Federal Promotion of Short-Term Health Insurance Plans: How Will These Plans Impact State Insurance Markets?

Last month, the departments of the Treasury, Labor, and Health and Human Services released a proposed rule that changes the definition of short-term, limited-duration insurance (STLDI) plans to make it easier to sell the plans, which do not have to adhere to Affordable Care Act (ACA) requirements, such as covering people with pre-existing conditions.

This proposed rule is the latest federal action to implement President Trump’s Executive Order promoting “health care choice and competition” in the United States. The cumulative effect of this proposed rule plus elimination of the individual mandate penalty and increased availability of association health plans under another pending rule is expected to significantly affect states’ insurance markets in 2019.

STLDI is insurance that individuals can purchase on a short-term basis, particularly consumers who need to fill a gap in coverage — such as when they change jobs and need interim coverage until their new employers’ insurance kicks in. Short-term plans are largely unregulated and exempt from many federal regulations, including several enacted under the ACA, including:

  • Guaranteed issue: Requires insurers to cover individuals regardless of pre-existing conditions;
  • Community rating: Prohibits insurers from charging consumers more for coverage based on their health rating;
  • Annual and lifetime limits: Prohibits insurers from setting annual and lifetime dollar limits on the amount of their plans’ coverage;
  • Medical-loss ratio: Requires insurers to spend at least 80 percent of premium dollars received on health care services; and
  • Essential health benefits: Requires all plans to cover certain benefits within 10 defined categories, including hospitalizations, maternity care, mental health and substance use disorder services, and prescription drugs.

Often, short-term plans are designed as low-cost, low actuarial value products targeting healthy individuals. States can impose their own laws and regulations over STLDI policies – even stricter than federal regulations. However, currently states have differing levels of regulatory oversight over STLDI. Given the federal government’s proposal to enhance the sale of these plans, some states are now reviewing and tightening their legislative reach over these short-term plans to make sure the consumer protections they want are in place in their markets.

Major Rule Changes Proposed
The proposed rule includes several changes aimed at expanding the availability and access to STDLI plans. The rule:

  • Allows for short-term plans to be sold to consumers covering a period of less than 12 months;
  • Allows for individuals to reapply for short-term plans, which had been prohibited under prior federal regulation;
  • Stipulates that consumers who purchase these plans must be informed that these short-term plans may not comply with ACA requirements; and
  • Continues to allow federal and state governments to not enforce STLDI regulations codified in 2016 insurance regulations.

The rule would be effective 60 days after enactment of the final rule, meaning that short-term plans meeting these parameters could be sold as early as this year.

This rule contrasts with a 2016 rule that stipulated that short-term plans could only be sold for a period of three months and limited consumer’s ability to renew STLDI coverage. The 2016 rule was designed to limit any negative impact that short-term plans could have on premium costs and risk mix of plans sold by state ACA marketplaces.

Effect of STDLI on State Insurance Markets
There is no question that the proposed rule will have a significant impact on most state markets. While short-term plans provide consumers with low-cost insurance options, the coverage is expected to provide limited benefits with high deductibles, putting consumers at risk of large out-of-pocket costs if they need to use comprehensive health services. Moreover, increasing the availability of short-term plans will draw consumers out of the individual market risk pool and could raise the risk of adverse selection—or unhealthy risk mix-in other individual market plans, including plans offered by state and federal health insurance marketplaces.

If enacted this year, the rule could lead to insurer instability in 2018. These carriers are locked into contracts and pricing that depended on a defined risk mix of customers – including a mix of healthy individuals and those with costly health care needs. Insurers could experience financial losses if healthy consumers leave these plans and enroll in STLDI plans this year. The rule will also lead to premium increases for individual market coverage offered in 2019 and beyond. The proposed rule estimates that 100,000 to 200,000 individuals will drop out of marketplaces to enroll in short-term plans in 2019.

Enrollment in short-term plans will be exacerbated by the elimination of the individual mandate penalty passed in the December 2017 Tax Reform Bill. Without a mandate requiring people to purchase “minimum essential coverage” (insurance that meets federal regulatory standards), consumers will be free to purchase de-regulated coverage options like STLDI. A recent Urban Institute analysis estimated that 4.2 million individuals would enroll in STLDI plans in 2019 if the rule were enacted as proposed. The report also estimates that individual market premiums will increase by an average of 16.4 percent in 2019 due to the cumulative effect of the loss of the individual mandate penalty and the enactment of the STLDI rule. See The Potential Impact of Short-Term Limited-Duration Policies on Insurance Coverage, Premiums, and Federal Spending for state-by-state estimates.

State Actions to Address STLDI
States have authority to impose their own regulations over short-term plans sold in their markets. Some have explicitly exempted short-term policies from benefit and other requirements imposed on other health insurance products. This enables issuers to offer low-cost options in certain states that serve as insurance protection against catastrophic events, but do not provide comprehensive coverage. Others have heighted restrictions over the sale of short-term plans in order to:

  • Preserve a healthier risk mix in their individual markets; and/or
  • Protect consumers against misleading marketing tactics practiced by some STLDI issuers and exorbitant out-of-pocket costs that might result.

As described in the Urban Institute’s report, Massachusetts, New Jersey, New York, Oregon, Vermont, and Washington currently have laws that would prevent an expansion of STLDI. Michigan and Nevada have laws to “limit STLD policy expansion.”

A few state legislatures have taken up STLDI insurance legislation during their current sessions. Proposed legislation in Missouri (HB 1685) and Virginia (SB 844) will conform state STLDI policies with those under the proposed federal rule, specifically to allow the sale of short-term plans that cover up to 364 days. Additional legislation is pending in Missouri (SB 860) to exempt STLDI from meeting requirements imposed on other health insurance products while also enforcing specific disclosure notices that STLD issuers must provide to consumers to inform them about the limited scope of this coverage.

Legislation in New Jersey and Vermont would state tighten regulation over STLDI. New Jersey’s (S 1210) legislation would require STLDI policies to meet the standards of other health insurance products. Vermont’s (H 892) would institute the 2016 federal regulation requirements by restricting the sale of products to only three months and limiting the renewability of short-term plans.

The release of this proposed rule carries additional weight for states that are currently in the midst of negotiating 2019 health insurance rates with their carriers. Absent strong state regulations, some states may have to set rates without knowing what will be enacted in the final rule.

The National Academy for State Health Policy (NASHP) will continue to monitor state actions during the current legislation session and rate-filing season to share critical information about the impact of these policies on states. Comments on the proposed rule are due April 23.