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Employee Benefits Security Administration

EBSA Final Rule

Employee Retirement Income Security Act of 1974; Rules and Regulations for Administration and Enforcement; Claims Procedure; Final Rule [11/21/2000]

[PDF Version]

Volume 65, Number 225, Page 70245-70271


[[Page 70245]]

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Part VIII





Department of Labor





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Pension and Welfare Benefits Administration



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29 CFR Part 2560



Employee Retirement Income Security Act of 1974; Rules and Regulations 
for Administration and Enforcement; Claims Procedure; Final Rule


[[Page 70246]]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2560

RIN 1210-AA61

 
Employee Retirement Income Security Act of 1974; Rules and 
Regulations for Administration and Enforcement; Claims Procedure

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Final regulation.

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SUMMARY: This document contains a final regulation revising the minimum 
requirements for benefit claims procedures of employee benefit plans 
covered by Title I of the Employee Retirement Income Security Act of 
1974 (ERISA or the Act). The regulation establishes new standards for 
the processing of claims under group health plans and plans providing 
disability benefits and further clarifies existing standards for all 
other employee benefit plans. The new standards are intended to ensure 
more timely benefit determinations, to improve access to information on 
which a benefit determination is made, and to assure that participants 
and beneficiaries will be afforded a full and fair review of denied 
claims. When effective, the regulation will affect participants and 
beneficiaries of employee benefit plans, employers who sponsor employee 
benefit plans, plan fiduciaries, and others who assist in the provision 
of plan benefits, such as third-party benefits administrators and 
health service providers or health maintenance organizations that 
provide benefits to participants and beneficiaries of employee benefit 
plans.

DATES: Effective Date: January 20, 2001.
    Applicability Date: This regulation applies to all claims filed on 
or after January 1, 2002.

FOR FURTHER INFORMATION CONTACT: Susan M. Halliday or Susan G. Lahne, 
Office of Regulations and Interpretations, Pension and Welfare Benefits 
Administration, Department of Labor, 200 Constitution Avenue NW., 
Washington, DC 20210, telephone (202) 219-7461. This is not a toll-free 
number.

SUPPLEMENTARY INFORMATION:

A. Background

    On September 9, 1998, the Department of Labor (the Department) 
published a notice in the Federal Register (63 FR 48390) containing a 
proposed regulation, designated as proposed Sec. 2560.503-1 of Title 29 
(the proposal), intended to substantially revise the minimum 
requirements for benefit claims procedures of all employee benefit 
plans covered under Title I of ERISA. The reforms contained in the 
proposal, as explained in the preamble that accompanied it, were based 
in part on comments the Department had previously received in response 
to a Request for Information (the RFI) published in the Federal 
Register (62 FR 47262) on September 8, 1997. In addition, the proposal 
was developed to respond to a memorandum from the President, dated 
February 20, 1998, directing the Secretary of Labor to ``propose 
regulations to strengthen the internal appeals process for all Employee 
Retirement Income Security Act (ERISA) health plans to ensure that 
decisions regarding urgent care are resolved within not more than 72 
hours and generally resolved within 15 days for non-urgent care'' and 
``to ensure the information [group health plans] provide to plan 
participants is consistent with the Patients' Bill of Rights.'' \1\
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    \1\ The President's memorandum specifically endorsed the reports 
of the President's Advisory Commission on Consumer Protection and 
Quality in the Health Care Industry (the Commission), which set out 
specific rights of health care consumers that should be protected, 
including the right ``to a fair and efficient process for resolving 
differences with their health plans, health care providers, and the 
institutions that service them, including a rigorous system of 
internal review and an independent system of external review.''
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    In response to the RFI comments, the President's directives, and 
the recommendations of the Commission, the Department developed a 
proposal to substantially reform the standards for the resolution of 
benefit claims under all employee benefit plans covered by the Act. The 
revised standards derive from section 503 of ERISA, which requires 
every employee benefit plan, in accordance with regulations of the 
Department, to ``provide adequate notice in writing to every 
participant or beneficiary whose claim for benefits under the plan has 
been denied, setting forth the specific reasons for such denial, 
written in a manner calculated to be understood by the participant'' 
and to ``afford a reasonable opportunity to any participant whose claim 
for benefits has been denied for a full and fair review by the 
appropriate named fiduciary of the decision denying the claim.'' While 
focusing primarily on group health plans and plans providing disability 
benefits, the proposal contained provisions altering the benefit claims 
procedures for all employee benefit plans. Among other reforms, the 
proposal imposed new notice requirements with respect to incomplete or 
incorrectly filed claims, altered the standards for appeals of denied 
claims, and increased or made more specific the disclosure obligations 
of plans generally with respect to procedural rights and denials of 
claims. With respect to group health plans and plans providing 
disability benefits specifically, the proposal shortened the time 
periods for making initial benefit claims decisions and decisions on 
appeal of denied claims and imposed additional obligations with respect 
to group health claims that involved urgent care.
    The Department received more than 700 letters of comment in 
response to the proposal. A public hearing on the proposal was held in 
Washington, DC., on February 17, 18, and 19, 1999. More than 60 
speakers, representing a fair cross-section of the interested public, 
including benefit plan sponsors, service providers, health care 
professionals, benefit claimants, health care organizations, and 
insurance companies, presented testimony and were questioned by a panel 
of Departmental officials.
    After due consideration of the issues raised by the written 
comments and oral testimony, the Department has modified the scope of 
the proposal, refined its requirements as to minimum procedural 
standards for the resolution of benefit claims disputes, and is now 
publishing in this notice, in final form, regulation Sec. 2560.503-1, 
establishing new minimum procedural requirements for benefit claims 
under employee benefit plans. In the course of developing this final 
regulation, the Department took serious notice of the issues raised by 
commenters on behalf of the employers that sponsor employee benefit 
plans and the institutions that aid in their administration or provide 
the promised benefits. In making changes in the regulation that respond 
to those issues, the Department has attempted to reconcile the need for 
procedural protections with the purely voluntary nature of the system 
through which these vital benefits are delivered. The Department 
believes, however, that the procedural reforms contained in this 
regulation are necessary to guarantee important procedural rights to 
benefit claimants.
    While the Department has made a number of significant changes to 
the proposal, in particular by limiting the scope of its reforms 
principally to group health plans and plans providing disability 
benefits and by moderating the severity of the decisionmaking time 
frames applicable to such plans, the regulation preserves the core 
reforms of the proposal. In publishing this

[[Page 70247]]

regulation, the Department believes it has responded to the needs of 
employers and employees and has successfully implemented, to the extent 
of its regulatory authority under the Act, the protections recommended 
by the President's Commission. This action, the Department believes, 
will ensure that benefit claimants, at least in ERISA-covered plans, 
are provided faster, fuller, and fairer decisions on their benefit 
claims.
    The following summarizes the most important modifications that the 
Department adopted in developing this regulation. It further describes 
generally the comments that gave rise to those changes and explains the 
Department's reasons for those modifications.

Scope

    The proposal contained a number of provisions that would have 
established new, substantially uniform procedural requirements for all 
employee benefit plans, including improved notice and disclosure 
protections and strengthened standards of conduct on review. A 
substantial number of commenters expressed concern about the scope of 
the proposal, pointing out that the Department's expressed reasons for 
procedural reform, as set forth in the preamble to the proposal, 
focused almost exclusively on perceived problems arising specifically 
under group health plans and plans providing disability benefits. These 
commenters claimed that the Department's record does not demonstrate a 
clear need to change the procedural rules in effect for plans other 
than group health plans and plans providing disability benefits.
    The Department believes, in light of the comments received on this 
issue, that it is premature to conclude that the proposed reforms are 
equally appropriate for all plans. In particular, the Department is 
concerned that it may not have an adequate record regarding the need 
for reform of procedural standards for pension plans. Accordingly, the 
Department has determined to limit more narrowly to group health plans 
and plans providing disability benefits the reforms presently adopted 
in the regulation and to reserve for further consideration the question 
of the appropriateness of extending these reforms to pension plans and 
welfare plans other than group health plans and plans providing 
disability benefits. The regulation, thus, contains standards 
respecting benefit claims procedures for pension and other welfare 
plans that are substantially similar to those currently in effect under 
the regulation promulgated by the Department in 1977 (the 1977 
regulation).\2\ As a result, under the regulation, pension plans and 
welfare plans other than group health plans and plans providing 
disability benefits will not generally be required to revise their 
procedures.
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    \2\ It should be noted that the regulation as it applies to such 
plans is not identical to the 1977 regulation. In some respects, the 
language of the regulation has been updated to reflect current 
practices and to incorporate the Department's longstanding 
interpretations of the 1977 regulation. In addition, as noted 
specifically below, some provisions of the 1977 regulation have been 
clarified in this regulation, and such clarifications apply 
uniformly to all employee benefit plans covered under the Act.
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    In revising the proposal in this manner, however, the Department 
notes its continuing interest in assessing the appropriateness of the 
1977 regulation's standards for pension and other welfare plans. In 
this regard, the Department is soliciting public comment on this issue 
to facilitate development of an adequate record upon which to consider 
additional reforms.
    One commenter requested clarification as to the application of the 
proposed regulation to ``long-term care benefits.'' This commenter 
described long-term care benefits as clearly distinguishable from group 
health or disability benefits. Long-term care benefits, it was 
suggested, have been designed uniquely to provide assistance in tasks 
of daily living to individuals with disabilities or chronic conditions. 
Eligibility for long-term care benefits is based, according to the 
commenter, solely on whether an individual is ``unable to perform a 
requisite number of the activities of daily living due to the loss of 
functional capacity or requires substantial supervision due to severe 
cognitive impairment.'' The commenter reported that ``long term-care 
benefits'' generally include a wide range of services, including 
respite care, coverage for home modifications for the disabled, 
nursing-home care, and payment for family care givers, all directed 
towards meeting the routine needs of daily life, but do not include 
``medical care'' within the meaning of section 733(a)(2) of the Act or 
replacement income as is usual under disability plans. It is the view 
of the Department that the provision of the type of benefits described 
by the commenter would not, in and of itself, cause a plan to be 
treated as a group health plan or a plan providing disability benefits 
for purposes of this regulation.

Time Frames for Decisionmaking

    The proposal contained new time frames for claims decisions by 
group health plans and plans providing disability benefits at both the 
initial claims decision stage and on review. In its treatment of group 
health claims, the proposal distinguished between claims involving 
urgent care and all other group health claims, setting different 
maximum time periods for the two categories of group health claims,\3\ 
and, with respect to disability claims,\4\ the proposal provided a 
separate set of maximum time periods somewhat longer than for group 
health plans. In proposing these relatively short time frames, the 
Department emphasized that they reflected specific ``best practices'' 
discussed in the RFI comments and the Department's belief that speedy 
decisionmaking is a crucial protection for claimants who need either 
medical care or the replacement income that disability benefits 
provide.\5\ The Department specifically solicited further public 
comment on the adequacy of the proposal's definition of claims 
involving urgent care, explaining that speedy decisionmaking has 
increased significance when a claim must be approved prior to a 
claimant's receiving medical care.
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    \3\ The proposal required urgent care claims decisions to be 
made during a stringent maximum 72-hour period at both the initial 
and review stages. All other group health claims were required under 
the proposal to be resolved within not more than 15 days, with 
respect to both initial and review decisions. The proposal did not 
provide for any extensions of these periods by plans in any 
circumstances, although it did not prohibit consensual agreements 
between claimants and plans on the timing of decisions.
    \4\ Where a single plan provides more than one type of benefit, 
it is the Department's intention that the nature of the benefit 
should determine which procedural standards apply to a specific 
claim, rather than the manner in which the plan itself is 
characterized.
    \5\ The proposal also eliminated, for group health plans and 
plans providing disability benefits, the time extension on review 
available, under the 1977 regulation, to plans administered by 
boards of directors or committees that meet at least quarterly.
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    There was relatively little objection among the commenters 
regarding the proposed decisionmaking time frames for urgent care group 
health claims. The majority of those commenting either actively 
supported or accepted the necessity for this reform, indicating that at 
the present time urgent care decisions are generally being made within 
the proposed time frames.\6\ In discussing

[[Page 70248]]

the time frames proposed for other group health and disability 
decisionmaking, however, a large number of commenters objected to the 
shortness of the time frames.
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    \6\ The rules contained in subparagraph (f)(2)(i) regarding 
treatment of claims involving urgent care are, therefore, largely 
unchanged from those contained in the proposal. A few commenters 
suggested that the definition of ``claims involving urgent care'' be 
expanded to include the concept of ``maintaining'' maximum function, 
as well as regaining maximum function. The Department has not made 
this change, but it is the view of the Department that the 
definition as proposed, and as adopted in this regulation, addresses 
the concern for protecting ``maximum function'' by providing that if 
delaying deciding a claim could seriously jeopardize the claimant's 
``life'' or ``health,'' the claim involves urgent care. Any effect 
on a claimant's ``maximum function'' that is less than serious 
jeopardy to life or health should not be considered a ``claim 
involving urgent care.''
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    With respect to the proposed time frames for non-urgent group 
health claims, many commenters acknowledged the legitimacy of the 
Department's concern for affording claimants speedy access to medical 
care, but asserted that the Department's concerns regarding access to 
care did not justify treating all non-urgent claims the same. These 
commenters asserted that it would be extremely difficult and expensive, 
if not impossible, to satisfy the proposal's requirement that all non-
urgent group health claims be decided within not more than 15 days. 
They urged the Department to consider distinguishing between ``pre-
service'' claims, that is, those claims that must be decided before a 
claimant will be afforded access to health care, and claims that 
involve only the payment or reimbursement of the cost for medical care 
that has already been provided (``post-service'' claims). \7\ The pre-
service claims, the commenters argued, should be subject to a shorter 
decisionmaking time frame. Other non-urgent group health claims, these 
commenters argued, do not raise the same degree of concern since they 
do not represent cases in which claimants may actually be denied 
medical care. In many instances, the commenters asserted, a longer 
decisionmaking period for these post-service claims may be appropriate, 
even necessary, since a longer period of deliberation may in some 
proportion of cases result in the grant of benefits that might 
otherwise be denied.
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    \7\ The record indicates also that representatives of claimants 
do not generally oppose making this distinction.
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    The Department has seriously considered the arguments and testimony 
put forth on this issue, and it has concluded that there is substantial 
justification for treating non-urgent health care claims along the 
lines suggested in the comments. Accordingly, the regulation makes a 
distinction, in setting the maximum time periods for deciding non-
urgent group health claims, between group health claims that involve 
access to medical care (pre-service claims) and group health claims 
that involve purely the payment or reimbursement of costs for medical 
care that has already been provided (post-service claims).
    Subparagraph (m)(2) defines a ``pre-service claim'' as any request 
for approval of a benefit with respect to which the terms of the plan 
condition receipt of the benefit, in whole or in part, on approval of 
the benefit in advance of obtaining medical care. In this regard, it is 
the Department's view that any review or approval that a plan requires 
as part of the process of receiving a benefit, even if such review or 
approval does not guarantee that the plan will ultimately grant the 
benefit, involves a ``claim'' and must be treated as such for purposes 
of this regulation. For example, a request for pre-approval under a 
utilization review program or for a prior authorization of health care 
items or service would be a ``pre-service claim'' under this 
definition, as would any request for a preauthorization that a plan 
requires a claimant to obtain as a precondition to the claimant's 
receiving a larger benefit (e.g., payment of 80% of the cost of the 
preauthorized service, rather than 50%). ``Post-service claims'' are 
defined in subparagraph (m)(3) as all claims under a group health plan 
that are not pre-service claims.
    Subparagraph (f)(2)(iii)(A) requires that pre-service claims be 
decided within a maximum \8\ of 15 days at the initial level, and 
subparagraph (i)(2)(ii) permits a maximum of 30 days on review of an 
adverse benefit determination.\9\ Post-service claims are subject to a 
maximum time period of 30 days for the initial decision under 
subparagraph (f)(2)(iii)(B) and a maximum of 60 days on review under 
subparagraph (i)(2)(iii)(A). With respect to both pre- and post-service 
claims, the regulation further provides for limited extensions of 
time.\10\ In the Department's view, establishing separate time frames 
for these two groups of claims, and providing more generous time frames 
for each group, will balance the needs of claimants and the business 
considerations raised by the commenters representing plans, employers, 
and administrators. These time frames accommodate both the need for 
additional time in some cases and the need for speedy decisionmaking 
when access to medical care is at stake.
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    \8\ As in the 1977 regulation and the proposal, the times 
established for decisionmaking are maximum times only. Decisions are 
required to be made, generally, within a reasonable period of time 
appropriate to the circumstances. Accordingly, in some cases, 
delaying a decision until the end of the applicable maximum period 
may be unreasonable under the circumstances and thus a violation of 
the procedural standards.
    \9\ Various commenters requested clarification as to whether the 
term ``days'' as used in the proposal was intended to refer to 
calendar days or to some other more limited construct, such as 
``business'' days. It was the Department's intention in the 
proposal, and it continues to be the Department's position with 
respect to this regulation, that the term ``days'' means calendar 
days. In light of the need for speedy decisionmaking in many of the 
time frames involved, the Department has determined not to restrict 
the counting of days as used in the regulation to less than every 
calendar day, but rather to provide reasonable periods of time 
determined by reference to calendar days.
    \10\ The regulation's provisions for extension of time for group 
health plans and plans providing disability benefits are discussed 
generally below. In addition, the regulation leaves in place a 
restricted form of the ``quarterly meeting'' rule contained in the 
1977 regulation, permitting extension of the decisionmaking time on 
review, under subparagraph (i)(2)(iii)(B) for post-service claims 
and under subparagraph (i)(3)(ii) for claims for disability 
benefits. The extension of time for plans administered by boards of 
trustees or committees that meet at least quarterly is available, 
under the regulation, only for multiemployer plans. It is the 
Department's view that such plans, in which employee representation 
is guaranteed, will delay decisionmaking by exercising this 
privilege only when it is necessary and not harmful to claimants.
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Concurrent Care Decisions

    The proposal contained a provision that would accelerate 
decisionmaking in the case of an urgent care claim arising out of a 
termination or reduction of previously granted benefits being provided 
over a period of time. Under the proposal, any such termination or 
reduction would be treated as an adverse benefit determination, and 
plans would be required to provide notice in such circumstances of the 
termination or reduction of benefits at a time sufficiently in advance 
of the termination or reduction so as to allow the claimant to appeal 
the denial before the termination or reduction takes effect. This 
proposal was intended to address RFI comments that expressed concern 
over the harm that patients suffer from interruptions in treatment that 
should have been provided on a continuous basis. The Department 
believed that the dangers of this harm could be minimized if patients 
are provided an opportunity to argue in favor of uninterrupted 
continuing care before treatment is cut short or reduced. No serious 
objections to this provision were raised in the comment record.
    In finalizing the regulation, the Department has concluded that 
there is no strong basis for providing this protection only for 
terminations or reductions involving urgent care. \11\ Any

