Financial reform has become entangled in the fight over confidentiality of patient medical records, adding a new obstacle to the long-sought legislation at its most critical moment.

Negotiators are expected to be named this week to hammer out a compromise between the House and Senate reform bills, and they already face tough calls on privacy protections for financial records as well as nitty- gritty banking issues such as community reinvestment requirements and powers for direct bank subsidiaries.

Injecting an issue that riles the American Medical Association, the American Civil Liberties Union, and other lobbying heavyweights is the last thing the financial services industry wanted-especially when the bill is closer to enactment than ever.

"It is a potential stumbling block," said Edward L. Yingling, chief lobbyist for the American Bankers Association. "It brings with it baggage that has nothing to do whatsoever with HR 10."

That's the number of the House bill adopted July 1, which would bar insurance companies from sharing medical records without customer permission. Numerous exceptions were granted for insurance underwriting, research, claims processing, and other purposes. Lawmakers modeled the provisions on restrictions in the Federal Reserve Board's approval of the Citicorp-Travelers Group merger last year.

The Senate bill would place no new privacy limits on financial institutions.

The medical safeguards seem to be the toughest privacy protections in the House bill because they require customer permission. By contrast, financial institutions could share most other data with third parties, provided they give customers the opportunity to block such transfers. No new restrictions would be placed on the sharing of financial information among affiliates.

But unfortunately for supporters of financial reform, they have stepped into a controversy almost as complex and old as Glass-Steagall Act reform itself. The medical privacy controversy is a vestige of President Clinton's failed health-care reform plan and earlier fights, and there are competing proposals in Congress.

Democrats hotly criticized the exceptions to the medical privacy protections in the financial reform bill as so loosely worded that insurance companies could share medical records with other insurers, credit bureaus, and marketing researchers.

"Although it is extremely well intentioned, the exceptions to it one could drive a Mack truck through," Rep. John J. LaFalce, the House Banking Committee's ranking Democrat, said during debate.

They also complained that the bill would override tougher state laws, be hard to enforce, and establish murky rules for getting consent. Finally, they said it would strip the Department of Health and Human Services of authority granted in a 1996 law to craft tough medical privacy regulations if Congress fails to act by Aug. 21.

Echoing the Democrats' concerns are the AMA, ACLU, and consumer groups. Republicans, however, argue that the proposal would be far better than current law and could be replaced by more comprehensive legislation later. "I have never known a more misunderstood provision," House Banking Chairman Jim Leach said.

Yet the Clinton administration said last week that it "strongly opposes" the House bill's medical privacy section and urged lawmakers to consider it as separate legislation.

Most sources are predicting House-Senate negotiators will jettison the medical provisions to save the bill. Republicans may demand in return a six-month extension of the Aug. 21 deadline.

Insurance industry lobbyists said that criticisms of the provisions have been exaggerated, but they would not object to breaking them out. "If this is an impediment to the bill, then it ought to go," said Allen R. Caskie, a senior counsel for the American Council of Life Insurance.

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