Hospital indemnity coverage may not have the name recognition of disability or the cachet of critical illness, but it could be poised for a rise up the ranks in this increasingly consumer-driven health care market.

"This product has been one of our best growth products in the past few years," says Bob Ruff, product manager with Colonial Life. "Part of that is probably due to the economy and what's going on with health care."

As employers move to CDHPs in response to the economic downturn and rising renewal rates - with some even dropping group health insurance altogether - HI can help ease the transition for employees. "Is a company going to be able to fill every gap and keep it affordable? No, probably not," says Ruff. "But at the same time, we can help focus on some of those larger financial exposures."

Referencing data from the Kaiser Family Foundation, the typical inpatient hospital stay has risen to more than $1,600 on average in the last couple of years, Ruff points out. If an employee who is used to a $250 deductible is now looking at $2,000 out-of-pocket "that's a big hit on the wallet if you ever become confined to a hospital," he says. "Hospital confinement really helps fit that need and keeps the product affordable as well."

A flexible product

Hospital indemnity plans come in handy when an individual enters the hospital for a few days but does not trigger short-term disability benefits. The lump-sum payment will help cover possible lost wages, child care expenses, high deductibles and other related costs of the hospital stay, says Doug Mantz, vice president of sales with The Farmington Company.

The Connecticut-based voluntary benefits firm hasn't received many requests for stand-alone HI coverage, but always includes a hospital indemnity component with their limited medical plans. "We haven't seen a real need to offer it unless there is a consumer-driven health plan," says Mantz.

The product is also used in connection with mini-med plans at American Public Life, according to Richard Mills, regional sales director for national accounts. While voluntary HI is "not as big a seller" as other individual products, the company still sells "a good bit" of supplementary individual HI. It can be used to supplement a qualified HSA plan, Mills adds, as long as it meets federal requirements to have an indemnity daily hospital benefit, first occurrence benefit and intensive care benefit on an indemnity basis. Individual coverage ranges from under $30 to just under $100 for ages 17-35, while family coverage runs from under $80 to around $140 per month. Another alternative is to add on riders for additional coverage, including hospital admission, surgery, outpatient surgery, emergency accident, doctor visits and testing.

At Colonial Life, although Ruff has seen growth in HI sales across all types of employer demographics, the largest increase is in groups with more than 500 employees. All hospital confinement plans include the payment of a lump-sum benefit, wellness benefit, rehab-unit benefits and a waiver of premium, and can be upgraded to include outpatient surgery benefits, diagnostic and emergency room visit benefits, and a doctor's office visit benefit.

"Even though it's focused on the hospital confinement indemnity, we expand it to a lot of other benefits as well," says Ruff. "Because again, we know when these people are making changes, hospital confinement is not going to be the only thing they're looking at to help them fill that first-dollar coverage with."

The strength of the Colonial Life product, says Ruff, is that it doesn't coordinate with major medical plans to complicate (or restrict) the payment process. "We've heard nothing but positive things said about this product," says Ruff. "We've seen growth ... as high as the 20% to 40% range."

The growth, which Ruff attributes to the flexibility of the product, has been largely in the health care and service industries.

As with most voluntary benefits, although hospital indemnity is a good product serving a needed purpose, "it is extremely important that the agent/broker makes very clear what the coverage is, what it does cover and what it does not cover," says Mills. "And that it is not sold as a major medical plan or major health insurance. It's very basic, limited benefit coverage."

Role in reform

If health care reform ends up passing with some form of universal coverage, there will certainly be less need for policies such as hospital indemnity, says Mantz. However, that doesn't mean the need will go away entirely. "Look at Medicare," he says. "Everybody has to buy a supplement of some sort. If it goes down that road then there could be a huge reason for these types of products."

No matter what form of government coverage emerges, Mills is confident that the market for supplemental coverage in the event of hospitalization will remain. He points to England's health care system, where it's possible to face a long waiting period for treatment. "Supplemental coverage is picking up steam in England because if I have supplemental coverage, it gives me the opportunity to go to the head of the line," he says. "So coverage such as the HI plans, I think, will have a very bright future in the event that we do have national[ized] health."

Judging from what he's seen so far, Ruff is confident gaps will remain in any type of reform that is enacted. "They're trying to keep it affordable, put some caps in places, but there are still going to be places where employees are going to have to come out-of-pocket in certain areas," he says. "It may require some changes depending on what comes out, but we don't think it's going to be anything drastic."