The New Short Term Health Insurance Duration Rule – Explained
On August 1, the Department of Health and Human Services (HHS) finalized a rule that defines duration limits for short term health insurance policies. Prior to this finalized rule, an Obama administration rule limited short term health plans to just three months without the possibility of renewal. The new rule will take effect on October 2, 2018, just in time for the nationwide open enrollment season that begins in November. Now, consumers will have more choice in how they get health insurance. While somewhat controversial, short term health insurance offers good protection in times of transition. This kind of coverage has been around for 30 years, serving a specific purpose in helping people to offset the cost of unexpected medical problems.
New Duration Limits
In 2017, a rule proposed by the Obama administration took effect that limited short term health plans to just three months. The idea behind this was to prevent young, healthy people – the demographic they felt most likely to buy short term policies – from exiting the individual insurance market, specifically the Affordable Care Act exchanges. This demographic is also necessary to support the large pool of people with Obamacare plans who need greater medical care.
But most people who buy short term policies do so because they need minimum coverage for a brief period, such as switching to a new job or right after graduating college. Limiting coverage to just three months hurts the people who actually need this kind of brief protection.
The Trump administration has been fairly clear in its intentions of dismantling the Affordable Care Act by any means necessary, but the rule on short term health insurance is a sound one. Under the new federal rule, short term health plans can last “less than 12 months.”
People who want or need short term insurance benefit from having access to plans with longer limits for a few important reasons:
- Longer duration limits mean that you only need to apply once for the initial contract period. If you developed a medical problem during month two of a three-month policy, you’d be out of luck for coverage once the policy ended because medical underwriting would likely prevent you from getting another plan. You’d be stuck waiting until you could enroll in and/or afford major medical insurance. A just-under-12-month policy would give you greater protection.
- There’s only one open enrollment period for individual health insurance (the kind you buy on your own instead of through work), and it’s a six-week period that starts on November 1. If you need health insurance but don’t qualify for a special enrollment period (for things like getting married or having a baby), short term coverage can bridge the gap while you wait for open enrollment. But let’s say you got a policy in April. With a three-month cap, you wouldn’t be able to buy coverage once the contract ended in June. That leaves four months without any coverage, and if you had developed a medical problem during that initial three-month contract, you wouldn’t likely find short term coverage again. But if you could buy a policy of up to 12 months, you’d be covered until you could get major medical insurance in November.
- Short term plans have deductibles just like major medical policies do. But with short term plans, the amounts reset when the contract ends. For a three-month policy, you might pay out of pocket for the whole term before ever seeing any real benefit (unless you experienced a catastrophic event, like major surgery). These amounts don’t roll over into a new policy. With a 12-month contract, though, you’re more likely to meet the deductible and not spend as much out of pocket since you’d only need to meet that deductible once for the term. Longer contracts give you better peace of mind from a financial standpoint.
In states that follow federal guidelines, which is most of them, new short term health insurance plans sold after the rule takes effect in October can have an initial contract duration limit of less than 12 months. The distinction between major medical policies and short term plans is that major medical policies last a full year, which is why the new rule specifies “less than 12 months.”
Renewable Up to 3 Years
Along with extending the duration limit for short term health insurance policies, the new HHS rule will allow people to renew these policies. Under the previous rule, temporary health plans were not renewable. You could still apply for a new policy after your contract ended, but you couldn’t renew the same policy. Renewals and extensions under the recently finalized rule allow policyholders to renew their policies – or an insurer to extend the policy – for up to 36 months total.
This is an important decision because it means you may only have to go through medical underwriting once for a three-year period of short term coverage. It depends on how insurers and individual states interpret and implement the rule. Theoretically, at least, it would be possible for you to apply for a short term health plan and keep that same policy for up to three years as long as you renewed it after the initial contract limit of 12 months.
Deductibles would reset after that initial 12-month contract and for each renewal, but the idea of only having to go through medical underwriting once could have a major impact on the attractiveness and practical appeal of these policies.
Let’s say you contract a parasite while vacationing in Gulf Shores during spring break. If you had a short term policy in place, it would likely cover the hospital stay and treatment. Under the previous federal rule that didn’t allow renewals, you would have to apply for a new policy at the end of your three-month contract. Now, since you’ve been treated for a serious water-borne disease, you don’t qualify for short term health insurance from any of the companies in your area. You would have to wait until open enrollment in the fall.
The new rule allows you to buy short term health insurance plans with an initial contract length of less than 12 months and renewability of up to 36 months. Even if you contracted that parasite at the start of your first contract term, you’d be covered for the rest of the initial period and – again, depending on company policy and state regulations – be able to renew that same policy if you needed to, up to the 36-month limit.