[[Page 70249]]

decision to terminate or reduce benefits that have already been granted 
will cause disruption and potential harm to patients receiving the 
ongoing care. In our view, claimants faced with such a disruption 
should be afforded an adequate opportunity to contest the termination 
or reduction of already granted benefits before it takes effect. 
Accordingly, subparagraph (f)(2)(ii)(A) retains the basic protection 
provided in the proposal as to the termination or reduction of 
previously granted benefits, but expands its scope to encompass any 
termination or reduction of already granted benefits.
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    \11\ The regulation calls this type of decisionmaking 
``concurrent care decisions'' because the decision to reduce the 
treatment is made concurrently with the treatment itself. The 
regulation clarifies that the provision applies to ongoing treatment 
covering either a period of time or a number of treatments. If a 
plan approves a course of treatment that has no finite termination 
date, such as treatments to be provided ``as long as medically 
necessary,'' a reduction or termination of that course of treatment 
is considered a concurrent care decision under the regulation.
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    Some commenters urged the Department to consider extending the 
protection of this special timing rule to requests for additional care 
discovered to be necessary during the course of the initially 
prescribed treatment. In response to these suggestions and to minimize 
the possibility of harm from interruptions in treatment, the regulation 
further provides that any urgent care claim requesting to extend a 
course of treatment beyond the initially prescribed period of time or 
number of treatments must be decided within not more than 24 hours, 
provided that the claim is made at least 24 hours prior to the 
expiration of the initially prescribed period. If such a claim is 
denied, it would be appealable as an urgent care claim. \12\
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    \12\ Of course, any request to extend a course of treatment that 
does not involve urgent care is a claim under the regulation and is 
governed by the standards generally applicable to such claims.
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Time Frames for Plans Providing Disability Benefits

    The proposal established time frames for resolution of disability 
claims that were shorter than those in the 1977 regulation.\13\ 
Commenters representing disability insurers voiced concern over this 
aspect of the proposal. These commenters argued that disability claims 
are often difficult to resolve inasmuch as they present complex issues 
requiring consideration of not only a claimant's medical condition, but 
also the claimant's continuing vocational capabilities. These 
commenters asserted that the proposed time frames were far too short to 
accommodate the individualized decisionmaking process involved in 
resolving most disability claims. Commenters representing claimants, 
especially long-term disability claimants, took an opposite position, 
arguing that disability providers frequently delay resolving these 
claims unnecessarily in order to avoid beginning to make payments. They 
emphasized the economic hardships disabled claimants experience as a 
result of any unnecessary delays in receiving the replacement income 
that disability benefits are intended to provide.
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    \13\ Under the proposal, disability claims were subject to a 30-
day maximum initial decisionmaking period, with the possibility of a 
15-day unilateral extension; review of adverse benefit 
determinations of such claims were made subject to a 45-day maximum 
period, with a possible 45-day unilateral extension.
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    After consideration of the comments and testimony on this issue, 
the Department has resolved to provide a limited opportunity for 
extension of time to resolve disability claims. Subparagraph (f)(3), in 
consequence, provides that disability claims must be resolved, at the 
initial level, within 45 days of receipt; a plan may, however, extend 
that decisionmaking period for an additional 30 days for reasons beyond 
the control of the plan. If, after extending the time period for a 
first period of 30 days, the plan administrator determines that it will 
still be unable, for reasons beyond the control of the plan, to make 
the decision within the extension period, the plan may extend 
decisionmaking for a second 30-day period. The regulation requires that 
the plan provide a disability claimant with an extension notice that 
details the reasons for the delay. Thus, a plan may take, under limited 
and justifiable circumstances, up to 105 days to resolve a disability 
claim at the initial claims stage, provided that appropriate notice is 
provided to the claimant before the end of the first 45 days and again 
before the end of each succeeding 30-day period. In the Department's 
view, this framework will enable a plan to take sufficient time to make 
an informed decision on what may be a complex matter, but the plan will 
be required to keep the claimant well informed as to the issues that 
are retarding decisionmaking and any additional information the 
claimant should provide. By limiting the reasons for which decisions 
may be delayed, the regulation also requires prompt decisonmaking when 
appropriate.
    With respect to the review of adverse benefit determinations 
involving disability claims, subparagraph (i)(3)(i) adopts the basic 
approach of the proposal, permitting a maximum of 45 days to complete a 
review,\14\ but it further permits plans providing disability benefits 
to extend the decisionmaking time on review for an additional 45-day 
period under the rules applicable to pension and other welfare plans, 
and under subparagraph (i)(3)(ii) allows multiemployer plans providing 
disability benefits that are administered by boards of trustees or 
committees meeting at least quarterly to take advantage of the 
``quarterly meeting'' extended time period on review.\15\
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    \14\ Under the regulation, a plan cannot impose more than two 
levels of mandatory review with respect to denial of a disability 
claim.
    \15\ See below for explanation of the ``quarterly meeting'' 
rule.
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Incomplete Claims and Extensions of Time

    The proposal specifically required all plans to make an early 
determination as to whether a filed claim is ``incomplete.'' Under the 
proposal, notification that a claim is incomplete, including a 
description of the information necessary to complete the claim, would 
be required to be provided to a claimant within 5 days of filing the 
claim. This provision, which responded directly to complaints expressed 
in the RFI comments, was intended to eliminate unnecessary causes of 
delay in the processing of claims and to speed communications between 
plan and claimant regarding essential information.
    The Department received many comments on the proposal asserting 
that it is often not possible to determine whether a claim is 
incomplete without deciding the claim in its entirety.\16\ The 
requirement to provide notice of incompleteness within 5 days, these 
commenters urged, would essentially force plans to make complete 
benefit determinations within that time. These commenters further 
suggested that providing an opportunity for extending the time for 
deciding ``incomplete'' group health and disability claims would better 
serve the purposes intended to be achieved by the notice of 
incompleteness.\17\
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    \16\ Representatives of claimants supported the proposed rule 
regarding incomplete claims, asserting that plans frequently and 
unnecessarily delay in informing claimants of obvious deficiencies 
in claims, thereby causing claims decisions to be made later than 
would otherwise be the case.
    \17\ The 1977 regulation permitted an extension of time of up to 
90 days for processing claims under ``special circumstances.'' The 
proposal would have eliminated this provision and prohibited plans 
from taking extensions of time without the claimant's consent. 
Commenters representing plans, employers, and plan administrators 
objected to the prohibition on extensions of time as inappropriately 
inflexible.
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    In light of these objections and arguments, the Department has 
reconsidered the structure of its proposed rule regarding incomplete 
claims and extensions of time. The regulation generally omits the 
provisions for incomplete claims except

[[Page 70250]]

with respect to urgent care claims.\18\ Instead, the Department has 
modified the 1977 regulation's provisions for extensions of time to 
permit group health plans and plans providing disability benefits a 
limited opportunity to extend the period for decisionmaking at the 
initial level.\19\ Under subparagraphs (f)(2)(iii)(A) and (B) group 
health plans may extend decisionmaking on both pre- and post-service 
claims for one additional period of 15 days after expiration of the 
relevant initial period, if the plan administrator determines that such 
an extension is necessary for reasons beyond the control of the plan. 
Under subparagraph (f)(3), plans providing disability benefits may 
avail themselves of a similar provision permitting a maximum of two 
extensions of time, each of 30 days, when necessary for reasons beyond 
the control of the plan.\20\
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    \18\ As was proposed, the regulation requires plans to provide 
notice of incompleteness, in the case of a claim involving urgent 
care, within 24 hours of receipt of the claim and does not permit a 
plan to unilaterally extend the time period for deciding an urgent 
care claim.
    \19\ With respect to pension and other welfare plans, this 
regulation fully continues the provisions of the 1977 regulation 
regarding extensions of time.
    \20\ The rules for disability claims are also described above.
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    In each case, if the reason for taking the extension is the failure 
of a claimant to provide necessary information, the time period for 
making the determination is tolled from the date on which notice of the 
necessary information is sent to the claimant until the date on which 
the claimant responds to the notice.\21\ In connection with providing 
an opportunity for extension, subparagraph (f)(4) further specifies 
that the time periods for making a decision are considered to commence 
to run when a claim is filed in accordance with the reasonable filing 
procedures of the plan, without regard to whether all of the 
information necessary to decide the claim accompanies the filing.
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    \21\ This tolling period ends on the date on which the plan 
receives the claimant's response to the notice, without regard to 
whether the claimant's response supplies all of the information 
necessary to decide the claim. Once the claimant responds, the plan 
will have the benefit of the extension of time (15 days for group 
health claims; 30 days for disability claims) within which to decide 
the claim. The plan may take only the extensions described in the 
regulation (e.g., one extension for group health claims) and may not 
further extend the time for making its decision unless the claimant 
agrees to a further extension.
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    In providing a limited extension opportunity for deciding group 
health and disability claims, it is the Department's intention to 
provide plans with the flexibility necessary to handle all claims 
appropriately, whether such claims are easy or difficult, complete when 
filed or needing more information. The Department emphasizes that the 
time periods for decisionmaking are generally maximum periods, not 
automatic entitlements. If a specific claim presents no difficulty 
whatsoever, it may be unreasonable to delay in deciding that claim 
until the end of the maximum period; similarly, an extension may be 
imposed only for reasons beyond the control of the plan. For example, 
the Department would not view delays caused by cyclical or seasonal 
fluctuations in claims volume to be matters beyond the control of the 
plan that would justify an extension. The Department further notes that 
there is no provision for extensions of time in the case of claims 
involving urgent care.

Notice and Disclosure Requirements

    The proposal contained several amplified notice and disclosure 
requirements, some of which were made applicable to all plans, and some 
of which applied specifically only to group health plans. Among such 
general new notice requirements was a provision requiring all plans to 
provide a specific notice, within 5 days (24 hours in the case of a 
claim involving urgent care), in any instance in which a participant or 
beneficiary made a request for a benefit, but failed to follow the 
plan's procedures for filing a claim.\22\ The mandated notice for 
incorrectly filed claims would explain that the request for a benefit 
did not constitute a claim under the terms of the plan and would 
further describe the plan's procedures for filing a claim. The 
Department's intention in proposing this new notice requirement was to 
ensure that plans did not ignore, either deliberately or inadvertently, 
any reasonable, albeit unsuccessful, attempt by claimants or their 
representatives to make a claim.
---------------------------------------------------------------------------

    \22\ The proposal listed a number of individuals and parties 
related to the plan and the employer, communication with whom would 
trigger the notice requirement.
---------------------------------------------------------------------------

    Many commenters representing employers, plans, and plan 
administrators objected to this provision, asserting that plans would 
have difficulty determining whether a communication with the plan was a 
``request for a benefit'' or a simple inquiry about the plan's 
provisions, unrelated to any specific benefit claim. These commenters 
argued that the notice requirement would be unduly expensive to 
implement because of the large number of plan-related individuals 
contact with whom could trigger the requirement. Commenters further 
argued that this notice requirement was superfluous since a plan's 
summary plan description (SPD) should clearly describe the requirements 
for filing a claim for benefits, and it can be assumed that claimants 
read and understand their plan's SPD.
    After reconsidering this proposal in light of the comments, the 
Department has determined to clarify this notice requirement to 
eliminate uncertainty as to its meaning and to narrow its application 
to better target the perceived problem. Under subparagraph (c)(1)(i), 
the requirement to provide a notice informing claimants that they have 
failed to properly file a claim will arise only if a request is made 
that involves a pre-service claim. Further, under subparagraph 
(c)(1)(ii), the notice requirement will be triggered only by a 
communication from a claimant or a health care professional 
representing the claimant that specifies the identity of the claimant, 
a specific medical condition or symptom, and a specific treatment, 
service, or product for which approval is requested, and the 
communication is received by a person or organizational unit 
customarily responsible for handling benefit matters. In order to 
reduce the asserted costs of compliance, the regulation provides that 
the notice may be provided orally to the claimant or health care 
professional (as appropriate), unless the claimant or representative 
requests a written notice. Restricting the scope of this notice 
requirement in this manner will reduce the compliance difficulties 
posited by the commenters, while still requiring notice of a defective 
filing to be given in those instances most critical to claimants.
    The proposal clarified the requirement under the 1977 regulation 
that a plan's claims procedures must be described in the SPD of the 
plan. The proposal specified that the description in the SPD must 
include all procedures for filing claim forms, providing notification 
of benefit determinations, and reviewing denied claims. With respect to 
group health plans, the proposal would require the SPD description to 
include any procedures for obtaining preauthorizations, approvals, or 
utilization review decisions.
    As a concomitant to this basic disclosure, the proposal further 
clarified that a notice of adverse benefit determination (at both the 
initial level and on review) \23\ must identify

[[Page 70251]]

specifically any internal rules, guidelines, protocols, etc. that 
served as a basis for the adverse benefit determination.\24\ If such 
rules had served as a basis for the decision either at the initial 
level or on review, the proposal further required that a copy of the 
protocol be provided to the claimant upon request.
---------------------------------------------------------------------------

    \23\ The proposal required written or electronic notice to be 
provided with respect to grants of benefits as well as denials. In 
view of the negative comments that the Department received regarding 
this requirement, the regulation requires written or electronic 
notice of benefit grants to be provided only in the case of claims 
involving urgent care and pre-service claims.
    \24\ It is the Department's view that such internal rules, 
guidelines, protocols, etc. are ``instruments under which the plan 
is established or operated'' within the meaning of section 104(b) of 
the Act and as such must be furnished to participants and 
beneficiaries upon written request. See Advisory Opinion 96-14A 
(July 31, 1996).
---------------------------------------------------------------------------

    While there was little comment on the proposal's provision for 
disclosure in the SPD of the plan's claims procedures, some commenters 
representing plan administrators and health insurance or services 
provider organizations objected to the requirements regarding 
identification and furnishing of a utilized internal rule or protocol. 
In the view of these commenters, these requirements would impose 
excessive burdens on administration of group health plans and provide 
little in the way of useful information to claimants. While the 
testimony and comments on this issue were in some conflict,\25\ a large 
number of commenters asserted that it would be expensive and difficult 
to specify in the notice of adverse benefit determination the 
individual protocol on which the decision was based because of the 
computerized nature of the determination processes. In addition, these 
commenters argued that specification of the protocol would not provide 
the claimant with useful information about why their benefit claim had 
been denied. These commenters also worried that the language of the 
proposal could be read to require plans routinely to furnish a copy of 
the specific protocol itself as part of the notice of adverse benefit 
determination. Because protocols can be of some length and complexity, 
providing these documents routinely with any adverse benefit 
determination could impose a large burden on the administration of 
group health plans.
---------------------------------------------------------------------------

    \25\ Many commenters representing claimants affirmed the 
importance of having access to internal rules or protocols used in 
decisionmaking. Other testimony, in particular from insurers, 
indicated that specifically utilized protocols are currently 
available and furnished to claimants upon request. Other testimony 
indicated that such protocols can be obtained routinely only through 
discovery processes in litigation.
---------------------------------------------------------------------------

    The Department continues to believe that claimants have a need to 
know the specific basis for an adverse benefit determination. Where a 
plan utilizes a specific internal rule or protocol, understanding the 
terms of the specific protocol may be crucial to a claimant's ability 
to successfully contest the denial on review. Therefore, subparagraph 
(g)(1)(v) generally retains the requirements that a plan inform a 
claimant that a protocol has been relied upon and furnish the protocol 
upon request. To reduce the potential burden of complying with these 
requirements, the regulation makes clear that the notice of adverse 
benefit determination may either set forth the protocol on which it was 
based or a statement that a protocol was relied upon and that a copy of 
such protocol will be made available to the claimant free of charge 
upon request.
    Several commenters requested that the Department amplify the 
disclosure requirements for adverse benefit determinations to require 
plans to provide an adequate explanation of the reason for an adverse 
benefit determination based on medical judgment especially when 
invoking plan exclusions based on ``medical necessity'' or similar 
broad terms. Commenters asserted that the reasons given in these 
circumstances were frequently ``cursory'' and ``vague and open ended.'' 
One commenter stated that when claimants receive such conclusory 
denials unsupported by scientific or clinical evidence, ``they are in 
the untenable position of having to refute arguments they are not 
allowed to understand.''
    The Department agrees that claimants would benefit from receiving 
fuller explanations when a claim is denied because the care is not 
medically necessary, is experimental in nature, or some similar plan 
exclusion or limit is applied. Consequently, the Department is adding 
new subparagraphs (g)(1)(v)(B) and (j)(5)(ii) to require that the 
notification of an adverse benefit determination (at both the initial 
level and on review) based on medical necessity, experimental 
treatment, or other similar exclusion or limit either explain the 
scientific or clinical judgment of the plan in applying the terms of 
the plan to the claimant's medical circumstances, or include a 
statement that such an explanation will be provided free of charge to 
the claimant upon request. In response to comments, the Department is 
also adding subparagraph (j)(5)(iii) to require inclusion of a 
statement notifying claimants that they can seek additional information 
about potential alternative dispute resolution methods.
    The preamble to the proposal discussed the Department's interest in 
providing claimants sufficient access to information that could aid 
them in determining whether a plan and its agents had acted fairly and 
consistently in denying their claims. In particular, the Department was 
concerned about claimants' difficulties in obtaining sufficient 
information to determine whether a particular claims decision comported 
with prior decisions on similar issues and whether a claimant would be 
justified in challenging a decision as defective under the Act on that 
basis. In this regard, the Department stated in the preamble that it 
was considering requiring plans to disclose, after an adverse benefit 
determination on review, documents and records relating to previous 
claims involving the same diagnosis and treatment decided by the plan 
within the five years prior to the adverse benefit determination (up to 
a maximum of 50 such claims). The disclosure obligation would have been 
limited to cases in which a claimant commences litigation over the 
benefit determination and would have been further limited, with respect 
to insured benefits, to claims involving the same plan or insurance 
contract language.
    This proposal was opposed by many commenters representing 
employers, plans, plan administrators, and insurers. They asserted that 
such a requirement would be prohibitively expensive to implement and 
would provide claimants with little information of any benefit. They 
also asserted that requiring this disclosure would be beyond the 
Department's regulatory authority under section 503 of the Act.
    The Department has seriously considered the objections raised to 
this suggestion in the preamble of the proposal and has altered its 
approach to the problem in order to reduce the potential burden on 
plans and avoid any suggestion of possible interference with the civil 
discovery processes in litigation. Subparagraph (b)(5) provides, as a 
general requirement for reasonable claims procedures for all plans, 
that a plan's claims procedures must include administrative safeguards 
and processes designed to ensure and to verify that benefit claims 
determinations are made in accordance with governing plan documents and 
that, where appropriate, the plan provisions have been applied 
consistently with respect to similarly situated claimants. Courts have 
long recognized that such consistency is required even under the most 
deferential judicial standard of review. \26\ It is the view of the

[[Page 70252]]

Department that this provision does no more than to require a plan to 
formalize, as a part of its claims procedures, the administrative 
processes that it must already have established and be using in 
operating the plan in order to satisfy basic fiduciary standards of 
conduct under the Act. The Department has not articulated specific 
requirements as to how such processes should be designed, believing 
that plans should have flexibility and are capable of monitoring their 
internal decisionmaking effectively and efficiently.
---------------------------------------------------------------------------

    \26\ See, e.g., Lutheran Medical Center v. Contractors, 
Laborers, Teamsters and Engineers Health and Welfare Plan, 25 F.3d 
616, 620-22 (8th Cir. 1994); De Nobel v. Vitro Corp., 885 F.2d 1180, 
1188 (4th Cir. 1989).
---------------------------------------------------------------------------

