Guest Article

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National Employee Benefits Institute Foundation, Inc.
A research and educational foundation serving the employee benefits interests of large employers
1350 Connecticut Avenue, N.W., Suite 600 Washington, D.C. 20036 - 888-822-1344 - 202-822-6432

The Employee Benefits Year in Review: 1999

National Employee Benefits Institute
by Carlos Maxwell, Joseph Semo, and Mark Nielsen

The past year has been characterized by substantial legislative and regulatory activity in the field of employee benefits. Since healthcare and retirement security are of top concern to Americans, policymakers in Congress have enjoyed trying to "fix" perceived problems in the managed healthcare industry and have attempted to expand access to retirement security plans. Not to be outdone by Congress, federal regulators have not shied away from leaving their own imprint on employer-provided healthcare and pension plans.

For the most part, proposed changes to healthcare plans have been designed to give people additional rights when dealing with managed care plans. Policymakers want to give individuals more freedom to choose their own physicians and to have access to coverage for certain services, like visits to emergency rooms. Despite the likelihood that increased healthcare regulations will raise costs, little attention was paid to helping individuals obtain affordable coverage. Furthermore, policymakers gave substantial consideration to expanding access to private pension plans by trying to ease administrative rules and by seeking to raise certain benefit limits. With the coming retirement of the "baby boomer" generation, and the recognition that Social Security faces chronic financial difficulties, policymakers agree that helping Americans save for retirement through private pensions is critical.

The following is a summary of major congressional and regulatory activities in the dynamic field of employee benefits. Important court cases and opinions are included in this document as well. This review is not an exhaustive summary of the year's events, but attempts to describe the major healthcare and retirement security policy developments of the past year. If you have any questions about this summary or would like additional information about any of the items described herein, please call the National Employee Benefits Institute ("NEBI") at 1-888-822-1344.

About the Authors: Carlos Maxwell is NEBI's Director of Government Affairs. Joseph Semo serves as NEBI's Executive Director and as Managing Shareholder of the Law Firm of Feder & Semo, P.C. Mark Nielsen is an Associate with Feder & Semo, P.C.

Disclaimer: This year-end review is intended for informational purposes only. It does not constitute legal advice. For a legal interpretation of the contents contained herein, please contact a benefits attorney.

I. SIGNIFICANT LEGISLATIVE ACTIVITY IN 1999

A. Managed Healthcare Reform Legislation

Throughout 1999, Congress and the Administration actively debated comprehensive legislation to reform the managed healthcare system. Policymakers felt that they needed to address the growing perception fueled by media "horror stories" that administrators of managed healthcare plans overly restrict access to coverage, and care more about profit margins than about quality of care. Several bills were introduced during the year that would overhaul the operations of managed healthcare plans.

The major managed healthcare bills shared many similar provisions. They were designed to ensure that patients, including those covered in ERISA healthcare plans, obtain coverage for certain benefits and have access to additional dispute resolution mechanisms. The following are some of the more prominent "patient protections" contemplated by Congress in 1999.

• Plans would have to cover visits to hospital emergency rooms under a "prudent layperson" standard.

• Patients would be given easier access to medical specialists and to physicians outside a plan's network. Employers offering closed-model managed healthcare plans would have to allow participants to enroll in a "point-of-service" plan.

• Plans would have to accelerate their utilization review procedures and offer claimants expedited internal and external reviews to settle disputes over coverage decisions.

• Patients would have a right to plan information that would be easily understood.

• "Gag-clauses" restricting communications between patients and their treating physicians would be prohibited.

• Plans would have to expand access to nonformulary prescription drugs.

• To promote continuity of care, patients would be permitted to see, for a limited time, physicians who have left a plan's network.

However, some bills would have seriously eroded ERISA preemption by allowing individuals to sue healthcare plans in state courts for injuries stemming from coverage decisions. The Bipartisan Consensus Managed Care Improvement Act (H.R. 2723) would allow individuals to sue healthcare plans in state courts for wrongful death and injuries stemming from coverage decisions. The House passed the legislation by a large margin and attached it to the Quality Care for the Uninsured Act (H.R. 2990). In particular, H.R. 2723 would allow individuals to seek punitive damages against healthcare plans refusing to comply with the decision of an external review entity. Employers could be included in such lawsuits if they exercise "discretionary authority" in making decisions regarding medical claims.

