Problems with Short-Term Health Plans

Issue: The Trump Administration has issued an executive order expanding the use of short-term health plans, which provide limited coverage compared to ACA compliant health plans. Short-term health plans have lower premiums but have significant coverage gaps. This paper describes short-term health plans, considers whether the rule expanding the sale of short-term health plans should be repealed and considers alternative ways to cover people who cannot afford premiums on ACA compliant policies.

Description of Short-Term Health Plans: Short term health plans were originally designed for people between jobs and were limited to 90 days under the Obama Administration. The Trump Administration altered rules extending plans to 364 days and allowed for renewals up to 36 months. The rules allow insurance companies to deny coverage and benefits to people with pre-existing benefits. The plans often have arbitrary benefit provisions, large deductibles, and no out-of-pocket limits. The plans are less expensive than comprehensive coverage but are highly profitable to insurance companies and leave consumers with substantial financial exposure.

Major Differences Between Short-term and ACA compliant health plans:

One of the most important achievements of the ACA was that it created access to insurance for people with pre-existing conditions. These protections do not apply to short-term health plans. Insurance companies can refuse to sell short-term health plans to people with pre-existing conditions. Insurance companies can base short-term insurance premiums on the health status or the gender of the applicant. Insurance companies issuing short term health plans can deny benefits to people they cover if they find that the condition being treated existed prior to the health plan being issued. There have been cases where the first incidence of an illness is covered but a relapse of the illness is not covered because it is viewed as a pre-existing condition. Insurance companies can refuse to renew short term insurance for people who get ill when covered. A discussion of how pre-existing conditions impact the market for short term health plans can be found here. https://www.cbpp.org/research/health/key-flaws-of-short-term-health-plans-pose-risks-to-consumers

Short term health plans tend to have lower prices than ACA compliant health plans; although, the price depends on the health status of the insured, the range of premiums on short-term plans is large, and some short-term plans can be quite expensive. Short term health plans have a substantially lower payout than ACA compliant health plans. The office of the actuary for the Center or Medicare and Medicaid Services projects that short-term health plans will pay out a benefit of roughly half of premiums. https://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/Downloads/STLD20180406.pdf By contrast, payouts on ACA compliant plans are roughly 80 percent of premiums. Short term health plans need not have an annual cap on cost sharing. It is not uncommon for the cost sharing cap to be in the $10,000 to $20,000 range. ACA plans have an annual cap of $7,350. Virtually all short-term health plans have an overall benefit limit, ranging from $100,000 to $2,000,000. ACA plans do not have any annual or lifetime benefit limits.

Short term health plans need not cover essential health benefits. Pharmaceutical benefits, maternity benefits, and mental health and substance abuse benefits are often excluded. A recent study by the Kaiser Family Foundation provided some data on the limitations of short-term health plans. KFF founds that 43 percent of short-term plans lacked mental health benefits, 62 percent lacked benefits for treatment of substance abuse, 71 percent of short term plans lacked benefits for pharmaceutical drugs, and 100 percent of short-term benefits lacked maternity benefits. Go here for this study. https://www.kff.org/health-reform/issue-brief/understanding-short-term-limited-duration-health-insurance/ Short term-plans that do provide these benefits often cap the benefits in some way. By contrast, ACA compliant plans should pay for all services that are deemed medically necessary.

Assessment of short-term health plans:

The rationale for short term health plans is that people cannot afford premiums on ACA health plans. However, the coverage gaps and the denial of benefits due to pre-existing conditions leads many people with short-term health plans exposed to large catastrophic losses. There is an old cliché that some health insurance is better than no insurance. My assessment of this literature does not allow me to rule out the possibility that many holders for short term health insurance are actually not better off than people without any insurance. Neither group is protected from catastrophic financial losses due to a health related event.

The office of the actuary at the Center for Medicaid Services projects that approximately 1.9 million people might be insured by short term health plans. The office believes that most of these people will be relatively healthy and that most of these people would have otherwise been covered by ACA compliant policies. The growth of short-term health plans will therefore lead to higher premiums on ACA plans.

Potential Policy Proposals:

The House Democrats have introduced a bill designed to strengthen the ACA that includes several provisions including one rolling back the use of short-term health plans. https://www.healthaffairs.org/do/10.1377/hblog20190327.894190/full/ The elimination of short-term health plans would eliminate insurance coverage for some individuals who could not afford ACA compliant plan. However, as noted above, people with short term health plans are underinsured and exposed to substantial financial risk. Short term health plans provide at best limited benefits to their policy holders and substantially weaken ACA state exchanges.

Alternative ways to provide health insurance to people who cannot afford the current cost of ACA compliant health plans need to be considered.

First, the house bill does include a modest expansion of premium tax credits, which would make ACA plans more affordable to some people. It is difficult to analyze the impact of expanded tax credits on ACA coverage.

Second, Medicaid could be expanded to cover more people. This approach has been adopted in some states and rejected in others.

Third, a private policy/public policy health plan could be created. The private component of the health plan would cover roughly the first $40,000 of health care expenses. All essential health benefits would be covered with no caps on specific benefits. The public component of the health plan in the form of Medicaid coverage would kick in once the benefit limit was reached on the private plan. This proposal essentially converts the Medicaid program to a reinsurance program where the reinsurance benefits are paid directly to the insured individual.

Authors Note: The author David Bernstein is an economist who lives in Colorado with his family. You may also like this post analyzing Senator Warren’s health care plan. https://medium.com/@bernstein.book1958/how-should-centrists-respond-to-senator-warren-on-health-care-e82967734384 He is also the author of the book “Defying Magnets: Centrist Policies in a Polarized World” the book is available on Kindle and at Amazon. https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X

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