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A new type of cheap health care plan is hitting the market

Money logo Money 8/2/2018 Elizabeth O’Brien
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The Trump administration on Wednesday passed a ruling expanding the duration of short-term health insurance plans in a move that proponents hailed as providing relief to cost-burdened consumers on the individual market. But critics fear this measure could further increase costs for those who remain on Obamacare plans.

Short-term health plans will soon be sold for a term of as long as 364 days instead of the current three months. The rule will likely take effect this fall, giving consumers another option as Obamacare open enrollment begins on Nov. 1.

Traditionally, short-term plans have been used to bridge a coverage gap of a few months or less, typically for those in between jobs or in between school and a job. Wednesday’s ruling suggests they could now be adopted as a longer-term solution — they can be renewed for up to 36 months.

The administration has praised short-term plans as a more affordable alternative to policies sold on the state and federal marketplaces of the Affordable Care Act, also known as Obamacare. In 2017, average monthly premiums increased by 21%, pricing many consumers — especially those who make too much to qualify for premium subsidies — out of the market, according to a recent government report.

Short-term plans can in fact be much less expensive than Obamacare plans: the cheapest short-term plans generally cost 20% or less of the premium for the lowest-cost Obamacare plan in the same area, according to an analysis by Kaiser Family Foundation.

But short-term plans are cheaper for a reason, experts caution, and consumers should understand what they’re buying. Short-term plans are not subject to the same consumer protections that the Affordable Care Act requires of comprehensive plans, and as such carriers can reject those with pre-existing conditions, charge them more, or issue policies that exclude treatment for the policyholder’s pre-existing condition.

The Congressional Budget Office estimates that about 2 million consumers will enroll in short-term plans once the rule is fully phased in. If healthy consumers flock to short-term plans, insurers may have to raise rates on the sicker consumers who remain in the more comprehensive policies, who will be more expensive to cover without the buffer of healthy people who pay into the system but don’t use many medical services.

Here are three things to know about short-term plans:

You’ll still owe the penalty for buying one in 2018

Short-term plans are not considered ‘qualifying health plans’ under the Affordable Care Act. That means you’ll still owe the penalty for going uninsured if you buy one this year, unless you qualify for a limited number of exemptions. That penalty is $695 for each adult and $347.50 for each child without insurance. The fee is capped at $2,085 per family, or 2.5% of your family income in excess of tax filing thresholds, whichever is higher.

However, this math changes in 2019, when the tax penalty goes away. (Technically, you’ll still be required to have health insurance — the law calls this the “individual mandate” — but the penalty for not having it will go to $0). Today, you have to add the cost of the penalty to the overall bill for a short-term plan to compare its price to Obamacare coverage, but starting next year you won’t.

They won't cover pregnancy or some other things

Under the Affordable Care Act, all qualifying health plans must cover 10 essential health benefits, including maternity care and hospitalization. Short-term plans don’t have the same requirements, and to them, pregnancy is the mother of all pre-existing conditions. None of the plans in the Kaiser analysis covered maternity care. (Don’t get complacent, guys: expectant dads can also get turned away, since the carrier doesn’t want to have to cover the future baby, says Sean Malia, senior director of carrier relations at broker eHealth.com.) Many short-term plans also exclude coverage for mental health, substance abuse, and prescription drugs, according to Kaiser.

Obamacare plans must cover you regardless of your pre-existing conditions and not charge you any more than everyone else of the same age, smoking status and general location. However, short-term plans can reject you or charge your more for coverage based on your health status. One of the questions carriers generally ask when you apply is whether you’ve been treated in recent years for a number of conditions, including cancer, COPD and diabetes, Malia says. If you answered yes, it’s likely you’ll be denied coverage.

That said, the government will require carriers to warn consumers that coverage might not be comprehensive; you should check with your carrier for specifics.

Once you file a claim with a short-term plan, the carrier may do something called “post-claim underwriting.” That means, they’ll scrutinize your medical history to see if there was any hint of the condition before you joined the plan. Your plan may determine, for example, that the lump the the doctor found a month into your policy was a pre-existing condition and deny you treatment, even though you weren’t aware of it before. This is ironic given the reason people buy coverage, says Karen Pollitz, senior fellow at the Kaiser Family Foundation: “You’re not buying insurance in case you stay healthy.”

They're not fail-safe catastrophic coverage

Short-term plans have limitations even as catastrophic coverage. Unlike Obamacare plans, short-term plans come with coverage limits of around $250,000 on the low end and $2 million on the high end, according to Kaiser. A very serious accident can easily test those limits.

What’s more, if you get hit by a bus, you’ll want to make a full recovery by the time the policy ends, Pollitz says. This is because your carrier may not renew you when your contract expires; Wednesday’s rule allows individual carriers to decide the terms of renewability, which could also be subject to state law. For guaranteed continued coverage, you can apply for Obamacare, but you’ll have to wait until open enrollment begins in the fall.

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