On August 1, 2018, the Departments of Health and Human Services, Labor, and Treasury (the tri-agencies) issued a final rule to dramatically expand access to short-term, limited-duration insurance coverage. The proposed rule would have largely reversed an Obama-era rule on short-term plans put in place in 2016 by extending the maximum duration of short-term plans from three months to up to 12 months. The final rule goes even further by allowing insurers to renew or extend short-term coverage for up to 36 months. The final rule also includes updated notice requirements.

Short-term plans do not have to comply with the Affordable Care Act’s (ACA’s) market reforms. Short-term insurers can charge higher premiums based on health status, exclude coverage for preexisting conditions, impose annual or lifetime limits, opt not to cover entire categories of benefits (such as substance use disorder treatment or prescription drugs), rescind coverage, and require higher out-of-pocket cost-sharing than under the ACA.

Given these limitations—and the fact that short-term coverage is generally only available to consumers who can pass medical underwriting—short-term coverage is much less expensive than ACA-compliant coverage and enrollment tends to skew younger and healthier. The sale of these plans can result in adverse selection against the ACA individual market, as healthier consumers exit the ACA market to enroll in short-term coverage.

The tri-agencies ignored requests from state insurance regulators and others to delay implementation of the rule until 2020 to give states time to assess their existing laws and adopt new protections if needed. Instead, the rule will go into effect 60 days after publication in the Federal Register (expected to be August 3, 2018). New short-term plans could be sold beginning then; however, federal regulators expect a delay as insurers take time to develop these plans and seek approval from state regulators.

The new rule was developed in response to President Trump’s executive order from October 2017 that directed the federal government to expand access to short-term plans, association health plans, and health reimbursement arrangements. The executive order directed the tri-agencies to “expand the availability of short-term limited duration insurance” and “consider allowing such insurance to cover longer periods and be renewed by the consumer.” Today’s final rule largely accomplishes those goals.

Background

Short-term coverage is designed to fill a temporary gap in coverage. A consumer might enroll in a short-term plan when they are, for instance, between jobs or otherwise need individual coverage outside of the open enrollment period (and do not qualify for a special enrollment period). 

The ACA does not mention or define short-term coverage. Rather, the ACA adopted existing definitions of insurance terms found in the Public Health Service Act, which defines “individual health insurance coverage” to be “health insurance coverage offered to individuals in the individual market, but [which] does not include short-term limited duration insurance.” Most of the ACA’s market reforms apply to “a group health plan” or “a health insurance issuer offering group or individual health insurance coverage.” Because short-term coverage is excluded from the definition of individual health insurance coverage, short-term coverage is not subject to the ACA’s requirements.  

The exclusion of short-term coverage from the definition of individual insurance coverage dates back to the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Although various versions of HIPAA legislation address short-term coverage differently, the final conference committee version established the current definitions now found in the Public Health Service Act, ERISA, and the Internal Revenue Code. The conference report clarified that Congressional intent was to include short-term coverage as creditable coverage for purposes of the preexisting condition exclusion period. In other words, short-term coverage did not qualify as “individual health insurance coverage” for purposes of guaranteed renewability or guaranteed availability under HIPAA, but it did qualify as “health insurance coverage” for the creditable coverage requirement.

HHS released an interim final rule to implement HIPAA in April 1997. In the rule, the tri-agencies defined short-term, limited duration insurance as “health insurance coverage provided pursuant to a contract with an issuer that has an expiration date specified in the contract (taking into account any extensions that may be elected by the policyholder without the issuer’s consent) that is within 12 months of the date such contract becomes effective.” The tri-agencies also included short-term coverage under the definition of “health insurance coverage,” and, in the preamble, confirmed that creditable coverage includes all forms of health insurance, including short-term coverage. Final HIPAA regulations adopted in 2004 included the same definitions. 

A number of early ACA rules referred to short-term coverage. The minimum essential coverage (MEC) regulations specified that short-term coverage did not qualify as MEC. Thus, individuals who enroll in short-term policies as their primary coverage could have to pay the individual mandate penalty (at least until the mandate is zeroed out beginning in 2019). And regulations implementing the ACA’s changes to HIPAA’s guaranteed availability and renewability requirements included a definition of “individual health insurance coverage” that excluded short-term coverage and cross-referenced the previous HIPAA definition.   