House GOP leaders opposed the bill and gave lighthearted support to legislation that included scaled-back liability language. Its opposition was not enough, however, to stem the growing tide of support in the House for broader right-to-sue legislation. House GOP leaders originally hoped that reforms along the following lines would have helped patients obtain needed coverage for care without resulting in additional lawsuits.

• Legislation supported by the House GOP leadership, the Patient Protection Act (H.R. 448), would have forced managed healthcare plans to create accelerated internal and external appeals procedures to settle disputes over denials of coverage for care.

• Plans would have to decide internal appeals for urgent care cases within 24 hours (72 hours for other cases).

• Patients would have the right to seek an independent external review of denied claims for coverage. Reviews would have to be conducted by appropriately trained medical professionals.

• Courts would have been empowered to assess significant monetary penalties (with a $250,000 cap) on healthcare plans for refusing to comply with a court's determination regarding coverage.

• As an alternative to the right-to-sue language in H.R. 2723, the GOP leadership supported legislation that would permit lawsuits only in federal court. Damage awards would be capped.

The Patients' Bill of Rights Act (S. 6) was sponsored in the Senate by Democratic leaders and would have given individuals a broader right than H.R. 2723 to sue healthcare plans. For example, S. 6 did not limit the award of punitive damages to cases where a plan refused to abide by the determination of an external review entity. The Senate rejected S. 6 and instead passed the Patients' Bill of Rights Plus Act (S. 1344), which contains no right-to-sue language. While not expanding healthcare liability, S. 1344 would provide participants of group healthcare plans with several of the above-mentioned "patient protections," including the managed care reforms supported by the House GOP leadership.

Near the end of the year, House and Senate leaders appointed a conference committee to resolve differences between H.R. 2990 and S. 1344. No meetings of the conference committee are expected to be held until February 2000, at the earliest. Congressional advocates of expanding the right to sue a healthcare plan expressed frustration with the leadership's decision not to include as conferees some of the most vocal proponents of additional healthcare liability, including Representatives Charles Norwood (R-GA) and Greg Ganske (R-IA).

In addition to having separate views on expanded healthcare liability, the two bills also differ on what types of healthcare plans should be covered by federal legislation. H.R. 2990 would affect both group healthcare plans under ERISA and health insurance plans, which are regulated by the states. The Senate-passed bill, however, would apply only to group healthcare plans. States would continue to have the primary regulatory authority over health insurance plans if the Senate's bill becomes law.

B. Other Major Healthcare Reform Legislation

Confidentiality of Personal Medical Information. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") required Congress to pass legislation by August 21, 1999, setting national standards for the protection of personal medical information. Given Congress's failure to do so, the Department of Health and Human Services ("HHS") issued proposed confidentiality regulations that apply to healthcare plans and other entities that use personal medical information (see section below on HHS's regulatory activities for a complete outline of its proposal).

Congress was hamstrung in passing legislation because of two primary issues. First, policymakers in Congress were divided over whether national confidentiality standards should preempt stricter privacy statutes existing at the state level. Proponents of greater preemption argued that setting a single national standard was important to helping healthcare entities operate in several states. Privacy advocates countered by saying that national standards should not weaken rules that already exist in several states. Second, policymakers disagreed over which activities should require permission from an individual that his/her medical information was being used. Privacy advocates said that entities should seek the express consent of individuals whenever their personal medical information was being disclosed to another entity. Administrators of healthcare plans argued, on the other hand, that being forced to seek permission every time they had to disclose a portion of an individual's personal medical information would be costly and inefficient.

Important confidentiality bills that received significant consideration this Congress included the Medical Information Protection Act (S. 881) introduced by Senator Robert Bennett (R-UT) and the Medical Record Information and Research Enhancement Act (H.R. 2470) authored by Representative Jim Greenwood (R-PA). Both bills would have preempted state laws to provide for nationally uniform medical privacy regulations. Bennett and Greenwood also wanted to ensure that plan administrators who share individuals' medical information with others had the flexibility to do so when processing healthcare plan benefits. Finally, the bills would permit researchers to continue using personal medical information as long as they developed steps to prevent inappropriate disclosure. The Bennett and Greenwood bills failed to move forward through the Committee process because of the persistent disputes between privacy advocates and users of personal healthcare information.

