The U.S. Departments of Labor, Health and Human Services, and the Treasury (collectively, the "Departments") recently released new guidance regarding when "fixed indemnity" insurance policies will qualify as "excepted benefits" under the Patient Protection and Affordable Care Act. The latest (Part XI) in the Departments' series of "FAQs About Affordable Care Act Implementation," dated January 24, 2013, states that the Departments intend to work with state insurance departments to enforce their interpretation of the rules pertaining to fixed indemnity coverage.

When the Health Insurance Portability and Accountability Act (“HIPAA”) was enacted in 1996, it exempted coverage of “excepted benefits” from its portability and nondiscrimination requirements because HIPAA was intended to apply only to comprehensive health insurance and not to various types of supplemental coverage. The Affordable Care Act adopted the HIPAA definition of excepted benefits, which includes “hospital indemnity or other fixed indemnity insurance,” “if offered as independent, noncoordinated benefits.”1 Excepted benefits coverage is exempt from the Affordable Care Act’s many “market reform” provisions, including prohibitions on lifetime and annual policy limits and Medical Loss Ratio (MLR) standards and premium refund requirements.

Question 7 of the Departments’ most recent Frequently Asked Questions ("FAQ") asks, “What are the circumstances under which fixed indemnity coverage constitutes excepted benefits?” The question is answered as follows:

The Departments' regulations provide that a hospital indemnity or other fixed indemnity insurance policy under a group health plan provides excepted benefits only if:

  • 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; and
  • 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 regulations further provide that 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.

Since the Affordable Care Act was enacted in 2010, many insurers have created new products or modified existing products in order to take advantage of the “excepted benefits” exemptions from the Act. Most attorneys and insurance industry commentators took the position beginning in 2010-2011 that policies that provided a fixed payment for any “event,” whether a surgical procedure, office visit, test or prescription drug, would fall under the “hospital indemnity or other fixed indemnity insurance” exemption. In other words, under this argument, any payment that was fixed in advance, rather than based on the amount of expenses that were actually incurred, would be considered a “fixed indemnity” benefit. Not surprisingly, as the Departments noted in their recent guidance, there has been a dramatic increase in the number of insurance plans that purport to fit within the exemption for fixed indemnity insurance. Working with state insurance departments, the Departments have determined that many such fixed indemnity plans actually provide benefits on a per-service basis, rather than per day or per other time period as the HIPAA regulation provides. As the FAQ states:

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.

The FAQ closes with the statement, “The Departments plan to work with the States to ensure that health insurance issuers comply with the relevant requirements for different types of insurance policies and provide consumers with the protections of the Affordable Care Act.” Although it is not yet known when the Departments will begin active enforcement of their interpretation, clearly insurers that are offering fixed indemnity policies that provide some benefits on a basis other than “per day (or per other period)” would be well advised to review the benefits and convert as many of them to “per day” benefits as possible. In many cases, this could be accomplished without truly changing the benefits offered; for example, there is little practical difference between a “per procedure” surgical benefit and a “per day” surgical benefit, because it would be rare for an insured to undergo two separate surgical procedures in a single day.

It seems likely, however, that the Departments would take the position that simply converting a preventive care physician’s office visit benefit, for example, from “per visit” to “per day” would not change its basic character as a “health insurance” benefit, rather than the “income replacement” type of benefit that hospital indemnity policies were originally designed to provide. Similarly, prescription drug benefits are unlikely to be acceptable in a fixed indemnity policy in any form under the new guidelines. Therefore, some “fixed indemnity” benefits will have to be eliminated from these policies if they are to continue to be exempt from the Affordable Care Act’s “market reform” provisions.