Fixing Problems with Short-term Health Plans

Abstract:   People with short-term health plans often experience catastrophic financial losses, despite their insurance coverage.  The Biden health plan would reduce but not eliminate demand for short-term health plans.  Problems with short-term health plans could be fixed through executive order and/or state Medicaid waivers.

Fixing Short-term Health Plans

Many people cannot afford comprehensive health insurance sold on state exchanges.   The Trump Administration responded to this affordability problem by expanding the use of short-term medically underwritten health plans, which are not compliant with ACA regulations and do not cover essential health benefits.   

recent report by the Democratic staff of the House Energy and Commerce Committee found short-term health plans have arbitrary benefit packages, fail to cover many needed health care procedures and often provide households little or no financial protection when faced with an existential medical situation.  

Short-term health plans include several features that can lead to extremely adverse health or financial outcomes.   These plans do not cover treatments for pre-existing conditions and exclude coverage for many common medical treatments, preventive care and prescription drugs.   

Short term health plans often limit physician office visits, hospitalizations, emergency services and coverage for surgery.  Limits can take the form of number of days or visits of coverage or the reimbursement rate per day or visit.   Some short-term health plans have rescinded coverage for high-risk patients and for cancer patients.  

Arbitrary benefit limits often lead to unusual and unpredictable health care bills.  The report by the Energy and Commerce committee describes situations where one patient received a $14,000 bill for two-day hospital stay for pneumonia and another situation where the short-term policy only paid $7,000 on a $35,000 bill for an emergency procedure. 

Short-term health plans can cause physical or financial ruin for the customer.   In many situations, people with short-term health insurance plans are de facto uninsured. 

Short-term health plans with arbitrary health insurance provisions are fundamentally different than the high cost-sharing arrangements used in conventional catastrophic health plan.   A catastrophic health plan with high deductibles and coinsurance rates can result in high out-of-pocket health care costs and can cause a sick individual to forego some necessary health care treatments.   However, the existence of a high deductible will generally not result in financial ruin when the health plan covers essential services and has a reasonable maximum out-of-pocket limit.

Catastrophic health care plans are a potentially rational choice for people who are willing to tradeoff higher deductibles for lower premiums.   Short-term health plans with arbitrary benefit limits basically do not reduce risk.

President-elect Biden’s health plan attempts to reduce the demand for short-term health insurance plans by offering a more generous premium tax credit for the purchase of state exchange insurance and an affordable public option. The Center for Medicare Services projects that most people selecting short-term health plans have income over 400 percent of the federal poverty line and are ineligible for a premium tax credit.  The more generous premium tax credit offered by President-elect Biden’s plan does not provide much assistance to young adults with income slightly above 400 percent of the federal poverty line.  Young adults with income near 400 percent of the federal poverty line are unlikely to be eligible for the new public option.

There is a need for a low-cost insurance option for people who cannot afford comprehensive health insurance.   This need is likely to persist even if President-elect Biden’s health care reforms are fully enacted. However, the low-cost insurance option should not expose people to catastrophic losses even though on paper they have insurance coverage. 

The incoming Biden Administration can fix some of the more flagrant problems with short-term health plans through executive order.  The executive order would create a short-term health plan with higher deductibles and higher out-of-pocket limits than current state-exchange health plans similar to the copper plan considered by Senator Alexander and Senator Murray.   

New copper plans could attract healthier people and increase premiums for more generous plans.  This problem could be minimized by targeting copper plans towards people without access to premium tax credits.

The executive order would prohibit many or all of the arbitrary benefit limitations including limits on nights in hospital, use of emergency rooms and doctor visits. The executive order would require short-term health plans to cover all medically necessary health procedures.   The executive order would prohibit underwriting based on health status and any discrimination against people with pre-existing conditions in short-term insurance markets. 

The ACA prohibits insurance companies from imposing caps on annual and lifetime health care benefits on all comprehensive health plans with the exception of short-term health plans. Caps on health care benefits used by short-term plans reduce the cost of the health plans but create catastrophic health and financial situations for people who hit the benefit limit.  

The incoming Biden Administration and Congress needs to either prohibit short-term health plans from imposing annual benefit caps or consider innovative ways to provide additional coverage to people once they reached their annual or lifetime benefit caps on their short-term health plan. 

One approach would involve the government sharing costs above some benefit threshold.   Cost sharing could occur at any level perhaps the annual cap.   The cost sharing could be implemented by direct payments from the government to health care providers for a portion of the health care bill once annual expenditures reach the chosen threshold. Previous risk-sharing programs making payments to insurance companies with a large number of expensive health care cases were criticized as corporate welfare.  Direct payments to providers for servicers above the annual cap would be easier to defend than subsidies to insurance companies.  

A new broad cost-sharing subsidy would require Congressional approval.  It may be possible for the Biden Administration and certain states to implement cost sharing through a Medicaid waiver, which allows states to use Medicaid funds to pay health expenditures for people with health expenditures over their annual cap.   This type of cost-sharing arrangement was first described in this SSRN paper.   

The focus of most health care reform discussions is on reducing the number of uninsured.   The growth of short-term health plans during the Trump era created a class of people with insurance on paper that would still be subject to potentially catastrophic financial losses or health outcomes.   Even if fundamental efforts for health care reform fail, the Biden Administration can fix some of the problems caused by the growth of short-term health plans through executive order or through the Medicaid waiver process.

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