Are Short-Term Plans a Solution to Affordable Healthcare?

Starting with the Bottom Line
The Health and Human Services (HHS) rule to expand the scope of short term limited duration (STLD) plans is the latest in a decades long practice of burying the lead when attempting to address healthcare costs in the United States. While short term plans may offer lower premiums by slashing benefits, they are an indictment of what continues to go wrong in healthcare policy making. The laser-focused attention given to premium prices inevitably fails to identify the underlying drivers of the American healthcare crisis.

Premiums are a reflection of risk and cost. The long-term solution to making healthcare affordable cannot be slashing benefits, reducing insurance providers’ liability, and leaving policy holders vulnerable in times of crisis. Ultimately there is a limit to how far benefits can be cut. Conversely, as medical expenditures in the United States continue accelerating to levels far beyond those anywhere else in the world, there does not appear to be a rapidly approaching limit to how high prices can rise. The future solvency and wellbeing of the United States government and its citizens hinges on a commitment to policies focused on risk minimization and cost reduction.

Background
HHS has officially announced it will be loosening restrictions around short-term, limited duration (STLD) healthcare plans. This decision will allow insurance providers to offer short term plans with a duration of up to 12 months. Under the new rule, these plans will also be renewable for up to three years. Prior to the announcement, short term plans had a maximum duration of 3 months.

Individual short-term plans differ from the individual plans offered through the ACA federal and state exchanges in a number of important ways.

• STLD plans are not required to cap consumers’ total annual costs and are allowed to set lifetime and annual limits on what they will payout.
• STLD plans are not required to provide the essential health benefits required of plans offered under the ACA.
• Providers of STLD plans are not barred from medical underwriting or refusing to cover expenses if a pre-existing condition can be established. Medical underwriting refers to an insurer’s right to refuse service or price discriminate based on patient’s health history (including pre-existing conditions). Seeking to establish a pre-existing condition, refers to a practice wherein an insurance provider investigates a policy holder who becomes ill. The investigation is conducted with the purpose of determining whether the newly-diagnosed condition could be considered pre-existing. Whether or not the patient knew he or she had the illness prior to acquiring insurance, if the diagnosis can be established as pre-existing, all submitted expenses can be excluded from coverage.[i]
• STLD plans are offered through the non-group market and cannot be purchased through federal and state exchanges. This distinction is important as it means individuals seeking these plans have a lowered ability to assess total plan cost and make comparisons across different plans and providers.

What follows are a series of arguments made by proponents of the rule, followed by counterpoints that attempt to take a deeper look at the claims being made.

Argument 1: The Cost of Insurance
Argument For — The first argument made by proponents of the HHS decision to expand consumer access to short term plans, is the assertion that these plans will help reduce healthcare costs for everyday consumers. The affordability of monthly premiums has been an issue on the minds of individuals and families in the United States for decades. As people look to uncover the cause of rising premiums over the last five years, fingers have continued to point to a number of different regulations put in place under the ACA.

ACA provisions, as discussed below, are accused of being a burden to insurance providers. This burden is thought to have been passed on to individuals in the form of higher premiums. Two examples of burdens born by insurers under the ACA include the prohibition of discrimination against enrollees with preexisting conditions and the required coverage of “essential health benefits.”

Under the ACA’s pre-existing condition legislation, insurers are not allowed to deny coverage or charge higher prices to enrollees based on their individual health history. For more information on the preexisting condition legislation see Article 1 of the Affordable Care Act review series. Required essential health benefits are defined as services insurers must make available to plan beneficiaries. These benefits include things such as emergency services, hospitalization, maternity care, and mental and substance abuse services.

Argument Against — To address the potential impact of STLDs on consumer costs, it is important to remember that insurance providers are not charitable organizations. They are first and foremost businesses. As any freshly minted business school graduate will tell you, the ultimate objective of a business is to create value for shareholders. Value is ultimately realized as revenues increase, and costs decrease. This profit objective is appropriate and fundamental to a fully functioning free market system. This understanding, however, is crucial when evaluating the short-term plans that will become available under this new rule.

Risk represents cost to insurers, and individual short-term plans introduce new sources of risk. As with all individuals plans, STLDs do not allow for a pooling or diversification of risk. A single individual will always look more costly than a pool of employees. The short-term nature of STLD plans compounds this issue as they can be purchased at any time for varying durations. This is in contrast to standard enrollment periods for employer sponsored plans and individual plans offered through state and federal exchanges. This flexibility increases the risk that individuals will only purchase short-term plans when they are in need of immediate treatment. The 2017 GOP tax bill repeal of the individual mandate makes this threat an even more pressing reality.