    As a concomitant to this general requirement, subparagraph 
(m)(8)(iii) further provides that, among the information that a plan 
must provide a claimant upon request after receiving an adverse benefit 
determination, is any information that the plan has generated or 
obtained in the process of ensuring and verifying that, in making the 
particular determination, the plan complied with its own administrative 
processes and safeguards that ensure and verify appropriately 
consistent decisionmaking in accordance with the plan's terms. It is 
not the Department's intention in this regard to require plans to 
artificially create new systems for the sole purpose of generating 
documents that can be handed to a claimant whose claim is denied in 
order to satisfy this disclosure requirement. The Department 
anticipates that plans generally will have systems for ensuring and 
verifying consistent decisionmaking that may or may not result in there 
being disclosable documents or information pertaining to an individual 
claims decision.
    The proposal attempted to clarify the 1977 regulation's requirement 
that claimants be afforded access, after a benefit denial, to 
``pertinent documents.'' Based on its conclusion from RFI comments that 
there was substantial public confusion concerning the meaning of the 
term ``pertinent,'' the Department proposed to replace that term with 
the term ``relevant.'' The proposal further stated that a document 
would be considered ``relevant'' to a claim whether or not such 
document was in fact relied upon by the plan in making the adverse 
benefit determination. As stated in the preamble to the proposal, the 
Department believed that these changes would make clear that claimants 
must be provided access to all of the information present in the claims 
record, whether or not that information was relied upon by the plan in 
denying the claim and whether or not that information was favorable to 
the claimant. Such full disclosure, which is what the 1977 regulation 
contemplated, is necessary to enable claimants to understand the record 
on which the decision was made and to assess whether a further appeal 
would be justified.
    Commenters representing plans, employers, insurers, and plan 
administrators expressed dissatisfaction with this attempted 
clarification.\27\ The main source of their objection was that the 
proposal failed to define adequately the scope of the intended 
disclosure. In their view, the use of the term ``relevant,'' 
particularly when coupled with the modifier that information need not 
have been relied upon to be relevant, would impose an unlimited burden 
on plans to search their records for any information relevant in the 
broadest sense to the claim, whether it was in any way related to the 
actual claims process. These commenters feared that plans would face 
added costs of keeping track of, and disclosing, a large amount of 
information generally accessible to the decisionmaker, without regard 
to whether such information was in any way utilized in the 
decisionmaking process.
---------------------------------------------------------------------------

    \27\ Representatives of claimants, however, strongly supported 
this clarification, complaining that plan officials occasionally 
seek to withhold information that would tend to support granting the 
claim.
---------------------------------------------------------------------------

    The regulation responds to this concern. While retaining the term 
``relevant'' in subparagraph (j)(3) to describe the documents and other 
information that must be made available to a claimant free of charge 
upon request after receiving an adverse benefit determination, the 
regulation provides a specific definition of that term. Subparagraph 
(m)(8) states that a document, record, or other information is 
considered ``relevant'' if it was relied upon in making the 
determination, or was submitted to the plan, considered by the plan, or 
generated in the course of making the benefit determination, without 
regard to whether such document, record, or other information was 
relied upon in making the determination. Subparagraph (m)(8) further 
provides that the claimant should receive any information demonstrating 
that, in making the adverse benefit determination, the plan complied 
with its own processes for ensuring appropriate decisionmaking and 
consistency. Additionally with respect to group health and disability 
claims under subparagraph (m)(8), a document, record, or other 
information is considered ``relevant'' if it constitutes a statement of 
policy or guidance with respect to the plan concerning the denied 
treatment option or benefit for that claimant's diagnosis, without 
regard to whether such advice or statement was relied upon in making 
the determination. The Department believes that this specification of 
the scope of the required disclosure of ``relevant'' documents will 
serve the interests of both claimants and plans by providing clarity as 
to plans' disclosure obligations, while providing claimants with 
adequate access to the information necessary to determine whether to 
pursue further appeal.

Standards of Review

    The proposal adopted new standards for a full and fair appeal of an 
adverse benefit determination. The proposal required that the review be 
conducted by an appropriate named fiduciary who is neither the party 
who made the initial adverse determination, nor the subordinate of such 
party; that the review not afford deference to the initial adverse 
benefit determination; and that the review take into account all 
comments, documents, records, and other information submitted by the 
claimant, without regard to whether such information was previously 
submitted or relied upon in the initial determination. In addition, 
with respect to group health claims, the proposal required fiduciaries 
reviewing any determination based on a medical judgment to consult with 
a health care professional with appropriate training and experience in 
the field of medicine involved in the medical judgment. Such health 
care professional was required to be ``independent'' of any health care 
professional consulted in making the initial adverse benefit 
determination.
    Most commenters considering this aspect of the proposal strongly 
supported these reforms, agreeing that there is a need to ensure that 
claims decisions are reviewed by a party with sufficient independence 
to provide a full and fair review. A significant number of commenters 
urged the Department to extend the requirement of consultation with an 
appropriate health care professional to the review of decisions on 
disability claims. Some commenters, however, voiced concern regarding 
the additional cost that would be imposed by the requirement of a 
separate decisionmaker and consultation with health care professionals. 
In particular, it was argued that small employers, whose plans, it was 
asserted, generally are administered solely by a single individual who 
is either the owner of the business or the general manager of the 
business, would be caused

[[Page 70253]]

substantial additional expense to obtain the independent review. Some 
commenters further urged the Department to clarify the type of 
``independence'' that would satisfy the Department's requirement for 
the health care professional who must be consulted on review.
    Subparagraphs (h)(3) and (4) generally retain the proposed 
standards for the conduct of reviews of adverse benefit determinations 
with respect to group health plans and plans providing disability 
benefits. By limiting the scope of this reform to group health plans 
and plans providing disability benefits, the regulation greatly 
reduces, the Department believes, the cost implications for small 
employers. In addition, the regulation requires consultation with an 
appropriately qualified health care professional on review of denied 
disability claims involving medical judgments. Subparagraph (h)(3)(v) 
further clarifies that the standards for ``independence'' of a health 
care professional who is consulted in connection with a review are the 
same as those that apply to the appropriate named fiduciary under 
subparagraph (h)(3)(ii), that is, the individual who is consulted must 
be an individual different from, and not subordinate to, any individual 
who was consulted in connection with the initial decision. The 
Department believes that these changes will accommodate the interests 
of benefit claimants in having a full opportunity for an adequate 
review and the needs of employers and plans to limit the costs of 
providing such a review.

Permitted Levels of Review

    The proposal provided that a plan may require only one appeal of a 
denied claim. This limitation was intended to assure that claimants 
whose claims are denied have the ability to take their claims to court 
without undue delay, as the Department believes was intended by section 
503 of the Act. Nothing in the proposal, however, was intended to 
preclude a plan from offering, or a claimant from agreeing to utilize, 
additional voluntary administrative appeals processes. The proposal 
further banned plans from requiring that denied claims be submitted to 
arbitration or that any costs be imposed on a claimant as a condition 
for filing or appealing a claim.
    These aspects of the proposal were opposed by many commenters 
representing employers, plans, plan administrators, benefit providers, 
and insurers. These commenters asserted that it is common practice 
among a large number of plans to provide more than one level of appeal 
for a denied claim and that such a practice generally benefits 
claimants by providing a less costly alternative to taking a denied 
claim to court. Such a practice is particularly common, it appears, 
with respect to insured benefits, where initial decisions and one or 
more appeals are handled within the insurer, and appeals at additional 
levels are to the plan or employer. Commenters representing claimants, 
on the other hand, supported the limitation on the number of mandatory 
appeals, arguing that multiple levels of administrative appeal often 
hamper and frustrate claimants, causing them to abandon claims. Such 
multiple levels often serve no actual purpose, these commenters assert, 
and provide no independent review.
    The Department continues to believe that allowing plans to impose 
an unlimited number of levels of administrative appeals of denied 
claims does not serve the best interests of claimants. However, it has 
concluded that the strict limitation of appeals to a single level may 
be unnecessarily limiting. In the interests of providing plans some 
flexibility in creating claims processes, and to accommodate what 
appears to be a common practice, subparagraph (c)(2) permits two levels 
of mandatory appeal of an adverse benefit determination. \28\ In order 
to promote speedy resolution of group health claims, however, 
subparagraph (i)(2) limits the overall time period within which plans 
must decide appeals of denied claims. \29\
---------------------------------------------------------------------------

    \28\ As with other aspects of the regulation's procedural 
reforms, this limit is imposed only with respect to group health 
plans and plans providing disability benefits. The Department 
solicits comments on whether this reform should be extended to other 
employee benefit plans.
    \29\ If a group health plan provides only one level of appeal, 
it may take up to 30 days to resolve an appeal of a pre-service 
claim denial; if it provides two levels of appeal, both levels must 
be concluded within that 30 days. For appeals of post-service claims 
denials, a plan with a single level of appeal may take up to 60 days 
to conclude that appeal; plans with two levels of appeal must 
complete both appeals within the same 60 days.
---------------------------------------------------------------------------

    With respect to the proposal's ban on arbitration, a significant 
number of commenters representing unions, \30\ multiemployer plans, and 
employers objected that this reform was contrary to the general 
approach of the Federal government, as expressed in the Federal 
Arbitration Act, to encourage the appropriate use of alternative 
dispute resolution. In addition, these commenters suggested that 
arbitration generally provides a useful and less costly means of 
resolving benefit disputes than litigation. An equal number of 
commenters representing claimants, however, supported the proposed ban 
on mandatory arbitration, asserting that, as applied to claims 
disputes, arbitration is inherently unfair because of the difference in 
status between the typical benefit claimant and the typical plan or 
employer. Commenters also suggested that the practice of requiring plan 
participants to agree to arbitrate all benefits disputes as a condition 
of participation in the plan is inherently unfair due to the inequality 
in bargaining power between employers and employees. Further, they 
argued that the traditional methods of cost-sharing involved in 
commercial arbitration, in which each party pays half of the costs of 
the arbitration, may be prohibitively expensive for most claimants.
---------------------------------------------------------------------------

    \30\ The issue of the 1977 regulation's special treatment of 
grievance procedures, including arbitration, adopted by collectively 
bargained, single employer plans through the collective bargaining 
agreement, is discussed separately below.
---------------------------------------------------------------------------

    After careful deliberation on the issues raised by the commenters 
regarding the use of alternative dispute resolution for benefit claims 
disputes, the Department has revised its approach to permit plans, 
pursuant to subparagraph (c)(4), to require some limited forms of 
mandatory arbitration. In addition, in subparagraph (c)(3), the 
Department addresses more generally the subject of plans' offering 
additional, voluntary processes, including voluntary binding 
arbitration, after conclusion of the required claims review process. By 
retaining the complete prohibition on imposing costs on claimants in 
connection with filing or appealing a claim, however, subparagraph 
(b)(3) makes clear that any process used by a plan to resolve a claim 
dispute, including arbitration, must be conducted without imposing fees 
on the claimant. These restrictions apply, under the regulation, only 
to group health plans and plans providing disability benefits.
    With respect to mandatory arbitration used as part of the claims 
process, subparagraph (c)(4) provides that a plan may require 
arbitration as one (or both) of the permitted levels of review of a 
denied claim, provided, first, that the arbitration is conducted in 
accordance with the requirements of the regulation applicable to such 
appeals and, second, that the claimant is not thereby precluded from 
challenging the arbitrator's decision, including pursuing the claim in 
court pursuant to section 502(a) of the Act. With respect to voluntary 
additional levels of appeal offered by a plan, including voluntary 
binding arbitration or other methods of dispute resolution, 
subparagraph (c)(3)(iii) provides that a plan may offer

[[Page 70254]]

such voluntary additional levels of appeal to a claimant as a method of 
resolving a benefit dispute only after the dispute has arisen. 
Subparagraph (c)(3)(iv) further requires the plan to provide the 
claimant with sufficient information about the voluntary process to 
permit the claimant to make an informed judgment about whether to 
submit the dispute to the voluntary process; this requirement includes 
information about the applicable rules, the process for selecting the 
decisionmaker, and the circumstances, if any, that may affect the 
impartiality of the decisionmaker, such as any financial or personal 
interests in the result or any past or present relationship with any 
party to the review process. The plan must also make clear to the 
claimant that the decision as to whether or not to submit a benefit 
dispute to the voluntary level of appeal will have no effect on the 
claimant's rights to any other benefits under the plan.\31\ In 
addition, subparagraph (c)(3) includes two protections intended to make 
sure that additional appeal levels offered by a plan remain truly 
voluntary. First, subparagraph (c)(3)(i) requires any plan offering a 
voluntary appeal to agree not to later assert a defense of failure to 
exhaust available administrative remedies against a claimant who 
chooses not to make use of the voluntary appeal process. Second, 
subparagraph (c)(3)(ii) requires such plans to agree that any statute 
of limitations or other defense based on timeliness is tolled while the 
dispute is under submission to the voluntary process. The Department 
considers these protections to be essential to procedural fairness for 
a claimant who is offered or pursues voluntary administrative processes 
as an alternative to pursuing a claim in court.
---------------------------------------------------------------------------

    \31\ In this regard, the regulation requires that any plan 
intending to offer an additional voluntary level of appeal must 
include, in the notice of adverse benefit determination on review, a 
statement describing the voluntary appeal procedure and the 
claimant's right to obtain the information about the process 
described in subparagraph (c)(3)(iv) free of charge before deciding 
to submit the claim to the voluntary level of appeal.
---------------------------------------------------------------------------

Preemption of State Law

    Section 514(a) of the Act provides that the provisions of the Act 
generally supersede State laws ``insofar as they may now or hereafter 
relate to any employee benefit plan [covered under the Act].'' Section 
514(b)(2)(A), however, saves from the general preemption of section 
514(a) State laws that regulate insurance, banking, or securities. The 
scope and meaning of the general preemption provision of section 514(a) 
and the savings clause contained in section 514(b)(2)(A) have been the 
subject of controversy since enactment of the Act.\32\ The proposal did 
not address section 514 of the Act or in any way propose to regulate 
the relationship between the proposed minimum standards for benefit 
claims procedures of employee benefit plans and State law that might 
affect or relate to such standards.
---------------------------------------------------------------------------

    \32\ See, e.g., Pegram v. Herdrich, 120 S. Ct. 2143 (2000); Unum 
Life Ins. Co. v. Ward, 526 U.S. 358, (1999); Boggs v. Boggs, 520 
U.S. 833 (1997); N.Y. State Conf. of Blue Cross & Blue Shield Plans 
v. Travelers Ins. Co., 514 U.S. 645 (1995); John Hancock Mut. Life 
Ins. Co. v. Harris Trust & Savings Bank, 510 U.S. 86 (1993).
---------------------------------------------------------------------------

    Many commenters, including several State insurance commissioners, 
urged the Department to consider addressing the question of the 
preemptive effect of a final regulation on State law. Such commenters 
suggested that a failure to do so would exacerbate existing confusion 
about the possible preemption of State law efforts seeking to improve 
the quality of health care, especially those that seek to protect 
patients' rights by providing State-mandated systems for the review of 
disputes between patients and health care providers or insurers. Such 
State law, the commenters argued, may be considered to be preempted to 
the extent that the State-law requirements differ from or conflict with 
the requirements of this regulation. Some commenters urged the 
Department to provide in this regulation for the complete preemption of 
State law that provides procedures for the resolution of benefit claims 
disputes. Others urged the Department to model the extent of the 
regulation's preemptive effect on section 731(a) of the Act, which 
provides special, more limited preemption with respect to the 
provisions of the Part 7 of the Act, concerning portability, 
renewability, nondiscrimination, and other rights relating to group 
health plans. Overall, a large number of commenters agreed that there 
would be benefit to the public in general in the Department's 
clarifying its views as to the preemptive effect of the regulatory 
standards.
    In response to these comments, the Department has added to the 
regulation a new paragraph (k) providing interpretive guidance on the 
question of the relationship of the substantive regulatory standards to 
State law. Subparagraph (k)(1) states that the regulatory standards 
should not be read to supersede State law regulating insurance (even 
when such State law prescribes standards for claims processes and 
internal review of claims) unless such State law prevents the 
application of a requirement of the regulation. For example, a State 
may have a law requiring insurers to allow oral appeals of all claims 
or to decide claims within shorter periods of time. These laws would 
not prevent the application of the regulation because plans could 
comply with both the regulation and the State laws.
    Subparagraph (k)(2)(i) explains that a State law regulating 
insurance should not be considered to prevent the application of a 
requirement of the regulation merely because the State law establishes 
a review procedure to evaluate and resolve disputes involving adverse 
benefit determinations under group health plans, so long as the review 
procedure is conducted by parties other than the insurer, the plan, the 
plan's fiduciaries, the employer, or any employee or agent of any of 
the foregoing. Subparagraph (k)(2)(ii) further explains that, in the 
Department's view, the types of procedures described in subparagraph 
(k)(2)(i) are not part of the claims procedures contemplated by section 
503 of the Act, but are ``external reviews'' that are beyond the scope 
of the regulation. As a result, while such procedures as established by 
State law are not preempted by the regulation, under subparagraph 
(k)(2)(ii), claimants cannot be required to submit their claims to such 
procedures in order to be entitled to file suit under section 502(a) of 
the Act.\33\ There is nothing in the regulation, however, that would 
preclude a claimant from voluntarily submitting a claim for review 
pursuant to a State-provided external review process.
---------------------------------------------------------------------------

    \33\ It is the view of the Department that claimants would be 
entitled to have a claim dispute adjudicated in court pursuant to 
section 502(a) of the Act after exhausting the plan's claims 
procedures, but without regard to State law procedures described in 
subparagraph (k)(2), regardless of whether such State law procedures 
are mandatory pursuant to State law.
---------------------------------------------------------------------------

    By providing that only State insurance law that does not prevent 
the application of the regulatory standards will be saved from 
preemption, subparagraph (k)(1) preserves the procedural protections 
required by the regulation, which the Department finds essential to the 
full and fair review mandated by section 503 of the Act,\34\ but 
recognizes that States may impose non-conflicting standards for 
internal processes. Subparagraph (k)(2) of the

[[Page 70255]]

regulation clarifies the extent to which State law reform efforts 
regarding patients' rights may be affected by the preemption provided 
for in paragraph (k)(1). Subparagraph (k)(2) articulates the 
Department's view that procedural remedies established by State law 
that are ``external'' to the plan will not be preempted by the 
regulation. In this regard, subparagraph (k)(2)(i) defines the 
processes that will be considered ``external'' to the plan by reference 
to the party who is responsible for conducting the procedures. It is 
the Department's view that procedures that are conducted by parties 
other than the insurer providing benefits under the plan, the plan 
itself, the plan's fiduciaries, or the employer sponsoring the plan (or 
by any employee or agent of any of these parties) \35\ are procedures 
sufficiently independent of the plan to be considered outside the scope 
of the process required by section 503 of the Act.
---------------------------------------------------------------------------

    \34\ Nothing in this regulation should be construed to limit a 
claimant's ability to pursue any state law remedy that may be 
available as a result of a medical decision, even where such 
decision implicates eligibility for benefits under a plan. See 
Pegram v. Herdrich, 120 S. Ct. 2143 (2000).
    \35\ Whether a party conducting a review procedure should be 
considered to act as the ``agent'' of a party related to the plan 
will depend on the independent authority with which the party is 
vested. That an insurer is required, under State law, to provide 
funds to pay for a review will not, in and of itself, cause the 
party who conducts the review to be considered an ``agent'' of the 
insurer.
---------------------------------------------------------------------------