Obama-Era Rule on Short-Term Coverage

Short-term policies largely look like the individual market coverage that existed before the ACA’s major market reforms went into effect in 2014. As noted above, these policies are medically underwritten, can have preexisting condition exclusions and annual or lifetime limits, and typically do not cover a comprehensive benefit package or have meaningful limits on out-of-pocket costs. One recent analysis found that short-term plans have out-of-pocket maximums as high as $30,000, coverage caps that range from $250,000 to $2 million, and significant benefit gaps.

Because of these limitations, short-term plans are cheaper than ACA-compliant plans and more attractive to younger, healthier consumers. These policies are also quite profitable for insurers. Data from the National Association of Insurance Commissioners (NAIC) shows that short-term plans had an average medical loss ratio of about 65 percent in 2017 (compared to 80 percent for ACA-compliant individual market policies). The three largest insurers offering short-term coverage had even lower loss ratios of about 44 percent, 34 percent, and 52 percent.

As the ACA’s major reforms went into effect, some insurers began selling short-term policies that lasted for 364 days. By offering coverage that extends just one day shy of 12 months, insurers could sell non-ACA compliant policies that met the definition of short-term, limited-duration insurance under federal law and, thus, avoid having to bring these policies into compliance with the ACA. (Short-term coverage is also not subject to the single risk pool requirement or risk adjustment program that applies to ACA-compliant individual coverage.)

Short-term policies have been the source of confusion for consumers. Because these policies can mimic (or are deceptively marketed as) major medical coverage, consumers may be unaware that they are enrolling in a policy that will not cover certain medical needs until after they are sick. In response, a number of state insurance departments have issued alerts or warnings to inform consumers about the limitations of short-term policies and deceptive marketing practices.

In 2016, federal regulators at the tri-agencies concluded that short-term coverage was being sold as primary coverage and was adversely impacting the risk pool for ACA-compliant coverage. In response, these agencies issued a regulation that made it less attractive to sell short-term policies. That rule limited short-term coverage to a period of less than three months and required each policy and all application materials to prominently state that the policy does not satisfy the individual mandate and is not MEC. The rule also provided that the three-month limit applied to any extensions of that policy. This provision was intended to prevent insurers from indefinitely extending or renewing short-term coverage at the end of the three-month coverage period. In other words, insurers could no longer offer short-term policies that lasted longer than three months or renew these policies.

In justifying the three-month limit, the tri-agencies linked short-term coverage to one of the exemptions from the individual mandate penalty known as the “short coverage gap exemption,” stating that:

Short-term, limited-duration insurance allows for coverage to fill temporary coverage gaps when an individual transitions between sources of primary coverage. … [F]or longer gaps in coverage, guaranteed availability of coverage and special enrollment period requirements in the individual health insurance market under the Affordable Care Act ensure that individuals can purchase individual market coverage through or outside of the Exchange that is minimum essential coverage and includes the consumer protections of the Affordable Care Act. Further, limiting the coverage of short-term, limited-duration insurance to less than three months is consistent with the exemption from the individual shared responsibility provision for gaps in coverage of less than three months (the short coverage gap exemption). Under current law, an individual who is not enrolled in minimum essential coverage (whether enrolled in short-term, limited-duration coverage or otherwise) for a period of three months or more generally cannot claim the short coverage gap exemption for any of those months. The final regulations help ensure that individuals who purchase a short-term, limited-duration insurance policy will be eligible for the short coverage gap exemption (assuming other requirements are met) during the temporary coverage period.

In commenting on the proposed Obama-era rule, stakeholders such as AHIP and the Blue Cross Blue Shield Association (BCBSA) supported limits on short-term coverage, including a maximum duration in many circumstances. AHIP described the tri-agencies’ proposal as “a reasonable policy approach to one in a series of interconnected challenges that need to be addressed to provide long-term stability to the individual market.” BCBSA noted that if short-term policies are not addressed, “the ultimate impact is there will be two risk pools, the ACA pool for people with pre-existing conditions and the STLD pool for persons without pre-existing conditions at the time they enroll.” Other stakeholders, such as the NAIC, raised concerns with the tri-agencies’ approach, asserting that a three-month limit was arbitrary and would reduce consumer options, and that the focus of federal efforts should rather be on educating consumers so they understand the limitations of short-term coverage.

