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What Is a Health Insurance Guaranty Association?

Protects Insureds and Medical Providers

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.