States Step Up to Protect Insurance Markets and Consumers from Short-Term Health Plans

Abstract

• Issue: Short-term health insurance plans are expected to siphon healthy individuals away from the ACA-compliant insurance market, causing higher premium rates in the individual market and leaving millions enrolled in coverage that excludes key services and financial protections.
• Goals: To offer a comprehensive look at state regulation of short-term plans, better understand emerging trends in regulation of the short-term market, and glean lessons learned in the policymaking process.
• Methods: Review of state laws, analysis of new laws and regulations governing short-term plans in nine states and D.C., and structured interviews with policymakers and stakeholders.
• Key Findings: States took steps in 2018 to ban or limit short-term plans and to increase the value of these products. State action aimed to protect consumers from products offering inadequate coverage and misinformation while safeguarding the individual health insurance market. New laws were passed with bipartisan backing and with support from consumer and patient advocates and health insurers.
• Conclusion: If states do not take action to protect consumers, premium costs for ACA-compliant coverage are likely to rise and consumers may find themselves with plans that do not provide the protection they expect. States can pursue a variety of policy options, in addition to duration limits, to protect consumers and the individual health insurance market.

Background

Short-term, limited duration health insurance — known as short-term plans — was originally intended to fill short gaps when people transitioned between coverage, but is now being sold as a replacement for year-round comprehensive coverage.¹ Short-term plans are not subject to the consumer protections of the Affordable Care Act (ACA). As a result, they have numerous gaps and limits in their benefit design, and people with these plans can be denied coverage for certain conditions (see Exhibit 1).² Short-term plans may appear cheaper, but may result in higher out-of-pocket costs or in people going without necessary care. In one instance, a plan paid only $11,780 toward $211,690 for heart surgery, leaving the enrollee with about $200,000 in bills. The insurer claimed this remainder exceeded the allowable amount under the plan.³

Federal regulations limit the duration of short-term plans. Out of a concern that people were enrolling in short-term plans in lieu of ACA-compliant coverage, in 2016 the Obama administration changed the maximum duration to less than three months and required the policies to include a consumer disclosure.⁴ In 2018, the Trump administration reverted to a maximum term of less than 12 months while also allowing short-term plans to be renewed for up to 36 months.⁵

States maintain primary authority for regulating short-term plans, with federal rules acting as a floor.⁶ Some states have a very light regulatory touch while four (California, Massachusetts, New Jersey, and New York) have banned the sale of all or most short-term plans (see Appendix A). Twenty-two states limit the initial duration of a short-term plan to less than the federal limit of 12 months. Some states additionally limit or prohibit “stacking,” a practice used by some brokers and insurers to sell consumers multiple short-term plans at one time with consecutive start dates so that the plans patch together a full year of coverage. While a majority of states mandate that short-term plans have some benefit requirements, Colorado and Connecticut are the only states that require coverage of a comprehensive set of benefits using the ACA’s essential health benefit provision.⁷ Other ways states have chosen to regulate the short-term market include limiting rating factors (that is, varying rates based on variables like gender or age); requiring insurers to pay a minimum percentage of premiums for medical claims and quality costs; and prohibiting rescissions, a practice in which insurers retroactively cancel coverage — often after a high-cost claim is filed (Exhibit 2).

In the states that do not strictly regulate short-term plans, the longer duration short-term plans now allowed by the Trump administration are expected to siphon healthy individuals from the individual insurance market.⁸ Estimates vary, but the Congressional Budget Office estimates 1.2 million people will enroll annually in short-term coverage by 2028.⁹ If this happens, rates will likely increase in the individual market and, if some insurers drop out of the market, consumer choice may decline.¹⁰ The millions who enroll in short-term plans will be left with inadequate coverage that excludes services such as substance use disorder treatment or is cancelled after high-cost claims are filed.¹¹

