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Can You Count On Short-Term Health Insurance?

Band-Aid brand bandages on a white background
photo by Marco Verch

With Halloween in the rearview, it is now officially the least wonderful time of the year: health insurance open enrollment season.

From Nov. 1 to Dec. 15, Americans who don’t get their health insurance through an employer, Medicaid or Medicare must brave the opaque and expensive world of health insurance. In many places, the Affordable Care Act exchanges offer few options, and premiums continue to climb for those who do not qualify for subsidies. Selecting an insurance plan under these conditions is a task no one relishes.

In this year’s search, many people weighing their insurance choices may run across the option to save 50 percent or more on premiums by using a “short-term insurance plan.” A closer look, however, reveals why these offerings are so cheap. While some shoppers may be attracted to the low premiums, it’s important to understand that this is a case in which you get what you pay for.

The Trump administration expanded the availability of short-term, limited duration health plans earlier this year. The Obama administration had previously curtailed such options, limiting the plans to less than three months of coverage. A new regulation that took effect in October changed the rules, however, permitting each state to set its own coverage period up to just under 12 months, with the option to renew the plan twice, potentially providing nearly three years of coverage.

Short-term health insurance predates the Affordable Care Act. Originally, it was designed as a stopgap measure for individuals who lost jobs, faced changes to their Medicaid eligibility or otherwise lost their coverage without an immediate route to a new full-coverage plan. Not only are they less expensive than other plans, but short-term plans can be purchased at any time of year if needed. However, as health insurance premiums became increasingly burdensome, many people – especially young and healthy people – kept renewing short-term plans indefinitely, due to their relatively low cost.

There are problems with these plans as either a short- or long-term solution. First, while people choose to enroll in such plans because they cannot afford or do not wish to pay for traditional options, they are not getting much for their money. If you have one of these policies and get sick or injured, insurers frequently engage in “post-claim underwriting,” in which they investigate a patient’s medical records and identify possible evidence that the insured did not report a pre-existing condition. Insurers then can use such information to justify denying patient claims.

In addition, short-term plans are not required to include all of the benefit categories mandated by the Affordable Care Act, which means they frequently leave out categories including maternity coverage, mental health care and prescription medication benefits. Maybe these matter to you; maybe they don’t. But short-term plans also often include annual or lifetime benefit caps, something Affordable Care Act plans cannot do. All of this means that people who enroll in such plans and then develop an expensive illness may find that their insurer declines to pay a large portion of their medical costs, effectively defeating the purpose of buying insurance in the first place.

This is assuming individuals can buy short-term coverage at all. Short-term plans often exclude people with pre-existing conditions outright. If they allow them, any care related to that condition may not be covered or the customer’s premiums may be much higher (or both). And while the new regulation allows renewals for up to three years, renewal is always at the insurer’s discretion – meaning that if you get sick, there is no guarantee you can continue to renew your plan after its original term expires. Depending on when your coverage began, that may or may not leave you with a coverage gap. Loss of a short-term plan is not a “qualifying life event,” meaning you might have to wait months before you can enroll in a plan that must accept customers with pre-existing conditions if you do not gain access to an employer-provided plan in the meantime.

Insurers excluding people with pre-existing conditions can lead to problems in the broader health insurance system as well, as congressional Democrats and health groups alike have warned. Because such plans will be sold mostly to healthy consumers, many of them young, their expanded use is considered likely to worsen the existing problem of a pool of insured in traditional plans who tend to be sicker than the general population. Some observers expect that this effect will be even more pronounced because Congress repealed the individual mandate penalty, which formerly applied to people choosing short-term plans. The exodus of healthy consumers from the market for Affordable Care Act-compliant plans could increase upward pressure on premiums, in turn sending even more people scrambling for cheaper options.

A group of health care and patient advocate organizations have filed a lawsuit attempting to block the regulation expanding short-term plans. Some states, including California and New York, have effectively banned them outright. But at least for now, they remain available in most of the U.S., and at much lower rates than Affordable Care Act-compliant alternatives – more than 50 percent lower on average, according to a study from the Henry J. Kaiser Family Foundation.

The high price of unsubsidized health insurance is a real and pressing problem. Many people who are not eligible for subsidies have a difficult time affording the insurance plans available to them. But buying coverage that doesn’t protect against risk ultimately does consumers no good. While there may be cases where a short-term plan could be appropriate, at a minimum, individuals should exercise extreme caution and consider finding someone with greater expertise to help them decipher the fine print (to the extent information is available to shoppers) before selecting one of these plans. Even if you only intend to protect yourself against catastrophic costs, many of these options fail to achieve that.

Of course, insurers could roll out new short-term products that provide better terms and are more attractive as a long-term solution in response to the new regulation. Yet my guess is that these plans will not attract enough people to affect the traditional insurance pool. The “young invincibles” who chose not to purchase health insurance at all can continue to do so without any government penalty. Other people may try a short-term plan, quickly have a bad experience, and then decide to either purchase traditional insurance or simply become uninsured.

The health insurance landscape remains a mess, and there are few likely prospects for fixing it in the near future. For now, consumers should remain intensely cautious when considering short-term limited insurance options. Some insurance is a bad deal at any price.

Managing Vice President Paul Jacobs, of our Atlanta office, is among the authors of our firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. He wrote Chapter 12, "Retirement Plans"; Chapter 15, "Investment Approaches And Philosophy"; and Chapter 19, "A Second Act: Starting A New Venture." He also contributed to the firm’s book The High Achiever’s Guide To Wealth.

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