Short-Term, Limited Duration Insurance Final Rule: Considerations for States
Sabrina Corlette, Georgetown Center for Health Insurance Reforms
On March 28, 2024, the U.S. Departments of Health and Human Services (HHS), Labor, and Treasury (the “tri-agencies”) released a final regulation that updates the definition of short-term, limited duration insurance (STLDI) and requires consumer disclosures for STLDI and hospital and fixed indemnity policies. These changes are designed to help consumers more clearly distinguish the differences between STLDI/fixed indemnity policies and comprehensive health insurance coverage that must comply with consumer protections under the Affordable Care Act (ACA) and other federal laws. State departments of insurance are the primary agencies responsible for oversight and enforcement of the new STLDI definition and notice requirements, and existing state laws that conflict with the new federal standards are preempted. This expert perspective discusses the implications of the final rule for state regulators. A detailed summary of the final rule is available on Health Affairs Forefront.
Provisions of the Final Rule: STLDI
Under federal rules promulgated in 2018, STLDI is defined as having an initial contract term of less than 12 months, and inclusive of renewals or extensions, having a duration of no longer than 36 months. However, STLDI is intended to serve as bridge coverage for short gaps in insurance, such as when a worker has a waiting period before gaining eligibility for an employer plan. It lacks the consumer protections of comprehensive health insurance coverage and can leave consumers with significant financial liability if they get sick. Because the 2018 definition contributed to consumer confusion over the differences between STLDI and comprehensive health insurance, the tri-agencies have revised the definition of STLDI to more closely align with the product’s purpose.
Under the final rule, STLDI is a health insurance policy with an expiration date of no more than three months and, inclusive of any renewals or extensions, a maximum duration of no more than four months. The new definition will apply to STLDI policies sold on or after September 1, 2024. Policies sold before then can continue to comply with the 2018 definition.
The rule also updates the consumer notice that STLDI issuers must prominently display on the first page of any marketing, application, and enrollment materials (including re-enrollment materials), in at least 14-point font. The new notice reads as follows:
Required Language for STLDI Consumer Disclosure Notices
STLDI issuers will be required to provide these notices within 75 days of the rule’s publication in the federal register.
STLDI Provisions: Considerations for States
In public comments, some stakeholders expressed concerns that the new definition of STLDI would interfere with states’ authority to regulate insurance. In response, the tri-agencies and other commenters observed that variation in state oversight of STLDI has resulted in a patchwork of consumer protections across states, requiring the establishment of a minimum national standard. However, the tri-agencies affirmed that states have authority to regulate STLDI, and may impose additional restrictions on these plans, tailored to the needs of their residents.
The tri-agencies also point to evidence that many STLDI plans are sold through associations. These associations often domicile in states with lax insurance regulation and market STLDI plans to consumers in other states. State regulators have reported that they often lack the authority to track sales of policies made through out-of-state associations and are unable to approve or regulate such policies when offered for sale by issuers that are not licensed by their state. This can result in harm to consumers when there are problems with their STLDI. The tri-agencies argue that a single national standard will reduce the incentives for STLDI issuers to escape state regulation by offering these products through an association.
The tri-agencies also observe that some group trusts and associations have marketed STLDI to employers as a form of employer-sponsored coverage. However, there is no provision in federal law excluding STLDI from the definition of group health insurance coverage. As a result, any STLDI sold to or through a group trust or association in connection with a group health plan is, under federal law, group health insurance and required to comply with the consumer protections in the ACA and other federal insurance laws.
Some commenters also expressed concern that the new federal notice would not comport with consumer notices for STLDI required in some states. One argued that states should be permitted to substitute their own disclosure language in place of the federal notice. The tri-agencies disagreed, arguing that a uniform federal notice best ensures that consumers receive information that enables them to “identify and distinguish” STLDI from comprehensive coverage. However, the final rule does not prevent states from requiring additional language to be included with the federally prescribed notice.
Provisions of the Final Rule: Hospital and Fixed Indemnity Policies
The tri-agencies proposed, but did not finalize, several provisions relating to the regulation and tax treatment of hospital and fixed indemnity policies. HHS proposed a requirement that issuers of hospital and fixed indemnity policies in the individual market pay benefits as a fixed dollar amount per day or other time period. Currently, such policies can pay benefits as a fixed dollar amount per time period or per service. The proposed change was designed to help consumers more clearly distinguish between a hospital/fixed indemnity policy, which is supposed to serve as an income replacement policy, and comprehensive health insurance.
The tri-agencies also proposed new standards for hospital and fixed indemnity policies in the group market. To help ensure that these policies are not confused with comprehensive health insurance, the draft rules would have required fixed indemnity issuers to pay benefits regardless of the cost of the healthcare provided to the enrollee or the severity of illness or injury experienced. The tri-agencies also raised concerns that some employers are circumventing federal consumer protections by offering workers fixed indemnity policies. Some employers offer these policies in tandem with a skimpy, preventive-services only plan in order to avoid the ACA’s employer mandate penalty. Many workers believe they have comprehensive health insurance when in fact they could face significant financial liability if they get sick. In the draft rule, the tri-agencies 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.
The draft rule also included proposals from the U.S. Treasury Department and Internal Revenue Service (IRS) to clarify the tax rules under which hospital and fixed indemnity policies operate in the group market. Some employers may be skirting income and employment taxes by labeling hospital and fixed indemnity policies as health benefits. Hospital and fixed indemnity insurance policies provide income replacement benefits and are thus not eligible for the tax exclusion that applies to a health benefit plan. The Treasury Department and IRS proposal would have clarified that the employer tax exclusion would not apply if benefits paid out under hospital/fixed indemnity policies were paid out without regard to the actual amount of medical expenses incurred by the enrollee.
In response to public comments, the tri-agencies did not finalize the above proposals related to hospital and fixed indemnity policies. However, the administration remains concerned about the health and financial risks for consumers and workers who enroll in these policies under the belief they have comprehensive coverage. The tri-agencies emphasized that they intend to revisit these proposals in a future rulemaking.
The tri-agencies did finalize their proposal that hospital and fixed indemnity issuers display a prominent notice to consumers for policies sold in the individual and group markets. The notices are drafted to help consumers more clearly differentiate between these policies and comprehensive health insurance that must comply with federal consumer protections. In response to comments, the tri-agencies agreed to delay the notice requirement to apply to plan years on or after January 1, 2025.
Hospital and Fixed Indemnity Provisions: Considerations for States
Although the tri-agencies did not finalize several proposals related to hospital and fixed indemnity policies, they raise significant concerns that these products are often aggressively and deceptively marketed to consumers as substitutes for comprehensive health insurance. The tri-agencies emphasize that in their oversight and enforcement of federal law, they will “look past the label” to determine how the policy functions; if it does not qualify as an excepted benefit under federal law, the tri-agencies will treat it as comprehensive coverage subject to federal consumer protections. The tri-agencies urge state regulators to take a similar approach.
Some commenters argued that the new federal notice requirements for hospital and fixed indemnity issuers interfere with state regulatory authority and conflict with existing state disclosure standards. The tri-agencies argue that a uniform federal notice is the best mechanism to promote consumer awareness and convey a consistent message about the differences between these policies and comprehensive health insurance. The tri-agencies also note that state regulators can impose additional, state-specific notice requirements on fixed indemnity issuers operating in their state. States may also determine the manner in which notice materials must be presented to insurance regulators for review and approval.