We reported in a recent post on proposed regulations dealing with, among other things, the treatment of hospital indemnity or other fixed indemnity insurance products in the group market. This post takes a closer look at the future of these products under the proposed rules and in light of a recent case, Central United Life v. Burwell, which struck down a final Department of Health and Human Services regulation requiring policyholders to certify that they had Affordable Care Act (ACA)-complaint minimum essential coverage in addition to fixed indemnity coverage for the latter to qualify as an excepted benefit. While the regulation in issue in Central United Life governed the individual market, the case’s reasoning could inform the final regulations governing hospital and fixed Indemnity policies in the group market.

We conclude that, in the absence of some significant changes to the proposed regulations, the market for hospital and fixed Indemnity policies is headed for some upheaval.

Background

The term “voluntary” has more than one meaning in the benefits context: Voluntary benefits or products can mean and refer to:

• Benefits that are exempt from coverage under the Employee Retirement Income Security Act (ERISA) pursuant to a Department of Labor final regulation;
• A broad range of employee-pay-all insurance products and coverages including life, disability, critical illness, accident, hospital and fixed indemnity, and even pet insurance; and
• Hospital indemnity or other fixed indemnity insurance and/or critical illness policies that are subject to ERISA but intended to qualify as HIPAA “excepted benefits.”

It is this last meaning—i.e., hospital/fixed indemnity coverage—that is the subject of this post. When properly structured as excepted benefits, these policies are exempt from the myriad insurance market and other mandates imposed by the ACA. As a practical matter, these policies are commercially viable only if they are exempt from the ACA.

Individual vs. Group Markets

The market for hospital/fixed indemnity products is bifurcated into “individual” and “group” products.

• Group hospital/fixed indemnity products are those that are made available under an “employee welfare benefit plan” as that term is defined and described under ERISA. (These plans can nevertheless escape regulation under ERISA if the plan satisfies a regulatory safe harbor for “voluntary” arrangements—within the meaning of the first bullet point above.) Under final regulations issued by the Departments of Health and Human Services, Labor and Treasury, in order for a hospital/fixed indemnity product to qualify as an excepted benefit in the group market (i) benefits must be provided under a separate policy, certificate, or contract of insurance; (ii) there can be no coordination between the provision of the benefits and an exclusion of benefits under any group health plan maintained by the same plan sponsor; (iii) the benefits must be paid with respect to an event without regard to whether benefits are provided with respect to the same event under any group health plan maintained by the same plan sponsor; and (iv) the benefit must consist of a fixed dollar amount per day (or per other period) of hospitalization or illness (e.g., $100/day) regardless of the amount of expenses incurred.
• The Department of Health and Human Services (HHS) has interpretive authority over the Public Health Service Act (“PHS Act”) for individual market products. Final HHS rules issued in 2014 impose four requirements that must be satisfied for a “hospital or other fixed indemnity product” to qualify as an excepted benefit: (i) benefits must be provided only to individuals who have other health coverage that qualifies as “minimum essential coverage;” (ii) there must be no coordination between the provision of benefits and an exclusion of benefits under any other health coverage: (iii) benefits must be paid in a fixed dollar amount per period of hospitalization or illness and/or per service, regardless of the amount of expenses incurred and without regard to the amount of benefits provided with respect to the event or service under any other health coverage; and (iv) notice in the form prescribed in the regulation clearly identifying the product as other than “major medical coverage” must be provided to the purchaser.

While this post focuses principally on the group market, the individual market rules are important in the context of the Central United Life case, which is discussed in the next section.

The January 2013, FAQ

In an FAQ issued January 24, 2013, the Departments of Health and Human Services, Labor and Treasury/IRS (the “Departments”) focused on hospital indemnity or other fixed indemnity policies in the group market that paid benefits other than on a “per period” basis. The regulators objected to the practice of paying benefits on a “per service” basis, saying:

Various situations have come to the attention of the Departments where a health insurance policy is advertised as fixed indemnity coverage, but then covers doctors’ visits at $50 per visit, hospitalization at $100 per day, various surgical procedures at different dollar rates per procedure, and/or prescription drugs at $15 per prescription. In such circumstances, for doctors’ visits, surgery, and prescription drugs, payment is made not on a per-period basis, but instead is based on the type of procedure or item, such as the surgery or doctor visit actually performed or the prescribed drug, and the amount of payment varies widely based on the type of surgery or the cost of the drug. Because office visits and surgery are not paid based on “a fixed dollar amount per day (or per other period),” a policy such as this is not hospital indemnity or other fixed indemnity insurance, and is therefore not excepted benefits. When a policy pays on a per-service basis as opposed to on a per-period basis, it is in practice a form of health coverage instead of an income replacement policy. Accordingly, it does not meet the conditions for excepted benefits.