In revisiting the definition of short-term, limited-duration coverage in the proposed rule, the tri-agencies cite comments received in response to a request for information from HHS in June 2017 on ways to reduce regulatory burdens imposed by the ACA. Commenters stated that the three-month limit deprived individuals of coverage options, constituted federal overreach, and forced some consumers to choose to go without coverage at all. The tri-agencies also cite the need to provide affordable options for individuals who do not qualify for premium tax credits and data from a recent HHS analysis of the ACA’s impact on unsubsidized consumers.

Analysis Of And Comments On The Proposed Rule

In February 2018, the tri-agencies released their proposed rule on short-term coverage. In the preamble, the tri-agencies acknowledged that those who purchase short-term coverage were “likely to be relatively young or healthy” and that the proposed rule “could potentially weaken states’ individual market single risk pools.” They went on to say that individual market insurers “could experience higher than expected costs of care and suffer financial losses, which might prompt them to leave the individual market,” and that this rule “may further reduce choices for individuals remaining in those individual market single risk pools.”

Despite these concerns, the tri-agencies estimated that the impact of the changes outlined in the rule would be minimal, resulting in the shift of only 100,000 and 200,000 individuals from marketplace coverage to short-term coverage. Implicit in this assumption is that these individuals would skew younger and healthier because they would need to be able to pass medical review. To calculate this number, the tri-agencies cited enrollment trends prior to the 2016 rule and assumed that only about 10 percent of these enrollees would have been eligible for subsidies through the marketplace.

Since the proposed rule was issued, a variety of stakeholders—including the Urban Institute, Wakely, Oliver Wyman, the chief actuary of the Centers for Medicare and Medicaid Services (CMS), and the Congressional Budget Office and Joint Committee on Taxation (CBO/JCT)—released additional analyses of the impact of the proposed rule. Each of these analyses found the impact of the proposed rule to be much greater than federal estimates. This is likely because these analyses assessed the impact on enrollment in the entire ACA-compliant market (both on- and off-marketplace), while the tri-agencies only modeled the effects on enrollment in on-marketplace coverage. Other analyses, such as a report by Georgetown University’s Center on Health Insurance Reforms, highlighted the effect of these plans on state insurance markets.

Overall, the CMS chief actuary estimated that enrollment in short-term coverage would reach 1.9 million people by 2022, and average marketplace premiums would be expected to be about $17 higher per month in 2019 due to short-term plans. Higher premiums would result in higher premium tax credits and thus higher federal outlays. The chief actuary projected that federal spending under the proposed rule would increase by about $1.2 billion in 2019 and about $38.7 billion over the next 10 years. 

The chief actuary’s estimates are most similar to those modeled by Wakely, which also found that short-term plans would decrease enrollment in the individual market by up to 1.9 million people. The Urban Institute’s estimate was slightly higher, finding that about 2.1 million people would leave the ACA-compliant individual market. The CBO/JCT estimate that about 2 million people would enroll in short-term coverage with a minority (fewer than 500,000) expected to purchase non-major medical coverage; premiums would increase by 2 to 3 percent in the ACA-compliant markets. Oliver Wyman’s analysis was limited to the District of Columbia.

More than 9,000 online comments were submitted on the proposed rule (the tri-agencies state that they received a total of about 12,000 comments). An analysis by the Los Angeles Times found that more than 98 percent of comments by health care groups, 335 of 340, were critical. As the article notes, “Not a single group representing patients, physicians, nurses or hospitals voiced support.”

Stakeholders such as BCBSA and AHIP raised concerns about the proposed rule; they urged federal regulators to maintain a limit on the duration of short-term plans (to three months and six months, respectively) and prohibit renewal of short-term plans. Other stakeholders, such as the American Academy of Actuaries, cautioned that existing short-term plan enrollment data is likely understated and could increase greatly if the proposed rule were finalized.

The NAIC requested a delay in the rule’s effective date until 2020 to give states more time to update state laws or regulations. Substantive summaries of many of these comments—from state officials, consumer advocates, insurers that offer individual coverage, and insurers and brokers that offer short-term coverage—are available here.

The Final Rule

Consistent with the proposed rule, the final rule allows short-term, limited-duration coverage to resume being sold for up to 12 months. Each short-term policy must have an expiration date that is less than 12 months, a maximum of 364 days, after the original effective date of the contract. This is the same definition that was in effect before the Obama administration issued its 2016 regulation curtailing the maximum duration of short-term plans to no more than three months.

However, the final rule goes one step further by allowing a short-term policy to be renewed or extended for up to three years. This dramatically extends the maximum coverage period relative to current regulations, from three months to potentially 36 months.