Other Issues

    The regulation makes a number of additional changes to the proposal 
in response to comments. Other aspects of the proposal have been 
retained unchanged, despite comments, in light of the Department's 
conclusions as to their importance. The following briefly summarizes 
these other issues.
    The proposal eliminated a provision in the 1977 regulation that 
seemed to imply that representatives of a claimant must be ``duly 
authorized'' to act on behalf of the claimant. This change reflected 
the perception of the Department that no single Federal standard 
governs the authorization of a representative and that claimants should 
be able to freely name representatives to act on their behalf. Many 
commenters representing employers and plans responded that elimination 
of the concept of an ``authorized'' representative could be read to 
require plans to accept anyone who claimed to be a representative of a 
claimant, without permitting plans to establish reasonable procedures 
to verify that status. This could prevent plans from protecting the 
privacy or other rights of claimants. The regulation responds to this 
concern by reinstituting a concept of authorization with respect to 
claimants' representatives.\36\ Specifically, subparagraph (b)(4) 
provides that a plan's claims procedures may not preclude an authorized 
representative (including a health care provider) from acting on behalf 
of a claimant and further provides that a plan may establish reasonable 
procedures for verifying that an individual has been authorized to act 
on behalf of a claimant. However, subparagraph (b)(4) requires a group 
health plan to recognize a health care professional with knowledge of a 
claimant's medical condition as the claimant's representative in 
connection with an urgent care claim.
---------------------------------------------------------------------------

    \36\ This provision, which is a clarification of current law, 
applies to all employee benefit plans covered under the Act.
---------------------------------------------------------------------------

    The proposal provided that a ``claim'' is any request for a plan 
benefit or benefits, made by a claimant or by a representative of a 
claimant, that complies with a plan's reasonable procedure for making 
benefit claims.\37\ It further specified that, in the case of a group 
health plan, a request for a benefit includes a request for a coverage 
determination, for preauthorization or approval of a plan benefit, or 
for a utilization review determination in accordance with the terms of 
the plan. One commenter argued that the reference to ``coverage 
determination'' in this provision could be read to include 
determinations of eligibility under a group health plan, and that such 
determinations should not be treated as claims. The Department agrees 
that all requests for determinations of eligibility under a group 
health plan should not be required to be treated as claims for benefits 
for purposes of ERISA's claims procedure under section 503.\38\ On the 
other hand, the Department also believes that where a claim for 
benefits is made in accordance with reasonable procedures and the claim 
is denied because the claimant is not eligible for benefits under the 
terms of the plan, the claimant should be afforded the right to appeal 
that determination in accordance with the claims procedures of the plan 
and this regulation.\39\ In this regard, the reference to ``coverage 
determination'' has been eliminated from the description of a claim for 
benefits in paragraph (e). In an effort to clarify the application of 
the regulation to benefit claim denials based on eligibility, the 
Department has amended the definition of ``adverse benefit 
determination'' in subparagraph (m)(4) to include denials of benefits 
based on a determination of a claimant's eligibility to participate in 
the plan. The Department, nonetheless, is interested in receiving 
public comments concerning whether, and to what extent, questions to a 
plan regarding eligibility should be governed by a prescribed process, 
with timing and notice standards.
---------------------------------------------------------------------------

    \37\ In this regard, the Department notes that all such claims 
for benefits are covered by this regulation, regardless of the 
reason or reasons a plan may have for denying the claim. For 
example, a claim for a health care service, even a health care 
service that is specifically excluded by the plan's governing 
documents, would be covered by the regulation.
    \38\ The Department notes that persons who need to establish 
their status as participants or beneficiaries under a plan have a 
number of ways to do so without implicating the claims procedures. 
Eligibility information is generally provided through the plan 
administrator, the summary plan description, and plan documents. If 
a person is unable to determine his or her status under the plan or 
if there is disagreement about a person's status under the plan, 
section 502(a)(1)(B) of the Act provides that participants and 
beneficiaries may bring a civil action to clarify their rights to 
future benefits under the terms of the plan.
    \39\ Sections 206(d)(3) and 609(a)(5) of the Act mandate certain 
specific plan procedures for determining the qualified status of 
domestic relations orders and medical child support orders, 
respectively, and for administering qualified domestic relations 
orders (QDROs) and qualified medical child support orders (QMCSOs). 
It is the view of the Department that issues pertaining to such 
orders must be resolved pursuant to the procedures described in 
section 206(d)(3) or 609(a)(5) of the Act, as appropriate, and not 
the claims procedures governed by section 503 of the Act and the 
current regulation.
---------------------------------------------------------------------------

    The proposal contained a provision setting forth the Department's 
view of the consequences that ensue when a plan fails to provide 
procedures that meet the requirements of section 503 as set forth in 
regulations. The proposal stated that if a plan fails to provide 
processes that meet the regulatory minimum standards, the claimant is 
deemed to have exhausted the available administrative remedies and is 
free to pursue the remedies available under section 502(a) of the Act 
on the basis that the plan has failed to provide a reasonable claims 
procedure that would yield a decision on the merits of the claim. The 
Department's intentions in including this provision in the proposal 
were to clarify that the procedural minimums of the regulation are 
essential to procedural fairness and that a decision made in the 
absence of the mandated procedural protections should not be entitled 
to any judicial deference.
    Many commenters representing employers and plans argued that this 
provision would impose unnecessarily harsh consequences on plans that 
substantially fulfill the requirements of the regulation, but fall 
short in minor respects. These commenters suggested that the Department 
adopt instead a standard of good faith compliance as the

[[Page 70256]]

measure for requiring administrative exhaustion. Alternatively, they 
suggested that the Department recognize the judicial doctrine under 
which exhaustion is required unless the administrative processes impose 
actual harm on the claimant.
    Upon consideration, the Department has determined to retain this 
provision in paragraph (l). Inasmuch as the regulation makes 
substantial revisions in the severity of the standards imposed on 
plans, we believe that plans should be held to the articulated 
standards as representing the minimum procedural regularity that 
warrants imposing an exhaustion requirement on claimants. In the view 
of the Department, the standards in the regulation represent essential 
aspects of the process to which a claimant should be entitled under 
section 503 of the Act. A plan's failure to provide procedures 
consistent with these standards would effectively deny a claimant 
access to the administrative review process mandated by the Act. 
Claimants should not be required to continue to pursue claims through 
an administrative process that does not comply with the law. At a 
minimum, claimants denied access to the statutory administrative review 
process should be entitled to take that claim to a court under section 
502(a) of the Act for a full and fair hearing on the merits of the 
claim. Further, the Department believes that it is unlikely that this 
provision, in and of itself, will result in an increase in benefit 
claims litigation. Given the limited remedies available in a suit under 
section 502(a) of the Act, claimants will have little incentive to 
invoke this provision unless they believe they will be unable to 
receive a fair consideration from the plan.
    The proposal eliminated several special provisions contained in the 
1977 regulations, including the special treatment provided for 
grievance procedures of collectively bargained, single-employer plans 
\40\ and for benefits provided through Federally qualified health 
maintenance organizations (``HMOs'').\41\ With respect to each of these 
special provisions, the Department requested comment on whether, in the 
interests of uniform treatment of benefit claims, these special 
treatments could be eliminated.
---------------------------------------------------------------------------

    \40\ The 1977 regulation provides that such collectively 
bargained plans may substitute, for the provisions of the 
regulation, a collectively bargained procedure that either provides 
for filing, initial disposition of claims, and grievance and 
arbitration of benefit claims, or provides only for grievance and 
arbitration of such claims.
    \41\ The 1977 regulation provides that plans that provide 
benefits through membership in a qualified HMO, as defined in 
section 1310(d) of the Public Service Act, 42 U.S.C. 300e-9(d), are 
deemed to satisfy the regulation with respect to such benefits if 
the HMO satisfies the requirements of section 1310 of the Public 
Service Act.
---------------------------------------------------------------------------

    Comments on these subjects were relatively sparse. With respect to 
the special HMO exception, the Department has determined to retain the 
proposal's elimination of the special treatment. With respect to 
treatment of collectively bargained, single-employer plans, the 
Department received a few comments from interested parties, arguing 
that elimination of the special treatment would interfere unduly with 
the collective bargaining process and citing the Department's policy, 
articulated in the preamble to the 1977 regulation,\42\ not to 
interfere with the operation of such agreements merely because they 
involve employee benefit plans. On review of the record, the Department 
has concluded that there is no reason to alter its policy position with 
regard to collective bargaining agreements that establish grievance 
procedures for single-employer collectively bargained plans and, 
accordingly, has determined to reinstate in subparagraph (b)(6) the 
special treatment provided in the 1977 regulation for such single-
employer, collectively bargained plans.
---------------------------------------------------------------------------

    \42\ See 42 FR 27426 (May 27, 1977).
---------------------------------------------------------------------------

    The proposal stated that the regulation, when finalized, would be 
applicable to plans on the later of the effective date of the final 
regulation or the first day of the plan year beginning on or after the 
effective date, with a delayed compliance date for collectively 
bargained plans. Commenters argued that these applicability dates would 
be too soon, delineating the significant changes that would be required 
to achieve compliance with the proposal's requirements, such as review 
of third party administrator relationships, revisions to vendor 
contracts, systems redesign, amendment of documents, and preparation of 
appropriate disclosures for participants and beneficiaries. Several of 
these commenters requested a period of twelve months between 
publication of the final regulation and its applicability to plans. 
Recognizing these concerns, the Department has determined to provide a 
more substantial period of time for orderly and deliberate compliance 
efforts. Therefore, the regulation provides that its provisions will 
apply to claims filed under a plan on or after January 1, 2002.

B. Economic Analysis Under Executive Order 12866

Overview

    In developing the regulation, the Department considered the 
potential economic effects of available alternative approaches. The 
regulation is crafted to maximize economic benefits net of costs. The 
Department believes that the regulation's benefits will substantially 
outweigh its costs.
    The regulation will have two major, direct effects: it will change 
the timing and outcomes of some health and disability claims decisions, 
and it will require affected plans to modify claims decision-making 
processes.
    The regulation will cause plans to promptly approve some valid 
claims that otherwise would have been denied. In economic terms, these 
changes in claims outcomes can be characterized as financial transfers 
that produce societal benefits. The cost to the plan of the services 
provided is offset by a benefit of equal financial value to the 
claimant, so the net cost to society is zero. The amount of the 
transfer cannot be estimated because there are no data on the number of 
valid claims that are denied today.
    At least two societal benefits will derive from the prompt approval 
of valid benefit claims. The first benefit will be improved health 
outcomes and financial security. Claimants will be assured access to 
needed health care when ill or injured and financial support when 
disabled. The second will be more efficient labor and insurance 
markets, which should facilitate more and better health and disability 
benefit coverage. Employers will be more able and inclined to provide 
these benefits if employees are confident that valid claims will be 
approved. These benefits generally cannot be quantified, but they are 
expected to be large.
    In estimating plans' cost to comply with the regulation, the 
Department considered the degree to which current claims handling 
practices conform to the regulation's requirements. Many claims are 
already handled in satisfaction of all or some applicable requirements, 
but assuring that all claims meet all the requirements will require at 
least some modifications to all plans' claims procedures. These 
modifications will entail one-time, ``start-up'' costs to establish the 
new processes, and ongoing costs to operate them.
    The Department anticipates that all health and disability benefit 
plans will incur some start-up cost. Start-up costs are estimated at 
$119 million in 2001. Most of that cost, $103 million, is attributable 
to health plans, while the remaining $16 million is attributable to 
disability plans. Health plan start-up costs amount to an estimated $37 
per plan and $0.75 per enrollee on average, while disability plan 
start-up costs are

[[Page 70257]]

estimated to average $9 per plan and $0.24 per enrollee. Since most 
claims administrators serve many plans so costs generally will be 
spread widely across plans.
    Ongoing costs will be incurred in connection with the subset of 
health and disability benefit claims that must be handled differently 
to satisfy the regulation's requirements. That subset will be small in 
connection with many of these requirements. Many claims are already 
handled in satisfaction of some requirements, such as the regulation's 
time frames for claims decisions, and many requirements apply only to a 
small subset of claims, such as urgent care claims or health benefit 
claims that are denied. Ongoing costs attributable to the regulation 
are estimated to be $399 million in 2002. Costs will fall over time 
with increased automation. Most of the ongoing cost, $379 million, is 
attributable to health benefit claims, while the remaining $21 million 
is attributable to disability benefit claims. Annual health plan costs 
amount to an average of $135 per plan. This is equivalent to $2.77 per 
enrollee on average, or approximately one-tenth of one percent of total 
plan premium. Disability plan ongoing costs average $12 per plan and 
$0.31 per enrollee. The cost to carry out any particular claims 
transaction in satisfaction of the regulation is likely to be low, but 
claims volume is high (1.4 billion health benefit claims per year), so 
aggregate costs are substantial.
    The single largest ongoing cost is attributable to the regulation's 
time frames for health claims decisions. The Department believes that 
under plans' current practices up to 1 percent of claims decisions are 
not made within the regulation's maximum time periods. Accelerating 
these 14 million decisions to comply with the regulation is estimated 
to cost $222 million in 2002.
    The economic costs of the regulation will be very small relative to 
the overall cost of providing and administering health and disability 
benefits. Health plans' ongoing cost of complying with the regulation 
will amount to just 0.1 percent of total plan expenditures. Costs of 
this relative magnitude are not expected to adversely affect employers' 
propensity to offer health and disability benefits.
    The regulation does not substantially change the standards 
applicable to pension benefit claims or welfare benefit claims other 
than health and disability benefit claims. Its economic effects are 
therefore are limited to those associated with health and disability 
benefit claims.
    The ongoing cost estimates for the regulation, presented here, are 
higher than the Department's ongoing cost estimates for the proposed 
regulation, previously presented in that proposed regulation's 
preamble. This should not be interpreted as an indication that the 
regulation will carry greater cost than would the proposed regulation. 
On the contrary, the regulation relaxes certain provisions of the 
proposed regulation, such as time frames for certain health benefit 
claims, in ways that will reduce economic costs without sacrificing 
economic benefits. The Department's estimation of the cost of the 
regulation incorporates new information, not available for estimating 
the cost of the proposed regulation, including the extensive public 
comments received in response to the proposed regulation. Based on this 
new information, the Department revised its estimations of the cost of 
certain provisions.

Required Analyses of Economic Impact

1. Executive Order 12866
    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule: (1) having an annual effect on the economy of $100 million 
or more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs, or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, it has been 
determined that this action is consistent with the President's 
priorities as articulated in the President's February 20, 1998, 
directive to the Secretary of Labor to propose regulations that, among 
other things, implement the recommendations of the President's Advisory 
Commission on Consumer Protection and Quality in the Health Care 
Industry. In addition, the Department estimates that this regulatory 
action will have an economic impact exceeding $100 million in the year 
2002, the year in which this regulation will be applicable to benefit 
claims. The total cost of this regulation is expected to be $399 
million in 2002, and to decrease thereafter. This amount is 
approximately $2.77 per group health plan enrollee and $.31 per 
disability plan enrollee. Therefore, this notice is ``significant'' and 
subject to OMB review under Sections 3(f)(1) and 3(f)(4) of the 
Executive Order. Accordingly, the Department has undertaken to assess 
the costs and benefits of this regulatory action. The benefits of the 
regulation, although not quantifiable, are expected to exceed its cost. 
The Department's assessment of the regulation's costs and benefits is 
summarized above and detailed later in this preamble.
2. Regulatory Flexibility Act
    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Unless an agency certifies that a final rule will not have a 
significant economic impact on a substantial number of small entities, 
section 604 of the RFA requires the agency to present a final 
regulatory flexibility analysis describing the impact of the rule on 
small entities at the time of publication of the notice of final 
rulemaking. Small entities include small businesses, organizations, and 
governmental jurisdictions.
    For purposes of analysis under the RFA, PWBA continues to consider 
a small entity to be an employee benefit plan with fewer than 100 
participants. The basis of this definition is found in section 
104(a)(2) of ERISA, which permits the Secretary of Labor to prescribe 
simplified annual reports for pension plans that cover fewer than 100 
participants. Under section 104(a)(3), the Secretary may also provide 
for simplified annual reporting and disclosure if the statutory 
requirements of part 1 of Title I of ERISA would otherwise be 
inappropriate for welfare benefit plans.
    PWBA believes that assessing the impact of this rule on small plans 
is an appropriate substitute for evaluating the effect on small 
entities. Because this definition differs from the definition of small 
business based on size standards, which is promulgated by the Small 
Business Administration (SBA) (13 CFR 121.201) pursuant to the Small 
Business

[[Page 70258]]

Act (5 U.S.C. 631 et seq.), PWBA solicited comments on its use of its 
standard for evaluating the effects of the proposal on small entities.
    A few comments concerning the size standard were received from 
Congressional and administrative representatives. One commenter was 
concerned that prior to adopting the proposed size standard, the 
Department first consult with the Office of Advocacy of the Small 
Business Administration (SBA) and provide an opportunity for public 
comment. The Department consulted with the SBA regarding its proposed 
size standard prior to publication of the proposed regulation in the 
Federal Register. The SBA agreed with the proposed alternate size 
standard, indicating that Department provided a reasonable 
justification for its definition. No other comments were received with 
respect to this size standard.
    A summary of the final regulatory flexibility analysis based on the 
100 participant size standard is presented below.
    This regulation applies to all small employee benefit plans covered 
by ERISA. Employee benefit plans with fewer than 100 participants 
include 631,000 pension plans, 2.8 million health plans, 1.7 million 
disability plans, and 1.7 million other welfare plans. The regulation 
makes substantial changes to the 1977 regulation, which it replaces, 
only in its provisions applicable to health and disability plans.
    The final rule amends the Department's existing benefits claims 
regulation, which implements ERISA's claims and appeals requirements. 
Both ERISA and the existing regulation require plans to maintain 
procedures to determine claims and to review disputed claims 
determinations. The compliance requirements assumed for purposes of 
this regulation consist of new standards for claims and appeals 
procedures.
    The objective of this revised regulation is to improve the accuracy 
and timeliness of health and disability benefit claims and appeals 
determinations. Certain provisions pertaining to group health plans are 
being implemented in response to the President's February 20, 1998, 
directive to the Secretary of Labor to propose regulations that among 
other things implements the recommendations of the President's Advisory 
Commission on Consumer Protection and Quality in the Health Care 
Industry. An extensive list of authorities may be found in the 
Statutory Authority section, below.
    The Department believes that modifying and operating claims and 
appeals procedures in compliance with the regulation will require a 
combination of professional and clerical skills.
    The Department estimates that the added cost to small plans of 
complying with the regulation will amount to $94 million over the years 
2001 to 2002. This figure includes $24 million in one-time, start-up 
costs incurred in 2001 to revise health and disability benefit claims 
procedures and related systems, and $71 million in annual, ongoing 
added costs beginning in 2002 to handle health and disability benefit 
claims in compliance with the regulation's new standards. The annual 
ongoing cost in later years will change with claims volume and mix, and 
is expected to decrease with increasing automation in claims 
processing. The $71 million annual cost in 2002 averages $25 for each 
small health plan and $2.77 for each small health plan enrollee, and $1 
for each small disability plan and $0.15 for each small disability plan 
enrollee. By contrast, the ongoing cost to large plans in 2002 is 
estimated at $329 million, or $6,183 for each large health plan and 
$2.77 for each large health plan enrollee, and $481 for each large 
disability plan and $0.35 for each large disability plan enrollee.
    Start-up costs for small plans will be modest because a large 
majority of such plans purchase claims administration services from a 
relatively small number of insurers, HMOs, and other service providers. 
Service providers typically use a single claims processing system to 
service a large number of customers. Thus, the cost of revising and 
implementing a relatively small number of claims and appeals procedures 
is spread thinly over a far larger number of small plans. The 
regulation therefore is not expected to adversely affect small plans. 
Small and large plans and their respective enrollees will benefit 
equally from improved accuracy and timeliness in claims and appeals 
determinations.
    The Department's assessment of the regulation's costs and benefits 
is detailed later in this preamble.
3. Paperwork Reduction Act
    On September 9, 1998, the Pension and Welfare Benefits 
Administration published in the Federal Register (63 FR 48390), a 
Notice of Proposed Rulemaking concerning the Employee Retirement Income 
Security Act of 1974, Rules and Regulations for Administration and 
Enforcement; Claims Procedure, which included a request for comments on 
its information collection provisions. That proposal, if adopted as 
proposed, would have revised the information collection request (ICR) 
included in the existing regulation relating to the minimum 
requirements for benefits claims procedures for all employee benefit 
plans covered under Title I of ERISA. Also on September 9, 1998, the 
Department submitted the revised ICR to OMB for review and clearance 
under the Paperwork Reduction Act of 1995 (PRA 95), and solicited 
public comments concerning the revision of the information collection 
request (ICR) included in the proposal.
    OMB has approved the ICR included in the Final Regulation 
concerning the Employee Retirement Income Security Act of 1974, Rules 
and Regulations for Administration and Enforcement; Claims Procedure. A 
copy of the ICR, with applicable supporting documentation, may be 
obtained by contacting the Department of Labor, Departmental Clearance 
Officer, Ira Mills, at (202) 693-4122. (Not a toll-free number.)
    The burden estimates are summarized below. A more detailed 
description of the assumptions and methodology underlying these 
estimates will be found below in the analysis of costs.
    Agency: Pension and Welfare Benefits Administration.
    Title: Final Regulation, Employee Retirement Income Security Act of 
1974; Rules and Regulations for Administration and Enforcement; Claims 
Procedure (Final Revisions to Benefit Claims Procedure Regulation 
Pursuant to 29 CFR 2560.503-1).
    OMB Number: 1210-0053.
    Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions.
    Frequency of Response: On occasion.
    Total Respondents: 6.7 million (2001); 6.7 million (2002); 6.7 
million (2003).
    Total Responses: 118 million (2001); 118 million (2002); 118 
million (2003).
    Estimated Burden Hours: 316,000 (annual average 2001-2003).
    Estimated Annual Costs (Operating and Maintenance): $96 million 
(annual average 2001-2003).
    Persons are not required to respond to the revised information 
collection unless it displays a currently valid OMB control number.
4. Unfunded Mandates Reform Act
    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) (UMRA), as well as Executive Order 12875, this rule does not 
include any Federal mandate that may result in expenditures by State, 
local, or tribal governments, but does include mandates that may impose 
an annual

[[Page 70259]]

expenditure of $100 million or more on the private sector. The basis 
for this statement is described in the analysis of costs for purposes 
of Executive Order 12866 and the Regulatory Flexibility Act. Elsewhere 
in this preamble we have identified the authorizing legislation, 
presented cost-benefit analyses, described regulatory alternatives, and 
explained how we selected the least costly alternative as required by 
UMRA.
5. Small Business Regulatory Enforcement Fairness Act
    This final rule is subject to the provisions of the Small Business 
Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) 
(SBREFA), and is a major rule under SBREFA. Accordingly, this final 
rule has been transmitted to Congress and the Comptroller General for 
review.

