Administration Takes Action To Limit Junk Health Insurance

On July 7, 2023, the Departments of Health & Human Services (HHS), Labor, and Treasury (collectively the “tri-agencies”) published a proposal to alter federal regulation of short-term, limited duration health insurance (STLDI) and “hospital and fixed indemnity” insurance; both of these insurance products are largely exempt from federal and many state-level consumer protections. The proposed rule would effectively reverse a 2018 tri-agency rule designed to expand the marketing and sale of STLDI to consumers.

The administration also seeks public comment on the impact of other health insurance products and arrangements, namely specified-disease coverage, such as cancer-only or diabetes-only policies, and level-funded health plans. The proposed policies were prompted by President Biden’s April 5, 2022 Executive Order directing federal agencies to consider polices or practices that make it easier for consumers to enroll in and retain coverage, understand their coverage options, and protect consumers from low-quality coverage. Comments on these proposals are due 60 days after their publication in the Federal Register.

Changes To Short-Term, Limited Duration Insurance-–Regulatory Background

Federal law explicitly excludes from the definition of “individual health insurance coverage” short-term, limited duration insurance. As a result, most federal standards and rules that apply to individual health insurance, such as those under the Health Insurance Portability and Accountability Act (HIPAA), the Affordable Care Act (ACA), the Mental Health Parity and Addiction Equity Act (MHPAEA), and the No Surprises Act (NSA), do not apply to short-term plans. However, the federal statute does not define what short-term, limited duration insurance means. Rules promulgated by the U.S. Department of Health & Human Services in 2004 defined STLDI to be: “Health insurance coverage…that is less than 12 months after the original effective date of the contract.”

At that time, STLDI was generally used by consumers to fill brief gaps in their health insurance coverage, such as when a college student must disenroll from their student health plan over the summer months, or a newly hired employee must wait until the end of a probationary period to enroll in their employer’s health plan. However, after enactment of the ACA’s individual market reforms, some STLDI issuers began marketing their plans to consumers for up to 364 days, just shy of 12 months. They could offer these policies more cheaply than ACA individual market plans because, unlike ACA-compliant plans, STLDI issuers can deny policies to people with pre-existing conditions, set caps on benefits, and exclude from coverage critical benefits such as prescription drugs, maternity services, and mental health care. Many consumers purchased these policies in the mistaken belief that they provided comprehensive coverage, when in fact many of these plans covered only a fraction of their care if they got sick.

In response to these concerns, the tri-agencies issued an updated definition of STLDI in 2016. The new definition specified that the maximum coverage period for STLDI must be less than 3 months. The rules also required STLDI issuers to prominently display a disclosure to consumers stating that the coverage was not “minimum essential coverage” under the ACA, and that they could face a tax penalty under that law for failing to maintain health coverage.

However, in 2017, shortly after Congress failed to repeal the ACA, President Trump issued an Executive Order directing the federal government to expand access to short-term plans. In response to that directive, the tri-agencies in 2018 published a new definition of STLDI. Under those regulations, STLDI is defined as having an initial contract term of less than 12 months, and inclusive of renewals or extensions, having a duration of no longer than 36 months. These regulations also revised the language of the consumer disclosure to state that the coverage does not comply with ACA federal requirements, and to urge consumers to check their policy carefully for exclusions and limitations.

There is evidence that the longer duration of STLDI under the 2018 regulations has increased the number of people enrolled in this form of coverage. The National Association of Insurance Commissioners (NAIC) has collected data suggesting that the number of individuals in STLDI plans more than doubled between 2018 and 2019, from approximately 87,000 to 188,000. However, this is likely an undercount of the total number of people enrolled in STLDI because these data do not include enrollment in STLDI sold through associations. The Congressional Budget Office (CBO) and Joint Committee on Taxation have estimated that 1.5 million people could currently be enrolled in STLDI, although this projection was made before Congress passed enhanced premium tax credits for Marketplace coverage in 2021.

The Case For Revisiting The STLDI Definition: Risks For Consumers, Insurance Markets

The tri-agencies are proposing to change the definition of STLDI to help consumers more clearly distinguish between a short-term policy and comprehensive, ACA-compliant plans. They also seek to protect the individual market risk pool from adverse selection and keep premiums stable.

