Biden Administration Finalizes Limits On Junk Health Plans

On March 28, 2024, the U.S. Departments of Health & Human Services, Labor, and Treasury (the “tri-agencies”) released final regulations setting new standards for short-term, limited duration health insurance (STLDI) and requiring expanded disclosures to consumers for STLDI and “hospital and fixed indemnity” insurance. These regulations will be effective 75 days after they are published in the federal register.

The administration released its draft regulations in July 2023 and received 571 comments from stakeholders during the public comment period. In response to those comments, the regulations:

Finalize a proposed revision of the federal definition of STLDI to mean a policy with an end date of 3 months;

Finalize proposed requirements that issuers of STLDI and hospital and fixed indemnity policies provide updated and prominent disclosures to consumers; and

Do not finalize proposals relating to the regulation and tax treatment of hospital and fixed indemnity insurance.

The proposed rule also sought comment on the impact of other health insurance products and arrangements, such as specified-disease coverage and level-funded health plans. The final regulation does not include any policies relating to these forms of insurance, but the tri-agencies indicate they may use the feedback they have received to inform future rulemaking.

Purpose Of The Final Rule

Under federal law, STLDI and hospital and fixed indemnity policies are exempt from the protections that apply to individual market health insurance, including protections under the Affordable Care Act (ACA), Health Insurance Portability and Accountability Act (HIPAA), Mental Health Parity and Addiction Equity Act (MHPAEA), and the No Surprises Act (NSA). STLDI and hospital and fixed indemnity policies generally provide limited benefits at lower premiums than individual market health insurance, largely because they can deny policies to people with pre-existing conditions, set caps on benefits, and exclude from coverage critical items and services such as prescription drugs, maternity care, and mental health care.

Consumer Protection Concerns

In promulgating these rules, the tri-agencies are responding to widespread concerns that many consumers purchase STLDI and hospital and fixed indemnity policies believing they provide comprehensive coverage, when in fact they are exposed to significant financial liability if they get sick. Numerous studies have documented misleading and even deceptive STLDI and hospital/fixed indemnity marketing practices. The marketing materials often do not disclose that these plans do not cover pre-existing conditions or essential benefits or pay only a fraction of the actual cost of medical services. For example, a STLDI plan left a Montana man with $40,000 in medical bills because it claimed his heart attack was a “pre-existing condition.” One study found that the implied actuarial value of STLDI is 49 percent, compared to the 87 percent applied actuarial value of a Marketplace plans.

In another example, a Texas consumer who believed he was enrolled in a comprehensive insurance policy received a $67,000 hospital bill after a heart attack. In fact, he had a fixed indemnity policy that provided a cash benefit of less than $200 per day of hospitalization. According to NAIC data, the medical loss ratios of fixed indemnity policies averaged 40 percent, compared to 86 percent for ACA-compliant individual market plans.

The tri-agencies also raise health equity concerns, noting that underserved populations and those with limited health literacy may be particularly vulnerable to aggressive and deceptive marketing tactics that don’t adequately explain the differences between comprehensive, ACA-compliant coverage and STLDI or fixed indemnity coverage. These populations also tend to have less of a financial cushion when they face high and unexpected medical bills due to inadequate insurance.

Risk Pool Concerns

Because STLDI and fixed indemnity policies can decline to cover pre-existing conditions, they are more likely to enroll healthy individuals. When healthy people leave individual market coverage, it can result in a smaller and sicker risk pool, which in turn leads to higher premiums for those who remain. In its efforts to expand enrollment in STLDI, the Trump administration projected that premiums in the individual market would increase by 6 percent due to the effects on the risk pool. Insurers’ own rate filings for the 2020 plan year indicated that they increased premiums between 0.5 and 2 percent because of the increased use of STLDI.

The tri-agencies argue that it is “necessary and appropriate” to amend existing federal rules to more clearly distinguish STLDI and hospital and fixed indemnity insurance from comprehensive coverage, and to increase consumer awareness of health insurance options that provide the full range of federal consumer protections.

