Fixed Indemnity Plans – buyer beware; regulations begin soon

In early 2013, we worked with a client shortly after he had received a sales pitch for what sounded like a very sketchy health insurance product.  We followed up on the issue, talking with an agent for the carrier in question, as well as the Colorado Division of Insurance.  At that time, full ACA implementation was still several months away, so policies were still being sold that were not yet fully ACA-compliant.  What flagged our attention regarding the policy our client described was that it still came with a lifetime benefit maximum, which the ACA did away with in 2010.  Long story short, it appears that the policy was probably a fixed indemnity plan, which are exempt from the ACA’s regulations (fixed indemnity plans pay a set amount for a schedule of services, regardless of the actual amount of the claim).

It’s now a year and a half later, and all major medical plans for sale in the individual market have been required to be ACA compliant (including being guaranteed issue) since January 1, 2014.  But fixed indemnity plans are still exempt from ACA regulations.  And we got a call this week from another local resident who just last month had purchased a plan from that same carrier, and told us that he had experienced medical underwriting, an application decline, and an offer of alternate coverage.

He had left his job in June, but his employer-sponsored health plan didn’t end until July 15 (that part is important, as involuntary loss of group coverage is a qualifying event, and his 60 day special enrollment period extends until the middle of September).  He put his name and contact information into website that sold the data to numerous agents and firms [note – we do not sell or share any data that you enter on our site when you’re looking for quotes], and was contacted by a lot of agents.  The company he ultimately settled on was the same one that had raised red flags for us last year.

The company’s website does mention major medical health insurance, but they also have a variety of other plans available, including fixed indemnity insurance.  We’re not sure which plan he applied for initially, but he was declined based on medical history and offered a policy with lesser benefits instead.  He accepted it, but later contacted us to see if he could get anything better.

Fixed Indemnity Plans - buyer beware for nowLuckily, he did so while he was still in his 60 day special enrollment period following the loss of his employer-sponsored plan.  If that window had already closed, there would have been no way that he could purchase any sort of “real” health insurance until November 15, when general open enrollment begins (and that’s for policies with January 1 effective dates).  No major medical plans are available in Colorado – from any source, including the exchange, brokers, or directly through any of the state’s health insurance carriers – outside of general open enrollment, unless you have a qualifying event.  If his special enrollment period had already ended, his best option at that point would have been a short term policy, which is better than nothing, but certainly not as good as a regular major medical health insurance plan.  Since he’s still within his special enrollment window, he has access to the full range of on and off-exchange plans in Colorado.  Subsidies are available if he’s eligible, as long as he selects an exchange plan (that can be done with the help of a broker or navigator).

We were curious about the marketing tactics that the carrier had used when he was enrolling in what must have been a fixed indemnity plan.  Our client told us that the agent he worked with did not mention anything about the ACA’s individual mandate penalty, which would have been assessed on this client when he filed his taxes next year if he had kept the fixed indemnity plan for the rest of the year. The ACA allows up to a three month gap in coverage, but he would have been without minimum essential coverage for five months if he had kept the fixed indemnity plan because fixed indemnity plans are not considered minimum essential coverage.

But what about the whole underwriting, declined application part?  Isn’t that prohibited now?  Well, it is if the policy itself is regulated by the ACA.  But fixed indemnity plans are exempt from ACA regulations, which means they can still use underwriting, still issue policies with benefit caps, and do not have to cover the essential health benefits.  In short, not much has changed about those plans from the pre-ACA days.

That’s going to change on January 1, 2015, when new rules go into effect regarding fixed indemnity plans.

HHS released a final rule that was published in the Federal Register on May 27, 2014, but the regulations pertaining to fixed indemnity plans become effective on January 1.  Two major parts of the ruling will help to ensure that other people do not purchase fixed indemnity plans without being aware that they aren’t “real” health insurance:

  • Fixed indemnity plans will have to display in at least 14 point font the following notice: “THIS IS A SUPPLEMENT TO HEALTH INSURANCE AND IS NOT A SUBSTITUTE FOR MAJOR MEDICAL COVERAGE. LACK OF MAJOR MEDICAL COVERAGE (OR OTHER MINIMUM ESSENTIAL COVERAGE) MAY RESULT IN AN ADDITIONAL PAYMENT WITH YOUR TAXES.”  That wording was included in the proposed rule HHS issued in March; they clarified in their final ruling that the wording would not change and would be consistent nationwide.
  • Insurers and agents will only be able to market fixed indemnity plans to people who already have other minimum essential coverage in place (ie, they’re using the fixed indemnity plan as a supplement, rather than a stand-alone policy).  Otherwise, the fixed indemnity plan loses its ACA-exempted status and would run afoul of numerous ACA regulations.

There are still a lot of moving parts in the ACA.  New regulations are constantly being added to ensure that all of the parts work well, but they don’t all take effect immediately.  So while regular major medical health insurance is guaranteed issue now, fixed indemnity plans are still being sold in the individual market – exempt from ACA regulations and quite possibly without the client understanding that the plan is not sufficient to avoid the individual mandate penalty.  Far worse than the penalty however, is the possibility that a person could purchase one of these plans thinking that it’s “real” health insurance, and only find out it’s not after incurring a significant claim.

For the time being, buyer beware.  Here are some red flags:

  • If an agent brags about the plan not having to comply with the ACA, it’s a sign that the plan is probably offering really poor coverage.
  • A plan that touts access to any provider, with no network restrictions at all, is also possibly suspect.
  • If the plan utilizes a whole booklet of hypothetical claim scenarios instead of just providing a basic, across-the-board benefits summary, you’re probably dealing with a policy that isn’t going to provide quality coverage when you really need it.
  • Any plan that is still using medical underwriting is problematic.  If they ask any medical history questions (other than about tobacco use), you’re probably looking at a sub-standard plan.
  • If the plan has a lifetime maximum benefit, it’s not ACA-compliant.

For the rest of this year, insurers can still sell you fixed indemnity plans that are not ACA compliant, and they’re not required to include the new HHS-mandated disclaimer or ensure that you already have minimum essential coverage in place.  But people who purchase these plans as their only coverage will still be on the hook for the individual mandate penalty when they file their 2014 tax return.  And more importantly, they also face the possibility of incurring massive medical bills – far in excess of the maximum out of pocket limits set by the ACA – if they have a claim while relying solely on a fixed indemnity plan.

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for healthinsurance.org, medicareresources.org, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

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