Short-Term, Limited Duration Insurance Proposed Rule: Summary and Options for States
In response to President Trump’s October 12 executive order (EO), the U.S. Departments of Health and Human Services (HHS), Labor (DOL) and Treasury have published proposed rules to expand the availability of health coverage sold through short-term, limited duration insurance (STDLI). The public has until April 23, 2018 to submit comments on these proposed rules; the new standards are slated to be effective 60 days after publication of the final rules.
What’s in the Short-Term, Limited-Duration Insurance Proposed Rule?
The President’s EO asks the tri-agencies to expand the availability of STLDI by allowing such insurance to cover longer periods and be extended or renewed by the consumer. The proposed rule extends the duration of STLDI policies to a period of less than 12 months, makes it easier for STLDI policies to be renewed, potentially extending the duration past 12 months, and revises the consumer disclosure that insurers must include in STLDI contracts and application materials.
Redefining Short-term, Limited-duration Policies
STLDI is designed to fill temporary gaps in coverage, such as may occur when an individual transitions from one type of major medical coverage to another. Federal statutes do not define STLDI. However, STLDI is excluded from the definition of individual health insurance coverage in the Public Health Service Act (PHSA), meaning, among other things, that this form of coverage is not required to comply with the Affordable Care Act’s (ACA) market reforms. See Table 1.
Table 1. Consumer Protections in ACA Plans Compared to Short-Term Coverage
|Consumer Protection||ACA Plans||Short-Term Coverage|
|Includes coverage for preexisting conditions?||Yes||No – short-term plans can decline to offer coverage at all or exclude coverage for preexisting conditions|
|Prohibits higher rates based on health status?||Yes||No – short-term plans can charge a higher rate based on an individual’s health status|
|Covers essential health benefits?||Yes||No – coverage varies by plan and many exclude benefits such as prescription drugs, maternity, mental health and substance use disorder services|
|Prohibits dollar caps on health care services?||Yes||No – short-term plans can include a dollar cap on services and stop paying medical bills after that cap is reached|
|Caps out-of-pocket expenses for consumers?||Yes||No – short-term plans may not have a maximum limit on consumer out-of-pocket costs|
|Allows consumers to use federal premium assistance based on their income?||Yes||No – premium tax credits cannot be used to purchase short-term plans|
|Satisfies the individual mandate?||Yes||No – consumers enrolled in a short-term plan may have to pay a penalty for failing to have minimum essential coverage|
To address concerns that STLDI was being sold as a primary form of coverage, and that these plans were likely to lead to adverse selection against the risk pool for the ACA-compliant market, the tri-agencies promulgated regulations in 2016 that imposed additional limits on STLDI. These rules, applicable to policies sold after January 1, 2017, prohibited STLDI from providing coverage for a period of three months or more, including any renewal period.
The Trump administration’s proposed rule would reverse the 2016 rulemaking and allow STLDI to provide coverage for up to 12 months, returning the federal definition to the duration in effect prior to January 1, 2017. The proposed rule would also allow policies to be renewed upon reapplication by the policyholder and with the consent of the insurer.
Revising the Notice Provided to Enrollees and Applicants for Coverage
Current rules require insurers to provide notice in contracts and any application materials that STLDI is not minimum essential coverage (MEC) that satisfies the individual mandate. Because STLDI lasting almost 12 months may be more difficult to distinguish from ACA-compliant coverage, the proposed rule would revise the notice to warn consumers that: (1) the coverage is not required to comply with federal requirements for health insurance, including the ACA; (2) to check the policy carefully for what it does and does not cover; and (3) that individuals losing eligibility for coverage under an STLDI policy may not be able to enroll in other coverage until open enrollment. Policies sold under the rule, if finalized, and prior to January 1, 2019 (when the individual mandate no longer applies) must also include notice that enrollees may be subject to a tax penalty.