Brief Regulatory History – STLDI

STLDI is an insurance product designed to help people bridge short gaps in coverage, such as when a college student’s school-based health plan ends with the school year, or when a worker is subject to an employer’s waiting period for benefit eligibility. In federal insurance statutes, Congress has delegated to the tri-agencies the responsibility to define STLDI.

In 2004, the U.S. Department of Health & Human Services issued regulations defining STLDI as “Health insurance coverage…that is less than 12 months after the original effective date of the contract.” After the ACA was enacted, some STLDI issuers began marketing their plans for 364 days, just shy of 12 months. Because these plans are exempt from the ACA’s market reforms, issuers could market them as a cheaper alternative to the ACA plans.

In 2016, the tri-agencies updated the definition of STLDI to more closely align with the gap-filling purpose of these products, and to mitigate concerns that consumers who wanted comprehensive coverage were misled into purchasing short-term plans. The 2016 definition specified that the maximum coverage period for STLDI must be less than three months and required STLDI issuers to prominently display a notice to consumers that the coverage was not “minimal essential coverage” under the ACA.

In 2018, the Trump administration published a new definition of STLDI. These regulations defined STLDI as having an initial contract term of less than 12 months, and, inclusive of any renewals or extensions, a duration of no more than 36 months. These rules also revised the required consumer disclosure language.

In this 2024 revision of the STLDI definition, the tri-agencies note that comprehensive coverage for individuals has become more accessible and affordable than it was in 2018. Consumers have significantly more choices, with the average number of issuers offering ACA-compliant coverage on the Marketplaces increasing to six per state in 2024. Further, the enhanced premium tax credits offered for Marketplace coverage through 2025 have dramatically increased the affordability of Marketplace coverage, with four out of five enrollees eligible for a plan at $10 a month or less. For plan year 2024, Marketplace enrollment reached a record high of 21.3 million.

Changes To STLDI

The final rule defines STLDI to mean health insurance coverage with an expiration date of no more than three months, and, taking into account any renewals or extensions, a maximum duration of no more than four months. These final rules apply to new STLDI policies sold on or after September 1, 2024. Policies sold before then can continue to comply with the Trump administration’s 2018 definition.

In public comments, the tri-agencies heard from opponents and supporters of the proposed changes. Opponents argued that the proposed new definition was an “overreach” of the tri-agencies’ authority and that it undermines Congress’ desire for consumers to have access to STLDI. In response, the tri-agencies note that they have clear authority under federal law to determine what is and is not individual health insurance coverage. To do so, they must give meaning to the term STLDI. Further, they argue that consumers will continue to have access to STLDI; these final rules simply enable consumers to more clearly delineate between STLDI and a comprehensive insurance policy.

Some commenters argued that the choice of the three-month duration for STLDI was arbitrary and unreasonable. However, the tri-agencies observed that their definition is consistent with federal group-market rules establishing a maximum 90-day waiting period and with STLDI’s traditional role of serving as temporary bridge coverage. They also note that their definition aligns with numerous state laws.

Other commenters supported the proposed new definition of STLDI, noting that it would help ensure consumers understood the differences between STLDI and comprehensive insurance. Some noted that low health literacy rates coupled with a long duration and deceptive marketing practices cause many consumers to confuse STLDI with comprehensive coverage. Some commenters asked the tri-agencies to create a special enrollment period (SEP) for people leaving STLDI coverage. The tri-agencies declined to do so, noting that such a SEP could have “negative consequences” for the individual market risk pool.

Closing The “Stacking” Loophole

The final rule closes a loophole in which issuers could enroll consumers in multiple consecutive STLDI policies to provide coverage for 12 months or longer, effectively sidestepping duration limits. Many commenters supported the tri-agencies’ limits on STLDI renewals or extensions within a 12-month period, noting that STLDI issuers have used their ability to “stack” STLDI policies to mislead consumers into thinking they have purchased a viable long-term health insurance policy. Other commenters argued that preventing consumers from renewing STLDI policies was contrary to federal law and inappropriately regulated a consumer’s conduct rather than the issuer’s conduct.

