Lower-Cost, Short-Term Insurance Plan Approved, But at What Cost to State Markets and Consumers?
Last week, the federal government released its final rule expanding the availability of short-term health insurance plans, which are usually less costly and do not have to cover pre-existing conditions or certain health care services. Increased enrollment in short-term plans is expected to upend states’ individual insurance markets unless states take steps to offset their potential negative impact on markets and consumers.
- Extends the term of limited duration short-term plans. Prior regulations restricted short-term plans to only three months of coverage. The new plan extends their coverage period to less than 12 months.
- Allows limited renewals of short-term plans. Plans may now be renewed for a total of 36 months, rescinding the prior prohibition on plan renewals. (Notably, the rule adds a “severability” clause that allows the remainder of the short-term rule to stand even if this 36-month renewal extension is struck down by the courts.)
- Requires consumer warnings explaining these plans do not meet federal insurance requirements: This regulation includes a specific paragraph that must be prominently displayed in any short-term plan application or contract that explains the plans are not required to meet federal health insurance requirements. It also explains that when the short-term plan ends, a consumer may have to wait for an open enrollment period to purchase coverage through individual markets.
The rule is the latest in a series of Administration’s efforts to provide consumers with more lower-cost coverage options. The new rule goes into effect Oct. 2, 2018, exactly one month before the beginning of the 2019 open enrollment period for insurance sold through Affordable Care Act (ACA) marketplaces. Below, the National Academy for State Health Policy (NASHP) highlights some of the rule’s expected effects on states and insurance markets.
Lower-Cost, Thinner Plans May Raise Individual Market Premiums
As described in NASHP’s Federal Promotion of Short-Term Health Insurance Plans: How Will These Plans Impact State Insurance Markets?, short-term plans do not have to meet many federal requirements for health insurance, including requirements that protect individuals with pre-existing conditions and mandated coverage of specific benefits, including hospitalizations and prescription drugs. Short-term plans are also exempt from having to guarantee certain consumer protections, such as prohibitions on lifetime limits and requirements that insurers spend a certain proportion of premium dollars on health care services.
Because short-term plans do not have to meet these requirements, insurers are able to offer short-term plans with skimpy benefits and lower actuarial value (the percentage of total health care costs that a plan will cover) at lower costs. The rule notes that in 2016, the average monthly premium of a short-term plan was $124, compared to $393 for a plan sold on the individual market.
Short-term plans are expected to be most attractive to healthy and/or young consumers who think they have limited need for health insurance. Analysis conducted by the Centers for Medicare & Medicaid Services specifically for this rule estimates that enrollment in short-term plans will increase by 600,000 individuals in 2019, with up to 1.4 million enrolled by 2028. The analysis also estimates that 500,000 individuals will disenroll from individual market coverage in 2019, with 1.3 million disenrolling by 2028.
These projected changes will have significant impact on state insurance markets. For most states, the consumer shift from individual market coverage to short-term plans will worsen the individual market risk pool, which requires a mix of healthy and less-healthy enrollees to keep costs in check. This is estimated to raise premiums for individual market consumers by 1 percent in 2019 and 5 percent by 2028.
State Actions to Regulate Short-Term Plans
The new federal rule repeatedly emphasizes that it does not preempt states’ authority to regulate these short-term, limited-duration insurance plans. It allows states to continue to:
- Limit the terms of short-term plans, (e.g., states can retain the three-month limit);
- Restrict renewability of these plans; and
- Even ban the sale of short-term plans altogether.
As detailed in, States Face Short Deadlines to Address the Risks of Short-term Health Insurance Plans, several states have taken steps to restrict short-term plans or to shore up protections for consumers who purchase short-term plans. During a recent NASHP webinar, experts from the Georgetown Center on Health Insurance Reforms outlined several strategies states can implement to regulate these plans:
- Limit short-term contract duration (to three months);
- Prevent “stacking” of plans by restricting how often they can be renewed;
- Require compliance with some or all mandates applicable to other forms of coverage (e.g., state-mandated benefits, pre-existing condition protections, guaranteed renewal, medical loss ratio requirements, limited rating factors, and network adequacy);
- Prohibit individuals eligible for marketplace coverage from enrolling in short-term plans; and
- Simply prohibit the sale of short-term plans in their states.
States can also expand their capacity to collect data on the sale of short-term plans to gain a better understanding of how the plans affect their insurance markets and consumers.
Short-Term Plan Assessments and 1332 Waivers
In addition to imposing new regulations, states may offset some of the potentially negative effects of short-term plans by imposing and collecting a financial assessment (fee) on these plans, or taking action to ensure these plans are subject to assessments currently imposed on other health insurance products sold in the state. These funds can be used to help offset instability and higher prices in the individual market. For example, states can use the funds to strengthen or create a reinsurance program under a 1332 waiver, or provide additional subsidies for individuals who enroll in the health insurance marketplaces. The new rule stipulated that states can consider how short-term plans fit into their 1332 waivers and noted that states can use the waivers to give subsidies to individuals who enroll in short-term plans. However, for a 1332 waiver to apply, coverage must include benefits that are at least as comprehensive as those required by ACA plans, a standard most short-term plans are unlikely to meet.
State Actions to Strengthen Consumer Protections
States may also take actions to protect consumers against fraud or misleading business practices, which have been associated with some short-term plan issuers in the past. States can impose stronger transparency and disclosure requirements on both insurers and agents and brokers who sell short-term plans and require their agencies (e.g., departments of insurance) to conduct regular reviews of short-term issuers and plans. Specifically, states can:
- Add specific language in disclosure notices highlighting that certain benefits are not included in short-term plans;
- Require issuers to provide clear information when plans do not guarantee renewability or coverage of pre-existing conditions;
- Establish clearer guidance detailing what is meant by a “prominent display” of disclosure statements; and
- Require issuers to feature clear language explaining the implications for consumers who enroll in these “thinner” short-term insurance plans (especially in states that have established their own individual mandate) and the implications for consumers who do not enroll in a federally-qualified health plan that offers more comprehensive coverage.
States may mix and match these approaches and safeguards to address market concerns and preserve protections for consumers. NASHP will continue to monitor the variety of approaches to short-term plans as states implement regulations reflecting their goals.