals under 
        this section after the date the Secretary notifies the 
        organization of a determination under paragraph (1) and 
        until the Secretary is satisfied that the deficiency 
        that is the basis for the determination has been 
        corrected and is not likely to recur.
    (D) The provisions of section 1128A (other than subsections 
(a) and (b)) shall apply to a civil money penalty under 
subparagraph (B)(i) or (C)(i) in the same manner as such 
provisions apply to a civil money penalty or proceeding under 
section 1128A(a).
    (7)(A) Each risk-sharing contract with an eligible 
organization under this section shall provide that the 
organization will maintain [an agreement] a written agreement 
with a utilization and quality control peer review organization 
(which has a contract with the Secretary under part B of title 
XI for the area in which the eligible organization is located) 
or with an entity selected by the Secretary under section 
1154(a)(4)(C) under which the review organization will perform 
functions under section 1154(a)(4)(B) and section 1154(a)(14) 
(other than those performed under contracts described in 
section 1866(a)(1)(F)) with respect to services, furnished by 
the eligible organization, for which payment may be made under 
this title.
          * * * * * * *
    (9) The Secretary may terminate a contract with an eligible 
organization under this section or may impose the intermediate 
sanctions described in paragraph (6) on the organization in 
accordance with formal investigation and compliance procedures 
established by the Secretary under which--
          (A) the Secretary first provides the organization 
        with the reasonable opportunity to develop and 
        implement a corrective action plan to correct the 
        deficiencies that were the basis of the Secretary's 
        determination under paragraph (1) and the organization 
        fails to develop or implement such a plan;
          (B) in deciding whether to impose sanctions, the 
        Secretary considers aggravating factors such as whether 
        an organization has a history of deficiencies or has 
        not taken action to correct deficiencies the Secretary 
        has brought to the organization's attention;
          (C) there are no unreasonable or unnecessary delays 
        between the finding of a deficiency and the imposition 
        of sanctions; and
          (D) the Secretary provides the organization with 
        reasonable notice and opportunity for hearing 
        (including the right to appeal an initial decision) 
        before imposing any sanction or terminating the 
        contract.
          * * * * * * *