Consumer Notices

The final rules require that STLDI issuers display a standard notice on the first page (in either paper or electronic form) of the policy, and in any marketing, application, and enrollment materials (including reenrollment materials), in at least 14-point font. The notice must prominently state that the STLDI is not comprehensive health coverage and does not comply with the consumer protections available in Marketplace health plans. The prescribed notice language is similar to that provided in the draft rule but has been revised to reflect the results of consumer testing.

Some commenters argued that the administration should defer to state insurance regulators regarding the language and placement of consumer notices. The tri-agencies disagreed, stating that a uniform federal notice will help ensure that consumers nationwide can adequately distinguish STLDI from comprehensive coverage.

Other commenters asked the administration to require issuers to make the notice accessible to people with limited English proficiency. The tri-agencies declined to do so, but noted that issuers that receive federal funds must comply with federal civil rights laws.

Effective Date

The tri-agencies sought comments on when the new duration limits and notice requirements should be effective for STLDI issuers. They agreed with some commenters that issuers would need some time to revise their plans to comply with the new duration limits and thus set an effective date of September 1, 2024. However, the tri-agencies also agreed with several commenters that the revised notice requirements should apply promptly to both current and new STLDI policies.

Impact Of The STLDI Changes

It is unknown how many people are enrolled in STLDI coverage. The National Association of Insurance Commissioners (NAIC) has released data indicating that 235,775 individuals were in STLDI in 2022, but this is likely an underestimate because the data do not include STLDI sold through associations, which is how most STLDI is sold. The tri-agencies estimate that these new rules will increase enrollment in the ACA Marketplaces by approximately 60,000 people in 2026, 2027, and 2028. The tri-agencies also estimate that these final rules will lead some people who are relatively healthy to switch from STLDI coverage to individual market coverage, leading to overall lower average premiums in that market. The reduction in gross premiums will also reduce federal spending on premium tax credits.

On net, the administration estimates that the rule will save taxpayers approximately $120 million in 2026, 2027, and 2028. The tri-agencies also conclude that the rule will improve health equity, noting that low-income consumers and those in underserved racial and ethnic groups face the greatest health and financial consequences when STLDI coverage proves inadequate.

Brief Regulatory History–Hospital And Fixed Indemnity Insurance

Hospital and fixed indemnity insurance products are intended as income replacement policies for people who must miss work due to illness or injury. They are considered “excepted benefits” under federal law because they do not function as health insurance and are thus exempted from the consumer protections that apply under HIPAA, the ACA, MHPAEA, and the NSA. Under federal rules, to be considered an excepted benefit, the hospital or fixed indemnity policy must:

Have benefits provided under a policy separate from the comprehensive health insurance policy;

Have no coordination between the policy and any employer group plan; and

Pay benefits without regard to whether any benefits are paid out under any employer group plan or individual market health insurance policy.

Federal regulations issued in 2004 require hospital and fixed indemnity insurance in the group market to pay a fixed dollar amount per day or other period during the course of treatment, regardless of the actual medical expenses incurred. In the individual market, hospital or fixed indemnity issuers can either pay a fixed dollar amount per day or pay a fixed dollar amount per service (i.e., $100/day or $50/visit). As income replacement policies, issuers traditionally pay out benefits directly to the policyholder, rather than to the health care provider or facility.

As the ACA’s insurance reforms were implemented in 2014, there was evidence that some issuers were marketing fixed indemnity insurance as a substitute for comprehensive individual market insurance, rather than a supplementary policy. At the time, individuals were required to maintain “minimum essential coverage” or face a tax penalty (known as the ACA’s “individual mandate”). The tri-agencies attempted to revise the rules relating to hospital and fixed indemnity insurance by requiring issuers to offer hospital and fixed indemnity policies only to people who could attest that they had minimum essential coverage under the ACA. However, this rule was struck down by a federal court in 2016.