Risks For Consumers

Numerous recent studies have documented deceptive STLDI marketing practices that steer consumers seeking comprehensive insurance to STLDI products. Marketing materials often do not fully disclose that STLDI products do not cover pre-existing conditions or essential benefits, or pay only a fraction of the actual cost of medical services, leaving policyholders at significant financial risk if they get sick or injured. One study of the medical claims of 47 million plan enrollees found that the implied actuarial value of STLDI is 49 percent, compared to the 87 percent implied average actuarial value of a Marketplace plan. This means that STLDI issuers are, on average, covering only 49 percent of their enrollees’ medical costs. While this is likely highly profitable for the STLDI companies, their enrollees may not realize that the financial protection they were promised is largely illusory.

At the same time, the U.S. Government Accountability Office (GAO) and other researchers have found that many insurance agents and brokers have strong financial incentives to sell consumers STLDI instead of an ACA-compliant policy. One study found that brokers’ commissions for selling STLDI are up to 10 times higher than their commissions for selling an individual health insurance policy (averaging 23 percent for STLDI and only 2 percent for an ACA-compliant individual market policy).

In their proposed rule, the tri-agencies note that the 2018 extension of STLDI to 12 months (and renewable up to 36 months) appears to be contributing to consumer confusion and increasing the likelihood that people unknowingly purchase STLDI when they actually need and want comprehensive coverage. This risk has become an even greater concern as states disenroll millions from Medicaid, many of whom will need to seek another coverage option in the commercial insurance market.

Risk Pool Issues

Because STLDI issuers can deny coverage to people with pre-existing conditions and cap benefits, they tend to enroll people with a relatively low risk of needing medical care, compared to those in ACA-compliant plans. The tri-agencies note that after the 2018 rule lengthened the duration of STLDI, studies found that healthier individuals did indeed gravitate to these products, leaving a less-healthy population in the individual market risk pool. This contributed to an increase in individual market premiums in 2020.

Proposed Changes To STLDI

The administration is proposing to interpret “short-term” to mean a contract term of no more than 3 months. The term “limited duration” would be interpreted to mean that the maximum permitted duration for STLDI is no more than 4 months in total, inclusive of any renewals or extensions. However, the duration limit on STLDI applies to policies issued by the same issuer. Once their STLDI policy terminates, consumers could purchase another STLDI policy from a different issuer.

The tri-agencies also propose to update the disclosures that STLDI issuers must provide to consumers. Issuers would be required to prominently display the notice in at least 14-point font, on both marketing and application materials, including on websites that advertise to enroll consumers in STLDI. The proposed new disclosure language would say:

IMPORTANT: This is short-term, limited-duration insurance. This is temporary insurance. It isn’t comprehensive health insurance. Review your policy carefully to make sure you understand what is covered and any limitations on coverage.

This insurance might not cover or might limit coverage for:

preexisting conditions; or

essential health benefits (such as pediatric, hospital, emergency, maternity, mental health, and substance use services, prescription drugs, or preventive care).

You won’t qualify for Federal financial help to pay for premiums or out-of-pocket costs.

You aren’t protected from surprise medical bills.

When this policy ends, you might have to wait until an open enrollment period to get comprehensive health insurance.

Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you’re eligible for coverage through your employer or a family member’s employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy.

The tri-agencies are considering whether to require state-specific information on these disclosures, such as the contact information for the state-based Marketplace. They are also considering adding a description of the maximum permitted length of STLDI, to further clarify for consumers the differences between these products and comprehensive coverage. The tri-agencies are seeking public comment, particularly from representatives of underserved communities, on both the language and formatting of the proposed notice.

The administration is also seeking public comment on whether there are additional ways to help consumers differentiate between STLDI and comprehensive insurance options. The tri-agencies also note concerns that STLDI issuers may engage in the deceptive marketing of their products to consumers during the annual open enrollment windows for ACA-compliant plans, increasing the likelihood of consumer confusion. Some states have prohibited the sale of STLDI during the annual open enrollment period. The tri-agencies seek public feedback on ways to prevent or mitigate the potential that consumers will mistakenly purchase STLDI instead of comprehensive coverage during the annual open enrollment period.

