Agencies propose overhaul of fixed-indemnity plan rules 

Under current regulations, group hospital indemnity or other fixed-indemnity insurance is considered an “excepted benefit” under the Health Insurance Portability and Accountability Act (HIPAA) and the ACA if the policy meets all of these conditions:

• Is issued separately
• Isn’t coordinated with exclusions in other health benefits provided by the same employer
• Pays benefits regardless of whether other coverage offered by the same employer pays for the same event
• Must pay a fixed dollar amount per day (or other period) of hospitalization or illness, regardless of the amount of expenses incurred

Excepted benefits are not subject to many group health plan standards, such as the ACA’s prohibition on annual or lifetime dollar limits on essential health benefits and the requirement for first-dollar coverage for preventive care. Excepted benefits also don’t count as minimum essential coverage (MEC) for employer shared-responsibility purposes. Employer-sponsored hospital or similar fixed-indemnity plans or policies that fail to meet excepted-benefit requirements must meet the full panoply of group health plan standards or risk incurring fairly steep penalties of $100 per day per affected member. Separate penalties for failure to provide the summary of benefits and coverage required by the ACA might also apply (up to $1000 per failure).

The departments propose the following modifications to the excepted-benefit rules out of concern that consumers may confuse fixed-indemnity excepted-benefit coverage with comprehensive health coverage.

New standards for “fixed” benefits. The proposed rules would provide new standards describing what it means for group hospital or other fixed-indemnity excepted-benefits coverage to provide benefits in a “fixed” amount (i.e., per period). The dollar amount would remain fixed regardless of the services or items received, actual or estimated amount of expenses incurred, severity of the illness or injury, or other characteristics particular to a covered participant’s or beneficiary’s course of treatment. The dollar amount also would not vary on any other basis (such as a per-item or per-service basis). The proposed rules provide examples of designs that fail to satisfy the new standard:

Example 1. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy pays benefits related to hospital stays at a fixed percentage of expenses up to a maximum of $100 a day. This policy doesn’t qualify as an excepted benefit under the proposed rules because the coverage pays a percentage of expenses incurred rather than a fixed dollar amount per day (or other time period, such as per week). Even if the policy in practice pays the $100  maximum for every day of hospitalization, the coverage still isn’t an excepted benefit.

Example 2. An employer-sponsored policy provides benefits when a person receives certain specific items and services in a fixed amount— for example, $50 per blood test or $100 per visit. This policy is not fixed-indemnity excepted-benefit coverage because the benefits are not paid (i) in a fixed dollar amount per time period and (ii) without regard to the services or items received. Furthermore, adding time limits (i.e., $50 per blood test per day) wouldn’t change the result — the benefits would still be payable without regard to the services or items received and would not satisfy the proposed excepted-benefit rules.

In the preamble to the rules, the departments state that they “will closely examine as part of potential enforcement actions” whether group fixed-indemnity excepted-benefit coverage that claims to provide benefits per day (or other time period) is actually paying per service or item.

Informal coordination with another group health plan prohibited. Group fixed-indemnity excepted-benefit coverage can’t coordinate with an exclusion under a group health plan sponsored by the same plan sponsor. The departments propose to broadly interpret prohibited “coordination” to include informal coordination with an employer’s group health plan. The proposed rules include the following example of prohibited informal coordination between an employer’s fixed-indemnity policy and group health plan.

Example 3. An employer sponsors a group health plan that offers a benefit package covering only  preventive services (and excluding all other health benefits) and a hospital insurance policy paying a fixed dollar amount per day of hospitalization for a wide variety of illnesses that are not preventive services. Both the preventive-services plan and the hospital insurance policy are offered at the same time and can be elected together. The hospital insurance policy does not qualify as fixed-indemnity excepted-benefit coverage because the policy coordinates with exclusions in the preventive services plan. The result would be the same even if the preventive services plan were offered at a different time than the insurance policy and even if the insurance policy did not pay benefits for a wide variety of illnesses.

Employers may have different reasons for offering a plan covering only preventive services. Some employers offer such a plan — which is considered MEC — to certain groups of employees to reduce the risk of an employer shared-responsibility assessment for failing to offer MEC to at least 95% of full-time employees. Employers often pair the preventive services plan with a fixed-indemnity plan — which isn’t considered MEC — to provide additional benefits to employees. This combination of plans won’t be allowed if the proposed rules are finalized without changes. Employers could offer either a preventive services plan or group hospital fixed-indemnity coverage — but not both — to the same group of employees. 

Notice requirement. The departments propose that group hospital or other fixed-indemnity plans or issuers must display a new notice in any marketing, application, enrollment and reenrollment materials (in paper or electronic form, including on a website).

Effective date. The proposed changes would take effect for new fixed-indemnity insurance sold or issued on or after the effective date of the final rules. For current fixed-indemnity coverage, most changes would apply for plan years beginning on or after Jan. 1, 2027, although plans would have to display the notice starting with the plan year after the rules are finalized.