Medicare Reform. Proposals to allow individuals as young as 55 to "buy in to" Medicare did not receive as much attention as they did in 1998. However, the Administration and several members of Congress proposed expanding Medicare to help seniors pay for prescription drugs.

For instance, President Clinton proposed spending $118 billion over ten years to provide Medicare coverage for prescription drugs. Clinton would pay for the benefit by using $45 billion of the growing budget surplus. The rest would come from other savings, including possible cuts in Medicare provider payments. Clinton also claimed that helping seniors pay for prescription drugs would preclude them from becoming sicker and obviate the need to seek costlier medical services. Finally, to discourage employers from dropping coverage for prescription drugs, Clinton promised to subsidize employers who continue offering retirees the benefit. Republican leaders proposed a more modest prescription drug benefit. They would means-test Medicare prescription drug coverage with benefits going to individuals at or below 135% of poverty.

Mental Health and Substance Abuse Parity. Several bills were introduced during the year that would mandate healthcare plans to treat mental health and substance abuse services on the same basis as other healthcare benefits.

• Representative Marge Roukema (R-NJ) introduced the Mental Health and Substance Abuse Parity Act of 1999 (H.R. 1515) to prohibit benefit limits for mental disorders, including clinical depression, rather than only for severe, biologically-based mental illnesses. Her bill would also require parity of benefits for substance abuse and chemical dependency treatments.

• Senators Pete Domenici (R-AZ) and Paul Wellstone (D-MN) introduced the Mental Health Equitable Treatment Act (S. 796). The legislation would prohibit limits on the number of covered hospital stays and outpatient visits for mental illnesses. It would also provide parity for co-payments, deductibles, and outpatient visit benefits for more serious mental health diseases such as schizophrenia, major depression, post traumatic stress disorder, and autism.

• Wellstone also introduced the Drug and Alcohol Addiction Recovery Act (S. 1477) to ensure that group health plans and health insurance plans that cover drug and alcohol addiction treatments do so at the same level as other diseases. Wellstone's legislation would prohibit plans that cover alcohol and drug addiction treatments from forcing participants to meet higher co-payments and deductibles. Plans would also be barred from having lower annual and lifetime limits for alcohol and drug addiction services.

C. Private Pension Simplification

Bipartisan Legislation. Two major bipartisan comprehensive pension simplification bills were introduced during 1999:

• The Comprehensive Retirement Security and Pension Reform Act (H.R. 1102) sponsored by Representatives Benjamin Cardin (D-MD) and Rob Portman (R-OH); and

• The Pension Coverage and Portability Act (S. 741) sponsored by Senators Charles Grassley (R-IA) and Bob Graham (D-FL).

Several pension reforms, most of which were contained in these bills, passed both houses of Congress as part of other bills. For instance, the pension reforms contained in H.R. 1102 were attached to the Taxpayer Refund and Relief Act (H.R. 2488). The legislation passed the House and Senate, but was vetoed by the President because of unrelated disputes over tax cuts and the use of growing budget surpluses. The following are some of the basic pension reforms considered by Congress in 1999.

• The annual dollar limit on elective 401(k) plan deferrals would be raised from $10,000 to $15,000.

• The annual dollar limit under section 415(b)(1) of the Internal Revenue Code for benefits from defined benefit plans would be raised to $180,000.

• The annual dollar limit under section 415(c)(1) of the Internal Revenue Code for additions to defined contribution plans would be raised to $45,000.

• The current $160,000 cap on compensation which can be taken into account for purposes of pension limits would be raised to $235,000.

• Annual elective contribution limits under section 402(g) of the Internal Revenue Code would be raised by an additional $5,000 for individuals 50 or older to help them make "catch-up" contributions.

• The 150 percent of current liability full-funding limit would be repealed for plan years beginning in 2003.

• Employers would be allowed to give their employees the opportunity to save through "Roth 401(k)" accounts.

• Individuals would also be able to roll over their assets among IRAs and all types of employer-provided retirement plans into a single plan.

• The legislation would accelerate the vesting schedule for all employer-matching contributions.

• Employers would have to provide additional disclosure to plan participants when plan amendments under consideration may result in significant reductions of expected pension benefits.

• Employers would be able to deduct ESOP dividends paid to employees, even if employees reinvest them back into the plan.