C. Detailed Assessment of Economic Benefits and Costs of the 
Regulation

Economic Benefits of the Regulation

    The regulation will ensure the prompt approval of some health and 
disability claims that otherwise would have been wrongly denied. The 
approval of such claims can be characterized as financial transfers 
that will produce societal benefits. Quicker and more accurate health 
benefit claims determinations will serve to encourage the delivery of 
more beneficial health care. This in turn will improve health benefit 
claimants' health outcomes, productivity, and quality of life, and 
possibly avert the need for some later health care and associated 
expense. With respect to disability claims, timelier determinations 
will assure prompt replacement of lost income for successful claimants, 
thereby averting some financial hardships. Improved standards for 
handling health and disability claims will also increase enrollee 
confidence in their health and disability plans and thereby promote 
efficiency in group insurance and labor markets and employer 
sponsorship of health and disability plans.
    These benefits of the regulation generally are impossible to 
quantify because of limitations in available data and the absence of 
reliable measures for their assessment. The Department's analysis is 
therefore restricted to identifying the categories of these benefits 
and describing their origins and anticipated magnitude.
1. Group Health Claims
    The regulation updates ERISA's requirements for benefit claims 
processing in group health plans to address recent, dramatic changes in 
the delivery and financing of health care services. This will improve 
health care quality by averting harmful, inappropriate delays and 
denials of health benefits, thereby yielding substantial social 
benefits. It will also increase confidence in the employment-based 
health benefits system, increase transparency and enrollee access to 
information related to their benefit claims, and help streamline and 
make more uniform and predictable claims and appeals procedures. In so 
doing, it can help increase the efficiency of health benefit plans and 
of health insurance, health care markets, and labor markets at large.
    The Department expects that the economic benefits of the regulation 
will be large. Benefits are expected to be large in part because 
serious weaknesses in current claims determination processes, which the 
regulation will help correct, are widespread. Elements of health claims 
and appeals processes that are widely considered to be essential are 
often lacking, the U.S. General Accounting Office has reported. Just 41 
percent of HMOs and 50 percent of indemnity insurers studied by GAO 
provided for appeals decisions to be made by individuals not involved 
in the original denial. Written denial notices explaining appeal rights 
were provided by 97 percent of HMOs, but just 67 percent of indemnity 
insurers. Expedited reviews were provided by 94 percent of HMOs, but 
just 67 percent of indemnity insurers.\43\
---------------------------------------------------------------------------

    \43\ GAO, HMO Complaints and Appeals: Most Key Procedures in 
Place, but Others Valued by Consumers Largely Absent, GAO/HEHS, 98-
119, May 1998; and GAO, Indemnity Health Plans: Key Features of 
Consumer Complaint and Appeals Systems, GAO/HEHS 98-189, June 1998.
---------------------------------------------------------------------------

Improving Health Outcomes

    There is broad agreement that more accurate and timely claims 
determinations can yield large economic benefits in the form of 
improved health outcomes. In one survey, 59 percent of physicians said 
their decisions regarding hospital length of stay were subject to 
review. Forty-five percent were subject to review in connection with 
site-of-care decisions, as were 39 percent in connection with treatment 
appropriateness. On average for various types of treatment, plans 
initially denied between 1.8 percent and 5.8 percent of physician-
recommended actions.\44\ In another survey, 87% of physicians reported 
that managed care health plans denied one or more patients' claims for 
medical services during a two-year period, often adversely affecting 
patients' health.\45\ In yet another survey, 17 percent of insured 
adults under age 65 reported problems with delayed or denied coverage, 
and 12 percent reported billing or payment problems. Of adults 
reporting problems, 21 percent said the problem resulted in them losing 
time from school or work, 21 percent reported worsened health, and 6 
percent reported suffering a permanent or long-lasting disability.\46\ 
These figures demonstrate the potential importance of prompt and 
accurate claims determinations to health outcomes.
---------------------------------------------------------------------------

    \44\ Dahlia K. Remler et. al., ``What Do Managed Care Plans Do 
To Affect Care? Results from a Survey of Physicians,'' Inquiry 34: 
196-204 (Fall 1997).
    \45\ Kaiser Family Foundation Press Release, ``New Survey Shows 
that Providers and Health Plans Clash Often over Patient Care'' 
(July 28, 1999).
    \46\ Kaiser Family Foundation, ``National Survey on Consumer 
Experiences with Health Care Plans'' (June 2000).
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    The President's Advisory Commission on Consumer Protection and 
Quality in the Health Care Industry (the Commission) placed ``highest 
priority'' on ``creating systems that minimize errors and correct them 
in a timely fashion,'' adding that improvements to appeals processes 
could avert injuries.\47\
---------------------------------------------------------------------------

    \47\ The President's Advisory Commission on Consumer Protection 
and Quality in the Health Care Industry, Quality First: Better 
Health Care for All Americans, Final Report to the President of the 
United States. The report points out that some patients suffer harm 
when ``inappropriate benefit coverage decisions . . . impinge on or 
limit the delivery of necessary care.'' A wrongful denial of 
coverage ``can lead to a delay in care or to a decision to forgo 
care entirely.'' The report adds that ``even a small number of 
mistakes . . . can have serious, costly, or fatal consequences,'' 
such as ``additional health expenses, increased disability, lost 
wages, and lost productivity.''
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    Lacking data on the number of claims and appeals that are wrongly 
denied and the incidence and severity of resultant injuries, the 
Department was unable to quantify the economic benefits of improved 
health outcomes under the regulation. There is evidence, however, that 
additional spending on appropriate health care increases social 
welfare.\48\ The Department believes that the economic benefits of 
improved health outcomes under the regulation will be large.
---------------------------------------------------------------------------

    \48\ See, e.g., David M. Cutler and Elizabeth Richardson, ``Your 
Money and Your Life: The Value of Health and What Affects It,'' in 
Frontiers in Health Policy Research (Alan M. Garber, ed., Cambridge: 
MIT Press, 1999, at 99-132).
---------------------------------------------------------------------------

Improving Market Efficiency

    By improving claims and appeals processes, the regulation will 
increase efficiency in the operation of employee benefit systems and 
health care, health insurance, and labor markets.
    The regulation will increase efficiency by reducing complexity. 
Idiosyncratic

[[Page 70260]]

requirements, time-frames, and procedures for claims processing impose 
substantial burdens on participants, their representatives, and service 
providers. By establishing a more complete, uniform set of minimum 
requirements the regulation will reduce the complexity of claims 
processing requirements, thereby increasing efficiency.
    The regulation will improve the efficiency of private employee 
benefits systems by enhancing its transparency and fostering 
participants' confidence in its fairness. In various surveys, consumers 
have expressed concern that plans sometimes withhold care or 
benefits.\49\ The ability to get a promised benefit, particularly when 
sick or disabled, is at the heart of these consumer concerns. The 
regulation will also increase efficiency by better informing claimants. 
When information about the terms and conditions under which benefits 
will be provided is unavailable to enrollees, they will discount the 
value of benefits to compensate for the perceived risk.
---------------------------------------------------------------------------

    \49\ For example, a 1997 Kaiser Family Foundation / Harvard 
University survey found that a majority of Americans say managed 
care plans have made it harder for people who are sick to see 
medical specialists and have decreased the quality of health care 
for the sick. A majority of those in managed care plans are very or 
somewhat worried that their health plan would be more concerned 
about saving money than about what is the best treatment for them if 
they were sick (Kaiser Family Foundation, ``Is There a Managed Care 
`Backlash'?'' Press Release, National Toplines, and Chart Pack, 
November 7, 1997).
---------------------------------------------------------------------------

    The voluntary nature of the employment-based health benefit system 
in conjunction with the open and dynamic character of labor markets 
make explicit as well as implicit negotiations on compensation a key 
determinant of the prevalence of employee benefits coverage. It is 
likely that 80% to 100% of the cost of employee benefits is borne by 
workers through reduced wages.\50\ The prevalence of benefits is 
therefore largely dependent on the efficacy of this exchange. If 
workers perceive that there is the potential for inappropriate denial 
of benefits, they will discount the value of such benefits to adjust 
for this risk. This discount drives a wedge in the compensation 
negotiation, limiting its efficiency. With workers unwilling to bear 
the full cost of the benefit, fewer benefits will be provided. To the 
extent that workers perceive that a federal regulation, supported by 
enforcement authority, reduces the risk of inappropriate denials of 
benefits, the differential between the employers' costs and workers' 
willingness to accept wage offsets is minimized.
---------------------------------------------------------------------------

    \50\ See, e.g., Jonathan Gruber and Alan B. Krueger, ``The 
Incidence of Mandated Employer-Provided Insurance: Lessons from 
Workers Compensation Insurance,'' Tax Policy and Economy (1991); 
Jonathan Gruber, ``The Incidence of Mandated Maternity Benefits,'' 
American Economic Review, Vol. 84 (June 1994), at 622-641; Lawrence 
H. Summers, ``Some Simple Economics of Mandated Benefits,'' American 
Economic Review, Vol. 79, No. 2 (May 1989); Louise Sheiner, ``Health 
Care Costs, Wages, and Aging,'' Federal Reserve Board of Governors 
working paper, April 1999; and Edward Montgomery, Kathryn Shaw, and 
Mary Ellen Benedict, ``Pensions and Wages: An Hedonic Price Theory 
Approach,'' International Economic Review, Vol. 33 No. 1 (Feb. 
1992).
---------------------------------------------------------------------------

    Effective claims procedures can also improve health care, health 
plan quality, and market efficiency by serving as a communication 
channel, providing feedback from participants, beneficiaries, and 
providers to plans about quality issues. Aggrieved claimants are 
especially likely to disenroll if they do not understand their appeal 
rights, or if they believe that their plans' claims and appeals 
procedures will not effectively resolve their difficulties. Unlike 
appeals, however, disenrollments fail to alert plans to the 
difficulties that prompted them. More effective appeals procedures can 
give participants and beneficiaries an alternative way to respond to 
difficulties with their plans. Plans in turn can use the information 
gleaned from the appeals process to improve services.
    By providing aggrieved claimants with an alternative to 
disenrollment, improved claims and appeals procedures will reduce 
disenrollment rates. Lower disenrollment rates in turn will increase 
plans' incentive to keep enrollees healthy over the long term, 
prompting managed care organizations (MCOs) to step up efforts to 
promote preventive care and healthy lifestyles. (In contrast, the high 
disenrollment rates associated with ineffective claims and appeals 
procedures discourage MCOs from investing in such efforts.) Such 
efforts by MCOs may yield long term improvements in population health 
and reductions in national health care costs.
    The disenrollments that will be discouraged by the regulation would 
have been economically inefficient. Such disenrollments can be 
characterized as instances where aggrieved claimant, lacking access to 
or knowledge of a full and fair appeals process, drop their otherwise 
preferred health coverage option in favor of an inferior option. By 
discouraging such disenrollments, the regulation will increase social 
welfare.
    Reducing economically inefficient turnover across health coverage 
options will also trim administrative costs. Plans incur costs directly 
to process enrollments and disenrollments. Turnover also imposes 
indirect transactions costs on enrollees and providers, including 
(sometimes) costs that arise when enrollees must change doctors or 
hospitals and when enrollees and doctors must become familiar with new 
plan provisions, including new claims procedures.
    The Department also expects that the regulation's higher standard 
for claims adjudication will enhance some insurers' and group health 
plans' abilities to effectively control costs by limiting access to 
inappropriate care. Providing a more formally sanctioned framework for 
internal review and consultation on difficult claims facilitates the 
adoption of cost containment programs by employers who, in the absence 
of a regulation providing some guidance, may have opted to pay 
questionable claims rather than risk alienating participants or being 
deemed to have violated ERISA's fiduciary provisions.
    Finally, it is worth noting that economic theory allows for 
regulation of managed care practices to be welfare-enhancing. For 
example, Korobkin contends that ``managed care organizations (MCOs) 
have an incentive to provide an inefficiently low quality of certain 
types of benefits because it is difficult for consumers to evaluate 
their quality prior to contracting, and because consumers who are able 
to evaluate quality after contracting are the customers that MCOs do 
not wish to retain.'' \51\
---------------------------------------------------------------------------

    \51\ Russell Korobkin, ``The Efficiency of Managed Care `Patient 
Protection' Laws: Incomplete Contracts, Bounded Rationality, and 
Market Failure,'' 85 Cornell Law Review 1 (1999).
---------------------------------------------------------------------------

    In summary, the regulation's new, higher standards for handling 
health benefit claims will reduce the incidence of excessive delays and 
inappropriate denials, averting serious, avoidable lapses in health 
care quality and resultant injuries and losses to enrollees. It will 
raise enrollees' level of confidence in and satisfaction with their 
health care benefits. It will improve plans' awareness of participant, 
beneficiary, and provider concerns, prompting plan responses that 
improve health care quality. Finally, by helping assure prompt and 
precise adherence to contract terms and by improving the flow of 
information between plans and enrollees, the proposed regulation will 
bolster the efficiency of labor, health care, and insurance markets. 
The Department therefore concludes that the economic benefits of the 
regulation will outweigh its costs.

[[Page 70261]]

2. Disability Benefit Claims
    With respect to disability claims, timelier determinations will 
assure prompt replacement of lost income for successful claimants, 
thereby averting some financial hardships. Improving standards for 
handling disability claims will also increase enrollee confidence in 
disability plans and promote efficiency in disability insurance and 
labor markets.

Averting Financial Hardship

    As with health benefit claims, the regulation is intended and 
expected to improve the timeliness and accuracy of disability benefit 
claims determinations. This will avert financial hardship for claimants 
whose claims or appeals would otherwise have been inappropriately 
delayed or denied.
    No data are available on how much financial hardship might be 
attributable to such delays or denials, or how much hardship the 
regulation might avert, but the potential magnitudes are large.
    Severe disabilities are not uncommon among the working age 
population. In 1994, 6 million Americans age 22 to 44 (or 6 percent of 
all those in the age group) were severely disabled, as were 3 million 
of those age 45 to 54 (12 percent) and 5 million of those 55 to 64 (22 
percent). Altogether more than one-half of severely disabled Americans 
were age 22 to 64, and nearly one-half of these were age 44 or younger.
    Severe disability often greatly impedes work and erodes income. The 
employment rate for people 21 to 64 years of age was 82 percent among 
those with no disability, but 26 percent among those with severe 
disabilities. The proportion of this age group with low income (less 
than one-half of the median) was 13 percent among those with no 
disability, but 42 percent among those with severe disabilities. \52\
---------------------------------------------------------------------------

    \52\ John M. McNeil, ``Americans with Disabilities: 1994-95,'' 
U.S. Bureau of the Census, Current Population Reports, P 70-61 
(August 1997).
---------------------------------------------------------------------------

    More than 4 million disabled individuals under age 65 currently 
rely on Supplemental Security Income (SSI), a federal means-tested cash 
assistance program for disabled individuals with very low incomes and 
assets. More than one-half million disabled Americans join the SSI 
rolls each year.\53\
---------------------------------------------------------------------------

    \53\ U.S. Social Security Administration, Social Security 
Bulletin, Annual Statistical Supplement, 1998.
---------------------------------------------------------------------------

    Private, employment-based disability insurance can help replace 
income people lose when disability forces them to terminate or curtail 
work. The Department estimates that in 2002 36 million U.S. private-
sector employees (or 32 percent of all such employees) will be insured 
against short-term disability, and 26 million (or 23 percent) will be 
insured against long term disability. Insured workers may nonetheless 
suffer financial hardship, however, if their claims for disability 
benefits are wrongly denied or unduly delayed. Public comments on the 
proposed regulation provide examples of such hardships.

Improving Market Efficiency

    The regulation's disability claims provisions will promote market 
efficiency in many of the same ways as its health claims provisions. 
Fuller information and fuller and fairer claims appeals processes will 
promote enrollee confidence and discourage workers from inappropriately 
discounting the value of their disability benefits, thereby fostering 
efficiency in disability insurance and labor markets. Fairer and faster 
determinations will also spare claimants and their representatives, 
including their health care providers, the incidental (but potentially 
large) costs associated with excessively cumbersome and lengthy claims 
and appeals processes. Finally, by averting some financial hardships, 
faster and more accurate claims determinations will relieve claimants 
and their creditors of some of the costs associated with borrower 
delinquency and bankruptcy.

