The Obama administration suffered a setback in its efforts to strengthen the individual insurance market when a federal appeals court last week struck down an HHS rule barring the sale of certain limited-benefit plans as stand-alone products.
In Central United Life v. Burwell, the U.S. Court of Appeals for the District of Columbia Circuit overturned a 2014 HHS rule restricting the sale of fixed-indemnity insurance plans that pay policyholders fixed dollar amounts to cover medical services regardless of how much the provider bills. These plans, which are cheaper to buy than comprehensive plans but exclude pre-existing conditions, do not comply with Affordable Care Act provisions on minimum essential benefits or guaranteed issue.
HHS had allowed the sale of such indemnity plans only to people who also had plans that complied with the ACA's minimum essential coverage standard. It also had mandated that insurers fully inform consumers that these plans were not a substitute for comprehensive coverage and could leave them exposed to the ACA's tax penalty for being uninsured.
A federal judge last year blocked the minimum essential benefits requirement, and the appellate panel affirmed that ruling (PDF) Friday, calling the HHS rule “administrative overreach.”
But the panel did not throw out the part of the rule requiring indemnity insurers to notify customers about the limits of the coverage and their potential liability for the ACA tax penalty. It's estimated that as many as 4 million people have fixed-indemnity policies without accompanying comprehensive coverage.
The Obama administration and some insurance industry officials are worried about the sale of such plans because they offer skimpy coverage and may be sucking younger, healthier consumers out of the individual insurance markets created by the ACA, thus driving up premiums. Last month, HHS proposed a rule restricting another type of cheaper, noncompliant insurance product known as short-term health plans, which have surged in sales. Under the rule, short-term plans could only be offered for less than three months and could not be renewed.
“By keeping these consumers out of the ACA single-risk pool, such abuses of limited-duration coverage increase costs for everyone else, and they could have a greater impact over time if allowed to become more widespread,” HHS said in a written statement when it issued the proposed rule.
It's expected that insurers will challenge that rule in court if and when the administration makes it final later this year. They are likely to cite last week's Central United Life decision, said Tim Jost, an emeritus law professor at Washington and Lee University who is an ACA expert. “Short-term coverage is more of a threat to insurance market stability than the special enrollment periods that insurers are up in arms about,” he said.
Policymakers and insurers say a number of steps are needed to shore up the ACA's individual insurance market, and that it's vital to maximize the number of healthier consumers in that market to offset the costs of sicker members. Currently, many insurers say they're losing money on the exchange business due in part to the sicker pool of customers. Fixed-indemnity and short-term plans likely undermine the ACA risk pool by drawing away healthier customers looking for cheaper premiums.
One factor that will help improve market stability and reduce overall premiums is that insurers will no longer be allowed to sell grandfathered individual-market plans that kept premiums down by restricting sales to existing customers starting in 2017. That's expected to push hundreds of thousands of healthier people into ACA-compliant plans on and off the exchanges.
Insurers and some state officials had defended fixed-indemnity plans as a more affordable option for consumers than the comprehensive plans available on the exchanges. They would pay less out-of-pocket even after paying the ACA tax penalty. Eleven states signed a friend-of-the-court brief in the Central United Life case arguing that fixed-indemnity insurance “is a rational choice for these individuals because it provides meaningful access to the health care system.”
But Jost said many consumers probably don't understand the limits in fixed-indemnity plans, such as pre-existing condition exclusions, dollar limits on benefits and no guarantee of renewal. They only find out when they need healthcare and face big medical bills. “You get what you pay for,” Jost said.
Another concern is that fixed-indemnity and short-term policies, which are not subject to ACA rules on minimum medical loss ratios, yield high profits for insurers because they pay out relatively small amounts in claims. The medical loss ratio in 2015 for individual short-term health plans—the percentage of premium revenue paid out in claims—was 69.8%, while the medical loss ratio for noncomprehensive medical plans was 58.8%, according to a report from the National Association of Insurance Commissioners (PDF), which currently is working on a model state law for regulating short-term plans.
“It's a very high-profit business, with very high commissions to agents and brokers and a very low payout to consumers,” Jost said. “It's a good business to be in if you can find someone to buy the stuff.”