On February 20, 2018, the Departments of Health and Human Services, Labor, and Treasury (the tri-agencies) proposed a new rule that would change the way that short-term, limited duration insurance coverage (or short-term plans) is regulated. The proposed 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 administration also released a fact sheet on the new rule.

In his executive order, President Trump directed the tri-agencies to allow short-term plans to be sold for longer periods and to be renewed by consumers. As expected by many health policy watchers, the new rule reverses an Obama-era rule on short-term plans put in place in 2016. The new rule would extend the maximum duration of these plans from three months to “less than 12 months” (which could be as long as 364 days), and would appear to allow individuals to reapply for short-term coverage (if not renew their policy) at the end of the 12-month period. It also includes updated notice requirements.

This post offers background information on short-term coverage, including the federal regulation of these policies and the rule adopted by the Obama administration in 2016; summarizes the proposed rule; and discusses the rule’s potential implications for consumers, the individual insurance market, and states. Comments on the proposal are due within 60 days. 

Brief Background

Short-term coverage has historically been defined as insurance that covers someone for less than 12 months. This type of coverage was designed to fill a temporary gap in coverage when a consumer is, for instance, between jobs. Although these policies are meant to be temporary, some insurers began offering short-term coverage that lasted for just shy of one year, such as 364 days.

By being shorter than a year, these policies avoid having to comply with the Affordable Care Act’s (ACA) market reforms. For instance, short-term insurers can refuse to cover people or 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 mental health care or prescription drugs), rescind coverage, and require higher out-of-pocket cost sharing than the maximums allowable under the ACA. One recent analysis found that short-term plans had out-of-pocket maximums that ranged from $7,000 to $20,000. Short-term coverage is also not subject to the single risk pool requirement or risk adjustment program that applies to ACA-compliant individual coverage.

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 typically much cheaper than ACA-compliant coverage and enrollment tends to skew younger and healthier. Under current law, individuals who enroll in short-term coverage for more than three months may be subject to the individual mandate penalty, which may have encouraged individuals to enroll in ACA-compliant coverage (rather than short-term coverage). This incentive will no longer be in place once the penalty ends in 2019, potentially increasing the risk of market segmentation.

Because enrollment in short-term plans tends to skew younger and healthier, the sale of these plans can have serious implications for the health of the overall individual market risk pool. In particular, the sale of these plans could lead to higher premiums in the traditional individual market, as healthier consumers exit the market to enroll in short-term coverage. Concerns about these implications have been raised by the American Academy of Actuaries and in a recent joint letter from the Blue Cross Blue Shield Association (BCBSA), America’s Health Insurance Plans (AHIP), Families USA, the American Heart Association, and the American Cancer Society Cancer Action Network, among other stakeholders.

Despite these concerns, some of the largest insurers—such as UnitedHealthcare and Independence Holding Co.—are expecting “a boon” from expanded short-term coverage sales.

Federal Regulation Of Short-Term Coverage

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, as noted above, individuals who enroll in short-term policies as their primary coverage could have to pay the individual mandate penalty. 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. Because of these limitations, they are also cheaper than ACA-compliant plans and likely more attractive to younger, healthier consumers.

Recognizing this, 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 was 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 policies have also 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 noted that short-term coverage was being sold as primary coverage, was adversely impacting the risk pool for ACA-compliant coverage, and “may not provide meaningful health 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 coverage mandate and is not MEC.

The rule also provided that the three-month limit applied to any extensions “that may be elected with or without the issuer’s consent.” 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 the short coverage cap exemption from the individual mandate penalty, 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 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 National Association of Insurance Commissioners , 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.

That brings us to today. In revisiting the definition of short-term, limited-duration coverage in the proposed rule, the tri-agencies note 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 if they did not qualify for a special open enrollment period. Although the rule also acknowledges some of the comments in favor of the 2016 rule—on matters such as the impact of the rule on improving the ACA’s individual market single risk pools—the tri-agencies focus largely on comments that opposed the 2016 rule.

Summary Of The Proposed Rule

The proposed rule would allow short-term, limited-duration coverage to resume being sold for up to 12 months. This would quadruple the maximum coverage period, extending it by nine months relative to current regulations. As a result, insurers could resume offering short-term coverage for up to 364 days. The rule also appears to allow individuals to reapply for short-term coverage, if not renew their policy, at the end of the 12-month period, and adopts revised notice requirements. The rule would go into effect 60 days after publication of the final rule in the Federal Register.