According to the regulators, “[w]hen a policy pays on a per-service basis as opposed to on a per-period basis, it is in practice a form of health coverage instead of an income replacement policy.” But he requirement that benefits be paid on the basis of an “amount per day (or per other period)” and not on a per-service basis appears nowhere in the statute. It is, rather, a regulatory contrivance. Here is the relevant portion of the statue (HIPAA, Title I, section 101):

(c) EXCEPTION FOR CERTAIN BENEFITS IF CERTAIN CONDITIONS MET.—

(1) LIMITED, EXCEPTED BENEFITS.—The requirements of this part shall not apply to any group health plan (and group health insurance coverage offered in connection with a group health plan) in relation to its provision of excepted benefits described in section 706(c)(2) if the benefits—

(A) are provided under a separate policy, certificate, or contract of insurance; or

(B) are otherwise not an integral part of the plan.

(2) NONCOORDINATED, EXCEPTED BENEFITS.—The requirements of this part shall not apply to any group health plan (and group health insurance coverage offered in connection with a group health plan) in relation to its provision of excepted benefits described in section 706(c)(3) if all of the following conditions are met:

(A) The benefits are provided under a separate policy, certificate, or contract of insurance.

(B) There is no coordination between the provision of such benefits and any exclusion of benefits under any group health plan maintained by the same plan sponsor.

(C) Such benefits are paid with respect to an event without regard to whether benefits are provided with respect to such an event under any group health plan maintained by the same plan sponsor.

(Emphasis added).

The regulations interpreting this rule [Treas. Reg. §54.9831-1(c)(4)(iii); Labor Reg. §2590.732(c)(4)(iii); HHS Reg. § 146.145(b)(4)(iii)] add the “per day” (or other period gloss):

Excepted benefits that are not coordinated. . . .  To be hospital indemnity or other fixed indemnity insurance, 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.

Curiously and inexplicably (at least to the authors of this post), this rule did not prevent carriers from designing and marketing policies with “per service” triggers, nor did it deter state insurance regulators from approving these policies. Thus, the observations of the regulators reported in the FAQ accord with experience. But does this matter? It seems to us that a service such as a physician visit would easily qualify as an “event” within the plain meaning of the statute. So even if a per service payment trigger is “in practice a form of health coverage” (as the regulators claim) might it not be a form of health insurance that Congress nevertheless intended to treat as an excepted benefit?

The January 2014 FAQ

The regulated community as well as the National Association of Insurance Commissioners (NAIC) objected to the January 2013 FAQ. In a comment letter dated August 27, 2013, the NAIC urged reconsideration based on consumer protection concerns. In response, the Departments, in a January 9, 2014 FAQ, relented, sort of, saying that hospital indemnity or other fixed indemnity policies that do not qualify for the non-coordinated benefits exception may nevertheless still qualify as supplemental coverage (which is another category of excepted benefits) if certain conditions are satisfied.

The clear implication of the January 9, 2014 FAQ is that a benefit that is paid on a “per service” basis, while failing to qualify as a non-coordinated excepted benefit, could nevertheless qualify as a supplemental excepted benefit. In Field Assistance Bulletin No. 2007-04, the Department of Labor described the standards a policy must satisfy to qualify as supplemental coverage, saying:

To fall within the safe harbor, a policy, certificate, or contract of insurance must be issued by an entity that does not provide the primary coverage under the plan and must be specifically designed to fill gaps in primary coverage.

In addition, the Department believes that the value of the supplemental coverage must be significantly less than the value of the primary coverage that it supplements. To fall within the enforcement safe harbor, the cost of supplemental coverage may not exceed 15 percent of the cost of the plan’s primary coverage.”

But how, exactly, can a per-service hospital or fixed indemnity benefit ever qualify as supplemental coverage, which (among other things) must be specifically designed to fill gaps in other coverage and must pay benefits without regard to whether the insured has any other coverage?

The February 2015 FAQ

In February 2015, the Departments issued a subsequent FAQ that further clarified what constituted supplemental coverage, saying:

“Specifically, the Departments intend to propose that coverage of additional categories of coverage would be considered to be designed to ‘fill in the gaps’ of the primary coverage only if the benefits covered by the supplemental insurance product are not an essential health benefit (EHB) in the State where it is being marketed. If any benefit in the coverage is an EHB in the State where it is marketed, the insurance coverage would not be an excepted benefit under our intended proposed regulations, and would have to comply with the applicable provisions of [the ACA].”

