Aug, 01, 2018

Short-Term, Limited Duration Insurance Final Rule: Summary and State Options

Sabrina Corlette, Georgetown Center for Health Insurance Reforms

The U.S. Departments of Health & Human Services (HHS), Labor, and Treasury (collectively the “tri-agencies”) have finalized a new federal definition of short-term, limited duration insurance (“short-term plans”). The new policy is effective 60 days after publication of the rule in the federal register, meaning that short-term plans could be available for sale by early October.

What is in the Short-Term Plan Final Rule?

In February, the tri-agencies proposed expanding the availability of short-term plans as alternatives to Affordable Care Act (ACA) coverage. Short-term plans are generally exempt from the ACA’s consumer protections, including requirements to issue policies to people with pre-existing conditions, cover a minimum set of benefits, and refrain from charging higher premiums to enrollees based on gender or health status. Federal rules don’t provide consumers in short-term plans with appeal rights and sellers aren’t prohibited from rescinding (cancelling) the policies of people who get sick after they enroll. The proposed rule extended the federally permissible duration of short-term plans to up to 12 months, made it easier for short-term plans to be renewed, and proposed a standard disclosure that would advise consumers that the coverage was not required to comply with the ACA’s consumer protections. In large part, the administration has finalized these policies as proposed.

Redefining Short-Term Plans: Length of Contract Term

Consistent with the proposed rule, the final rule would allow the sale of short-term plans with contract terms of “less than 12 months.” The final rule clarifies that renewals or extensions are permitted for a duration of up to 36 months (states cannot permit a longer term or duration). Although the administration considered making these policies “guaranteed renewable,” as is required of ACA-compliant plans, it ultimately allows renewals to be at state or insurer discretion. Further, the rule does not prohibit consumers from entering into separate short-term plan contracts that run consecutively, so long as each individual contract lasts no longer than 36 months.

The rule affirms that states have authority to set an initial contract term of less than 12 months or a maximum policy duration of less than 36 months. The tri-agencies also note that nothing prevents a state from banning short-term plans outright, limiting underwriting, or otherwise regulating their marketing and sale.

Consumer Disclosure

The final rule retains the proposed consumer disclosure requirement. Short-term plan insurers must include in their marketing materials in 14-point font the following language:

This coverage is not required to comply with certain federal market requirements for health insurance, principally those contained in the Affordable Care Act. Be sure to check your policy carefully 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). Your policy might also have lifetime and/or annual dollar limits on health benefits. If this coverage expires or you lose eligibility for this coverage, you might have to wait until an open enrollment period to get other health insurance coverage. Also, this coverage is not “minimum essential coverage.” If you don’t have minimum essential coverage for any month in 2018, you may have to make a payment when you file your tax return unless you qualify for an exemption from the requirement that you have health coverage for that month.

However, the rule does not prescribe where or how prominently insurers must display this disclosure. The rule’s preamble reminds states that they can require the disclosure of additional information, and also regulate the manner and form in which it is communicated to consumers.

Effective Date

The National Association of Insurance Commissioners (NAIC), several states, and many other commenters encouraged the administration to delay the effective date of this rule to January 1, 2020. Their comments argued that states would need time to modify existing laws and regulations in response to the rule. The administration rejected this request and short-term plans under this new federal definition could be sold by early October, just a few weeks before the open enrollment period for ACA coverage begins.

Projected Impact

The administration acknowledges the concerns of critics that its rule could result in premium increases for ACA-compliant coverage and potentially the market exit of insurers offering ACA plans. Its regulatory impact analysis estimates that approximately 500,000 people will leave the ACA-compliant individual market for short-term plans in 2019, leading to a 5 percent premium increase for ACA-compliant individual market plans by 2021. However, the administration argues that the “critical need for coverage options that are more affordable” than ACA coverage outweighs the projected risks to the individual market.

Options for States

The administration affirms states’ authority to regulate short-term plans, and further notes that states may need to address concerns about misleading marketing materials or unfair or deceptive practices on the part of insurers, agents, or brokers. A number of states have already acted to protect consumers and stabilize their insurance markets. For example, Hawaii, Maryland and Oregon limit the length and renewal of short-term plan contracts. Vermont, in addition to limiting their contract duration, requires short-term plan sellers to submit marketing materials to the department of insurance for advance review. Other states, such as Massachusetts, New York, and New Jersey, require short-term plans to comply with individual market consumer protections. As a result, short-term plans are not available in those states. A bill to ban short-term plans is pending in California.

In the absence of state legislation to limit or ban short-term plans, state departments of insurance may wish to use their regulatory authority to review the new short-term plan contracts and rates, regulate underwriting practices, and to limit the potential for fraudulent marketing tactics. For example, in 2017, Pennsylvania’s insurance commissioner revoked the licenses of seven brokers for deceptively marketing short-term plans, while Montana officials recommended disciplining short-term plan insurers and brokers that used “misinformation and deception” in communicating with consumers. Insurance departments in Alaska, Indiana, and Wyoming have also used their websites or issued alerts to warn consumers about the limitations and deceptive marketing often associated with short-term plans. State officials may also want to mount education campaigns during the open enrollment period to ensure that consumers fully understand and can appropriately weigh their coverage options.