• The same desk rule, which currently prevents workers who keep the same job after a merger or acquisition from consolidating their retirement savings in the new employer's plan, would be repealed.

After the President vetoed the Taxpayer Refund and Relief Act, pension reform advocates attached these same measures to legislation increasing the minimum wage by $1 over three years. In mid-November, the Senate added over Democrats' opposition a similar pension/minimum wage bill to bankruptcy reform legislation (S. 625), which is still pending. Meantime, the House Ways and Means Committee passed the Wage and Employment Growth Act (H.R. 3081), which contained many of the same pension reforms. The President opposes the GOP effort to increase the minimum wage by $1 because he says the increase takes too long to become effective, and because he believes tax cuts attached to the bills are too large. With Congress completing the year without moving forward on this matter, many observers believe that minimum wage legislation will become a presidential and congressional campaign issue next year. This would make the strategy of attaching pension reform to a minimum wage bill uncertain.

Cash Balance Plan Legislation. The firestorm that swept the media in 1999 regarding the way older workers fare after employers switch from traditional defined benefit contribution plans to cash balance plans encouraged members of Congress to draft legislation. Since accruals in cash balance plans are more evenly distributed than in traditional defined benefit plans, which usually have more back-loaded accruals, older employees who have been working for a company for a long period of time tend to lose future benefits after such a conversion. Legislators felt that older workers were being treated unfairly and deserved to know, before a plan conversion took place, how their pension benefits could change.

Just before the year ended, Vice President Al Gore, who is running for President, proposed broad legislation addressing the challenges raised by conversions to cash balance plans. He would force plans to notify workers 45 days before a conversion to a cash balance plan takes place. Gore would also force companies to provide general information explaining how different categories of individuals will fare after a plan conversion. Finally, if a company converts its defined benefit plan into a cash balance plan, the opening balance of the new plan would have to have the same benefit value as under the old plan, to protect individuals' benefit levels.

Earlier in 1999, Senator Daniel Patrick Moynihan (D-NY) and Representative Jerry Weller (R-IL) introduced the Pension Right to Know Act (S. 659/H.R. 1176), which would force employers who switch to a cash balance plan to inform participants at least 15 days before the conversion takes place. In addition, administrators would have to prepare individualized benefit statements to help participants compare their pension benefits under the amended plan with what they would have had without the plan amendment. The comparative benefit statement would have to include the projected accrued benefit and the projected present value of the accrued benefit as of the date which is three years, five years, and ten years from the effective date of the plan amendment, and as of the participant's normal retirement age.

Senator Paul Wellstone (D-MN) and Representative Bernie Sanders (I-VT) drafted even more prescriptive legislation. Their Pension Benefits Protection and Preservation Act (H.R. 2902/S. 1640) would force employers to give workers the option of remaining in the traditional defined benefit plan as well as requiring employers to give workers 45 days' advanced notice of a conversion to a cash balance plan.

D. Social Security Reform

The year 1999 was characterized by substantial debate on Social Security, but little concrete legislative action took place. Due to several demographic factors, particularly the coming retirement of the "baby boomer" generation, analysts predict that Social Security will not be able to pay its obligations beginning in 2034. In fact, Social Security may begin paying out more than it collects as early as 2014.

President Clinton started the year by proposing to have the government invest a portion of the Social Security trust fund in the private sector to increase investment returns. He also suggested that the government create "Universal Savings Accounts" to help supplement Social Security benefits. Under this proposal, the federal government would automatically deposit $300 in individuals' accounts every year and match, to a certain point, individuals' contributions to the accounts. The matching rate would be phased out according to an individual's income. Because of substantial criticism, President Clinton back-peddled later in the year on government-directed private investment of the Social Security trust fund and on creating Universal Savings Accounts. His latest proposal would credit the Social Security program with the interest savings generated by reducing the national debt. By doing so, White House officials believe they can extend the life of Social Security for 50 years. However critics charge that the demographic challenges posed by the retirement of the "baby boomer" generation require more structural reform.

Most proposals providing such structural reform entail creating personal Social Security accounts financed by a portion of the payroll tax. Advocates of such an approach believe it is critical to move Social Security to a program where people save for themselves, and not to pay for the benefits of current retirees.