Most sales of STLDI are conducted through group trusts or associations that are not related to employment. Quite often, these associations set up headquarters in a state with lax regulations and market their products nationwide. State insurance regulators have reported that that they often lack the authority needed to monitor STLDI sold through these national associations to adequately protect consumers in their states. While the tri-agencies have not proposed new policies specific to STLDI sold through associations, they seek public comment on how best to support state oversight of these marketing arrangements.

The proposed new duration limits would apply only to new STLDI policies; policies issued before the effective date of the final rule could maintain the duration specified in the 2018 rule: a contract term of up to 12 months, with a maximum duration of up to 36 months. However, the proposed new consumer disclosure requirements would be required for policies sold before as well as after the effective date. The expected “effective date” for the new STLDI definition would be 75 days after publication of the final rule.

Impact Of The Proposed STLDI Changes

The CMS Office of the Actuary (OACT) estimates that the proposed provisions regarding STLDI would increase Marketplace enrollment by approximately 60,000 people in 2026, 2027, and 2028. The administration also projects that the rules would likely result in a reduction in consumers’ out-of-pocket expenses, medical debt, and risk of medical bankruptcy for consumers that switch to comprehensive coverage.

In addition, individuals shifting from STLDI to Marketplace plans are expected to be, on average, healthier than the current Marketplace population. OACT therefore estimates that the proposal would reduce federal spending on premium tax credits by approximately $120 million in 2026, 2027, and 2028, due to a healthier risk pool.

The tri-agencies also believe that the proposal would help reduce health inequities by increasing regulation of issuers offering skimpy insurance plans and encouraging enrollment in comprehensive coverage. They seek comments on the potential health equity implications of these proposed rules.

Changes To Fixed Indemnity Insurance-–Regulatory Background

Most of the federal consumer protections and standards that apply to comprehensive individual and group market health insurance, such as those under HIPAA, ACA, MHPAEA, and the NSA, do not apply to a set of products known as “excepted benefits.” Under the Public Health Service Act, there are four categories of excepted benefits: (1) independent, non-coordinated benefits (the relevant category here); (2) benefits that are excepted in all circumstances; (3) limited excepted benefits; and (4) supplemental excepted benefits. The first category, “independent, non-coordinated excepted benefits,” includes products called “hospital indemnity” and “fixed indemnity” insurance.

To be considered an excepted benefit, federal rules establish the following conditions:

The benefits must be provided under a separate policy;
There can be no coordination between the policy and any employer group plan; and
The benefits under the policy must be paid without regard to whether any benefits are paid out under any employer group health plan or individual market health insurance policy.

Hospital and fixed indemnity policies are intended to be income replacement, not health insurance policies. Federal rules issued in 2004 require hospital indemnity and other fixed indemnity insurance in the group market to pay a fixed dollar amount per day (or other period) during the course of treatment, regardless of the actual medical expenses incurred. The same is true for hospital and fixed indemnity policies sold in the individual market, but carriers can either pay a fixed dollar amount per day or per service (for example, $100/day or $50/visit). As income replacement policies, benefits have traditionally been paid directly to a policyholder, rather than to a health care provider or facility, and the policyholder has discretion over how to use their benefits.

In 2014, the tri-agencies attempted to update rules relating to hospital and fixed indemnity polices for the individual market. Beginning in 2014, the ACA required individuals to maintain minimum essential coverage or pay a tax penalty (the “individual mandate”). The administration was concerned that consumers could mistakenly believe that fixed indemnity policies would qualify as the minimum essential coverage required by the ACA. They adopted a rule stating that hospital and fixed indemnity policies may only be provided to individuals who attest that they have the minimum coverage required under the ACA. However, this rule was struck down in a 2016 federal court decision, Central United Life Insurance Company v. Burwell.

The Case For Updating Rules For Fixed Indemnity Policies: Deceptive Marketing, Consumer Confusion

Although it is not known how many people are enrolled in hospital or fixed indemnity policies, several studies have documented these companies’ aggressive marketing and sales tactics, many of which lead consumers to believe they are purchasing a comprehensive health insurance policy when they are not. The tri-agencies also observe that companies are designing and packaging these policies to more closely resemble comprehensive health insurance, but without any of the consumer protections associated with that coverage.