The rule also adopts revised notice requirements. The final rule will go into effect 60 days after publication in the Federal Register.

“Short-Term” As Less Than 12 Months

The tri-agencies acknowledge that most comments argued against extending the permissible duration o f short-term coverage beyond the current three-month maximum, or favored some sort of limit (such as six or eight months) less than one year. By extending the initial maximum duration to up to 12 months, the agencies believe they are being more protective of consumers who will no longer have to repurchase a new policy every three months. By having to purchase a new policy, consumers could face a new round of underwriting or re-underwriting, the possibility of higher premiums or a coverage denial, a waiting period for coverage of a preexisting condition, and/or a new deductible that they would have to meet.

The agencies acknowledge that these concerns would be mitigated if the initial maximum duration was longer, such as nine months, but still declined to set an initial maximum duration of less than 12 months. The tri-agencies also rejected suggested alternatives, such as requiring short-term policies to end on December 31 of each calendar year.

Renewability And “Limited-Duration” As 36 Months

Under the final rule, insurers can—but are not required to—offer a short-term policy that allows for renewal up to 36 months. Insurers have the option to offer this renewal without additional medical underwriting or experience rating. This is, again, optional for insurers and is by no means guaranteed for consumers, who could face a new round of underwriting before being enrolled in a new policy or continuing under an existing policy. (New rule aside, it is unclear why an insurer would offer such an option. Perhaps the only incentive for doing so could be if an insurer could charge much higher premiums for a “renewal guarantee” without additional underwriting.)

The preamble confirms that the 36-month maximum duration applies only to enrollment in a single short-term policy. This means that the rule does not prohibit a consumer from enrolling in two or more separate short-term policies consecutively (referred to as “stacking”) even if the duration of enrollment is greater than 36 months. (This is true now: under the 2016 rule, consumers could stack policies by applying for a new or different short-term plan every three months, hopping from plan to plan, so long as they could pass underwriting.)

The tri-agencies authorize renewal by interpreting the phrase “limited-duration” and then setting this limited duration at 36 months. They believe that “limited-duration” refers to a period of time that is longer than the time period contemplated by the phrase “short-term.” In reaching this conclusion, they point to stakeholder comments, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), and the Federal Employee Health Benefits Program; they place a particular emphasis on COBRA.

COBRA allows individuals who are losing certain group coverage to continue that coverage for up to 36 months, depending on the circumstances. This means that employers (and other group health plan sponsors) must allow an employee or dependent to maintain their employer-sponsored coverage for up to 36 months.

The tri-agencies analogize short-term coverage to COBRA coverage. They assert that both serve as temporary coverage for those transitioning between types of coverage, and that Congress recognized that 36 months qualifies as a “temporary period of transition” under COBRA. In making this analogy, they ignore that COBRA was enacted far in advance of the ACA, meaning that employees and dependents leaving group health coverage in most states did not have protections in the individual market or may have faced waiting periods and other restriction in different group coverage. COBRA continuation coverage thus served as a key option for individuals who may have been turned away from coverage altogether. Now, while COBRA remains a key option for individuals to maintain, for instance, their provider network or ongoing access to health care, individuals leaving group coverage have many more options, including the opportunity to take advantage of a special enrollment opportunity in ACA coverage, protections for preexisting conditions, and guaranteed issue.

Although the proposed rule had not included a renewal option of up to 36 months, the tri-agencies state that they received sufficient comments on renewability generally. Some commenters wanted short-term coverage to be guaranteed renewable, renewed for a limited period of time, or not renewed at all. The tri-agencies also solicited comments on whether there should be an “expedited or streamlined” reapplication process or an otherwise standardized process. The tri-agencies did not adopt standards in this area. Instead, states can define and regulate reapplication and renewability standards.

The preamble cites an example of a pre-ACA stand-alone product for a “renewal guarantee” that costs an annual premium equal to 20 percent of the cost of a guaranteed renewable health insurance policy. The tri-agencies repeatedly mention the use of a renewal guarantee policy as a potential option that could be paired with a short-term policy. They also conclude that any extension of a short-term policy by a renewal guarantee would not count toward the 36-month maximum.

Notice Requirements

Consistent with the 2016 rule, the final rule requires all short-term policies to include a prominent notice in their contract and application materials regarding some of the limitations of short-term coverage. This notice must appear in at least 14 point type. The final rule clarifies that states can impose additional requirements for the consumer notice. Insurers also have the option of including additional language in their notices so long as the information is accurate. Notices must be prominently displayed in contracts or application materials for renewals or extensions (in addition to the initial contract).

