Last month I wrote about a proposed rule published by the U.S. Department of Health and Human Services (HHS) that attempts to crack down on the use of “fixed indemnity” insurance policies to evade consumer protections required of traditional health insurance plans under the Affordable Care Act (ACA). On May 16^th the Administration finalized the rule with few changes.

Concerns about fixed indemnity policies

As previously noted in this blog, state and federal regulators have had longstanding concerns that insurance companies would market fixed indemnity policies, which are not subject to the ACA’s consumer protections, as alternatives to health insurance. Not only are these policies often very skimpy, leaving consumers on the hook for unexpected and sometimes exorbitant medical bills, but because they also don’t count as minimum essential coverage (MEC) for purposes of the ACA’s individual mandate requirement, they leave unsuspecting policyholders vulnerable to a tax penalty.

HHS sought to provide rules that would protect consumers from the risks of fixed indemnity insurance while also allowing legitimate sales of these products as a supplement to traditional health insurance. To that end, the agency proposed four requirements that fixed indemnity policies must satisfy in order to be exempt from the ACA’s consumer protections:

(1)    The insurer must only sell fixed indemnity policies to people who already have MEC;

(2)    The insurer can’t coordinate benefits between the minimum essential coverage and the fixed indemnity policy;

(3)    The insurer pays benefits in a fixed amount per day of hospitalization or illness or per service (i.e., $100/day or $50/visit) and without regard to the amount of benefits provided; and

(4)    The insurer is required to 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.”

Adoption of a Final Rule and Outstanding Questions

In its final rule, HHS largely maintained these requirements as proposed, but with a few modifications. One outstanding question had been how insurers would know whether a consumer was already enrolled in MEC. HHS could have required insurers to collect some sort of proof of coverage, but the final rule instead allows them to rely on consumers’ self-attestations without any further documentation.

In its proposed rule HHS also asked for comment on whether the rules should be enhanced to require that fixed indemnity insurance only be sold to people who have coverage that meets the essential health benefit requirements. This would have been helpful for some individuals enrolled in large group plans that, while they qualify as MEC under federal rules, actually provide very skimpy coverage. In its final rule HHS decided not to provide this protection. As a result, HHS and the Department of Labor will need to watch for whether this has created incentives for insurers to market bare bones plans that qualify as MEC, but require employees to purchase fixed indemnity policies to help offset shortfalls in the underlying coverage.

Ultimately, fixed indemnity policies are primarily regulated at the state level by departments of insurance. It will be incumbent on state regulators to monitor the marketing and sale of these policies, and to take action if and when consumers are buying them in the mistaken belief they provide comprehensive health insurance.