Understanding Short-term Health Insurance

These plans may work for some people if they remain healthy and never suffer an accident.

However, if they need medical care requiring a trip to the hospital, these plans can be a financial disaster.

Short-term coverage is skimpy

The plans cover much less than a traditional plan. It is also not uncommon for these plans to weave in exclusions in a way that most consumers would never notice until they tried to use the insurance.

♦ Short-term health insurance plans can be much cheaper than normal health insurance one might purchase through the Marketplace. In some cases, up to 54% less.

These plans may look like a good deal but there is a reason they are less expensive.

♦ People who buy short-term plans in order to reduce their monthly premiums are taking a big risk.

There are many people who have no other choices. Especially, families living in states that did not expand their Medicaid program. And anyone without enough income to qualify for Obamacare is priced out of the market.

♦ Short-term is meant to mean a short period of time.

The Affordable Care Act does not control short-term plans.

The department of Health and Human Service (HHS) uses rules to restricted short-term plans to 90-days maximum.

The 90-day rule was to discourage people from trying to rely on short-term plans too long. Over a long period of time, the chances are high that a healthy person will develop a health condition that these plans would not protect against.

♦ Rules can be changed. In the summer of 2018, the Trump administration decided do just that. They changed the rule so that short-term plans no longer need to be short.

Administrations change too.

President Biden called these plans "junk" during the 2020 campaign.

July 2023, the Biden administration finally got around to addressing some of the changes the prior administration put in place.

♦ Under the "new rules", short-term products may last a maximum of three months plus a one-month renewal.

The rule changes also would require more robust disclosures of short-term plan risks.

• It takes many months to finalize a rule change. It is likely to be the first part of 2024  before the rules are finalized.

The rules would not apply to new short-term policies until 75 days after the rules are finalized.

Policies issued before that date would not have to comply with the new rules.

• It is easy to overlook an important point, 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 or renewal of the old policy.

The Affordable Care Act guarantees renewability, which means an insurance company cannot refuse to renew a policy even if you have a serious illness.

• There is no such guarantee for short-term health plans.

If you become seriously ill you will likely not be able to purchase a new policy. But you will be able to apply for health insurance through the Marketplace.

Why some people are not happy with these plan?

It is believed that these plans destabilize the health insurance markets.

The sale of short-term plans is expected to result in fewer people signing up for ACA-compliant plans.

♦ Healthier people will be drawn to short-term plans while sicker people must remain with an individual plan.

Insurance companies taking part in the exchanges are unhappy because when risks are spread over fewer consumers their profits could suffer unless they can charge higher premiums.

Higher premiums will hurt everyone that does not qualify for premium tax credits. It will also filter down to small business health insurance.

♦ Patient advocates worry that unsuspecting consumers will be duped into buying worthless policies that end up leading them to financial ruin.

What to know before you buy

When you shop for short-term health insurance you must be very careful.

♦ Short-term health insurance is like stepping back in time to the days before the Affordable Care Act. There are very few rules controlling how insurance companies structure and administer short-term plans.

You are responsible for reading all plan documents.

♦  These types of plans are notorious for having a lot of fine print to mask exclusions and weave in pre-existing condition loopholes. This makes it much harder to understanding what is covered and what will not be covered.

Fewer benefits

Short-term plans cover fewer medical services than typical comprehensive insurance covers. As a result, it is difficult to find coverage that provides benefits that will protects against large health care costs.

♦ The new rules require short-term plans to provide greater disclosure than in the past. But there is no guarantee the information will make it easier to understand what isn't covered.

Short-term plans are not required to provide Essential Health Benefits like plans sold under Obamacare. Very few short-term plans covered prenatal and maternity care, mental health care and drug treatment or prescription drugs.

♦ Short-term plans are not constrained by the Affordable Care Act.

→ Insurance companies can refuse to cover people with pre-existing health problems.

They can charge higher prices to people with a health issue or even exclude a particular health condition.

Key points

• Insurance companies can refuse you coverage.
• Insurance companies can more easily cancel short-term coverage than is permitted with a traditional plan.
• Older people and less healthy people may have difficulty buying a short-term plan.
• You can be charged more depending on your medical history, age and gender.
• Some policies deny coverage because of a symptom of a condition that you had, even if you did not need to seek treatment for it.
• Your policy can be canceled if the insurer becomes aware of a previously undisclosed condition. Should you experience a serious and expensive health condition you can expect your application and medical records will be heavily reviewed, so be careful.
• Some plans have waiting periods where treatment will not be covered until the waiting period is over.
• Most plans have an annual dollar limit that they will pay. If you become ill and need expensive health care you can easily go over most limits.
• There may be a small dollar per day maximum for a hospital stay.
• Some plans may not cover hospitalization at all.
• Specialist office visit may be limited to a certain number per year, after that you pay all.
• Deductibles and other out-of-pocket costs are usually higher than a traditional insurance plan.
• No plans cover prenatal and maternity care. Planning to have a baby then these plans are not for you.
• Some plans provide limited coverage for mental health care.
• Only a few plans provide drug treatment.
• Coverage for prescription drugs is very rare.
• Many plans do not cover immunization, which should be a concern for a family with small children.
• Short-term plans are famous for exclusions for odd things, like injuries caused by playing a sport like football or baseball.

♦ You have to read the fine print.

Insurance agents want to sell these plans

For the most part, insurance agents and brokers have an incentive to sell short-term plans. It is called commissions.

In 2019, the average short-term plan spent less than 62 cents of every premium dollar on medical care. This is compared to at least 80 cents for an Obamacare plan, which also must refund to enrollees any excess premiums.

There is no rule controlling profits from short-term plans like there is for Obamacare plans. Because of this a short-term plan can keep nearly half of all premiums to cover overhead and profits.

♦ Agent and brokers can make higher commissions on the short-term plans through shared profits, some paying close to 20%. In comparison, Obamacare plans typically pay a commission of 5%.

However, the math may not always favor short-term plans. If the premium cost is too low the commission from a short-term plan could end up no better than a Marketplace or off-exchange plan. When this happens don’t expect agents to push short-term plans with much enthusiasm.

State restrictions

The HHS rules do not prevent states from putting in place more restrictive rules.

Three states have actually banned theses plans.

• California, Hawaii and New Jersey

Many states have either tightened up restrictions or required enhancements making their market unappealing for insurers.

• Colorado, Connecticut, District of Columbia, Maine, Massachusetts, Minnesota, New Hampshire, New York, New Mexico, Rhode Island, Washington and Vermont

All other states allow these plans to some degree. A few allow plans to be written for 6 months with no renewal while others permit renewals of 6 month plans.

♦ Red states of the deep south clapped with glee when the Trump administration gave short-term plans the green light.

Most of these states allow plans to be written for 364 days with as many a three renewals, effectively allowing for 36 months maximum duration.

After the Biden administration's rule changes are finalized (end of 2023 or first part of 2024), this will change.

♦ The system of renewal can be tricked. The insurer can issue a new policy and get around the renewal restrictions the HHS has in place.

States that take these plans seriously are expected to put in place their own rules to prevent this.