Economic Costs of the Regulation

1. Cost Estimates
    The Department performed a comprehensive, unified analysis to 
estimate the economic cost attributable to the final regulation for 
purposes of compliance with Executive Order 12866, the Regulatory 
Flexibility Act, and the Paperwork Reduction Act. The analysis takes 
into account a wide range of information, including public comments on 
the Department's proposed regulation.
    Table 1 summarizes the Department's cost estimates, disaggregated 
by type of claim and plan size.\54\ ``Small'' plans have fewer than 100 
participants. Health claims, which at 1.4 billion annually are far more 
numerous than disability claims, account for the majority of costs. 
Ongoing costs will change over time with claims volume and mix, and 
will fall over time as health claims processing becomes more automated.
---------------------------------------------------------------------------

    \54\ In the tables that follow, due to rounding, individual 
reported estimates may not always add to reported totals.
---------------------------------------------------------------------------

    The Department does not anticipate any increase in the cost of 
processing pension claims or welfare plan claims other than health and 
disability claims. As noted earlier in this preamble, the regulation's 
standards applicable to pension claims and welfare claims other than 
health and disability claims are substantially similar to those 
currently in effect under the 1977 regulation.

                                                        Table 1.--Summary of Administrative Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Start-up costs 2001            Annual costs 2002           Total costs 2001-2002
                           Plan size                           -----------------------------------------------------------------------------------------
                                                                  Small     Large     Total     Small     Large     Total     Small     Large     Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions:
  Health......................................................       $20       $82      $103       $68      $310      $379       $88      $393      $481
  Disability..................................................         4        13        16         2        18        21         6        31        37
                                                               -----------------------------------------------------------------------------------------
      Total...................................................        24        95       119        71       329       399        94       424       518
Dollars per enrollee:
  Health......................................................      0.81      0.73      0.75      2.77      2.77      2.77      3.58      3.50      3.51
  Disability..................................................      0.24      0.24      0.24      0.15      0.35      0.31      0.40      0.59      0.55
Dollars per plan:
  Health......................................................         7     1,642        37        25     6,183       135        32     7,825       172
  Disability..................................................         2       332         9         1       481        12         3       814        22
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 70262]]

    The regulation applies different standards to disability claims and 
to different kinds of health benefit claims. The start-up cost of 
meeting these standards reflects the number of claims processes that 
must be modified and the degree of changes to those processes that are 
necessary. The ongoing cost of adhering to the standards reflects the 
volume of claims transactions to which they apply and the necessary 
degree of change to bring all transactions into compliance. Based on 
public comments and other information, it is clear that many health and 
disability plans already comply or nearly comply with many of the 
regulations' standards in connection with a large number of claims, but 
that all or most will need to make at least some changes in their 
handling of at least some claims.
    Table 2 connects the Department's cost estimates with the 
regulation's major provisions and the Department's estimates of 
affected claims processes and claims transactions. The single largest 
ongoing cost is attributable to the regulation's time frames for health 
claims decisions. The Department believes that under plans' current 
practices up to 1 percent of claims decisions would violate this 
provision. Accelerating these 14 million decisions is estimated to cost 
$222 million in 2002.
    In estimating the start-up cost, the Department considered the 
major actions that plans (or their service providers) would undertake, 
including revising processes, modifying forms, modifying systems, and 
hiring or contracting where necessary. The Department estimated these 
combined costs at $119 million in 2001, or a little more than $12,000 
on average for each entity that processes health or disability claims.

                         Table 2.--Start-Up Costs, and Ongoing Costs by Major Provision
----------------------------------------------------------------------------------------------------------------
                                                                Health benefit claims      Disability benefit
                                                             --------------------------          claims
                        Type of claim                                                  -------------------------
                                                                Affected    Estimated     Affected    Estimated
                                                               procedures   cost ($MM)   procedures   cost ($MM)
----------------------------------------------------------------------------------------------------------------
Start up, 2001..............................................      308,000         $103       24,000          $16



----------------------------------------------------------------------------------------------------------------
                                                              Affected
                                                            transactions   Estimated     Affected     Estimated
                                                                (MM)       cost ($MM)  transactions   cost ($MM)
Ongoing, 2002.............................................  ............         $379  ............          $21
  Notices.................................................         114.6           27       179,000            6
  Time frames.............................................       1,397.6          222     1,421,000            6
  Fuller reviews..........................................           0.4           32        32,000            3
  Disclosure on request...................................           2.9           68        57,000            3
Expert consultations......................................           0.2           30        32,000            3
----------------------------------------------------------------------------------------------------------------

2. Basis for Estimates
    The Department's analysis relies on various government and private 
surveys and studies and the testimony, written comments, and other 
materials received by the Department in response to its proposed 
regulation and earlier request for information. The Department 
developed additional assumptions as necessary where no data were 
available.
    Comments on the Department's proposed regulation were helpful to 
the Department's effort to estimate the cost impact of its regulation. 
Many commenters described how the proposed regulation's major 
requirements compared with, and would affect, their current business 
practices, and how the requirements would interact with state laws, 
accreditation standards, and other strictures on those practices. In 
estimating the cost of the regulation, the Department relied on these 
comments to gauge the differences between plans' current business 
practices and the regulation's requirements and to develop reasonable 
assumptions regarding the cost of compliance.
    The Department separately estimated the one-time, start-up cost of 
coming into compliance with the regulation and the ongoing, annual cost 
of complying.
3. Start-Up Costs
    In estimating start-up costs, the Department considered the number 
of claims processes that will be affected by the regulation. The 
overwhelming majority of health and disability benefit plans rely on 
service providers to administer their claims processes. Only a small 
fraction perform these administrative functions in-house. Those that do 
tend to be very large, self-insured plans. Service providers, which are 
less numerous than plans, tend to use a single claims process to 
service a large number of plans. They may also provide customized 
claims processes for some plans, especially for self-insured plans, 
which generally are not subject to state laws regarding benefit 
coverage. The Department expects that the start-up cost of revising 
claims processes, which for a given claims process may be large, in 
most cases will be spread thinly across plans and participants. Table 3 
presents the Department's estimates of the number of affected health 
and disability claims processes.

              Table 3.--Affected Plans and Claims Processes
------------------------------------------------------------------------
                                          Health benefit    Disability
                                               plans       benefit plans
------------------------------------------------------------------------
Number of plans.........................       2,802,000       1,716,000
Number of claims processes..............         308,000          35,000
Maintained by plans that self-administer           4,000           3,000
Maintained by service providers.........         305,000          32,000
------------------------------------------------------------------------


[[Page 70263]]

    The Department considered the following major actions that plans 
(or their service providers) would undertake to come into compliance 
with the regulation: revising processes, revising forms, modifying 
systems, and hiring or contracting where necessary. The Department 
assumed that all health and disability plans would have to revise 
processes and forms and modify systems to at least some degree and that 
some would hire personnel or contract for additional or different 
services in order to achieve compliance. \55\
---------------------------------------------------------------------------

    \55\ This estimate is not intended to include the cost of 
developing new explanations of claims processes for inclusion in 
plan descriptions. The Department separately accounts for that cost 
as part of the estimated cost of its regulation governing the 
content of summary plan descriptions.
---------------------------------------------------------------------------

4. Ongoing Costs
    In estimating the ongoing cost of various provisions, the 
Department considered the number of claims transactions to which they 
apply, the degree to which plans already comply in the course of normal 
business or in response to a state law or other mandate other than 
ERISA, and, to the degree that they do not, the likely cost of coming 
into compliance.
    Claims volume was estimated by applying estimated claiming rates 
for various types of claims to projected estimates of plan enrollment 
in 2002. To estimate the application of the regulation's various 
requirements to different types of benefit claims, it was necessary to 
separately estimate health, disability, pension, and other benefit 
claims volumes. With respect to health benefit claims, it was necessary 
to separately estimate urgent, pre-service, and post-service claims 
volume, and the number of denials that are based on clinical or medical 
judgments. With respect to disability claims, it was necessary to 
estimate short-term and long-term disability claims separately. The 
Department also accounted separately for costs associated with approved 
and denied claims and appeals. Table 4 summarizes estimated 2002 claims 
volume.

                                    Table 4.--Summary of Claims Volume, 2002
----------------------------------------------------------------------------------------------------------------
                                                                 Health     Disability    Pension       Other
                                                                 (MMs)        (000s)       (000s)       (000s)
----------------------------------------------------------------------------------------------------------------
Claims......................................................      1,369.7      1,389.7      2,122.1        244.5
  Approved..................................................      1,328.6      1,304.9      2,104.0        236.4
  Denied....................................................         41.0         84.8         18.0          8.1
Appeals.....................................................          0.4         31.6          1.8          0.8
  Approved..................................................          0.3          6.5          0.9          0.4
  Denied....................................................          0.1         25.1          0.9          0.4
Health claims (MMs).........................................      1,369.7  ...........  ...........  ...........
  Urgent pre-service........................................          1.2  ...........  ...........  ...........
  Routine pre-service.......................................         40.0  ...........  ...........  ...........
  Post-service..............................................      1,328.5  ...........  ...........  ...........
Denied health claims (MMs)..................................         41.0  ...........  ...........  ...........
  Clinical/scientific basis.................................         14.5  ...........  ...........  ...........
  Other basis...............................................         26.5  ...........  ...........  ...........
Disability claims (000s)....................................      1,389.7  ...........  ...........  ...........
  Short-term................................................      1,162.7  ...........  ...........  ...........
  Long-term.................................................        227.1  ...........  ...........  ...........
----------------------------------------------------------------------------------------------------------------

    The Department applied estimates of health and disability benefit 
claiming rates and claims mix to its estimates of enrollment in health 
and disability plans to produce its estimates of total claims volume. 
The Department estimated claims volume and mix in light of comments 
received in response to its proposed regulation and other data that 
provide reasonable proxies for private-sector employment-based health 
and disability benefit plans' claim patterns. For example, comments on 
the proposed regulation indicated health benefit claiming rates ranging 
from about 5 to 18 claims per individual per year. The average rate 
across all comments reporting rates was 9 claims per year, and surveys 
available to the Department reported rates of 6 \56\ and 11 \57\ claims 
per year. Many of these reported figures may omit some health benefit 
claims, such as dental claims, made by the same individuals under 
separate plans. The Department assumed that the health benefit claiming 
rates average 10 per covered individual, believing that this is 
consistent with comments received and other available information.
---------------------------------------------------------------------------

    \56\ A published 1995 survey of 53 health insurers' claims 
systems by the Health Insurance Association of America.
    \57\ A survey of 7 managed care organizations conducted and 
provided to the Department in response to its proposed regulation.
---------------------------------------------------------------------------

    The Department similarly relied on comments received and other 
available data to assess health benefit claims denial and appeal rates 
and the mix of urgent, pre- and post-service claims. The Department 
assessed disability claiming rates and claims mix based on comments 
received (including information from the life insurance industry) and 
available data on the incidence of temporary and permanent disability 
in the working age population. \58\
---------------------------------------------------------------------------

    \58\ Primarily, data from the National Center for Health 
Statistics and the Social Security Administration.
---------------------------------------------------------------------------

    The Department separately considered the effect of each of the 
regulation's major provisions on each type of claim to which it 
applies. Based on its analysis, the Department attributed cost to the 
application of the regulation's notice, timeliness, disclosure, 
standard of review, and expert consultation requirements to health and 
disability claims and appeals. \59\ Many plans' current, normal

[[Page 70264]]

business practices meet or nearly meet one or more of these 
requirements. Nonetheless, the Department believes that many health and 
disability benefit plans will have to modify their claims processes to 
some degree in order to meet all of these requirements in connection 
with all claims. \60\
---------------------------------------------------------------------------

    \59\ The Department did not attribute cost to certain other 
major provisions of the regulation, including the regulation's 
prohibition against unduly inhibiting or hampering the initiation or 
processing of claims for benefits, the requirement that plans have 
procedures to ensure and verify appropriately consistent decisions, 
and the provisions applicable to pension plans and welfare plans 
other than health and disability benefit plans. These provisions 
merely clarify current law and do not impose new standards. Other 
provisions, including the requirement that certain health care 
professionals be treated as claimants' representatives in connection 
with urgent health benefit claims, the prohibition against requiring 
more than two mandatory levels of administrative appeal, the 
restrictions on arbitration, and the requirement of at least 180 
days for filing appeals, are expected to have minimal impact on plan 
costs.
    \60\ For example, not all health plans currently include in 
denied claim notices statements of claimants' rights to request 
copies of any guidelines or protocols or explanations of any 
clinical or scientific judgments that were applied. Not all health 
and disability claims are decided within the time frames specified 
in the final regulation. Not all health and disability plans 
routinely disclose relevant information, such as statements of 
policy or guidance regarding denied treatments for claimants' 
conditions. Not all provide for decisionmakers on review who are 
different from and not subordinate to initial decisionmakers, or 
disclose the identity of medical experts consulted in connection 
with reviews.
---------------------------------------------------------------------------

    As reported in table 2 (above), the Department attributed the 
single largest ongoing cost, $222 million, to the application of the 
regulation's timeliness requirements to health benefit claims. The 
magnitude of this estimated cost is a function of the large volume of 
total health benefit claims (estimated at 1.4 billion in 2002) and the 
proportion of these that will be affected by the time frames of the 
regulation. In light of comments received in response to its proposed 
regulation and other available information, \61\ the Department assumed 
that 1 percent of claims and appeals determinations will have to be 
accelerated in order to comply with the regulation. On the same basis, 
it assumed that the unit cost of accelerating determinations will range 
from $10 for initial determinations that do not involve medical 
judgments to $50 for determinations on appeal that do involve such 
judgments. The low end of this range represents the use of 
administrative staff to accelerate precessing times, the higher end a 
substantially greater cost due to the need for consultation by a 
medical professional in some circumstances. On average the affected 
claims are expected to be close to the low end of the range because the 
majority of claims transactions are initial determinations that will 
not hinge on medical judgments.
---------------------------------------------------------------------------

    \61\ Including the 1995 survey of insurers cited above and a 
Mercer/Foster Higgins Survey of employment-based health plans.
---------------------------------------------------------------------------

    The costs attributed to disclosure following adverse 
determinations, fuller reviews on appeal, and expert consultations in 
appeals involving medical judgments reflect the progressively smaller 
incidence (relative to total claims volume) of adverse determinations, 
appeals, and appeals involving medical judgments. Estimated unit costs 
associated with these provisions reflect comments received and other 
available information on the cost of these elements of health benefit 
claims processes and the degree to which plans' normal business 
practices currently conform to the provisions. For example, in light of 
such information, the Department believes that expert medical 
consultations for a typical appeal cost between $350 and $500. However, 
most plans' normal business practices already provide for some type of 
expert consultation in appeals involving medical judgments. The 
Department therefore assumed that the cost of such consultations will 
rise by $100 on average, reflecting the understanding that plans' 
normal business practices may not always provide consultations as 
required by the regulation's provisions.
5. Required Estimates
    The Department developed estimates as appropriate for purposes of 
compliance with Executive Order 12866, the Regulatory Flexibility Act, 
and the Paperwork Reduction Act. Because the regulation establishes new 
standards for, and will have a substantial economic impact on, health 
and disability claims, the Department estimated the cost of the 
regulation in connection with these claims for purposes of Executive 
Order 12866 and the Regulatory Flexibility Act, as well as for purposes 
of the Paperwork Reduction Act. Because it established no substantial 
new standards for pension claims and other welfare benefit claims, the 
Department estimated its cost in connection with these claims only for 
purposes of the Paperwork Reduction Act.
6. Changes in Claims and Appeals Volume and Disposition
    The cost estimates reported above reflect administrative costs 
associated with processing claims and appeals, based on the assumption 
that the volume, mix, and disposition of claims and appeals remain 
constant. The regulation, however, is expected to change the overall 
volume and nature of appeals and to improve the accuracy of claims and 
appeals decisions. The Department was unable to quantify these changes, 
but undertook a qualitative assessment of their likely nature, 
magnitude, and social welfare effects. The Department believes that 
changes in the nature of appeals and in claims and appeals decisions 
may be large in number, but will be small as a fraction of total claims 
and appeals volume and will result in a substantial overall increase in 
social welfare.
    The regulation may increase or decrease the actual number of 
appeals. It is expected to decrease the number of non-meritorious 
appeals and to encourage and help ensure the approval of meritorious 
claims. Improved accuracy of initial claims decisions under the 
regulation will serve to reduce the volume of appeals. The volume may 
increase, however, if the existence of fuller review processes and 
information disclosure under the regulation increases claimants' 
propensity to appeal denied claims. Fuller disclosure of information to 
claimants will also tend to encourage appeals that are meritorious and 
discourage those that are not. Improved accuracy of initial decisions 
provides social benefits without the administrative expense of appeals. 
Any new appeals arising as a result of the regulation are likely to be 
both meritorious and successful; such appeals are likely to deliver 
social benefits that are larger than the associated administrative 
cost. The regulation is also expected to reduce non-meritorious, 
unsuccessful appeals, which generally deliver no social benefits to 
justify their administrative cost.
    Changes in claims and appeals decisions under the regulation are 
also expected to increase social welfare. The Department expects that 
the regulation will improve the timeliness and accuracy of decisions. 
In particular, the Department expects that some claims and appeals that 
otherwise would have been denied, but in fact should have been approved 
under plans' terms, will now be paid. Therefore, it is highly likely 
that the number and dollar amount of claims approved will increase. For 
example, encouraging meritorious over non-meritorious appeals should 
increase the number of favorable determinations on appeal. As noted 
earlier in this preamble, the approval of meritorious claims that 
otherwise would have been denied can be characterized as a financial 
transfer from plans to claimants that will have societal benefits. 
Economic theory suggests that, all else being equal, improving 
adherence to private voluntary agreements, such as plans' terms, tends 
to increase economic efficiency. In addition, as noted earlier in this 
preamble, there is evidence that additional spending on appropriate 
health care increases social welfare.