Many noteworthy bills, including the Social Security Solvency Act (S. 1792) introduced by Senator Daniel Patrick Moynihan (D-NY) and Senator J. Robert Kerrey (D-NE) would set aside two percentage points of the current payroll tax to finance personal Social Security accounts that can be invested in the private sector. The Moynihan-Kerrey legislation would also gradually raise the Social Security eligibility age and change the way annual cost-of-living adjustments are made. Opponents to "partial privatization" say that the federal government should not expose retirees and near-retirees to the vagaries of the stock market.

II. OUTLOOK FOR YEAR 2000

The fact that 2000 is a presidential election year means that policymakers' attention will be on politics and positioning their parties for victory. GOP leaders will be drafting legislation to help their presidential nominee, now likely to be either Texas Governor George W. Bush or Senator John McCain of Arizona, gain more national prominence. In addition, House Democrats believe they have a solid opportunity to recapture the House of Representatives and help their candidate, Vice President Al Gore or ex-Senator Bill Bradley of New Jersey, reach the White House. It's thus very likely that congressional and presidential politics in 2000 will be partisan and highly divisive.

In such a setting, it's difficult to predict what kind of legislation will be considered by Congress. President Bill Clinton started the debate by emphasizing at year's end what Congress failed to do in 1999. He encouraged policymakers to display renewed focus on patients' rights and on Social Security reform in the year 2000. However, observers believe President Clinton is teeing up these issues for the upcoming campaign, and not to force enactment of any legislation.

Managed Healthcare Reform. Passage in 1999 by the House and Senate of differing, but not mutually exclusive, patients' rights bills makes ultimate enactment of such legislation hard to predict. A conference committee was appointed by House and Senate leaders to resolve differences between the House- and Senate-passed versions of the bills. No meetings are expected to take place until early in 2000.

Moreover, patients' rights advocates may be happy to see no legislation passed next year so they can take advantage of the populist appeal of HMO reform during the 2000 presidential and congressional campaigns. Opponents of additional managed healthcare regulations will focus on access to care issues and a report issued by the Institute for Medicine showing that up to 98,000 people die in the U.S. every year as a result of medical errors. They believe these two issues will divert attention from managed care reform to the plight of the uninsured and to the need to review decisions made by treating physicians.

Pension Reform. Enactment of comprehensive pension reform has a fair chance next year, given that the House and Senate passed such reforms in 1999. Unfortunately, even though the pension reforms have broad bipartisan support, enactment in 1999 was problematic because they were attached to partisan legislative vehicles -- a large GOP tax-cut bill and a GOP bill to raise the minimum wage. If the pension reforms are attached to a partisan bill once more in 2000, enactment may prove difficult yet again.

In addition, legislation expanding disclosure rules for companies converting traditional defined benefit pension plans to cash balance plans could be seriously considered by Congress next year. As Congress reviews such legislation, federal agencies will be reviewing whether cash balance plans discriminate against older workers since they, as a group, would tend to lose future benefits.

Social Security Reform. There is a growing consensus that fundamental restructuring of Social Security is necessary to prepare the program for the coming retirement of the "baby boomer" generation. Under current estimates, Social Security is projected to begin paying out more than it collects by the year 2014, and is only solvent until 2034. Moreover, with each additional year that policymakers wait to resolve Social Security's financial problems, the harder will be their challenge.

Once a radical notion, permitting investment of Social Security's assets in the private sector is becoming more of a mainstream idea among policymakers. Several GOP presidential candidates, including GOP-frontrunner George W. Bush, have said that the investment gains offered by private accounts are necessary to help fix Social Security. However, little has been discussed about the way such accounts would work with the private pension system; and Democratic presidential candidates have been less willing to support creating personal Social Security accounts.

Given Social Security's large and politically active constituency, Washington observers doubt that policymakers will agree to any significant legislation in 2000, a year that promises to be another year of debate.

III. SIGNIFICANT REGULATORY ACTIVITY

A. Department of Labor ("DOL")

Women's Health and Cancer Rights Act ("WHCRA"). The Departments of Labor and Health and Human Services, on October 18, 1999, issued new guidance regarding the Women's Health and Cancer Rights Act, which requires all healthcare plans that cover a mastectomy to pay for the ensuing reconstructive surgery. The guidance addresses annual notice requirements that group health plans and health insurers must fulfill.