    certification of medicare supplemental health insurance policies

Sec. 1882. (a) * * *

          * * * * * * *
    (d)(1) * * *
          * * * * * * *
    (3)(A)[(i) It is unlawful for a person to sell or issue to 
an individual entitled to benefits under part A or enrolled 
under part B of this title--
          [(I) a health insurance policy with knowledge that 
        the policy duplicates health benefits to which the 
        individual is otherwise entitled under this title or 
        title XIX,
          [(II) a medicare supplemental policy with knowledge 
        that the individual is entitled to benefits under 
        another medicare supplemental policy, or
          [(III) a health insurance policy (other than a 
        medicare supplemental policy) with knowledge that the 
        policy duplicates health benefits to which the 
        individual is otherwise entitled, other than benefits 
        to which the individual is entitled under a requirement 
        of State or Federal law.] (i) It is unlawful for a 
        person to sell or issue to an individual entitled to 
        benefits under part A or enrolled under part B of this 
        title--
          (I) a health insurance policy with knowledge that the 
        policy duplicates health benefits to which the 
        individual is otherwise entitled under this title or 
        title XIX,
          (II) a medicare supplemental policy with knowledge 
        that the individual is entitled to benefits under 
        another medicare supplemental policy, or
          (III) a health insurance policy (other than a 
        medicare supplemental policy) with knowledge that the 
        policy duplicates health benefits to which the 
        individual is otherwise entitled, other than benefits 
        to which the individual is entitled under a requirement 
        of State or Federal law.
Subclause (I) or (III) shall not apply with respect to the sale 
or issuance of a health insurance policy or plan under which 
all the benefits are fully payable directly to or on behalf of 
the individual without regard to other health benefit coverage 
of the individual.
    (ii) Whoever violates clause (i) shall be fined under title 
18, United States Code, or imprisoned not more than 5 years, or 
both, and, in addition to or in lieu of such a criminal 
penalty, is subject to a civil money penalty of not to exceed 
$25,000 (or $15,000 in the case of a person other than the 
issuer of the policy) for each such prohibited act.
    (iii) A seller (who is not the issuer of a health insurance 
policy) shall not be considered to violate clause (i)(II) with 
respect to the sale of a medicare supplemental policy if the 
policy is sold in compliance with subparagraph (B).
    (iv) For purposes of this subparagraph, a health insurance 
policy shall be considered to ``duplicate'' benefits only when, 
under its terms, the policy provides specific reimbursement for 
identical items and services to the extent paid for under other 
coverage of such individual, and a health insurance policy 
providing for benefits which are payable to or on behalf of an 
individual without regard to other health benefit coverage of 
such individual is not considered to ``duplicate'' any health 
benefits.
    (v) For purposes of this subparagraph, a health insurance 
policy (or a rider to an insurance contract which is not a 
health insurance policy), providing benefits for long-term 
care, nursing home care, home health care, or community-based 
care, or a contract with a health maintenance organization that 
provides comprehensive health benefits, and that coordinates 
against or excludes items and services available or paid for 
under this title and (for policies other than contracts with 
health maintenance organizations sold or issued on or after 90 
days after the date of enactment of this provision) that 
discloses such coordination or exclusion in the policy's 
outline of coverage, is not considered to ``duplicate'' health 
benefits under this title. For purposes of this clause, the 
terms ``coordinates'' and ``coordination'' mean, with respect 
to a policy in relation to health benefits under this title, 
that the policy under its terms is secondary to, or excludes 
from payment, items and services to the extent available or 
paid for under this title.
    (vi) Notwithstanding any other provision of law, no 
criminal or civil penalty may be imposed at any time under this 
subparagraph and no legal action may be brought or continued at 
any time in any Federal or State court if the penalty or action 
is based on an act or omission that occurred after November 5, 
1991, and before the date of the enactment of this clause, and 
relates to the sale, issuance, or renewal of any health 
insurance policy or rider during such period, if such policy or 
rider meets the nonduplication requirements of clause (iv) or 
(v).
    (vii) A State may not impose, in the case of the sale, 
issuance, or renewal of a health insurance policy (other than a 
medicare supplemental policy) or rider to an insurance contract 
which is not a health insurance policy, that meets the 
nonduplication requirements of this section pursuant to clause 
(iv) or (v) to an individual entitled to benefits under part A 
or enrolled under part B, any requirement with respect to the 
duplication or nonduplication of health benefits to which the 
individual is otherwise entitled to under this title.
          * * * * * * *
    (C) Subparagraph (A) shall not apply [with respect to (i)] 
with respect to the sale or issuance of a group policy or plan 
of one or more employers or labor organizations, or of the 
trustees of a fund established by one or more employers or 
labor organizations (or combination thereof), for employees or 
former employees (or combination thereof) or for members or 
former members (or combination thereof) of the labor 
organizations[, (ii) the sale or issuance of a policy or plan 
described in subparagraph (A)(i)(I) (other than a medicare 
supplemental policy to an individual entitled to any medical 
assistance under title XIX) under which all the benefits are 
fully payable directly to or on behalf of the individual 
without regard to other health benefit coverage of the 
individual but only if (for policies sold or issued more than 
60 days after the date the statements are published or 
promulgated under subparagraph (D)) there is disclosed in a 
prominent manner as part of (or together with) the application 
the applicable statement (specified under subparagraph (D)) of 
the extent to which benefits payable under the policy or plan 
duplicate benefits under this title, or (iii) the sale or 
issuance of a policy or plan described in subparagraph 
(A)(i)(III) under which all the benefits are fully payable 
directly to or on behalf of the individual without regard to 
other health benefit coverage of the individual].
    [(D)(i) If--
          [(I) within the 90-day period beginning on the date 
        of the enactment of this subparagraph, the National 
        Association of Insurance Commissioners develops (after 
        consultation with consumer and insurance industry 
        representatives) and submits to the Secretary a 
        statement for each of the types of health insurance 
        policies (other than medicare supplemental policies and 
        including, but not limited to, as separate types of 
        policies, policies paying directly to the beneficiary 
        fixed, cash benefits, and policies that limit benefit 
        payments to specific diseases) which are sold or issued 
        to persons entitled to health benefits under this 
        title, of the extent to which benefits payable under 
        the policy or plan duplicate benefits under this title, 
        and
          [(II) the Secretary approves all the statements 
        submitted as meeting the requirements of subclause (I),
each such statement shall be (for purposes of subparagraph (C)) 
the statement specified under this subparagraph for the type of 
policy involved. The Secretary shall review and approve (or 
disapprove) all the statements submitted under subclause (I) 
within 30 days after the date of their submittal. Upon approval 
of such statements, the Secretary shall publish such 
statements.
    [(ii) If the Secretary does not approve the statements 
under clause (i) or the statements are not submitted within the 
90-day period specified in such clause, the Secretary shall 
promulgate (after consultation with consumer and insurance 
industry representatives and not later than 90 days after the 
date of disapproval or the end of such 90-day period (as the 
case may be)) a statement for each of the types of health 
insurance policies (other than medicare supplemental policies 
and including, but not limited to, as separate types of 
policies, policies paying directly to the beneficiary fixed, 
cash benefits, and policies that limit benefit payments to 
specific diseases) which are sold or issued to persons entitled 
to health benefits under this title, of the extent to which 
benefits payable under the policy or plan duplicate benefits 
under this title, and each such statement shall be (for 
purposes of subparagraph (C)) the statement specified under 
this subparagraph for the type of policy involved.]
          * * * * * * *