The notice required in the 2016 regulations focused on the fact that short-term coverage does not qualify as MEC and that enrollees may face a penalty for failing to have health insurance. In the final rule, the tri-agencies adopt two different notices based on whether the coverage begins before or after January 1, 2019. Both notices require short-term coverage to state that it “is not required to comply with certain federal market requirements for health insurance, principally those contained in the Affordable Care Act.” Consumers are also advised to understand the coverage limitations and the fact that they may have to wait until an open enrollment period to get other coverage.

Relative to the proposed rule, the tri-agencies made some of the limitations of short-term plans more explicit. For instance, the final notice advises consumers to “make sure you are aware of any exclusions or limitations regarding coverage of preexisting conditions or health benefits (such as hospitalization, emergency services, maternity care, preventive care, prescription drugs, and mental health and substance use disorder services).” The notice must state that the policy may have lifetime or annual dollar limits on benefits. The notice must be in sentence case, instead of all capital letters.

Although the tri-agencies did add more specificity to the notice, they did not agree to all commenter suggestions. They decided against, for instance, requiring insurers to add a “caution” heading, provide the notice in multiple languages, post the notice on the first page of the policy (rather than “prominently”), or include a link to HealthCare.gov or a state-based marketplace. The tri-agencies also declined to require insurers offering short-term coverage to provide a Summary of Benefits and Coverage.

Like the 2016 regulations, the notification for coverage that begins before January 1, 2019 additionally informs consumers that the short-term coverage does not qualify as MEC and that enrollees may face a penalty unless they qualify for an exemption. (The notice for coverage that begins after January 1, 2019 does not include a similar notification because the individual mandate penalty was repealed beginning in plan year 2019.)

State Regulation

The tri-agencies confirm that states have the authority to regulate short-term coverage and adopt standards that are more stringent than the federal rule. States can, for instance, adopt a definition with a shorter maximum initial duration, prohibit renewals or extensions of short-term plans, or require additional insurer disclosures. The tri-agencies establish federal standards only for 1) the maximum length of the initial contract term (up to 12 months); 2) the maximum duration of a policy, including renewals and extensions under the same insurance contract (up to 36 months); and 3) a notice requirement. States are free to adopt stronger standards in these three areas and regulate short-term coverage in every other respect. The final rule does not preempt state laws that prohibit the sale of short-term coverage.

Student Health Insurance

The tri-agencies affirm that short-term, limited-duration insurance cannot be sold as student health insurance coverage. This is because student health insurance coverage is, by definition, individual health insurance coverage that must thus comply with most of the ACA’s individual market standards. Insurers can market short-term coverage to individual students, but short-term coverage cannot be used as a substitute for student health insurance coverage.

Other Federal Standards, Including Section 1557's Nondiscrimination Provisions

Commenters had suggested applying additional standards to short-term coverage. These suggestions included benefit standards (such as requiring the coverage of preventive services and preexisting conditions), marketing standards (such as training for agents and brokers selling these policies), and regulatory oversight (such as additional federal oversight of these policies sold associations). The tri-agencies declined to adopt any standards beyond those noted above and, instead, restated that states are free to adopt these or other standards as they see fit.

A number of stakeholders noted that Section 1557 appears to apply to short-term policies. Section 1557 is the ACA’s chief nondiscrimination provision and prohibits discrimination on the basis of race, color, national origin, sex, age, and disability in certain health programs and activities. Section 1557 applies to insurers that receive federal health funding. Thus, an insurer that receives marketplace subsidies, offers Medicare Advantage coverage, or operates Medicaid managed care plans would have to comply with Section 1557 across their lines of business.

Stakeholders, including the NAIC, asked for clarity about the scope of Section 1557 as it applies to short-term policies. Most short-term policies likely discriminate based on sex, age, and disability due to experience rating and some benefit limitations. If Section 1557 applies to short-term plans, insurers that participate in the marketplaces, Medicare, and Medicaid would likely run afoul of this provision if they were to short-term plans that discriminated on these bases.

Despite this request for clarification, the tri-agencies noted only that Section 1557 is beyond the scope of this rule. However, a new proposed rule on Section 1557 has been under review at the White House since mid-April and could be released soon. It is unclear whether the new rule will address the scope of Section 1557 and whether it applies to short-term coverage.

