Individual Health Insurance Markets Improving in States that Fully Permit Short-Term Plans

February 11, 2021

Given freedom to purchase health coverage, some people will choose plans that contain fewer benefits or that charge lower premiums for people with lower expected medical claims. Many political leaders, however, believe the government should allow plans to be sold only if they cover a prescribed set of benefits and charge people of similar ages the same premium regardless of their health status. The conflict between the freedom that some Americans desire to purchase less-regulated health coverage and the preferences of some government leaders to restrict that freedom has caused deep division at the federal and state government levels for more than a decade. However, evidence is emerging to suggest that a free market can coexist with a more regulated and subsidized market.

Because of the Affordable Care Act (ACA), people are guaranteed the opportunity to buy health insurance that covers 10 essential benefits, provides pre-existing conditions protections, and charges healthy and sick people of the same age the same premium if they buy coverage during designated enrollment periods. However, many people—particularly those who earn a middle income or above—have been priced out of the market because of how significantly the ACA has increased premiums and deductibles. Lower-income people can qualify for large subsidies to purchase ACA coverage and largely have been held harmless by premium changes.

One alternative to ACA-compliant individual market coverage is short-term, limited-duration insurance. These plans permit millions of people the opportunity to purchase coverage that is more affordable and flexible, and a 2018 rule by the Departments of Health and Human Services (HHS), Labor, and the Treasury increased the amount of
time short-term coverage could last to up to 364 days, with renewals permitted for up to three years. An estimated 3 million people enrolled in this coverage at some point in 2019.

Critics of short-term plans, and of the 2018 rule, argue that the plans would lead to greater adverse selection in the individual market as some relatively healthy people drop more expensive individual market plans and replace them with more affordable shortterm plans. They have warned that the 2018 rule would lead to fewer individual market
enrollees, fewer insurers offering individual market plans, and higher premiums for individual market plans. For example, Timothy Westmoreland, M. Gregg Bloche, and Lawrence Gostin wrote in the Journal of American Medical Association, “By drawing healthier people away from ACA-qualifying plans, short-term plans make ACA-qualifying coverage less affordable.”

Some policy experts have proposed significant federal restrictions on short-term plans that would effectively take away these plans from millions of people who have them and deny that option to tens of millions more people who could benefit from them in the future. Moreover, these restrictions would be inconsistent with one of President
Biden’s promises during the presidential campaign: “If you have private insurance, you can keep it.”

Fortunately, since some states have permitted short-term plans to the full extent that federal law allows while others have placed restrictions on these plans, policymakers and regulators can determine whether the predictions about harm to the individual market from allowing short-term plans have come to fruition. Perhaps surprisingly, it
turns out that states that fully permit short-term plans have had a much more favorable experience in their individual markets since the 2018 rule took effect. States that permit short-term plans have lost fewer enrollees in the individual market, have had far more insurers offer coverage in the market, and have had larger premium reductions since the 2018 rule took effect. The only states where individual market premiums have increased
since 2018 are the five states that effectively prohibit short-term plans.

Contrary to projections, the evidence shows that the 2018 rule expanding short-term options not only expanded consumer choice of coverage and reduced the number of uninsured but also had no adverse impact on the individual market.

The 2018 short-term plan rule may have, in fact, helped improve the individual market. This could have occurred because short-term plans forced insurers selling ACA-compliant products to offer more attractive products because of the added competition and because people with short-term plans who got sick or injured had short-term plans pay their expenses instead of moving to the individual market to get coverage to pay their expenses.

Full research paper here


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