It’s starting to be as predictable as April showers. As soon as open enrollment for Affordable Care Act (ACA) health plans closes, insurers and brokers come out of the woodwork to sell people limited coverage insurance products, such as short-term policies, that don’t meet ACA standards. By some accounts, enrollment in short-term insurance is surging, with one company reporting that short-term sales are up by 150 percent. By marketing and selling these products, however, insurers are peeling off healthy risks from the ACA’s health insurance marketplaces and contributing to the adverse selection that they bemoan to policymakers, investors and the media. One of the top sellers of short-term coverage is United Healthcare, which has announced that it will no longer sell ACA-compliant plans through 23 marketplaces, citing financial losses.
What is short-term health insurance and why do insurers like selling these policies?
We’ve written about short-term health insurance on CHIRblog before, noting that these policies are not regulated by the ACA, and thus don’t need to comply with federal prohibitions on pre-existing condition discrimination, out-of-pocket cost protections, or requirements to cover a basic set of essential health benefits. Consumers can enroll in them from one month to up to a year (you can buy a policy for as many as 364 days), and you can enroll outside the ACA’s prescribed open enrollment period so long as you are healthy enough to pass the plan’s medical underwriting.
Many consumers may be attracted by the plans’ very low prices (as much as 70 percent cheaper than unsubsidized traditional insurance) and purchase one of these plans, not realizing that they often offer shoddy coverage that, if you need health care services, can leave you holding the financial bag. In addition, these plans don’t count as minimum essential coverage (MEC) under ACA rules, meaning that people with these plans will face a penalty under the law’s mandate that individuals maintain health coverage. Because some of the marketing of these short-term policies can be deceptive, several state departments of insurance have issued alerts, warning consumers about the risks of these policies (see here and here, for example).
The brokers behind the website “healthcare.com” are one example of how these policies are sold. With fonts and logos that strongly mimic the government website for the federal health insurance marketplace, healthcare.com markets short-term or “term” health insurance, noting for consumers that “it’s an affordable and flexible alternative to Obamacare,” and that it’s “cheaper for you to pay the penalty and have [a short-term policy] instead of an Obamacare plan.”
Insurers like short-term policies because they can deny applicants who pose potential health risks, or exclude from coverage treatment for pre-existing conditions. Enrollment in these policies thus skews younger and healthier than for ACA-compliant coverage. One online broker estimates that individuals age 18 to 34 made up 55 percent of all short-term insurance applicants in 2014, compared to 28 percent of those in the ACA marketplaces. And according to a National Association of Insurance Commissioners’ report of companies’ annual financial statements, the loss ratio for short-term coverage tends to be significantly lower than for traditional comprehensive insurance, making this line of business considerably more profitable.
The benefits and risks of the growth in the short-term health plan market
There are many reasons for consumers to be interested in short term coverage. As originally conceived, they can fill temporary gaps in coverage, such as when someone has a 1- or 2-month hiatus between jobs. They can also be an option for people who missed the ACA’s open enrollment season and don’t qualify for a special enrollment opportunity. They are also significantly cheaper than unsubsidized ACA-compliant plans. But their low-cost comes with risks – the coverage can be spotty and can put people at financial risk – both due to unexpected health costs and the individual mandate penalty.
The surge in enrollment in short-term policies also puts the ACA marketplaces at risk. While several large insurers have announced that they will no longer pay broker commissions for off-season enrollment into ACA-compliant plans, some of those very same companies appear to be happy to pay commissions for the sale of the underwritten short-term policies. By doing so, however, they are siphoning healthy risks away from ACA-compliant coverage, undermining the marketplace risk pools, and – to the extent they’re operating in both markets – cannibalizing their own marketplace line of business.