In August 2018, the Trump administration announced new rules for short-term health insurance plans. It extended the maximum coverage period for these bare-bones plans from 90 days to just under a year, with an option to extend the plans for as long as three years.
The White House claimed this move would offer Americans relief from high health insurance premiums. And it’s true, these plans can cost around 75% less than full-fledged health care plans. But they also provide less coverage — a lot less. They don’t cover basic care like checkups, and most of them only pay up to a certain dollar amount per year no matter how sick you get.
So, before you rush out to replace your pricey health care plan with a cheap short-term plan, make sure you have all the facts. Here’s the lowdown on what short-term health insurance plans cost, what they cover, and how they stack up against regular health plans that meet the standards of the Affordable Care Act (ACA).
What Is Short-Term Health Insurance?
Short-term health insurance policies are designed as stopgaps to provide basic, emergency coverage when you’re in between regular insurance plans. Because they’re only for short-term use, they don’t have to meet the requirements of the ACA (also known as Obamacare) for “minimum essential coverage.”
As HealthInsurance.org explains, the ACA requires all regular health plans to cover certain medical expenses with no annual or lifetime limit. These essential health benefits include doctor visits, emergency services, hospitalization, maternity care, mental health, prescription drugs, and lab tests.
However, short-term plans are an exception to this rule. They don’t have to cover all the essential benefits, and they can set dollar limits on how much they’ll pay out for the ones they do cover. Short-term plans cost less than standard partly because they cover so little.
The other reason they’re cheaper is that they only provide temporary coverage. Even if you develop a serious and costly illness, such as cancer, while on a short-term plan, the insurer only has to cover the costs of your care for a few months before the plan expires. And even this is unlikely because the people who tend to opt for a short-term plan are usually fairly healthy.
How Short Is Short-Term?
The rules for short-term coverage have changed several times in the past few years. Before 2017, federal law defined short-term insurance as plans that provided coverage for less than one year. However, some individual states imposed time limits of six months or less.
A new rule issued by the Obama administration, which took effect in early 2017, required all new short-term plans to provide health coverage for no more than 90 days. The purpose of this change was to stop people from relying on short-term plans as their primary source of care, as some people had been doing since Obamacare first went into effect.
However, some insurance companies got around this rule by selling consumers up to four back-to-back 90-day plans. That way, consumers only needed to apply once to get care for up to 360 days.
In October 2017, then-President Donald Trump signed an executive order directing federal agencies to revise these rules. Under the new rules, which took effect on October 2, 2018, short-term policies can have terms of up to 364 days and can be renewed for up to three years. However, states are still allowed to set stricter limits on these plans if they choose.
Pros of Short-Term Health Insurance
Why would anyone choose a short-term health insurance policy, given its drawbacks? There are a few factors that could make it appealing.
1. Lower Premiums
The chief benefit of short-term insurance is its cost. Short-term health plans are a great deal cheaper than ACA-compliant plans that provide comprehensive coverage.
To compare the two, HealthInsurance.org looked at the cost of care for a single 45-year-old living in Wyoming with an income of $12,000 per year. Because that’s below the poverty level, this person would not qualify for premium subsidies. They couldn’t get Medicaid either because Wyoming has opted not to expand its Medicaid program.
The site found that the cheapest ACA-compliant plan this person could get in the state health insurance marketplace would cost $593 per month — nearly 60% of their total income. In addition, they would have a deductible of $8,550.
However, the person could buy a short-term health insurance plan for a little more than $100 per month. That would still be a stretch on a $1,000 monthly budget, but at least it would be possible.
On the other hand, the short-term plan would have even higher out-of-pocket costs. The deductible would be around $10,000, and the out-of-pocket maximum would be $20,000. So even with insurance, the person’s yearly health care costs could end up being more than their total income.
Short-term policies vary in coverage. Instead of having to pay for all the essential health benefits, you can choose a plan that covers only the types of care you think you’re most likely to need.
Most short-term health plans cover only emergency care, surgery, hospitalization, and outpatient care such as lab work. However, with a little effort, you might be able to find a plan that covers some preventive care or prescription drugs.
