Last week, the Departments of Treasury, Labor, and Health and Human Services (the "Departments") issued final regulations to redefine the meaning of "short-term, limited duration insurance" ("short-term insurance"). The controversial regulations are likely to expand the use of this limited form of health insurance among consumers who do not receive coverage through their employers.
The Affordable Care Act ("ACA") imposes strict requirements on most individual health insurance coverage. Short-term insurance is exempt from most of those requirements. Significantly, short-term insurance (unlike other forms of individual insurance) is: (1) allowed to exclude or limit coverage for preexisting conditions; (2) not required to provide coverage for essential health benefits (such as coverage for emergency care, inpatient care, prescription drugs, and mental health services); and (3) permitted to impose annual and lifetime maximums to limit the amount that the insurance company pays.
Prior Short-Term Insurance Regulations
In 2016, the Departments issued a final regulation regarding short-term insurance. The 2016 regulation provided that:
- Short-term insurance could not exceed 3 months (including all extensions and renewals); and
- Each short-term insurance contract must prominently display a disclaimer, in 14-point font, warning that such coverage does not satisfy the minimum essential coverage requirements of the ACA and, consequently, that the purchaser might owe an individual-mandate penalty.
New Short-Term Insurance Regulations
In 2017, President Trump issued an executive order directing the Departments to reduce the regulatory burdens associated with the ACA. The new regulations are a response to that executive order. The new regulations provide that:
- Short-term insurance cannot exceed 12 months in the first instance, but can be extended or renewed for up to 36 months; and
- Short-term insurance contracts must contain a new disclaimer warning that the coverage is not required to comply with certain ACA requirements and that the consumer should check for policy limitations on preexisting conditions and other coverage exclusions. Notably, the disclaimer on contracts that begin on or after January 1, 2019 does not need to warn consumers about a potential individual-mandate penalty, because Congress repealed the penalty as part of the recent tax law.
The most important change in the new regulations is the extension of the maximum short-term insurance contract period from 3 months to 36 months. Previously, the 3-month limit on such coverage meant that individuals typically purchased short-term insurance coverage only when transitioning from one health insurance policy to another, to prevent a gap in coverage. Now, the extended period of coverage means that individuals are likely to purchase short-term insurance coverage as an alternative to individual insurance offered in the marketplace. The use of short-term insurance as an alternative (rather than a stopgap) is even more likely because, as of January 1, 2019, individuals will no longer be penalized for purchasing short-term coverage instead of minimum essential coverage, even though short-term coverage need not provide all of the essential health benefits.
Opposing Views and Controversy Surrounding the Regulations
Everyone agrees that the new short-term insurance regulations will have effects on the market for individual insurance that is comprehensive and ACA-compliant (comprehensive insurance). The nature and scope of those effects, however, are controversial and have not been universally accepted by all stakeholders.
Proponents of the new regulations argue that the expansion of short-term insurance coverage as an alternative to individual insurance will make health insurance available to more consumers. Because short-term insurance coverage is not required to comply with the ACA's requirements for comprehensive insurance, it can be offered at a lower cost. Therefore, proponents of the regulations argue, consumers who have been priced out of the market or overwhelmed by the high costs of comprehensive insurance will be able to access more affordable coverage.
Opponents of the regulations argue that expanding the use of a short-term insurance plan will harm consumers. They argue that healthier consumers are more likely to purchase short-term insurance; as a result, they argue, the risk pool for comprehensive insurance will be composed of sicker consumers, and the cost of that individual insurance will rise dramatically. Opponents also point out that while short-term insurance will likely have lower premiums, it could actually be more costly for consumers in the long run—consumers with short-term insurance may be forced to pay for costly procedures out of pocket because short-term insurance plans do not typically cover many common medical events and conditions (such as hospitalization and cancer treatment).
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If you have any questions about the impact of the regulations or any related matters, please contact the authors or any attorney in Venable's Employee Benefits and Executive Compensation Group.