By Dannae Delano, Roberta Casper Watson and Barry Salkin
On July 7, the Departments of Health and Human Services, Labor, and Treasury (the “Departments”) issued proposed regulations modifying the definition of short-term limited duration insurance and the conditions for hospital indemnity and other fixed indemnity insurance to be considered excepted benefits not subject to the market reforms of the Affordable Care Act (“ACA”). The proposed regulations also solicit comments on specified-disease coverage as excepted benefits, and on self-funded level-funded plans maintained by small employers. The press release accompanying the proposed regulations is clear that the regulations are intended to support the goals of the ACA by increasing access to affordable and comprehensive coverage, and promoting consumer understanding that certain coverage options are not comprehensive coverage. The proposed regulations’ intent, as the White House put it, is to “crack down on junk insurance.”
Plan sponsors with any of the types of coverage described below should evaluate what the proposed regulations, once they are finalized, could mean to the coverage they offer their employees. Employers attempting to utilize these products as an alternative to comprehensive health coverage should be aware that significant changes will likely be required of their health insurance coverage offers if the proposed regulations are finalized as proposed.
Short-Term Limited Duration Insurance (“STLDI”)
STLDI is a type of health insurance that is designed to fill temporary gaps in coverage when an individual is transitioning from one source of coverage to another. STLDI is important because it is exempt from the definition of individual health insurance coverage under the Public Health Service Act and therefore generally not subject to the applicable federal individual market consumer protections and requirements for comprehensive coverage under the ACA. The Departments propose to amend the definition of STLDI to limit the length of the initial contract period to no more than three months and the maximum coverage period to no more than four months, taking into account any renewals or extensions. This four-month period would match the maximum 90-day waiting period and one month orientation period under the ACA. This change would also reduce the maximum length of STLDI from the current initial contract term of less than 12 months and maximum total duration of 36 months, including renewals and extensions. The Departments are proposing these changes to the terms “short-term” and “limited duration” to clearly differentiate STLDI from comprehensive coverage, realign the definition of STLDI with its traditional purpose of bridging short-term gaps in comprehensive coverage, and avoid the financial risk associated with enrolling in this limited coverage as an alternative, rather than a supplement, to comprehensive coverage.
Further, the proposed regulations attempt to address a practice known as “stacking.” Stacking is renewing or extending an STLDI policy using separate, sequential STLDI policies that would collectively evade any duration limits. If finalized, the regulation would allow an individual to enroll in consecutive STLDI contracts that in total exceed four months in duration only if the contracts that are effective within a 12-month period were sold by different insurers and were consistent with applicable state law.
The proposed regulations also include a required notice emphasizing that STLDI is not comprehensive health insurance coverage. The notice must be displayed prominently in at least 14 point font on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance and in any marketing application, and enrollment and reenrollment materials that are provided to individuals at or before individuals have an opportunity to enroll or reenroll in coverage.
Fixed Indemnity Coverage
Fixed indemnity coverage is exempt from the federal consumer protections and requirements for comprehensive health insurance because it is designed to provide a source of income replacement rather than full medical coverage. The Departments propose to prohibit fixed indemnity coverage in the individual market from paying benefits on a per-service basis. The purpose of this proposal is “to limit the practice among certain issuers of designing complex fee for service style fixed indemnity plans that resemble comprehensive coverage.”
The Departments also propose additional payment standards for fixed indemnity coverage in both the individual and group markets. (Fixed indemnity coverage is considered an “excepted benefit,” and thus is exempt from many requirements for employer-sponsored group health plans.) To be considered an excepted benefit under the proposed regulations, hospital indemnity or other fixed indemnity insurance would be required to pay benefits in a fixed dollar amount per day or other pay period, without regard to services or items received, the actual or estimated amount of expenses incurred, the severity of the illness or injury, or other characteristics particular to a course of treatment, and not on any other basis, such as a per item or per service basis. Additionally, to qualify as an excepted benefit, payment must be made without regard to whether the benefits are provided with respect to the event under any other health insurance coverage maintained by the same health insurance provider with respect to the same policyholder.
To qualify as an excepted benefit, fixed indemnity coverage must be offered as independent, non-coordinated coverage. The proposed regulations clarify that coordination occurs when fixed indemnity coverage is offered as a complementary coverage option that is coordinated with an exclusion of benefits under a group health plan maintained by the same plan sponsor, even if there is not a formal coordination of benefits arrangement.
