Grace Periods: A Good Start But Not Sufficient
Joel Ario, Manatt Health; Sabrina Corlette, Georgetown University; Jason Levitis, Levitis Strategies
Update – April 15, 2020
States have continued to assess the need for premium payment relief or expanded grace periods since this expert perspective was published in early April. Most notably, a few states have published new or updated emergency orders requiring insurers to pay claims during grace periods. Others have responded to new federal grace period flexibility by requiring insurers to delay the start of the 90-day grace period for Affordable Care Act (ACA) marketplace enrollees who receive advanced premium tax credits (APTCs) and are late in paying their share of the premium. This enables insurers to continue to pay claims for a longer period of time, while also collecting and retaining APTCs.
Insurer payment of claims during grace periods. Four states acted in early April to protect consumers and providers by limiting the ability of insurers to pend rather than pay claims during grace periods. In each case, the insurer obligation to pay claims is not contingent on the premium eventually being paid, though new opportunities for insurers to retain advance premium tax credits played an important role in some state orders.
- Washington – After initially allowing health insurers to pend claims during mandatory 60-day grace periods (see description of March 24 order below), the Washington Office of the Insurance Commissioner issued an updated order on April 3 requiring all health insurers to pay claims for at least the first 30 days of grace periods.
- New York – In an April 7 emergency order, Governor Cuomo directed state regulators to require all health insurers to provide 60-day grace periods for non-payment of premium and to pay claims during those 60 days, with exceptions for insurers in financial difficulty. For enrollees in subsidized marketplace coverage, state regulators accomplished the Governor’s directive by requiring insurers to delay the start of ACA-mandated grace periods by 30 days. The delay in triggering an ACA grace period allows the insurer to collect tax credits and pay claims for 30 days before the ACA grace period starts and then do the same thing for the first 30 days of the ACA grace period. The insurer is then allowed to pend claims and must return tax credits to the federal government for the second and third months of the 90-day ACA grace period (see description of ACA grace periods below). Other states are considering longer delays in triggering ACA grace periods.
- New Jersey – In an April 9 emergency order, Governor Murphy required insurers offering group and individual health insurance to extend grace periods to June 1 and pay claims until that date. The order authorized the insurance commissioner to further extend grace periods if necessary for public health purposes and prohibited insurers from recouping claims payments from consumers.
- Colorado – In a draft bulletin subject to public comment through April 14, the Colorado Division of Insurance directed health insurers providing individual market coverage “to defer the triggering of a grace period for a consumer’s failure to pay premiums and make reasonable accommodations to prevent policyholders from losing coverage.” Accommodations are to continue until 30 days after the Governor’s disaster declaration ends or the bulletin is rescinded. Insurers that had previously issued cancellation notices for non-payment of premium are directed to suspend those cancellations. For consumers receiving APTCs, the effect of the bulletin is to enable insurers to collect and retain APTCs in exchange for paying claims for each month that the bulletin remains in effect.
Other state developments. States continue to announce extensions of grace periods with various conditions. For example, Connecticut Governor Ned Lamont issued an executive order on April 1 that required insurers to extend grace periods to June 1 for any individual or group policyholder that suffered a revenue loss or other COVID-related hardship.
States also continue to wrestle with the role that grace periods can play in preserving current coverage, as well as ensuring that claims incurred during grace periods are handled in a fair and transparent manner. For example, Oregon insurance regulators are meeting with all interested parties to determine the most equitable way to allocate financial responsibility for claims incurred during a mandated grace period that currently runs through April 23.
In addition, states are taking various related actions, such as requiring waiver of late fees, prohibiting or requiring regulatory approval for coverage cancellations, putting a moratorium on non-renewals, and requiring insurers to allow furloughed workers or those working reduced hours to remain on group coverage.
Alternatives to grace periods. States are closely watching related developments with ACA coverage options and other potential federal relief for consumers whose current coverage is at risk because an individual or group policyholder cannot afford to pay monthly premiums. While the federal government chose not to reopen Healthcare.gov for all uninsured individuals, those who have lost coverage or income in the current crisis may be eligible for a special enrollment period (SEP) and/or may have an opportunity to receive or increase APTCs. In 11 states (plus the District of Columbia) with state-based marketplaces (SBMs), eligibility for ACA coverage has been extended to the broader uninsured population through SEPs that vary in length by state.
