The Department of Health and Human Services (“HHS”) recent adoption of fixed indemnity insurance regulations1 has drawn new attention to the disconnect between federal and state law as to what constitutes group health insurance coverage. HHS’s new fixed indemnity insurance regulations and FAQ guidance that HHS released on January 9, 2014, establishes separate rules for fixed indemnity products offered in the group and individual markets. Under federal law, only employee welfare benefits plans are considered group coverage2, but state laws recognize additional types of group coverage unrelated to employee welfare benefit plans including association, trust, franchise, etc.3
The HHS fixed indemnity benefit final rule amends 45 C.F.R Section 148, which regulates the individual health insurance market. The final rule amends the types of benefits that are excluded from the Public Health Service Act’s (“PHSA”) insurance reform regulations as amended by the Patient Protection and Affordable Care Act. The rule provides that the insurance reform requirements and the group and individual insurance reform provisions do not apply to individual health insurance in relation to the provision of hospital indemnity benefits or any other fixed indemnity benefits, and sets new standards for offering those new benefits.
The key to interpreting the impact of the HHS rule is understanding what constitutes individual health insurance coverage under federal law. Under the PHSA regulations, “individual health insurance coverage” includes all health insurance coverage (as defined in § 144.103) that is neither health insurance coverage sold in connection with an employment-related group health plan, nor short-term, limited-duration coverage.4
Under the PHSA, and implementing regulations, all coverage is individual coverage unless the coverage is 1) employment-related, and 2) a group health plan. Both conditions must be met. Thus, some employment-based coverage might be regulated as individual coverage under the federal rules if is not a “group health plan.” The PHSA defines a “group health plan” as an employee welfare benefit plan as defined by the Employee Retirement Income Security Act (“ERISA”) to the extent that the plan provides medical care.5 As a result, if coverage is not part of an employee welfare benefit plan under ERISA, it is individual coverage under the federal rules.
This creates the situation, and the ensuing confusion, that a hospital indemnity or other fixed indemnity product might have different standing under state and federal law. Federal regulators contemplated this situation. The federal rules state that “In some cases, coverage that may be considered group coverage under State law (such as coverage sold through certain associations) is considered individual coverage” under federal rules.6
HHS also noted that this was permissible under the PHSA. Federal rules provide that the “individual market rules of this part do not prevent a State law from establishing, implementing, or continuing in effect standards or requirements unless the standards or requirements prevent the application of a requirement of this part.”7
Finally, HHS addressed this issue in the preamble to the final fixed indemnity rule. HHS noted that the PHSA “defines the individual market in terms of health insurance (that is, not in terms of excepted benefits), and defines individual health insurance coverage.” HHS further states that it was its “intention that new fixed indemnity rule applies to excepted benefits sold in the ‘individual market’ …This would preempt any state law that classifies an individual product as a ‘group’ product (for example, individual policies sold through associations).”8
These new rules have created confusion at the state level. State regulators are still grappling with issues such as whether a product that is regulated as an individual product at the state level should still be filed as a group product at the state level. States need to resolve how these new federal regulations impact policies that were previously filed under what was the common state regulatory interpretation of the HIPAA excepted benefits rules. A related issue is whether these new rules should even apply to policies that were issued on a guaranteed renewal basis. Unfortunately, the new rules create more questions than they answer and the industry and state regulators remain in a “wait and see” mode.
1The requirements of these new regulations were discussed in the article “HHS Regulates, and Confuses, Fixed Indemnity Market” published in the firm’s Summer 2014 newsletter.
2This limited definition of group health insurance was created as part of the Health Insurance Portability Act (“HIPAA”), but state regulators generally only applied it to major medical coverage.
3See, for example NAIC Model 100
445 C.F.R. § 148.102.
542 U.S.C. § 300gg–91(a)(1).
645 C.F.R. § 148.102.
745 C.F.R. § 148.210(b).
8Federal Register, Vol. 79, May 27, 2014 at 30256.