On July 7, 2023, the Department of Health and Human Services (HHS), the Department of Labor, and the Department of the Treasury (collectively, the Departments) released a notice of proposed rulemaking (NPRM). This NPRM proposes to modify the definition of short-term, limited-duration insurance (STLDI) and modify the conditions for hospital indemnity or other fixed indemnity insurance to be considered an excepted benefit. The NPRM also solicits comments regarding specified disease excepted benefits coverage and comments regarding level-funded plan arrangements. The NPRM further includes a proposal from the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) that would clarify the tax treatment of certain benefit payments in fixed amounts received under employer-provided accident and health plans.
These proposed changes would support the goals of the Affordable Care Act (ACA) by increasing access to affordable and comprehensive coverage, strengthening health insurance markets, and promoting consumer understanding of coverage options.
Background – STLDI and Fixed Indemnity Excepted Benefits Coverage
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 exempt from the definition of individual health insurance coverage under the Public Health Service Act and, therefore, is generally not subject to the applicable federal individual market consumer protections and requirements for comprehensive coverage under the ACA. For example, STLDI is not subject to the prohibition on discrimination based on health status, prohibition of preexisting condition exclusions, and the prohibition on lifetime and annual dollar limits on essential health benefits. Thus, individuals who enroll in STLDI are not guaranteed these key consumer protections under the ACA.
Hospital indemnity or other fixed indemnity insurance provides fixed, cash payments upon the occurrence of a health-related event. Under current regulations, payments under fixed indemnity insurance in the group market must be made as a fixed dollar amount per day or per other period of hospitalization or illness (for example, $100 per day of hospitalization), while in the individual market, payments may be made per period of hospitalization or illness or per service (for example, $50 per medical examination). Benefits are paid regardless of the amount of expenses a consumer incurs. Fixed indemnity insurance has traditionally been used as a form of income replacement, and it is not a substitute for comprehensive coverage. When fixed indemnity coverage meets certain criteria, it is an excepted benefit that is not subject to most federal requirements or consumer protections that apply to health insurance coverage.
Summary of NPRM
Short-Term, Limited-Duration Insurance
The Departments propose to amend the federal 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 proposal would reduce the maximum length of STLDI from the current initial contract term length of less than 12 months and maximum total duration of up to a total of 36 months, including renewals and extensions. This proposal would more clearly differentiate STLDI from comprehensive coverage, realign the federal definition of STLDI with its traditional purpose of bridging short gaps in comprehensive coverage, and ultimately reduce the financial risk associated with enrolling in this limited coverage as a long-term alternative to comprehensive coverage.
The Departments also propose to redefine STLDI to prohibit the same issuer from issuing multiple STLDI policies to the same policyholder within a 12-month period. This practice, known as “stacking,” takes advantage of a loophole to provide separate, sequential STLDI policies that collectively evade duration limits, obscuring the distinction between STLDI and comprehensive coverage. If finalized, the proposal would allow an individual to enroll in consecutive STLDI contracts that in total exceed 4 months in duration only if the contracts effective within a 12-month period were sold by different issuers, and if consistent with applicable state law.
The Departments understand that most sales of STLDI occur through group trusts or associations. This practice has been used by some issuers in states with lax regulation to sell STLDI to consumers in other states while avoiding local state regulation. In the NPRM, the Departments remind the regulated community and 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 and must meet the federal definition of STLDI or else comply with the federal requirements for comprehensive individual health insurance coverage.
The Departments are also aware that some group trusts and associations have marketed STLDI policies to employers as a form of employer-sponsored coverage. The NPRM reminds the regulated community and interested parties that any health insurance sold in connection with employment is group health insurance coverage that must comply with the federal consumer protections and requirements for comprehensive coverage in the group market even if it purports to be STLDI.
The Departments are interested in additional strategies to help consumers distinguish between STLDI and comprehensive coverage. The proposed rules include a comment solicitation to gather additional information on how the Departments could mitigate direct competition between STLDI and comprehensive coverage to ensure consumers do not mistakenly enroll in STLDI as an alternative to comprehensive coverage. In particular, the Departments are interested in learning more from the experiences of states that have limited the sale of STLDI during the annual open enrollment period on the Marketplace, and what steps can be taken to further support state efforts to protect consumers from misleading and deceptive marketing and sales practices.
Fixed Indemnity Excepted Benefits Coverage
Fixed indemnity excepted benefits 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. These proposed regulations are intended to ensure that consumers can better distinguish between comprehensive coverage and fixed indemnity excepted benefits coverage, including proposals aimed at preventing plans and issuers from offering fixed indemnity excepted benefits coverage that mimics comprehensive coverage without being required to provide the same consumer protections.
