The Department of Labor Employee Benefits Security Administration issued guidance on the issuance of fixed indemnity insurance on January 24, 2013 in its FAQs about Affordable Care Act Implementation Part XI. These FAQs are prepared by the Departments of Labor, Health and Human Services (HHS), and the Treasury (collectively the Departments). Question 7 of this FAQ addressed under what circumstances fixed indemnity coverage constitutes excepted benefits.
The FAQ noted that fixed indemnity coverage under a group health plan is an excepted benefit under PHS § 2791(c)(3)(B) [42 U.S.C. § 300gg-91(c)(3)(B)], ERISA § 733(c)(3)(B), and Code § 9832(c)(3)(B) if it meets the conditions outlined in the Departments' regulations. Provisions in HIPAA, 42 U.S.C. § 300gg-91(c)(3)(B), also applies to exclude fixed indemnity coverage from the definition of excepted benefits in the individual market. After commenting on the exemption, the FAQ stated: "The Departments have noticed a significant increase in the number of health insurance policies labeled as fixed indemnity coverage."
The FAQ then listed the requirements for hospital indemnity or other fixed indemnity policies to qualify as excepted benefits:
- The benefits are provided under a separate policy, certificate, or contract of insurance.
- There is no coordination between the provision of the benefits and an exclusion of benefits under any group health plan maintained by the same plan sponsor.
- The benefits are paid with respect to an event without regard to whether benefits are provided with respect to the event under any group health plan maintained by the same plan sponsor.
- 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.
After listing these requirements, the FAQ goes on to discuss the most essential element that seems to prohibit the combining of various benefits in fixed indemnity policies:
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.
At the end of the FAQ, the Departments indicate that they shall work with the states to ensure compliance with requirements for different types of policies and so that consumers are provided with the protections of the Affordable Care Act.