In Central United Life Ins. Co. v. Burwell, the US Court of Appeals for the DC Circuit held that HHS lacked authority to expand the criteria for fixed indemnity insurance policies in the individual market to qualify as an excepted benefit (and thereby be exempt from many requirements under the Public Health Service Act (PHSA), as amended by the Affordable Care Act (ACA); see Practice Note, Excepted Benefits). The court affirmed a district court ruling that permanently enjoined HHS's enforcement of this rule ( (D.C. Cir. July 1, 2016)).

The Public Health Service Act (PHSA) establishes coverage requirements for health plans, but excludes specified forms of insurance known as excepted benefits (see Practice Note, Excepted Benefits). Among the list of excepted benefits are fixed indemnity policies, which pay a fixed amount of cash to a policyholder on occurrence of specified medical events (see Legal Update, DOL FAQs Address Deadline for Distributing Exchange Notices, HRAs and More: Fixed Indemnity Coverage).

The Affordable Care Act (ACA) reorganized, amended, and added to the PHSA's provisions, and also requires individuals to maintain minimum essential coverage (MEC) (see Practice Notes, Grandfathered Health Plans Under the ACA: Applicability of ACA Rules to Grandfathered Plans and Affordable Care Act (ACA) Overview, and Legal Update, Supreme Court Upholds the ACA's Individual Mandate). However, the ACA left intact the PHSA's rules regarding excepted benefits. After the ACA's enactment, but before HHS's issuance of the 2014 final regulations at the center of this case, some individuals found it cost-effective (notwithstanding the ACA's individual mandate penalty) to forego MEC in favor of fixed indemnity policies. For a fixed indemnity policy to qualify as an excepted benefit, the PHSA requires that the arrangement be:

(42 U.S.C. §§ 300gg-63(b) and -91(c)(3).)

However, HHS's final regulations (May 2014) added a third requirement for fixed indemnity policies to be an excepted benefit (79 Fed. Reg. 30240 (May 27, 2014)). Specifically, a fixed indemnity policy could only be provided to individuals who already had MEC, meaning that these policies could no longer be obtained as an alternative to MEC. The result, according to the DC Circuit in this case, was to effectively eliminate the sale of stand-alone fixed indemnity policies.

In response, several providers challenged HHS's rule as an impermissible interpretation of the PHSA. The district court agreed with the providers and permanently enjoined HHS's enforcement of the rule. HHS appealed.

The DC Circuit applied an analysis (that is, the two-part Chevron test) commonly used to evaluate whether an administrative agency has acted within its regulatory authority (Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984); regarding Chevron deference, see Legal Update: Supreme Court Upholds ACA Subsidies). The court concluded that HHS's fixed indemnity rule failed the Chevron test because it was an attempt to amend the PHSA itself, which HHS, as an administrative agency, was not entitled to do. Specifically, the court reasoned that whereas Congress exempted all plans that satisfied the statutory criteria from the PHSA's coverage requirements, HHS's "tacked on" criterion impermissibly exempted less than all such plans. The court observed that the ACA had reaffirmed the PHSA's definition of excepted benefits by excluding benefits described in the PHSA from what counts as MEC (26 U.S.C. § 5000A(f)(3)).

The court also rejected the government's argument that PHSA's requirement that fixed indemnity policies be "offered as independent, noncoordinated benefits" (42 U.S.C. § 300gg-91(c)(3)(B)):

In the DC Circuit's view, however, this requirement:

According to the court, HHS's attempt to regulate individuals under a provision targeted at providers confirmed that "the agency's rule was an act of amendment, not interpretation."

The DC Circuit's decision is a victory for fixed indemnity insurers and other industry stakeholders, many of whom have long questioned HHS's legal authority to require that fixed indemnity insurance be sold as a supplement to MEC to be an excepted benefit. These industry stakeholders took the view that fixed indemnity policies fill an important space in the market, including for young and healthy (or middle aged) individuals with moderate incomes who cannot afford high-deductible coverage under the ACA, but for whom a limited indemnity plan is within reach.