Consumers who purchase these policies are often not aware they cover only a fraction of the cost of their medical expenses. Consumers can be left with tens of thousands of dollars in unpaid medical bills. According to NAIC data from 2021, the medical loss ratios of these types of products averaged 40 percent; by comparison, the medical loss ratio of individual market comprehensive health insurance averaged 87 percent. The deficiencies of these products, as well as STLDI, were made even more apparent during the COVID-19 public health emergency, as they often did not cover, or only covered a fraction of, critical treatment costs, and were exempted from federal mandates to cover and waive cost-sharing for COVID-19 tests and vaccines.

The tri-agencies have also obtained evidence that some hospital indemnity and fixed indemnity insurers are paying benefits directly to medical providers and facilities, rather than to the policyholder. They note that hospital and fixed indemnity policies are intended to be income replacement policies, not health insurance policies, and that making payments directly to providers obscures the differences between these products and a comprehensive health insurance plan. When issuers of these products pay benefits on a per service, as opposed to per period, basis, it can further contribute to consumer confusion over the nature of the product they have purchased.

Proposed Changes To Hospital And Fixed Indemnity Policies

The tri-agencies proposals to amend hospital and fixed indemnity rules are intended to reduce the risk that consumers will be confused into purchasing such products as a substitute for comprehensive health insurance. First, HHS proposes to require that fixed indemnity products sold in the individual market provide benefits paid only on a per-period basis (such as per day). Such products would no longer be able to pay out benefits on a per-service basis (such as per hospital stay, or per doctor’s visit). Such a change would restore fixed indemnity products to their traditional intent, that is, to help replace lost income when someone is out of work due to an illness. This shift should also help reduce the potential that consumers will be confused into believing such policies are comprehensive health insurance.

In the employer group market, the tri-agencies seek new standards for the payment of fixed benefits. Specifically, the tri-agencies propose to require that benefits be paid regardless of the actual or estimated amount of expenses incurred by the policyholder.

The tri-agencies would also require issuers of hospital and fixed indemnity products to display a consumer notice in both the group and individual insurance markets. The notice would need to say, in prominent, 14-point font:

Notice to Consumers About Fixed Indemnity Insurance

IMPORTANT: This is fixed indemnity insurance. This isn’t comprehensive health insurance and doesn’t have to include most Federal consumer protections for health insurance.

Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you’re eligible for coverage through your employer or a family member’s employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy.

The tri-agency intends this notice to help consumers more clearly distinguish between these products and comprehensive health insurance.

“Noncoordination” Of Benefits Requirement

Additionally, the tri-agencies raise concerns that some employers are offering employees a “package” of coverage options that on the surface appear to be comprehensive coverage but in fact leave workers exposed to significant financial liability if they or a family member needs care. Such packages may include a stripped-down group health plan (such as a preventive services-only plan) combined with a fixed indemnity policy labeled as an excepted benefit. However, federal rules for such excepted benefits prohibit coordination between the group health plan and the excepted benefit. If the package described above uses the fixed indemnity policy to fill in gaps in the group health plan, it would not meet federal “noncoordination” requirements. The tri-agencies provide plans and issuers with new examples to clarify this.

Tax Treatment Of Payments

The U.S. Treasury Department and Internal Revenue Service (IRS) report concerns that some employment-based coverage arrangements are skirting income and employment taxes by characterizing income replacement benefits that may primarily replace lost income—like fixed indemnity, specified disease, or hospital indemnity products—as benefits for medical care. In general, employer premiums for “accident or health insurance” are, under federal tax law, excluded from employees’ gross income.

The Treasury Department and IRS are proposing to clarify tax rules with respect to hospital and fixed indemnity and similar policies offered by employers to workers and their dependents. For payments made under these policies to qualify for the tax exclusion for employer-sponsored health coverage, payments from hospital indemnity, fixed indemnity, or similar policies would have to be related to a specific health expense that is not otherwise reimbursed. In other words, the exclusion of employer health plan benefits from gross income would not apply if the benefits paid under a hospital indemnity, fixed indemnity, or disease specific policy were paid out without regard to the actual amount of medical expenses incurred by the enrollee. The proposed amendments would also clarify that the requirement to substantiate that reimbursements under the policy constitute “qualified medical expenses” applies to these products, in order for those reimbursements to be excluded from an individual’s gross income.