The tri-agencies request comments on all aspects of the proposed rule, including whether the length of short-term coverage should be a different duration, whether there are barriers to entry into the short-term coverage market, the applicability dates of the rule, the conditions under which insurers should be allowed to offer short-term coverage for longer than 12 months, and the revisions to consumer notices.

Reapplication And Renewability

The rule does not require insurers to offer short-term coverage on a guaranteed renewable basis (meaning that insurers would not be required to renew a short-term policy at the end of the policy period). However, the rule does appear to allow individuals to reapply for short-term coverage (if not fully renew or extend their policy) at the end of the 364-day policy period. In these cases, a consumer would likely face a new round of underwriting before being enrolled in a new policy or continuing under an existing policy.

The tri-agencies open up this potential by making a slight change to the definition of short-term, limited duration coverage relative to current rules. Under current regulations contained in the 2016 Obama-era rule, the three-month limit includes any extensions or renewals made “with or without the issuer’s consent.” Coverage renewed “without the issuer’s consent” generally refers to a guaranteed renewable policy where the policyholder can continue coverage even if the insurer would prefer not to renew. Coverage renewed “with the issuer’s consent” generally refers to renewal or enrollment where both the insurer and policyholder want to continue coverage.

By specifying that the three-month limit applied in both instances, the 2016 rule prohibited all renewals of the same policy past three months. (Even under the 2016 rule, consumers could apply for a new or different short-term plan every three months, hopping from plan to plan, so long as they could pass underwriting.)

In contrast, the proposed rule would change the definition to include only extensions or renewals made “without the issuer’s consent.” As such, the rule would continue to prohibit these policies from being available on a guaranteed renewable basis (i.e., renewable “without the issuer’s consent”). But the tri-agencies propose to remove the inclusion of renewal “with the issuer’s consent.” This suggests the possibility that insurers and policyholders could extend or renew coverage where both the insurer and policyholder want to do so, even at the end of the 12-month period. Consumers in those circumstances, however, are likely to face an additional round of underwriting that they may or may not pass or that may or may not affect the type of coverage they are offered on reapplication.

The tri-agencies specifically request comment on this approach, asking for comments on the conditions under which short-term plans should be allowed to continue for 12 months or longer with the issuer’s consent. They also solicit comments on whether there should be an “expedited or streamlined” reapplication process, whether federal standards should be adopted for this process, and whether further definitional clarifications are needed. In particular, the tri-agencies note the possibility of developing minimum federal standards for what must be considered during an expedited reapplication process while allowing insurers to consider additional factors at reapplication or renewal. They also ask for information on state approaches to short-term plan reapplication processes.

Notice Requirements

Consistent with the 2016 rule, the proposed rule includes a requirement that all short-term policies 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 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 proposed rule, the tri-agencies proposed two different notices based on whether the coverage begins before or after January 1, 2019.

Both notices would require short-term coverage to state that it “is not required to comply with federal requirements for health insurance, principally those contained in the Affordable Care Act.” Consumers would be advised to understand the coverage limitations and that they may have to wait until an open enrollment period to get other 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.)

The tri-agencies request comment on the revised notice and whether the language should be changed to ensure that it is understandable for consumers.

Extends Obama-Era Nonenforcement Policy

The 2016 rule went into effect for short-term coverage that began on or after January 1, 2017. However, when the final rule was adopted in October 2016, federal regulators recognized that some states may have already approved short-term coverage that did not comply with the three-month durational limit. As such, HHS announced that it would not take enforcement action against an insurer that offered short-term coverage before April 1, 2017 solely because the coverage period was three months or longer, so long as the coverage ended on December 31, 2017 and otherwise complied with the final rule (such as the notice requirement). HHS also extended this nonenforcement option to states for coverage sold before April 1, 2017. The tri-agencies appear to extend this nonenforcement policy until the new rule is finalized (although it is not clear that it affects any policies currently in the market).