Accordingly, all group health plans and their insurers that offer mastectomy coverage are subject to the notice requirements under WHCRA. WHCRA, which became law in 1998, requires that three notices be provided to plan participants:

• A written description of the benefits that WHCRA mandates must be provided to participants no later than January 1, 1999;

• A second notice describing the benefits required under WHCRA must be provided to participants upon enrollment in the plan; and

• A third notice must be furnished annually to plan participants.

The guidance provides that "a plan or health insurance issuer satisfies the annual requirement if the plan delivers the annual notice anytime during a plan year." The guidance also clarifies that plans and insurers are not required to give participants an annual notice for the plan year during which they enrolled if they were provided with the appropriate notice upon enrollment. Furthermore, notices under WHCRA may be included in a summary plan description, summary of material modifications, or summary annual report; a union newsletter or a benefits newsletter; open enrollment materials; or any other written communication by the plan.

The guidance further provides that the notice given to participants upon enrollment must state what coverage benefits WHCRA requires. The notice must also say that mastectomy coverage will be provided in a manner determined in consultation with the attending physician and the patient for all stages of reconstruction on the breast on which the mastectomy was performed; surgery and reconstruction of the other breast to produce a symmetrical appearance; and prostheses and treatment of physical complications of the surgery, including lymphedema. The notice must also detail any deductibles or coinsurance limitations that apply to the coverage, which must be consistent with those established for other coverage benefits under the plan.

Proposed ERISA Claims and Appeals Regulations. Late in 1998, the DOL released proposed regulations (63 FR 48390) that replace current claims and appeals procedures for ERISA pension, health, and disability plans. DOL received over 600 comments and in February 1999, held three days of hearings. Given the breadth of public opinion, the DOL did not finalize the comments. In fact, since many of the provisions contained in the proposed regulation are the subject of congressional legislation, observers believe that the agency may wait to see if Congress can pass a managed healthcare reform consensus bill that the President would sign.

The DOL's proposed rules would accelerate the time frames under which health benefit claims and appeals must be decided. The proposed rules would also change the definition of a claim and may add cumbersome new disclosure rules to the claims and appeals process. The following are some of the major changes proposed by DOL.

• Claims would be defined as requests for benefits, including requests for coverage determinations, preauthorizations of plan benefits, or utilization review determinations.

• Initial health claims must be decided in 15 days (72 hours for urgent care cases).

• Plan administrators must notify the claimant within five days (24 hours in urgent care cases) if a health claim is not properly filed. If a claim lacks adequate information, plan administrators would also have to provide guidance on what is needed.

• Health claims denials must state the specific reasons for the denial, refer to the governing plan provision, and outline appeal and legal remedies.

• Plan administrators would have 30 days (72 hours for urgent care cases) to adjudicate appeals of denied healthcare claims.

• The plan official involved in the initial decision, including his/her subordinate, must not be involved in conducting the review.

• The reviewer must consult an independent medical expert if the initial denial pertains to a medical necessity issue.

• Reviewers would need to give claimants the opportunity to submit additional information and not take into account that the initial claim was denied.

Section 401(k) Plan Fees. The DOL continued to work on answering common questions about the fees and expenses paid by employers and participants of some 401(k) plans. In 1998, the DOL designed a booklet to encourage 401(k) plan participants to make informed investment decisions. In 1999, DOL released a similar booklet, A Look at 401(k) Fees For Employers, to help employers deal with issues raised by 401(k) plan fees.

For example, the booklet highlights the overall obligations employers must fulfill in operating a plan, and describes the various fiduciary standards employers must follow under federal pension law. It also lists ten basic questions employers should answer in considering fees and expenses paid for services. This includes employers' obligation to ensure that fees paid by 401(k) plans are reasonable.

In addition, DOL published the 401(k) Plan Fee Disclosure Form, which features a flexible format that employers can use depending on the type of plan investments and services. The form gives employers tools to make decisions and compare the investment fees and administrative costs of competing providers of plan services. The 401(k) fee form also contains basic information employers may use, including an overview of the purpose of the form and general description on calculating 401(k) fees, a schedule summarizing total plan fees and expenses, and additional schedules providing information on investment product fees and estimates.