Proposed Changes to Hospital And Fixed Indemnity Insurance

In its draft regulation, the U.S. Department of Health & Human Services proposed to align the rules for individual hospital and fixed indemnity policies with those of the group market, so that issuers would need to pay a fixed dollar amount per day or other time period to be considered an excepted benefit. In other words, issuers of individual hospital and fixed indemnity policies would no longer be able to pay out benefits on a per-service basis.

The tri-agencies also raised concerns that, in the group market, some employers are circumventing federal consumer protections that apply to comprehensive health coverage by offering workers fixed indemnity policies. Workers often do not realize that these policies do not provide comprehensive benefits and leave them at financial risk if they get sick.

In particular, the tri-agencies pointed to some employers’ practice of offering a “package” of coverage options that includes a skinny group plan with very minimal coverage, such as a preventive-services only plan, combined with a fixed indemnity policy that is exempt from federal consumer protections. The tri-agencies expressed concern that these packaged plans are structured as coordinated arrangements, in violation of federal requirements for excepted benefits.

The tri-agencies thus proposed new standards for group market hospital and fixed indemnity policies. To help ensure that these policies are not confused with major medical insurance, the draft rules would have required fixed indemnity issuers to pay benefits regardless of the cost of the health care provided to the enrollee or the severity of illness or injury experienced. They also reminded employers that they could incur penalties if they treat fixed indemnity policies as excepted benefits if they are not offered as an independent, non-coordinated benefit, in addition to the group health plan.

Proposed Changes To The Tax Treatment Of Hospital And Fixed Indemnity Policies

The U.S. Treasury Department and Internal Revenue Service (IRS) raised concerns in the draft rules that some employers are skirting income and employment taxes by labeling income replacement benefits such as fixed indemnity policies as benefits for medical care. In general, employer premiums for health insurance are excluded from employees’ gross income. The Treasury Department and IRS proposed to clarify tax rules such that payments made under hospital and fixed indemnity or similar policies would have to be related to a specific health expense that is not otherwise reimbursed. In other words, the tax exclusion associated with employer health benefits would not apply if the benefits paid under a hospital indemnity, fixed indemnity, or similar policy were paid out without regard to the actual amount of medical expenses incurred by the enrollee. The proposed amendments would also clarify the requirement to substantiate that reimbursements under the policy constitute “qualified medical expenses” for those reimbursements to be excluded from an employee’s gross income.

In response to public comments, and “to provide more time to study the issues and concerns,” the tri-agencies decided not to finalize these provisions of the draft rules. However, the tri-agencies emphasized that they remain concerned about the risks to consumers associated with these policies, as well as the potential circumvention of tax rules, and intend to revisit these issues in a future rulemaking.

Consumer Notices For Hospital And Fixed Indemnity Policies

The tri-agencies have finalized their proposed new notice requirements for fixed indemnity policies sold in the individual and group markets. The notices are designed to ensure that fixed indemnity excepted benefits coverage is clearly described in marketing, application, and enrollment materials as exempt from the federal consumer protections that apply to comprehensive health insurance. The tri-agencies’ goals were to ensure that consumers have the information necessary to make an informed choice among the benefit options available to them. In response to public comment and consumer testing, the tri-agencies have modified the content and applicability dates of the required disclosures.

Some commenters called for the tri-agencies to require issuers to ensure that the notices are accessible to people with limited English proficiency. The tri-agencies declined to adopt language access standards for these notices, but remind issuers that they must comply with existing state and federal non-discrimination and language access laws.

In response to comments, the tri-agencies have agreed to delay the notice provisions to apply to plan years on or after January 1, 2025.

Sabrina Corlette, “Biden Administration Finalizes Limits On Junk Health Plans,” Health Affairs Forefront, March 29, 2024, https://www.healthaffairs.org/content/forefront/biden-administration-finalizes-limits-junk-health-plans. Copyright © 2024 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.