New Rule on Short-Term Health Plans Could Affect COBRA Choices

Longer duration may attract those transitioning between other types of coverage

Stephen Miller, CEBS By Stephen Miller, CEBS August 3, 2018
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The Trump administration has taken another step to promote health care options that avoid some of the coverage mandates under the Affordable Care Act (ACA), receiving cheers and jeers. The expansion of short-term health insurance plans may provide an option for some departing employees seeking a lower-cost COBRA alternative, among others, but they should understand the coverage limits.

On Aug. 1, the departments of Health and Human Services, Labor and the Treasury issued a final rule, Short-Term, Limited-Duration Insurance, extending short-term health plans—sometimes referred to by the acronym STLDI—from three months to one year, with renewal options to extend coverage to three years.

The final regulations, published in the Federal Register on Aug. 3, take effect 60 days later, on Oct. 2.

While short-term plans are not ACA-compliant employer-sponsored group health plans, they may factor into a departing employee's decision on whether to take advantage of COBRA to remain on the employer's health insurance plan. A short-term plan may also appeal to more workers at small companies that don't provide health insurance.

An executive order from President Donald Trump last October directed federal agencies to consider rulemaking to expand the availability and use of association health plans (AHPs), short-term insurance, and stand-alone health reimbursement arrangements (HRAs) funded by employers and used by employees to purchase coverage on the individual market.

The Trump administration issued a final rule on AHPs in June and is expected to propose a rule soon to allow large employers to fund stand-alone HRAs, as small employers currently may do, said Chatrane Birbal, the Society for Human Resource Management's director of congressional affairs for health and employee benefits policy.

[SHRM members-only toolkit: Managing Health Care Costs]

Option for Transitional Coverage

"Under the Affordable Care Act, Americans have seen insurance premiums rise and choices dwindle," said Health and Human Services Secretary Alex Azar in a news statement. The administration's goal is "bringing more affordable insurance options back to the market, including through allowing the renewal of short-term plans."

"This final rule opens the door to new, more-affordable coverage options for millions of middle-class Americans who have been priced out of ACA plans," added Seema Verma, administrator of the Centers for Medicare and Medicaid Services.

"Short-term plans can be an affordable solution to fill gaps in coverage," said Jeff Smedsrud, CEO of Pivot Health, a provider of low-cost health insurance alternatives. "New employees typically have a 90-day waiting period before insurance coverage begins or have an extremely expensive COBRA option when they leave a job. That's when short-term health plans, which are structured like major medical health plans, can provide coverage and save consumers about 50 percent or more when compared to ACA plans."

New employees may have a 90-day waiting period before coverage begins or an expensive COBRA option when they leave a job.

Others to whom short-term plans may appeal include self-employed entrepreneurs who make too much to qualify for an ACA subsidy, retirees younger than age 65 who are not yet eligible for Medicare, and younger adults turning 26 and no longer eligible to be on a parent's health plan.

Criticism over Limited Coverage

Short-term plans need not include the 10 essential health benefits required by the ACA, and an analysis of short-term plans released earlier this year by the nonprofit Kaiser Family Foundation warned of significant coverage gaps: "Unlike ACA-compliant plans, short-term policies can deny or restrict coverage to people with pre-existing conditions and are not required to cover essential health benefits. They also can include dollar caps on coverage and higher deductibles that would not be allowed under ACA-compliant individual market and group health plans."

The analysis confirmed, however, that short-term plans often have premiums much lower than ACA coverage—often 20 percent or less than the lowest-cost bronze plan available through the ACA marketplace in the same location.

While issuers can deny coverage based on pre-existing conditions, as critics note, under the new rule "consumers can purchase consecutive short-term plans, tied together with renewal guarantees that protect them from medical underwriting when they fall ill," so that they can extend their coverage at the same rate as healthy enrollees, explained Michael Cannon, director of health policy studies at the Cato Institute, a libertarian think tank.

Understand Plan Coverage

Because coverage varies by plan, those signing up for a short-term plan could "find out the hard way it covers virtually nothing," and then "when something bad happens, they'll be on the hook for thousands more dollars in costs than they would have been under a plan with ACA protections," warned Shandon Fowler, founder and principal of benefits consultancy Four8 Insights in Charleston, S.C.

UnitedHealthcare's short-term plans paid out just 44 percent of their premium revenues last year for medical care, while ACA plans must pay out at least 80 percent, the health care industry newsletter AxiosVitals recently reported.

Because short-term plans could lure healthier people away from ACA plans that can't exclude purchasers based on pre-existing conditions, expanding short-term plans "has the potential to further destabilize individual market ACA coverage, which ultimately hurts all consumers," Fowler said, echoing the views of other critics.

"It's now up to states to protect their residents and their insurance markets from an expansion of substandard coverage," wrote Sarah Lueck, a senior policy analyst at the liberal Center on Budget and Policy Priorities.

Instead of short-term plans, Fowler prefers allowing workers without employer-sponsored coverage to purchase ACA plans through employer-funded HRAs, which "could, in time, strengthen the individual ACA market to the point that it is a healthier risk pool that becomes more appealing than any alternatives."

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