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Hospital Indemnity and Critical Illness Plans at Risk

Federal regulators recently announced they are considering a ban on the sale of Hospital Indemnity and Critical Illness policies. The “Tri-Agency” Team – the Internal Revenue Service, the Employee Benefits Security Administration and the U.S. Department of Health and Human Services – has included this proposal in a new batch of draft regulations that also proposes to limit short-term major medical insurance coverage to three months maximum. The reason given for these proposals is consumer protection.

In the past the agencies have said these type of policies would be “excepted benefits” meaning  products free from federal benefit design rules.  They have been  allowed to be used to fill the gaps not covered by major medical policies that comply with PPACA.

The TA Team states that it has been receiving reports that these types of polices are being used as alternatives to PPACA-compliant major medical, and that some group plan operators are telling workers in employer-sponsored group health plans that indemnity policies and other supplemental products meet the requirements of minimum essential coverage. The TA Team has also expressed concern that some individuals may incorrectly understand these policies to be comprehensive major medical coverage and experience unexpected out-of-pocket costs when they file claims.  This article recently appeared on LifeHealthPro.com, and outlines the proposals and the concerns expressed by the agencies.

Will it really matter if these types of policies are banned?  Do they have any real value today?

Critical illness insurance has a 33 year history – it was founded by Doctor Marius Barnard, and the first plan was launched in 1983 in South Africa under the name Dread Disease Insurance. The coverage has been accepted globally into many insurance markets around the world ever since, and became available in the United States in the late 1990`s.

Critical illnesses cause financial devastation to millions of individuals and families, even those with health insurance. Health insurance policies come with deductibles and co-pays that can be $5,000 a year, or much higher. Medical problems contributed to over 60 percent of all bankruptcies in the United States in 2013. A  Harvard University study found that more than three-quarters of those filing (77.9 percent) had health insurance at the start of the bankrupting illness. Critical illnesses are striking more Americans every single year. According to the American Cancer Society, 1.4 million Americans were diagnosed with cancer in 2015. An estimated 785,000 Americans will have a first heart attack and 600,000 Americans will experience their first stroke according to the American Heart Association. The vast majority will survive. Prescriptions are not just costly, they are rarely fully covered.

When undergoing treatment or recovering for an extended period of time, people still have to pay all of their regular bills including health insurance premiums, rent or mortgage, credit card bills, food and utilities, etc. These policies pay either a lump sum upon first diagnosis, up to as much as $50,000, or pay per a schedule based on care received.

Over 3 million Americans now have this type of protection, purchased on an individual basis or through a plan offered by their employer.  Supplemental policies such as Hospital Indemnity and Critical Illness policies do have value, and have provided much-needed financial assistance to so many who’ve experienced a critical illness.

Most people would agree supplemental policies of all types should come with the proper disclosures and exclusions, including a prominent statement that they do not meet the qualification of minimum essential coverage. Hopefully, balance will prevail and the Tri-Agency Team will see the value in these types of policies, enact clearer distinctive disclosures to satisfy the consumer protection issues, and keep these valuable products available to purchase for the financial protection and well-being of those afflicted with a devastating critical illness.