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Paul Zimmerman
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New Proposed Regulations for Short-Term Health Insurance Are a Modest Step on the Road to Cheaper Coverage for Individuals

Federal regulators just announced new proposed rules that will make it easier to sell short-term, limited duration individual health insurance. Short-term insurance can be less costly because it is exempt by statute from most Affordable Care Act (ACA) mandates. In late 2016, to curtail its sale, federal regulators changed the rules to require that such insurance have a term of no more than 90 days, and that it not be renewable without the consent of both the insurer and the insured. The new rules alter these restrictions and permit short-term policies with a term of less than 12 months that are renewable with just the insurer’s consent. The net effect: insurers will be able to sell short-term individual policies with terms of up to 364 days that are essentially automatically renewable.

The ACA requires most individual insurance to cover a list of essential health benefits, including items that plans had often omitted, such as maternity care and pediatric dentistry. The ACA requires individual plans to eliminate annual and lifetime caps on most benefits, limits their ability to vary cost-sharing, and requires parity in benefit limits between mental health and physical conditions, among other mandates. The ACA also prohibits insurers from engaging in underwriting based on an insured’s health status or gender, and insurers may not deny coverage based on pre-existing conditions. These mandates raise the cost of individual insurance sold through the Exchanges, but they do not apply to short-term coverage.

The ACA excludes short-term individual health insurance from these rules – and their resulting costs. Still, short-term insurance is not without drawbacks. Because it is not required to comply with the ACA mandates, such as the essential health benefits rules, short-term coverage does not qualify for the premium tax credits or cost-sharing reductions available for plans sold on the Exchanges. (Note that approximately 85% of individual insurance sold on the Exchanges qualifies for subsidies.) Further, short-term insurance does not qualify as “minimum essential coverage” for purposes of the individual mandate. So a consumer that purchases a short-term policy may have to pay a penalty to the IRS – at least for 2018 (the individual mandate penalty was repealed for 2019). In addition, because short-term insurance is not subject to the ACA mandates, prospective insureds with pre-existing conditions may find it unavailable. A purchaser will also need to carefully consider how the benefit mix under a short-term plan will likely work out, given his/her expected lifestyle.

Regulators hope that their proposed rule change will make short-term insurance more readily available to consumers. That being said, official projections are modest. According to the regulatory impact analysis, only 100,000-200,000 people are expected to change enrollment from Exchange policies to short-term insurance. Part of the reason for the limited anticipated response is that short-term insurance is not eligible for subsidies. And some states limit the benefits of short-term insurance by requiring such policies include many of the ACA mandates anyway. It should also be noted that some short-term insurance carriers might be circumventing the current 90-day rule by offering packages of four 90-day policies to customers already.

Despite its limitations, short-term health insurance may provide a cost-effective option, especially for people with higher incomes who do not qualify for the subsidies available for Exchange policies. For more information about the changing face of health care reform, contact David Johnson at david.johnson@mrllp.com.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.