Hospital Indemnity Insurance

Hospital indemnity insurance is coverage that pays a stated dollar amount for each day of hospitalization or for each covered service, without regard to what the care cost or to what any other coverage paid. Federal law calls the wider category "hospital indemnity or other fixed indemnity insurance" (42 USC 300gg-91(c)(3)(B)), and the National Association of Insurance Commissioners uses the headword "hospital indemnity coverage" for a pre-determined fixed benefit or daily indemnity tied to a stay at a hospital or intensive care facility. The payment goes to the policyholder rather than to the hospital, so it is cash that arrives because a covered event happened, rather than a payment toward a particular bill.

The fixed dollar amount is a condition of the product's legal status, not a design preference. In the individual market, 45 CFR 148.220(b) exempts a list of benefit types from the federal individual-market requirements, but only where the benefits are "provided under a separate policy, certificate, or contract of insurance." Paragraph (b)(4) then adds two conditions specific to this product. First, "[t]here is no coordination between the provision of benefits and an exclusion of benefits under any other health coverage." Second, "[t]he benefits are paid in a fixed dollar amount per period of hospitalization or illness and/or per service (for example, $100/day or $50/visit) regardless of the amount of expenses incurred and without regard to the amount of benefits provided with respect to the event or service under any other health coverage." An insurer that paid a percentage of the actual bill, or that reduced its payment because a health plan had already paid, would fail those tests, and the policy would then have to satisfy the whole of the individual-market rules it was written to sit outside.

So the complaint and the design are the same fact. People buy hospital indemnity coverage expecting it to fill the gap a health plan leaves, and are surprised when a $200-a-day benefit meets a $9,000 bill. The regulation is the reason: a policy that measured the gap would be coordinating with the other coverage, and coordination is exactly what the excepted-benefit conditions forbid. The payment is calculated from the event, never from the invoice.

What the excepted-benefit status costs the buyer. Because these policies sit outside the federal health insurance requirements, the familiar protections do not attach: there is no out-of-pocket maximum, no required package of essential health benefits, no bar on annual or lifetime dollar limits, and no general prohibition on medical underwriting or pre-existing condition exclusions. 45 CFR 149.20(b)(1) also puts excepted benefits outside the federal surprise-billing protections, so a policyholder relying on one has none of that machinery either. Those consequences are the trade the category makes: fewer obligations on the insurer in exchange for a product that is not, and cannot be, comprehensive coverage.

It does interact cleanly with a health savings account, which is a point in its favor. IRC 223(c)(3) defines "permitted insurance", and clause (C) is "insurance paying a fixed amount per day (or other period) of hospitalization." Coverage in that list is disregarded when testing whether someone is an eligible individual, so holding a hospital indemnity policy alongside a high deductible health plan does not block contributions to the account. That is a different route from the one that covers dental, vision, accident and telehealth coverage, which are disregarded under IRC 223(c)(1)(B)(ii); the statute reaches the same outcome for these products by two separate lists.

How to judge one honestly. The useful comparison is the annual premium against the expected payout, and the expected payout is a small number times a small probability. A daily benefit is multiplied by nights in hospital rather than by the size of the bill, so the recovery from a covered admission is the daily amount times the length of the stay: at $250 a day, four nights pay $1,000 and a full week pays $1,750, whatever the hospital charged. Where a policy is offered through an employer at a low payroll cost it can be reasonable as a cash cushion. Where it is sold as a way to make a high deductible affordable, the arithmetic rarely supports it, because the benefit does not move when the deductible does.

1. You buy a separate policy, often through an employer at open enrollment or directly from an insurer. It must be a separate contract to qualify as an excepted benefit.

2. A covered event happens, most often an inpatient admission, and sometimes a defined list of services such as an intensive care day, an emergency room visit or an outpatient surgery.

3. You file a claim with the indemnity insurer, separately from anything your health plan is doing.

4. The policy pays its stated amount per unit, without reference to the hospital's charges or to what the health plan paid.

5. You decide what to do with the money. It is yours, so it can go to the hospital bill, to a deductible, to lost income, or to anything else.

A hypothetical. Owen has a health plan with a $5,000 deductible and 20% coinsurance, and a hospital indemnity policy paying $250 per inpatient day for up to 30 days, at a premium of $22 a month, or $264 a year. He is admitted for four nights and the hospital's allowed amount is $28,000. Under the health plan he pays the $5,000 deductible plus 20% of the remaining $23,000, which is $4,600, for a total of $9,600 before any out-of-pocket ceiling applies. The indemnity policy pays 4 times $250, which is $1,000. So the policy covers about 10 percent of his cost sharing in the year it paid out, and in a year with no admission it pays nothing while still costing $264. Both figures are the product working exactly as designed; neither is a defect in the policy.

Pros

• The benefit is cash paid to the policyholder, so it can cover a deductible, a lost paycheck, travel, or childcare rather than only a medical bill.
• It cannot be reduced because other coverage paid, since coordination would cost the policy its excepted-benefit status.
• Premiums are usually low, and group versions offered at work are often cheaper than individually purchased ones.
• It counts as permitted insurance under IRC 223(c)(3)(C), so it does not block health savings account contributions.

Cons

• The payment has no relationship to the cost of the care, so a large bill and a small bill produce the same benefit.
• Excepted-benefit status means no out-of-pocket maximum, no required benefit package, no bar on annual or lifetime dollar limits, and no general prohibition on medical underwriting.
• The federal surprise-billing protections do not reach it, because 45 CFR 149.20(b)(1) excludes excepted benefits.
• The benefit accumulates only while the stay lasts, so the total recovery is the daily amount times a handful of nights rather than a share of what the hospital billed.
• It is not coverage and satisfies no coverage requirement, so buying one in place of a health plan leaves the whole of the medical cost unfunded.