By Brian Blase and Doug Badger
Although a Trump administration rule expanding Americans’ ability to benefit from short-term limited-duration insurance plans (short-term plans) was recently upheld by the District of Columbia appeals court, these plans are unpopular with many members of Congress. As such, there is a threat that the millions of people with these plans may no longer be able to benefit from them in the future.
A June 2020 report by the Democratic staff of the House Energy and Commerce Committee describes concerns about short-term limited duration health insurance plans (short-term plans), The report concludes that these plans represent “a threat to the health and financial well-being of American families” and “a bad deal for consumers.”
The staff recommend that Congress “subject [short-term] plans to all of the Affordable Care Act’s consumer protections.” In essence, they call on Congress to reverse the policy it established in 1996 of exempting short-term plans from federal regulation.
We emphatically disagree. Short-term plans represent an important option for millions of Americans harmed by federal policy over the past decade that has resulted in reduced choice of health insurance plans and skyrocketing premiums and deductibles. Eliminating this option would force those enrolled in short-term plans to choose between paying much higher premiums for ACA-compliant coverage and becoming uninsured. Although the Committee’s Democratic staff feel that the value of short-term plans is “unclear” because they provide “a false sense of security,” millions of consumers covered by these plans would consider themselves worse off if Congress took this option away.
Michael Cannon of the Cato Institute illustrated this point by recounting the story of Jeanne Balvin, a 61-year old Arizona resident:
In 2017, Balvin purchased an STLDI plan from UnitedHealthcare for $274 per month. It covered the entire cost of her emergency surgery for diverticulitis, minus a $2,500 deductible. Had she purchased an ACA plan, her premium would have been three times as high and her deductible in the range of $6,000.
Cannon also detailed how Balvin lost her coverage because of an Obama administration rule limiting the duration of short-term plans to three months, a rule that Democratic committee staffers have proposed to codify. The new rule on short-term plans left Balvin with $97,000 in hospital charges from two further hospitalizations related to her diverticulitis.
Most of the problems described in the report could be remedied by enhanced information disclosure and state enforcement of insurance regulations. States are already free to oversee, regulate, and even ban short-term plans; indeed, the Democratic committee staff found that 24 states have restricted or banned the sale of these plans. Other concerns about the plans—largely that they don’t satisfy all the requirements of the Affordable Care Act (ACA)—are features of the coverage that help explain their popularity.
Rather than reducing options for families by reversing a recent Trump administration rule that increased access to short-term plans, policymakers should focus on expanding consumer choice and control over their health care, increasing information available to consumers, and penalizing companies that commit fraud. Below, we briefly lay out the history and rationale of short-term plans and explain the advantages of the Trump’s administration’s regulatory approach to short-term plans as compared to its predecessor’s approach. We then offer a detailed rebuttal of the Democratic staff report on short-term plans.
Short-Term Plans: The Lay Of The Land
The Trump Short-Term Plan Rule Restored Long-Standing Federal Rules For Coverage
The 1996 Health Insurance Portability and Accountability Act (HIPAA) exempted short-term plans from federal regulation. Regulations issued in 1997 pursuant to HIPAA defined short-term plans as health insurance coverage with a term of less than one year. The ACA did not make any changes to these rules. Plans that met the federal definition were subject to state regulation, but were free from federal requirements, including those subsequently added by the ACA. This allowed insurers to design coverage to best meet consumer needs with actuarially appropriate rates so that premium matches risk.
In late 2016, the Obama administration issued a rule that changed the two-decade-old regulatory definition, limiting short-term plans to no more than 90 days and denying consumers the ability to renew their coverage. The Trump administration rule largely undid the Obama administration’s restrictions, restoring the long-standing definition of “short term” as meaning a contract period of up to 364 days. The Trump rule also defined “limited duration” to allow greater plan innovation by permitting people to keep their plan for up to three years, including renewals and extensions. Many insurers now sell three-year plans in select states.
Short-Term Plans Offer A Better Deal For Many Americans
Many middle-income people have been priced out of individual market coverage. Enrollment in individual policies fell by 4.3 million between December 2015 and December 2019, largely among those ineligible for premium subsidies. Short-term plans are particularly useful for many of the 30 million uninsured, including people between jobs, retirees looking for coverage before they qualify for Medicare, the self-employed, workers in the gig economy, and others with middle incomes who lack access to an employer plan and find premiums for ACA-compliant coverage unaffordable.
The Congressional Budget Office (CBO) issued a report on short-term plans last year. CBO estimated that 95 percent of people moving from the individual market will buy a short-term plan that provides them with meaningful financial protection sufficient to meet CBO’s definition of private health insurance coverage with premiums “as much as 60 percent lower than premiums for the lowest cost [ACA] bronze plan.”
Manhattan Institute scholar Chris Pope conducted a study comparing ACA plans with short-term plans, finding that for equivalent insurance protection, the premiums for short-term plans are much lower than for ACA plans—in some cases about half the cost. According to Pope’s review, narrow-network HMOs are often the only types of plans available in the ACA exchanges and short-term plans typically cover far more doctors and hospitals.
