Enrollees Aren’t Abusing Marketplace Grace Period

By Tara Straw, Senior Policy Analyst, Center on Budget and Policy Priorities

Despite claims by insurers and critics, people who receive subsidies to help pay for coverage in health insurance marketplaces aren’t abusing their three-month grace period for paying overdue premiums, as I explain in a new paper.

Those who receive such subsidies have three months to pay overdue premiums before insurers can end their coverage. That helps keep enrollees who miss a payment from quickly losing their insurance.

Critics assert that enrollees are using the grace period to get 12 months of coverage for nine months of premium payments. But that reflects a misunderstanding of how grace periods work.

Marketplace enrollees owe monthly insurance premiums by the due date that the insurer establishes, often the first day of the month. Health reform gives people who are eligible for and receive an advance premium tax credit for the insurance they buy in state or federal marketplaces a three-month grace period for nonpayment.

If a person doesn’t catch up on all overdue premiums by the end of the grace period, his or her coverage ends retroactively to the end of the first month of the grace period. The enrollee (1) must repay the premium tax credit that the insurer received for the first month of the grace period, (2) owes the insurer the outstanding premium for that month, (3) is responsible for the full cost for any medical bills incurred in months two and three, and (4) may owe health reform’s financial penalty for not having insurance for the second and third months and any subsequent months he or she was uninsured. That’s far from a free ride for an enrollee losing coverage for nonpayment.

Enrollment data refute the notion that lots of people drop coverage late in the year to take advantage of three “free” months of care in the grace period, then immediately reenroll the following year. Rather, enrollment falls gradually throughout the year, according to Centers for Medicare and Medicaid Services data. That’s because enrollees leave the market during the year for many reasons, including obtaining other coverage, while entry is restricted to people who qualify for special enrollment periods.

Insurers have called for changing the law to reduce the grace period to the time otherwise specified in each state’s health insurance laws, generally 30 days or less. That would hurt low- and moderate-income individuals and families who miss a payment or even part of a payment for any reason, such as a costly home or car repair. Shortening the grace period to only 30 days would leave well-intentioned consumers with too little time to catch up on premiums when they fall behind and lock people out of coverage for the rest of the year, raising the number of uninsured.  

Editor’s Note: This post was originally published on the Center on Budget and Policy Priorities’ Off the Charts blog. It was lightly edited for content.

1 Comment

  • Correction says:

    I know this is much later, just wanted to say now that the federal mandate penalty has been removed, people actually can “game” the grace period now.

    But it’d mostly be for the middle income types of those who don’t get the full tax credits (those who pay next to nothing in premiums would have little to no reason to do it).

    For example, if you get a APTC of $200 and have to pay $700 in premiums every month, you could stop paying premiums in October, and the grace period would cover October, November, and December, if you end up needing to go to the hospital, then you pay up the $2,100.

    If you luck out and don’t need the doctor, then you only have to pay back the $200 APTC for the October first grace month, and you save $1,900 overall and you can still enroll during open enrollment.

    That’s a more extreme example, where the person wasn’t getting much help anyways and can game the system (and that type of person is going to be more wealthy and less likely to care to pull off such a switcheroo) , but a more modest example would be someone getting let’s say $400 in APTC and paying $450 in premiums, Then the 3 month grace is $1,350 in premiums they don’t pay, and if they end up not using the grace period (no hospital stays, etc.) or only needing services in the first month (that’s still retroactively covered, just not months 2 and 3) then they’d save $950 by not paying the last 3 month’s premiums. ($1,350 minus the $400 APTC repayment bill they’ll get when they file taxes)

    Basically if you pay 50% or more of your premiums, you generally benefit by not paying premiums the last 3 months of October-December (unless you end up having medical bills in November or December as the insurance won’t have to pay for month 2 or month 3 of the grace period). This is because you have to pay a penalty essentially of month 1 of the APTC which you don’t get the APTC back on your taxes. So those who have say, $700 APTC and pay only $200 premiums, would lose money doing it (since they’d have to repay the $700 APTC subsidy for the 1st grace month which is greater than the $600 premium savings). The break even point is if you pay more than 33% (1/3rd) of your premium, as you pay your APTC as a penalty (1 month’s 66% is equal to 2 month’s 33%), essentially.

    Someone REALLY gaming the system, long-term thinking, would basically only have APTC cover like 1% of their premium, to maximize this benefit, but that would mean they’d have to pay 99% of their insurance during the year (and get 9 months of APTC back on their tax return) as this would mean they wouldn’t have to repay anything for that first month of the APTC (and yet still get insurance coverage for that month! free insurance!) From what I’ve read, it doesn’t appear that the IRS will take anything to repay the insurers for months 2 or 3 from the APTC even if you do it like that in a lump sum, so you basically can eliminate that month 1 penalty but reducing your APTC as much as possible, but not totally eliminating it (if you choose to have it all lumpsum on your tax refund and have zero APTC then you don’t get the 3 month grace period, only a 1 month grace period).

    Luckily, most Americans are too dumb to know of this benefit, too poor to pay their month-to-month premiums just to get an extra $1,000 on their tax refund (even though it’s pretty good ROI ) , or too lazy (they’d have to refile during open enrollment and many prefer to just be automatically re-enrolled) so it generally won’t be exploited that much.

    But there is certainly a large group of Americans that WOULD benefit financially IF they exploited the loophole. Most of them won’t though. Basically anyone paying part of their premium COULD benefit (if they reduce the APTC to like $5/month of their premiums that way they have no APTC repayment penalty) and those who currently pay more than a third of their premium WOULD benefit (since the two extra month of not having to pay 33% of a month’s premiums outweighs the 66% 1 month APTC “penalty”, which again is totally avoidable if they planned it in advance and reduced their APTC).

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