                       medicare integrity program

    Sec. 1893. (a) Establishment of Program.--There is hereby 
established the Medicare Integrity Program (in this section 
referred to as the ``Program'') under which the Secretary shall 
promote the integrity of the medicare program by entering into 
contracts in accordance with this section with eligible private 
entities to carry out the activities described in subsection 
(b).
    (b) Activities Described.--The activities described in this 
subsection are as follows:
          (1) Review of activities of providers of services or 
        other individuals and entities furnishing items and 
        services for which payment may be made under this title 
        (including skilled nursing facilities and home health 
        agencies), including medical and utilization review and 
        fraud review (employing similar standards, processes, 
        and technologies used by private health plans, 
        including equipment and software technologies which 
        surpass the capability of the equipment and 
        technologies used in the review of claims under this 
        title as of the date of the enactment of this section).
          (2) Audit of cost reports.
          (3) Determinations as to whether payment should not 
        be, or should not have been, made under this title by 
        reason of section 1862(b), and recovery of payments 
        that should not have been made.
          (4) Education of providers of services, 
        beneficiaries, and other persons with respect to 
        payment integrity and benefit quality assurance issues.
          (5) Developing (and periodically updating) a list of 
        items of durable medical equipment in accordance with 
        section 1834(a)(15) which are subject to prior 
        authorization under such section.
    (c) Eligibility of Entities.--An entity is eligible to 
enter into a contract under the Program to carry out any of the 
activities described in subsection (b) if--
          (1) the entity has demonstrated capability to carry 
        out such activities;
          (2) in carrying out such activities, the entity 
        agrees to cooperate with the Inspector General of the 
        Department of Health and Human Services, the Attorney 
        General of the United States, and other law enforcement 
        agencies, as appropriate, in the investigation and 
        deterrence of fraud and abuse in relation to this title 
        and in other cases arising out of such activities;
          (3) the entity demonstrates to the Secretary that the 
        entity's financial holdings, interests, or 
        relationships will not interfere with its ability to 
        perform the functions to be required by the contract in 
        an effective and impartial manner; and
          (4) the entity meets such other requirements as the 
        Secretary may impose.
In the case of the activity described in subsection (b)(5), an 
entity shall be deemed to be eligible to enter into a contract 
under the Program to carry out the activity if the entity is a 
carrier with a contract in effect under section 1842.
    (d) Process for Entering Into Contracts.--The Secretary 
shall enter into contracts under the Program in accordance with 
such procedures as the Secretary shall by regulation establish, 
except that such procedures shall include the following:
          (1) The Secretary shall determine the appropriate 
        number of separate contracts which are necessary to 
        carry out the Program and the appropriate times at 
        which the Secretary shall enter into such contracts.
          (2)(A) Except as provided in subparagraph (B), the 
        provisions of section 1153(e)(1) shall apply to 
        contracts and contracting authority under this section.
          (B) Competitive procedures must be used when entering 
        into new contracts under this section, or at any other 
        time considered appropriate by the Secretary, except 
        that the Secretary may contract with entities that are 
        carrying out the activities described in this section 
        pursuant to agreements under section 1816 or contracts 
        under section 1842 in effect on the date of the 
        enactment of this section.
          (3) A contract under this section may be renewed 
        without regard to any provision of law requiring 
        competition if the contractor has met or exceeded the 
        performance requirements established in the current 
        contract.
    (e) Limitation on Contractor Liability.--The Secretary 
shall by regulation provide for the limitation of a 
contractor's liability for actions taken to carry out a 
contract under the Program, and such regulation shall, to the 
extent the Secretary finds appropriate, employ the same or 
comparable standards and other substantive and procedural 
provisions as are contained in section 1157.
          * * * * * * *
                              ----------                              