HHS proposes to prohibit fixed indemnity excepted benefits coverage in the individual market from paying benefits on a per-service basis, in order to limit the practice among certain issuers of designing complex, fee-for-service-style fixed indemnity plans that resemble comprehensive coverage. This change would restore requirements in place prior to 2014 rule changes and realign the individual market fixed indemnity excepted benefits coverage regulations with the group market regulations.
The Departments propose additional payment standards for fixed indemnity excepted benefits coverage in both the individual and group markets. To be considered an excepted benefit under the proposed rules, hospital indemnity or other fixed indemnity insurance would be required to pay benefits without regard to services or items received, 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). These proposals further define what it means to provide “fixed” benefits and would serve to differentiate fixed indemnity excepted benefits coverage from comprehensive coverage and align conditions across the individual and group markets.
Fixed indemnity excepted benefits coverage must be offered as independent, non-coordinated coverage. In response to reports that some employers are offering fixed indemnity excepted benefits coverage to employees as an alternative to comprehensive, employer-provided health coverage, the Departments propose to clarify that coordination occurs when fixed indemnity insurance 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, regardless of the existence of a formal coordination-of-benefits arrangement. HHS proposes to apply the same interpretation of the term “noncoordination” to individual market fixed indemnity excepted benefits coverage.
Consumer Notices
The Departments propose amendments to ensure that consumers receive clear information about the differences between STLDI and fixed indemnity excepted benefits coverage and comprehensive coverage so they can make more informed coverage purchasing decisions. The proposals would revise current notice language to be clearer and more consumer-friendly; direct consumers to HealthCare.gov for information on comprehensive coverage; require the notice be provided with marketing, enrollment, reenrollment, and application materials; and expand the notice to also apply to fixed indemnity excepted benefits coverage sold in the group market.
Specified Disease Excepted Benefits Coverage
Coverage only for a specified disease or illness (for example, cancer-only policies) is categorized in the statute and regulations as excepted benefits coverage if offered as independent, non-coordinated benefits and certain other conditions are met. The proposed rules solicit comments to gather information from stakeholders to better understand how specified disease excepted benefits coverage is marketed and sold to consumers, how consumers use this coverage, and to inform any future Federal action regarding specified disease excepted benefits coverage.
Level-Funded Plans
Level funding is an increasingly popular method of funding for group health plans, especially among small employers. Level-funded plans purport to be, and are often regulated as self-funded, but they mimic many features of fully-insured plans. The Departments are soliciting comments to better understand the prevalence of level-funded plans, such plans’ designs, and whether additional guidance or rulemaking is needed to clarify a plan sponsor’s obligation with respect to coverage provided through a level-funded plan arrangement.
Tax Treatment of Certain Benefit Payments in Fixed Amounts Received Under Employer-provided Accident and Health Plans
Treasury and the IRS propose amendments to clarify that payments from employer-provided fixed indemnity health insurance plans (and other similar plans) are not excluded from a taxpayer’s gross income if the amounts are paid without regard to the actual amount of any incurred medical expenses. Additionally, the proposal would clarify that the taxpayer must meet substantiation requirements for reimbursements for qualified medical expenses from any employer-provided accident and health plan to be excluded from the taxpayer’s gross income.
Applicability Date & Comment Period
Applicability – STLDI and Fixed Indemnity Excepted Benefits
The Departments propose applicability dates that are intended to ensure rapid implementation of the new requirements for new policies, while also avoiding disruption in coverage for people currently enrolled in either STLDI or fixed indemnity excepted benefits coverage.
New coverage: For both STLDI and fixed indemnity excepted benefits coverage sold or issued on or after the effective date of the final rule, the proposed changes would be applicable for coverage starting on or after the effective date of the final rules. Consumers that purchase or enroll in new STLDI or fixed indemnity excepted benefits coverage after the effective date of the final rules would immediately benefit from these changes.
Existing coverage: The proposed regulations would allow individuals enrolled in STLDI sold or issued prior to the effective date of the final rules to keep their coverage for the full duration allowed under current rules (up to 36 months, including renewals and extensions), to the extent permitted by applicable state law. However, the new consumer notice, if finalized, would apply to notices provided in connection with the renewal or extension of existing STLDI policies on or after the effective date of the final rules.
For fixed indemnity excepted benefits coverage sold or issued in the group or individual market prior to the effective date of the final rules, the proposed amendments related to such coverage would apply with respect to plan years (in the individual market, policy years or coverage periods) that begin on or after January 1, 2027. However, the proposed notice would apply to existing fixed indemnity excepted benefits coverage for notices provided in connection with plan years or coverage periods beginning on or after the effective date of the final rules and certain technical amendments would become effective on the effective date of the final rules.
Applicability – Treasury and IRS NPRM
Treasury and the IRS propose that the proposed tax rules would apply as of the later of the date of the publication of final regulations or January 1, 2024.
Comment Period
Written comments must be received by September 11, 2023 to be considered.
to read more about the proposed rule.
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