The tri-agencies are seeking public comments on the above proposals.

Requests For Public Comment: Other Products And Coverage Arrangements

The proposed amendments to STLDI and hospital and fixed indemnity rules do not address other excepted benefits and coverage arrangements that could put consumers and, in some cases, small employers, at financial risk. The tri-agencies are seeking public comment on two additional coverage options: specified disease excepted benefits and level-funded plan arrangements.

Specified Disease Products

Specified disease excepted benefits generally provide a cash payment upon the diagnosis of a particular medical condition, such as cancer or diabetes. As “excepted benefits,” these policies are exempt from the federal consumer protections that apply to comprehensive health insurance, such as HIPAA, ACA, MHPAEA, and the NSA.

While the tri-agencies are not proposing new regulations with respect to specified disease benefits, they are asking for public comment on whether their proposed changes to fixed indemnity products could affect the market for disease specific products. Specifically, the tri-agencies ask whether the new limits on hospital and fixed indemnity products could prompt issuers to try to shift enrollment into specified disease products as a replacement for comprehensive coverage. The tri-agencies also ask the public whether consumer protections or disclosures would be helpful to reduce potential confusion about the differences between these products and comprehensive insurance coverage.

Level-Funded Plan Arrangements

Many small employers are leaving the ACA-compliant group market and opting for “level-funded” health insurance arrangements. These arrangements combine a self-funded health plan with a stop-loss insurance policy. An estimated 35 percent of covered workers in small firms are now in a level-funded health plan. Employer-sponsored self-funded plans are generally exempt from state insurance regulation, and they are not subject to the rating restrictions and minimum essential benefit standards required under the ACA for the small-group market. Further, because issuers of the stop-loss policy can use underwriting (i.e., the analysis of an employer’s claims experience) to determine a group’s eligibility for the policy and the rate, they are able to cherry pick healthy employer groups out of the fully insured market. Later, if an employee or dependent in one of those groups gets a high-cost medical condition, the issuer can dump the employer back into the fully insured market.

Often, the level-funded plans that small employers purchase come with low attachment points for stop-loss coverage. Since the employer pays a monthly amount to the stop-loss issuer that resembles a premium, they may not realize they have become the sponsor of (and taken on the fiduciary duties for) a self-funded plan. The NAIC has documented several consumer protection concerns associated with level funding arrangements, including excluded benefits, deadlines that leave the employer responsible for late-submitted claims, termination clauses that give the stop-loss issuer just 30 days to end the contract, without cause, and clauses that authorize premium increases at any time, including retroactively.

The expanded use of level funded arrangements can lead to adverse selection in the small group health insurance market and rising premiums for small employers that have older or sicker workers. Although the tri-agencies are not currently proposing new regulations for level-funded arrangements, they are seeking public comments to try to better understand how these plans are being marketed and sold, as well as their impact on employers, workers, and the group market. The administration poses several specific questions, including:

How prevalent are level-funded group health plans among private and public employers? How many individuals are covered under level-funded plans?
What factors are leading an increasing number of plan sponsors, particularly small employers, to utilize level-funded plans?
What types of benefits are commonly offered or not offered by level-funded plans? How do the benefit packages differ from fully-insured plans?
What benefits and consumer protections are generally no longer included when a small employer converts its plan from fully-insured coverage to a level-funded arrangement? Are changes in benefits and consumer protections communicated to plan participants and beneficiaries, and if so, how?
Are additional safeguards needed with respect to level-funded arrangements to ensure that individuals and/or small employers are not subjected to unexpected costs resulting from the stop-loss coverage failing to comply with Federal group health plan requirements?
What impact, if any, does the use of level-funding for plans offered by small employers have on the insured small group market?

Severability

In anticipation of a potential court challenge to these rules, if finalized, the tri-agencies state their intent that if any portion of the rule is invalidated, the other provisions are severable.

Authors’ Note

The author thanks Jason Levitis for his review and edits to this post.

The Robert Wood Johnson Foundation provided grant support for the author’s time researching and writing this post.

Sabrina Corlette, “Administration Takes Action To Limit Junk Health Insurance,” Health Affairs Forefront, July 10, 2023, https://www.healthaffairs.org/content/forefront/administration-takes-action-limit-junk-health-insurance. Copyright © 2023 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.