Effective Date

The final rule will go into effect 60 days after publication in the Federal Register, which is expected on August 3, 2018. Short-term policies could be available as early as October 2018 under the new rule. However, it is unclear how quickly insurers can design these new products, obtain state approval (where required), update marketing materials, and offer these policies.  

Severability

The final rule includes a new severability provision that had not been previously proposed. This part of the regulation provides that the rest of the rule would remain operative even if the 36-month maximum duration standard was found to be invalid or unenforceable. The severability clause only applies to that portion of the rule and would apply if the 36-month provision is invalidated either “as applied” or “facially.”

Implications Of Expanded Access To Short-Term Coverage

Litigation is likely given the expansion of the rule. Beyond simply reversing the 2016 Obama-era regulation, the tri-agencies have gone further to allow short-term coverage to be renewed or extended for up to three years. Comparison to COBRA aside, it is difficult to see how short-term coverage—which is supposed to be an option to fill temporary gaps in coverage and have a limited duration—can be reasonably defined as coverage that could extend up to three years.

Legal Authority

Commenters on the proposed rule previewed questions of legality. Commenters questioned whether the tri-agencies have the authority to define short-term coverage, argued that the proposed changes were inconsistent with federal law, and asserted that the tri-agencies have failed to justify the need for the rule. Commenters also raised questions about the tri-agencies’ authority to make certain changes, such as authorizing the renewal or extension of short-term policies beyond 12 months, arguing that such an extension is contrary to federal law.

In response to these commenters (and anticipating legal challenges), the preamble includes an extended discussion about the tri-agencies’ legal authority to issue the rule. The agencies believe that they have clear statutory authority under the Public Health Service Act to interpret undefined provisions of federal law. This includes the definition of short-term, limited-duration insurance, which is undefined in statute and referenced only in the definition of individual health insurance coverage. The tri-agencies want to define short-term, limited-duration insurance to distinguish it from individual health insurance coverage. As noted above, they interpret “short-term” to mean an initial contract term of less than 12 months and “limited-duration” to be an extension or renewal of no more than 36 months.

Previous administrations have issued regulations to define short-term, limited-duration insurance. However, none have gone this far as to explicitly allow for these policies to extend to up to three years. The tri-agencies recognize as much, noting that “there is a possibility that some stakeholders may challenge the 36-month maximum duration standard in court.” To address this possibility, the tri-agencies added the new severability clause discussed above to the final regulation. (The Department of Labor recently used a similar strategy by adopting a severability clause in the final rule on association health plans even though one had not been included in the proposed rule.)

The tri-agencies repeatedly state their intent to allow short-term plans to serve as an alternative coverage option for those who cannot afford coverage in the individual market. They explain that short-term plans play a critical role in providing temporary coverage but then go on to state that these policies “can also provide a more affordable, and potentially desirable, coverage option for some consumers, such as those who cannot afford unsubsidized coverage in the individual market.”

Despite the stated purpose of the rule to distinguish between short-term, limited duration insurance and individual health insurance coverage, the tri-agencies blur these lines. They acknowledge that a major goal of the rule is to expand short-term coverage to fill a perceived gap in the individual market and to allow short-term plans to be sold “side-by-side with individual market coverage.”

The tri-agencies want to establish a parallel market that competes with the traditional ACA individual market, rather than solely enabling short-term, temporary policies that serve as a bridge between major medical policies. They assert that doing so is appropriate because Congress was not concerned with short-term plans existing alongside individual coverage. If Congress had been concerned, they argue, it would have amended the definition of individual health insurance coverage or otherwise addressed short-term coverage in the ACA.

The tri-agencies also suggest that states may be able to subsidize the purchase of short-term, limited-duration insurance under a Section 1332 waiver. Barring changes to the Section 1332 guardrails, however, it is unclear how a state would satisfy the requirement that coverage must be as comprehensive as ACA-compliant coverage and effectuate this statement.

Effects On The ACA Risk Pool

This new policy is expected to siphon off healthy enrollees from the ACA-compliant marketplace. Allowing longer-term enrollment in non-ACA policies that are medically underwritten could leave the ACA-compliant market with a higher-risk population that will drive up premiums for those who remain in the market and depend on comprehensive coverage.  This concern has been raised by insurers, consumer advocates, and federal regulators alike. In the final rule, as in the proposed rule, the tri-agencies acknowledge as much.