Congress also continues to debate other ways to extend health insurance coverage, including direct subsidies to individuals for COBRA coverage, as was done in the 2008 stimulus package. Depending on how these alternative coverage strategies develop, individuals in a grace period may have more than one option for preserving their health security in a difficult time.
Original Post- April 3, 2020
A growing number of state insurance regulators have sought to protect consumers during the COVID-19 crisis by requesting or ordering that insurers provide extended grace periods during which insurance coverage cannot be cancelled for non-payment of premiums. The intent is twofold: to buy some time for federal and state policymakers to find solutions that preserve current coverage wherever possible, and to give individuals and employers some measure of security about their current coverage while their ability to pay premiums is at risk because of a public health crisis.
Grace periods are a good way to accomplish the first objective, but grace periods alone may provide a false sense of security as to the second objective. In the worst-case scenario, traditional grace periods without any additional protection allow insurers to pend rather than pay claims during the grace period and then retroactively cancel the coverage back to the start of the grace period if full payment is not received before the end of the grace period. In this scenario, the policyholder would be responsible for claims incurred during the grace period and individuals (or employees covered by a group policy) may have difficulty obtaining services during grace periods if providers are wary of not getting paid. Because COVID-19 costs could be quite high [[1]] there will be some risk for all parties – consumers, providers, and insurers – if there is not more clarity about how claims costs should be handled during the current crisis and policymakers have to sort it out after the fact.
This does not mean that grace periods are a bad idea. Keeping options open in a crisis can be extremely helpful. But there should be transparency about the situation for all parties, and policymakers should be considering a range of solutions to prevent retroactive cancellations and minimize service disruptions during the grace period.
Pre-existing state grace periods. State laws on grace periods vary by line of insurance, but health insurers are seldom obligated to provide more than 30 days for group coverage and often less for individual market coverage (unless it is certain ACA coverage subject to a 90-day grace period as described below). Insurers are generally allowed to pend (i.e. not pay) claims during grace periods and may have varying levels of obligation to notify providers of that fact. Insurance laws typically do not address provider obligations during a grace period other than to prohibit balance billing (provider billing the consumer directly) and suspend “prompt pay” laws (requiring insurers to pay provider claims on strict timelines) during the grace period. If premiums are not paid in full by the end of the grace period, the insurer may cancel retroactively back to the start of the grace period and providers may bill the consumer for any claims costs incurred during the grace period. While these rules are relatively straightforward for individual coverage, group coverage can get more complicated if employees incur claims without knowledge that their employer has not paid premiums. Insurance regulators may be successful in securing some claims payments from insurers in those cases, especially if the employer has gone out of business.
ACA grace periods and updated federal guidance on COVID-19. State law governs grace periods in most situations, but the ACA requires insurers to provide a 90-day grace period for non-payment of premium for consumers who are receiving advance premium tax credits (APTCs). For the first month, the insurer is required to pay rather than pend claims and is allowed to keep APTCs regardless of whether the consumer pays their premium for that month. If the consumer’s coverage is ultimately cancelled for non-payment, the cancellation is retroactive but only for the second and third months of the grace period. For the second and third months, the insurer must return APTCs, and the consumer is liable for claims incurred [[2]]. The ACA grace period rule leaves the question of provider obligations during grace periods to state law.
In response to the COVID-19 crisis, CMS has suggested an additional layer of coverage protection is possible if, with permission of the state insurance regulator, an insurer chooses not to invoke a grace period for one or more months of premium non-payment and instead continues to receive APTCs and pay claims without any payment from the consumer. In essence, the insurer is allowed to delay the start of the 90-day grace period as long as it is willing to pay claims in exchange for APTCs [[3]].
Recent state COVID-19 orders. Many states have acted – and more are considering it – to require extended grace periods for all lines of insurance in the current crisis [[4]]. These state actions typically rely on emergency authority and may include directives beyond the scope of preexisting state laws and rules about grace periods. Most state orders have been silent on the question of payment of claims during the grace period; some reinforce the right of insurers to pend claims by referencing the insurer obligation to notify providers and/or enrollees of how claims are being handled.