Effective Date

As noted above, the proposed rule specifies that these new requirements would go into effect 60 days after publication of the final rule in the Federal Register. Despite this specific timeline, it is unclear exactly how quickly new short-term plans would be able to be sold and whether they would be available in 2018.

Today’s release was of a proposed rule with a 60-day comment period, meaning comments will be accepted until late April. The tri-agencies will then need to consider these comments, draft a final rule, undergo interagency review, and then obtain approval by the Office for Management and Budget before releasing the final rule. From there, assuming there are no changes to the effective date provision, the rule’s requirements would go into effect 60 days after publication in the Federal Register.

Although it’s possible that the tri-agencies could move through this process quickly, it could be challenging to finalize this rule before fall 2018 given all the requirements that the agencies must meet. If these policies are available in 2018, consumers who enroll in them may still be subject to the individual mandate penalty, which remains in effect until 2019.

Potential Implications of Expanded Access to Short-Term Coverage

The proposed rule would increase the availability of short-term coverage by expanding both the maximum duration of short-term coverage (from three months to 364 days) and allowing consumers to reapply for or potentially renew coverage, potentially extending the policy beyond the 12-month period. This increased availability is likely to have several implications.

Effects on the ACA Risk Pool

This new policy could siphon off healthy enrollees from the ACA-compliant marketplace. Allowing longer-term enrollment in off-marketplace policies that are medically underwritten could leave the ACA-compliant market with a higher-risk population that would likely 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 October 2016, the tri-agencies stated that short-term coverage was “adversely impacting the risk pool for Affordable Care Act-compliant coverage.”

The tri-agencies acknowledge as much in this proposed rule, noting that “individuals who are likely to purchase short-term, limited-duration insurance are likely to be relatively young or healthy” and that the proposed rule “could potentially weaken states’ individual market single risk pools.” They go 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 estimate 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 cite enrollment trends prior to the 2016 rule and assume that only about 10 percent of these enrollees would have been eligible for subsidies through the marketplace.

This loss of healthy risk from the marketplaces (and the broader ACA-compliant individual market) would result in higher premiums for those who maintained ACA coverage, which in turn would tend to increase total payments for advance premium tax credits. Relative to current law in 2018, premiums would increase by up to $69/month, resulting in federal outlays for advance premium tax credits that would increase by up to $3.048 billion.

The tri-agencies, however, cite lower numbers, asserting that the most significant effects on the individual market will result from the loss of the individual mandate beginning in 2019 (rather than the short-term coverage rule). When the loss of the individual mandate is taken into account, the tri-agencies cite much smaller effects, including premium increases of up to only $4/month and federal outlays for advance premium tax credits that would increase by up to $168 million. The tri-agencies seek comment on these estimates and welcome other estimates of the increase in enrollment in short-term coverage and the health status and age of individuals who would purchase these policies.

Effects On Consumers

Beyond higher premiums in the ACA-compliant market, full-year short-term coverage could deprive enrollees of essential ACA protections. The proposed rule acknowledges as much, citing costs of the rule that include “reduced access to some services and providers for some consumers” and “increased 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 individual mandate penalty.

The tri-agencies state that short-term coverage will be unlikely to include the elements of ACA-compliant plans, such as community rating, preventive care, maternity and prescription drug coverage, rating restrictions, and guaranteed renewability. The tri-agencies seek comment on the value of these excluded services to consumers. They also note that 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 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. 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.

The tri-agencies argue that 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 subsidy-eligible are harmed by increased premiums. The tri-agencies assert that increased premiums are due to “a lack of other, more affordable alternative coverage options” and that the rule is needed to increase options for individuals “unable or unwilling” to purchase ACA-compliant plans.

Effects On States

State policymakers may take on a bigger role in regulating short-term coverage in the wake of the proposed rule. States might do so to protect their consumers and their state health insurance markets from the risk of market segmentation. The tri-agencies affirm that states can apply or adopt standards that are more restrictive than those outlined in the proposed rule.

Although states have broad authority to regulate short-term coverage, current state regulation of short-term policies varies significantly by state. Some states, such as New Jersey, prohibit short-term plans from being offered altogether; other states, such as Arizona and Oregon, limit the duration of short-term policies to 185 days or less and restrict policy renewals. Still other states require short-term policies to cover some state benefit mandates. 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.