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.
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.
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. . . .
Proposed rule: https://www.federalregister.gov/d/2023-14238
Fact sheet: https://www.cms.gov/newsroom/fact-sheets/short-term-limited-duration-insurance-independent-noncoordinated-excepted-benefits-coverage-level
WSJ, U.S. Moves to Curtail Short-Term Health Plans https://www.wsj.com/articles/consumers-to-face-new-limits-on-private-short-term-health-insurance-2e943e7f?st=uk2fs4jqshafimt&reflink=desktopwebshare_permalink