B. Internal Revenue Service ("IRS")

COBRA Continuation Coverage. In February, the IRS released both final (64 FR 5160) and proposed regulations (64 FR 5237) providing greater clarity regarding COBRA continuation coverage. Some of the more significant provisions in the final version of the regulations include:

• Preventing group health plans from terminating COBRA continuation coverage on the basis of other coverage that a qualified beneficiary had prior to electing COBRA continuation coverage, in accordance with the Supreme Court's decision in Geissal v. Moore Medical Corp.;

• Giving employers and employee organizations more flexibility in determining, for purposes of COBRA, the number of group healthcare plans they maintain; and

• Eliminating the requirement that group health plans offer qualified beneficiaries the option to elect only core (health) coverage under an all inclusive (vision and dental) healthcare plan.

The proposed regulations released in conjunction with the final rules provide additional guidance on how business reorganizations and the Family and Medical Leave Act affect COBRA continuation coverage. The rules were issued in a question and answer format, and are designed to help plan administrators understand how the final and proposed rules regarding COBRA continuation coverage work.

C. Department of Health and Human Services ("HHS")

Confidentiality of Personal Medical Information. In early November, HHS published a proposed regulation to implement the first-ever national standards to protect the confidentiality of electronic medical records.

If adopted, HHS's proposed regulation would prohibit group health plans (including HMOs, health insurance carriers, and ERISA-covered plans) and healthcare providers that transmit or store information electronically from using or disclosing an individual's health information without explicit authorization from the individual, unless specifically permitted by the proposed regulation. The improper disclosure of protected health information could result in civil penalties of up to $25,000 per year for each violation, as well as criminal penalties.

HHS would allow plans and healthcare providers to use and disclose identifiable health information without a patient's authorization for purposes of healthcare treatment, payment of claims, and "healthcare operations," such as quality assurance, credentialing, and utilization review programs. However, the amount of information disclosed must be limited to the minimum amount of identifiable health information necessary to achieve the purpose of the disclosure. Prior to a plan's use or disclosure of identifiable health information for almost any other purpose, a plan must obtain the patient's authorization for the use or disclosure of the information. Plans would generally be prohibited from relying on "blanket" authorizations to use or disclose medical information.

Plans would also be required to adopt procedures to ensure the confidentiality of electronic medical records, provide privacy training to employees, appoint officials to coordinate a plan's privacy efforts, and develop a system of sanctions for employees and business partners who violate a plan's privacy policies.

D. Pension Benefit Guaranty Corporation ("PBGC")

Late Premium Payments. The PBGC proposed in 1999 to limit penalties for late premium payments. Under current regulations, pension plans whose premiums are based on a participant count that turns out to be incorrect can be subject to a late payment levy from the PBGC. Under certain conditions, PBGC officials propose to exonerate plans that use mistaken participant counts when calculating premiums.

The participant count for the premium payment year is generally determined as of the last day of the plan year preceding the premium payment year. Since plan administrators often do not know the exact number of participants for the premium payment year, the proposed PBGC regulation provides a safe harbor from late payment penalty charges under the following circumstances:

• By February 28 of the premium payment year, the plan administrator must pay the lessor of 90 percent of the flat-rate premium due for the premium payment year or 100 percent of the flat-rate premium that would be due if that amount were determined by using the actual participant count from the preceding premium payment year.

• By October 15 of the premium payment year, the plan administrator must pay any outstanding amount.

IV. SIGNIFICANT ACTIVITY BY THE U.S. SUPREME COURT

HMO Financial Incentive Programs. In 1999, the Supreme Court decided to hear the case of Pegram v. Herdrich. Oral arguments are scheduled to take place on February 23, 2000. The case requires the Supreme Court to determine if an HMO violates its fiduciary duties under ERISA by implementing a managed healthcare program in which physicians receive financial incentives to provide medical care in a cost-effective manner.

In August 1998, the Seventh Circuit Court of Appeals in Herdrich vs. Pegram held that a physician-owned HMO violated its fiduciary duties to plan participants by providing year-end bonuses to physicians that were based, at least in part, on a physician's utilization of referrals and medical tests. The Seventh Circuit found that the compensation arrangement encouraged physicians to withhold medical treatment from patients in an effort to increase physicians' compensation, which violated the HMO's fiduciary duties to enrollees.