Some short-term plans also promise you can choose your own doctor and other health care providers, such as hospitals, without limits. However, plans like this often cost you more out of pocket.
Because the insurer doesn’t have contracts with any providers, the providers haven’t agreed to accept the insurer’s rates as full payment. If the insurer pays less than their full fee, they can bill you for the difference.
3. Easy to Get
You can sign up for short-term health insurance at any time during the year. With ACA-compliant plans, by contrast, you can only sign up during the annual open enrollment period at the end of the year or a special enrollment period due to a qualifying event, such as losing your job.
Enrolling in a short-term health plan is easy: just answer a few yes-or-no questions about your health history. Once you’re signed up, your policy can take effect as soon as the next day. And, if you know how long you’ll want the coverage for, you can sometimes make just one upfront payment for the whole policy, rather than paying by the month.
Cons of Short-Term Health Insurance
To many health care shoppers, short-term insurance looks like an incredible bargain. Price is one of the most significant factors in choosing a health plan, and these short-term plans are much cheaper than any regular plan. However, when you look past the price and consider their actual value, you can see that these cheap plans don’t give you a lot of bang for your buck.
1. Very Limited Coverage
The biggest problem with short-term insurance is that it just doesn’t provide much coverage. In particular, there are several types of health conditions and care these plans rarely cover.
Short-term insurance only covers you for new health problems that develop while you have the policy. Most plans provide no coverage for preexisting conditions — that is, health problems you had at the time you applied. In some cases, this includes conditions that hadn’t even been diagnosed yet when you bought the policy.
If you develop a chronic health problem while you’re on a short-term plan, this problem will be considered a preexisting condition when it comes time to renew the plan. You might be unable to renew the plan at all, and even if you can, it will no longer cover your new “preexisting” condition.
Short-term plans are meant to provide coverage for emergencies only. Most of them don’t cover any routine care, including office visits, preventive care, or maternity care.
However, there are a few exceptions to this rule. Karen Pollitz, a health insurance expert interviewed by CNBC, says some short-term plans are now dressing themselves up to look more like regular plans by covering a limited number of doctor or hospital visits.
Short-term plans rarely include coverage for mental health problems, such as depression and anxiety. CNBC tells the story of one woman who bought a short-term health plan after leaving college and ended up paying $600 per month out of pocket — roughly half her gross pay — for therapy and medication.
Most short-term health plans only pay for prescription drugs if you receive them while you’re in the hospital. Even if you leave the hospital with a prescription for the same drug to take at home, a short-term plan won’t pay for you to fill the prescription.
Some short-term plans list prescription drug coverage as one of their benefits. But if you look closer, you’ll see that all they provide is a prescription discount card.
2. High Deductibles
Short-term health insurance plans don’t just limit the types of care they cover; they also limit the amount they’ll pay for the care they do cover. Many short-term insurance plans come with a very high deductible — the amount you must pay out of your own pocket before your insurance kicks in.
According to Louise Norris, another insurance expert interviewed by CNBC, it’s not uncommon for these plans to have a deductible of $10,000 or higher. That’s more than the average individual paid for an ACA-compliant plan in 2019, including both the premiums and the deductible, according to eHealth.
If you have one of these high-deductible plans, you’ll most likely end up paying for all your health care costs out of pocket. That could discourage you from seeking needed care, allowing small problems to turn into big ones that could be harder to fix, cost more money, or even put your life at risk.
3. Caps on Coverage
For some people, a plan that charges a high deductible in exchange for low premiums doesn’t seem like such a bad deal. If you can pay for the first $10,000 in medical bills out of your emergency fund, you only have to worry about potential costs on top of that. Unfortunately, you can’t always count on short-term plans to protect you from these costs.
All ACA-compliant health plans have an out-of-pocket maximum, which is the most you’ll have to pay for care in a given calendar year. For 2021, that limit can’t be higher than $8,550 for an individual or $17,100 for a family, according to HealthCare.gov. However, short-term insurance plans aren’t subject to these restrictions.
