When CHIRblog last reported on fixed indemnity insurance in early 2013, we flagged the Obama Administration’s attempt to limit the use of fixed indemnity policies as a loophole out of the Affordable Care Act’s (ACA) consumer protections. In a proposed rule released on Friday, March 14, 2014, the U.S. Department of Health and Human Services (HHS) has adjusted its stance, while continuing to guard against the sale of a fixed indemnity policy as a substitute for health insurance in the individual market.

What are fixed indemnity policies?

Federal law (and most states) does not consider fixed indemnity insurance to be traditional medical insurance.  Historically, they have been considered income replacement policies, to help compensate people for time out of work. These policies are considered “excepted benefits” under the Public Health Service Act, and exempted from the consumer protections in the ACA that apply to traditional insurance, such as a minimum set of comprehensive benefits and a cap on out-of-pocket costs. However, both federal and state regulators have expressed concerns that insurance companies could attempt to market these policies in such a way that they appear to consumers to be health insurance, even though the policies don’t cover a meaningful set of benefits or protect people from significant financial harm if they get sick. Because they don’t count as minimum essential coverage for purposes of the ACA’s individual mandate requirement, they could also subject unsuspecting policyholders to a tax penalty.

Previously published rules required that, in order to be exempted from federal (and many state) standards for health insurance, fixed indemnity insurance must pay benefits on a fixed amount basis, without regard to the cost of the item or service. In addition, federal rules required insurers to pay benefits only on a per-period basis (i.e., per day) and not on a per-service basis. For example, under federal rules, a policy that pays a fixed $50 per visit for doctors’ visits and $100 per day for a hospitalization would not be considered “fixed indemnity.” If not fixed indemnity, it’s not an “excepted benefit” product and therefore would be subject to the same protections required of a traditional health insurance product.

What do HHS’ proposed rules say?

In response to push back from insurance industry stakeholders and state insurance regulators, HHS is revising its definition of fixed indemnity insurance in the individual market. First, HHS proposes to eliminate the current requirement that these policies pay benefits only on a per-period, and not per-service basis. Second, HHS would impose a new requirement that insurers sell fixed indemnity insurance only to people who already have minimum essential coverage, as defined under the ACA. Third, HHS would prohibit any coordination between the benefits in a fixed indemnity policy and an exclusion of benefits under other health coverage. Fourth, insurers must display a prominent notice (at least 14 point font) that says the following: “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.”

Why did the insurance industry and state regulators want the rule changed?

Insurance company stakeholders, as well as the National Association of Insurance Commissioners (NAIC) asserted that fixed indemnity coverage that pays variable fixed amounts based on the services delivered (i.e., a doctor’s visit or a hospital stay) could be an important source of supplemental coverage for people who already have comprehensive medical insurance.  For example, some people might want a fixed indemnity policy to help pay co-payments and other out-of-pocket costs.

What are the risks for consumers?

HHS’ proposed rule attempts to protect consumers from being duped into buying a fixed indemnity policy as their sole source of health coverage, by requiring insurers to sell these policies only to people who can demonstrate that they already have minimum essential coverage. For people who have access to comprehensive medical coverage, this is an important protection. However, some individuals may be enrolled in group health plans that, while they qualify as “minimum essential coverage” under federal rules, may actually provide only bare bones coverage. As a result, HHS is asking for comment on whether the rules should be enhanced to require that fixed indemnity insurance only be sold to people who have health coverage that meets the essential health benefit requirements.

In addition, if the same insurer is allowed to sell both major medical coverage and a fixed indemnity policy to the same person, that could create an incentive for the insurer to carve out certain benefits from its major medical policy in order to entice people into buying a separate fixed indemnity policy as a “supplemental” benefit. The Administration has instituted protections in the group market so that major medical and fixed indemnity plans are sold by different insurers, but they haven’t done so in the individual market. In the preamble to this proposed rule, federal regulators suggest that this might be an important protection to include in final regulations.