For example, the State of Washington Office of Insurance Commissioner (OIC) issued Emergency Order No. 20-03 on March 24th that required insurers to provide grace periods of at least 60 days and apply them uniformly to all enrollees. The order also includes this directive:
Any communication from Regulated Entities addressed to enrollees during the grace period must clearly state the enrollee’s obligation to pay back premiums or potentially be subject to billing from health care providers for unpaid claims, and must clearly state the Regulated Entity’s obligations during the grace period, in light of the state of emergency and emergency orders issued by the Governor or the Office of the Insurance Commissioner.
The Washington order enhances transparency, but also leaves open the insurer’s obligations if future emergency orders issued by the Governor or OIC change the obligations of the respective parties. At the same time, it reinforces the potential liability of enrollees if nothing changes. The order acknowledges the current reality – there is no easy solution as to who should bear what costs among insurers, providers, and consumers – but also implies that more needs to be done to avoid payer-provider disputes that could result in one or both of these parties pursuing consumers for the costs or delaying needed services.
Potential solutions. There are a range of potential solutions to prevent those insured under a grace period from becoming liable for claims costs incurred if the grace period ends with non-payment. Those solutions include:
- Extend the ACA solution. Require insurers to pay claims for 30 or 60 days during a grace period. This option could be combined with state-based subsidy payments to insurers similar to the APTCs that insurers receive under the ACA policy. With or without subsidies, however, this option could impose very high claims costs on insurers without corresponding premium revenues [1] and may require broader actions to preserve the financial stability of insurers. A more limited solution might be to require insurers to pay claims unless full notice of potential liability is given to both providers and consumers.
- Federal payment of premiums. The CARES Act (P.L. 116-136) covers wages for certain employees (with limitations) to preserve the employment relationship, and a similar approach could be taken to health premiums to keep the current coverage in place [[5]]. This was suggested during deliberations over the CARES Act and could be part of a subsequent federal bill. This solution would eliminate the need for grace periods in applicable cases.
- Federal financial support. The CARES Act includes multiple funding streams that could be devoted to covering costs incurred when enrollees are in a grace period. The extent to which these options are available will depend on the rules clarifying how appropriated funds, including funds earmarked for providers, will be distributed.
- State relief. The CARES Act also includes an allocation of $1.25 billion or more to each state [[6]]. Using some of these COVID-19 grants could help offset all or some of the costs for unpaid premiums, perhaps in conjunction with insurers and providers agreeing to share some of the burden as well. States may be better positioned to target limited funding if there is no broader federal solution, though states will have many high-priority uses for their grants and are also facing lower revenues due to the crisis.
- Alternative coverage. Individuals in a grace period may also be eligible for alternative coverage, including subsidized ACA coverage through special enrollment periods in some cases. Being in a grace period may affect a consumer’s eligibility for SEPs and APTCs. And individuals in a grace period may face difficult trade-offs between retaining their current coverage and switching to another option.
[1] An actuarial brief from Covered California projects the cost of testing and treating those with COVID-19 that are covered by their employers’ plans or through individual plans to be as much as $251 billion over the next year.
[2] See 45 CFR § 156.270 (d)(1-3)
[3] See guidance from CMS, issued March 24, 2020, https://www.cms.gov/files/document/faqs-payment-and-grace-period-covid-19.pdf
[4] O’Brien, M. and Corlette, S. (Updated March 30, 2020). State Action Related to COVID-19 Coverage of Critical Services by Private Insurers. The Commonwealth Fund. https://www.commonwealthfund.org/publications/maps-and-interactives/state-action-related-covid-19-coverage-critical-services-private
[5] Technically the credit can also reimburse employers’ health coverage expenses, but because it’s limited to $5,000 per employee per quarter, it will likely cover only wages.
[6] D.C. received less funding than all states in the stimulus bill; it was included as a territory along with Guam, U.S. Virgin Islands, and others, which were collectively provided $3.3 billion in funding in total.