This means that along with their high deductibles, these plans can limit the total amount they’ll pay out in benefits. For instance, a plan could cap your total benefits at $2 million. If you have a severe enough condition to require more than $2 million worth of medical care — unlikely, but possible — you’ll have to pay everything above that amount yourself.
You can try to protect yourself by choosing a plan that has a high cap on benefits. However, you likely won’t be able to find a short-term plan with no limit on benefits. So these plans don’t do the one thing health insurance is supposed to do: protect you from catastrophic losses that could drive you into bankruptcy.
4. No Subsidies Available
Short-term health insurance plans are not ACA-compliant and are not available for sale on the health insurance marketplace. Therefore, if you choose to buy one of these short-term plans, you can’t qualify for an Obamacare subsidy.
Of course, you wouldn’t qualify for a subsidy anyway if the premiums for your new short-term plan cost less than 9.83% of your monthly income — the limit to receive subsidies in 2021, according to HealthCare.gov. However, if by some chance your short-term plan costs more than 9.83% of your income, it would be cheaper to get a subsidized plan through the marketplace.
5. Possible Penalties
Before 2019, the Obamacare individual mandate required everyone to carry health insurance if they could afford it. If you had an ACA-compliant plan available to you for less than 8.05% of your income and you didn’t buy it, you would face a penalty. And because short-term health plans don’t meet ACA standards, buying one wouldn’t get you off the hook.
The federal individual mandate is still technically in effect, but the penalty for it has expired. However, several states have created their own statewide individual mandates, complete with penalties.
According to HealthInsurance.org, five states — Massachusetts, New Jersey, the District of Columbia, California, and Rhode Island — currently have these individual mandates. If you live in one of those five states, you’ll still face a penalty for failing to carry ACA-compliant insurance. (Vermont also has a mandate, but it’s not backed by a penalty.)
Most of these states don’t allow the sale of short-term plans anyway (as discussed below). If you live in the District of Columbia, you can still choose a short-term plan, but you’ll have to pay the penalty if you do. The maximum penalty is the cost of the average yearly premium for a Bronze-level plan in D.C. Thus, for D.C. residents, the costs of a short-term plan and the penalty for choosing it could add up to more than the cost of an ACA-compliant plan.
6. Possible Gaps in Coverage
Perhaps you’re planning to buy a short-term plan to cover you for just a few months while you get through a rough patch. As soon as your income returns to normal, you plan to go to the marketplace to buy a full, ACA-compliant health policy.
Unfortunately, you probably won’t be able to do that. Under the ACA, you can’t buy a new policy on the marketplace outside of the regular open enrollment period unless you’ve had a “qualifying event,” such as having a baby or getting married.
If you’ve lost your health care coverage — say, by losing your job — that counts as a qualifying event, but only if the plan you lost provided minimum essential coverage. Short-term plans don’t meet this standard, so having yours expire doesn’t count as a loss of coverage.
This rule only applies to policies you buy in the marketplace. If you’re using short-term insurance to get you through until you start a new job, you can enroll in the health care plan at your new job right away. If you had access to a plan at work but chose to use a cheaper short-term plan instead, you’ll be able to sign up for your employer’s plan as soon as that plan expires.
7. Not Available Everywhere
Depending on where you live, a short-term plan might not even be an option for you. Although the federal government has relaxed the regulations on short-term insurance, states are still free to set their own limits, and several states have done so.
According to HealthInsurance.org, short-term health plans are unavailable in 10 states: California, Colorado, Connecticut, Hawaii, Massachusetts, New York, New Jersey, Rhode Island, Vermont, and Washington. Some of these states ban short-term plans outright. Others have regulations that make it unappealing for insurers to offer these plans.
In other states, short-term plans are legal, but there are limits on their use. Eight states don’t allow you to use a short-term plan for more than three consecutive months, and nine states don’t allow them for longer than six months. An additional six states let you carry short-term insurance for up to a year, but without the option to renew it.