When providers of STLD plans price risk into monthly premiums, they are limited by the fact that the plans being marketed must appear less expensive than alternatives on the exchange market. As a result, the only lever insurance providers have available in the profitability function is cost minimization. The inevitable result of this conundrum are plans that offer so little coverage they have been deemed by many to be predatory. It is why three states have outlawed such plans and why several more have put severe limitations on them.

As the costs of healthcare goods and services continue to increase at alarming rates, far outpacing the growth in other major markets, under-insured individuals often face unsurmountable bills in the event of a health crisis. Individuals without preventative care access are more likely to avoid health services until conditions have become so intense medical intervention is inevitable and far more expensive. Even after protections put in place by the ACA, healthcare bills continue to be one of the leading causes of bankruptcies in the United States.

Beyond the cost to individuals, one must also consider the impact STLD plans have on other players in the healthcare industry and society as a whole. Patients’ inability to pay leaves hospitals to shoulder the brunt of costs associated with emergency services. This added burden either leads to insolvency or leads to higher prices charged for other non-emergency services provided to the wealthier and better-insured. Higher costs ultimately impact everyone’s premiums.

An increase in the under-insured population also brings about significant macroeconomic headwinds. Workers on disability due to severe health events, and households struggling to recover after filing bankruptcy, limit the country’s ability to operate at full efficiency. These forces, among many, continue to contribute to the hollowing out of the middle class in the United States.

Argument 2: Engaging the Uninsured
Argument For — Under the new rule, STLD plans are no longer restricted to being short term or of limited duration. For many individuals these plans will now be viewed as long-term health insurance alternatives. In a recent interview, Health and Human Services Secretary Alex Azar conceded this fact by arguing that STLD plans would bring uninsured individuals back into the insurance market.

Enticing members of the currently uninsured population to re-enter the insurance market would certainly be of tremendous value. Bigger pools of individuals allow for greater risk diversification. Lower risk means lower costs for insurance providers and lower premiums for individuals. It is this understanding that motivated the individual mandate. The failure to attract a greater percentage of the uninsured population into the market, specifically the young and healthy, has certainly contributed to higher premiums.

Argument Against — Prior to the ACA the percentage of uninsured individuals was considerably higher than it is today. This was the reality even during a time when skimpy plans, like the ones made legal under the recent HHS rule, were widely available. As such, it is very unlikely that a substantial number of the currently uninsured population will reenter the market in light of increased access to STLD plans. In fact, the Congressional Budget Office estimates an additional 3 million individuals will leave the insurance market during 2018 as the result of the individual mandate repeal.

To evaluate the likelihood of bringing new individuals into the market via the lower premiums offered by short-term plans, it is important to take a look at the characteristics and composition of the uninsured population.

First, it is important to understand when we talk about large shifts in the uninsured population, we are generally referring to working age adults. Social programs such as CHIP and Medicare are generally in place to cover uninsured children and elderly adults. Second, it is important to understand the escalation of the problem over time. Prior to the ACA, the percentage of non-elderly uninsured Americans sat at roughly 16.7 percent, representing 44 million individuals. In 2016, two years after the bill passing, the percentage of uninsured Americans hit a low of 10.3 percent equating to 27.6 million individuals.[ii]

Recent data from the Commonwealth Fund’s first look report, conducted between February and March of this year, shows that the percentage of uninsured working-age adults has increased to 15.5 percent.[iii] While the exact number of newly uninsured adults has not been published, it is estimated that an additional 4 million individuals have been added to the aggregate uninsured figure due to this increase. This number falls in line with the estimates that follow.

To understand the impact STLDs may have in the current environment, the following table has been compiled to estimate the most current dispersion of enrollees across different health insurance sources.

Going on the figures published in the above table, the below analysis will go on the assumption that roughly 31.4 million working age adults remain uninsured in the United States. From this number I will evaluate which individuals may return to the market in light of STLD plans.

To begin, the first group of people that must be removed from the total number of individuals likely to reenter the market are individuals living in the Medicaid gap. These individuals sit below the federal poverty level but live in states that did not expand Medicaid coverage under the ACA. Individuals living at this level of income will not be able to afford short-term plans regardless of the price.

Of the 29.2 million individuals remaining, we can make some assumptions of who may reenter based on IRS data. According to information published by the IRS, since the individual mandate penalty was enacted, roughly two thirds of uninsured individuals qualified for an exemption from the penalty. Reasons for exemption include extenuating circumstances such as incarceration, being a member of certain religious affiliations, living abroad, being a member of an Indian tribe eligible for services through IHS, and general affordability limitations related to hardship and income (projected and current). Individuals in these circumstances are almost certainly not going to reenter the market. Thus, keeping with this two thirds figure, we can assume 19.5 of the 29.2 million will not return.