This 36-month limit on renewability only applies to a single policy. If you decided to buy a different plan after your first short term health insurance policy ended, you could renew the new plan at the end of its term for up to 36 months. Each new contract has its own 36-month limit on renewals and extensions.
The Obama administration rule that limited short term policies to three months also required insurers to include a notice on plan materials that alerted consumers to the fact that these plans did not comply with the Affordable Care Act. This standard notice had to be printed in a certain font size and include standard language. The new rule issued by the HHS this month also includes a notice that differentiates between short term health insurance and major medical plans. Here’s that notice verbatim from the final rule:
This coverage is not required to comply with certain federal market requirements for health insurance, principally those contained in the Affordable Care Act. Be sure to check your policy carefully to make sure you are aware of any exclusions or limitations regarding coverage of preexisting conditions or health benefits (such as hospitalization, emergency services, maternity care, preventive care, prescription drugs, and mental health and substance use disorder services). Your policy might also have lifetime and/or annual dollar limits on health benefits. If this coverage expires or you lose eligibility for this coverage, you might have to wait until an open enrollment period to get other health insurance coverage. Also, this coverage is not “minimum essential coverage.” If you don’t have minimum essential coverage for any month in 2018, you may have to make a payment when you file your tax return unless you qualify for an exemption from the requirement that you have health coverage for that month. (p. 47-48, Short-Term, Limited-Duration Insurance)
Plan documents for short term health insurance, which could include advertising materials and actual policy information, must include this language so that consumers are aware that this is not the same thing as a comprehensive major medical policy. States can require insurers to include additional language, and insurers themselves can add to the notice if they feel the need to elaborate further or include extra caveats. Any short term policy sold on or after October 2, 2018 should include this language per the new rule.
The line about not meeting minimum essential coverage requirements for 2018 will be obsolete starting January 1, 2019. That’s when the penalty fee for not having health insurance under the ACA will be zeroed out, effectively voiding the individual mandate.
Flexibility for the States
One thing the Department of Health and Human Services makes clear throughout the finalized rule on short term health insurance is that this rule only regulates the initial max duration of short term health plans, the max duration including renewals and extensions, and the notice required that highlights how temporary health plans differ from major medical insurance under the ACA. Several times throughout the 121-page document, the department reiterates that “States are free to regulate such coverage in every other respect” (and other variations of this phrase).
This means that states can regulate their own short term, limited duration health plans as they see fit, up to the limits imposed by the federal government. Several states already have laws on the books or proposed bills as of this year to restrict the sale of short term health insurance or to make it more unappealing for consumers. We offer an overview of current state guidelines for duration limits in another article.
If you live in a state with tighter restrictions, then you’ll need to adhere to those regulations – as will the companies that sell these policies. You can check your state’s insurance department website (or call the department) for information if you’re not sure. Make sure you understand the limits in your state so that you don’t fall prey to dishonest companies selling policies that can’t exist.
What the New Rule Doesn’t Do
Don’t believe the hysteria surrounding short term health insurance. Outside of duration limits, renewability caps and an updated required notice, the new rule does not define or impose any other stipulations for temporary health plans. As we mentioned in the last section, states are still free to set their own limitations up to the federal definition of “less than 12 months,” and they can cap renewability, impose stricter guidelines and define health insurance differently according to state law. The new rule also does not:
- Define short term health plans to include student health insurance
- Consider short term health insurance as minimum essential coverage
- Replace Obamacare or any minimum essential coverage requirements for major medical policies defined by the ACA
These are important things to keep in mind. Opponents of the new rule argue that extending the duration limit of short term plans and allowing consumers to renew a single policy for up to 36 months will drastically affect the individual health insurance market. However, the Obama administration rule only took effect in 2017, meaning that by the time this new Trump administration rule takes effect in October, the three-month cap will have been in effect for less than two years. Before that cap, short term plans could last up to 364 days in many states – and these plans have been around for about three decades.
Major medical insurance still follows different regulations. The major health plans you can buy on and off ACA exchanges, as well as many group health plans sold through employers, must adhere to minimum essential coverage requirements. These regulated plans also protect consumers by being guaranteed-issue and prohibiting caps on payouts or lifetime limits. This new rule does not take away from any current ACA regulations of major medical policies. It certainly doesn’t replace Obamacare. Instead, it gives consumers another option if they can’t afford or don’t want the comprehensive coverage afforded by ACA-compliant health plans.