                      TITLE 18, UNITED STATES CODE

                     CHAPTER 1--GENERAL PROVISIONS

Sec.
1. Repealed.
2. Principals.
     * * * * * * *
24. Definition of Federal health care offense.
     * * * * * * *

Sec. 24. Definition of Federal health care offense

    (a) As used in this title, the term ``Federal health care 
offense'' means a violation of, or a criminal conspiracy to 
violate--
          (1) section 669, 1035, or 1347 of this title; or
          (2) section 287, 371, 664, 666, 1001, 1027, 1341, 
        1343, or 1954 of this title, if the violation or 
        conspiracy relates to a health care benefit program.
    (b) As used in this title, the term ``health care benefit 
program'' has the meaning given such term in section 1347(b) of 
this title.
          * * * * * * *

                   CHAPTER 31--EMBEZZLEMENT AND THEFT

Sec.
641. Public money, property or records
     * * * * * * *
669. Theft or embezzlement in connection with health care.
     * * * * * * *

Sec. 669. Theft or embezzlement in connection with health care

    (a) Whoever embezzles, steals, or otherwise without 
authority willfully and unlawfully converts to the use of any 
person other than the rightful owner, or intentionally 
misapplies any of the moneys, funds, securities, premiums, 
credits, property, or other assets of a health care benefit 
program, shall be fined under this title or imprisoned not more 
than 10 years, or both; but if the value of such property does 
not exceed the sum of $100 the defendant shall be fined under 
this title or imprisoned not more than one year, or both.
    (b) As used in this section, the term ``health care benefit 
program'' has the meaning given such term in section 1347(b) of 
this title.
          * * * * * * *

                         CHAPTER 46--FORFEITURE

          * * * * * * *

Sec. 982. Criminal forfeiture

    (a)(1) The court, in imposing sentence on a person 
convicted of an offense in violation of section 5313(a), 5316, 
or 5324 of title 31, or of section 1956, 1957, or 1960 of this 
title, shall order that the person forfeit to the United States 
any property, real or personal, involved in such offense, or 
any property traceable to such property. However, no property 
shall be seized or forfeited in the case of a violation of 
section 5313(a) of title 31 by a domestic financial institution 
examined by a Federal bank supervisory agency or a financial 
institution regulated by the Securities and Exchange Commission 
or a partner, director, or employee thereof.
          * * * * * * *
    (6) The court, in imposing sentence on a person convicted 
of a Federal health car offense, shall order the person to 
forfeit property, real or personal, that constitutes or is 
derived, directly or indirectly, from gross proceeds traceable 
to the commission of the offense.
    (b)(1) Property subject to forfeiture under this section, 
any seizure and disposition thereof, and any administrative or 
judicial proceeding in relation thereto, shall be governed--
          (A) in the case of a forfeiture under subsection 
        (a)(1) or (a)(6) of this section, by subsections (c) 
        and (e) through (p) of section 413 of the Comprehensive 
        Drug Abuse Prevention and Control Act of 1970 (21 
        U.S.C. 853); and
          * * * * * * *

                 CHAPTER 47--FRAUD AND FALSE STATEMENTS

Sec.
1001.  Statements or entries generally.
     * * * * * * *
1035.  False statements relating to health care matters.
     * * * * * * *

Sec. 1035. False statements relating to health care matters

    (a) Whoever, in any matter involving a health care benefit 
program, knowingly--
          (1) falsifies, conceals, or covers up by any trick, 
        scheme, or device a material fact; or
          (2) makes any false, fictitious, or fraudulent 
        statements or representations, or makes or uses any 
        false writing or document knowing the same to contain 
        any false, fictitious, or fraudulent statement or 
        entry,
in connection with the delivery of or payment for health care 
benefits, items, or services, shall be fined under this title 
or imprisoned not more than 5 years, or both.
    (b) As used in this section, the term ``health care benefit 
program'' has the meaning given such term in section 1347(b) of 
this title.
          * * * * * * *