The Shorter Period In The Obama-Era Rule Hurt The Sick
The National Association of Insurance Commissioners (NAIC) opposed the Obama administration’s 2016 rule. NAIC argued that restricting short-term plans would harm people whose three-month coverage expired and who acquired some condition or illness in their coverage period:
[I]f the person develops a new condition while covered under the first policy, the condition would be denied as a pre-existing condition under the next short-term policy. In other words, only the healthy consumers would have coverage options available to them; unhealthy consumers would not.
NAIC also argued that the Obama rule would not improve the individual market risk pool since healthy people could continue to get short-term coverage. “Only those who become unhealthy will be unable to afford care, and that is not good for the risk pools in the long run.”
Short-Term Plans Are Valuable During The Pandemic
During the coronavirus pandemic, short-term plans serve a valuable role helping people cope with a short-term period of unemployment, with many plans covering coronavirus-related testing and treatment so long as people obtain coverage before getting the virus. Many of the 16 million unemployed individuals can be expected to remain unemployed for longer than 90 days. And once they get a job, their new employer, if they offer coverage, can impose a wait period of up to 90 days before allowing the employee to participate in the group health plan. That 90 days is in addition to the period of unemployment.
The Trump Short-Term Plan Rule Expanded Consumer Protections
The Trump administration rule protects people who get sick from losing coverage. Under the Obama administration rule, they would likely have been forced to go without coverage, since they would have to wait to obtain coverage until the six-week annual open enrollment period for ACA coverage (for a plan starting the following January 1). People can now, subject to state rules, maintain a plan for up to 364 days with an option to renew it for up to three years. People who get sick can thus keep their coverage longer and avoid coverage gaps.
The Trump Rule Has Withstood Legal Challenge
The Association for Community Affiliated Plans (ACAP), a lobbying organization representing companies that sell ACA plans, filed lawsuit against the Trump administration’s short-term plan rule. Having the courts strike down the Trump administration’s rule would remove competition faced by the companies in ACAP.
On July 19, 2019, U.S. District Court Judge Richard Leon dismissed a lawsuit challenging the short-term plan rule, writing: “Not only is any potential negative impact from the 2018 rule minimal, but its benefits are undeniable.” According to Judge Leon, the ACA exempted certain health coverage from its regulatory reach, writing that “lawmakers were not rigidly pursing the ACA-compliant market at all costs, e.g., at the risk of individuals going without insurance.” On July 17, 2020, the District of Columbia Appeals Court upheld the Trump administration’s rule. In a 2-1 decision, the Court held that the Trump administration properly followed the Administrative Procedures Act when promulgating the rule. Moreover, the Court stated that reversing the rule could harm the sick as more patients “could be denied a new policy based on pre-existing medical conditions.”
The Energy And Commerce Democratic Staff Report: Where It Goes Wrong
The report by House Energy and Commerce Committee Democratic staff lists two major concerns with short-term plans:
- The plans are exempt from federal ACA regulatory requirements; and
- Issuers and sellers of these plans are alleged to have engaged in misleading and fraudulent marketing and sales practices.
Exemption Of Short-Term Plans From Federal ACA Requirements
In essence, the first set of concerns relate to these plans functioning as “insurance,” meaning that insurers engage in underwriting in order to try to match premium to risk, which is regarded as the central principle for a well-functioning insurance market. In general, if premium is higher than risk, people will underinsure and potentially go uninsured. If premium is held below risk, people will overinsure, insurers will lose money and not be able to pay claims. Either way, the market unravels.
Short-term plan issuers conduct health evaluations to determine an offer of coverage and the premium. Underwriting works like this for other types of insurance such as life, disability, homeowners, and vehicle coverage. If a person has a pre-existing condition, an issuer of a short-term plan might charge a higher premium to cover medical care related to that condition or exclude coverage of such care. Without such provisions, the market could collapse.
The ACA market can persist without these provisions because of high premiums and massive federal subsidies that allow insurers to incur large losses on people with expensive medical conditions. There are no such subsidies for short-term plans, meaning insurers must cover medical claims with the premium dollars paid by willing consumers.
Short-term plans often exclude coverage for certain services, like maternity benefits. While the staff report characterizes this exclusion as a “discriminatory practice,” it allows younger women who are not planning on having children to obtain coverage that is much more affordable than ACA-compliant coverage, which mandates this benefit. If maternity benefits were mandated, young women would face prohibitive premiums.
Likewise, committee staff found that some short-term plans don’t cover certain primary care services like wellness visits. These services are relatively inexpensive, and many consumers prefer to pay for them directly, rather than incurring higher health insurance premiums for “free” preventive care.
The Democratic staff report suggests that, because the federal government doesn’t mandate that short-term plans cover these and other benefits, like prescription drugs or mental health services, no short-term plans offer such benefits. But many short-term plans do offer these benefits.