[[Page 70265]]

D. Federalism Summary Impact Statement

    Although the Department has identified this regulation as possibly 
having federalism implications, those implications are limited. 
Therefore, in compliance with Executive Order 13132, 64 FR 43255 
(August 10, 1999), the Department has taken a number of steps to 
consult with affected entities.
    First, the Department has, throughout the process of developing the 
proposed regulation and the final regulation, provided State and local 
officials with significant opportunities for meaningful and timely 
input. After issuance of the proposed regulation, the Department 
invited public comment from all affected parties, including States and 
local governments, and held the public comment period open for an 
extended period. The Department further held a three-day public hearing 
and consulted separately with the major organizations that represent 
state and local government prior to finalizing the regulation.
    The insurance commissioners of various states, acting collectively 
through the National Association of Insurance Commissioners (NAIC), 
provided substantial public comment on the proposed regulation and 
participated in the public hearing by submitting written testimony, 
testifying personally, and engaging in public discussion with the 
Department's panel of officials. The Department also invited all of the 
``Big 7'' organizations \62\ that represent state and local government 
to meet separately with the Department to discuss this regulation.
---------------------------------------------------------------------------

    \62\ The organizations invited were the National Governors 
Association, the National League of Cities, the National Conference 
of State Legislatures, the National Association of Counties, the 
U.S. Conference of Mayors, and the Council of State Governments. The 
meeting was attended by representatives of the National Governors 
Association, the National Conference of State Legislatures, and the 
National Association of Counties.
---------------------------------------------------------------------------

    The NAIC and the Big 7 attendees have generally praised the 
Department for taking this regulatory action regarding ERISA covered 
plans because the Department's approach has generally paralleled the 
approach taken by many States in regulating the conduct of insurance 
companies doing business in their States. However, both the NAIC and 
the Big 7 attendees asked the Department to limit the application of 
the regulation to ``self-funded'' plans, which do not provide benefits 
through insurance directly regulated by the States. The NAIC and Big 7 
attendees argued that many States have already provided protections to 
participants in insured plans that are greater than that contained in 
the proposed regulation. The Department has not followed this 
suggestion, although the Department has sought to address the concerns 
raised by the NAIC and Big 7 attendees in other ways. (See, for 
example, the discussion below and elsewhere in this preamble regarding 
preemption.) It is the view of the Department that the importance of 
establishing uniform minimum procedural rights for all participants and 
beneficiaries in ERISA-covered group health plans outweighs the 
concerns of the State and local governments.
    With respect specifically to preemption, Executive Order 13132 
requires agencies taking such action to act in strict accordance with 
governing law and to restrict preemption to the minimum level necessary 
to achieve the objectives of the statute pursuant to which any 
regulations are promulgated. The Department has satisfied these 
requirements in this regulation.
    The proposed regulation was silent on preemption. The Department 
intended that the scope of preemption that would result under the 
proposed regulation would be limited to the minimum level required by 
section 514 of the Act and the Supremacy Clause of the Constitution. 
The Department's intent remains the same with respect to this final 
regulation. The NAIC and other commenters argued that the proposal's 
silence on the subject of preemption was potentially confusing and 
asked the Department to make clear its views as to the preemptive 
effect of the final regulation. The Department has responded to these 
comments by adding paragraph (k) to the final regulation. Paragraph (k) 
provides interpretive guidance on preemption.
    The Department's view of the preemptive effect of the regulation is 
consistent with the Department's intent that the regulation's 
preemptive effect be limited to the minimum required by section 514 and 
the Supremacy Clause. As explained elsewhere in this preamble, 
paragraph (k) specifically sets forth the Department view that State 
insurance laws are not preempted unless they ``prevent the 
application'' of a requirement of the regulation. In other words, State 
insurance laws are preempted by the final regulation only to the extent 
that those laws are in conflict with the regulation such that the State 
laws could not be read in harmony with the regulation.
    In response to the specific concern most commonly expressed by 
state insurance commissioners, the Department stated further in 
paragraph (k)(2) its view that State-mandated external review 
procedures, which operate outside the scope of plans' internal review 
procedures, are not preempted by promulgation of the regulation.
    Thus, the Department has made every effort to limit the effect that 
the regulation will have on State law to the minimum imposed by 
operation of the statute and the Constitution.
    Finally, Executive Order 13132 limits the extent to which agencies 
may impose mandates on State and local governments. This regulation 
does not create a mandate on State or local governments. The regulation 
does not impose any enforceable duties on these entities. This 
regulation will be implemented at the Federal level and imposes 
compliance obligations only on private industry. The regulation 
therefore does not require imposition on States of substantial direct 
compliance costs, mandates, duties, or similar obligations.

List of Subjects in 29 CFR Part 2560

    Employee benefit plans, Employee Retirement Income Security Act, 
Benefit Claims Procedures.

    For the reasons set out in the preamble, 29 CFR part 2560 is 
amended as follows:

PART 2560--RULES AND REGULATIONS FOR ADMINISTRATION AND ENFORCEMENT

    1. The authority citation for part 2560 continues to read as 
follows:

    Authority: Secs. 502, 505 of ERISA, 29 U.S.C. 1132, 1135, and 
Secretary's Order 1-87, 52 FR 13139 (April 21, 1987).
    Section 2560-502-1 also issued under sec. 502(b)(1), 29 U.S.C. 
1132(b)(1).
    Section 2560-502i-1 also issued under sec. 502(i), 29 U.S.C. 
1132(i).
    Section 2560-503-1 also issued under sec. 503, 29 U.S.C. 1133.

    2. Section 2560.503-1 is revised to read as follows:


Sec. 2560.503-1  Claims procedure.

    (a) Scope and purpose. In accordance with the authority of sections 
503 and 505 of the Employee Retirement Income Security Act of 1974 
(ERISA or the Act), 29 U.S.C. 1133, 1135, this section sets forth 
minimum requirements for employee benefit plan procedures pertaining to 
claims for benefits by participants and beneficiaries (hereinafter 
referred to as claimants). Except as otherwise specifically provided in 
this section, these requirements apply to every employee benefit plan 
described in section 4(a) and not exempted under section 4(b) of the 
Act.
    (b) Obligation to establish and maintain reasonable claims 
procedures.

[[Page 70266]]

Every employee benefit plan shall establish and maintain reasonable 
procedures governing the filing of benefit claims, notification of 
benefit determinations, and appeal of adverse benefit determinations 
(hereinafter collectively referred to as claims procedures). The claims 
procedures for a plan will be deemed to be reasonable only if--
    (1) The claims procedures comply with the requirements of 
paragraphs (c), (d), (e), (f), (g), (h), (i), and (j) of this section, 
as appropriate, except to the extent that the claims procedures are 
deemed to comply with some or all of such provisions pursuant to 
paragraph (b)(6) of this section;
    (2) A description of all claims procedures (including, in the case 
of a group health plan within the meaning of paragraph (m)(6) of this 
section, any procedures for obtaining prior approval as a prerequisite 
for obtaining a benefit, such as preauthorization procedures or 
utilization review procedures) and the applicable time frames is 
included as part of a summary plan description meeting the requirements 
of 29 CFR 2520.102-3;
    (3) The claims procedures do not contain any provision, and are not 
administered in a way, that unduly inhibits or hampers the initiation 
or processing of claims for benefits. For example, a provision or 
practice that requires payment of a fee or costs as a condition to 
making a claim or to appealing an adverse benefit determination would 
be considered to unduly inhibit the initiation and processing of claims 
for benefits. Also, the denial of a claim for failure to obtain a prior 
approval under circumstances that would make obtaining such prior 
approval impossible or where application of the prior approval process 
could seriously jeopardize the life or health of the claimant (e.g., in 
the case of a group health plan, the claimant is unconscious and in 
need of immediate care at the time medical treatment is required) would 
constitute a practice that unduly inhibits the initiation and 
processing of a claim;
    (4) The claims procedures do not preclude an authorized 
representative of a claimant from acting on behalf of such claimant in 
pursuing a benefit claim or appeal of an adverse benefit determination. 
Nevertheless, a plan may establish reasonable procedures for 
determining whether an individual has been authorized to act on behalf 
of a claimant, provided that, in the case of a claim involving urgent 
care, within the meaning of paragraph (m)(1) of this section, a health 
care professional, within the meaning of paragraph (m)(7) of this 
section, with knowledge of a claimant's medical condition shall be 
permitted to act as the authorized representative of the claimant; and
    (5) The claims procedures contain administrative processes and 
safeguards designed to ensure and to verify that benefit claim 
determinations are made in accordance with governing plan documents and 
that, where appropriate, the plan provisions have been applied 
consistently with respect to similarly situated claimants.
    (6) In the case of a plan established and maintained pursuant to a 
collective bargaining agreement (other than a plan subject to the 
provisions of section 302(c)(5) of the Labor Management Relations Act, 
1947 concerning joint representation on the board of trustees)--
    (i) Such plan will be deemed to comply with the provisions of 
paragraphs (c) through (j) of this section if the collective bargaining 
agreement pursuant to which the plan is established or maintained sets 
forth or incorporates by specific reference--
    (A) Provisions concerning the filing of benefit claims and the 
initial disposition of benefit claims, and
    (B) A grievance and arbitration procedure to which adverse benefit 
determinations are subject.
    (ii) Such plan will be deemed to comply with the provisions of 
paragraphs (h), (i), and (j) of this section (but will not be deemed to 
comply with paragraphs (c) through (g) of this section) if the 
collective bargaining agreement pursuant to which the plan is 
established or maintained sets forth or incorporates by specific 
reference a grievance and arbitration procedure to which adverse 
benefit determinations are subject (but not provisions concerning the 
filing and initial disposition of benefit claims).
    (c) Group health plans. The claims procedures of a group health 
plan will be deemed to be reasonable only if, in addition to complying 
with the requirements of paragraph (b) of this section--
    (1)(i) The claims procedures provide that, in the case of a failure 
by a claimant or an authorized representative of a claimant to follow 
the plan's procedures for filing a pre-service claim, within the 
meaning of paragraph (m)(2) of this section, the claimant or 
representative shall be notified of the failure and the proper 
procedures to be followed in filing a claim for benefits. This 
notification shall be provided to the claimant or authorized 
representative, as appropriate, as soon as possible, but not later than 
5 days (24 hours in the case of a failure to file a claim involving 
urgent care) following the failure. Notification may be oral, unless 
written notification is requested by the claimant or authorized 
representative.
    (ii) Paragraph (c)(1)(i) of this section shall apply only in the 
case of a failure that--
    (A) Is a communication by a claimant or an authorized 
representative of a claimant that is received by a person or 
organizational unit customarily responsible for handling benefit 
matters; and
    (B) Is a communication that names a specific claimant; a specific 
medical condition or symptom; and a specific treatment, service, or 
product for which approval is requested.
    (2) The claims procedures do not contain any provision, and are not 
administered in a way, that requires a claimant to file more than two 
appeals of an adverse benefit determination prior to bringing a civil 
action under section 502(a) of the Act;
    (3) To the extent that a plan offers voluntary levels of appeal 
(except to the extent that the plan is required to do so by State law), 
including voluntary arbitration or any other form of dispute 
resolution, in addition to those permitted by paragraph (c)(2) of this 
section, the claims procedures provide that:
    (i) The plan waives any right to assert that a claimant has failed 
to exhaust administrative remedies because the claimant did not elect 
to submit a benefit dispute to any such voluntary level of appeal 
provided by the plan;
    (ii) The plan agrees that any statute of limitations or other 
defense based on timeliness is tolled during the time that any such 
voluntary appeal is pending;
    (iii) The claims procedures provide that a claimant may elect to 
submit a benefit dispute to such voluntary level of appeal only after 
exhaustion of the appeals permitted by paragraph (c)(2) of this 
section;
    (iv) The plan provides to any claimant, upon request, sufficient 
information relating to the voluntary level of appeal to enable the 
claimant to make an informed judgment about whether to submit a benefit 
dispute to the voluntary level of appeal, including a statement that 
the decision of a claimant as to whether or not to submit a benefit 
dispute to the voluntary level of appeal will have no effect on the 
claimant's rights to any other benefits under the plan and information 
about the applicable rules, the claimant's right to representation, the 
process for selecting the decisionmaker, and the circumstances, if any, 
that may affect the impartiality of the decisionmaker,

[[Page 70267]]

such as any financial or personal interests in the result or any past 
or present relationship with any party to the review process; and
    (v) No fees or costs are imposed on the claimant as part of the 
voluntary level of appeal.
    (4) The claims procedures do not contain any provision for the 
mandatory arbitration of adverse benefit determinations, except to the 
extent that the plan or procedures provide that:
    (i) The arbitration is conducted as one of the two appeals 
described in paragraph (c)(2) of this section and in accordance with 
the requirements applicable to such appeals; and
    (ii) The claimant is not precluded from challenging the decision 
under section 502(a) of the Act or other applicable law.
    (d) Plans providing disability benefits. The claims procedures of a 
plan that provides disability benefits will be deemed to be reasonable 
only if the claims procedures comply, with respect to claims for 
disability benefits, with the requirements of paragraphs (b), (c)(2), 
(c)(3), and (c)(4) of this section.
    (e) Claim for benefits. For purposes of this section, a claim for 
benefits is a request for a plan benefit or benefits made by a claimant 
in accordance with a plan's reasonable procedure for filing benefit 
claims. In the case of a group health plan, a claim for benefits 
includes any pre-service claims within the meaning of paragraph (m)(2) 
of this section and any post-service claims within the meaning of 
paragraph (m)(3) of this section.
    (f) Timing of notification of benefit determination. (1) In 
general. Except as provided in paragraphs (f)(2) and (f)(3) of this 
section, if a claim is wholly or partially denied, the plan 
administrator shall notify the claimant, in accordance with paragraph 
(g) of this section, of the plan's adverse benefit determination within 
a reasonable period of time, but not later than 90 days after receipt 
of the claim by the plan, unless the plan administrator determines that 
special circumstances require an extension of time for processing the 
claim. If the plan administrator determines that an extension of time 
for processing is required, written notice of the extension shall be 
furnished to the claimant prior to the termination of the initial 90-
day period. In no event shall such extension exceed a period of 90 days 
from the end of such initial period. The extension notice shall 
indicate the special circumstances requiring an extension of time and 
the date by which the plan expects to render the benefit determination.
    (2) Group health plans. In the case of a group health plan, the 
plan administrator shall notify a claimant of the plan's benefit 
determination in accordance with paragraph (f)(2)(i), (f)(2)(ii), or 
(f)(2)(iii) of this section, as appropriate.
    (i) Urgent care claims. In the case of a claim involving urgent 
care, the plan administrator shall notify the claimant of the plan's 
benefit determination (whether adverse or not) as soon as possible, 
taking into account the medical exigencies, but not later than 72 hours 
after receipt of the claim by the plan, unless the claimant fails to 
provide sufficient information to determine whether, or to what extent, 
benefits are covered or payable under the plan. In the case of such a 
failure, the plan administrator shall notify the claimant as soon as 
possible, but not later than 24 hours after receipt of the claim by the 
plan, of the specific information necessary to complete the claim. The 
claimant shall be afforded a reasonable amount of time, taking into 
account the circumstances, but not less than 48 hours, to provide the 
specified information. Notification of any adverse benefit 
determination pursuant to this paragraph (f)(2)(i) shall be made in 
accordance with paragraph (g) of this section. The plan administrator 
shall notify the claimant of the plan's benefit determination as soon 
as possible, but in no case later than 48 hours after the earlier of--
    (A) The plan's receipt of the specified information, or
    (B) The end of the period afforded the claimant to provide the 
specified additional information.
    (ii) Concurrent care decisions. If a group health plan has approved 
an ongoing course of treatment to be provided over a period of time or 
number of treatments--
    (A) Any reduction or termination by the plan of such course of 
treatment (other than by plan amendment or termination) before the end 
of such period of time or number of treatments shall constitute an 
adverse benefit determination. The plan administrator shall notify the 
claimant, in accordance with paragraph (g) of this section, of the 
adverse benefit determination at a time sufficiently in advance of the 
reduction or termination to allow the claimant to appeal and obtain a 
determination on review of that adverse benefit determination before 
the benefit is reduced or terminated.
    (B) Any request by a claimant to extend the course of treatment 
beyond the period of time or number of treatments that is a claim 
involving urgent care shall be decided as soon as possible, taking into 
account the medical exigencies, and the plan administrator shall notify 
the claimant of the benefit determination, whether adverse or not, 
within 24 hours after receipt of the claim by the plan, provided that 
any such claim is made to the plan at least 24 hours prior to the 
expiration of the prescribed period of time or number of treatments. 
Notification of any adverse benefit determination concerning a request 
to extend the course of treatment, whether involving urgent care or 
not, shall be made in accordance with paragraph (g) of this section, 
and appeal shall be governed by paragraph (i)(2)(i), (i)(2)(ii), or 
(i)(2)(iii), as appropriate.
    (iii) Other claims. In the case of a claim not described in 
paragraphs (f)(2)(i) or (f)(2)(ii) of this section, the plan 
administrator shall notify the claimant of the plan's benefit 
determination in accordance with either paragraph (f)(2)(iii)(A) or 
(f)(2)(iii)(B) of this section, as appropriate.
    (A) Pre-service claims. In the case of a pre-service claim, the 
plan administrator shall notify the claimant of the plan's benefit 
determination (whether adverse or not) within a reasonable period of 
time appropriate to the medical circumstances, but not later than 15 
days after receipt of the claim by the plan. This period may be 
extended one time by the plan for up to 15 days, provided that the plan 
administrator both determines that such an extension is necessary due 
to matters beyond the control of the plan and notifies the claimant, 
prior to the expiration of the initial 15-day period, of the 
circumstances requiring the extension of time and the date by which the 
plan expects to render a decision. If such an extension is necessary 
due to a failure of the claimant to submit the information necessary to 
decide the claim, the notice of extension shall specifically describe 
the required information, and the claimant shall be afforded at least 
45 days from receipt of the notice within which to provide the 
specified information. Notification of any adverse benefit 
determination pursuant to this paragraph (f)(2)(iii)(A) shall be made 
in accordance with paragraph (g) of this section.
    (B) Post-service claims. In the case of a post-service claim, the 
plan administrator shall notify the claimant, in accordance with 
paragraph (g) of this section, of the plan's adverse benefit 
determination within a reasonable period of time, but not later than 30 
days after receipt of the claim. This period may be extended one time 
by the plan for up to 15 days, provided that the plan administrator 
both determines that

[[Page 70268]]

such an extension is necessary due to matters beyond the control of the 
plan and notifies the claimant, prior to the expiration of the initial 
30-day period, of the circumstances requiring the extension of time and 
the date by which the plan expects to render a decision. If such an 
extension is necessary due to a failure of the claimant to submit the 
information necessary to decide the claim, the notice of extension 
shall specifically describe the required information, and the claimant 
shall be afforded at least 45 days from receipt of the notice within 
which to provide the specified information.
    (3) Disability claims. In the case of a claim for disability 
benefits, the plan administrator shall notify the claimant, in 
accordance with paragraph (g) of this section, of the plan's adverse 
benefit determination within a reasonable period of time, but not later 
than 45 days after receipt of the claim by the plan. This period may be 
extended by the plan for up to 30 days, provided that the plan 
administrator both determines that such an extension is necessary due 
to matters beyond the control of the plan and notifies the claimant, 
prior to the expiration of the initial 45-day period, of the 
circumstances requiring the extension of time and the date by which the 
plan expects to render a decision. If, prior to the end of the first 
30-day extension period, the administrator determines that, due to 
matters beyond the control of the plan, a decision cannot be rendered 
within that extension period, the period for making the determination 
may be extended for up to an additional 30 days, provided that the plan 
administrator notifies the claimant, prior to the expiration of the 
first 30-day extension period, of the circumstances requiring the 
extension and the date as of which the plan expects to render a 
decision. In the case of any extension under this paragraph (f)(3), the 
notice of extension shall specifically explain the standards on which 
entitlement to a benefit is based, the unresolved issues that prevent a 
decision on the claim, and the additional information needed to resolve 
those issues, and the claimant shall be afforded at least 45 days 
within which to provide the specified information.
    (4) Calculating time periods. For purposes of paragraph (f) of this 
section, the period of time within which a benefit determination is 
required to be made shall begin at the time a claim is filed in 
accordance with the reasonable procedures of a plan, without regard to 
whether all the information necessary to make a benefit determination 
accompanies the filing. In the event that a period of time is extended 
as permitted pursuant to paragraph (f)(2)(iii) or (f)(3) of this 
section due to a claimant's failure to submit information necessary to 
decide a claim, the period for making the benefit determination shall 
be tolled from the date on which the notification of the extension is 
sent to the claimant until the date on which the claimant responds to 
the request for additional information.
    (g) Manner and content of notification of benefit determination. 
(1) Except as provided in paragraph (g)(2) of this section, the plan 
administrator shall provide a claimant with written or electronic 
notification of any adverse benefit determination. Any electronic 
notification shall comply with the standards imposed by 29 CFR 
2520.104b-1(c)(1)(i), (iii), and (iv). The notification shall set 
forth, in a manner calculated to be understood by the claimant --
    (i) The specific reason or reasons for the adverse determination;
    (ii) Reference to the specific plan provisions on which the 
determination is based;
    (iii) A description of any additional material or information 
necessary for the claimant to perfect the claim and an explanation of 
why such material or information is necessary;
    (iv) A description of the plan's review procedures and the time 
limits applicable to such procedures, including a statement of the 
claimant's right to bring a civil action under section 502(a) of the 
Act following an adverse benefit determination on review;
    (v) In the case of an adverse benefit determination by a group 
health plan or a plan providing disability benefits,
    (A) If an internal rule, guideline, protocol, or other similar 
criterion was relied upon in making the adverse determination, either 
the specific rule, guideline, protocol, or other similar criterion; or 
a statement that such a rule, guideline, protocol, or other similar 
criterion was relied upon in making the adverse determination and that 
a copy of such rule, guideline, protocol, or other criterion will be 
provided free of charge to the claimant upon request; or
    (B) If the adverse benefit determination is based on a medical 
necessity or experimental treatment or similar exclusion or limit, 
either an explanation of the scientific or clinical judgment for the 
determination, applying the terms of the plan to the claimant's medical 
circumstances, or a statement that such explanation will be provided 
free of charge upon request.
    (vi) In the case of an adverse benefit determination by a group 
health plan concerning a claim involving urgent care, a description of 
the expedited review process applicable to such claims.
    (2) In the case of an adverse benefit determination by a group 
health plan concerning a claim involving urgent care, the information 
described in paragraph (g)(1) of this section may be provided to the 
claimant orally within the time frame prescribed in paragraph (f)(2)(i) 
of this section, provided that a written or electronic notification in 
accordance with paragraph (g)(1) of this section is furnished to the 
claimant not later than 3 days after the oral notification.
    (h) Appeal of adverse benefit determinations. (1) In general. Every 
employee benefit plan shall establish and maintain a procedure by which 
a claimant shall have a reasonable opportunity to appeal an adverse 
benefit determination to an appropriate named fiduciary of the plan, 
and under which there will be a full and fair review of the claim and 
the adverse benefit determination.
    (2) Full and fair review. Except as provided in paragraphs (h)(3) 
and (h)(4) of this section, the claims procedures of a plan will not be 
deemed to provide a claimant with a reasonable opportunity for a full 
and fair review of a claim and adverse benefit determination unless the 
claims procedures--
    (i) Provide claimants at least 60 days following receipt of a 
notification of an adverse benefit determination within which to appeal 
the determination;
    (ii) Provide claimants the opportunity to submit written comments, 
documents, records, and other information relating to the claim for 
benefits;
    (iii) Provide that a claimant shall be provided, upon request and 
free of charge, reasonable access to, and copies of, all documents, 
records, and other information relevant to the claimant's claim for 
benefits. Whether a document, record, or other information is relevant 
to a claim for benefits shall be determined by reference to paragraph 
(m)(8) of this section;
    (iv) Provide for a review that takes into account all comments, 
documents, records, and other information submitted by the claimant 
relating to the claim, without regard to whether such information was 
submitted or considered in the initial benefit determination.
    (3) Group health plans. The claims procedures of a group health 
plan will not be deemed to provide a claimant with a reasonable 
opportunity for a full