This would then leave 9.7 million individuals with the potential to reenter the market. From this number we would need to subtract any of the 9.7 million individuals living in New York, New Jersey, or Boston. All three of these states have banned STLD plans. This cut may soon be extended to include individuals living in California as the state is now considering legislation that would disallow the selling of such plans. Furthermore, several other states have put in place severe limitations that would likely make offering such plans unprofitable for insurers, and thus individuals living in these states would also need to be deducted from the 9.7 million.

From this number we would then need to deduct individuals with a less than spotless medical history. As underwriting is a permissible practice under the new rule, individuals with a spotted medical record can be denied coverage or be subject to higher premiums. Remembering preexisting conditions are often set with little to no regulatory oversite, this could put everyone from cancer to acne survivors outside the reach of an inexpensive STLD plan.

Finally, from however many individuals who remain in this uninsured number, we must remove all individuals who will not choose to return to the market in the absence of the individual mandate. All of these deductions considered, there does not appear to be a persuasive argument that STLD plans will in any significant way bring people back into the insurance pool.

Beyond encouraging the uninsured population to rejoin the health insurance market, proponents of STLD plans argue that these plans offer relief to individuals who have experienced rising premiums on the exchanges. Of the 11.8M Americans purchasing plans via the federal or state exchanges, 83 percent live below 400 percent of the federal poverty level. These individuals qualify for tax breaks that are provided to make premiums more affordable. Under the exchange, these individuals have their total healthcare out of pocket expenses limited to a set percentage of their total income. As a result, these individuals have been largely immune to price increases and are unlikely to consider STLD plans.

The remaining 17 percent of exchange shoppers account for 2 million individuals. It is these individuals who have the most to lose as insurance premiums rise. Living above 400 percent of the poverty level, these individuals and families do not qualify for social healthcare programs, nor do they receive tax credits on the exchange. For everyone in this group that does not wish to leave themselves or their families vulnerable under an STLD plan, they will face an average premium that is about 34 percent higher than it was in 2017.[i]

The CBO attributes this jump in monthly premiums to insurers that were adjusting for (1) the expected repeal of the individual mandate (2) the discontinuation of CSR payments to insurers and (3) the consolidation of insurance providers in rural areas. As people continue to leave the market it is these 2 million individuals who will face the reality of skyrocketing premiums or skimpy insurance plans that will leave them to foot the bill in the event of a health crisis.

Argument 3: Risk Pooling and Insurance Premiums Among the Healthy and Sick
Argument For — It is an undeniable reality that healthy Americans pay more in premiums than they would otherwise if providers were allowed to charge higher premiums to those in poor health. It is conversely true that individuals in poor health pay less in premiums than they would if they were not in a risk pool that also included healthy people. From this reality comes the argument that the healthy should not be forced to subsidize the sick.

Argument Against — Healthy is not a permanent descriptor. You may always have blue eyes or brown hair, but you will not always be healthy. You will age, you may get in a car accident, or you may be diagnosed with a chronic disease. To say the healthy are paying for the sick is to objectively ignore the fact that individuals will fall into both categories over the course of their lifetime.

While many have villainized the Obama administration’s choice to clamp down on STLD plans, there is an important reason why healthy individuals must stay in the market. First, one of the primary objectives of the Affordable Care Act was to make healthcare accessible to the poor and the sick. It provided tax credits to make premiums more affordable, it eliminated the ability to deny coverage or make coverage prohibitively expensive for those individuals with preexisting conditions, and it sought to put protections in place that would guard patients from being exploited in times of crisis. Inherent in making healthcare accessible to individuals throughout their entire life, is the idea that people are paying into the pool their entire lives.

Concluding Thoughts
While access is only one of the issues that continues to go wrong in the American healthcare system, pulling legislation that allows for greater access is not something that should be done lightly. As was discussed above, there are public, private, and personal consequences to the actions being taken. The reality in the current environment remains that healthcare costs in the United States are greater and continue to grow faster than any other country in the world. Until serious action is taken to reign in the corruption, waste, and protectionist policy rampant in the US healthcare market, eliminating risk pools will do nothing but add to the national deficit, continue to devastate families, and put providers out of business.

[i] https://www.kff.org/health-reform/issue-brief/understanding-short-term-limited-duration-health-insurance/

[ii] https://www.kff.org/uninsured/fact-sheet/key-facts-about-the-uninsured-population/

[iii] Commonwealth First Look at Health Insurance Coverage in 2018 — https://bit.ly/2Ax56PJ