What happens to policyholders and their medical providers when a health insurance company becomes insolvent and can no longer pay claims? In most cases, the health insurance guaranty association—also referred to as the health insurance guaranty fund—steps in to provide at least some degree of protection.
How It Works
Health insurance is regulated at the state level, so the guaranty associations are run by each state and differ somewhat from one state to another, but they are modeled on the National Association of Insurance Commissioners’ (NAIC) Life and Health Insurance Guaranty Association Model Act.
The model act has existed for five decades and been modified numerous times over the years. States can implement the model act as it’s written, but most states have made adjustments that are state-specific.
As long as a policyholder continues to pay monthly premiums when they’re due, the guaranty association will pay claims for covered insureds for the remainder of the plan year, up to the maximum limits determined by the state.
At the end of the plan year, the policy will not renew (since the insurer is insolvent) and the individual or business owner will be able to switch to a plan offered by a different insurer.
Without guaranty associations, insureds and their medical providers would be stuck having to wait for the liquidation process to be completed, and assets—if available—to be allocated. This would generally involve a lengthy wait, and depending on the insurer’s financial situation, it might also result in very little in the way of payouts.
Guaranty associations were created in order to alleviate these problems and ensure that claims are still paid in a timely manner when an insurance company becomes insolvent.
How Much It Covers
States set their own limits for guarantee association coverage. In most states, it’s $500,000 for major medical coverage, although a few states limit it to $300,000, and New Jersey does not set an upper limit.
Instead, New Jersey’s guaranty association will follow the limits of the policy that the insurer has from the now-insolvent insurer, but payments to medical providers are limited to 80% of the benefits the insurer would have paid.
Under the Affordable Care Act, major medical health insurance plans cannot impose lifetime caps on how much they’ll pay for covered essential health benefits. With the exception of grandfathered individual market plans, they also cannot impose annual benefit caps.
So the guaranty association coverage will generally always be less than the insolvent insurer would have covered. But if an insured’s claims exceed the coverage provided by the guaranty association, the insured is allowed to file a claim against the remaining assets of the insurer, which will be distributed during the liquidation process.
Across health insurance, life insurance, and annuities, guaranty associations have provided coverage for more than 2.6 million people since the early 1980s, paying $6.9 billion in claims.
Types of Health Insurance Protected
State guaranty funds provide coverage for people whose insurer was part of the guaranty association, which means the insurer was paying an assessment to help fund the guaranty association. States require covered insurers to participate in the association; it’s not voluntary.
But states have different rules in terms of which insurers have to participate. Some states do not include HMOs as members of the guaranty association, for example.
The guaranty associations in some states, such as New York and Kentucky, only cover plans that are issued by life insurers—including health plans issued by life insurers—and not health plans issued by health insurers.
Lawmakers in New York have been trying to create a health insurance guaranty association for several years, but have been unsuccessful. Legislation to do this has been introduced again in New York in 2021.
It’s fairly rare for health insurance companies to become insolvent, and the ones that do are often smaller companies with fairly few members. But between 2015 and 2017, most of the ACA-created CO-OPs failed, triggering headlines across the country.
Some of these CO-OPs were in states where the guaranty association stepped in to help cover unpaid claims, but some were not (and in some cases, the CO-OPs were able to meet their claims obligations in full before winding down their operations).
In New York and Kentucky, for example, the guaranty association coverage did not apply, because the CO-OPs were not life insurance companies. This was part of the impetus for the legislation that lawmakers have since considered in New York in an effort to create a guaranty fund for health insurers in the state.
The majority of people who have employer-sponsored health coverage are covered under self-insured plans. This means the employer’s money—as opposed to a health insurer’s money—is used to pay claims, although most self-insured businesses contract with a health insurer to administer the plan.
If your employer self-insures your coverage and then the employer becomes insolvent, the state guaranty association won’t be able to step in, because your coverage wasn’t provided by a licensed insurer that was part of the guaranty association.
The good news is that if your employer’s coverage terminates in that scenario, the loss of coverage will trigger a special enrollment period during which you can sign up for other health insurance coverage. This won’t help to cover outstanding claims from before the new insurance took effect, but it will prevent you from being stuck with insolvent coverage for the remainder of the plan year.
How Are Guaranty Associations Funded?
Health insurance guaranty associations are funded by assessments on all health insurers in the state—and life insurers, since the guaranty association is usually for life and health coverage. The NAIC Model Act specifies that the assessments should not exceed 2% of premium revenue, but states can choose to set lower assessment levels.
In most states, life and health insurers are allowed to offset some of the assessment against the premium taxes that they would otherwise have to pay, reducing the burden of the assessment.
Depending on the circumstances, guaranty associations are also able to recoup a portion of the insolvent insurer’s assets during the liquidation process and use those funds to cover the insurer’s claims obligations.
How Can I Find It in My State?
The National Organization of Life and Health Guaranty Associations has a web page where you can select your state and be directed to the website of the guaranty association that operates in your state.
You’ll be able to see information about the types of coverage that are protected by the guaranty association, as well as details of insurers that have become insolvent over the years. Note that most states have separate guaranty associations for life/health/annuity coverage versus property/casualty coverage (for things like homeowner’s coverage and automobile insurance).
The health insurance guaranty funds are overseen by each state’s insurance commissioner, so you can also contact your state’s insurance department with questions about the guaranty association.
The National Organization of Life and Health Insurance Guaranty Associations has an FAQ page that includes answers to a variety of common questions about guaranty associations and how they work.