While most states’ short-term laws have existed for years or even decades, nine states and the District of Columbia (D.C.) finalized new laws or regulations in 2018 in response to the changes from the federal government (Exhibit 3). California, Hawaii, Illinois, Maryland, Vermont, and D.C. did so through legislation; Colorado, Delaware, New Mexico, and Washington issued regulations.¹² To better understand emerging regulatory trends in this area, we analyzed these new laws and regulations and interviewed policymakers (legislators, legislative staff, or regulators) and stakeholders (consumer and patient advocates or health insurers).¹³

Findings

States Aimed to Protect Consumers from Inadequate Products and Misinformation and to Safeguard Individual Health Insurance Markets

Decisions by states to regulate or ban short-term plans were based on concerns for consumers and the stability of health insurance markets. Some concerns centered on the coverage limitations of short-term plans. For example, Illinois consumer advocates highlighted a short-term plan that excludes coverage for some hospitalizations when patients are admitted over a weekend. Policymakers generally wanted to make sure consumers are aware of what they are purchasing. One regulator said there have been instances of individuals “thinking they had an ACA-compliant major medical plan” and a consumer advocate pointed to “sticker shock” after enrollees file claims. Regulators in two states expressed concerns about what brokers are telling consumers, noting that staff in their agencies happened to have been on the receiving end of telemarketing calls selling short-term plans and therefore experienced the sales pitch directly.

Some policymakers were concerned that the sale of longer duration short-term plans, with a 12-month term and potential for renewal up to 36 months, would harm the individual health insurance market if healthy enrollees pursued these plans instead of individual market coverage. One regulator said “people going into [short-term] plans are going to be healthier people . . . and therefore our marketplace is adversely impacted.”

Nine States and the District of Columbia Took Action to Protect Insurance Markets and Consumers in 2018

Nine states and D.C. passed laws or introduced regulations in 2018 because of the new federal regulations (Exhibit 4 and Appendix B). The actions taken by states were designed to limit the sale of short-term plans and bolster consumer protections in the market.

Limiting Enrollment in Short-Term Plans

Stakeholders interviewed in almost every state reported that officials first considered whether there was a place for short-term plans in their insurance markets. In general, policymakers thought that short-term policies provided an important option to consumers transitioning between coverage. But legislators in California concluded that the drawbacks of short-term plans outweigh any potential benefits, especially since consumers transitioning between coverage can buy ACA-compliant plans through special-enrollment periods. California banned short-term plans, so such plans may no longer be sold.

The other eight study states and D.C. limit duration of short-term plans to six months or less. Colorado had already limited duration to six months; Illinois newly limited duration to less than 181 days, and six other states and D.C. newly limited duration to about three months. One regulator explained a three-month limit keeps short-term plans issued only “for the purpose they were intended.” Five states and D.C. limit or prohibit the practice of stacking by restricting the total time an individual can enroll in short-term plans offered by one or more insurers. Stacking “effectively defeats the purpose of short-term” plans, one regulator said.

Two states took innovative approaches to limiting enrollment in short-term plans. Hawaii limits eligibility to those who were unable to enroll in marketplace coverage in the prior year in the open-enrollment or a special-enrollment period. This leaves only a small group of individuals, including undocumented immigrants and new residents, eligible to buy short-term plans. Washington prohibits the sale of short-term plans during the open-enrollment period for the next calendar year. This is to minimize the likelihood of short-term plans siphoning healthy risk from the ACA marketplace.

Making Modest Improvements in Value of Short-Term Plans

Some study states created additional consumer protections in the short-term market. Illinois and Washington now ban rescissions except for very limited circumstances, such as fraud on the part of the enrollee. D.C. protects enrollees and applicants who are currently receiving medical treatment or have sought treatment in the past 12 months from being denied coverage or having a claim denied because of their preexisting condition. As of April 2019, short-term plans in Colorado cannot deny coverage based on a preexisting condition. Five of the study states and D.C. have consumer disclosure requirements, although some simply codify the federal requirement. In an effort to increase the likelihood consumers see or hear the disclosure, Delaware requires prominent placement on application materials, Illinois requires brokers and agents to read the disclosure to the applicant, and Washington requires consumers to sign a standard disclosure form that includes details on benefits and exclusions.

