By Karen Pollitz, Michelle Long, Ashley Semanskee, and Rabah Kamal
Kaiser Family Foundation, April 23, 2018
Late last year, Congress repealed the Affordable Care Act’s individual mandate penalty, the requirement that individuals have minimum essential health coverage or face a tax penalty. Starting in 2019, the tax penalty will be reduced to $0. It is possible this change could lead more consumers to consider purchasing short-term policies. In addition, late last year, President Trump issued an executive order directing the Secretary of Health and Human Services to take steps to expand the availability of short-term health insurance policies, and a proposed regulation to increase the maximum coverage term under such policies was published in February. This brief provides background information on short-term policies and how they differ from ACA-compliant health plans.
As the name suggests, short-term health insurance policies are not renewable. Whereas federal law since 1996 has required all other individual health insurance to be guaranteed renewable at the policyholder’s option, coverage under a short-term policy terminates at the end of the contract term. To continue coverage beyond that date requires applying for a new policy. As a result, an individual who buys a short-term policy and then becomes seriously ill will not be able to renew coverage when the policy ends.
The Affordable Care Act (ACA) exempted short-term policies from market rules that apply to most major medical health insurance policies sold to individuals in the non-group market: rules that prohibit medical underwriting, pre-existing condition exclusions, and lifetime and annual limits, and that require minimum coverage standards. By contrast, short-term policies:
* are often medically underwritten – applicants with health conditions can be turned down or charged higher premiums, without limit, based on health status, gender, age, and other factors;
* exclude coverage for pre-existing conditions – policyholders who get sick may be investigated by the insurer to determine whether the newly-diagnosed condition could be considered pre-existing and so excluded from coverage;
* do not have to cover essential health benefits – typical short-term policies do not cover maternity care, prescription drugs, mental health care, preventive care, and other essential benefits, and may limit coverage in other ways;
* can impose lifetime and annual limits – for example, many policies cap covered benefits at $2 million or less;
* are not subject to cost sharing limits – some short term policies, for example, may require cost sharing in excess of $20,000 per person per policy period, compared to the ACA-required annual cap on cost sharing of $7,350 in 2018; and
* are not subject to other ACA market requirements – such as rate review or minimum medical loss ratios; for example, while ACA-compliant non-group policies are required to pay out at least 80% of premium revenue for claims and related expenses, the average loss ratio for individual market short-term medical policies in 2016 was 67%; while for the top two insurers, who together sold 80% of all short-term policies in this market, the average loss ratio was 50%.
From the Discussion
Short-term health insurance policies offer lower monthly premiums compared to ACA-compliant plans because short-term policies offer less insurance protection. Medically underwritten policies can only be purchased by people when they are healthy. Individuals who buy short-term policies and then develop health conditions will lose coverage when the contract ends. Short-term policies typically do not cover essential benefits, such as prescription drugs, and often apply dollar caps and higher deductibles on coverage that are no longer allowed under ACA-compliant individual market and group health plans. As a result, people who buy short-term policies today in order to reduce their monthly premiums take a risk that, if they do need medical care, they could be left with uncovered bills and/or find themselves “uninsurable” under such plans in the future (though they would be able to buy ACA-compliant policies at the next open enrollment period).
To the extent that healthy individuals opt for cheaper short-term policies instead of ACA-compliant plans, such adverse selection contributes to instability in the reformed non-group market and raises the cost of coverage for people who have health conditions. Income-related premium subsidies in the non-group market offset the cost differential, and so help correct for adverse selection to a significant extent. Lower-income people would be protected by the premium subsidies, but middle-income people not eligible for subsidies who buy ACA-compliant plans would likely see premium increases. So far, the individual mandate penalty also has helped offset the cost differential between short-term plans and ACA-compliant plans, though this will disappear starting in 2019. The combined effect of repealing the individual mandate penalty and the administration’s efforts to promote the sale of short-term plans could result in fewer people signing up for ACA-compliant plans and higher premiums in the ACA-compliant individual market, potentially adversely affecting the stability of the ACA-compliant individual market.
By Don McCanne, M.D.
President Trump has issued an executive order directing that steps be taken to expand the availability of short-term health insurance plans. Although there is a general recognition that these short-term plans are more limited than plans regulated by the Affordable Care Act, this policy brief from Kaiser Family Foundation explains just how severe the deficiencies in coverage are and the negative impact that they will likely have on more comprehensive plans that are compliant with the Affordable Care Act.
People will buy these plans because the premiums will be less, but most will suffer significant financial hardship should they be faced with severe acute or chronic conditions.
Why are President Trump, HHS Secretary Azar and CMS Administrator Verma not only supporting but actually encouraging these plans? Is there a rational reason, or do they share some form of psychopathology? Whatever it is, we need to fix the problem by enacting and implementing a single payer national health program – an improved Medicare for all – and do it as soon as possible.
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