The market for voluntary hospital indemnity benefit plans may be headed for upheaval, according to legal experts in the benefits market.

Last June, the departments of Labor, Treasury, and Health and Human Services proposed a rule that would affect the structure of so-called “excepted” benefit insurance policies.

The excepted benefit distinction is critical for voluntary insurance product manufacturers; these policies can be structured without regard to the regulations in the Affordable Care Act, certain provisions of the Employee Retirement Income Security Act or the Public Health Service Act.

As a result of this excepted status, hospital indemnity and disease-specific voluntary policies have become increasingly competitive. Because they are not bound by such rules as the ACA’s loss-ratio provisions, they can be more readily marketed and delivered at consumable price points.

So how would the proposed rule affect these plans?

What it takes to be “excepted”

There are four statutorily defined categories of excepted benefits, the proposed rule explains.

Non-medical policies, like auto and liability insurance, fall into the first category. The second category includes vision, dental, long-term care, and other voluntary or ancillary policies that are excepted so long as plans are provided under a contract separate from the group’s major medical coverage. Voluntary policies also can’t replace core coverage requirements under a major medical group plan.

The third category is a bit more explicit, and it’s where the proposed rule would most impact the group hospital indemnity market. So-called “non-coordinated” excepted benefits, which include hospital indemnity and disease-specific policies, must also be offered under separate contracts, not those of major medical plans. Sponsors and brokers also may not coordinate voluntary policies with other exclusions of basic coverage in the major medical offering.

What’s more, hospital indemnity or disease-specific plans must be paid out on a fixed-dollar, per-day (or other time period) amount for hospitalization or illness -- regardless of actual expenses.

Regulators hope to codify this definition in the most recent proposed regulation. In the proposal, regulators pointed out the market includes disease-specific and hospital indemnity policies that have entirely different benefit triggers. Some policies offer a fixed amount for doctor’s visits, prescription drugs and specific services on a per-day basis (amounts vary by service). Instead of the per-period requirement that regulators proposed, which would qualify these plans for excepted status, then, the plans offer benefits on a per-service basis.

And regulators say that policies that pay a per-service basis fail the “fixed-dollar amount per day” test needed to receive excepted benefit status.

“Dizzying array” of products

The hospital indemnity sector has churned out a varied portfolio of coverage, as even the most cursory review of available policies would show. Some plans offer only hospitalization coverage, while others are more “far-reaching and address diagnostic procedures, outpatient surgery and transportation by ambulance,” according to the marketing material of one major voluntary hospital indemnity coverage provider.

And some policies clearly pay out different benefits for different covered services. Attorneys from Mintz Levin’s Employment, Labor and Benefits practice describe the market as including a “dizzying array” of scheduled voluntary hospital indemnity options.

Regulators have been eyeing on the “per-period” excepted benefits requirement for some time now. In 2013, the DOL, HHS and Treasury issued an FAQ that laid the groundwork for the regulation now under consideration.

The regulators were blunt: “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.”

Insurance carriers, along with the National Association of Insurance Commissioners, have criticized that interpretation. In a comment to regulators, NAIC noted the popularity of policies with per-service triggers. The new requirement could also effectively nullify in-force policies with per-service triggers, creating more confusion for employers that were scrambling to prepare for full ACA implementation when those policies were issued.

Industry questions regulators’ authority to re-define exempted qualifications

The debate over previous excepted benefits interpretations won’t matter much, though, if the proposed regulation is finalized. The 60-day comment period has already passed; regulators are hoping to implement a rule by early 2017.

The proposed rule also included amendments to other regulations, including those affecting expatriates, short-term duration plans and lifetime annual limits for grandfathered plans in the individual market. This is in addition to a provision that would require employers to clearly communicate to employees that supplemental benefits do not qualify as minimum essential coverage under the ACA.

The regulation could also prohibit disease-specified voluntary policies from covering more than one disease. In its comment on the proposed rule, the American Insurance Association questioned whether regulators even had the authority to create new language limiting hospital indemnity products to a per-period design.

The ERISA Industry Committee, a trade association that lobbies on behalf of large employers and their benefits interests, favors flexible voluntary benefits design -- and also claimed the departments have no legal standing to re-interpret these regulations.

The U.S. Chamber of Commerce did not have an opinion on the per-period clause of the exempted benefit qualification, but noted that the 2017 implementation date does not give employers enough time to comply; it urged the departments to push the date back to 2018.

In a blog post, Mintz Levin attorney Alden Bianchi speculated that those carriers affected will weigh their legal options relative to “the degree [they] feel they need to retain a ‘per-service’ option in order for their products to have the requisite ‘sizzle’.”

Ultimately, if implementing a strict “per-period” qualifier for hospital indemnity plans will not impact carriers’ sales, then they are unlikely to put up a legal fight.

“We doubt this to be the case,” speculated Bianchi.

Instant Insights /

Voluntary hospital indemnity, disease-specific plans, on regulators&rsquo; radar

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Voluntary hospital indemnity, disease-specific plans, on regulators’ radar