The notice requirements are identical in form to the STLDI notice requirements. The proposed regulations contain a notice that the plan or issuer must display prominently in at least 14 point font on the first page (in either paper or electronic form, including on a website) of any marketing, application, and enrollment materials that are provided to plan participants at or before the individuals are given the opportunity to enroll or reenroll.
In the preamble to the proposed regulations, the Departments also express concerns about fixed indemnity payments being made directly to providers rather than to plan participants, but did not address this issue in the proposed regulations.
The effective date of these new provisions with respect to STLDI is 75 days after final regulations are published in the Federal Register. For new STLDI sold or issued on or after the effective date of the final rules, the amendments to the definition of STLDI would apply for coverage periods beginning on or after such date. However, for STLDI sold or issued before the effective date of the final regulations (including any subsequent renewals or extensions consistent with applicable law), the current definition of such coverage would continue to apply. Therefore, existing STLDI could continue to have an initial contract term of less than 12 months and a maximum duration of 36 months, subject to any limits under applicable state law. However, the Departments propose that the amendments to the notice requirement of the definition of short-term, limited duration insurance would apply for coverage periods beginning on or after the effective date of the final rules, regardless of whether the coverage was sold or issued before, on, or after the effective date of the final regulations. The Departments also sought comments with respect to both the applicability date of the notice requirements to STLDI plans in existence before the effective date of final regulations and the application of the new definition of STLDI in general.
The effective date of these regulations with respect to fixed indemnity coverage is for plan years beginning 75 days after final regulations are published in the Federal Register. For fixed indemnity coverage sold or issued after that date, the final regulations would apply. However, for fixed indemnity coverage sold or issued in the group or individual market prior to the effective date of the final regulations, the amendments related to such coverage would apply with respect to plan years in the group market and policy years in the individual market that begin on or after January 1, 2027. However, the proposed notice requirements would apply to existing fixed indemnity excepted benefits coverage for notices provided in plan years or policy years beginning on or after the effective date of the final regulations.
In the preamble to the proposed regulations, the Departments express their understanding that most sales of STLDI occur through group trusts or associations. An issuer will register its product in one jurisdiction and sell to consumers in another jurisdiction through an association. In the preamble to the proposed regulations, the Departments remind the regulated community and other interested parties that STLDI sold to individuals through a group trust or association, other than in connection with a group health plan, is not group coverage for purposes of Federal law. Therefore, unless the STLDI satisfies the definition of STLDI in the proposed regulations, it must comply with ACA requirements for comprehensive individual health insurance coverage.
In the preamble to the proposed regulations, the Departments also indicate their awareness that some group trusts and associations have marketed STLDI policies to employers as a form of employer-sponsored coverage. The Departments explain that this approach does not satisfy the STLDI exemption, because any health insurance sold in connection with employment is group health insurance that must comply with the ACA market reforms in the group market, even if it purports to be STLDI. The Departments did not propose any policies or policy changes specific to STLDI sold through associations, but did request comments on what steps, if any, could be taken to support state oversight of STLDI sold to or through associations.
The Departments also indicated in the preamble their interest in additional strategies to help consumers distinguish between STLDI and comprehensive coverage. The Departments solicited comments on how the Departments could mitigate direct competition between STLDI and comprehensive coverage to ensure that consumers do not mistakenly enroll in STLDI as an alternative to comprehensive coverage.
Specified Disease Excepted Benefit Coverage
Coverage limited to a specific disease or illness (for example, cancer-only policies) are categorized in the statute and the regulations as excepted benefits if offered as independent, non-coordinated benefits and certain other conditions are met. The proposed regulations do not address specific-disease excepted benefits coverage, but the Departments are soliciting comments to gather information from stakeholders to better understand how specified-disease excepted benefits coverage is marketed and sold to consumers and how consumers use this coverage, and to inform any future action regarding specified-disease excepted benefits coverage.
In the preamble to the proposed regulations, the Departments observe that level funding is an increasingly popular method of funding for group health plans, especially among small employers. These level-funded plans purport to be and are regulated as self-funded plans, but often have low stop-loss coverage attachment points, and mimic many features of fully insured plans. While not addressed in the proposed regulations, the Departments are soliciting comments on level-funded plans to better understand the prevalence of such plans, the designs of such plans, and whether additional guidance or rulemaking is needed to clarify the obligations of a plan sponsor with respect to coverage provided through a level-funded plan arrangement.
Written comments on the proposed regulations are due by September 11, 2023.