Regulatory Impact and Requests for Comment
The impact of the proposed rule on consumers and state insurance markets must be considered in tandem with Congress’ repeal of the ACA’s individual mandate penalty, effective December 31, 2018. Consumers may find STLDI more attractive when they no longer face a tax penalty for using it as an exclusive source of coverage. This in turn could accelerate a shift in enrollment from the ACA-compliant individual market to STLDI. According to estimates from the Urban Institute, the proposed rule will result in 2.1 million people shifting from ACA-compliant plans to short-term coverage, resulting in premium increases of 18.2 percent in states that do not prohibit or limit short-term plans. For consumers, the proposed rule notes that STLDI poses the risk of higher out-of-pocket costs in the event they need health care services, which could cause financial hardship. This may be compounded by the deceptive marketing tactics used by some STLDI insurers that have been identified in a number of states.
The tri-agencies seek comment on all aspects of the proposed rule but specifically ask for comment on the appropriate duration of STLDI policies; any other regulations or guidance that may limit insurers’ flexibility to design STLDI or pose barriers to entry into the STLDI market; conditions under which insurers should be allowed to continue STLDI for 12 months or longer with the insurer’s consent; ways in which the reapplication process can be made easier for insurers and consumers; and the proposed rule’s estimated impact on the growth in STLDI policies and the effect on marketplace plan premiums and federal outlays for premium tax credits.
Options for States
Nothing in the proposed rule changes or diminishes states’ authority as the primary regulators of STLDI and states have a broad set of options. State responses to the potential growth of the STLDI market will vary based on the state’s legal authority and regulatory capacity; some states may need new legislation to alter their regulation of short-term coverage while others can leverage existing law to do so. State policy options include, but are not limited to:
- Require short-term plans to comply with all individual market rules. States could apply state and federal rules for the individual market to STLDI, as New York and New Jersey do currently.
- Require short-term plans to comply with some individual market rules. States could require sellers of STLDI to comply with minimum benefit standards, limits on underwriting, or other selected individual market rules. For example, Florida requires STLD insurers to comply with state benefit mandates, while Rhode Island prohibits them from imposing preexisting condition exclusions.
- Limit the duration of STLDI. States could enact the 2016 rules limiting short-term plans to a 3-month, non-renewable duration, or some other time period shorter than 12 months. For example, Oregon limits the contract period to three months; Arizona and Minnesota limit it to six months. Some other states require STLDI insurance contracts exceeding six months to comply with state benefit mandates and other standards.
- Require STLDI to meet a minimum medical loss ratio (MLR). Average loss ratios for STLDI are much lower than for ACA-compliant coverage, in many cases as low as 50 or 60 percent. States could impose a higher loss ratio to help consumers obtain a better value for their health care dollar. Rhode Island requires STLDI to meet a minimum MLR; state officials report that it has discouraged sellers from entering their market.
- Improve consumer disclosures and education about STLDI. States could require more prominent warnings than mandated under federal rules on marketing materials and broker websites that STLDI is not major medical insurance and enrollees who use it as their sole source of coverage in 2018 will face a mandate penalty.
The proposed rule could substantially expand the number of STLDI policies that are sold to individuals and used as a longer-term alternative to individual market insurance. It will have significant implications for consumers who enroll in the coverage, as well as for the ACA-compliant individual markets. States have a wide range of options to enhance consumer protections with respect to STLDI and improve the stability of their insurance markets.
Keith K, Administration Moves to Liberalize Rules on Short-Term, Non-ACA-Compliant Coverage, Health Affairs Blog, February 20, 2018.
Palanker D, Lucia K, Corlette S, Kona M, Proposed Federal Changes to Short-Term Health Coverage Leave Regulation to States, The Commonwealth Fund, February 20, 2018.
Georgetown University Center on Health Insurance Reforms, State Options to Protect Consumers and Stabilize the Market: Responding to President Trump’s Executive Order on Short-Term Health Plans, Robert Wood Johnson Foundation, December 2017.
 Data on state regulatory approaches provided by Lucia K, Giovannelli J, Corlette S, et al, “State Regulation Of Coverage Options Outside of the Affordable Care Act: Limiting the Risk To The Individual Market,” The Commonwealth Fund, forthcoming.