On the subject of excepted benefits, the February 2015 FAQ explains:

“We note that this standard applies to coverage that purports to qualify as an excepted benefit as similar supplemental coverage provided to coverage under a group health plan” under [the ACA]. This standard does not apply to other circumstances where the coverage may qualify as another category of excepted benefits, such as limited excepted benefits under section 2791(c)(2), ERISA section 733(c)(2), and Code section 9832(c)(2).” (Internal quotations omitted).

What the regulators appear to be saying here is that supplemental coverage must not be for an essential health benefit. But what is the benefit here exactly? It may be that the “benefit” under the supplemental product is the cash payment, in which case almost any benefit could be supplemental, since the cash could be applied to cost-sharing. We are not persuaded that is the sort of “supplement” envisioned by the regulators, however. It is more likely that the “benefit” that triggers the supplemental payment is the underlying service (e.g., a specified, inpatient or outpatient physician service or the prescription of a specified drug). If so, then it’s even harder to see how a hospital or fixed indemnity benefit such as a physician visit could ever qualify as supplemental under this rule.

Under the newly-issued proposed regulations, none of this appears to matter. The proposed regulations are silent about the approach of treating per service hospital indemnity benefits as supplemental as suggested in the January 2014 FAQ. Under the proposed regulations, benefits paid on the basis of a fixed amount per visit, per drug, or per day/per service (with amounts that vary by the type of service) do not qualify as excepted. Such a benefit does not, according to the preamble to the proposed rule, “meet the condition that benefits be provided on a per day (or per other time period, such as per week) basis.”

In the preamble to the proposed regulations, the Departments request comments, “on the requirement that hospital indemnity and other fixed indemnity insurance in the group market that are excepted benefits must provide benefits on a per day (or per other time period, such as per week) basis in an amount that does not vary based on the type of items or services received.”

Central United Life v. Burwell

In May 2014, the Department of Health and Human Services issued final regulations under which fixed indemnity coverage sold in the individual market is deemed to qualify as an excepted benefit only if it meets the conditions described above in connection with individual marked products. These conditions include a requirement that benefits must be provided only to individuals who have other health coverage that qualifies as “minimum essential coverage.” Central United Life v. Burwell involved a frontal challenge to this requirement. We discussed the particulars of the case in a July 13, 2016 post. In essence, the Court of Appeals for the D.C. Circuit struck down the HHS rule prohibiting the sale and marketing of “fixed indemnity” plans to consumers who did not otherwise have minimum essential coverage. In the Court’s view, HHS was attempting (impermissibly) to amend the PHS Act. The court rejected HHS’ argument that it has the authority to supplement the PHS Act reference to the law’s requirement that the fixed indemnity plans must be “offered as independent, non-coordinated benefits.” The subtext of HHS’s argument, which the court did not address, is that the rule was needed as a consumer protection measure and was therefore necessary and appropriate to carry out the ACA insurance mandates.

The final HHS regulation in issue in Central United Life is noteworthy because it appears that HHS was offering a trade-off: we will permit fixed indemnity coverage payments to be made on a “per service” basis in addition to a “per period” basis provided that the individual purchasing the coverage also has other, minimum essential coverage.

As we highlighted above, the regulators have invited comment on whether voluntary hospital/fixed indemnity benefits ought to be permitted to be paid on a per-service basis without losing the benefit’s status as excepted. Does the Treasury Department agree with the Department of Health and Human Services’ view that the requirements to have other minimum essential coverage as being “in exchange” for permitting per-service benefits? And, if so, are per-service benefits now off the proverbial table? And if so, might Central United Life v. Burwellembolden carriers to challenge the bar on paying benefits on a “per service” basis as inconsistent with the statute?

Looking to the Future

The final contours of the regulation of hospital or other fixed indemnity insurance in the group market will, it seems to us, depend on three things:

• The attractiveness of “per service” payments in the marketplace: To what degree do the carriers feel they need to retain a “per service” option in order for their products to have the requisite “sizzle?” If the lack of per service payments will not affect product sales, the carriers will have little interest in pursuing the matter. Anecdotally, we doubt this to be the case. The broader the definition of “event” on which payments may be made, the greater the product design leeway.
• The willingness of the regulators to cede the point and permit per service payment triggers. While this is hard to gauge, it seems to us that the regulators will have to at least consider and think twice about the impact ofCentral United Life v. Burwell. Is this a fight worth having?
• The position and influence of the NAIC.