How Short-Term Insurance Affects the Market
Short-term health plans don’t just cause problems for their subscribers; they can also make health care more expensive for everyone else. Here’s how:
- When cheap short-term insurance is an option, young and healthy people are likely to choose these inexpensive plans rather than buying ACA-compliant plans in the health insurance marketplace.
- As a result, insurers selling plans in the marketplace cover an older and sicker group of people overall, driving up their costs.
- Insurers pass these increased costs on to consumers by raising their premiums, making ACA-compliant plans more expensive.
- As premiums rise, more people are unable to find an affordable plan, so the government ends up paying out more money for subsidies.
The new rules for short-term insurance will make this problem even worse. Having short-term plans available for a year or longer will encourage young, healthy people to rely on these plans over longer periods. And the elimination of the individual mandate will make these plans even cheaper by removing the penalty for relying on short-term coverage.
When the government published its new rules in the Federal Register, it estimated that 600,000 new customers would sign up for short-term plans in 2019. Most of them would be people who used to have ACA-compliant plans.
Several patient groups sued to block the expansion of short-term insurance, claiming it was directly opposed to the original purpose of the ACA. However, a district court judge upheld the administration’s move in 2019, and an appeals court panel upheld it again in 2020. So far, the Biden administration has made no move to undo the rules change.
The new rules for short-term plans won’t just make ACA-compliant plans more expensive; they could also drive up health care costs in other ways. The high deductibles these plans often have will discourage people from seeking care for their problems until they become an emergency, which will make them more expensive to treat.
As more people face high out-of-pocket costs they can’t afford, the number of medical bankruptcies could increase, raising costs for hospitals and other health care providers. These providers will then pass on these costs to other customers through higher fees.
When to Choose a Short-Term Plan
Despite all the problems with short-term health insurance, it can be useful in certain situations. A short-term plan could be worth considering if:
1. You’re Young and Healthy
Short-term health insurance is only useful if you’re in good health. It doesn’t provide coverage for preexisting conditions, and it provides very little coverage for everything else. Short-term plans are also probably too risky for anyone middle-aged or older because they’re more likely to develop new health problems than young people.
2. You’re Between Plans
The best reason to buy short-term health insurance is for its intended use: to tide you over during a temporary gap between plans. For instance, if you’ve lost your job but know you’ll be starting a new one in a few months, you can use a short-term plan to get you through the brief period in between.
3. You Can’t Afford Anything Else
Another reason to buy short-term insurance is that you simply can’t get an affordable plan any other way. For instance, these plans can help people stuck in the Medicaid coverage gap who are too poor to qualify for Obamacare subsidies but not poor enough to qualify for Medicaid in states that haven’t expanded the program.
Short-term plans can also be useful for people affected by the Obamacare family glitch, under which some workers can get affordable care for themselves but not their families. These plans aren’t much help because they provide so little coverage and have such high out-of-pocket costs, but they’re better than nothing.
However, if there’s any way you can afford a real health plan, either from your workplace or the health insurance marketplace, it’s a much better choice. With a short-term plan, you could end up on the hook for tens of thousands of dollars in medical bills you can’t afford. An ACA-compliant plan will cost more for the premiums, but it will give you much more value overall.
The key thing to understand about short-term plans is that they’re not the same as real health insurance policies. They provide some protection for emergencies, but you can’t count on them to cover the costs of basic medical care.
Unfortunately, according to CNBC, consumers don’t always realize this. They sometimes buy the plans without reading the fine print, only to discover these plans provide almost no coverage.
The new rules for short-term health plans address this problem to some extent. They require insurers to disclose that the plans aren’t ACA-compliant, don’t have to cover all essential health benefits, and can have annual or lifetime limits. However, people may still brush off this warning, assuming that because they’re young and healthy, they don’t have to worry about getting sick.
The truth is that it’s almost impossible to predict what your health care costs will be. That’s why you need health insurance in the first place — to protect you against medical costs you didn’t expect. So, there’s little point in buying a short-term plan that doesn’t truly protect you.