Two study states have benefit requirements. Washington requires a minimum level of benefits for short-term plans. According to a regulator, this is intended to balance two objectives: make coverage not “illusory” and also so that it does not look “so much like an ACA plan it would entice people away from marketplace coverage.” In Colorado, regulations finalized in 2019 require short-term plans to cover all 10 essential health benefit categories.¹⁴ To make sure plans have all the mandated benefits, Colorado requires the insurance commissioner to review the forms prior to the sale of the plans.

States Restricted Sale of Short-Term Plans with Little Opposition and with Bipartisan Support

Consumer and Patient Advocates and Individual Market Insurers Supported Changes; Brokers and Short-Term Insurers Opposed Them

In most of the study states, advocates and health insurers participating in the individual market supported the policy changes. Consumer and patient advocacy groups sometimes pushed for stronger consumer protections and engaged in efforts to educate the public and legislators on the gaps in short-term policies. In two states, individual market health insurers proposed legislative language limiting short-term plans. In many states, legislators worked closely with their insurance marketplaces and regulators in writing legislation. Final legislation in D.C. included additional protections introduced by the mayor in separate legislation and recommended by patient advocates and regulators during a hearing.

When there was opposition, it was primarily from agents, brokers, and short-term health insurers.¹⁵ One state reported that a short-term insurer was adamant about the need to “discriminate against people with preexisting conditions in order to have a vibrant business.” In another state, a few brokers commented that a three-month limit “makes no sense” and that some consumers either do not want to pay for ACA-compliant coverage or miss open enrollment.

Advancing Bipartisan Policies

All the states that passed legislation did so with bipartisan support, although these were all states with Democratic control of one or more legislative chambers. While the Republican governor vetoed Illinois’s bill, the Senate overrode the veto unanimously. The sponsoring legislator in Illinois agreed to amend the legislation, including taking out the requirement that short-term plans meet all the same requirements as ACA-compliant plans, to obtain bipartisan support. In Maryland, a Republican administration supported the Democrat-sponsored legislation.

One factor credited for bipartisan consensus was the efforts of advocates to educate legislators on the nature and limitations of short-term policies. Advocates said they laid out the differences in benefits between individual market and short-term policies. Consumer advocates in one state found legislation to be an “easy sell” to policymakers once they understood the limitations of short-term policies. A legislator in another state noted that experts supporting and explaining the proposal helped shore up bipartisan support.

Discussion

The short-term market is expected to grow as plans with longer durations are marketed as an alternative to ACA-compliant coverage. In states that take no steps to protect consumers, premium costs for ACA-compliant coverage are likely to rise and consumers will discover too late that their short-term plan does not provide the protection they expect. An increasing number of people will likely be left with denied claims or find themselves uninsured when their coverage is rescinded. States that took early action regulating short-term plans can provide insight to policymakers looking to protect consumers and insurance markets.

While states frequently adopt duration limits in their effort to regulate short-term plans, there are other policy options that can restrict short-term plans and increase consumer protections. At a minimum, states can enforce duration limits and prohibit the sale of consecutive policies to close the stacking loophole. Policymakers also are thinking creatively about ways to improve the value of short-term plans, by requiring a minimum set of benefits, prohibiting the rescission of coverage from sick enrollees, or banning discrimination against applicants and enrollees with preexisting conditions. States can decide which protections best fit their insurance markets.

Although the effects of these state actions on the broader insurance markets is still unknown, these efforts show that regulating the short-term market is feasible. Legislation can be passed with support across party lines and with the backing of large health insurers, as well as consumer and patient advocates.

Acknowledgments

The authors thank the state insurance policymakers, regulators, and stakeholders who shared their time and valuable insights with us. We are also grateful to Sarah Lueck and Trish Riley for their thoughtful review.