The tri-agencies state that the rule “could lead to further worsening of the risk pool by keeping healthy individuals out of the individual market for longer periods of time, increasing premiums for individual market plans and may cause an increase in the number of individuals who are uninsured.” They estimate that there will be fewer healthier people in the individual market and that premiums will increase for marketplace enrollees as a result. This, in turn, will result in higher federal outlays for premium tax credits to the tune of about $0.2 billion in 2019, and a total of $28.2 billion from 2019 to 2028.

The tri-agencies dismiss many of these concerns, however. They conclude that the final rule will have a higher impact than the proposed rule, but that this impact will still be relatively minimal. The final rule will result in an increase in enrollment in short-term coverage by about 600,000 individuals in 2019. Consistent with estimates in the proposed rule, on-marketplace enrollment in 2019 is expected to decrease by 200,000 people. The tri-agencies include a new estimate of off-marketplace enrollment, which they expect to decrease by 300,000 people in 2019. The additional 100,000 people who enroll in short-term coverage in 2019 will have been previously uninsured. By 2028, enrollment in the individual market will decrease by 1.3 million, while enrollment in short-term coverage will increase by 1.4 million.

Individuals who enroll in short-term coverage are expected to pay a premium that is about half of the average unsubsidized marketplace premium, while premiums for unsubsidized marketplace enrollees will increase by 1 percent in 2019 and 5 percent in 2028. The tri-agencies cite many of the studies noted above when estimating the impact of the final rule on premiums, enrollment, and federal tax outlays.

Effects On Consumers

Beyond higher premiums in the ACA-compliant market, enrollees will not have the benefit of essential ACA protections. The tri-agencies acknowledge as much, citing costs of the rule that include “reduced access to some services and providers for some consumers”; “possibly reduced choice for individuals remaining in the individual market risk pools”; and a “potential increase in out-of-pocket costs for some consumers, possibly leading to financial hardship.” For consumers who enroll in these plans in 2018 (assuming they are available), they may also have to pay the mandate penalty.

The tri-agencies do not expect short-term coverage to reflect key elements of ACA-compliant plans, such as community rating, preventive care, maternity and prescription drug coverage, rating restrictions, and guaranteed renewability. Consumers who enroll in short-term coverage and then develop chronic conditions could face financial hardship until they are able to enroll in an ACA-compliant plan that would provide the coverage they need. The agencies received a number of comments from individuals who shared negative personal experiences with short-term coverage (and pre-ACA individual coverage).

The rule’s notice provisions notwithstanding, allowing short-term coverage to be sold for 12 months could cause consumer confusion if enrollees believe they are enrolling in major medical health insurance. A number of commenters noted that the risk of confusion is arguably heightened when these policies can be sold for up to 12 months—instead of three months—in a way that more closely mimics what consumers expect from major medical coverage. Commenters also raised concerns about aggressive and deceptive marketing practices by agents, brokers, and insurers offering short-term coverage; the tri-agencies noted, but did not address, these concerns.

Some commenters raised concerns that the rule could have a disproportionate impact on rural hospitals, young people, small businesses, and the self-employed and that the rule would result in higher levels of uncompensated care. The tri-agencies note the possibility, but do not believe, that all short-term policies will exclude coverage for emergency room treatment. They also note that uninsured people enrolling in short-term policies could result in a decrease in uncompensated care.

The tri-agencies believe the rule will help consumers who do not qualify for advance premium tax credits through the marketplace by providing more affordable coverage. They note that “individuals who qualify for [premium tax credits] are largely insulated from significant premium increases” while individuals who are not subsidy-eligible are harmed by increased premiums and a lack of affordable coverage options. The tri-agencies believe this rule is needed to increase coverage options for individuals “unable or unwilling” to purchase ACA-compliant plans.

Role Of States

State policymakers may want to consider a larger role in regulating short-term coverage in the wake of the final rule. A recent analysis shows significant variation in state regulation of short-term plans. States might increase their role to protect their consumers and their state health insurance markets from the risk of market segmentation. The preamble confirms that states can apply or adopt standards that are more restrictive than those in the final rule. Some states—such as California and Illinois—have adopted or are actively considering legislation to prohibit or restrict short-term plans.

Some of the policy options that states have are outlined in a recent issue brief from the Center on Health Insurance Reforms and include banning or limiting short-term coverage, reducing the risk of market segmentation, and increasing consumer disclosures and regulatory oversight.