Expanded access to short-term, limited-duration insurance coverage—which could lead to adverse selection in the Affordable Care Act’s individual market—may also result in consumer confusion over coverage, a rise in the number of uninsured and underinsured individuals, and bad debt incurred in paying for coverage.
The US departments of Health and Human Services, Labor, and Treasury issued a final rule on August 1 to expand access to short-term, limited-duration insurance coverage, which is intended to extend the time period that this type of insurance can remain effective. The final rule was developed in response to an executive order issued by President Donald Trump in October 2017 that directed the federal government to expand access to short-term plans, association health plans, and health reimbursement arrangements. The rule will go into effect 60 days after formal publication in the Federal Register.
Short-term plans are intended to fill gaps in coverage that may occur when an individual is transitioning from one plan or coverage to another; for example, in between jobs or an instance in which individual coverage is needed outside of an enrollment period. These plans are exempt from the federal market requirements applicable to health insurance sold on the exchange because they are not considered individual health insurance coverage. For example, these plans are not subject to the essential health benefits requirements that the Affordable Care Act (ACA) established to ensure that a minimum set of coverage options were part of each health insurance product sold in the individual market. They are also not subject to the preexisting condition exclusions or annual dollar limits that were established by the ACA. Out-of-pocket costs can be very, very high.
Most prominent is the change in the length of duration of the contract with an issuer—these plans now can be offered for 12 months at a time with renewals (no longer than 36 months total), rather than the more limited three-month time frame previously in effect. Enrollment materials must contain specific prominent notices.
With the addition of this final rule, short-term issuers can charge higher premiums based on health status, exclude coverage for preexisting conditions, impose lifetime or annual caps, opt not to cover certain conditions and benefits, rescind coverage, and require higher out-of-pocket costs. Generally, these plans are attractive to healthy, younger individuals who will pass medical underwriting. As a result, the likelihood of increased adverse selection in the ACA individual market is high.
The short-term policies are subject to state regulation. Some states and the National Association of Insurance Commissioners requested that there be a delay in implementation to allow states to put certain protections in place, but the regulatory agencies nonetheless determined that the rule will go into effect 60 days after publication in the Federal Register.
The intent of the ACA market reforms was to ensure that consumers had access to and understood the coverage they were purchasing. Further, these reforms were intended to define a core set of coverage consistent with what most Americans think of when they are purchasing medical insurance. The consumer protections in the ACA, which most Americans favor, are the very protections that these short-term, limited duration plans abandon. The final regulations reflect a determination that greater consumer choice was needed, and that many purchasers of short-term insurance would otherwise forgo health insurance coverage. With the expansion of short-term, limited duration coverage, there will be a higher incidence of consumer confusion over what type of coverage is purchased and a fear by providers in the industry that patients who think they have coverage may, in fact, not be aware of growing limitations in coverage and payment obligations – the very issue that the ACA sought to eliminate. There will likely be a higher number of uninsured and underinsured individuals, as well as bad debt incurred in obtaining and paying for healthcare coverage, especially emergency coverage.
If young, healthy individuals abandon the market in favor of these limited duration plans due solely to cost, it will be more expensive to provide comprehensive health insurance through the market. With sicker patients who need access to the full protections afforded by insurance sold on the exchange (this is what adverse selection is), costs rise, leading to what economists have termed the “death spiral” in insurance rates. These are the exact concerns that prompted the ACA provisions and rules in the first place – to avoid adverse selection and ensure that the insurance marketplace included a broad representation of individuals; those who are healthy and young as well as those who may not be as healthy and young. The agencies even note this in the comments, identifying that “the rule could lead to further worsening of the risk pool by keeping healthy individuals out of the individual market for longer periods of time, increasing premiums for individual market plans and may cause an increase in the number of individuals who are uninsured.”
With the rule, limited duration coverage can now be offered for up to three years. The concept of limited-duration coverage is that the coverage is supposed to be similar to COBRA coverage, not coverage that can be relied on for three years at a time. Because some of the plans may not even have emergency room coverage, the key is that consumers understand the terms of the plan they are purchasing. Even if they understand it, no one can predict their future and if ER coverage is excluded, should the plan be allowed to be sold? Let the buyer beware.
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