Exempting some plans from federal benefit mandates offers advantages to consumers, allowing them to select affordable policies that align with their needs. We should not expect all plans to cover all ACA-mandated services because not everyone wants insurance to cover these expenses. Many consumers prefer lower premiums to paying higher rates for policies subject to these sweeping mandates.
The staff report also attempts to discredit short-term plans by calculating an average medical loss ratio (MLR) of 48 percent, compared with 80 percent for ACA-compliant plans sold on the individual market. The MLR is the percent of premiums expended on medical claims. We cannot verify how the Committee calculated the MLR, but there are many reasons why the MLR is lower for short-term plans. One is that the average amount of time an enrollee maintains a plan is shorter. This requires issuers to cover fixed costs over a shorter period. When short-term plans were only allowed for three months, which they were from April 2017 through October 2018, the MLR was likely lower. Allowing longer contract periods will increase the MLR.
The report did not separate out MLR data based on the contract period of the short-term plan or indicate what percentage of the MLR data was from before the Trump rule took effect. Presumably, much of it was.
Allegations Of Fraudulent Marketing Of Short-Term Plans
The second category of staff criticisms concerns practices that are clearly within the realm of state insurance regulators: the enforcement of penalties on fraudulent insurance practices
The report, for example, takes aim at post-claims review processes and recissions, meaning the insurer cancels the underlying policy. These practices are not fraudulent or abusive per se. For the market to function, there needs to be a way to ensure that people are truthful on their application about their medical history and health status. Both post-claims reviews and recissions are justified when incorrect or fraudulent information is provided in the application process. Such provisions protect not only the insurer but the insurer’s customers and prospective customers by preserving access to affordable coverage.
They can also, however, be used inappropriately, by canceling valid policies and denying legitimate claims. State insurance regulators are in the best position to evaluate an insurer’s practices. When they identify improper practices, state regulators should require the insurer to reimburse the policyholders’ claims and impose proportionate penalties against the insurer. The report says that post-claims reviews and rescissions are “common industry practice,” but it does not distinguish between legitimate reviews and abusive ones. Such abuses are probably extremely limited since insurers that engage in them would harm their own reputations and their business prospects.
Another concern raised by staff is that people are misinformed about what their plan does and doesn’t cover. This is a valid concern, and consumers should understand the options. Federal regulations require that short-term plans contain a disclaimer in 14-point type that the policy “is not required to comply with certain federal market requirements for health insurance, principally those contained in the Affordable Care Act.” The notice advises people to carefully review the policy’s benefits, rules governing pre-existing conditions, and limits on annual and lifetime benefits. It also informs consumers that they may have to wait until the next open enrollment to buy a new plan, should their short-term coverage lapse.
Insurers that fail to comply with this federal requirement are subject to federal penalties. They also are likely at risk of state penalties.
State regulators can apply additional requirements on insurers (e.g., in their policy documents and marketing materials), as well as on brokers in their communications with customers and prospective customers (e.g., requiring a customer’s signed attestation that he or she has reviewed and understands policy limitations). The staff report nevertheless contends that consumers “are deprived of robust information to inform their purchasing decisions” and some brochures provide “incomplete information about a plan’s limitations and exclusions.”
False and misleading representations of coverage by insurers and brokers are inconsistent with state laws. State regulators hold the power of licensure and can, in addition to imposing intermediate sanctions, deny an insurer a license to sell its products in the state. Brokers who mislead consumers are similarly subject to state sanctions, including loss of license.
Rather than Congress banning a product because some market participants allegedly engaged in unlawful practices, as the committee’s Democratic staff recommend, states should enforce their consumer protection regulations. Any allegedly fraudulent practice should be referred to the appropriate state agency.
Reject New Restrictions On Short-Term Plans
The Democratic staff report notes that enrollment in short-term plans has increased, which is another way of saying that consumers like them. Despite the increased popularity of these plans, last month the House of Representatives voted to restore the Obama-era restrictions on short-term plans. This would reduce consumer options and harm people who get sick during the three-month coverage period, forcing many to be uninsured until the next open enrollment period. With the pandemic pushing unemployment rates to high levels, it also would mean that people who remain out of work for more than 90 days and can’t afford ACA-compliant policies will remain uninsured.
The Democratic staff report goes further and recommends new federal legislation to force short-term plans to comply with the ACA’s broader insurance regulations. This would paradoxically worsen the individual market since it would allow people to wait until they were sick to enroll in a short-term plan, since an insurer would need to offer it to them without the ability to exclude any conditions or charge higher rates for people who waited until they were in need of medical care to purchase coverage. Of course, the most likely outcome is that the market would collapse, because the only way such a market can work is with massive government subsidies and the short-term market is not subsidized.
Although the Democratic staff report did not mention it, there is a key reason for why we should expect people to get better value from short-term plans than ACA-compliant plans—people spend their own money on short-term plans, while most people purchasing ACA-compliant plans receive subsidies covering most, if not all, of the premium. Ultimately, the question is whether we believe that consumers and families, who have widely different preferences, should have the freedom to finance their health care needs or whether their choices should be constricted to what government bureaucrats and experts think is best for them.