The market for voluntary hospital indemnity benefit plans may beheaded for upheaval, according to legal experts in the benefitsmarket.

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

The excepted benefit distinction is critical for voluntaryinsurance product manufacturers; these policies can be structuredwithout regard to the regulations in the Affordable Care Act,certain provisions of the Employee Retirement Income Security Actor the Public Health Service Act.

As a result of this excepted status, hospital indemnity anddisease-specific voluntary policies have become increasinglycompetitive. Because they are not bound by such rules as the ACA’sloss-ratio provisions, they can be more readily marketed anddelivered 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 exceptedbenefits, the proposed rule explains.

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

The third category is a bit more explicit, and it’s where theproposed rule would most impact the group hospital indemnitymarket. So-called “non-coordinated” excepted benefits, whichinclude hospital indemnity and disease-specific policies, mustalso be offered under separate contracts, not those ofmajor medical plans. Sponsors and brokers also may not coordinatevoluntary policies with other exclusions of basic coverage in themajor medical offering.

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

Regulators hope to codify this definition in the most recentproposed regulation. In the proposal, regulators pointed out themarket includes disease-specific and hospital indemnity policiesthat have entirely different benefit triggers. Some policies offera fixed amount for doctor’s visits, prescription drugs and specificservices on a per-day basis (amounts vary by service). Instead ofthe per-period requirement that regulators proposed, which wouldqualify these plans for excepted status, then, the plans offerbenefits on a per-service basis.

And regulators say that policies that pay a per-service basisfail the “fixed-dollar amount per day” test needed to receiveexcepted benefit status.

“Dizzying array” ofproducts

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

And some policies clearly pay out different benefits fordifferent covered services. Attorneys from Mintz Levin’sEmployment, Labor and Benefits practice describe the market asincluding a “dizzying array” of scheduled voluntary hospitalindemnity options.

Regulators have been eyeing on the “per-period” exceptedbenefits requirement for some time now. In 2013, the DOL, HHS andTreasury issued an FAQ that laid the groundwork for the regulationnow under consideration.

The regulators were blunt: “When a policy pays on a per-servicebasis as opposed to on a per-period basis, it is in practice a formof health coverage instead of an income replacement policy.Accordingly, it does not meet the conditions for exceptedbenefits.”

Insurance carriers, along with the National Association ofInsurance Commissioners, have criticized that interpretation. In acomment to regulators, NAIC noted the popularity of policies withper-service triggers. The new requirement could also effectivelynullify in-force policies with per-service triggers, creating moreconfusion for employers that were scrambling to prepare for fullACA implementation when those policies were issued.

Industry questions regulators’authority to re-define exempted qualifications

The debate over previous excepted benefits interpretations won’tmatter much, though, if the proposed regulation is finalized. The60-day comment period has already passed; regulators are hoping toimplement a rule by early 2017.

The proposed rule also included amendments to other regulations,including those affecting expatriates, short-term duration plansand lifetime annual limits for grandfathered plans in theindividual market. This is in addition to a provision that wouldrequire employers to clearly communicate to employees thatsupplemental benefits do not qualify as minimum essential coverageunder the ACA.

The regulation could also prohibit disease-specified voluntarypolicies from covering more than one disease. In its comment on theproposed rule, the American Insurance Association questionedwhether regulators even had the authority to create new languagelimiting hospital indemnity products to a per-period design.

The ERISA Industry Committee, a trade association that lobbieson behalf of large employers and their benefits interests, favorsflexible voluntary benefits design -- and also claimed thedepartments have no legal standing to re-interpret theseregulations.

The U.S. Chamber of Commerce did not have an opinion on theper-period clause of the exempted benefit qualification, but notedthat the 2017 implementation date does not give employers enoughtime to comply; it urged the departments to push the date back to2018.

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

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

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