                         CHAPTER 63--MAIL FRAUD

Sec.
1341.  Frauds and swindles.
     * * * * * * *
1347.  Health care fraud.
     * * * * * * *

Sec. 1345. Injunctions against fraud

    (a)(1) If a person is--
          (A) violating or about to violate this chapter or 
        section 287, 371 (insofar as such violation involves a 
        conspiracy to defraud the United States or any agency 
        thereof), or 1001 of this title; [or]
          (B) committing or about to commit a banking law 
        violation (as defined in section 3322(d) of this 
        title), or
          (C) committing or about to commit a Federal health 
        care offense.
the Attorney General may commence a civil action in any Federal 
court to enjoin such violation.
    (2) If a person is alienating or disposing of property, or 
intends to alienate or dispose of property, obtained as a 
result of a banking law violation (as defined in section 
3322(d) of this title) or a Federal health care offense or 
property which is traceable to such violation, the Attorney 
General may commence a civil action in any Federal court--
          (A) a enjoin such alienation or disposition of 
        property; or
          (B) for a restraining order to--
                  (i) prohibit any person from withdrawing, 
                transferring, removing, dissipating, or 
                disposing of any such property or property of 
                equivalent value; and
                  (ii) appoint a temporary receiver to 
                administer such restraining order.
          * * * * * * *

Sec. 1347. Health care fraud

    (a) Whoever knowingly executes, or attempts to execute, a 
scheme or artifice--
          (1) to defraud any health care benefit program; or
          (2) to obtain, by means of false or fraudulent 
        pretenses, representations, or promises, any of the 
        money or property owned by, or under the custody or 
        control of, any health care benefit program;
in connection with the delivery of or payment for health care 
benefits, items, or services, shall be fined under this title 
or imprisoned not more than 10 years, or both. If the violation 
results in serious bodily injury (as defined in section 1365 of 
this title), such person shall be fined under this title or 
imprisoned not more than 20 years, or both; and if the 
violation results in death, such person shall be fined under 
this title, or imprisoned for any term of years or for life, or 
both.
    (b) As used in this section, the term ``health care benefit 
program'' means any public or private plan or contract, 
affecting commerce, under which any medical benefit, item, or 
service is provided to any individual, and includes any 
individual or entity who is providing a medical benefit, item, 
or service for which payment may be made under the plan or 
contract.
          * * * * * * *

                   CHAPTER 73--OBSTRUCTION OF JUSTICE

Sec.
1501.  Assault in process server.
     * * * * * * *
1518.  Obstruction of criminal investigations of health care offenses.
     * * * * * * *

Sec. 1510.  Obstruction of criminal investigations

    (a) * * *
    (b)(1) Whoever, being an officer of a financial 
institution, with the intent to obstruct a judicial proceeding, 
directly or indirectly notifies any other person about the 
existence or contents of a subpoena for records of that 
financial institution, or information that has been furnished 
to the grand jury in response to that subpoena, shall be fined 
under this title or imprisoned not more than 5 years, or both.
          * * * * * * *
    (3) As used in this subsection--
          (A) the term ``an officer of a financial 
        institution'' means an officer, director, partner, 
        employee, agent, or attorney of or for a financial 
        institution; and
          (B) the term ``subpoena for records'' means a Federal 
        grand jury subpoena or a Department of Justice subpoena 
        (issued under section 3486 of title 18), for customer 
        records that has been served relating to a violation 
        of, or a conspiracy to violate--
                  (i) section 215, 656, 657, 1005, 1006, 1007, 
                1014, 1344, 1956, 1957, or chapter 53 of title 
                31; or
                  (ii) section 1341 or 1343 affecting a 
                financial institution.
          * * * * * * *

Sec. 1518. Obstruction of criminal investigations of health care 
                    offenses

    (a) Whoever willfully prevents, obstructs, misleads, delays 
or attempts to prevent, obstruct, mislead, or delay the 
communication of information or records relating to a violation 
of a Federal health care offense to a criminal investigator 
shall be fined under this title or imprisoned not more tha