[[Page 70269]]

and fair review of a claim and adverse benefit determination unless, in 
addition to complying with the requirements of paragraphs (h)(2)(ii) 
through (iv) of this section, the claims procedures--
    (i) Provide claimants at least 180 days following receipt of a 
notification of an adverse benefit determination within which to appeal 
the determination;
    (ii) Provide for a review that does not afford deference to the 
initial adverse benefit determination and that is conducted by an 
appropriate named fiduciary of the plan who is neither the individual 
who made the adverse benefit determination that is the subject of the 
appeal, nor the subordinate of such individual;
    (iii) Provide that, in deciding an appeal of any adverse benefit 
determination that is based in whole or in part on a medical judgment, 
including determinations with regard to whether a particular treatment, 
drug, or other item is experimental, investigational, or not medically 
necessary or appropriate, the appropriate named fiduciary shall consult 
with a health care professional who has appropriate training and 
experience in the field of medicine involved in the medical judgment;
    (iv) Provide for the identification of medical or vocational 
experts whose advice was obtained on behalf of the plan in connection 
with a claimant's adverse benefit determination, without regard to 
whether the advice was relied upon in making the benefit determination;
    (v) Provide that the health care professional engaged for purposes 
of a consultation under paragraph (h)(3)(iii) of this section shall be 
an individual who is neither an individual who was consulted in 
connection with the adverse benefit determination that is the subject 
of the appeal, nor the subordinate of any such individual; and
    (vi) Provide, in the case of a claim involving urgent care, for an 
expedited review process pursuant to which--
    (A) A request for an expedited appeal of an adverse benefit 
determination may be submitted orally or in writing by the claimant; 
and
    (B) All necessary information, including the plan's benefit 
determination on review, shall be transmitted between the plan and the 
claimant by telephone, facsimile, or other available similarly 
expeditious method.
    (4) Plans providing disability benefits. The claims procedures of a 
plan providing disability benefits will not, with respect to claims for 
such benefits, be deemed to provide a claimant with a reasonable 
opportunity for a full and fair review of a claim and adverse benefit 
determination unless the claims procedures comply with the requirements 
of paragraphs (h)(2)(ii) through (iv) and (h)(3)(i) through (v) of this 
section.
    (i) Timing of notification of benefit determination on review. (1) 
In general. (i) Except as provided in paragraphs (i)(1)(ii), (i)(2), 
and (i)(3) of this section, the plan administrator shall notify a 
claimant in accordance with paragraph (j) of this section of the plan's 
benefit determination on review within a reasonable period of time, but 
not later than 60 days after receipt of the claimant's request for 
review by the plan, unless the plan administrator determines that 
special circumstances (such as the need to hold a hearing, if the 
plan's procedures provide for a hearing) require an extension of time 
for processing the claim. If the plan administrator determines that an 
extension of time for processing is required, written notice of the 
extension shall be furnished to the claimant prior to the termination 
of the initial 60-day period. In no event shall such extension exceed a 
period of 60 days from the end of the initial period. The extension 
notice shall indicate the special circumstances requiring an extension 
of time and the date by which the plan expects to render the 
determination on review.
    (ii) In the case of a plan with a committee or board of trustees 
designated as the appropriate named fiduciary that holds regularly 
scheduled meetings at least quarterly, paragraph (i)(1)(i) of this 
section shall not apply, and, except as provided in paragraphs (i)(2) 
and (i)(3) of this section, the appropriate named fiduciary shall 
instead make a benefit determination no later than the date of the 
meeting of the committee or board that immediately follows the plan's 
receipt of a request for review, unless the request for review is filed 
within 30 days preceding the date of such meeting. In such case, a 
benefit determination may be made by no later than the date of the 
second meeting following the plan's receipt of the request for review. 
If special circumstances (such as the need to hold a hearing, if the 
plan's procedures provide for a hearing) require a further extension of 
time for processing, a benefit determination shall be rendered not 
later than the third meeting of the committee or board following the 
plan's receipt of the request for review. If such an extension of time 
for review is required because of special circumstances, the plan 
administrator shall provide the claimant with written notice of the 
extension, describing the special circumstances and the date as of 
which the benefit determination will be made, prior to the commencement 
of the extension. The plan administrator shall notify the claimant, in 
accordance with paragraph (j) of this section, of the benefit 
determination as soon as possible, but not later than 5 days after the 
benefit determination is made.
    (2) Group health plans. In the case of a group health plan, the 
plan administrator shall notify a claimant of the plan's benefit 
determination on review in accordance with paragraphs (i)(2)(i) through 
(iii), as appropriate.
    (i) Urgent care claims. In the case of a claim involving urgent 
care, the plan administrator shall notify the claimant, in accordance 
with paragraph (j) of this section, of the plan's benefit determination 
on review as soon as possible, taking into account the medical 
exigencies, but not later than 72 hours after receipt of the claimant's 
request for review of an adverse benefit determination by the plan.
    (ii) Pre-service claims. In the case of a pre-service claim, the 
plan administrator shall notify the claimant, in accordance with 
paragraph (j) of this section, of the plan's benefit determination on 
review within a reasonable period of time appropriate to the medical 
circumstances. In the case of a group health plan that provides for one 
appeal of an adverse benefit determination, such notification shall be 
provided not later than 30 days after receipt by the plan of the 
claimant's request for review of an adverse benefit determination. In 
the case of a group health plan that provides for two appeals of an 
adverse determination, such notification shall be provided, with 
respect to any one of such two appeals, not later than 15 days after 
receipt by the plan of the claimant's request for review of the adverse 
determination.
    (iii) Post-service claims. (A) In the case of a post-service claim, 
except as provided in paragraph (i)(2)(iii)(B) of this section, the 
plan administrator shall notify the claimant, in accordance with 
paragraph (j) of this section, of the plan's benefit determination on 
review within a reasonable period of time. In the case of a group 
health plan that provides for one appeal of an adverse benefit 
determination, such notification shall be provided not later than 60 
days after receipt by the plan of the claimant's request for review of 
an adverse benefit determination. In the case of a group health plan 
that provides for two appeals of an adverse determination, such 
notification shall be provided, with respect to any one of

[[Page 70270]]

such two appeals, not later than 30 days after receipt by the plan of 
the claimant's request for review of the adverse determination.
    (B) In the case of a multiemployer plan with a committee or board 
of trustees designated as the appropriate named fiduciary that holds 
regularly scheduled meetings at least quarterly, paragraph 
(i)(2)(iii)(A) of this section shall not apply, and the appropriate 
named fiduciary shall instead make a benefit determination no later 
than the date of the meeting of the committee or board that immediately 
follows the plan's receipt of a request for review, unless the request 
for review is filed within 30 days preceding the date of such meeting. 
In such case, a benefit determination may be made by no later than the 
date of the second meeting following the plan's receipt of the request 
for review. If special circumstances (such as the need to hold a 
hearing, if the plan's procedures provide for a hearing) require a 
further extension of time for processing, a benefit determination shall 
be rendered not later than the third meeting of the committee or board 
following the plan's receipt of the request for review. If such an 
extension of time for review is required because of special 
circumstances, the plan administrator shall notify the claimant in 
writing of the extension, describing the special circumstances and the 
date as of which the benefit determination will be made, prior to the 
commencement of the extension. The plan administrator shall notify the 
claimant, in accordance with paragraph (j) of this section, of the 
benefit determination as soon as possible, but not later than 5 days 
after the benefit determination is made.
    (3) Disability claims. (i) Except as provided in paragraph 
(i)(3)(ii) of this section, claims involving disability benefits 
(whether the plan provides for one or two appeals) shall be governed by 
paragraph (i)(1) of this section, except that a period of 45 days shall 
apply instead of 60 days for purposes of that paragraph.
    (ii) In the case of a multiemployer plan with a committee or board 
of trustees designated as the appropriate named fiduciary that holds 
regularly scheduled meetings at least quarterly, paragraph (i)(3)(i) of 
this section shall not apply, and the appropriate named fiduciary shall 
instead make a benefit determination no later than the date of the 
meeting of the committee or board that immediately follows the plan's 
receipt of a request for review, unless the request for review is filed 
within 30 days preceding the date of such meeting. In such case, a 
benefit determination may be made by no later than the date of the 
second meeting following the plan's receipt of the request for review. 
If special circumstances (such as the need to hold a hearing, if the 
plan's procedures provide for a hearing) require a further extension of 
time for processing, a benefit determination shall be rendered not 
later than the third meeting of the committee or board following the 
plan's receipt of the request for review. If such an extension of time 
for review is required because of special circumstances, the plan 
administrator shall notify the claimant in writing of the extension, 
describing the special circumstances and the date as of which the 
benefit determination will be made, prior to the commencement of the 
extension. The plan administrator shall notify the claimant, in 
accordance with paragraph (j) of this section, of the benefit 
determination as soon as possible, but not later than 5 days after the 
benefit determination is made.
    (4) Calculating time periods. For purposes of paragraph (i) of this 
section, the period of time within which a benefit determination on 
review is required to be made shall begin at the time an appeal is 
filed in accordance with the reasonable procedures of a plan, without 
regard to whether all the information necessary to make a benefit 
determination on review accompanies the filing. In the event that a 
period of time is extended as permitted pursuant to paragraph (i)(1), 
(i)(2)(iii)(B), or (i)(3) of this section due to a claimant's failure 
to submit information necessary to decide a claim, the period for 
making the benefit determination on review shall be tolled from the 
date on which the notification of the extension is sent to the claimant 
until the date on which the claimant responds to the request for 
additional information.
    (5) Furnishing documents. In the case of an adverse benefit 
determination on review, the plan administrator shall provide such 
access to, and copies of, documents, records, and other information 
described in paragraphs (j)(3), (j)(4), and (j)(5) of this section as 
is appropriate.
    (j) Manner and content of notification of benefit determination on 
review. The plan administrator shall provide a claimant with written or 
electronic notification of a plan's benefit determination on review. 
Any electronic notification shall comply with the standards imposed by 
29 CFR 2520.104b-1(c)(1)(i), (iii), and (iv). In the case of an adverse 
benefit determination, the notification shall set forth, in a manner 
calculated to be understood by the claimant--
    (1) The specific reason or reasons for the adverse determination;
    (2) Reference to the specific plan provisions on which the benefit 
determination is based;
    (3) A statement that the claimant is entitled to receive, upon 
request and free of charge, reasonable access to, and copies of, all 
documents, records, and other information relevant to the claimant's 
claim for benefits. Whether a document, record, or other information is 
relevant to a claim for benefits shall be determined by reference to 
paragraph (m)(8) of this section;
    (4) A statement describing any voluntary appeal procedures offered 
by the plan and the claimant's right to obtain the information about 
such procedures described in paragraph (c)(3)(iv) of this section, and 
a statement of the claimant's right to bring an action under section 
502(a) of the Act; and
    (5) In the case of a group health plan or a plan providing 
disability benefits--
    (i) If an internal rule, guideline, protocol, or other similar 
criterion was relied upon in making the adverse determination, either 
the specific rule, guideline, protocol, or other similar criterion; or 
a statement that such rule, guideline, protocol, or other similar 
criterion was relied upon in making the adverse determination and that 
a copy of the rule, guideline, protocol, or other similar criterion 
will be provided free of charge to the claimant upon request;
    (ii) If the adverse benefit determination is based on a medical 
necessity or experimental treatment or similar exclusion or limit, 
either an explanation of the scientific or clinical judgment for the 
determination, applying the terms of the plan to the claimant's medical 
circumstances, or a statement that such explanation will be provided 
free of charge upon request; and
    (iii) The following statement: ``You and your plan may have other 
voluntary alternative dispute resolution options, such as mediation. 
One way to find out what may be available is to contact your local U.S. 
Department of Labor Office and your State insurance regulatory 
agency.''
    (k) Preemption of State law. (1) Nothing in this section shall be 
construed to supersede any provision of State law that regulates 
insurance, except to the extent that such law prevents the application 
of a requirement of this section.
    (2) (i) For purposes of paragraph (k)(1) of this section, a State 
law regulating insurance shall not be considered to prevent the 
application of a requirement of this section merely because such State 
law establishes a review procedure

[[Page 70271]]

to evaluate and resolve disputes involving adverse benefit 
determinations under group health plans so long as the review procedure 
is conducted by a person or entity other than the insurer, the plan, 
plan fiduciaries, the employer, or any employee or agent of any of the 
foregoing.
    (ii) The State law procedures described in paragraph (k)(2)(i) of 
this section are not part of the full and fair review required by 
section 503 of the Act. Claimants therefore need not exhaust such State 
law procedures prior to bringing suit under section 502(a) of the Act.
    (l) Failure to establish and follow reasonable claims procedures. 
In the case of the failure of a plan to establish or follow claims 
procedures consistent with the requirements of this section, a claimant 
shall be deemed to have exhausted the administrative remedies available 
under the plan and shall be entitled to pursue any available remedies 
under section 502(a) of the Act on the basis that the plan has failed 
to provide a reasonable claims procedure that would yield a decision on 
the merits of the claim.
    (m) Definitions. The following terms shall have the meaning 
ascribed to such terms in this paragraph (m) whenever such term is used 
in this section:
    (1)(i) A ``claim involving urgent care'' is any claim for medical 
care or treatment with respect to which the application of the time 
periods for making non-urgent care determinations--
    (A) Could seriously jeopardize the life or health of the claimant 
or the ability of the claimant to regain maximum function, or,
    (B) In the opinion of a physician with knowledge of the claimant's 
medical condition, would subject the claimant to severe pain that 
cannot be adequately managed without the care or treatment that is the 
subject of the claim.
    (ii) Except as provided in paragraph (m)(1)(iii) of this section, 
whether a claim is a ``claim involving urgent care'' within the meaning 
of paragraph (m)(1)(i)(A) of this section is to be determined by an 
individual acting on behalf of the plan applying the judgment of a 
prudent layperson who possesses an average knowledge of health and 
medicine.
    (iii) Any claim that a physician with knowledge of the claimant's 
medical condition determines is a ``claim involving urgent care'' 
within the meaning of paragraph (m)(1)(i) of this section shall be 
treated as a ``claim involving urgent care'' for purposes of this 
section.
    (2) The term ``pre-service claim'' means any claim for a benefit 
under a group health plan with respect to which the terms of the plan 
condition receipt of the benefit, in whole or in part, on approval of 
the benefit in advance of obtaining medical care.
    (3) The term ``post-service claim'' means any claim for a benefit 
under a group health plan that is not a pre-service claim within the 
meaning of paragraph (m)(2) of this section.
    (4) The term ``adverse benefit determination'' means any of the 
following: a denial, reduction, or termination of, or a failure to 
provide or make payment (in whole or in part) for, a benefit, including 
any such denial, reduction, termination, or failure to provide or make 
payment that is based on a determination of a participant's or 
beneficiary's eligibility to participate in a plan, and including, with 
respect to group health plans, a denial, reduction, or termination of, 
or a failure to provide or make payment (in whole or in part) for, a 
benefit resulting from the application of any utilization review, as 
well as a failure to cover an item or service for which benefits are 
otherwise provided because it is determined to be experimental or 
investigational or not medically necessary or appropriate.
    (5) The term ``notice'' or ``notification'' means the delivery or 
furnishing of information to an individual in a manner that satisfies 
the standards of 29 CFR 2520.104b-1(b) as appropriate with respect to 
material required to be furnished or made available to an individual.
    (6) The term ``group health plan'' means an employee welfare 
benefit plan within the meaning of section 3(1) of the Act to the 
extent that such plan provides ``medical care'' within the meaning of 
section 733(a) of the Act.
    (7) The term ``health care professional'' means a physician or 
other health care professional licensed, accredited, or certified to 
perform specified health services consistent with State law.
    (8) A document, record, or other information shall be considered 
``relevant'' to a claimant's claim if such document, record, or other 
information
    (i) Was relied upon in making the benefit determination;
    (ii) Was submitted, considered, or generated in the course of 
making the benefit determination, without regard to whether such 
document, record, or other information was relied upon in making the 
benefit determination;
    (iii) Demonstrates compliance with the administrative processes and 
safeguards required pursuant to paragraph (b)(5) of this section in 
making the benefit determination; or
    (iv) In the case of a group health plan or a plan providing 
disability benefits, constitutes a statement of policy or guidance with 
respect to the plan concerning the denied treatment option or benefit 
for the claimant's diagnosis, without regard to whether such advice or 
statement was relied upon in making the benefit determination.
    (n) Apprenticeship plans. This section does not apply to employee 
benefit plans that solely provide apprenticeship training benefits.
    (o) Applicability dates. This section shall apply to claims filed 
under a plan on or after January 1, 2002.

    Signed at Washington, DC, this 15th day of November, 2000.
Leslie Kramerich,
Acting Assistant Secretary, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 00-29766 Filed 11-20-00; 8:45 am]
BILLING CODE 4510-29-P