Short-Term, Limited Duration Insurance

Key Points

• • • Short-term, limited duration insurance (STLDI), a type of health insurance originally designed to allow consumers to fill temporary gaps in coverage, may now be an alternative to plans available under the ACA.
    • The Final Rule released by the Departments of the Treasury, Labor and Health and Human Services now allows STLDI plans to have a duration of up to 36 months, including renewals.
    • STLDI may be an attractive alternative to young, healthy consumers who require little or no ongoing health care or prescription drugs, but may increase premiums for individuals who want or need ACA-compliant coverage and could cause insurers to leave the ACA-compliant market.
    • Newly defined STLDI plans could be available for sale to consumers in late 2018 or early 2019.

Introduction

On October 12, 2017, President Donald Trump issued an Executive Order promoting two types of health insurance coverage as alternatives to the health insurance plans available to individuals and small businesses under the Affordable Care Act (ACA) — association health plans (http://bit.ly/KHI-1810) and short-term, limited duration insurance (STLDI). The order directed the secretaries of the Treasury, Labor and Health and Human Services (the “Departments”) to consider expanding the availability of STLDI by allowing it to cover longer periods and be available for renewal by consumers. The president noted that since STLDI is not subject to the ACA’s mandates and regulations, it can be an affordable alternative to the health plans sold through the ACA marketplaces for individuals who do not obtain coverage through their employer.

In response to the president’s order, the Departments issued a proposed rule on February 21, 2018, stating the intent to “lengthen the maximum period of short-term, limited duration insurance, which will provide more affordable consumer choice for health coverage.” During the public comment period for the proposed rule, which ended on April 23, the Departments received more than 12,000 comments. The Final Rule, which lengthened the maximum period to three years, was released on August 1. It will become effective October 2, 2018.

Short-Term, Limited Duration Insurance (STLDI)

STLDI is a type of health insurance coverage originally designed to allow consumers to fill temporary gaps in coverage they might experience when transitioning from one health plan to another, for example, when changing jobs or relocating. Under the requirements applicable to individual health insurance coverage established under the Public Health Service Act (PHS Act), STLDI is not considered individual health insurance and is not subject to the market reforms and other requirements of the ACA.

Although the PHS Act does not define STLDI, up until 2016 federal regulations implementing the Health Insurance Portability and Accountability Act of 1996 (HIPAA) defined STLDI as “health insurance coverage provided pursuant to a contract with an issuer that has an expiration date specified in the contract … that is less than 12 months after the original effective date of the contract.” However, following the enactment of the ACA, some insurers began to offer STLDI coverage that lasted for just less than one year (364 days). To address concerns that STLDI was being sold to consumers as a type of primary health insurance coverage, as well as concerns about the impact of adverse selection on the risk pool for ACA-compliant plans, the Obama administration issued a final rule in October 2016 that changed the long-standing definition of STLDI to specify that it only could provide coverage for less than three months.

The Final Rule

The Final Rule, which includes modifications to the proposed rule, amends the definition of STLDI in existing federal regulations and revises the required notice that must appear in STLDI contracts and application materials by:

• • Allowing plans to have an expiration date specified in the contract that is less than 12 months (up to 364 days) after the original effective date of the contract and, taking into account renewals or extensions, have a duration of no longer than 36 months in total; and
  • Revising the required notices that must appear in all STLDI contracts and application materials to assist consumers in distinguishing between STLDI plans and ACA-compliant coverage.

The renewability of STLDI plans, which was not included in the proposed rule, permits renewals or extensions of STLDI policies, but does not require STLDI issuers to renew or extend them.

Concerns About Extending the Duration of STLDI

With the extended duration and renewability of STLDI plans, and the reduction of the individual mandate penalty beginning in 2019, the Departments acknowledge in the Final Rule that relatively young and healthy individuals, including those who are uninsured or are currently enrolled in ACA-compliant individual market plans and whose income disqualifies them from obtaining advanced premium tax credits, are more likely to purchase STLDI plans. The potential loss of these young, healthy individuals who choose to purchase STLDI plans as their primary health insurance coverage rather than ACA-compliant plans, could impact the ACA-compliant individual market single risk pools in each state by increasing premiums for individuals who want or need ACA-compliant coverage and causing insurers to experience higher than expected costs and losses, which could motivate them to leave the ACA-compliant market.

Consumers who purchase STLDI and later develop chronic conditions could face significant financial hardship or loss of access to benefits until they are able to enroll in ACA-compliant plans that would provide coverage for such conditions. In addition, because STDLI plans are not subject to the ACA regulations applicable to the individual insurance market, individuals who purchase STLDI plans may be left with large bills since STLDI plans are exempt from the requirements for prohibitions on annual and lifetime limits, and limits on deductibles and out-of-pocket costs.

Conclusion

Newly defined STLDI plans could be available for sale to consumers in late 2018 or early 2019. Kansas insurance regulators and policymakers will want to monitor closely enrollment in STLDI plans in the future and how that impacts the state’s individual health insurance market and the availability and cost of coverage for all Kansans.