On July 1, the D.C. Circuit decided two appeals challenging aspects of the implementation of the Affordable Care Act, accepting one challenge and rejecting the other. In Central United Life v. Burwell, a three-judge panel of the D.C. Circuit Court of Appeals affirmed a lower court injunction against a 2014 HHS regulatory prohibition on the sale of fixed indemnity insurance unless the purchaser attests that he or she already has minimum essential coverage. And in West Virginia v. HHS, a different panel of the D.C. Circuit rejected a challenge brought by the state of West Virginia to the “administrative fix” announced by HHS late in 2013. Under this arrangement, HHS deferred for 2014 enforcement of eight of the ACA’s insurance market reform requirements against existing insurance plans in the individual and small group market.

Central United Life v. Burwell

The Issues

Fixed indemnity insurance is an “excepted benefit.” Excepted benefits were recognized by amendments adopted in the Health Insurance Portability and Accountability Act of 1996 (commonly known as HIPAA) to the Public Health Services Act (PHSA). HIPAA was an early attempt by Congress to regulate health insurance; it limited, for example, health status underwriting within groups and preexisting condition requirements. Congress intended HIPAA’s reforms to apply to only major medical coverage, however, and excepted from them certain limited forms of coverage that are not major medical coverage.

These excepted benefits included some insurance products that are clearly not major medical, such as dental, vision, and long-term care benefits. Excepted benefits also include some products that are not so clearly distinguishable, including fixed dollar indemnity insurance. HIPPA provided that fixed dollar indemnity policies would be excepted benefits only if they were offered as “independent, noncoordinated benefits,” but did not define them further.

Defining this coverage more clearly became much more important, however, when the ACA was passed. The ACA imposes significantly more comprehensive and stringent requirements and limitations on major medical health insurance than did HIPAA, prohibiting (for example) annual and lifetime dollar limits on coverage, capping out-of-pocket limits, and requiring individual and small-group policies to cover ten essential health benefits.

Excepted benefit coverage is free from these limits; indeed, it is not subject to any of the ACA’s health insurance requirements or prohibitions. If a health insurer could simply label a product as fixed indemnity coverage and thereby escape all ACA requirements, the insurance reforms could be eviscerated. Moreover, excepted benefit products are profitable and pay high commissions, thus insurers and agents and brokers have a significant incentive to sell them, even though these products are undermining the risk pool for comprehensive coverage.

Some consumers do not in all likelihood fully understand how limited the coverage is under these policies. Excepted benefit policies exclude preexisting conditions and have dollar limits, and consumers who buy them are not legally guaranteed renewal if their coverage is cancelled. Consumers may only realize how minimal excepted benefit coverage is when they become seriously ill or have an accident, and by then it will likely  be too late to purchase ACA-compliant coverage.

Finally, the ACA explicitly provides that excepted benefits are not minimum essential coverage. If a large employer offers only fixed indemnity coverage to its full-time employees, it has not complied with the employer mandate because it has not offered minimum essential coverage to its full-time employees. Individuals who have only fixed indemnity coverage have not complied with the individual mandate and will have to pay the individual mandate tax, in addition to paying premiums.

It is important, therefore, that employers and individuals clearly understand whether a product is fixed indemnity coverage or ACA-compliant health insurance before they purchase it.

Pre-ACA regulations had provided that group fixed indemnity coverage had to pay benefits on a per-period basis, for example, $100 per day of hospitalization. In a guidance released late in 2013, CMS took the position that this was a necessary characteristic of fixed indemnity insurance. Many indemnity policies, however, were being written on a per-service rather than a per-period basis.

In the regulations promulgated later in 2014, therefore, CMS permitted the continued marketing of per-service indemnity policies in the individual market, but only if certain requirements were met. Specifically:

  • Fixed indemnity insurance could only be sold to individuals who otherwise had minimum essential coverage,
  • Benefits under the indemnity policy could not be coordinated with benefits under other health coverage or cover exclusions under other coverage.
  • Benefits had to be paid on a fixed dollar basis regardless of actual expenses incurred or covered by other coverage.
  • The consumer had to be provided with a prominent 14-point notice informing him or her that the coverage was not a substitute for major medical coverage and could result in imposition of the individual responsibility tax.

Central United Life, a company that sells indemnity plans, sued, challenging the provision of the rule prohibiting the sale of fixed indemnity insurance to individuals who lacked minimum essential coverage. In September of 2015, district court Judge Royce Lambeth held for the plaintiffs, enjoining the minimum essential coverage requirement.

The D.C. Circuit Panel’s Decision

The D.C. Circuit panel affirmed. The court observed that “fixed indemnity” coverage was defined by the PHSA (that is, by HIPAA), and that the PHSA definition was not amended by the ACA. The court noted that the HHS regulation requiring purchasers of fixed indemnity coverage to also have minimum essential coverage was adopted in 2014, four years after the ACA was adopted and eighteen years after HIPAA, in an attempt by HHS to forestall consumers from purchasing fixed indemnity policies in lieu of minimum essential coverage.

HHS asked the court to defer to its interpretation of the statute under the Chevron rule, which counsels courts to defer to agency regulatory interpretations of statutes if Congress has not directly addressed the question at issue and the agency’s interpretation of the statute is permissible. But, the court noted, Chevron only requires deference to an agency’s interpretation of a law if Congress authorized the agency to act.

The D.C. Circuit held that Congress had given HHS no discretion to act in this case. The statute, the court held, permits fixed indemnity plans if the plan “(1) is provided under a separate policy, contract, etc. and (2) offers independent noncoordinated benefits.” Nothing, the court held, “suggests Congress left any leeway for HHS to tack on additional criteria.” This definition, the court observed, was not changed by the ACA, which simply adopted the HIPAA definition.