In an amicus brief filed with the Supreme Court on behalf of the petitioner HMO in Pegram v. Herdrich, DOL argued that the financial incentive program did not violate the HMO's or its participating physicians' fiduciary duties under ERISA. Specifically, DOL argued that "[a]n HMO acts as a medical provider, rather than an ERISA fiduciary, when it establishes and implements an arrangement for paying its physicians to treat their patients, even if the arrangement includes incentives for using less costly treatment regimens."

ERISA Preemption. In a decision that seriously weakened the armor of ERISA preemption, the Supreme Court ruled unanimously, in the case of UNUM Life Insurance Company of America v. Ward, that California's "notice-prejudice" rule is not preempted by ERISA. California's notice-prejudice rule forces insurance companies to show that they were actually prejudiced by the fact that a claim was filed late before denying it. The Supreme Court based its decision on the argument that the notice-prejudice rule deals strictly with the business of insurance and is thus saved from ERISA preemption.

In addition, and more significantly, the Supreme Court ruled that a state law designed to regulate health insurance does not have to meet all three prongs of the McCarran-Ferguson test in order to be saved from ERISA preemption. The three prongs are:

• The state law must have the effect of spreading or transferring a policyholder's risk of loss;

• The state law must constitute an integral part of the policy relationship between the insurer and the insured; and

• The state law must be limited in its application to the insurance industry.

Instead, the Supreme Court called the three prongs mere "guideposts" for determining if a state law is preempted by ERISA. While agreeing that the notice-prejudice rule did not necessarily satisfy the first prong, the Supreme Court held that the California law sufficiently satisfied the second and third prongs of the McCarran-Ferguson test to be saved from ERISA preemption.

Essentially, the Supreme Court's decision implies that a state health insurance law no longer needs to have the effect of spreading a policyholder's risk of loss to be saved from ERISA preemption. As a result, health insurers may now be held liable under additional state causes of action that had previously been preempted by ERISA.

Effect of Social Security Disability Benefit Applications on ADA Claims. The Supreme Court ruled unanimously in May 1999, that disabled individuals who apply for Social Security disability benefits are not automatically barred from bringing claims against employers under the Americans with Disabilities Act ("ADA") (Cleveland v. Policy Management Systems Corp., U.S. No. 97-1008, 5/24/99).

Resolving a split among the circuit courts, Justice Stephen Breyer wrote that "despite the appearance of conflict [between Social Security disability claims and ADA claims] . . . the two claims do not inherently conflict to the point where courts should apply a negative presumption" that would bar ADA claims when a plaintiff has also applied for or received Social Security disability benefits. Rather, Breyer noted that determinations of disability under the Social Security Act are made without regard to the ability of a claimant to work if provided with reasonable accommodations. "The result is that an ADA suit claiming that the plaintiff can perform her job with reasonable accommodation may well prove consistent with [a Social Security disability benefits] claim that the plaintiff could not perform her own job (or other jobs) without it."

Nonetheless, the Supreme Court held that an ADA plaintiff may not simply ignore his or her sworn contention to the Social Security Administration that the extent of disability was so severe as to preclude any type of substantial gainful work in the national economy. To survive a defendant-employer's motion for summary judgment on the ADA claim, the Supreme Court held that the plaintiff must "explain why the [Social Security disability] contention is consistent with her ADA claim that she could 'perform the essential functions' of her previous job, at least with 'reasonable accommodation.'" The plaintiff's reconciliation of the inconsistency must be "sufficient to warrant a reasonable juror's concluding that, assuming the truth of, or the plaintiff's good faith belief in, the earlier statement [claiming total disability], the plaintiff could nonetheless 'perform the essential functions' of her job, with or without "reasonable accommodation." The ease with which the plaintiff's burden may be overcome was acknowledged by the Supreme Court, which found that an ADA plaintiff's pursuit and receipt of Social Security disability benefits does not "erect a strong presumption against the recipient's success under the ADA."

Supreme Court Upholds Employer's Right to Amend Defined Benefit Plan. In Hughes Aircraft Company vs. Jacobson, the Supreme Court upheld an employer-plan sponsor's right to amend the benefit structure of a defined benefit plan. In doing so, the Supreme Court rejected the argument that plan participants had any right to the plan's actuarial surplus, even where the plan was funded by mandatory employee contributions. The Supreme Court further affirmed that defined benefit plans may only be terminated in accordance with Title IV of ERISA.

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(Reprinted on BenefitsLink.com by permission.)