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HHS Regulates, and Confuses, Fixed Indemnity Market

08.18.2014

The Department of Health and Human Services (“HHS”) recently released regulations and guidance on the treatment of fixed indemnity products.  HHS action is important since it provides a road map as to how HHS believes these products should be regulated under the Patient Protection and Affordable Care Act (“ACA”). 

HHS bifurcated the regulation of “individual” and “group” fixed indemnity products. Group fixed indemnity products, defined as products offered as part of an employee welfare benefit plan, are defined under a FAQ that HHS released on January 9, 2014.  (FAQ 18)  Individual products, i.e., all products that are not part of an employee welfare benefit plan, are regulated under regulations that HHS published in the Federal Register, May 27, 2014. 

Individual Products.  The new individual regulations establish four standards that must be met in order for a hospital or other fixed indemnity product to qualify as an excepted benefit (i.e., a benefit not subject to ACA reforms).  The first standard provides that the benefits are provided only to individuals who have other health coverage that qualifies as “minimum essential coverage”.  Insurers are required to obtain an attestation from the proposed insured that the individual has coverage for minimum essential coverage. For new business issued after January 1, 2015, this attestation must be obtained at application.  For existing business, the new regulation states that an attestation must be obtained at renewal.

The regulation also implies that coverage must be cancelled if an insurer is unable to obtain this attestation at renewal.  Unfortunately, this standard does not seem to take into consideration either the fact that fixed indemnity products are guaranteed renewable under state law or the inherent unfairness of cancelling an individual’s coverage simply because the individual purchased the product under existing state insurance department interpretations of what qualified as a fixed indemnity product.  State regulators, working through the NAIC and with HHS, will need to resolve this issue to ensure that consumers are protected.

The second standard provides that there is no coordination between the provision of benefits and an exclusion of benefits under any other health coverage.  This is consistent with existing state regulation. 

Third, the HHS regulations provide that the benefits must be paid in a fixed dollar per day and/or illness or per service, regardless of the amount of expenses incurred and regard to the amount of benefits provided with respect to the event or service under any other health coverage. 

Finally, the regulation provides that the following notice must be provided: “THIS IS A SUPPLEMENT TO HEALTH INSURANCE AND IS NOT A SUBSTITUTE FOR MAJOR MEDICAL COVERAGE.  LACK OF MAJOR MEDICAL COVERAGE (OR OTHER MINIMUM ESSENTIAL COVERAGE) MAY RESULT IN AN ADDITIONAL PAYMENT WITH YOUR TAXES.”  For new business, beginning January 1, 2015, this notice must be included in the application.  For in-force business, the notice must be delivered shortly before the first renewal although insurers are only required to provide the notice once.

Group Products.  HHS’ rules for group fixed indemnity products also include a four-part test; however, the group standards vary significantly from the individual rules.   For example, the group rules do not include an attestation or the notice requirement.  In addition, per service benefits are not permitted in the group market.  In order to qualify as an excepted benefit, a group fixed indemnity product must meet the following requirements: 1) it must be a separate policy, certificate, or contract of insurance; 2) there may not be any coordination between the provision of the benefits and an exclusion of benefits under any group health plan maintained by the same plan sponsor; 3) the benefits must be paid with respect to an event without regard to whether benefits are provided, with respect to the event under any group health plan maintained by the same plan sponsor; and 4) the insurance must pay a fixed dollar amount per day (or per other period) of hospitalization or illness (for example, $100/day) regardless of the amount of expenses incurred.

Left unanswered is how recent state regulations and insurance department guidance on fixed indemnity insurance interact with the new HHS rules.  Hopefully this is another issue that the state regulators and the NAIC will be able to clarify.