Biden Administration Sets Limits on Use of Short-Term Health Insurance Plans, But States Can Do More to Protect Consumers

In July, the Biden administration proposed safeguards designed to help consumers navigate the critical differences between comprehensive coverage that is subject to the Affordable Care Act’s (ACA) consumer protections and other coverage arrangements — like short-term insurance plans — that are not.

As the name suggests, short-term plans were originally intended for people experiencing a short gap in comprehensive coverage; for instance, when switching from one job-based plan to another. Even though short-term plans aren’t covered by the ACA’s consumer safeguards, the Trump administration sought to promote these products as a cheap alternative to year-round comprehensive coverage. In 2018, the administration rescinded rules that limited the plans’ duration. This allowed short-term products to last 364 days and be renewed for an additional two years, for a maximum length of 36 months.

In the years since, new laws have significantly improved the affordability of ACA marketplace coverage. At the same time, the dangers to consumers of ACA-exempt products have become more evident. The Biden administration’s proposed regulations would reestablish tighter limits on the length of short-term plans. It is also considering policies that would make it easier for consumers to evaluate their coverage options.

Evidence Shows Unregulated Short-Term Products Endanger Consumers

Unlike ACA-compliant coverage, short-term plans don’t cover preexisting conditions and may decline to sell a policy based on a person’s health. They usually exclude common benefits such as prescription drugs, mental health care, maternity care, and preventive services. And they limit the benefits they do cover, with dollar caps and unregulated cost-sharing designs that require out-of-pocket spending that is far higher than what is permitted in comprehensive coverage. These limitations typically make for a product with a low upfront cost, which may be appealing to some people who are healthy (and stay that way) and they are highly profitable for the companies that sell them. But for enrollees who do need care, short-term plans are likely to result in much higher overall costs. Depending on a consumer’s diagnosis, they open the door to potentially catastrophic financial hardship.

These risks are heightened when short-term plans are marketed in ways that make it difficult for consumers to make informed enrollment decisions. Because short-term plans are money-makers for insurers, brokers typically receive significantly higher compensation for selling them versus comprehensive coverage. Perhaps because of this financial incentive, studies repeatedly have revealed aggressive and misleading marketing practices that obscure the limitations of short-term plans and the availability of subsidized comprehensive coverage. These abuses continued during the pandemic and are continuing in its aftermath.

Short-term plans even impose costs on those who don’t enroll in them. By attracting healthy individuals and discouraging people with higher care needs, these products weaken the risk pool for comprehensive coverage. This raises premiums for everyone who relies on comprehensive coverage, including those with preexisting conditions.

Federal Response

The Biden administration’s new proposed rule would address these harms by ensuring that short-term products may last a maximum of three months plus a one-month renewal. To curtail gaming this limit, the proposal contains a partial ban on “stacking,” a practice in which insurers sell consumers multiple policies strung together (e.g., one three-month policy followed by a nominally separate three-month policy). The rule also would require more robust disclosures of short-term plan risks, and seeks comment on what federal regulators might do to prevent misleading and deceptive marketing practices.

State Regulatory Options

While the new federal approach should reduce the risk that short-term plans are used as a substitute for comprehensive coverage, states have full authority to do more to safeguard residents, and many have. States can:

• Prohibit sales during ACA marketplace open enrollment. To mitigate the dangers posed by misleading and deceptive marketing of short-term plans, states can prohibit the sale of these products during the annual enrollment period for comprehensive coverage.
• Ban rescissions. If an enrollee incurs significant costs under a short-term policy, the insurer may challenge whether the consumer’s medical claims are eligible for payment — a process known as “post-claims underwriting” — and deny or even retroactively cancel coverage. Comprehensive plans are barred from rescinding coverage (except in cases of fraud); this prohibition can be extended to short-term products.
• Establish minimum coverage standards. While short-term products typically don’t play by the same rules as comprehensive coverage, states can change this. For example, states can prohibit short-term plans from excluding preexisting conditions and require them to cover essential health benefits.
• Collect data to identify and close regulatory loopholes. States should ensure they are collecting sufficient data to determine how many short-term products are being sold and the methods of sale. This includes identifying and tracking the sometimes byzantine legal arrangements created to distribute these products across states. This information, which should be made public, would offer insight into whether short-term plan rules are working as intended. For instance, data could reveal that a state should clarify its authority over multistate sales or strengthen limitations on practices such as stacking.

Looking Forward

The expansion of short-term plans occurred during a period of instability in the individual market that has now ended, and the legal landscape has since changed. Meanwhile, evidence that these products aren’t a substitute for comprehensive coverage, and the dangers of treating them as such, has accumulated. The federal government has updated its regulatory approach, and states too may determine that the time is right to revisit these products.