HHS argued that it had authority to supplement the HIPAA definition by way of defining what was meant by the requirement that fixed indemnity plans be “offered as independent, noncoordinated benefits.” HHS argued that this “presume[es] the existence of other coverage,” that is, minimum essential coverage.

The court rejected this argument, however, observing that the noncoordination requirement applies to insurers, not to consumers. Insurers may not offer fixed indemnity coverage in coordination with other forms of coverage, but consumers cannot be required to have minimum essential coverage to purchase fixed indemnity coverage. The court affirmed the district court injunction.

An Alternative Argument?

The court did not consider another argument that could perhaps have sustained the requirement but was not made clearly by the government. Congress decided in adopting the ACA that insurance in the nongroup market should meet minimum requirements to qualify as minimum essential coverage. It also decided that fixed indemnity coverage does not have to meet those requirements.

Congress explicitly directed HHS (in coordination with the Treasury department) to define minimum essential coverage, and thus implicitly directed it to define the conditions excepted benefits would have to meet to be exempted from the legal requirements that minimum essential coverage must meet. By defining minimum essential coverage to exclude fixed indemnity policies, Congress gave HHS the authority to further define fixed indemnity coverage. HHS exercised this authority in promulgating the regulation at issue in the case.

The Importance Of Fully Informing Consumers

The challenged HHS regulation also requires that fixed indemnity application materials include a prominent notice warning consumers that fixed indemnity policies are a supplement to and not a substitute for minimum essential coverage, that they do not meet the minimum essential coverage requirement, and that an individual who purchases indemnity policy coverage only will need to pay the individual responsibility penalty. The court explicitly noted that this requirement was not challenged and explicitly expressed no opinion as to its validity.

HHS has recently proposed rules that would require this warning to be given in application materials also for group fixed indemnity coverage and for short-term, limited duration coverage (which is not an excepted benefit but was also excluded from the regulations that apply to comprehensive insurance by HIPAA and the ACA). Requiring such a warning and taking further steps to clarify the definition of coverage is a reasonable exercise of the authority HHS has to define minimum essential coverage and should be upheld if future litigation occurs.

West Virginia v. HHS

The Issues

HHS instituted the administrative fix to forestall mass cancellations of insurance coverage in the individual and small group markets and allow a more orderly transition to enforcement of the ACA reforms. As Judge Silberman noted in his decision, “All hell broke loose as policies were cancelled.” Judge Silberman further observed that “the President acted, allegedly, to pre-empt Congress,” which he speculated was poised to modify the law itself.

In March of 2015, HHS extended the administrative fix to delay enforcement against existing individual and small group plans for policy years beginning on or before October 1, 2016.

While HHS announced it would not enforce the insurance reforms against transitional plans, it left to the states discretion to decide whether or not they would themselves enforce the ACA reforms. In the words of Judge Silberman, it “left the States holding the bag.”

West Virginia sued HHS, claiming that HHS’s passing off of the decision whether or not to enforce the law to the states was illegal, violating the ACA itself and the Administrative Procedures Act, as well impinging on state sovereignty under the Tenth Amendment and unlawfully delegating federal executive and legislative power to the states. HHS moved to dismiss West Virginia’s complaint, contending that the court had no jurisdiction to hear the claim because West Virginia had not been injured by the HHS decision and thus had no standing to pursue a federal lawsuit.

The Constitution only allows the federal courts to hear lawsuits when a complainant has standing—that is, when the complainant has suffered a factual injury caused by the defendant’s complained-of conduct that can be redressed by the court. West Virginia claimed that it had been injured by the HHS transition plan policy because the policy made the state “politically accountable” for enforcement of the law while the ACA itself imposed the political accountability for enforcing the law on the federal government. West Virginia claimed that its citizens who wished to see the ACA enforced would blame it for non-enforcement when the real blame belonged with the federal government.

The D.C. Circuit Panel’s Decision

The district court dismissed West Virginia’s complaint, holding that West Virginia was not concretely injured by the administration’s action and thus lacked standing to challenge it in federal court. The D.C. Circuit panel affirmed this decision.

The court held, as the state conceded at oral argument, that West Virginia’s situation was the same as it would have been had Congress given only states authority to enforce the federal mandate, along with discretion to decide whether or not to do so. Had Congress compelled the states to enforce the law, West Virginia might have been able to claim injury, but that was not the case here. Neither did the state claim any concrete economic injury.

The court focused on West Virginia’s claim that it was injured because the administration had given it “political responsibility” for deciding whether or not to enforce the federal law. The court stated:

There is simply no support for this extraordinary claim. Although Appellant dresses up its argument as a breach of State sovereignty in violation of the Tenth Amendment, its injury is nothing more than the political discomfort in having the responsibility to determine whether to enforce or not—and thereby annoying some West Virginia citizens whatever way it decides. And no court has ever recognized political discomfort as an injury-in-fact. . . . Increased political accountability of this nature—greater likelihood of political consequence in making a decision—is the kind of inherently immeasurable harm that our standing doctrines have been designed to screen out.

The court also rejected as legally unsupportable West Virginia’s argument that an entity always has standing to challenge a delegation of responsibility to carry out a governmental responsibility.

The decision joins a long line of cases in which the federal courts have rejected challenges to the ACA because the cases were brought to express an abstract political grievance rather than to redress a concrete injury. Nevertheless, political opposition to the ACA remains deep seated, and opponents who have so far been unable to overturn the law through political channels continue to hope the judiciary will come to their aid.